<PAGE>
As filed with the Securities and Exchange Commission on April 19, 1999.
Registration No. 333-61057
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- -------------------------------------------------------------------------------
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
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<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
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<S> <C> <C> <C> <C>
8.19% Debentures due
2009.................... $50,000,000 -- $34,500,000 $10,178
</TABLE>
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(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.
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<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
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TABLE OF CONTENTS
<TABLE>
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Page
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<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
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<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
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<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
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<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.
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<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
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<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
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<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>
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<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
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<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,
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<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.
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<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,
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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."
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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.
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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,
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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
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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.
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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
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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
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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.
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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
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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.
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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.
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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
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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
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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.
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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."
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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
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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.
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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
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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
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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
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employees, scientific consultants or collaborators develop inventions or
technologies independently that may be applicable to the Company's products
under development, disputes may arise about ownership of proprietary rights to
those inventions and technologies. Such inventions and technologies will not
necessarily become the Company's property, but may remain the property of
those persons or their employers. Protracted and costly litigation could be
necessary to enforce and determine the scope of the Company's proprietary
rights. There can be no assurance that the Company will have, or will devote,
sufficient resources to pursue such litigation. The Company's failure to
obtain or maintain patent and trade secret protection, for any reason, could
have a material adverse effect on the Company's business, financial position
and results of operations.
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SPECIAL FACTORS
Events Leading to the Restructuring
The Company has for many years experienced and continues to experience,
severe financial difficulties, resulting in the immediate need to restructure
both its business operations and its capital structure. The Company has
incurred losses in all but one of the years since 1985. These results
generally reflect, among other things: significant and persistent declines in
the Company's gross margins, largely resulting from reductions in color
television prices driven by competitive factors, and high operating costs and
performance difficulties associated with product development programs and new
automated production processes.
In light of the Company's net losses, the competitive environment and
inflationary cost pressures over the past several years, and in an effort to
increase gross margins and lower costs, the Company has undertaken various
cost reduction programs, profit improvement initiatives, design,
manufacturing, logistics and distribution improvements and various business
consolidations. While the Company has been able to achieve some operating
improvements through these measures, it has been unable to generate sufficient
revenues to support its continued business operations in the absence of a
significant operational and financial restructuring.
LGE Acquisition of Controlling Interest
Beginning in 1994 and as part of its strategy to return to profitability,
the Company developed plans to expand and modernize its production facilities
in the United States and Mexico. Those plans, which in 1994 had projected
costs of $150 million, necessitated that the Company initiate discussions with
possible joint venture partners because the Company did not have sufficient
financial resources to undertake the planned projects without additional
capital. In January 1995, the Company retained Merrill Lynch, Pierce, Fenner &
Smith Incorporated to assist in the exploration of possible strategic
alternatives, focusing on alternatives for raising equity and locating
potential investors or strategic partners. In early 1995, the Company had
discussions with potential investors, none of which resulted in a transaction.
At this time, the Company also approached and had numerous discussions with
LGE, with which the Company had a long-term supply relationship and which had
already purchased 4.97% of the Company's Old Common Stock in 1991 for $15
million, concerning its willingness to make an investment in the Company to
provide capital necessary for the Company's expansion and modernization plans.
Discussions between the Company and LGE resulted in an agreement (the "LGE
Stock Purchase Agreement"), which was approved by the stockholders of the
Company. In November 1995, pursuant to the LGE Stock Purchase Agreement, LGE
and LG Semicon purchased 18,619,000 shares of Old Common Stock at $10.00 per
share from the Company's stockholders pursuant to a tender offer and
16,500,000 newly issued shares of Old Common Stock at $10.00 per share from
the Company. After giving effect to such transactions, which resulted in a
$186.2 million aggregate payment to the stockholders of the Company and a $165
million capital contribution to the Company, LGE and LG Semicon owned
approximately 57.7% of the Old Common Stock. Pursuant to the Prepackaged Plan,
the $366.2 million equity investment of LGE and LG Semicon will be cancelled.
Financing Transactions
In 1996 the Company continued to experience price competition in the color
television markets and delays in production of new high-margin products. The
Company's losses accelerated in 1996 and 1997 as it attempted to modernize and
automate its manufacturing facilities. The Company invested heavily in
upgrading portions of its color picture tube operations in Melrose Park and in
setting up a new automated manufacturing line for computer display terminals
("CDTs"). The Company's CDT line was set up to produce low definition, small
screen size displays. By the time the CDT line was operational, the market for
such displays was limited, having been replaced in demand by higher
definition, larger screen sizes capable of handling the requirements of
advanced gaming and software developments. In order to make the CDT line
economically feasible, the Company would have to invest substantial additional
funding. Such funding will not be available under the Business Plan
Projections. Additionally, reconfiguring the production line would take
substantial time and expense relating to the process of bringing the
production line up to capacity.
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After an initial investment of $9.8 million, the Company abandoned its plans
to build a fully automated plant in Woodridge, Illinois to provide larger
screen size picture tubes when the projected cost of the facility
significantly exceeded its budget and available funding.
Despite initiatives to reduce costs, including restructuring some of its
business lines and reducing its workforce, the Company experienced
deteriorating working capital levels. In response, LGE began to provide
additional funding to the Company through extended payment terms on interest
bearing acceptances for products, such as VCRs, manufactured by LGE for the
Company. LGE also extended payment terms to the Company on other payables owed
by the Company to LGE.
In 1997, facing decreasing liquidity due to losses of $178 million in 1996
and expenditures in excess of $100 million on the revised expansion and
modernization plan for its Melrose Park facility, the Company sought to
refinance its existing credit facility. During March and April 1997, the
Company entered into financing arrangements with two consortia of financial
institutions led by Citibank. The Company obtained a three year $110 million
secured credit facility (the "Citibank Credit Facility") and a three year
trade receivables securitization facility (the "Citibank Receivables
Facility").
In 1997, the Company also consummated $87 million in sale-leaseback
transactions 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.
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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.
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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
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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
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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
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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.
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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
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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
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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-
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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.
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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
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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
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$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.
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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
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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
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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.
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(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
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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
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<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.
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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
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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
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<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
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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
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(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>
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<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
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.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 $127.0 million, derived from (i) a present value of free cash flow
(using a discount rate that ranged from 12% to 16%) that ranged from
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$(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
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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
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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
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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
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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
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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.
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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
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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.
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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
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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.
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THE PREPACKAGED PLAN
General
Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under chapter 11 of the Bankruptcy Code, a debtor is
authorized to reorganize its business for the benefit of its creditors and
stockholders. In addition to permitting rehabilitation of the debtor, chapter
11 seeks to promote equality of treatment of creditors and equity security
holders of equal rank with respect to the distribution of a debtor's assets.
In furtherance of these two goals, upon the filing of a petition for
reorganization under chapter 11, section 362 of the Bankruptcy Code generally
provides for an automatic stay of substantially all acts and proceedings
against the debtor and its property, including all attempts to collect Claims
or enforce liens that arose prior to the commencement of the debtor's case
under chapter 11.
The consummation of a plan of reorganization is the principal objective of a
chapter 11 reorganization case. A plan of reorganization sets forth the means
for satisfying Claims against, and Equity Interests in, a debtor. Confirmation
of a plan of reorganization by the Bankruptcy Court makes the plan binding
upon the debtor, any issuer of securities under the plan, any person acquiring
property under the plan and any creditor, equity security holder or general
partner in the debtor. Subject to certain limited exceptions, the confirmation
order discharges the debtor from any debt that arose prior to the date of
confirmation of the plan and substitutes 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
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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
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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.
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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.
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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
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(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
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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
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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.
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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.
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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.
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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.
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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.
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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
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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
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<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.
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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.
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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
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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
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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.
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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.
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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.
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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."
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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>
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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
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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;
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. 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
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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
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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
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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.
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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
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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.
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The liquidation proceeds realized by the Company are heavily dependent upon
liquidation of inventories and sale of real properties, plants and equipment in
a timely and efficient manner. Consequently, the liquidation analysis assumes
that appropriate professionals would be employed to oversee the process of
disposition of the Company's assets. During the liquidation, the Company
believes there would be significant costs of the liquidation and employee
turnover. See notes accompanying the liquidation analysis.
The Company believes, based on the assumptions set forth herein, that the
value of the distributions offered to the members of each Class of Impaired
Claims under the Prepackaged Plan will be greater than the distribution such
creditors would receive in a liquidation under chapter 7.
Section 1129(a)(7)(A)(ii) of the Bankruptcy Code states that the Bankruptcy
Court shall confirm a plan of reorganization only if certain requirements are
met, including a requirement that each holder of an Impaired Claim or Equity
Interest who does not consent to the plan receive or retain property that has a
value at least equal to the distribution such holder would receive if the
company were liquidated under chapter 7 of the Bankruptcy Code.
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STATEMENT OF ASSETS AND LIQUIDATION PROCEEDS:
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>
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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
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<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.
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DESCRIPTION OF DEBT AND CREDIT ARRANGEMENTS
Short-Term Debt
Citibank Credit Facility and Amended Citibank Credit Facility
In April 1997, the Company obtained a three-year, $110 million revolving
credit facility, composed of a $45 million term tranche and a $65 million
revolving tranche, with a bank group syndicated by Citibank. This Citibank
Credit Facility replaced the Company's previous credit agreement with a lending
group which was syndicated by General Electric Capital Corporation ("GECC
Credit Facility"). Under the revolving credit line, the maximum commitment of
funds available for borrowing was limited by a defined borrowing base formula
related to eligible inventory. Initially, the facility was secured by the
Company's inventory, domestic fixed assets, stock of the Company's subsidiaries
and tuner patent royalties, along with the related patents, licenses and other
general intangibles. Interest on borrowings is based on market rates.
The Citibank Credit Facility contained certain covenants that had to be met
in order to remain in compliance with the facility, including financial
covenants that had to be maintained as of the end of each fiscal quarter.
During 1997, the Company amended the Citibank Credit Facility to relax certain
financial covenants and to provide additional collateral. As amended, the
financial covenants include a minimum EBITDA amount, a current ratio test, a
funded debt/total capitalization ratio test, a tuning patent royalties test and
an LGE payable test. As a result of waivers obtained from the bank group in
December 1997 and March 1998, only the tuning patent royalties test and the LGE
payable test were in effect as of December 31, 1997 and March 31, 1998, and the
Company was in compliance with both of those covenants. In addition, there were
restrictions regarding investments, acquisitions, guarantees, transactions with
affiliates, sales of assets, mergers and additional borrowings, along with
limitations on liens, along with dividend payments on the Company's common
stock.
On June 29, 1998 the Citibank Credit Facility was amended and restated and
the Citibank Receivables Facility was terminated. The Amended Citibank Credit
Facility provides for up to $125.0 million of revolving loans, subject to
borrowing base restrictions, including up to $25.0 million in letters of credit
and up to $11.0 million in swing line loans. The revolving loans must be repaid
on or before the earlier of the Company's filing for bankruptcy 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.
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<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.
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<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>
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<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>
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<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.
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<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.
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<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.
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<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
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<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.
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<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
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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
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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.
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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.
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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.
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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.
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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)
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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
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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.
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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.
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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
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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.
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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.
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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.
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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
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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.
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BUSINESS
The following discussion of the business of the Company has largely been
excerpted from the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 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.
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Seasonal Variations in Business
Sales of the Company's consumer electronics products are generally at a
higher level during the second half of the year. Sales of consumer electronics
products typically increase in the fall, as the summer vacation season ends
and people spend more time indoors with the new fall programming on television
and during the Christmas holiday season. During each of the last three years,
approximately 55% of the Company's net sales were recorded in the second half
of the year and approximately 30% of the Company's net sales were recorded in
the fourth quarter of the year.
Major Customers
Sales to a single customer, Circuit City Stores, Inc., amounted to $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.
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Financial Information about Foreign and Domestic Operations and Export Sales
Financial information regarding foreign and domestic operations is
summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
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>
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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
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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
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<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.
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<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.
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<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
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<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.
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<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.
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<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
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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.
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(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).
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SECURITY OWNERSHIP
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information regarding the beneficial
ownership of the Old and New Common Stock as of 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.
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DESCRIPTION OF CAPITAL STOCK
Old Common Stock and Old Preferred Stock
The Company is presently authorized to issue 150,000,000 shares of Old Common
Stock, par value $1.00 per share, and 8,000,000 shares of preferred stock, par
value $1.00 per share (the "Old Preferred Stock"). As of 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.
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CERTAIN TRANSACTIONS
The Company has several financings, supply and other arrangements with LGE
and its affiliates. See "SPECIAL FACTORS--Events Leading to the
Restructuring--Financing Transactions" and "--Other Transactions with LGE."
In November 1995, a change in control of the Company occurred, in which LGE
and LG Semicon purchased shares of the Company pursuant to a combined tender
offer and purchase of newly issued shares of common stock from the Company. As
of 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
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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
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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.
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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.
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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
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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.
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Certain Transactions by Stockbrokers
Under section 1145(a)(4) of the Bankruptcy Code, stockbrokers are required to
deliver a copy of the Disclosure Statement (and supplements hereto, if any, if
ordered by the Bankruptcy Court) at or before the time of delivery of
securities issued under the Prepackaged Plan to their customers for the first
40 days after the Effective Date. This requirement specifically applies to
trading and other aftermarket transactions in such securities.
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
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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.
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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
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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
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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
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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.
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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
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accordance with sections 1125, 1126(b) and/or 1145 of the Bankruptcy Code
and Bankruptcy Rule 3018 and/or other applicable law.
37. "Disputed" means, with respect to any Claim or Equity Interest, any
Claim or Equity Interest: (a) listed on the Schedules as unliquidated,
disputed or contingent; or (b) as to which the Debtor or any other party in
interest have interposed a timely objection or request for estimation in
accordance with the Bankruptcy Code and the Bankruptcy Rules or is
otherwise disputed by the Debtor in accordance with applicable law, which
objection, request for estimation or dispute has not been withdrawn or
determined by a Final Order.
38. "Distribution Record Date" means the close of business on the
Business Day immediately preceding the Effective Date.
39. "Effective Date" means the date selected by the Corporation which is
a Business Day after the Confirmation Date on which: (a) no stay of the
Confirmation Order is in effect, and (b) all conditions specified in both
Article IX.A and IX.B of the Plan have been (i) satisfied or (ii) waived
pursuant to Article IX.C.
40. "Entity" means an entity as defined in section 101(15) of the
Bankruptcy Code.
41. "Equity Interest" means any equity interest of the Corporation,
including, but not limited to, all issued, unissued, authorized or
outstanding shares or stock (including the Common Stock), together with any
warrants, options or contract rights to purchase or acquire such interests
at any time.
42. "Estate" means the estate of the Debtor created by section 541 of the
Bankruptcy Code upon the commencement of the Prepackaged Chapter 11 Case.
43. "File" or "Filed" means file or filed with the Bankruptcy Court in
the Prepackaged Chapter 11 Case.
44. "Final Decree" means the decree contemplated under Bankruptcy Rule
3022.
45. "Final Order" means an order or judgment of the Bankruptcy Court, or
other court of competent jurisdiction with respect to the subject matter,
which has not been reversed, stayed, modified or amended, and as to which
the time to appeal or seek certiorari has expired and no appeal or petition
for certiorari has been timely taken, or as to which any appeal that has
been taken or any petition for certiorari that has been or may be filed has
been resolved by the highest court to which the order or judgment was
appealed or from which certiorari was sought.
46. "General Unsecured Claim" means any Unsecured Claim that is not a
Bank Lender Claim, Old Subordinated Debenture Claim, LGE Tranche A Claim or
LGE Tranche B Claim. 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
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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.
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62. "LGE Reimbursement Claims" means any and all claims of LGE against
the Debtor arising from or relating to the Reimbursement Agreement or the
LGE Bank 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.
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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.
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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
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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.
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(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.
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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.
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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.
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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
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and shall be in effect, without any requirement of further action by the
security holders or directors of the Debtor or the Reorganized Debtor. On the
Effective Date, the appropriate officers of the Reorganized Debtor and members
of the board of directors of the Reorganized Debtor are authorized and
directed to issue, execute and deliver the agreements, documents, securities
and instruments contemplated by the Plan in the name of and on behalf of the
Reorganized Debtor.
E. LGE New Credit Support
On or after the Effective Date, pursuant to the terms and conditions of the
Restructuring Agreement, LGE will provide the Debtor with the LGE New Credit
Support.
F. Sources of Cash for Plan Distribution
All Cash necessary for the Reorganized Debtor to make payments pursuant to
the Plan shall be obtained from existing Cash balances, the operations of the
Debtor or Reorganized Debtor, or post-confirmation borrowing under other
available facilities of the Debtor or Reorganized Debtor, including, without
limitation, to the extent available, the LGE New Credit Support. The
Reorganized Debtor may also make such payments using Cash received from its
subsidiaries through the Reorganized Debtor's consolidated cash management
system and from advances or dividends from such subsidiaries in the ordinary
course.
ARTICLE VI.
TREATMENT OF EXECUTORY CONTRACTS
AND UNEXPIRED LEASES
A. Assumption of Executory Contracts and Unexpired Leases
Immediately prior to the Effective Date, all executory contracts or
unexpired leases of the Reorganized Debtor will be deemed assumed in
accordance with the provisions and requirements of sections 365 and 1123 of
the Bankruptcy Code except those executory contracts and unexpired leases that
(1) have been rejected by order of the Bankruptcy Court, (2) are the subject
of a motion to reject pending on the Effective Date, (3) are identified on a
list to be filed with the Bankruptcy Court on or before the Confirmation Date,
as to be rejected, or (4) are rejected pursuant to the terms of the Plan.
Entry of the Confirmation Order by the Bankruptcy Court shall constitute
approval of such assumptions and rejections pursuant to sections 365(a) and
1123 of the Bankruptcy Code.
Notwithstanding anything to the contrary contained herein, on the Effective
Date, the Leveraged Leases shall be deemed rejected pursuant to section 365(a)
of the Bankruptcy Code. Any Claim arising from such rejection, including, but
not limited to, those Claims arising under section 502 of the Bankruptcy Code,
shall be part of and are included in the LGE Leveraged Lease Claims. Other
than on account of the LGE Leveraged Lease Claims, LGE shall not receive any
property or distribution arising from or related to such rejection. Except as
provided in the Restructuring Agreement, on the Effective Date, all property
that is the subject of the Leveraged Leases shall be vested in the Reorganized
Debtor free and clear of all liens, claims and encumbrances.
B. Claims Based on Rejection of Executory Contracts or Unexpired Leases
All proofs of claim with respect to Claims arising from the rejection of
executory contracts or unexpired leases, if any, must be Filed with the
Bankruptcy Court within sixty (60) days after the date of entry of an order of
the Bankruptcy Court approving such rejection. Any Claims arising from the
rejection of an executory contract or unexpired lease not Filed within such
times will be forever barred from assertion against the Debtor or Reorganized
Debtor, its estate and property unless otherwise ordered by the Bankruptcy
Court or provided in this Plan, all such Claims for which proofs of claim are
required to be Filed will be, and will be treated as, General Unsecured Claims
subject to the provisions of Article VIII hereof.
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C. Cure of Defaults for Executory Contracts and Unexpired Leases Assumed
Any monetary amounts by which each executory contract and unexpired lease to
be assumed pursuant to the Plan is in default shall be satisfied, pursuant to
section 365(b)(1) of the Bankruptcy Code, by payment of the default amount in
Cash on the Effective Date or on such other terms as the parties to such
executory contracts or unexpired leases may otherwise agree. In the event of a
dispute regarding: (1) the amount of any cure payments, (2) the ability of the
Reorganized Debtor or any assignee to provide "adequate assurance of future
performance" (within the meaning of section 365 of the Bankruptcy Code) under
the contract or lease to be assumed, or (3) any other matter pertaining to
assumption, the cure payments required by section 365(b)(1) of the Bankruptcy
Code shall be made following the entry of a Final Order resolving the dispute
and approving the assumption.
D. Indemnification of Directors, Officers and Employees
The obligations of the Debtor to indemnify any Person or Entity serving at
any time on or prior to the Effective Date as one of its directors, officers or
employees by reason of such Person's or Entity's service in such capacity, or
as a director, officer or employee of any other corporation or legal entity, to
the extent provided in the Debtor's constituent documents or by a written
agreement with the Debtor or the Delaware General Corporation Law, shall be
deemed and treated as executory contracts that are assumed by the Debtor
pursuant to the Plan and section 365 of the Bankruptcy Code as of the Effective
Date. Accordingly, such indemnification obligations shall be treated as General
Unsecured Claims, and shall survive unimpaired and unaffected by entry of the
Confirmation Order, irrespective of whether such indemnification is owed for an
act or event occurring before or after the Petition Date.
E. Compensation and Benefit Programs
Except as otherwise expressly provided hereunder, all employment and
severance policies, and all compensation and benefit plans, policies, and
programs of the Debtor applicable to its employees, retirees and non-employee
directors and the employees and retirees of its subsidiaries, including,
without limitation, all savings plans, retirement plans, health care plans,
disability plans, severance benefit plans, incentive plans, and life,
accidental death, and dismemberment insurance plans are treated as executory
contracts under the Plan and on the Effective Date will be assumed pursuant to
the provisions of sections 365 and 1123 of the Bankruptcy Code.
ARTICLE VII.
PROVISIONS GOVERNING DISTRIBUTIONS
A. Distributions for Claims Allowed as of the Effective Date
1. Except as otherwise provided in this Article VII or as may be ordered by
the Bankruptcy Court, distributions to be made on the Effective Date on account
of Claims that are allowed as of the Effective Date and are entitled to receive
distributions under the Plan shall be made on the Effective Date. Distributions
on account of Claims that become Allowed Claims after the Effective Date shall
be made pursuant to Articles VII.C and VIII.C below.
2. For purposes of determining the accrual of interest or rights in respect
of any other payment from and after the Effective Date, the LGE New
Restructured Senior Note, the New Bank Lender 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.
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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
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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
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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
<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: [ ]
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<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>
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<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>
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<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
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<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
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<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
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<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.
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<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.
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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.
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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
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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.
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(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.
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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.
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<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.
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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
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and shall be in effect, without any requirement of further action by the
security holders or directors of the Debtor or the Reorganized Debtor. On the
Effective Date, the appropriate officers of the Reorganized Debtor and members
of the board of directors of the Reorganized Debtor are authorized and
directed to issue, execute and deliver the agreements, documents, securities
and instruments contemplated by the Plan in the name of and on behalf of the
Reorganized Debtor.
E. LGE New Credit Support
On or after the Effective Date, pursuant to the terms and conditions of the
Restructuring Agreement, LGE will provide the Debtor with the LGE New Credit
Support.
F. Sources of Cash for Plan Distribution
All Cash necessary for the Reorganized Debtor to make payments pursuant to
the Plan shall be obtained from existing Cash balances, the operations of the
Debtor or Reorganized Debtor, or post-confirmation borrowing under other
available facilities of the Debtor or Reorganized Debtor, including, without
limitation, to the extent available, the LGE New Credit Support. The
Reorganized Debtor may also make such payments using Cash received from its
subsidiaries through the Reorganized Debtor's consolidated cash management
system and from advances or dividends from such subsidiaries in the ordinary
course.
ARTICLE VI.
TREATMENT OF EXECUTORY CONTRACTS
AND UNEXPIRED LEASES
A. Assumption of Executory Contracts and Unexpired Leases
Immediately prior to the Effective Date, all executory contracts or
unexpired leases of the Reorganized Debtor will be deemed assumed in
accordance with the provisions and requirements of sections 365 and 1123 of
the Bankruptcy Code except those executory contracts and unexpired leases that
(1) have been rejected by order of the Bankruptcy Court, (2) are the subject
of a motion to reject pending on the Effective Date, (3) are identified on a
list to be filed with the Bankruptcy Court on or before the Confirmation Date,
as to be rejected, or (4) are rejected pursuant to the terms of the Plan.
Entry of the Confirmation Order by the Bankruptcy Court shall constitute
approval of such assumptions and rejections pursuant to sections 365(a) and
1123 of the Bankruptcy Code.
Notwithstanding anything to the contrary contained herein, on the Effective
Date, the Leveraged Leases shall be deemed rejected pursuant to section 365(a)
of the Bankruptcy Code. Any Claim arising from such rejection, including, but
not limited to, those Claims arising under section 502 of the Bankruptcy Code,
shall be part of and are included in the LGE Leveraged Lease Claims. Other
than on account of the LGE Leveraged Lease Claims, LGE shall not receive any
property or distribution arising from or related to such rejection. Except as
provided in the Restructuring Agreement, on the Effective Date, all property
that is the subject of the Leveraged Leases shall be vested in the Reorganized
Debtor free and clear of all liens, claims and encumbrances.
B. Claims Based on Rejection of Executory Contracts or Unexpired Leases
All proofs of claim with respect to Claims arising from the rejection of
executory contracts or unexpired leases, if any, must be Filed with the
Bankruptcy Court within sixty (60) days after the date of entry of an order of
the Bankruptcy Court approving such rejection. Any Claims arising from the
rejection of an executory contract or unexpired lease not Filed within such
times will be forever barred from assertion against the Debtor or Reorganized
Debtor, its estate and property unless otherwise ordered by the Bankruptcy
Court or provided in this Plan, all such Claims for which proofs of claim are
required to be Filed will be, and will be treated as, General Unsecured Claims
subject to the provisions of Article VIII hereof.
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C. Cure of Defaults for Executory Contracts and Unexpired Leases Assumed
Any monetary amounts by which each executory contract and unexpired lease to
be assumed pursuant to the Plan is in default shall be satisfied, pursuant to
section 365(b)(1) of the Bankruptcy Code, by payment of the default amount in
Cash on the Effective Date or on such other terms as the parties to such
executory contracts or unexpired leases may otherwise agree. In the event of a
dispute regarding: (1) the amount of any cure payments, (2) the ability of the
Reorganized Debtor or any assignee to provide "adequate assurance of future
performance" (within the meaning of section 365 of the Bankruptcy Code) under
the contract or lease to be assumed, or (3) any other matter pertaining to
assumption, the cure payments required by section 365(b)(1) of the Bankruptcy
Code shall be made following the entry of a Final Order resolving the dispute
and approving the assumption.
D. Indemnification of Directors, Officers and Employees
The obligations of the Debtor to indemnify any Person or Entity serving at
any time on or prior to the Effective Date as one of its directors, officers or
employees by reason of such Person's or Entity's service in such capacity, or
as a director, officer or employee of any other corporation or legal entity, to
the extent provided in the Debtor's constituent documents or by a written
agreement with the Debtor or the Delaware General Corporation Law, shall be
deemed and treated as executory contracts that are assumed by the Debtor
pursuant to the Plan and section 365 of the Bankruptcy Code as of the Effective
Date. Accordingly, such indemnification obligations shall be treated as General
Unsecured Claims, and shall survive unimpaired and unaffected by entry of the
Confirmation Order, irrespective of whether such indemnification is owed for an
act or event occurring before or after the Petition Date.
E. Compensation and Benefit Programs
Except as otherwise expressly provided hereunder, all employment and
severance policies, and all compensation and benefit plans, policies, and
programs of the Debtor applicable to its employees, retirees and non-employee
directors and the employees and retirees of its subsidiaries, including,
without limitation, all savings plans, retirement plans, health care plans,
disability plans, severance benefit plans, incentive plans, and life,
accidental death, and dismemberment insurance plans are treated as executory
contracts under the Plan and on the Effective Date will be assumed pursuant to
the provisions of sections 365 and 1123 of the Bankruptcy Code.
ARTICLE VII.
PROVISIONS GOVERNING DISTRIBUTIONS
A. Distributions for Claims Allowed as of the Effective Date
1. Except as otherwise provided in this Article VII or as may be ordered by
the Bankruptcy Court, distributions to be made on the Effective Date on account
of Claims that are allowed as of the Effective Date and are entitled to receive
distributions under the Plan shall be made on the Effective Date. Distributions
on account of Claims that become Allowed Claims after the Effective Date shall
be made pursuant to Articles VII.C and VIII.C below.
2. For purposes of determining the accrual of interest or rights in respect
of any other payment from and after the Effective Date, the LGE New
Restructured Senior Note, the New Bank Lender 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.
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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
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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
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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.
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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.
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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
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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;
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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.
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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:
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Exhibit 10(a)(k)
REIMBURSEMENT AGREEMENT
THIS AGREEMENT is made as of November 3, 1997 (as from time to time
amended, supplemented or otherwise modified, this "Agreement") between LG
Electronics Inc. ("LGE") and Zenith Electronics Corporation ("Zenith").
WITNESSETH:
WHEREAS, Zenith from time to time may apply to LGE to guarantee up to
$160,000,000 of unsecured credit facilities for Zenith, and LGE may in its sole
discretion in each instance determine whether to issue each such guarantee; and
WHEREAS, Zenith and LGE desire to enter into this Agreement to set forth
the terms and provisions pursuant to which any such guarantees may be issued by
LGE and reimbursed by Zenith;
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound hereby, LGE and Zenith agree as
follows:
1. GUARANTEES AND SECURITY DOCUMENTS.
1.1 Unless otherwise defined herein or in the Security Documents
referred to below, capitalized terms where used herein or in the Security
Documents shall have the meaning set forth in that certain Credit Agreement,
dated as of March 31, 1997, with Citicorp North America, Inc., as Agent, and
the other lenders parties thereto, as in effect on the date hereof without
giving effect hereafter to changes in said definitions not consented to in
writing by LGE for purposes of this Agreement.
1.2 Each guarantee requested by Zenith shall be substantially in the
form of Exhibit A hereto, with such modifications thereto as shall be agreed to
by LGE (individually a "Guarantee" and collectively the "Guarantees"). Zenith
shall not request issuance of any Guarantee except to lenders which extend
prior to December 31, 1997 unsecured credit facilities on terms substantially
the same as set forth in Exhibit B hereto ("Credit Facilities") to Zenith for
its working capital needs. Zenith shall not request Guarantees in an aggregate
principal amount outstanding at any one time in excess of $160,000,000.
1.3 Zenith agrees to reimburse LGE, immediately upon demand, for any
and all payments made from time to time by LGE under the Guarantees, with
interest on the amounts so paid by LGE from and including the date paid by LGE
to but not including the date LGE is reimbursed therefor, at the Reference Rate
(hereinafter defined) in effect on the date of payment plus two percent (2%) per
annum; Zenith's obligations under this Section 1.3 shall be referred to
collectively as the "Reimbursement Obligations." "Reference Rate" means at any
time, the rate of interest then most recently announced by Bank of America
National Trust and Savings Association at Chicago, Illinois as its reference
rate.
<PAGE>
1.4 The Reimbursement Obligations shall be secured by a valid and
continuing security interest in and lien on certain assets of Zenith and its
Material Subsidiaries, including, without limitation, all equipment, real
estate, certain general intangibles and stock of domestic Subsidiaries. Such
security interests and liens shall be prior to all other security interests and
liens other than those in favor of the Agent and Permitted Liens, all pursuant
to a security agreement by Zenith, a stock pledge agreement by Zenith, a
subsidiary security agreement by Material Subsidiaries, a mortgage by Zenith and
the Material Subsidiaries and any other documents required by LGE (together with
all UCC-1 financing statements and any other document, instrument or agreement
in connection therewith, as the same may be amended or modified from time to
time hereinafter collectively called the "Security Documents"). LGE
acknowledges that LGE's liens and security interests shall be subject to a
subordination agreement with the Agent, in form and substance satisfactory to
the Agent and LGE (the "Subordination Agreement").
1.5 The payment by Zenith of the Reimbursement Obligations under this
Agreement shall be absolute, unconditional, and irrevocable, and shall be paid
strictly in accordance with the terms of this Agreement, under all circumstances
whatsoever, including, without limiting the generality of the foregoing, the
following circumstances:
(a) any lack of validity or enforceability of any term or provision of any
of the Guarantees, this Agreement, or any other instrument, document, or
agreement entered into in connection therewith;
(b) the existence of any claim, setoff, right of recoupment, defense or
other right of Zenith against LGE or any other person or entity, whether in
connection with this Agreement or otherwise, all of which are hereby
waived;
(c) any amendment or waiver of, any full or partial release of any
collateral under, or any consent to departure from the terms or conditions
of any of the Security Documents;
(d) any decision by LGE not to issue a Guarantee in any particular
instance;
(e) any other circumstance or happening whatsoever, whether or not similar
to any of the foregoing; or
(f) notwithstanding anything to the contrary set forth above, the payment
by Zenith of the Reimbursement Obligations shall at all times be subject to
the terms of the Subordination Agreement.
2. GUARANTEE FEE AND INTEREST CALCULATION.
2.1 Zenith agrees to pay LGE a guarantee fee, as set forth in a
letter agreement between LGE and Zenith attached hereto as Exhibit C.
2
<PAGE>
2.2 Interest shall be computed on the basis of a year consisting of
360 days and paid for actual days elapsed.
3. PAYMENTS AND OFFSET.
3.1 All payments hereunder shall be made to LGE in immediately
available funds at such place as may be designated by LGE to Zenith in writing.
3.2 In addition to, and not in limitation of, all rights of offset or
recoupment that LGE may have under applicable law, unless otherwise expressly
waived by LGE in writing, LGE shall have the right to appropriate and apply to
the payment of Zenith's obligations hereunder any and all balances, credits,
deposits, accounts or moneys of Zenith then or thereafter with or owing by LGE.
4. WARRANTIES. To induce LGE to enter into this Agreement and to execute
and deliver Guarantees, Zenith warrants that:
4.1 Zenith and all of its Subsidiaries are corporations duly
organized, validly existing and in good standing under the laws of the states of
their respective incorporation, and they are duly qualified and in good standing
as foreign corporations authorized to do business in each state where, because
of the nature of their respective activities or properties, such qualification
is required.
4.2 Zenith is duly authorized to execute and deliver this Agreement
and the Security Documents and is and will continue to be duly authorized to
perform its obligations under this Agreement and the Security Documents in
accordance with its respective terms.
4.3 The execution and delivery of this Agreement and the Security
Documents, and the performance by Zenith of its obligations under this Agreement
and the Security Documents, do not and will not conflict with any provision of
law or of Zenith's charter or by-laws or of any agreement binding upon Zenith,
except under Series 2000 Debentures and Series 2001 Debentures.
4.4 This Agreement and the Security Documents, when duly executed and
delivered by Zenith and its Material Subsidiaries, as the case may be, will be
legal, valid and binding obligations of Zenith and the Material Subsidiaries to
the extent such persons are parties thereto enforceable against Zenith and the
Material Subsidiaries, as the case may be, in accordance with their respective
terms, except as enforceability may be limited by bankruptcy, insolvency or
other similar laws of general application affecting the enforcement of
creditors' rights or by general principles of equity.
5. CONDITIONS PRECEDENT TO ISSUANCE OF GUARANTEES. Although LGE shall
have no obligation to issue any Guarantee, but reserves the right to issue
Guarantees in its discretion in each instance, it is understood and agreed that
LGE will not issue any Guarantee unless
3
<PAGE>
at the time of such issuance:
5.1 The warranties contained in Section 4 hereof shall be true and
correct.
5.2 Zenith shall have delivered to LGE:
(a) A copy, duly certified as of the date hereof by Zenith's secretary or
assistant secretary, of (i) the resolutions of the Zenith's Board of
Directors authorizing the execution and delivery of this Agreement and
Security Documents, (ii) all documents evidencing other corporate action,
and (iii) all approvals or consents, if any, with respect to this Agreement
and the Security Documents.
(b) A certificate of Zenith's secretary or assistant secretary, dated the
date hereof, certifying the names of the Zenith's officers authorized to
sign this Agreement and the Security Documents and all other documents or
certificates to be delivered hereunder, together with the true signatures
of such officers.
(c) Duly executed Security Documents covering such collateral as is
satisfactory to LGE, together with the Subordination Agreement, all in form
and substance satisfactory to LGE and its counsel.
(d) A legal opinion from counsel to Zenith in form and substance
satisfactory to LGE.
6. GENERAL.
6.1 No amendment or waiver of any provision of this Agreement nor
consent to any departure by Zenith therefrom shall be effective unless the same
shall be in writing and signed by LGE, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
6.2 This Agreement is a continuing agreement and shall inure to the
benefit of and be binding on the parties hereto, their respective successors,
transferees and assigns; provided, that except as otherwise permitted by this
Agreement, Zenith may not assign any of its rights or delegate any of its
obligations to or under all or any part of this Agreement without the prior
written consent of LGE.
6.3 Zenith agrees to pay on demand all reasonable costs and expenses
in connection with the negotiation, preparation, execution, delivery and
enforcement of this Agreement, the Security Documents and any other documents
which may be delivered in connection with this Agreement and the Security
Documents, including, without limitation, the reasonable fees and out-of-pocket
expenses of counsel for LGE with respect thereto and with respect to advising
LGE as to its rights and responsibilities under this Agreement and the Security
Documents and all costs and expenses, if any, in connection with the enforcement
of this Agreement, the Security Documents
4
<PAGE>
and such other documents which may be delivered in connection with this
Agreement and the Security Documents. In addition, Zenith shall pay any and all
stamp and other taxes and fees payable or determined to be payable in connection
with the execution, delivery, filing and recording of this Agreement and the
Security Documents and such other documents and agrees to save LGE harmless from
and against any and all liabilities with respect to or resulting from any delay
in paying or omission to pay such taxes and fees.
6.4 Any provision of this Agreement which is prohibited,
unenforceable or not authorized in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition, unenforceability
or non-authorization without invalidating the remaining provisions hereof or
affecting the validity, enforceability or legality of such provision in any
other jurisdiction.
6.5 LGE's rights and remedies under this Agreement shall be
cumulative and nonexclusive of any other rights and remedies LGE may have under
any other agreement, including the Guarantees and Security Documents, or by
operation of law or otherwise.
6.6 This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Illinois.
6.7 This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original and shall be binding upon the
parties, their successors and permitted assigns.
6.8 All notices under this Agreement or the Security Documents shall
be in writing and shall be deemed to have been given five (5) days after deposit
in the mail, or one (1) day after being entrusted to a reputable commercial
overnight delivery service, or when sent out by telex or telecopy addressed to
the party to which such notice is directed at its address.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
caused it to be executed and delivered by their duly authorized officers, all as
of the day and year first above written.
LG ELECTRONICS INC.
By:
-------------------------
Title:
----------------------
ZENITH ELECTRONICS CORPORATION
By:
-------------------------
Title:
----------------------
6
<PAGE>
EXHIBIT A
<PAGE>
FIRST
CHICAGO
NBD
- ---------------------
Limited Kun-Guarantee KUN-GUARANTEE
- --------------------- Date: September 24, 1997
Creditor: The First National Bank of Chicago
Joint and Several Guarantor
-----------------------------------
Address:
- --------------------------------------------------------------------------------
Issuing a joint and several guarantee to secure debt is a serious legal act with
potentially adverse financial consequences for the Guarantor. The Guarantor
should carefully read this Agreement and the "Notice to Guarantor" printed at
the end of this Agreement before making his/her decision.
- --------------------------------------------------------------------------------
The Guarantor hereby guarantees for the benefit of the Creditor, jointly and
severally with the Debtor, the repayment and payment of any and all indebtedness
or liability of the Debtor which is now or may at any time hereafter be due to
the Creditor and included within the scope of the indebtedness or liability
described below. The Guarantor agrees that the terms of the relevant agreements
concerning the Guaranteed Obligations described in Item 2 below shall apply to
any and all performance of its guarantee obligations hereunder (the "Guarantee
Obligations") and agrees to be bound by the following provisions (the term
"Creditor" shall include any branch or subsidiary of the Bank).
1. Debtor Name
Address
2. Scope of the Guaranteed Obligations:
Any and all obligations, debts and liabilities of the Debtor to the
Creditor, presently existing or to be incurred hereinafter, arising
out of, connected with or related to loans against bills, discounting
of bills, loans by deed, overdrafts, payment guarantees (including
debenture payment guarantees), sales of bonds, mutual savings
transactions, lending of instruments and securities, foreign exchange
transactions and all other credit transactions, guarantee obligations,
obligations under promissory notes or checks (including obligations
under the promissory notes or checks which the Creditor acquires from
a third party), payment of interest and default interest, incidental
indebtedness including any expenses and insurance premiums payable by
the Debtor, and any and all other credit transactions [: provided that
the Guarantor shall not be liable for the Debtor's obligations
guaranteed by any of the following institutions:
[1] Financial institutions under the Bank Act and any other special
statutory banks;
[2] Credit Guarantee Fund under the Credit Guarantee Fund Act;
[3] Technology Credit Guarantee Fund under the Law Concerning
Financial Assistance for New Technology Industry;
[4] Housing Finance Credit Guarantee Fund under the Law Concerning
Assistance for Housing Security and Housing Fund for Workers; or
[5] Guarantee Insurance Corporation under the Insurance Business
Act.]
Article 1. Maximum Amount of Guarantee Obligations
The maximum amount of the Guarantee Obligations (including interest, default
interest, incidental indebtedness, and any and all other obligations which have
accrued to the date when the Guaranteed Obligations become determined) shall be
30,000,000.00 (Thirty Million) (United States Dollars). Notwithstanding such
maximum amount of Guarantee Obligations, the Guarantor shall be liable for any
interest, default interest or all other incidental indebtedness accruing or
arising after the date when the Guaranteed Obligations become determined.
Article 2. Guarantee period
The period of this Guarantee shall be a provided for in Item 2 below (Delete
Item 1).
1. Not finite but continuing, provided the Guarantor may notify the
Creditor of its intention to terminate this Agreement by written
notice after the third anniversary of this Agreement. On the 45th day
from receipt of the notice by the Creditor, the Agreement shall
terminate whereupon the Guaranteed Obligations incurred prior to such
termination (regardless whether due and payable as of such termination
date) shall be fixed as the Guaranteed Obligations and shall continue
to be so guaranteed until full payment of such Guaranteed Obligations.
2. The guarantee period shall expire on September 25, 1998. Upon the
expiration of the guarantee period, it is agreed that the Guarantor
shall guarantee the Debtor's obligations (regardless whether due and
payable as of the expiration date) owing to the Creditor which remain
outstanding as of the expiration date of the guarantee period.
Article 3. Limitation of Set-off
The validity and enforceability of this Guarantee shall not be affected by any
set-off by the Debtor of the Guaranteed Obligations against any deposits or
other credit of the Debtor maintained with the Creditor.
Article 4. Enforcement of Subrogation Rights
The Guarantor shall not exercise, prior to the Creditor, any right to which the
Guarantor has succeeded by subrogation to the Creditor as long as any obligation
is owed by the Debtor to the Creditor. Even if the Guarantor exercises such
rights contemporaneously with the Creditor, the Guarantor shall be paid only
after the Creditor is fully paid.
Article 5. Relations Between This Agreement and Other Guarantee and Security
Any guarantee or any other security offered by the Guarantor to secure the
Guaranteed Obligations shall not be affected by this Guarantee unless otherwise
agreed. If there is a maximum limit to the obligation secured by such guarantee
or offered security, the maximum limit of Guarantee Obligation under this
Agreement shall be deemed to be additional to such maximum limit of other
guarantee or security. This Article shall apply mutatis mutandis to any other
additional guarantee or security to be offered by the Guarantor, separately from
the guarantee or the security offered in connection with this Agreement.
<PAGE>
-3-
Article 6. Modification or Termination of Security
The Creditor may amend, terminate or release, as applicable, other guarantees or
collateral securing any of the Debtor's obligations owed to the Creditor, if the
Guarantor consents thereto or if the Creditor determines that the Guarantor's
subrogation right will not be adversely affected by substitution of the existing
security with another security with more value or the guarantor with another
guarantor with comparable financial resources or the release of the security or
the guarantee in proportion to the partial payment of the guaranteed or secured
obligation.
Article 7. Indemnification
Notwithstanding the Creditor's right against the Debtor becomes invalid or not
enforceable due to legal incapacity or lack of corporate power of the Debtor to
incur the debt lack of authority or disability of the signatory to the
transaction agreement to represent or act for the Debtor, or for any other
reasons that invalidate the Guaranteed Obligations, the Guarantor shall continue
to be obligated to perform its obligation hereunder and shall indemnify the
Creditor against any and all damages arising therefrom. All terms and conditions
hereunder shall apply mutatis mutandis to the Guarantor's liability under this
Article.
Article 8. No Counterclaim Taxation
(1) All payments to be made by or on behalf of the Guarantor to the Creditor
pursuant to this Guarantee shall be made (a) without any set-off,
counterclaim or condition whatsoever and (b) free and clear of, and without
deduction for or on account of, any present or future taxes, unless the
Guarantor is required by law or regulation to make any such payment subject
to any taxes.
(2) In the event that the Guarantor is required by any law or regulation to
make any deduction or withholding on account of any taxes from any payment
due under this Guarantee, then: (a) the Guarantor shall notify the Creditor
promptly as soon as it becomes aware of such requirement; (b) the Guarantor
shall remit promptly the amount of such taxes to the appropriate taxation
authority, and in any event prior to the date on which penalties attach
thereto; (c) such payment shall be increased by such amount as may be
necessary to ensure that the Creditor receives a net amount free and clear
of all taxes, equal to the full amount which the Creditor would have
received had such payment not been subject to such taxes; and (d) the
Guarantor shall indemnify the Creditor against any liability of any of them
in respect of such taxes.
(3) Not later than thirty days after each deduction or withholding of any such
taxes, the Guarantor shall forward to the Creditor evidence satisfactory to
the Creditor that such taxes have been remitted to the appropriate taxation
authority.
Article 9. Guarantor's Representations and Warranties.
The Guarantor represents and warrants to the Creditor as follows:
(1) The Guarantor is a duly organized corporation (Chusik Hoesa), existing
under the laws of Korea.
(2) The Guarantor has all necessary powers and authority to issue this
Guarantee and to perform and observe the obligations contained herein and
this Guarantee has been validly authorized by its Board of Directors and
this Guarantee constitutes its legal, valid and binding obligations
enforceable in accordance with its terms.
(3) Neither the giving of this Guarantee nor the observance of its terms,
including without limitation the making of payment hereunder in United
States Dollars, contravene any law, decree, ordinance, or similar enactment
binding on the Guarantor, nor does the giving of this Guarantee and the
observance of its terms contravene any existing mortgage, contract or
agreement binding on the Guarantor.
(4) All approvals, consents, licenses and other authorizations from any
legislative or executive body of government, ministry, agency, exchange,
central authority or other authority required by the Constitution or the
laws of Korea in order for the Guarantor to incur the obligations contained
in this Guarantee, to execute and deliver this Guarantee and to perform and
observe the terms and provisions hereof and to make all payments hereunder
in Dollars, have been duly obtained and are in full force and shall remain
in full force and effect without amendment or restriction during the term
hereof, unless such amendment or restriction is beyond the control of the
Guarantor.
(5) There are no proceedings pending before any court or to the Guarantor's
knowledge threatened against or affecting the Guarantor, the Debtor or any
of the Guarantor's subsidiaries and there are no proceedings pending before
any governmental agency or administrative body or to the Guarantor's
knowledge threatened against Guarantor, the Debtor or any of the
Guarantor's subsidiaries, which if adversely determined would materially
and adversely affect the Guarantor's financial condition or the Guarantor's
ability to pay under the terms and conditions of this Guarantee, and the
Guarantor's obligations hereunder rank and shall rank throughout the life
hereof at least pari passu with all the Guarantor's other unsecured
indebtedness.
(6) The Guarantor's balance sheets as at December 31, 199__ and the related
statements of income and retained earnings for the fiscal year then ended,
copies of which have been provided to the Creditor, fairly present the
Guarantor's financial condition as at the date of such balance sheet and
the results of the Guarantor's operations for the period ended on such date
all in accordance with generally accepted accounting principles of Korea
consistently applied and since the dates of each such balance sheet there
has been no material adverse change in the Guarantor's financial condition
or operations.
(7) The Guarantor has filed all income tax returns and all other material tax
returns which are required to be filed by the Guarantor and has paid all
taxes due pursuant to such returns or pursuant to any assessment received
by the Guarantor. The charges, accruals and reserves on the books of the
Guarantor in respect of taxes and other governmental charges are, in the
opinion of the Guarantor, adequate.
Article 10. Currency Indemnity
If under any applicable law or regulation, and whether pursuant to a judgment
being made or registered against the Guarantor or the liquidation of the
Guarantor or for any other reason, any payment under or in connection with this
Guarantee is made in a currency (the "payment currency") other than the currency
in which such payment is due under or in connection with this Guarantee (the
"contractual currency"), then to the extent that the amount of such payment
actually received by the Creditor, when converted into the contractual currency
at the rate of exchange, falls short of the amount due under or in connection
with this Guarantee, the Guarantor, as a separate and independent obligation,
shall indemnify and hold harmless the Creditor against the amount of such
shortfall. For the purposes of this Article, "rate of exchange" means the rate
at which the Creditor is able on or about the date of such payment to purchase
the contractual currency with the payment currency and shall take into account
any premium and other costs of exchange with respect thereto.
<PAGE>
Article 11. _____________________
The Guarantee will be executed in the English and Korean languages. In the
event of any conflict between two languages, the English language version shall
prevail.
Article 12. Agreement on Jurisdiction and Governing Law
Any dispute arising out of or in relation to this Agreement shall be subject to
the non-exclusive jurisdiction of the Supreme Court of the State of New York,
County of New York or any Federal court of the United States of America located
in the City and State of New York, United States of America and shall be subject
to the laws of the State of New York without regard to choice of law principles.
Notice to Guarantor
The Legal Nature of Joint and Several Guarantee
. The guarantor agrees to guarantee the principal obligations incurred by the
principal obligor to the bank (the creditor) jointly and severally with the
principal obligor. Therefore, if the borrower fails to pay loans due and
payable to the bank, the bank is entitled to compel the guarantor to pay such
principal obligations prior to making demands on the borrower (e.g.,
compulsory foreclosure of the guarantor's property)
Liability for Joint and Several Guarantee
. "Guarantee for specific obligation" guarantees only obligations arising from
a credit transaction with specified purpose and amount. An extension of
maturity, roll-over of credit or replacement with another loan will discharge
the guarantee.
. "Limited kun-guarantee" guarantees within the maximum guarantee amount any
obligations which are included within the scope of specified obligations of
the borrower outstanding at present (including obligations previously
incurred and outstanding at present) or to be incurred in the future. By
granting this limited kun-guarantee, the guarantor assumes substantial
liability to guarantee the borrower's obligations. The specific guaranteed
obligations may be described as follows.
. Specific credit transaction with specified date of agreement (e.g.,
Agreement for Loans against Trade Bills dated (date))
The extension of maturity is permitted; however, roll-over or
replacement with another loan will discharge the guarantee.
. Credit transaction of a special type (e.g., loans against trade bills)
Extension of the maturity, roll-over and replacement with other credit of
the same type is permitted, but replacement with other credit of a
different type will discharge the guarantee.
. "Comprehensive kun-guarantee" guarantees, within the maximum guarantee amount
any and all obligations of the borrower outstanding at present or to be
incurred in the future without specifying the scope of such guaranteed
obligations. Therefore, by granting a comprehensive kun-guarantee, the
guarantor assumes an extensive liability.
(Note) An executive officer of a company may guarantee the company's obligations
only in the form of "guarantee for specific obligation" or "limited kun-
guarantee."
Guarantor's Signature
. If you have any questions about the scope of guaranteed obligations,
guarantee period, etc. after carefully reading the entire content of the
relevant agreement, please contact the bank's office in charge of credit. If
you determine that the agreement accurately expresses your intentions, please
enter an amount (maximum amount of guaranteed indebtedness) on the relevant
agreement (a letter of guarantee of an agreement) in your handwriting or
confirm the amount on the relevant agreement and be sure to set your hand and
affix your seal thereon.
Delivery of a Copy of Kun-Guarantee Agreement
. After executing the kun-guarantee agreement, you may request a copy thereof
from the officer in charge.
Officer:
(seal) Title:
Name: (seal)
In the space above marked with * please state briefly, in your own words that
you ____________ of corporation, a representative or an agent of the corporation
have read the above notice carefully, sign your name and affix your seal.
<PAGE>
EXHIBIT B
<PAGE>
FIRST The First National Bank of Chicago
CHICAGO 153 West 51st Street
NBD New York, New York 10019
Telephone (212) 373-1033
Fax (212) 373-1458
Jin-Woo Park Date: October 27, 1997
First Vice President
U.S. Korea Marketing Division
Mr. Shin-IK (Simon) Kang
Vice President and Corporate Treasurer
Zenith Electronics Corporation
1000 Milwaukee Avenue
Glenview, IL 60025-2493
Dear Mr. Kang:
The First National Bank of Chicago (the "Bank") is pleased to establish a
guaranteed line of credit in favor of Zenith Electronics Corporation, a
Delaware corporation, (the "Borrower"), in the amount of US$30,000,000
which shall continue from ( ) through ( )
(the "Maturity Date") and be operative under the following terms and
conditions.
a) The Bank's provision of the line of credit is subject to a guarantee
for repayment in U.S. Dollars of the principal and payment of interest
thereon issued and delivered by LG Electronics Inc. (the "Guarantor"),
Seoul, Korea, duly validated in accordance with all applicable Korean
FX control laws and/or regulations.
b) Loans under this line of credit will be evidenced and governed by the
Bank's standard form of master note (the "Note"), a copy of which is
attached hereto, and will bear interest, at the Borrower's option, at:
i) a rate equal to the Bank's Corporate Base Rate of interest
announced by the Bank from time to time, changing when and as the
Corporate Base Rate changes, with interest payable on the last
business day of each month, on the Maturity Date, and on demand
thereafter; or
ii) subject to availability and for a maturity to be agreed upon, at
a fixed rate equal to the sum of 0.65% per annum plus the
Eurodollar rate, where the Eurodollar rate is the rate at which
deposits in U.S. dollars in the amount and for a maturity
corresponding to that of the loan are offered by the Bank in the
offshore interbank market at approximately 10:00 a.m. (Chicago
time) two business days prior to the date on which such loan is
made, adjusted for maximum statutory reserve requirements.
<PAGE>
Mr. Shin-IK (Simon) Kang
Vice President and Corporate Treasurer
Zenith Electronics Corporation
Page 2
The aggregate amount of loans at any time outstanding shall in no event
exceed $30,000,000.
c) No interest period for or maturity of a loan hereunder shall extend beyond
the Maturity Date. Interest and fees will be computed on the basis of
actual days elapsed on a 360 day year basis.
d) The Borrower will use the proceeds of the loans hereunder for working
capital purposes. The Borrower will provide the Bank with the Note,
appropriate resolutions, incumbency certificates, and other documents that
the Bank may require from time to time.
e) The Bank shall have no obligation to make a loan hereunder (and all
outstanding loans and accrued and unpaid interest, at the option of the
Bank, may be declared immediately due and payable without notice) if, (I)
there is any failure by the Borrower to pay principal, interest, fees, or
other obligations when due under this letter, the Note, or any other
agreement or arrangement with the Bank, (ii) there exists any default under
this letter or the Note, or any violation or failure to comply with any
provision of this letter or the Note, (iii) there occurs any material
adverse change in the condition or results of operations of the Borrower
since the date of the financial statements most recently delivered to the
Bank prior to the date of this letter, (iv) any litigation is pending or
threatened against the Borrower which might have a material adverse effect
on its financial condition or results of operations, (v) there is a default
under any agreement governing indebtedness of the Borrower, (vi) any
petition is filed by or against the Borrower under the bankruptcy laws of
the United States of America or any other jurisdiction, (vii) the Borrower
becomes insolvent, howsoever evidenced, or (viii) the Guarantor cancels its
guarantee for repayment of the loan and/or interest hereon under this
letter agreement or there occurs an event or events to the Guarantor the
same as or similar to the ones described in items (I) through (vii) of this
article (e). The Bank may require a certificate of compliance with these
conditions from the Borrower's Chief Financial Officer or Treasurer as a
condition to making any loan hereunder.
<PAGE>
Mr. Shin-IK (Simon) Kang
Vice President and Corporate Treasurer
Zenith Electronics Corporation
Page 3
f) The Bank may make assignments and sell participation in this line of credit,
the Note and loans made hereunder, and may disclose information pertaining
to the Borrower to perspective assignees and participants. Any assignment
will release the Bank of its funding obligation with respect to the amount
assigned and may be made upon notice to the Borrower.
g) This line of credit shall be effective as of the date of this letter when
the Borrower has signed and returned to the Bank a copy of the letter and
may be terminated by you or us at any time effective upon the giving of
written advice to the other party and in the sole discretion of the party
electing to terminate.
h) THIS LETTER AND NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF
ILLINOIS. BOTH PARTIES HERETO HEREBY WAIVE TRIAL BY JURY IN THE EVENT THIS
LETTER OR THE NOTE BECOMES THE SUBJECT OF A DISPUTE.
Very truly yours,
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ Jin-Woo Park
----------------------------
Jin-Woo Park
Title: First Vice Presdient
Accepted and Agreed:
Zenith Electronics Corporation
By: /s/ Roger A. Cregg /s/ S. I. Kang
------------------ ------------------
Roger A. Cregg S.I. Kang
Vice President and Treasurer
Title: Executive Vice President and
Chief Financial Officer
Date: October 27, 1997
<PAGE>
MASTER NOTE
Chicago, Illinois
Date: October 27, 1997
U.S.$30,000,000
FOR VALUE RECEIVED, Zenith Electronics Corp. (the "Company"), promises to pay to
the order of THE FIRST NATIONAL BANK OF CHICAGO (the "Bank"), in lawful money of
the United States at the office of the Bank at One First National Plaza,
Chicago, Illinois, or as the Bank may otherwise direct, the lesser of Thirty
Million and No/Hundreds Dollars (U.S.$30,000,000) or the aggregate outstanding
unpaid principal amount of loans advanced hereunder and pursuant to that certain
letter agreement dated 10/27/97 between the Company and the Bank (the "Letter
Agreement"), together with interest as provided below.
The Company and the Bank may agree to a fixed interest rate and a specific
maturity for a loan (a "fixed rate loan") at the time of borrowing. Interest on
each fixed rate loan shall be payable upon the maturity of such fixed rate loan
and, in the case of a fixed rate loan with an original maturity in excess of
three months, interest shall also be payable on the last day of each three-month
interval while such fixed rate loan is outstanding. A fixed rate loan not paid
at maturity shall thereafter be payable on demand and bear interest at a rate
equal to the sum of the corporate base rate of interest announced by the Bank
from time to time, plus 2% per annum, changing when and as the corporate base
rate changes.
Except as provided in the preceding paragraph, loans hereunder shall be payable
on demand and shall bear interest at a rate equal to the corporate base rate of
interest announced by the Bank from time to time, changing when and as the
corporate base rate changes. Interest on all loans bearing interest at a rate
related to the corporate base rate shall be payable on the last business day of
each month and on demand.
Any person authorized to borrow on behalf of the Company (an "authorized
person") may request a loan hereunder by telephone or telex. The Company agrees
that, in implementing this arrangement, the Bank is authorized to honor requests
which it believes, in good faith, to emanate from an authorized person acting
pursuant to this note, whether in fact that be the case or not. If the Bank
requests a written confirmation, the Company will confirm the terms of each loan
so requested by mailing a confirmation letter to the Bank signed by an
authorized person. If the Bank elects to confirm the terms of a loan to the
Company, the Company will notify the Bank in writing within 10 days after the
Company's receipt of such confirmation if it believes such confirmation to be
inaccurate, and the Company hereby waives any right to contest the accuracy of
such confirmation after such 10-day period.
The Company hereby authorizes the Bank to record loans, maturities, repayments,
interest rates and payment dates on the schedule attached to this note or
otherwise in accordance with the Bank's
1
<PAGE>
usual practice. The obligation of the Company to repay each loan made hereunder
shall be absolute and unconditional notwithstanding any failure to enter such
amounts of such schedule or to receive written confirmation of the transaction
from the Company and, in the event of disagreement as to the terms of a
transaction, the Bank's records shall govern, absent manifest error. The Company
hereby authorizes the Bank to deposit the proceeds of loans to, and to charge
payments of principal and interest against, the Company's deposit account with
the Bank.
Each payment of principal or interest hereunder shall be made in immediately
available funds. If any payment shall become due and payable on a Saturday,
Sunday or legal holiday under the laws of Illinois, such payment shall be made
on the next succeeding business day in Illinois and any such extended time of
the payment of principal or interest shall be included in computing interest at
the rate this note bears in connection with such payment. All interest hereunder
shall be computed for the actual number of days elapsed on a 360-day basis.
If any change in any law, rule, regulation or directive (including, without
limitation, Regulation D of the Board of Governors of the Federal Reserve
System) imposes any condition the result of which is to increase the cost to the
Bank of making, funding or maintaining any fixed rate loan hereunder or reduces
any amount receivable by the Bank hereunder in connection with a fixed rate
loan, the Company shall pay the Bank the amount of such increased expense
incurred or the reduction in any amount received which the Bank determines is
attributable to making, funding and maintaining the fixed rate loans hereunder.
A fixed rate loan may not be prepaid prior to the agreed maturity of the loan
without the written consent of the Bank. If, for any reason, any payment of a
fixed rate loan occurs prior to maturity of that loan, the Company will
indemnify the Bank for any loss or cost resulting therefrom, including, without
limitation, any loss or cost in liquidating or employing deposits acquired to
fund or maintain the fixed rate loan. Loans bearing interest at a rate related
to the corporate base rate may be prepaid by the Company, without premium or
penalty.
The Company agrees that all sums payable hereunder whether in respect of
principal, interest, fees or otherwise shall be paid in accordance with the
terms of the Letter Agreement.
The Bank may elect to sell participations in or assign its rights under loans
made hereunder and the Letter Agreement. The Company hereby authorizes the Bank
to disclose information relating to the financial condition or operations of the
Company to any purchaser or prospective purchaser of an interest in any loan
made hereunder. The Company agrees that if it fails to pay any loan when due,
any purchaser of an interest in such loan shall be entitled to seek enforcement
of this note if the purchaser is permitted to do so pursuant to the terms of the
participation agreement between the Bank and such purchaser.
Nothing in this note shall constitute a commitment to make loans to the Company.
In addition to, and without limitation of, any rights of the Bank under
applicable law, if any amount payable hereunder is not paid when due, there is
any material adverse change in the Company's financial condition, there is a
default under any agreement governing indebtedness of the Company, any
2
<PAGE>
petition is filed by or against the Company under the Federal Bankruptcy Code or
similar state law or if the Company becomes insolvent, howsoever evidenced, the
Bank may declare all unpaid principal and interest on fixed rate loans and
unpaid fees immediately due and payable and any indebtedness from the Bank to
the Company may be offset and applied toward the payment of all unpaid
principal, interest and fees payable hereunder, whether or not such amounts, or
any part thereof, shall then be due. The Company expressly waives any
presentment, demand, protest or notice in connection with this note now, or
hereafter, required by applicable law and agrees to pay all costs and expenses
of collection.
This note shall be governed by the internal law (and not the law of conflicts)
of the State of Illinois, giving effect, however, to federal laws applicable to
national banks. The Company agrees to the jurisdiction of any United States
federal or Illinois state court selling in Chicago, Illinois and hereby waives
its right to trial by jury in the event this note becomes the subject of any
dispute.
Zenith Electronics Corp.
By: /s/ Roger A. Cregg
---------------------
Roger A. Cregg
Title: Executive Vice President
and Chief Financial Officer
By: /s/ S. I. Kang
----------------
S. I. Kang
Vice President and Treasurer
3
<PAGE>
SCHEDULE
to be attached and become a part of
the Master Note dated October 27, 1997
executed by Zenith Electronics Corp.
and payable to
The First National Bank of Chicago
<TABLE>
<CAPTION>
Unpaid Initials
Amount Principal of
Date Amount of Balance Person
of of Interest Principal of Making
Transaction Loan Maturity Rate Payment Note Notation
- ----------- ------ -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
4
<PAGE>
EXHIBIT C
<PAGE>
October 29, 1997
Zenith Electronics Corporation
1000 Milwaukee Avenue
Glenview, Illinois 60025-2495
Attention: Roger A. Cregg, Chief Financial Officer
Dear Mr. Cregg:
This letter agreement sets forth our mutual understanding regarding the
terms on which LG Electronics Inc. ("LGE") will provide credit support to Zenith
Electronics Corporation ("Zenith") in the form of such guarantees as may be
required by the lenders under proposed credit facilities for Zenith in an amount
up to $160 million in the aggregate (the "Aggregate Available Amount"). We
mutually acknowledge that LGE owns directly and indirectly a majority of the
outstanding common stock of Zenith, which stock is subject to the rules of the
New York Stock Exchange.
The parties hereto agree as follows:
1. LGE shall guarantee up to $160 million of credit facilities for Zenith
under the proposed credit facilities currently being negotiated with a proposed
group of lenders.
2. In consideration of the guarantees and subject to Paragraph 7. below,
Zenith expects to pay and LGE expects to receive a credit support fee based on
the Aggregate Available Amount. The parties intend that the credit support fee
shall be in the form of either cash or equities (which may be in the form of
stock or of options to purchase shares of Zenith's common stock). At the present
time, LGE proposes that the credit support fee be at a rate of 2% per annum of
the Aggregate Available Amount.
3. The credit support fee shall accrue as of the date of the closing of
each credit facility, and if paid in cash, shall be payable within 30 days after
the date of the next stockholders' meeting.
4. If the credit support fee is in the form of stock or stock options, such
stock or options will vest with LGE on a monthly basis, as of the first business
day of any month, at the rate of 1/12 of the total options granted for each
year's fee.
5. If the proposed credit support fee is in the form of equity, the
arrangement shall be submitted for approval to the stockholders of Zenith in
accordance with the rules of the New York Stock Exchange at the next annual
meeting, which is currently scheduled for May, 1998,
<PAGE>
and the payment of the credit support fee in the form of equity shall be
conditioned upon the approval by the stockholders of Zenith. LGE undertakes that
it will vote in favor of the credit support fee arrangement at the stockholders'
meeting.
6. In the event that Zenith is unable to complete its arrangements with
respect to the full $160 million in proposed credit facilities prior to December
31, 1997, then the fee from January 1, 1998, forward on such facilities shall be
based on the face amount of facilities actually secured and in effect from time
to time.
7. LGE understands and acknowledges that the Board of Directors (including
its Finance Committee) and, if the fee is to be paid in equity, the shareholders
of Zenith must approve certain terms and conditions concerning the guarantee
fee; which approvals have not been obtained as of the date of this letter
agreement. LGE further acknowledges that the Board of Directors of Zenith has
retained certain independent consultants for the purpose of making
recommendations as to the appropriate compensation to be paid to LGE for its
guarantee, and that the consultants may determine that the appropriate credit
support fee is other than that proposed by LGE in this letter. LGE further
understands that Zenith will in good faith seek to obtain all necessary
approvals for appropriate and fair compensation to LGE for its financial
support.
8. On acceptance of this proposal by Zenith, LGE shall proceed with the
issuance of its guarantee of up to $160 million of the credit facilities for
Zenith under the proposed credit facilities prior to the determination of the
appropriate fee level, and in doing so relies on the good faith effort of Zenith
with respect to the fee arrangement.
Very truly yours,
LG Electronics Inc.
LG Electronics
By: /s/
--------------------------------
Its:
-------------------------------
President
Accepted and agreed to:
Zenith Electronics Corporation
By: /s/ Roger A. Cregg
-------------------------------
Its: Roger A. Cregg, Exec. VP & CFO
-------------------------------
Date: November 5, 1997
----------------
<PAGE>
EXHIBIT 10.AP
EXECUTION COPY
FORBEARANCE, LOCK-UP AND VOTING AGREEMENT
-----------------------------------------
This FORBEARANCE, LOCK-UP AND VOTING AGREEMENT (this "Agreement") is made
and entered into as of March 31, 1999 by and among Zenith Electronics
Corporation, a Delaware corporation ("Zenith" or the "Company"), LG Electronics
Inc., a corporation existing under the laws of the Republic of Korea ("LGE"),
Loomis, Sayles & Company, L.P., a Delaware limited partnership ("Loomis"),
Mariner Investment Group, a Delaware limited liability partnership ("Mariner")
and Caspian Capital Partners, L.L.P., a Delaware limited liability partnership
("Caspian"; and together with Loomis and Mariner, collectively the "Consenting
Holders"). Capitalized terms used herein but not otherwise defined herein shall
have the meanings given such terms in that certain January 29, 1999 Amendment
No. 2 ("Amendment No. 2") to Form S-4 Registration Statement, Disclosure
Statement and Proxy Statement - Prospectus for the Solicitation of Votes for the
Prepackaged Plan of Reorganization of Zenith Electronics Corporation (as amended
from time to time, the "Registration Statement/Disclosure Statement"). The
Company, LGE, and the Consenting Holders are collectively referred to herein as
the "Parties" and individually as a "Party."
RECITALS
WHEREAS, Zenith, LGE and the Consenting Holders have engaged in good faith
negotiations with the objective of reaching an agreement with regard to
restructuring the indebtedness outstanding under the Old Subordinated
Debentures;
WHEREAS, Zenith, LGE and the Consenting Holders now desire to implement a
financial restructuring (the "Financial Restructuring") of Zenith substantially
on the terms set forth in the Registration Statement/Disclosure Statement, but
as modified pursuant to the terms of this Agreement and the Term Sheet attached
as Exhibit A hereto (the "Term Sheet");
WHEREAS, in order to implement the Financial Restructuring, Zenith intends,
subject to the terms and conditions of this Agreement, to prepare and file (i)
the Registration Statement/Disclosure Statement and (ii) a plan of
reorganization (the "Prepackaged Plan") implementing the terms of the Financial
Restructuring in a case (the "Chapter 11 Proceedings") filed under chapter 11 of
title 11 of the United States Code (the "Bankruptcy Code"), and Zenith intends
to use its reasonable best efforts to have such Registration
Statement/Disclosure Statement approved and such Prepackaged Plan confirmed by
the Bankruptcy Court for such U.S. Judicial District as may be selected by
Zenith (so long as venue in such District is proper) (the "Bankruptcy Court"),
in each case as expeditiously as possible under the Bankruptcy Code and the
Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules");
WHEREAS, in order to facilitate the implementation of the Financial
Restructuring, each of the Consenting Holders is prepared to commit, as set
forth in more detail herein, during the period commencing on the date hereof and
ending on the date a Termination Event (as defined herein) first
<PAGE>
occurs, and no longer (i) to forbear from exercising remedies in respect of the
Old Subordinated Debentures and (ii) not to sell, transfer or assign any of the
Old Subordinated Debentures except as permitted herein;
WHEREAS, each of the Consenting Holders is prepared to commit, on the terms
and subject to the conditions of this Agreement, to vote to accept a Prepackaged
Plan that satisfies the Conditions (as defined herein).
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, Zenith, LGE and
the Consenting Holders hereby agree as follows:
1. Forbearance. During the period commencing on the date hereof and
ending on the date that a Termination Event first occurs, and no longer, each
Consenting Holder hereby agrees to forebear (and agrees not to give any
instructions to the trustee under the Old Subordinated Debenture Indenture
inconsistent with such forbearance) from the exercise of any rights or remedies
it may have under the Old Subordinated Debentures or the Old Subordinated
Debenture Indenture (the "Existing Agreements"), applicable law or otherwise,
with respect to any default in existence or arising under the Existing
Agreements; provided, however, during such period, Zenith and LGE shall have
-------- -------
continued to comply with their obligations under the terms and conditions of
this Agreement. In the event that this Agreement shall terminate, each
Consenting Holder shall have, and shall be entitled to exercise, each of its
rights or remedies under the Existing Agreements and applicable law, as if this
Agreement was never executed (and shall not be deemed to have waived any such
rights or remedies by virtue of executing this Agreement).
2. Voting. Each of the Consenting Holders represents that, as of the
date hereof, it is the beneficial owner, and/or the investment adviser or
manager for the beneficial owner (with the power to vote and dispose of Old
Subordinated Debentures on behalf of such beneficial owner) of Old Subordinated
Debentures set forth on the schedule attached to its signature page (for each
such Party, the "Relevant Claims"). Each of the Consenting Holders agrees that,
subject to the conditions (the "Conditions") that (i) the Registration
Statement/Disclosure Statement shall have been declared effective by the
Securities and Exchange Commission and/or approved by the Bankruptcy Court; (ii)
the terms of the Prepackaged Plan and all documents attendant thereto,
including, without limitation, the terms, financial instruments, and security
documents (if any) to be provided to the holders of the Old Subordinated
Debentures (collectively, the "Attendant Documents"), contained in such
Registration Statement/Disclosure Statement relating to the Old Subordinated
Debentures include and/or are consistent with the terms set forth in the Term
Sheet; and (iii) except as may be modified pursuant to the terms of this
Agreement, all other terms of the Prepackaged Plan shall be, in all material
respects, the same as the terms contained in Amendment No. 2, or, any material
changes shall be reasonably acceptable to the Consenting Holders, it shall
timely vote (including instructing custodial agents to vote, as the case may be)
its Relevant Claims (and not revoke or withdraw such vote except as permitted
hereunder) to accept such Prepackaged Plan.
-2-
<PAGE>
3. Restriction on Transfer. Each of the Consenting Holders hereby
agrees that, during the period commencing on the date hereof and ending on the
date that a Termination Event first occurs, and no longer, it shall not sell,
transfer or assign any of the Relevant Claims or any option thereon or any right
or interest (voting or otherwise) therein, unless the transferee thereof agrees
in writing to be bound by all the terms of this Agreement by executing a
counterpart signature page of this Agreement and the transferor provides Zenith
with a copy thereof, in which event Zenith shall be deemed to have acknowledged
that its obligations to the Consenting Holders hereunder shall be deemed to
constitute obligations in favor of such transferee, and Zenith shall confirm
that acknowledgment in writing.
4. Zenith Agreements. Zenith hereby agrees to use its reasonable best
efforts to have the Registration Statement/Disclosure Statement declared
effective by the Securities and Exchange Commission and/or approved by the
Bankruptcy Court, and thereafter to take all reasonable steps necessary and
desirable to obtain an order of the Bankruptcy Court confirming the Prepackaged
Plan, in each case, as expeditiously as possible under the rules and regulations
of the Securities and Exchange Commission, the Bankruptcy Code and the
Bankruptcy Rules; provided, however, that notwithstanding anything contained
-------- -------
herein to the contrary, the commitments and obligations of the Parties hereunder
shall not be affected or modified by the commencement of a voluntary or
involuntary bankruptcy case prior to the completion of a solicitation of
consents to the Prepackaged Plan.
5. Support of the Plan. Zenith and LGE will use their reasonable best
efforts to obtain confirmation of the Prepackaged Plan in accordance with the
Bankruptcy Code as expeditiously as possible. The Consenting Holders will take
all necessary and appropriate actions to support confirmation. No Consenting
Holder shall (a) object to confirmation of a Prepackaged Plan that satisfies the
Conditions or otherwise commence any proceeding to oppose or alter a Prepackaged
Plan that satisfies the Conditions or any other reorganization documents
containing terms that satisfy the Conditions, (b) vote for, consent to, support
or participate in the formulation of any other plan of reorganization or
liquidation proposed or filed or to be proposed or filed in any chapter 11 or
chapter 7 case commenced in respect of the Company provided that Zenith files
and is supporting a Prepackaged Plan that satisfies the Conditions, (c) directly
or indirectly seek, solicit, support or encourage any other plan, proposal or
offer of dissolution, winding up, liquidation, reorganization, merger or
restructuring of the Company or any of its subsidiaries that could reasonably be
expected to prevent, delay or impede the successful restructuring of the Company
as contemplated by the Prepackaged Plan, provided that the Prepackaged Plan
satisfies the Conditions, (d) object to the Registration Statement/Disclosure
Statement or the solicitation of consents to the Prepackaged Plan, provided that
the Prepackaged Plan satisfies the Conditions, or (e) take any other action that
is inconsistent with, or that would delay confirmation of, the Prepackaged Plan,
provided that the Prepackaged Plan satisfies the Conditions.
6. Acknowledgment. This Agreement is not and shall not be deemed to be a
solicitation for consents to the Prepackaged Plan. The acceptances of the
Consenting Holders will not be solicited until the Consenting Holders have
received the Registration Statement/Disclosure Statement and related ballot.
-3-
<PAGE>
7. Termination of this Agreement and Consenting Holders' Obligations.
Each Consenting Holder may terminate its obligations hereunder and rescind any
vote on the Prepackaged Plan by such Consenting Holder (which vote shall be null
and void and have no further force and effect) and this Agreement shall
terminate if any of the following events (any such event, a "Termination Event")
occurs: (i) a Prepackaged Plan that satisfies the Conditions has not been filed
with the Bankruptcy Court on or prior to September 15, 1999; (ii) a Prepackaged
Plan that satisfies the Conditions has not been confirmed by the Bankruptcy
Court on or prior to December 31, 1999; (iii) Zenith or LGE withdraw (and do not
promptly refile) from consideration by the Bankruptcy Court any Prepackaged Plan
that satisfies the Conditions; (iv) Zenith or LGE file, propound or otherwise
support any Prepackaged Plan or other plan of reorganization or liquidation that
does not satisfy the Conditions; (v) the Prepackaged Plan is modified or
replaced such that it (or any such replacement) at any time does not satisfy the
Conditions or (vi) LGE shall not support the Prepackaged Plan.
8. Good Faith Negotiation of New Subordinated Debentures. Zenith, LGE
and each Consenting Holder hereby further covenants and agrees to negotiate the
definitive documents relating to the New Subordinated Debentures in good faith.
Zenith shall not terminate (or cause to be rejected) its fee agreements with
Hebb & Gitlin, a Professional Corporation or Crossroads Capital Partners LLC
(together, the "Advisors") prior to the earlier to occur of (i) a Termination
Event or (ii) the date a Prepackaged Plan that satisfies the Conditions is
confirmed by the Bankruptcy Court, becomes effective, and a final closing has
occurred. In any event, so long as the Consenting Holders are in compliance
with the terms of this Agreement, Zenith shall cause all amounts due to the
Advisors to be received by them immediately prior to the commencement by Zenith
of Chapter 11 Proceedings. The obligations of Zenith set forth in the
immediately preceding sentence shall survive the termination of this Agreement.
9. Releases. The Consenting Holders agree, provided that the Releases
(as defined herein) are contained in a Prepackaged Plan that satisfies the
Conditions (i) to grant the releases and exculpation provided in the
Registration Statement/Disclosure Statement and Prepackaged Plan (the
"Releases") (and to take such action as Zenith or LGE shall reasonably request
to evidence such grant), (ii) not to object to the entry of an order by the
Bankruptcy Court approving the Releases, and (iii) not to make any election with
respect to the Relevant Claims not to grant the Releases. The Releases shall be
null and void if a Prepackaged Plan that satisfies the Conditions is not
confirmed by the Bankruptcy Court prior to the termination of this Agreement.
10. Representations and Warranties. Zenith, LGE and each of the
Consenting Holders, represents and warrants to each other the following
statements are true, correct and complete as of the date hereof:
(a) Corporate Power and Authority. It has all requisite corporate
power and authority to enter into this Agreement and to carry out the
transactions contemplated by, and perform its respective obligations under,
this Agreement.
-4-
<PAGE>
(b) Authorization. The execution and delivery of this Agreement and
the performance of its obligations hereunder have been duly authorized by
all necessary corporate, partnership or LLC action on its part.
(c) No Conflicts. The execution, delivery and performance by it of
this Agreement do not and shall not (i) violate any provision of law, rule
or regulation applicable to it or any of its subsidiaries or its
Certificate of Incorporation or bylaws or other organizational documents or
those of any of its subsidiaries or (ii) conflict with, result in a breach
of or constitute (with due notice or lapse of time or both) a default under
any material contractual obligation to which it or any of its subsidiaries
is a party.
(d) Governmental Consents. The execution, delivery and performance
by it of this Agreement do not and shall not require any registration or
filing with, consent or approval of, or notice to, or other action to, with
or by, any federal, state or other governmental authority or regulatory
body, except such filings as may be necessary and/or required for
disclosure by the Securities and Exchange Commission and in connection with
the commencement of the Chapter 11 Proceedings, the approval of the
Registration Statement/Disclosure Statement and confirmation of the
Prepackaged Plan.
(e) Binding Obligation. This Agreement is the legally valid and
binding obligation of it, enforceable against it in accordance with its
terms, except as enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or limiting
creditors' rights generally or by equitable principles relating to
enforceability.
11. Restructuring Agreement. Notwithstanding anything contained in this
Agreement to the contrary, LGE's obligations, undertakings, representations and
warranties hereunder are subject to the terms and conditions of the
Restructuring Agreement.
12. Further Acquisition of Securities. This Agreement shall in no way be
construed to preclude the Consenting Holders from acquiring additional Claims.
However, any such additional Claims so acquired shall automatically be deemed to
be Relevant Claims and to be subject to the terms of this Agreement.
13. Indemnification. (a) Zenith hereby agrees to indemnify and hold the
Consenting Holders and their officers, directors, partners, agents, employees
and advisors, and each of their respective successors and assigns, harmless from
and against any and all claims, actions, suits, liabilities, and judgments, and
costs and expenses directly related thereto (including reasonable costs of
defense on an as-incurred basis), arising by reason of or resulting from the
Consenting Holders' execution of this Agreement and performance of their
obligations hereunder, but expressly excluding any liability, cost or expense
arising from or related to the gross negligence, fraud or willful misconduct of
the Consenting Holders. In the event that any of the Consenting Holders
terminate their obligations under this Agreement in accordance with Section 7
hereof, the terms of this Section 13 shall survive, but solely for the period
commencing from the date hereof through the date of such termination.
-5-
<PAGE>
(b) In the event that a third party commences any action to which any
person (an "Indemnified Party") is entitled to indemnification under this
Agreement, the Indemnified Party shall provide written notice of such
commencement to Zenith. Zenith may, at its election and at its own expense and
without limiting its obligation to indemnify the Indemnified Party, assume
control of the defense of such action with counsel reasonably satisfactory to
the Indemnified Party; provided, however, that if Zenith assumes control of the
-------- -------
defense, the Indemnified Party may retain separate counsel of its choice at its
own cost and expense. The Indemnified Party will cooperate with Zenith in the
defense of any such action. Zenith shall provide the other party with copies of
all notices, pleadings, and other papers filed or received in connection with
such action, and in no event shall either the Indemnified Party or Zenith
consent or agree to a settlement of any such action without the prior written
consent of the other; provided; however; that if Zenith obtains a settlement of
-------- -------
such action that includes an unconditional release of the Indemnified Party as
to the claims set forth in such action, Zenith shall not require the consent of
the Indemnified Party to settle such action.
14. Amendments. This Agreement may not be modified, amended or
supplemented except in writing signed by Zenith, LGE and each of the Consenting
Holders.
15. Disclosure. Unless required by applicable law or regulation, neither
Zenith nor LGE shall disclose any Consenting Holder's holdings of Relevant
Claims without the prior written consent of such Consenting Holder, and if such
announcement or disclosure is so required by law or regulation, Zenith and LGE
shall afford such Consenting Holder a reasonable opportunity to review and
comment upon any such announcement or disclosure prior to such announcement or
disclosure. The foregoing shall not prohibit Zenith and LGE from disclosing
names of the Consenting Holders, the approximate aggregate holdings of Claims by
the Consenting Holders as a group, or the existence and terms of this Agreement;
provided, however, that any press release of Zenith naming the Consenting
- -------- -------
Holders (individually or as an ad hoc committee) shall be acceptable to the
Consenting Holders, such approval not to be unreasonably withheld, delayed or
denied.
16. Impact of Appointment to Creditors Committee. If an official
committee of unsecured creditors or of holders of Old Subordinated Debentures is
appointed by the United States Trustee in the Chapter 11 Proceedings, to the
extent that any Consenting Holder wishes, in its sole and absolute discretion,
to be appointed to any official committee of unsecured creditors or holders of
Old Subordinated Debentures, Zenith and LGE shall cooperate with the Consenting
Holders in seeking to cause the United States Trustee to appoint the Consenting
Holders to be members of such official committee pursuant to Section 1102 of the
Bankruptcy Code. Notwithstanding anything herein to the contrary, in the event
that any Consenting Holder is appointed to and serves on a committee of
creditors or holders of Old Subordinated Debentures in the Chapter 11
Proceedings, the terms of this Agreement shall not be construed so as to limit
such Consenting Holder's exercise (in its sole and absolute discretion) of its
fiduciary duties to any person arising from its service on such committee, and
any such exercise (in the sole and absolute discretion of such Consenting
Holder) of such fiduciary duties shall not be deemed to constitute a breach of
the terms of this Agreement (but the fact of such service on such committee
shall not otherwise affect the continuing validity or enforceability of this
Agreement).
-6-
<PAGE>
17. Governing Law; Jurisdiction. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Illinois, without
regard to any conflicts of law provision which would require the application of
the law of any other jurisdiction. By its execution and delivery of this
Agreement, each of the Parties hereto hereby irrevocably and unconditionally
agrees for itself that any legal action, suit or proceeding against it with
respect to any matter under or arising out of or in connection with this
Agreement or for recognition or enforcement of any judgment rendered in any such
action, suit or proceeding, may be brought in the U.S. District Court for the
Northern District of Illinois. By execution and delivery of this Agreement,
each of the parties hereto hereby irrevocably accepts and submits itself to the
nonexclusive jurisdiction of each such court, generally and unconditionally,
with respect to any such action, suit or proceeding. Notwithstanding the
foregoing consent to Illinois jurisdiction, upon the commencement of the
Chapter 11 Proceedings, each of the Parties hereto hereby agrees that the
Bankruptcy Court shall have exclusive jurisdiction of all matters arising out of
or in connection with this Agreement.
18. Specific Performance. It is understood and agreed by each of the
Parties hereto that money damages would not be a sufficient remedy for any
breach of this Agreement by any Party and each non-breaching Party shall be
entitled to specific performance and injunctive or other equitable relief as a
remedy of any such breach.
19. Headings. The headings of the sections, paragraphs and subsections of
this Agreement are inserted for convenience only and shall not affect the
interpretation hereof.
20. Successors and Assigns. This Agreement is intended to bind and inure
to the benefit of the Parties and their respective successors, assigns, heirs,
executors, administrators and representatives. The agreements, representations
and obligations of the Consenting Holders under this Agreement are, in all
respects, several and not joint.
21. Prior Negotiations. This Agreement and the Term Sheet supersede all
prior negotiations with respect to the subject matter hereof.
22. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same Agreement.
23. No Third-Party Beneficiaries. Unless expressly stated herein, this
Agreement shall be solely for the benefit of the Parties hereto and no other
person or entity shall be a third-party beneficiary hereof.
24. Consideration. It is hereby acknowledged by the Parties hereto that
no consideration shall be due or paid to the Consenting Holders for their
agreement to vote to accept the Prepackaged Plan in accordance with the terms
and conditions of this Agreement other than Zenith's agreement to use its
reasonable best efforts to obtain approval of the Registration
Statement/Disclosure Statement and to take all steps necessary and desirable to
confirm the Prepackaged Plan in accordance with the terms and conditions of this
Agreement.
-7-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed and delivered by its duly authorized officer as of the date first
above written.
ZENITH ELECTRONICS CORPORATION
By: /s/ Edward J. McNulty
--------------------------------
Name: Edward J. McNulty
Title: Senior Vice President and
Chief Financial Officer
LG ELECTRONICS INC.
By: /s/ John Koo
--------------------------------
Name: John Koo
Title:
<PAGE>
LOOMIS SAYLES & COMPANY, L.P.
By: LOOMIS, SAYLES & COMPANY,
INCORPORATED, ITS GENERAL PARTNER
By: /s/ Thomas H. Day
--------------------------------------
Name: Thomas H. Day
Title: Vice-President
Old Subordinated Debentures Owned or Controlled
-----------------------------------------------
$ 52,050,000 Face Amount
<PAGE>
MARINER LDC
By: MARINER INVESTMENT GROUP, INC.
By: /s/ C. Howe II
------------------------------------
Name: C. Howe II
Title: Treasurer
CASPIAN CAPITAL PARTNERS, L.L.P.
By: /s/ C. Howe II
_______________________________
Name: C. Howe II
Title: Treasurer of G.P.
Old Subordinated Debentures Owned or Controlled
-----------------------------------------------
Caspian Capital Partners, L.P. $1,683,500
Mariner LDC $1,992,500
-11-
<PAGE>
EXHIBIT A
---------
TERM SHEET
----------
In satisfaction of all amounts owed with respect to the Old
Subordinated Debentures, the Company will issue New Subordinated Debentures
("New Subordinated Debentures") pursuant to an indenture (the "New Indenture")
dated as of the Effective Date.
<TABLE>
<S> <C>
Aggregate Principal Amount........... $50 million
Maturity Date........................ November 1, 2009
Interest............................. 8.19% per annum, payable in cash
semiannually
Redemption........................... may be redeemed at the option of the
Company, at any time, in whole or in
part, at par
Conversion........................... not convertible
Ranking; Security.................... pari passu with the LGE New
Restructured Senior Note; to the extent
secured, the New Subordinated
Debentures receive a silent lien or inter-
creditor agreement to share collateral
(other than the leveraged lease assets)
upon liquidation of the Company
Sinking Fund......................... none
Events of Default.................... same as Old Subordinated Debenture
Indenture
Remedies............................. same as Old Subordinated Debenture
Indenture
Covenants............................ same as Old Subordinated Debenture
Indenture
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Releases............................. each holder of Old Subordinated
Debentures shall grant the releases
provided in the Registration
Statement/Disclosure Statement unless
such holder affirmatively indicates its
determination not to grant such releases
on its respective ballot; LGE's
commitment contingent on not more
than 5% of holders electing not to grant
releases
Other Terms.......................... provisions in favour of the Consenting
Holders and their professional advisors
from the Company relating to
indemnification (on the terms set forth
in the Agreement), releases,
exculpation, pre and post-petition
professional advisor fees (whether in
the context of committee or individual
bondholder representation) and
expenses
Co-Terminus.......................... the Maturity Date of the LGE New
Restructured Senior Note shall be
co-terminus with the Maturity Date of
the New Subordinated Debentures
</TABLE>
<PAGE>
EXHIBIT 10 AQ
March 29, 1999
Mr. Edward J. McNulty
Senior Vice President & Chief Financial Officer
Zenith Electronics Corporation
1000 Milwaukee Avenue
Glenview, Illinois 60025
Re: $150,000,000 Debtor-In-Possession Revolving Credit Facility and
$150,000,000 Exit Revolving Credit Facility
COMMITMENT LETTER
Dear Mr. McNulty:
You have advised us that Zenith Electronics Corporation ("Zenith")desires
to establish a $150,000,000 debtor-in-possession revolving credit facility (the
"DIP Facility")and a $150,000,000 exit revolving credit facility (the "Exit
Facility"; collectively with the DIP Facility, the "Facilities" and each a
"Facility") in connection with that certain case under Chapter 11 of the United
States Bankruptcy Code, as more fully described in the Registration Statement on
Form S-4 and Schedule 13E-3, as amended, filed by Zenith with the Securities and
Exchange Commission (the "Bankruptcy Case"), to be voluntarily commenced by
Zenith. You have asked Citicorp North America, Inc. ("CNAI") to commit to
provide you with financing commitments for the Facilities.
CNAI is pleased to inform you of its commitment to provide the entire
amount of the Facilities, subject to the terms and conditions described in this
letter and the
<PAGE>
attached Annex I and II(collectively, the "Commitment Letter").
CONDITIONS PRECEDENT
- --------------------
The commitment of CNAI hereunder is subject to: (i) Borrower's acceptance of
this Commitment Letter by its execution hereof in the space provided below and
delivery thereof to CNAI on or before March 31, 1999, (ii) the preparation,
execution and delivery of mutually acceptable loan documentation for each
Facility, including a credit agreement, incorporating substantially the terms
and conditions outlined in this Commitment Letter; (iii) the absence of (A) a
material adverse change in the business, condition (financial or otherwise),
operations, performance or properties of Zenith since December 31, 1998, and (B)
any change in loan syndication, financial or capital market conditions generally
that, in the judgment of CNAI or its affiliates, would materially impair
syndication of either Facility; (iv) the accuracy and completeness of all
representations that you make to us and all information that you furnish to us
and your compliance with the terms of this Commitment Letter; (v) the payment in
full of all fees, expenses and other amounts payable under this Commitment
letter; (vi) a closing of the DIP Facility on or prior to August 31, 1999 and a
closing of the Exit Facility on or prior to October 31, 1999; and (vii)
satisfaction of the conditions precedent set forth on the attached Annex I and
Annex II, including, without limitation, (A) CNAI's receipt of a "prepackaged
plan" to be filed contemporaneously with the commencement of the Bankruptcy
Case, in form and substance acceptable to CNAI, and (B) evidence satisfactory to
CNAI that LGE Electronics Inc.("LGE")has committed to provide a $60,000,000 exit
financing facility to Zenith, on terms acceptable to CNAI, to be closed
contemporaneously with the closing of the Exit Facility, and evidence that LGE
has received the consent of all applicable governmental entities to provide such
exit financing facility.
COMMITMENT TERMINATION
- ----------------------
<PAGE>
Zenith Electronics Corporation
March 29, 1999
Page 3
CNAI's commitment set forth in this Commitment Letter will terminate (i) with
respect to both Facilities, on August 31, 1999 unless the DIP Facility closes on
or before such date, and (ii) with respect to the Exit Facility, on October 31,
1999, unless the Exit Facility closes on or before such date. This Commitment
Letter may be terminated (i) by you at your option upon payment of all fees,
expenses and other amounts then payable under this Commitment Letter at any time
prior to the earlier of (A) the closing of the DIP Facility, and (B) August 31,
1999, or (ii) by CNAI if any event occurs or information has become available
that, in its reasonable judgment, results or is likely to result in the failure
to satisfy any condition set forth in the immediately preceding paragraph.
SYNDICATION
- -----------
CNAI intends to syndicate all or a portion of its commitment under each Facility
to one or more other financial institutions that will become parties to such
definitive documentation pursuant to a syndication to be managed by Salomon
Smith Barney, Inc. ("SSBI")(the financial institutions becoming parties to such
definitive documentation being collectively referred to herein as the
"Lenders"). You understand that SSBI intends to commence syndication efforts
promptly and that it may elect to appoint one or more syndication agents (which
may include CNAI or Citibank, N.A.) to direct the syndication efforts on its
behalf.
SSBI will act as the syndication agent with respect to the Facilities and will
manage all aspects of the syndication in consultation with you, including the
timing of all offers to potential Lenders, the acceptance of commitments, and
the determination of the amounts offered and the compensation provided.
<PAGE>
Zenith Electronics Corporation
March 29, 1999
Page 4
You agree to take all action as SSBI may reasonably request to assist it in
forming a syndicate acceptable to it. Your assistance in forming such a
syndicate shall include but not be limited to: (i) making senior management and
representatives of Zenith and LGE available to participate in information
meetings with potential Lenders at such times and places as SSBI may reasonably
request; (ii) using your reasonable efforts to ensure that the syndication
efforts benefit from your lending relationships; and (iii) providing SSBI with
all information reasonably deemed necessary by it to successfully complete the
syndication.
To ensure an orderly and effective syndication of each Facility, you agree that
until the termination of the syndication (as determined by SSBI), you will not,
and will not permit any of your affiliates to, syndicate or issue, attempt to
syndicate or issue, announce or authorize the announcement of the syndication or
issuance of, or engage in discussions concerning the syndication or issuance of,
any debt facility or debt security (including any renewals thereof), without the
prior written consent of SSBI; provided, however, the foregoing shall not apply
to $60,000,000 exit financing facility to be provided by LGE and referenced
above or to any securities to be issued in connection with any confirmed plan of
reorganization of Zenith, substantially in the form described in a draft
"prepackaged plan" provided to, and in form and substance acceptable to, CNAI.
You agree that CNAI will act as the sole agent bank for the Facilities and that
SSBI will act as sole syndication agent for the Facilities and that no
additional agents, co-agents or arrangers will be appointed, or other titles
conferred, without the consent of SSBI and CNAI. You agree that no Lender will
receive any compensation of any kind for its participation in any Facility,
except as expressly provided for in Annex I or II.
<PAGE>
Zenith Electronics Corporation
March 29, 1999
Page 5
INDEMNIFICATION
- ---------------
You agree to indemnify and hold harmless CNAI, SSBI, each Lender and each of
their affiliates and each of their respective officers, directors, employees,
agents, advisors and representatives (each, an "Indemnified Party") from and
against any and all claims, damages, losses, liabilities and expenses
(including, without limitation, fees and disbursements of counsel), joint or
several, that may be incurred by or asserted or awarded against any Indemnified
Party, in each case arising out of or in connection with or relating to any
investigation, litigation or proceeding or the preparation of any defense with
respect thereto, arising out of or in connection with or relating to this
Commitment Letter or the loan documentation or the transactions contemplated
hereby or thereby, or any use made or proposed to be made with the proceeds of
any Facility, whether or not such investigation, litigation or proceeding is
brought by Zenith, any of its subsidiaries, shareholders, advisors or creditors,
an Indemnified Party or any other person, or an Indemnified Party is otherwise a
party thereto and whether or not the transactions contemplated hereby are
consummated, except to the extent such claim, damage, loss, liability or expense
is found in a final, non-appealable judgment by a court of competent
jurisdiction to have resulted from such Indemnified Party's gross negligence or
willful misconduct.
You agree that no Indemnified Party shall have any liability (whether direct or
indirect, in contract, tort or otherwise) to Zenith or any of its subsidiaries,
shareholders, advisors or creditors for or in connection with the transactions
contemplated hereby, except to the extent such liability is found in a final
non-appealable judgment by a court of competent jurisdiction to have resulted
from such Indemnified Party's gross negligence or willful misconduct.
<PAGE>
Zenith Electronics Corporation
March 29, 1999
Page 6
COST AND EXPENSES
- -----------------
In further consideration of the commitment of CNAI hereunder, and recognizing
that in connection herewith CNAI is incurring substantial costs and expenses
(including, without limitation, reasonable fees and disbursements of counsel and
its syndication agent(s), filing and recording fees and due diligence,
syndication, transportation, computer, duplication, messenger, appraisal, audit
(including per diem costs of auditors), insurance and consultant costs and
expenses), you hereby agree to pay, or reimburse CNAI on demand for, all such
reasonable costs and expenses (whether incurred before or after the date
hereof), regardless of whether any of the transactions contemplated hereby are
consummated. You also agree to pay all reasonable costs and expenses of CNAI
(including, without limitation, fees and disbursements of counsel) incurred in
connection with the enforcement of any of its rights and remedies hereunder.
CONFIDENTIALITY
- ---------------
By accepting delivery of this Commitment Letter, you agree that this Commitment
Letter is for your confidential use only and that neither is existence nor the
terms hereof will be disclosed by you to any person other than your officers,
directors, employees, accountants, attorneys and other advisors, and then only
on a "need to know" basis in connection with the transactions contemplated
hereby and on a confidential basis. Notwithstanding the foregoing, following
your acceptance of the provisions hereof and your return of an executed
counterpart of this Commitment Letter to us as provided below, together with
fifty percent(50%) of the Closing Fee referenced on the attached Annex I,(i) you
may make public disclosure of the existence and amount of CNAI's commitment
hereunder and of CNAI's identity as agent bank, (ii) you may file a copy of this
Commitment Letter in
<PAGE>
Zenith Electronics Corporation
March 29, 1999
Page 7
any public record in which it is required by law to be filed, and (iii) you may
make such other public disclosures of the terms and conditions hereof as you are
required by law, in the opinion of your counsel, to make.
REPRESENTATIONS AND WARRANTIES OF ZENITH
- ----------------------------------------
You represent and warrant that (i) all information (other than financial
projections) that has been or will hereafter be made available to CNAI, any
Lender or any potential Lender by you or any of your representatives in
connection with the transactions contemplated hereby, taken as a whole, is and
will be complete and correct in all material respects and does not and will not
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements contained therein not misleading in
light of the circumstances under which such statements were or are made and (ii)
all financial projections, if any, that have been or will be prepared by you and
made available to CNAI, any Lender or any potential Lender have been or will be
prepared in good faith based upon reasonable assumptions. You agree to
supplement the information and projections from time to time so that the
representations and warranties contained in this paragraph remain correct.
In issuing this commitment, CNAI is relying on the accuracy of the information
furnished to it by or on behalf of Zenith and its affiliates without independent
verification thereof.
<PAGE>
Zenith Electronics Corporation
March 29, 1999
Page 8
NO THIRD PARTY RELIANCE, ETC.
- -----------------------------
The agreements of CNAI hereunder and of any Lender that issues a commitment
under any Facility are made solely for the benefit of Zenith and may not be
relied upon or enforced by any other person. Please note that those matters
that are not covered or made clear herein or in Annex I or Annex II are subject
to mutual agreement of the parties. The terms and conditions of this Commitment
Letter may be modified only in writing.
GOVERNING LAW, ETC.
- -------------------
This Commitment Letter shall be governed by, and construed in accordance with,
the laws of the State of New York. This Commitment Letter sets forth the entire
agreement between the parties with respect to the matters addressed herein and
supersedes all prior communications, written or oral, with respect hereto. This
Commitment Letter may be executed in any number of counterparts, each of which,
when so executed, shall be deemed to be an original and all of which, taken
together, shall constitute one and the same Commitment Letter. Delivery of an
executed counterpart of a signature page to this Commitment Letter by facsimile
shall be as effective as delivery of a manually executed counterpart of this
Commitment Letter. Your obligations under the paragraphs captioned
"Indemnification", "Costs and Expenses" and "Confidentiality" shall survive the
expiration or termination of this Commitment Letter.
WAIVER OF JURY TRIAL
- --------------------
Each party hereto irrevocably waives all right to trial by jury in any action,
proceeding or counterclaim (whether based on contract, tort or otherwise)
arising out of or relating to this Commitment Letter or the transactions
contemplated hereby or the actions of CNAI or SSBI or their
<PAGE>
Zenith Electronics Corporation
March 29, 1999
Page 9
respective affiliates in the negotiation, performance or enforcement hereof.
Please indicate your acceptance of the provisions hereof by signing the enclosed
copy of this Commitment Letter and returning it, together with fifty percent
(50%) of the Closing Fee referenced on the attached Annex I, to Thomas M.
Halsch, Vice President, Citicorp North America, Inc., 399 Park Avenue, Sixth
Floor, Zone 4, New York, New York 10043 (facsimile: 212-793-1290) at or before
5:00 p.m. (New York City time) on March 31, 1999, the time at which the
commitment of CNAI set forth above (if not so accepted prior thereto) will
expire. If you elect to deliver this Commitment Letter by facsimile, please
arrange for the executed original to follow by next-day courier.
Very truly yours,
CITICORP NORTH AMERICA, INC.
By:_________________
Title: Vice President
<PAGE>
Zenith Electronics Corporation
March 29, 1999
Page 10
Accepted and agreed to by
Zenith Electronics Corporation
By:___________________________
Title:________________________
Date: March __, 1999
cc: Mr. Todd R. Snyder
Director
Peter J. Solomon Company
767 Fifth Avenue
New York, New York 10153
<PAGE>
Annex I
Summary of Terms for $150,000,000
---------------------------------
Debtor in Possession Financing for
----------------------------------
Zenith Electronics Corporation
------------------------------
Borrower: Zenith Electronics Corporation, as debtor and debtor-in-
- --------
possession
DIP Lenders: Any one or more of the Lenders under the Amended and
- -----------
Restated Credit Agreement dated as of June 29, 1998, as
thereafter amended from time to time (the "Original
Credit Agreement"), plus any additional lenders
reasonably acceptable to Borrower that may from time to
time be party to the post-petition financing
(collectively, the "DIP Lenders") described below.
Capitalized terms used herein which are not otherwise
defined or limited herein are as defined in the Original
Credit Agreement.
Agent: Citicorp North America, Inc.
- -----
Amount and
- ----------
Type of Facility: The DIP Lenders shall provide Borrower with a revolving
- ----------------
credit facility (the "Post-Petition Financing")
providing for extensions of credit in an amount not to
exceed $150,000,000 (inclusive of a sub-facility for
outstanding letters of credit issued or committed), as
may be adjusted from time to time in accordance with the
final loan documentation in the form of revolving credit
loans and letters of credit. Borrowings will be subject
to Post-Petition Borrowing Base calculations described
below. Initial, interim advances (the "Interim Post-
Petition Financing") under the Post-Petition Financing
will be in amounts sufficient to meet Borrower's
projected liquidity needs (after taking into
consideration use of cash collateral if required) prior
to a final hearing before the Bankruptcy Court with
respect to the Post-Petition Financing, and in no event
shall the Interim Advances plus the principal amount
outstanding (including letters of credit) under the
Original Credit Agreement exceed the Post Petition
Borrowing Base. The Interim Post-Petition Financing
shall be made available upon entry by the Bankruptcy
Court of an order
<PAGE>
("Interim Order") authorizing Borrower to obtain interim
financing and incur post-petition indebtedness as agreed
herein. Hereinafter, the terms "Post-Petition Financing" and
"Interim Post-Petition Financing" shall be collectively
referred to as the "DIP Facility."
Term: The earlier of (i) the six-month anniversary of the closing
- ----
date of the DIP Facility, (ii) confirmation of a plan of
reorganization acceptable to Agent, (iii) acceleration
following the occurrence of an Event of Default (as defined
below), or (iv) the date of the closing of the sale of all
or substantially all of Borrower's assets (other than as
described in the Disclosure Statement and Prospectus
prepared by Borrower in connection with the Prepackaged Plan
(as defined below), and in form and substance acceptable to
Agent (collectively, the "Disclosure Statement"). The
earliest of such dates is hereinafter referred to as the
"Termination Date".
Advances and
- ------------
Use of Proceeds: Borrower may draw upon the DIP Facility and apply proceeds
- ---------------
only for the following uses and in accordance with the
following Post-Petition Borrowing Base (as defined below)
calculation:
(a) Use of Proceeds: The proceeds of the Interim Post-
---------------
Petition Financing, along with use of cash collateral, shall
be used to maintain liquidity and operations of Borrower in
the early stages of any Chapter 11 filing and, if allowed,
to repay amounts outstanding and owing under the Original
Credit Agreement. The proceeds of the initial revolving
loans following the entry of the Final Order shall be used
by Borrower to repay all amounts then owing, if any, under
the Original Credit Agreement. The proceeds of all revolving
loans under the DIP Facility thereafter shall be used for
working capital in the ordinary course of business of
Borrower. The proceeds of the DIP Facility shall not be
used for Capital Expenditures or acquisitions not in the
ordinary course of business, other than necessary Capital
Expenditures within a budget to be agreed between Borrower
and Agent.
(b) Post-Petition Borrowing Base: Advances under the DIP
----------------------------
Facility shall not exceed the lesser of (the "Post-Petition
Borrowing Base") (A) $150,000,000 or (B) the sum of (i) up
to 60% of the Value of Eligible Finished Goods VCR Inventory
plus up to 60% of the Value of
-2-
<PAGE>
Eligible Finished Goods TV and Other Inventory plus up to
35% of the Value of Eligible Picture Tube Inventory, plus
----
(ii) up to 80% of the face value of all Eligible Accounts
plus (iii) the lesser of (x) 65% of the value of the Tuning
----
Patents, and (y) $29,500,000 (the "Advance Amount");
provided, however, commencing March 30, 1999, and on the
last day of each calendar quarter thereafter, such Advance
Amount shall be reduced by $2,250,000; and provided further,
however, if Agent receives an acceptable appraisal of the
Tuning Patents valuing the Tuning Patents in an amount of
not less than $60,000,000 as of the closing date, such
reduction in the Advance Amount shall be deferred for a
period of one year (the "Deferral Period") and the amount of
the quarterly reduction in the Advance Amount after the
Deferral Period will be as agreed to by Agent and Borrower,
plus (iv) up to 50% of the face value of all eligible trade
----
letters of credit, plus (v) up to $5,000,000 in Agent's sole
----
discretion, based upon the appraised value of Borrower's
domestic property, plant and equipment, provided, that the
amount available under this item (v) shall be reduced by the
Net Cash Proceeds received by Borrower upon the sale or
disposal of any such property, plant or equipment from time
to time, less (vi) such reserves in existence under the
----
Original Credit Agreement and such other reserves as Agent
may deem necessary. Borrower will provide to Agent on a
weekly basis, a certificate (the "Borrowing Base
Certificate") setting forth the Post-Petition Borrowing Base
on the date of such certificate and the arithmetical
calculations used in determining such Post-Petition
Borrowing Base, and which includes a summary of third party
invoices relating thereto, which summary shall be in form
and substance reasonably satisfactory to Agent.
Interest: Interest to be paid monthly for Base Rate advances and at
- --------
interest period maturity for Eurodollar Advances, accruing
at a per annum floating rate of interest equal (a) to the
sum of (i) the Base Rate, as in effect from time to time,
plus (ii) 1.75% or (b) to the sum of (i) the Eurodollar
Rate, as in effect from time to time, plus (ii) 2.75%.
Eurodollar advances will be available for interest periods
of one month or three months duration. Effective
immediately upon the occurrence of an Event of Default (as
hereinafter defined), and until such Event of Default is
waived in writing by the Majority DIP Lenders, interest
shall accrue at a rate of interest which is 2% per annum in
excess of the rate specified above. Interest will be
computed on a 360-day
-3-
<PAGE>
basis. For purposes of this term sheet, "Majority DIP
Lenders" shall correspond to the meaning of the term
"Majority Lenders" as defined in the Original Credit
Agreement. Additionally, Agent shall be entitled, after
consultation with Borrower and prior to the closing of
the DIP Facility, to change the interest rate and
structure of the DIP Facility if Agent determines that
such changes are reasonable and advisable to ensure a
successful syndication of the DIP Facility.
Mandatory Repayments: Principal payments shall be made by Borrower under the
- --------------------
DIP Facility such that the aggregate principal amount
outstanding thereunder does not exceed the lesser of
(a) the Post-Petition Borrowing Base, as calculated
from time to time, or (b) the commitment amount as the
case may be.
Upon the sale of any assets (other than sales of
Inventory in the ordinary course of its business and
sales of assets leased to Borrower in connection with
the Salomon Lease Transaction (the "Salomon Assets"))
or the issuance of any post-petition debt or equity
(other than in connection with any confirmed plan of
reorganization of Borrower), one hundred percent (100%)
of the Net Cash Proceeds received by Borrower from such
issuance or sale shall on the date of receipt thereof
by Borrower be used to repay principal outstanding
under the DIP Facility. Upon the sale of the Salomon
Assets, one hundred percent (100%) of the Net Cash
Proceeds received by Borrower from such sale shall on
the date of receipt thereof by Borrower be used to
repay the Subrogation Obligations. Repayments of the
Net Cash Proceeds from asset sales will not reduce the
DIP Facility commitment.
All principal will be due and payable in full on the
Termination Date.
Collateral Security: The DIP Facility including accrued interest, and
- -------------------
reasonable costs and expenses, shall be secured,
subject to the Carveout and the Permitted Liens (each
as hereinafter defined), in accordance with Section
364(c) of the Bankruptcy Code by "super-priority" liens
on and security interests in all property and
interests, real and personal, tangible and intangible,
of Borrower, whether now owned or hereafter acquired,
all products and proceeds thereof, and accessions
thereto, including, without limitation, all inventory,
accounts receivable, intellectual property, cash and
interests in real property. Additionally, the DIP
-4-
<PAGE>
Facility including accrued interest, and reasonable costs
and expenses, shall be secured, subject to the Carveout and
the Permitted Liens, by first priority liens on and security
interests in all after-acquired property of Borrower. All
such collateral is hereinafter referred to collectively as
the "Post-Petition Collateral." Additionally, the DIP
Facility will be guaranteed by the Material Subsidiaries.
Priority: To the extent that Post-Petition Collateral is insufficient
- --------
to satisfy all obligations under the DIP Facility on the
Termination Date, the DIP Facility including all accrued
interest, and reasonable costs and expenses shall
constitute, in accordance with Section 364(c)(1) of the
Bankruptcy Code, a claim having priority over any or all
administrative expenses of the kind specified in, among
other sections, Sections 105, 326, 330, 331, 503(b), 506(c),
507(a), 507(b) and 726 of the Bankruptcy Code but subject
and subordinate to (i) in the event that an Event of Default
has occurred and is continuing, the payment of allowed
professional fees and disbursements incurred by Borrower or
any statutory committee appointed in the case in an
aggregate amount not in excess of $1,000,000 at any time
(the "Cap"); and (ii) the payment of fees pursuant to 28
U.S.C. (S) 1930 (collectively, the "Carveout"). Borrower
shall be permitted to pay, as the same may become due and
payable (i) administrative expenses of the kind specified in
Section 503(b) of the Bankruptcy Code incurred in the
ordinary course of business of Borrower and (ii)
compensation and reimbursement of expenses to professionals
allowed and payable under Sections 330 and 331 of the
Bankruptcy Code, and, the payment of such compensation and
reimbursement of expenses to professionals, prior to the
occurrence of an Event of Default, shall not reduce the Cap.
"Permitted Liens" shall mean post-petition liens (i) for
current taxes not delinquent or for taxes being contested in
good faith and by appropriate proceedings (and in respect of
which adequate reserves or other appropriate provisions are
being maintained in accordance with GAAP), (ii) arising in
the ordinary course of business to secure statutory
obligations or similar obligations, (iii) in connection with
the acquisition of property after the date hereof, and
attaching only to the property being acquired, provided that
the indebtedness secured by such liens may not exceed
$1,000,000 in the aggregate, and (iv) arising in the
ordinary course of business which do not materially detract
from the value or interfere with the use of properties of
Borrower or
-5-
<PAGE>
otherwise materially impair the business or operations
of Borrower, provided that the indebtedness secured by
such liens may not exceed $500,000 in the aggregate.
Additionally, LGE shall be permitted to retain, to the
extent permitted by the Bankruptcy Court, its
subordinated liens on the assets of Borrower and its
subsidiaries as currently permitted by the Original
Credit Agreement.
Adequate Protection
- -------------------
Claim: To the extent cash collateral use under the Original
- -----
Credit Agreement is necessary and is allowed, as
adequate protection the Lenders under the Original
Credit Agreement (the "Pre-Petition Lenders") shall
have, in accordance with Section 364(c)(1) of the
Bankruptcy Code, a claim having priority over any or
all administrative expenses of the kind specified in,
among other sections, Sections 105, 326, 330, 331,
503(b), 506(c), 507(a), 507(b) and 726 of the
Bankruptcy Code, except allowed claims paid under the
Carveout, subject, however, to the super-priority
claims of the DIP Lenders described herein and in the
final loan documentation.
Documentation and
- -----------------
Covenants: The agreement evidencing the DIP Facility will be
- ---------
treated as a new credit agreement incorporating
representations and warranties, events of default,
conditions precedent and covenants (affirmative,
negative and financial), in each case that is standard
in debtor-in-possession financing agreements and
consistent with Borrower's rights and obligations as a
debtor-in-possession, including, but not limited to the
following:
Conditions Precedent:
--------------------
. Entry of an Interim Order as to extensions of
credit under Interim Post-Petition Financing and
allowance of use of cash collateral (if cash
collateral use is required), and entry of an order
of the Bankruptcy Court (the "Final Order") as to
the Post-Petition Financing authorizing and
approving the DIP Facility and relevant agreements
in form and substance reasonably acceptable to
Agent.
. Payment of all reasonable fees and expenses owing
to Agent and the DIP Lenders in connection with
the DIP Facility.
-6-
<PAGE>
. Execution by Borrower of all documentation with
respect to the DIP Facility, and delivery of all
appropriate and customary opinions of counsel
relating thereto, reasonably satisfactory in all
respects to Agent and its attorneys.
. Implementation of a cash management system
reasonably satisfactory to Agent, which shall
include, among other things, a daily cash sweep of
local deposits into concentration accounts and
further into a cash collateral account at a
specified bank.
. Reasonable approval by Agent of all "first day"
orders, including, without limitation any orders
concerning the payment of trade vendors,
employees, etc.
. Completion of satisfactory due diligence by Agent
regarding all collateral which shall include,
among other things, evidence the Tuning Patents
and License Agreements are in full force and
effect and not the subject of any pending or
threatened litigation (other than the Funai
Litigation to the extent there has been no
judgment, order or other decision entered in the
Funai Litigation which is materially adverse to
Borrower, and to the extent there is no reasonable
likelihood of the entry of such order, judgment or
decision in the reasonable determination of
Agent).
. Receipt of appraisals reasonably acceptable to
Agent of the Tuning Patents and Borrower's
domestic property, plant, and equipment.
. Receipt of evidence satisfactory to Agent of LGE's
commitment to provide future financial support to
Borrower and evidence that LGE has received the
approval of the Korean Ministry of Finance and all
other applicable governmental entities necessary
to provide such financial support.
. Receipt of management's projections and business
plan for the succeeding twelve month period from
closing, on a month by month basis.
-7-
<PAGE>
. Receipt of a "Prepackaged Plan" in form and
substance satisfactory to Agent filed
contemporaneously with initiating the Chapter 11
case (the "Prepackaged Plan").
. Receipt of Borrower's plan to become Year 2000
compliant, in form and substance reasonably
satisfactory to Agent.
. Other conditions precedent of the type contained
in the Original Credit Agreement.
Conditions to Each Borrowing Under the
--------------------------------------
Facility:
--------
There shall exist no Event of Default (or event which
would constitute an Event of Default with the giving of
notice or lapse of time) under any of the loan
documents entered into in connection with the DIP
Facility and the representations and warranties stated
in such documents shall be true and correct in all
material respects.
Affirmative Covenants:
---------------------
. Borrower shall maintain all bank accounts with
depositories which have entered into agreements
reasonably satisfactory to Agent, acknowledging
Agent's and the DIP Lenders' security interest
therein, as appropriate, and waiving any rights of
setoff.
. Financial reporting compliance certificates.
. Maintenance and insurance of assets.
. Maintenance of material supplier agreements.
. Inspection of records and properties.
. Compliance with ERISA.
. Payment of state, Federal and local taxes and
compliance with laws.
. Notices of litigation, default and other
information.
. Copies of business plans.
-8-
<PAGE>
. Other affirmative covenants of the type contained in
the Original Credit Agreement to the extent customary
in debtor-in-possession financing agreements.
Negative Covenants:
------------------
. Restriction on sales of assets other than sales of
inventory in the ordinary course of business, sales of
assets contemplated by the Disclosure Statement and
sales of obsolete equipment in an amount agreed to by
Agent and Borrower.
. Restriction on investment and leases outside the
ordinary course of Borrower's business.
. Restriction on mergers, acquisitions and
consolidations.
. Limitations on post-petition Liens and encumbrances
other than the Permitted Liens.
. Restriction on post-petition indebtedness (including
guarantees) other than that incurred in the ordinary
course of Borrower's business.
. Prohibition against cash distributions, dividends, or
repayment of subordinated debt or intercompany debt for
borrowed money (excluding required payments of interest
to the extent allowed by the Bankruptcy Court and
repayment of the Subrogation Obligations with the Net
Cash Proceeds received from sales of the Salomon
Assets), or issuance of Capital Stock.
. Restriction on affiliate and shareholder transactions
outside the ordinary course of Borrower's business.
. Other negative covenants of the type contained in the
Original Credit Agreement to the extent customary in
debtor-in-possession financing agreements.
Financial Covenants:
-------------------
. Financial covenants agreed to by Agent and Borrower.
-9-
<PAGE>
Representations and Warranties
------------------------------
. Representations and Warranties of the type
contained in the Original Credit Agreement.
Events of Default: The following, among other things, shall be deemed
-----------------
"Events of Default":
. Borrower's Chapter 11 case shall be converted to a
case under Chapter 7 of the Bankruptcy Code.
. Borrower's Chapter 11 case shall be dismissed.
. Filing of a proposed plan of reorganization by
Borrower or any other party-in-interest which does
not provide for the payment in full of Borrower's
obligations outstanding under the DIP Facility as
of the effective date of such plan.
. Entry of a final order confirming a plan of
reorganization that does not require repayment of
the DIP Facility as of the effective date of the
plan.
. Appointment in Borrower's Chapter 11 case of a
trustee under Section 1104 of the Bankruptcy Code.
. Appointment in Borrower's Chapter 11 case of an
examiner with enlarged powers (powers beyond those
set forth in Section 1106(a)(3) and (4) of the
Bankruptcy Code) under Section 1106(b) of the
Bankruptcy Code.
. Entry of a final order amending, supplementing,
staying, vacating or otherwise modifying the DIP
Facility or the interim or final order approving
the DIP Facility without all of the DIP Lenders'
written consent.
. Any attempt by Borrower or any other party-in-
interest to invalidate, reduce or otherwise impair
Agent's or any of the DIP Lenders' pre- or post-
petition claims, or to subject the DIP Lenders'
collateral to assessment pursuant to Section
506(c) of the Bankruptcy Code.
. Any payment on, or application for authority to
pay, any prepetition claim, other than those of
trade
-10-
<PAGE>
creditors, employees (or paid for their benefit),
taxing authorities, creditors under leases or executory
contracts assumed by Borrower, customers for refunds,
exchanges and rebates in the ordinary course of
business and other than those required to be paid with
the DIP Facility pursuant to the terms of the DIP
Facility, without the Majority DIP Lenders' prior
written consent.
. A final order is entered granting any creditor relief
from the automatic stay which has a material impact on
the DIP Lenders.
. Failure to make the payments under the DIP Facility
when due.
. Failure to pay any undisputed, material post-petition
taxes or indebtedness.
. Breach of any covenant of the DIP Facility, subject to
any grace period to be negotiated.
. Any representation or warranty which is incorrect or
misleading when made.
. Any Change of Control shall occur (to be defined as
agreed to by Agent and Borrower).
. Any material adverse change in the financial condition
or result of operations of Borrower occurs.
. Other Events of Default of the type contained in the
Original Credit Agreement to the extent customary in
debtor-in-possession financing agreements.
Termination: Upon the occurrence and continuation of an Event of Default,
- -----------
Agent shall at the request, or may with the consent, of the
Majority DIP Lenders, (1) terminate the DIP Facility
whereupon the DIP Lenders shall have no obligation to
provide any further funds, and (2) declare the obligations
in respect of the DIP Facility to be immediately due and
payable.
Remedies: Upon the occurrence and continuation of an Event of Default,
- --------
Agent, on behalf of the DIP Lenders, shall have customary
rights and remedies in respect of the DIP
-11-
<PAGE>
Facility and the Post-Petition Collateral, without
further resort to the Bankruptcy Court, including,
without limitation, the right to seek appointment of a
trustee in the Chapter 11 case or to seek appointment
of a receiver under applicable non-bankruptcy law.
Nothing herein contained shall impose any limitation on
Agent's right, on its or the DIP Lenders' behalf, or
Borrower's right to request the Bankruptcy Court to
grant such remedies as it deems appropriate.
Waivers and
- -----------
Amendments: 100% DIP Lender approval required only to approve any
- ----------
decrease in interest rate, decrease in fees payable to
DIP Lenders, increase of commitments, extensions of any
amortization or maturity, material releases of
collateral, or change in voting requirements.
Amendments or waivers with respect to other matters
will require the written consent of the Majority DIP
Lenders. Other amendment and waiver requirements will
be of the type contained in the Original Credit
Agreement.
Collateral Management
- ---------------------
Fee: An annual fee of $125,000 payable in advance at
- ---
closing to Agent for purposes of monitoring and
managing the collateral for the DIP Facility.
Commitment Fee: One-half of one percent (0.5%) per annum of the unused
- --------------
DIP Facility commitment, payable monthly in arrears to
be shared among the participating DIP Lenders pro rata
according to their respective shares of such
commitment. Additionally, during the period commencing
upon Borrower's acceptance of a DIP Facility commitment
issued by Agent and until the closing of the DIP
Facility, Borrower shall pay a Commitment Fee of one-
half of one percent (0.5%) per annum on the amount of
$25,000,000 (representing the difference between the
DIP Facility commitment and the Original Credit
Agreement commitment).
Letter of Credit Fee: Two and one-half percent (2.50%) per annum on the
- --------------------
stated amount of outstanding Letters of Credit will be
paid to the Lenders and one-quarter of one percent
(.25%) per annum on the stated amount of Letters of
Credit will be paid to the Issuing Bank.
Closing Fee: One and three-quarters percent (1.75%) of the total DIP
- -----------
Facility commitment, payable to Agent as follows: (a)
fifty
-12-
<PAGE>
percent (50%) upon Borrower's acceptance of a commitment
letter issued by Agent; and (b) fifty percent (50%) upon
closing of the DIP Facility and entering of the Interim
Order.
Expenses: Borrower shall pay (i) all reasonable costs and expenses of
- --------
Agent (including all reasonable fees and expenses of
attorneys and other professionals engaged by Agent relating
to the DIP Facility and the syndication and administration
of the DIP Facility, including, without limitation, all
reasonable costs of due diligence, consultation, travel,
appraisal, audit, collection, search, filing, title
insurance, and recording fees, whether or not the DIP
Facility is consummated), and (ii) all reasonable costs and
expenses, including reasonable professional fees and
disbursements of the DIP Lenders and Agent in connection
with the collection of the DIP Facility obligations or the
enforcement of their rights thereunder.
Indemnification: Borrower will indemnify Agent and the DIP Lenders against
- ---------------
all losses, liabilities, claims, damages and expenses
relating to the DIP Facility (other than those resulting
solely from a claim or action brought by one DIP Lender
against another DIP Lender and unrelated to acts of
Borrower) and Borrower's use thereof, including, without
limitation, reasonable attorneys' fees and settlement costs,
excepting only those determined by a final non-appealable
judgment of a court of competent jurisdiction to have been
caused by the gross negligence or wilful misconduct of Agent
or the DIP Lenders as determined by a final non-appealable
judgment of a court of competent jurisdiction.
Governing Law: The documentation relating to the DIP Facility shall be
- -------------
governed by the laws of the State of New York without giving
effect to the conflict of laws principals thereof.
Yield Protection: Standard yield protection (including compliance with risk-
- ----------------
based capital guidelines), increased costs, payments free
and clear of withholding taxes and interest period breakage
indemnities, Eurodollar illegality and similar provisions.
Miscellaneous: Waiver of Jury Trial
- -------------
-13-
<PAGE>
Annex II
Summary of Terms for $150,000,000
---------------------------------
Exit Financing for
------------------
Zenith Electronics Corporation
------------------------------
Borrower: Zenith Electronics Corporation
- --------
Lenders: Any one or more of the Lenders under the Amended and
- -------
Restated Credit Agreement dated as of June 29, 1998, as
thereafter amended from time to time (the "Original Credit
Agreement"), plus any additional lenders reasonably
acceptable to Borrower and Agent that may from time to time
be party to Borrower's debtor-in-possession credit facility
(the "Debtor-In-Possession Credit Agreement") or the
financing (collectively, the "Lenders") described below.
Capitalized terms used herein which are not otherwise
defined or limited herein are as defined in the Original
Credit Agreement.
Agent: Citicorp North America, Inc.
- -----
Amount and
- ----------
Type of Facility: The Lenders shall provide Borrower with a revolving credit
- ----------------
facility (the "Facility") providing for extensions of credit
in an amount not to exceed $150,000,000 (inclusive of a sub-
facility for outstanding letters of credit issued or
committed), as may be adjusted from time to time in
accordance with the final loan documentation in the form of
revolving credit loans and letters of credit. Borrowings
will be subject to Borrowing Base calculations described
below.
Term: The earlier of (i) the three-year anniversary of the closing
- ----
date of the Facility, or (ii) acceleration following the
occurrence of an Event of Default (as defined below). The
earliest of such dates is hereinafter referred to as the
"Termination Date".
Advances and
- ------------
Use of Proceeds: Borrower may draw upon the Facility and apply proceeds only
- ---------------
for the following uses and in accordance with the following
Borrowing Base (as defined below) calculation:
<PAGE>
(a) Use of Proceeds: The proceeds of the initial
---------------
revolving loans shall be used by Borrower to repay all
amounts owing under the Debtor-In-Possession Credit
Agreement. The proceeds of all revolving loans under the
Facility thereafter shall be used to fund Borrower's plan of
reorganization and for working capital in the ordinary
course of business of Borrower. The proceeds of the
Facility shall not be used for Capital Expenditures or
acquisitions not in the ordinary course of business, other
than necessary Capital Expenditures within a budget to be
agreed between Borrower and Agent.
(b) Borrowing Base: Advances under the Facility shall not
--------------
exceed the lesser of (the "Borrowing Base") (A) $150,000,000
or (B) the sum of (i) up to 60% of the Value of Eligible
Finished Goods VCR Inventory plus up to 60% of the Value of
Eligible Finished Goods TV and Other Inventory, plus (ii)
----
80% of the face value of all Eligible Accounts, plus (iii)
----
the lesser of (x) 65% of the value of the Tuning Patents,
and (y) $29,500,000 (the "Advance Amount"); provided,
however, upon the later of March 30, 1999 or the expiration
of the Deferral Period (as defined in the preceding Annex
I), and on the last day of each calendar quarter thereafter,
such Advance Amount shall be reduced by $2,250,000 (or such
amount as may have been agreed to by Agent and Borrower in
connection with the Debtor-in-Possession Credit Agreement to
be the Advance Amount quarterly reduction after the
expiration of the Deferral Period), plus (iv) up to 50% of
----
the face value of all eligible trade letters of credit, plus
----
(v) up to $5,000,000 in Agent's sole discretion, based upon
the appraised value of Borrower's domestic property, plant
and equipment, provided, that the amount available under
this item (v) shall be reduced by the Net Cash Proceeds
received by Borrower upon the sale or disposal of any such
property, plant or equipment from time to time, less (vi)
----
such reserves in existence under the Original Credit
Agreement and such other reserves as Agent may deem
necessary. Borrower will provide to Agent on a weekly
basis, on each day Borrower requests an advance and as a
condition precedent to any advance, a certificate (the
"Borrowing Base Certificate") setting forth the Borrowing
Base on the date of such certificate and the arithmetical
calculations used in determining such Borrowing Base, and
which includes a summary of third party invoices relating
thereto, which
-2-
<PAGE>
summary shall be in form and substance reasonably
satisfactory to Agent.
Interest: Interest to be paid monthly for Base Rate advances and
- --------
at the earlier of interest period maturity or every 90
days for Eurodollar advances, accruing at a per annum
floating rate of interest equal (a) to the sum of (i)
the Base Rate, as in effect from time to time, plus
(ii) 2.00% or (b) to the sum of (i) the Eurodollar
Rate, as in effect from time to time, plus (ii) 3.00%,
subject to a grid based on performance levels to be
determined by Agent and Borrower. Eurodollar advances
will be available for interest periods of one, two,
three or six months duration or, if available, nine or
twelve months duration, at the option of Borrower.
Effective immediately upon the occurrence of an Event
of Default (as hereinafter defined), and until such
Event of Default is waived in writing by the Majority
Lenders, interest shall accrue at a rate of interest
which is 2% per annum in excess of the rate specified
above. Interest will be computed on a 360-day basis.
Additionally, Agent shall be entitled, after
consultation with Borrower and prior to the closing of
the Facility, to change the interest rate and structure
of the Facility if Agent determines that such changes
are reasonable and advisable to ensure a successful
syndication of the Facility.
Mandatory Repayments: Principal payments shall be made by Borrower under the
- --------------------
Facility such that the aggregate principal amount
outstanding thereunder does not exceed the lesser of
(a) the Borrowing Base, as calculated from time to
time, or (b) the commitment amount as the case may be.
Upon the sale of any assets (other than the HDTV
Patents, the sale of inventory in the ordinary course
of business, the sale of assets leased to Borrower in
connection with the Salomon Lease Transaction (the
"Salomon Assets"), the Excluded Assets (as defined
below) and the transfer of assets required by
Borrower's confirmed plan of reorganization), or the
issuance of any debt or equity, one hundred percent
(100%) of the Net Cash Proceeds received by Borrower
from such issuance or sale shall on the date of receipt
thereof by Borrower be used to repay principal due
under the Facility. Upon the sale of any HDTV Patents,
the Net Cash Proceeds received by Borrower from such
sale shall on the date of receipt thereof by Borrower
be used to repay indebtedness and permanently reduce
the commitment under the LGE Credit Facility. Upon the
sale
-3-
<PAGE>
of the Salomon Assets, the Net Cash Proceeds received
by Borrower from such sale shall on the date of receipt
thereof by Borrower be used to repay the LGE New
Restructured Senior Note (as defined in the Disclosure
Statement and Prospectus prepared by Borrower in
connection with its prepackaged bankruptcy plan and in
form and substance acceptable to Agent (the "Disclosure
Statement")). Repayments of the Net Cash Proceeds from
asset sales will not reduce the Facility commitment.
All principal will be due and payable in full on the
Termination Date.
Collateral Security: The Facility including accrued interest, and reasonable
- -------------------
costs and expenses, shall be secured, subject to
Permitted Liens (as hereinafter defined), by first
priority liens on and security interests in all
property and interests, real and personal, tangible and
intangible, of Borrower and its Subsidiaries (other
than certain fixed assets determined prior to closing
to be sold by Borrower and acceptable to Agent (the
"Excluded Assets")), whether now owned or hereafter
acquired, all products and proceeds thereof, and
accessions thereto, including, without limitation, all
inventory, accounts receivable, intellectual property,
cash and interests in real property. All such
collateral is hereinafter referred to collectively as
the "Collateral." "Permitted Liens" shall mean liens
(i) for current taxes not delinquent or for taxes being
contested in good faith and by appropriate proceedings
(and in respect of which adequate reserves or other
appropriate provisions are being maintained in
accordance with GAAP), (ii) arising in the ordinary
course of business to secure statutory obligations or
similar obligations, (iii) in connection with the
acquisition of property after the date hereof, and
attaching only to the property being acquired, provided
that the indebtedness secured by such liens may not
exceed $1,000,000 in the aggregate, (iv) arising in the
ordinary course of business which do not materially
detract from the value or interfere with the use of
properties of Borrower or otherwise materially impair
the business or operations of Borrower, provided that
the indebtedness secured by such liens may not exceed
$500,000 in the aggregate, (v) of LGE securing the LGE
Credit Facility on the stock of Borrower's subsidiaries
and on equipment, real estate and intellectual property
(other than the Tuning Patents and the HDTV Patents) of
Borrower and its subsidiaries, provided such liens are
at all times junior and subordinate to the liens
-4-
<PAGE>
of Agent on such assets, (vi) of LGE securing the LGE
Credit Facility on the HDTV Patents which will be prior
in right to the lien of Agent on the HDTV Patents, and
(vii) of LGE securing the LGE New Restructured Senior
Note on the Salomon Assets. Additionally, the Facility
will be guaranteed by the Material Subsidiaries and LGE
will execute a "No Set-Off Letter" in favor of the
Borrower and the Lenders in form and substance
substantially similar to the one currently in place.
Documentation and
- -----------------
Covenants: The agreement evidencing the Facility will be treated
- ----------
as a new credit agreement incorporating representations
and warranties, events of default, conditions precedent
and covenants (affirmative, negative and financial), in
each case that is acceptable to Agent (and containing
appropriate baskets and carve-outs acceptable to
Agent), including, but not limited to the following:
Conditions Precedent:
- --------------------
. Receipt of evidence of the entry of a final
Confirmation Order approving Borrower's plan of
reorganization and disclosure statement, and
satisfaction of all other conditions to the
confirmation of such plan of reorganization, which
plan of reorganization (including the treatment of
LGE's claims thereunder), disclosure statement and
confirmation order shall be in form and substance
reasonably acceptable to Agent.
. Payment of all reasonable fees and expenses owing to
Agent and the Lenders in connection with the
Facility.
. Execution by Borrower of all documentation with
respect to the Facility, and delivery of all
appropriate and customary opinions of counsel
relating thereto, reasonably satisfactory in all
respects to Agent and its attorneys.
. Implementation of a cash management system
reasonably satisfactory to Agent, which shall
include, among other things, weekly financial and
performance reports, a daily cash sweep of local
deposits into concentration accounts at a specified
-5-
<PAGE>
bank and further into a cash collateral account at
the specified bank.
. Completion of satisfactory due diligence by Agent
regarding all collateral which shall include, among
other things, evidence the Tuning Patents and
License Agreements are in full force and effect and
not the subject of any pending or threatened
litigation (other than the Funai Litigation to the
extent there has been no judgment, order or other
decision entered in the Funai Litigation which is
materially adverse to Borrower, and to the extent
there is no reasonable likelihood of the entry of
such order, judgment or decision in the reasonable
determination of Agent).
. Receipt of evidence satisfactory to Agent of LGE's
commitment to provide a revolving credit facility to
Borrower in a principal amount of not less than
$60,000,000 (which principal amount may be increased
to up to $80,000,000 at any time in LGE's
discretion) secured by the liens described in
clauses (v) and (vi) of the definition of "Permitted
Liens" set forth herein (the "LGE Credit Facility")
and evidence that LGE has received the approval of
the Korean Ministry of Finance and all other
applicable governmental entities necessary to
provide such credit facility.
. Receipt of management's projections and business
plan for the succeeding twelve month period from
closing, on a month by month basis.
. Receipt of evidence that LGE owns at least ninety
percent of the outstanding common stock of Borrower.
. Receipt of Borrower's plan to become Year 2000
compliant, in form and substance reasonably
satisfactory to Agent.
. Citicorp North America, Inc. shall have arranged,
and acted as Agent under, the Debtor-In-Possession
Credit Agreement.
. Evidence satisfactory to Agent that all obligations
of Borrower under the Debtor-In-Possession Credit
-6-
<PAGE>
Agreement will be paid in full with the proceeds of the
initial advance under the Facility.
. Receipt of appraisals reasonably acceptable to Agent of
Borrower's domestic property, plant and equipment to be
retained by Borrower pursuant to Borrower's confirmed
plan of reorganization.
. Other conditions precedent of the type contained in the
Original Credit Agreement.
Conditions to Each Borrowing Under the
- --------------------------------------
Facility:
- --------
There shall exist no Event of Default (or event which
would constitute an Event of Default with the giving of
notice or lapse of time) under any of the loan documents
entered into in connection with the Facility and the
representations and warranties stated in such documents
shall be true and correct in all material respects.
Affirmative Covenants:
- ---------------------
. Borrower shall maintain all bank accounts with
depositories which have entered into agreements
reasonably satisfactory to Agent, acknowledging Agent's
and the Lenders' security interest therein, as
appropriate, and waiving any rights of setoff.
. Financial reporting compliance certificates.
. Maintenance and insurance of assets.
. Maintenance of material supplier agreements.
. Inspection of records and properties.
. Compliance with ERISA.
. Payment of state, Federal and local taxes and
compliance with laws.
. Notices of litigation, default and other information.
. Copies of business plans.
-7-
<PAGE>
. Other affirmative covenants of the type contained in
the Original Credit Agreement.
Negative Covenants:
- ------------------
. Restriction on sales of assets other than sales of
inventory in the ordinary course of business, sales of
the Excluded Assets and sales or transfers of assets as
required by Borrower's confirmed plan of reorganization
or the Disclosure Statement.
. Restriction on investment and leases outside the
ordinary course of Borrower's business.
. Restriction on mergers, acquisitions and
consolidations.
. Limitations on Liens and encumbrances other than the
Permitted Liens.
. Restriction on indebtedness (including guarantees)
other than the LGE Credit Facility and the guaranty of
Borrower's subsidiaries thereof, indebtedness incurred
in the ordinary course of Borrower's business and
indebtedness set forth in Borrower's plan of
reorganization.
. Prohibition against cash distributions, dividends, or
repayment of subordinated debt (except to the extent
permitted by the terms of any applicable subordination
agreement) or intercompany debt for borrowed money
(excluding required payments of interest, the repayment
of the LGE New Restructured Senior Note with the Net
Cash Proceeds received from sales of the Salomon Assets
and, prior to the occurrence of an Event of Default,
payments on the LGE Credit Facility), or issuance of
Capital Stock.
. Restriction on affiliate and shareholder transactions
outside the ordinary course of Borrower's business.
. Other negative covenants of the type contained in the
Original Credit Agreement.
Financial Covenants:
- -------------------
-8-
<PAGE>
. Financial covenants agreed to by Agent and Borrower.
Representations and Warranties:
- ------------------------------
. Representations and Warranties of the type contained in
the Original Credit Agreement.
Events of Default: The following, among other things, shall be deemed
- -----------------
"Events of Default":
. Failure to make the payments under the Facility when
due.
. Failure to pay any undisputed, material taxes or other
indebtedness.
. Breach of any covenant of the Facility, subject to any
grace period to be negotiated.
. Any representation or warranty which is incorrect or
misleading when made.
. Any Change of Control shall occur (to be defined as
agreed to by Agent and Borrower).
. Any material adverse change in the financial condition
or result of operations of Borrower occurs.
. Bankruptcy, dissolution or similar event for Borrower,
LGE or any Material Subsidiary.
. Other Events of Default of the type contained in the
Original Credit Agreement.
Termination: Upon the occurrence and continuation of an Event of
- -----------
Default beyond any applicable grace periods, Agent shall
at the request, or may with the consent, of the Majority
Lenders, (1) terminate the Facility whereupon the Lenders
shall have no obligation to provide any further funds, and
(2) declare the obligations in respect of the Facility to
be immediately due and payable.
Remedies: Upon the occurrence and continuation of an Event of
- --------
Default, Agent, on behalf of the Lenders, shall have
customary rights and remedies in respect of the Facility
and
-9-
<PAGE>
the Collateral, including, without limitation, the
right to seek appointment of a receiver under applicable
law.
Assignment and
- --------------
Participations: Any Lender may at any time make assignments with
- --------------
Agent's consent and, if no Event of Default then exists,
Borrower's consent (which consents shall not be
unreasonably withheld) or participations of up to 100% of
its commitment under the Facility to any other Lender or a
new Lender in minimum amounts of $5,000,000.
Majority Lenders: 51%; 100% bank approval required only to approve any
- ----------------
decrease in interest rates, decrease in fees payable to
Lenders, increase of commitments, extensions of any
amortization or maturity, material releases of collateral,
or change in voting requirements.
Collateral Management
- ---------------------
Fee: An annual fee of $125,000 payable in advance to Agent for
- ---
purposes of monitoring and managing the collateral for the
Facility.
Commitment Fee: One-half of one percent (0.5%) per annum of the unused
- --------------
Facility commitment, payable monthly in arrears to be
shared among the participating Lenders pro rata according
to their respective shares of such commitment.
Letter of Credit Fee: Two and three-quarters percent (2.75%) per annum (also
- --------------------
based on a grid) on the stated amount of outstanding
Letters of Credit will be paid to the Lenders and one-
quarter of one percent (.25%) per annum on the stated
amount of Letters of Credit will be paid to the Issuing
Bank.
Expenses: Borrower shall pay (i) all reasonable costs and expenses
- --------
of Agent (including all reasonable fees and expenses of
attorneys and other professionals engaged by Agent
relating to the Facility and the syndication and
administration of the Facility, including, without
limitation, all reasonable costs of due diligence,
consultation, travel, appraisal, audit, collection,
search, filing, title insurance, and recording fees,
whether or not the Facility is consummated), and (ii) all
reasonable costs and expenses, including reasonable
professional fees and disbursements of the Lenders and
Agent in connection with the collection of the Facility
obligations or the enforcement of their rights thereunder.
-10-
<PAGE>
Indemnification: Borrower will indemnify Agent and the Lenders against all
- ---------------
losses, liabilities, claims, damages and expenses relating
to the Facility (other than those resulting solely from a
claim or action brought by one Lender against another
Lender and unrelated to acts of Borrower) and Borrower's
use thereof, including, without limitation, attorneys'
fees and settlement costs, excepting only those determined
by a final non-appealable judgment of a court of competent
jurisdiction to have been caused by the gross negligence
or wilful misconduct of Agent or the Lenders as determined
by a final non-appealable judgment of a court of competent
jurisdiction.
Governing Law: The documentation relating to the Facility shall be
- -------------
governed by the laws of the State of New York without
giving effect to the conflict of laws principals thereof.
Yield Protection: Standard yield protection (including compliance with risk-
- ----------------
based capital guidelines), increased costs, payments free
and clear of withholding taxes and interest period
breakage indemnities, Eurodollar illegality and similar
provisions.
Miscellaneous: Waiver of Jury Trial
- -------------
-11-
<PAGE>
Exhibit 10 ar
ASSET SALE AND PURCHASE AGREEMENT-MELROSE PARK
This Asset Sale and Purchase Agreement is entered into on March 26,
1999 by and between The Zenith Electronics Equipment Owner Trust 1997-I, a
non-business trust organized under the laws of the State of Connecticut
("Seller"), and Zenith Electronics Corporation, a Delaware corporation
("Buyer").
WHEREAS, Seller is the sole legal owner of the equipment identified on
Schedule I hereto (the "Equipment"), which is located in Melrose Park, Illinois;
WHEREAS, Seller desires to sell, and Buyer desires to purchase, the
Equipment;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein and the other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties agree as
follows:
1. Purchase and Sale of Equipment.
1.1. Transfer of Equipment. In consideration for the payment by Buyer of
the purchase price specified in Section 1.2, Seller hereby transfers to Buyer,
and Buyer hereby accepts, all right, title and interest of Seller in and to the
Equipment.
1.2. Purchase Price. In consideration of Seller's sale and transfer of the
Equipment pursuant to Section 1.1 and the commitment of LG Electronics Inc.
("LGE") to take assignment of Buyer's rights under that certain Manufacturing
Agreement dated November 2, 1998, between Buyer and Philips Electronics North
America Corporation ("Philips"), if LGE or an affiliate acquires the assets of
Buyer's Reynosa facility, Buyer hereby agrees to pay this day to Seller
US$11,505,000, payable by Buyer in Credits (as such term is defined in that
certain letter agreement, dated as of November 2, 1998, between Buyer and
Philips, relating to the purchase by Philips from Buyer of certain equipment at
Buyer's Melrose Park facility).
2. Representation of Parties.
2.1. Representations of Seller. Seller hereby represents and warrants to
Buyer that it has good and exclusive title to the Equipment free and clear of
any lien or other encumbrance.
<PAGE>
2.2 Representations of Buyer. Buyer accepts the Equipment "As Is," "Where
Is" and "With All Faults." Buyer represents and warrants that it has inspected
and accepted the quality of the Equipment.
3. Further Assurances. At any time and from time to time after the date
hereof, at the request of Buyer, seller will execute and deliver or cause to be
executed and delivered, such other instruments of sale, transfer, conveyance,
assignment and confirmation and take such action as Buyer may reasonably
determine is necessary to transfer, convey and assign to Buyer the Equipment,
all such instruments and actions to be in form and substance reasonably
acceptable to Seller.
4. Redemption of Credits. Buyer and Seller hereby agree that from time
to time upon the request of Buyer, Buyer shall acquire from Seller and Seller
shall sell to Buyer all or any portion of the Credits owned by Seller in each
case in exchange for United States dollars in an amount equal to the face amount
of Credits so acquired by Buyer. Buyer, Seller and LGE agree that LGE's claim
against Buyer arising out of LGE's payments under the Guaranty, dated as of
March 26, 1997, shall not be reduced except to the extent LGE receives United
States dollars for such Credits.
5. Miscellaneous. This Agreement shall not confer and rights or remedies
upon any person or entity other than the parties and their respective successors
and permitted assigns. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York,
without giving effect to any choice or conflict of law provision or rule to the
extent the application thereof would require or permit the application of the
laws of another jurisdiction.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have entered into this agreement on
this date first above written.
THE ZENITH ELECTRONICS EQUIPMENT CENTER
TRUST 1997-I
By: State Street Bank and Trust Company,
as trustee and not in its individual capacity
By: /s/ Steve Cimalore
---------------------
Name: STEVE CIMALORE
Title: Vice President
ZENITH ELECTRONICS CORPORATION
By:
---------------------
Name:
Title:
Acknowledged and agreed
with regard to Section 4:
LG Electronics Inc.
Very truly yours,
LG Electronics, Inc.
By: /s/ Cha Hong (John) Koo
-------------------
Name: Cha Hong (John) Koo
Title: Vice-Chairman of the
Board of Zenith Electronics
Corporation
[LOGO]
3
<PAGE>
EXHIBIT (12)
ZENITH ELECTRONICS CORPORATION
EXHIBIT 12 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Pro Forma Year ended December 31,
------------ --------------------------------------------------------
1998 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Earnings
- --------
Pre-Tax Income/(Loss) from continuing operations $(246.4) $(272.5) $(300.2) $(177.6) $(98.5) $(14.8)
adjustment: Fixed Charges (34.7) (55.9) (34.9) (18.0) (25.9) (21.7)
less: Capitalized Interest - - 4.1 2.3 - -
------- ------- ------- ------- ------ ------
Earnings - for ratio purposes $(211.7) $(216.6) $(269.4) $(162.1) $(72.6) $ 6.9
Fixed Charges
- -------------
Interest Expense $ 24.1 $ 44.3 $ 25.5 $ 15.1 $ 19.9 $ 15.9
Interest Capitalized - - (4.1) (2.3) - -
Est'd interest equivalent in Rent expense 6.0 7.0 7.8 3.8 4.6 4.1
Est'd Amortization of debt expenses 4.6 4.6 5.7 1.4 1.4 1.7
------- ------- ------- ------- ------ ------
Total $ 34.7 $ 55.9 34.9 18.0 25.9 21.7
Ratio
- -----
Deficiency of earnings to cover fixed charges $ 246.4 $ 272.5 $ 300.2 $ 177.8 $ 98.5 $ 14.8
</TABLE>
<PAGE>
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
made a part of Zenith Electronics Corporation's Amendment No. 3 to the
Registration Statement on Form S-4, Registration No. 333-61057, filed in April
1999.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
April 16, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 178
<ALLOWANCES> 42
<INVENTORY> 84
<CURRENT-ASSETS> 231
<PP&E> 771
<DEPRECIATION> 677
<TOTAL-ASSETS> 350
<CURRENT-LIABILITIES> 602
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> (432)
<TOTAL-LIABILITY-AND-EQUITY> 350
<SALES> 985
<TOTAL-REVENUES> 985
<CGS> 906
<TOTAL-COSTS> 906
<OTHER-EXPENSES> 368
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> (273)
<INCOME-TAX> 3
<INCOME-CONTINUING> (276)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (276)
<EPS-PRIMARY> (4.08)
<EPS-DILUTED> (4.08)
</TABLE>
<PAGE>
Exhibit 99g
[CUSHMAN & WAKEFIELD LETTERHEAD]
November 13, 1998
Ms. Beverly A. Wyckoff, Esq.
Legal Department
Zenith Electronics Corporation
1000 Milwaukee Avenue
Glenview, Illinois 60025
Re: SEC Registration Reference
C&W Appraisal 98-90843
Dear Ms. Wyckoff:
Permission is hereby given for the public disclosure, as a part of Zenith's
disclosures to the SEC (registration statement Form S-4, dated as of August 10,
1998, as amended), of the contents of the above referenced appraisal, dated June
12, 1998, performed by Cushman & Wakefield of Arizona, Inc. concerning Zenith's
real property located in Reynosa, Mexico (Partes de Television de Reynosa, SA de
CV). It is our understanding that the above registration is being filed as part
of Zenith's planned restructuring, and our permission is subject to such
intended use and disclosure pursuant to the terms and conditions of the
Indemnity Agreement (and Exhibit "A") executed between the parties.
Sincerely,
Cushman & Wakefield of Illinois, Inc.
/s/ Stanley R. Dennis, Jr.
- -------------------------------
Stanley R. Dennis, Jr., MAI
SRD: dw
[LOGO]
[BOTTOM LETTERHEAD]
<PAGE>
Cushman & Wakefield of Illinois, Inc. [LOGO OF CUSHMAN & WAKEFIELD]
455 N. Cityfront Plaza Drive
Suite 2800
Chicago, IL 60611-5555
Tel: (312) 470-1800
Fax: (312) 470-3800
Exhibit 99h
April 16, 1999
Ms. Beverly A. Wyckoff, Esq.
Legal Department
Zenith Electronics Corporation
1000 Milwaukee Avenue
Glenview, Illinois 60025
Re: SEC Registration Reference
Various Properties located in Illinois, Texas, and Mexico
Dear Ms. Wyckoff:
Permission is hereby given for the public disclosure, as part of Zenith's
disclosures to the SEC (registration statement form S-4, dated as of August 10,
1998, as amended), of the contents of the referenced appraisals (please refer to
Exhibit "A"), performed by Cushman & Wakefield of Arizona, Inc., and Cushman &
Wakefield of Illinois, Inc., concerning Zenith's real property located in
Illinois, Texas, and Mexico, and referenced in Exhibit "A". It is our
understanding that the above registration is being filed as part of Zenith's
planned restructuring, and our permission is subject to such intended use and
disclosure pursuant to the terms and conditions of the Indemnity Agreement (and
Exhibit "A") executed between the parties.
Sincerely
Cushman & Wakefield of California, Inc.
/s/ Stanley R. Dennis, Jr.
Stanley R. Dennis, Jr., MAI
SRD:sjb
Exhibit "A"
To
Indemnity Agreement given by
ZENITH ELECTRONICS CORPORATION ("Indemnitor")
In favor of
C & W, as defined therein and its Affiliates
---------------------------------
Appraisals of property described as follows:
1. Cushman & Wakefield of Illinois, Inc. Appraisal file No. 98-398 dated
as of October 1, 1998 and relating to the Zenith Corporate Headquarters
Facility, 1000 Milwaukee Avenue, Glenview, Cook County, Illinois in a
self-contained report
2. Cushman & Wakefield of Illinois, Inc. Appraisal file No. 98-217 dated
as of June 1, 1998 and relating to the Zenith Corporate Headquarters
Facility, 1000 Milwaukee Avenue, Glenview, Cook County, Illinois in a
self-contained report
3. Cushman & Wakefield of Arizona, Inc. Appraisal file No. 98-90847 dated
as of May 27, 1998 and relating to Zenith Plant 15, 6601 South 33/rd/
Street, McAllen Foreign Trade Zone, McAllen, Hildalago County, Texas in
a self-contained report
4. Cushman & Wakefield of Illinois, Inc. Appraisal file No. 98-217-2 dated
as of May 21, 1998 and relating to the Zenith Electronics Corporation
Rauland Pictures Tube Division Plant #25, 2407 West North Avenue,
Melrose Park, Cook County, Illinois in a self-contained report
5. Cushman & Wakefield of Arizona, Inc. Appraisal file No. 98-90843 dated
as of May 28, 1998 and relating to Electro Partes de Matamoros, SA de
CV manufacturing and warehouse facility located General Lauro Villar
KM4, Number 700H, Matamoros, Tamaulipas, Mexico in a self-contained
report
6. Cushman & Wakefield of Illinois, Inc. Appraisal file No. 98-217-1 dated
as of May 21, 1998 and relating to the Zenith Electronics Corporation
Rauland Picture Tube Division Plant #45, 2155 Rose Street
(25/th/Avenue) unincorporated Leyden Township, Cook County, Illinois in
a self-contained report
7. Cushman & Wakefield of Arizona, Inc. Appraisal file No. 99-9011 dated
as of January 13, 1999 and relating to Zenco de Chihuahua, S.A. de C.V.
industrial manufacturing/warehouse facility, Carretera Pan Americana,
Parque Industrial Aeropuerto, C.P. 32690, Ciudad Juarez, Chihuahua,
Mexico in a self-contained report
8. Cushman & Wakefield of Arizona, Inc. Appraisal file No. 98-9084 dated
as of May 29, 1998 and relating to Zenco de Chihuahua, S.A. de C.V.
industrial manufacturing/warehouse facility, Carretera Pan Americana,
Parque Industrial Aeropuerto, C.P. 32690, Ciudad Juarez, Chihuahua,
Mexico in a self-contained report
9. Cushman & Wakefield of Arizona, Inc. Appraisal file No. 98-90842 dated
as of May 29, 1998 and relating to Cableproductos de Chihuahua, S.A. de
C.V. industrial manufacturing/warehouse facility, Prolongacion Avenue
de Las Americas, Parque Industrial Las Americas, Chihuahua, Chihuahua,
Mexico in a self-contained report
To be referenced in the following material:
Zenith Electronics Corporation Registration Statement on Securities and
Exchange Commission Form S-4 dated as of August 10, 1998, as amended, and
relating to Zenith's planned restructuring (Amendment No. 3 to be filed in
April 1999 shall include as exhibits the Appraisals described above.)
<PAGE>
Exhibit 99j
[Zenith Letterhead]
_______, 1999
Dear Zenith Security Holder:
Enclosed are several documents related to our planned financial and
operational restructuring. We are asking holders of our subordinated debt to
vote whether to accept the terms of our proposed prepackaged plan of
restructuring under the U.S. Bankruptcy Code. If the financial restructuring is
completed:
. holders of our 6 1/4% subordinated debentures will receive
approximately $483 in principal amount of new 8.19% debentures due
2009 for each $1,000 principal amount of our 6 1/4% subordinated
debentures they hold; and
. holders of our Common Stock will not receive any distribution, because
the Company does not have enough value for a distribution to
equityholders under the restructuring.
We realize that the enclosed documents are lengthy. We urge you to read
them carefully, however, because they describe our planned restructuring.
First, however, let me try to put our restructuring plan into perspective for
you in a summary fashion.
Background of the Restructuring
Our operations have historically included the design, development,
manufacturing and marketing of video products (including color television sets
and other consumer products), and related parts and accessories. Unfortunately,
we have experienced severe financial difficulties for many years. We incurred
losses in all but one of the years since 1985. In addition, we project that our
future cash flows will not be sufficient to meet all of our working capital
requirements, scheduled cash debt service obligations and anticipated capital
expenses without the restructuring.
In light of our persistent losses, we implemented various programs and
initiatives designed to lower costs and increase profits. These programs and
initiatives were financed primarily by LG Electronics, Inc. If the financial
restructuring is completed, LG Electronics, Inc. will receive a promissory note
having a projected principal amount of $105.1 million, certain plant, property
and equipment located in Reynosa, Mexico that has an appraised value of
approximately $32.4 million and 1,000 shares of common stock, representing 100%
of our outstanding common stock following the restructuring.
The Restructuring Plan
In May 1998, we announced that we were developing a long-term restructuring
plan designed to enhance our long-term viability by reducing production costs
and concentrating on areas in which we believe we can operate profitably. As a
result of this operational restructuring, we will become a sales, distribution
and technology company, we will discontinue substantially all of our
manufacturing operations and will outsource substantially all components and
products.
<PAGE>
At that time, we also concluded that we could not implement our operational
restructuring with our current capital structure. Therefore, we developed a
financial restructuring plan designed to reduce our total outstanding debt and
annual interest payments. That plan, which was developed in conjunction with LG
Electronics, Inc., our bank lenders, and an ad hoc committee of holders of our
subordinated debt is described in the enclosed documents.
We believe that the restructuring is the best alternative for achieving a
capital structure that is appropriate based on current industry conditions and
our financial projections. A Special Committee of our Board of Directors
composed of directors who are not officers or directors of LG Electronics, Inc.
or current officers of the Company has unanimously recommended the proposed
restructuring to the complete Board of Directors of the Company. The Board of
Directors has recommended that the holders of the subordinated debt and other
impaired claims accept the restructuring. When LG Electronics, Inc. and its
affiliate took a majority stake in the Company, they acquired the right to
designate six members of the Board of Directors. One of the members originally
designated by LG Electronics, Inc. is a member of the Special Committee. Since
1995, LG Electronics, Inc. has had the ability to elect all of the members of
the Board of Directors by virtue of the ownership by LG Electronics, Inc. and
its affiliate of over 50% of our common stock.
Over the last year, the Company has been discussing the terms of the
planned restructuring with a committee of three holders of our subordinated
debt, Loomis Sayles & Company, L.P., Mariner Investment Group and Caspian
Capital Partners L.L.P. These holders informed the Company that they
collectively hold or control over 50% of the outstanding principal amount of the
subordinated debt. On March 31, 1999, the members of this committee entered
into an agreement with the Company and LG Electronics, Inc. pursuant to which
they have agreed to vote for and support the planned restructuring. The
committee retained Crossroads Capital Partners LLC as its financial advisor and
Hebb & Gitlin as its legal advisor to assist in the negotiations which resulted
in the agreement.
How to Vote on the Restructuring
As described in the enclosed documents, we are asking holders of our
subordinated debt to accept the restructuring.
To vote on the restructuring, each holder of subordinated debt should:
(i) fill in the enclosed Ballot;
(ii) check the box entitled "Accepts the Prepackaged Plan" or "Rejects the
Prepackaged Plan;"
(iii) sign the Ballot; and
(iv) return the Ballot to the Solicitation Agent as directed in the
enclosed disclosure statement.
If you hold subordinated debt and do not wish to consent to the
releases granted in favor of certain directors of and investors in the Company
as provided for in the Prepackaged Plan, you should check the box under Item 5
of your Ballot. It is a condition to consummation of our prepackaged plan of
restructuring that no more than 5% of the holders of the subordinated debt shall
have checked the box under Item 5.
If you hold subordinated debentures in "street name" through a
brokerage firm, bank, trust company or other sources, return the Ballot to the
nominee as promptly as possible so that the nominee may complete a Master Ballot
that will reflect your vote.
All holders of our Common Stock are automatically deemed to reject the
restructuring and are therefore not being asked to submit Ballots.
<PAGE>
Finalizing the Restructuring
Once the voting period has ended, we will determine, based on the results
of the voting, whether we can finalize the restructuring. If a majority in
number of holders of subordinated debt who vote accept the restructuring,
and they hold at least 66 2/3% of the dollar amount of subordinated debt voted,
each of the holders of subordinated debt will be deemed to have accepted the
restructuring.
If we receive enough votes in favor of the restructuring, we will seek to
consummate the restructuring plan. If we do not receive enough votes to accept
the restructuring from holders of the subordinated debt, we intend to seek the
approval of the Bankruptcy Court to carry out the restructuring without such
approval by using provisions of the Bankruptcy Code that would allow us to
implement the restructuring over the rejection of the holders of the
subordinated debt. If the Bankruptcy Court grants our request pursuant to those
provisions, holders of subordinated debt will receive no distribution and retain
no property under the restructuring instead of the current offer being made to
them. While we believe that this treatment is permissible under the Bankruptcy
Code, we recognize that arguments exist that certain case law would permit the
Bankruptcy Court to reach a contrary conclusion.
Alternatives to Restructuring
If we do not receive the vote necessary to finalize the restructuring or
the Bankruptcy Court does not permit us to carry out the restructuring, we will
be forced to consider some unattractive alternatives, including a liquidation of
our assets or development of an alternative restructuring plan. We believe that
the current restructuring will minimize the disruption to our business and
ultimately results in a larger distribution for creditors than would occur under
our other alternatives.
In Conclusion
Again, we urge you to read all the enclosed documents carefully and to
follow the instructions for participating in the restructuring before the
expiration date on _________________.
We believe the restructuring provides the best alternative for creating a
capital structure that is appropriate given our operational capabilities. We
are nearing the end of a very lengthy process that is the most likely of the
alternatives to result in a stronger and well-positioned Company with manageable
debt obligations. As we work toward completing the restructuring, we thank you
for your continued support.
Sincerely,
Jeffrey P. Gannon
President and Chief Executive Officer
<PAGE>
Exhibit 99K
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- --------------------------------------------------------------------------------
Forrester Numbers
-----------------
<TABLE>
<CAPTION>
Summary Valuation: VSB Technology
- -------------------------------------------------------------------------------
(Amounts in Million)
Domestic 1999 2000 2001 2002 2003 2004 2005
- -------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
OAM Cable Box
- -------------
Market Size 8.0 8.0 8.0 8.0 8.0 8.0 8.0
% Digital 20.0% 35.0% 50.0% 65.0% 80.0% 100.0% 100.0%
% Using VSB Remodulation 0.0% 4.0% 7.0% 10.0% 14.0% 14.0% 14.0%
TVs
- ---
Market Size 25.0 25.0 25.0 25.0 25.0 25.0 25.0
% Digital 0.3% 1.0% 4.0% 7.0% 10.0% 14.0% 20.0%
% Using VSB Demodulation 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
PCs
- ---
Market Size 11.0 13.0 14.5 16.0 17.8 19.6 21.5
% Digital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
% Using VSB Demodulation 0.0% 0.5% 1.5% 2.5% 3.5% 5.0% 5.0%
Add-In Cards
- ------------
Market Size 0.2 0.2 0.2 0.2 0.2 0.2 0.2
% Digital 0.0% 20.0% 80.0% 100.0% 100.0% 100.0% 100.0%
% Using VSB Demodulation 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Video Recorders/DVD-R
- ---------------------
Market Size 15.0 15.0 15.0 15.0 15.0 15.0 15.0
% Digital 1.0% 3.0% 5.0% 7.0% 9.0% 12.0% 20.0%
% Using VSB Remod/Demo 50.0% 80.0% 100.0% 100.0% 100.0% 100.0% 100.0%
DVD-P
- -----
Market Size 1.8 2.5 3.7 5.0 5.0 4.0 3.0
% Digital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
% Using VSB Remod/Demo 0.0% 5.0% 10.0% 12.0% 18.0% 20.0% 20.0%
ATSC Converters (For Analog TV or Monitor)
- ------------------------------------------
Market Size NA NA NA NA NA NA NA
% Digital NA NA NA NA NA NA NA
% Using VSB Demodulation NA NA NA NA NA NA NA
Total VSB Demodulation 0.3 0.4 0.5 1.9 2.2 2.5 3.8
Satallite Box
- -------------
Market Size 1.5 1.5 1.5 1.5 1.5 1.3 1.1
% Digital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
% Using VSB Demodulation 10.0% 20.0% 40.0% 60.0% 80.0% 100.0% 100.0%
</TABLE>
<TABLE>
<CAPTION>
Domestic 2006 2007 2008 2009 2010 2010
- -------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
OAM Cable Box
- -------------
Market Size 8.0 8.0 8.0 8.0 8.0 8.0
% DIgital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
% Using VSB Remodulation 14.0% 14.0% 14.0% 14.0% 14.0% 14.0%
TVs
- ---
Market Size 25.0 25.0 25.0 25.0 25.0 25.0
% Digital 30.0% 45.0% 60.0% 75.0% 100.0% 100.0%
% Using VSB Demodulation 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
PCs
- ---
Market Size 23.7 26.0 28.6 31.5 34.6 38.1
% Digital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
% Using Demodulation 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Add-In Cards
- ------------
Market Size 0.2 0.2 0.2 0.2 0.2 0.2
% Digital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
% Using VSB Demodulation 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Video Recorders/DVD-R
- ---------------------
Market Size 15.0 15.0 15.0 15.0 15.0 15.0
% Digital 40.0% 60.0% 70.0% 80.0% 90.0% 100.0%
% Using VSB Remod/Demo 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
DVD-P
- -----
Market Size 2.0 1.0 0.0 0.0 0.0 0.0
% Digital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
% Using VSB Remod/Demo 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%
ATSC Converters (For Analog TV or Monitor)
- ------------------------------------------
Market Size NA NA NA NA NA NA
% Digital NA NA NA NA NA NA
% Using VSB Demodulation NA NA NA NA NA NA
Total VSB Demodulation 3.9 3.7 3.0 2.5 2.0 1.5
Satallite Box
- -------------
Market Size 0.9 0.7 0.5 0.3 0.1 0.0
% Digital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
% Using VSB Demodulation 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
<PAGE>
EXHIBIT 99L
--------------------------------------------------------------
COMPLETE APPRAISAL OF REAL PROPERTY
ZENCO DE CHIHUAHUA, S.A. DE C.V.
An Industrial Manufacturing/Warehouse Facility
Carretera Pan Americana
Parque Industrial Aeropuerto
C.P. 32690
Ciudad Juarez, Chihuahua, Mexico
C & W Appraisal File No. 99-9011
--------------------------------------------------------------
IN A COMPLETE FORMAT
As of January 13, 1998
Prepared For:
ZENITH ELECTRONICS CORPORATION
Attention: Ms. Beverly Wyckoff
1000 Milwaukee Avenue
Glenview, Illinois 60025
Prepared By:
CUSHMAN & WAKEFIELD OF ARIZONA, INC.
Valuation & Consulting Services
Suite 300
1850 North Central Avenue
Phoenix, Arizona 85004-4540
<PAGE>
January 20, 1999
ZENITH ELECTRONICS CORPORATION
Attention: Ms. Beverly Wyckoff
1000 Milwaukee Avenue
Glenview, Illinois 60025
Re:Complete Appraisal of Real Property
Zenco de Chihuahua, S.A. de C.V.
An Industrial Manufacturing/Warehouse Facility
Carretera Pan Americana
Parque Industrial Aeropuerto
C.P. 32690
Ciudad Juarez, Chihuahua, Mexico
Dear Ms. Wyckoff:
In fulfillment of our agreement as outlined in the Letter of Engagement,
Cushman & Wakefield of Arizona, Inc., is pleased to transmit our report
estimating the market value of the fee simple interest in the subject property
as is.
As specified in the Letter of Engagement, the value opinion reported is
qualified by certain assumptions, limiting conditions, certifications and
definitions, which are set forth in the report. This is a complete appraisal
prepared in accordance with the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
This report was prepared for the client, and it is intended only for the
specified use of the client. It may not be distributed to, or relied upon by,
other persons or entities without written permission of Cushman & Wakefield of
Arizona, Inc.
The subject consists of a single tenant industrial building encompassing
904,000 square feet. The facility is utilized by a subsidiary of Zenith for the
manufacturing and warehousing of televisions. The improvements were constructed
in 1984 and are in average condition, with no major deferred maintenance noted.
<PAGE>
Ms. Wyckoff
January 20, 1999
Page 2
Because of the site size and placement of the improvements on the industrial
site, we have allocated 44.215 acres for the building site and 32.346 acres as
excess land that could be sold and developed with another industrial facility
unrelated to the existing improvements.
Michael L. Miller, MAI inspected the subject property and prepared the
report. As a result of our analysis, we have formed an opinion that the market
value of the fee simple estate in the manufacturing facility, which includes
excess land valued at $5,280,000, subject to the assumptions, limiting
conditions, certifications and definitions, as of January 13, 1998, is:
TWENTY MILLION DOLLARS
$20,000,000
This letter is invalid as an opinion of value if detached from the report,
which contains the text, exhibits, and an Addendum.
Respectfully submitted,
CUSHMAN & WAKEFIELD OF ARIZONA, INC.
Michael L. Miller, MAI
Director
Valuation Advisory Services
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
- -------------------------------------------------------------------------------
PROPERTY NAME: Zenco de Chihuahua, S.A. de C.V.
LOCATION: Carretara Pan Americana, Parque Industrial
Aeropuerto, C. P. 32690
Ciudad Juarez, Chihuahua, Mexico 185389
INTEREST APPRAISED: Fee simple estate
DATE OF VALUE: January 13, 1998
DATE OF INSPECTION: January 13, 1998
OWNERSHIP: Zenith
LAND AREA:
BUILDING SITE: 44.215 acres, or 1,926,000 square feet
EXCESS LAND: 32.346 acres, or 1,409,000 square feet
ZONING: Industrial (assembly non-contaminants)
HIGHEST AND BEST USE
If Vacant: Industrial development
As Improved: Continued single-tenant industrial use
IMPROVEMENTS
Type: Single-tenant industrial manufacturing and
warehouse building
Year Built: 1984
Type of Construction: Tilt wall and masonry block with roof truss
system
Gross Building Area: 904,000 square feet
Condition: Average
VALUE INDICATORS
MARKET VALUE
Cost Approach: $27,900,000
Land Value:
Building Site $ 5,590,000
Excess Land $ 4,090,000
Sales Comparison Approach: $20,000,000 (includes $4,090,000 in excess
land value)
Income Approach: $31,330,000 (includes $4,090,000 in excess
land value)
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
- --------------------------------------------------------------------------------
VALUE CONCLUSION
(INCLUSIVE OF EXCESS LAND): $20,000,000
ESTIMATED MARKETING TIME: 12 to 18 months
SPECIAL LIMITING CONDITIONS:
The appraiser conducted an appraisal on the subject in May of 1998. At that
time, a market value estimate of $31,130,000 and a liquidation value of
$28,500,000. The market value considered a 12 to 18 month marketing period,
while liquidation value considered only a six-month marketing period. However,
since that appraisal was conducted, a number of factors support a decline in the
market value:
1) A 25.0 percent decline in the value of the peso has occurred since the
previous date of appraisal. This directly affects the value of real estate in
Mexico.
2) The world capital markets contracted substantially in October and November
1998. Although the capital markets are recovering, the contraction has still
limited the number of potential purchasers (particularly REITs), increased the
cost of loans (even though the prime interest rate has decreased) and made
secondary markets, like Juarez, less desirable for real estate financing. Bob
Burnand with Cushman & Wakefield's Financial Services Group indicated that real
estate prices still remain 10 to 15 percent below those levels immediately prior
to October 1998.
3) At the time of the initial appraisal, we could find no industrial building
over 300,000 square foot building had ever been marketed, much less sold in the
entire country of Mexico. Our surveys included the largest brokerage firms
throughout Mexico and those specific to Juarez. Further, we also surveyed the
largest industrial developers in the country, and those active in Juarez.
Because of the lack of large facility transactions, a great deal of subjectivity
had to be employed in the previous analysis.
However, since the initial appraisal, the subject building has been marketed
for sale. A number of investors and potential users have looked into purchasing
the property. Most of the investment purchasers expressed preliminary interest
in the $13,000,000 to $15,000,000 range. However, only one potential user has
made an offer for the subject, allocating $18,750,000 for the real estate. This
tends to suggest that the market, even after considering the devaluation of the
peso and the contraction in the capital markets, is requiring a larger discount
for the building size than previously expected.
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
INTRODUCTION............................................................ 1
Identification of Property........................................... 1
Property Ownership and Recent History................................ 1
Purpose and Function of the Appraisal................................ 1
Scope of the Appraisal............................................... 1
Date of Value and Property Inspection................................ 2
Property Rights Appraised............................................ 2
Definitions of Value, Interest Appraised, and Other Pertinent Terms.. 2
Legal Description.................................................... 3
Personal Property.................................................... 3
Reporting Guidelines................................................. 3
Marketing Time....................................................... 3
REGIONAL ANALYSIS....................................................... 5
MAQUILADORA ANALYSIS.................................................... 12
MAQUILADORA INDUSTRY.................................................... 20
INDUSTRIAL MARKET ANALYSIS.............................................. 24
NEIGHBORHOOD ANALYSIS................................................... 33
PROPERTY DESCRIPTION.................................................... 35
Site Description..................................................... 35
Improvements Description............................................. 36
ZONING.................................................................. 40
REAL ESTATE ASSESSMENTS AND TAXES....................................... 41
HIGHEST AND BEST USE.................................................... 42
VALUATION METHODOLOGY................................................... 45
COST APPROACH........................................................... 46
SALES COMPARISON APPROACH............................................... 55
INCOME APPROACH......................................................... 63
RECONCILIATION AND FINAL VALUE ESTIMATE................................. 68
ASSUMPTIONS AND LIMITING CONDITIONS..................................... 70
CERTIFICATION OF APPRAISAL.............................................. 72
ADDENDA................................................................. 73
Subject Photographs
Legal Description
Building Plans
Qualifications of Appraiser
</TABLE>
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
IDENTIFICATION OF PROPERTY
The subject property is known as the Zenco de Chihuahua, S.A. de C.V., a
subsidiary of Zenith. The improvements consist of an industrial
manufacturing/warehouse building totaling 904,000 square feet of gross building
area. The site contains 76.561 acres, which we have allocated as 44.215 acres
for the building site and 32.346 acres of excess land, which can be sold
separately. The physical address is Carretara Pan Americana, Parque Industrial
Aeropuerto, C. P. 32690, in the city of Ciudad Juarez, state of Chihuahua,
Mexico.
The subject property, situated within an established industrial park in the
southwest quadrant of the city of Ciudad Juarez. The subject has immediate
access to Carretera Pan Americana (Pan American Highway), a major thoroughfare
in the city. The neighborhood is predominantly industrial with residential
interspersed throughout.
PROPERTY OWNERSHIP AND RECENT HISTORY
The subject site was acquired by the current owners prior to 1984 and
subsequently constructed the improvements in 1984. Minor interior remodeling has
periodically occurred as demands on manufacturing have changed. No prior sales,
listings, or offers are known to have occurred in the last three years.
PURPOSE AND FUNCTION OF THE APPRAISAL
The purpose of the appraisal is to provide an estimate of the market value of
the fee simple interest in the subject property as is. At the request of the
client, we have estimated the liquidation value of the subject property. This
assumes a six-month sale period, which is less than the estimated marketing
period if sold at the market value previously noted. It is our understanding the
appraisal will be utilized to assist in making management decisions relative to
financing.
SCOPE OF THE APPRAISAL
In the process of preparing this appraisal, we:
. Inspected the building and site improvements with the production manager.
. Drove every major street in the community and inspected all large commercial,
industrial and office facilities and all industrial parks within the
community.
. Conducted market research and analysis regarding the socio-economic makeup of
the country and the specific community where the subject is located.
. Prepared specific interviews and reviewed business and industrial overviews
prepared by Cushman & Wakefield of Mexico, Northern Mexico's regional
economic centers, real estate brokers, and industrial developers in order to
prepare a comprehensive overview of the maquiladora market.
. Conducted market research and analysis of occupancies, asking rents,
concessions, and operating expenses at competing properties. These included
phone conversations with industrial park managers, the individual maquiladora
production managers, area real estate brokers in the U.S. and throughout
Mexico. Further, we reviewed publications put out by the State, the local
economic development council and the U.S. sister city.
- --------------------------------------------------------------------------------
-1-
<PAGE>
INTRODUCTION
- -------------------------------------------------------------------------------
. Conducted market inquiries into recent sales of similar properties to
ascertain sales prices per square foot and capitalization rates. This
included reviewing all potential commercial and industrial transactions in
the community, a regional search in the City, State and a national search of
potential leases and sales
. Reviewed specific construction costs of projects recently completed, under
construction and proposed in order to substantiate a replacement cost
estimate. A land value estimate through a comparison of recent land sales was
conducted and after depreciation, used to derive a value via the Cost
Approach.
DATE OF VALUE AND PROPERTY INSPECTION
The date of value is January 13, 1998, the same as the date of inspection.
PROPERTY RIGHTS APPRAISED
Fee simple estate and liquidation value based on a six month marketing
period.
DEFINITION OF MARKET VALUE
The definition of market value taken from the Uniform Standards of
Professional Appraisal Practice, 1994 Edition, published by The Appraisal
Foundation, is as follows:
The most probable price which a property should bring in a competitive and
open market under all conditions requisite to a fair sale, the buyer and
seller each acting prudently and knowledgeably, and assuming the price is not
affected by undue stimulus. Implicit in this definition is the consummation
of a sale as of a specified date and the passing of title from seller to
buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what they
consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of financial
arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions granted
by anyone associated with the sale.
EXPOSURE TIME
Under paragraph 3 of the Definition of Market Value, the value estimate
presumes that a reasonable time is allowed for exposure in the open market.
Exposure time is defined as the estimated length of time the property
interest being appraised would have been offered on the market prior to the
hypothetical consummation of a sale at the market value on the effective
date of the appraisal. Exposure time is presumed to precede the effective
date of the appraisal.
- -------------------------------------------------------------------------------
-2-
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
The following definitions of pertinent terms taken from the Dictionary of
Real Estate Appraisal, Third Edition (1993), published by The American Institute
of Real Estate Appraisers (now known as The Appraisal Institute), are as
follows:
FEE SIMPLE ESTATE
Absolute ownership unencumbered by other interest or estate, subject only
to the limitations imposed by the governmental powers of taxation, eminent
domain, police power and escheat.
MARKET RENT
The rental income that a property would most probably command in the open
market; indicated by the current rents paid and asked for comparable space
as of the date of the appraisal.
CASH EQUIVALENT
A price expressed in terms of cash, as distinguished from a price expressed
totally or partly in terms of the face amounts of notes or other securities
that cannot be sold at their face amounts.
MARKET VALUE AS IS ON APPRAISAL DATE
The value of specific ownership rights to an identified parcel of real
estate as of the effective date of the appraisal; related to what
physically exists and is legally permissible and excludes all assumptions
concerning hypothetical market conditions or possible rezoning.
LEGAL DESCRIPTION
A legal description is found the Addenda.
PERSONAL PROPERTY
There is no noted personal property associated with the operations of the
subject property that would require value consideration in the analysis of the
real estate.
REPORTING GUIDELINES
Throughout this report, all figures will be reported in United States (US)
dollars, unless specifically specified as pesos. All sizes will also be reported
in square footage or in acres.
MARKETING TIME
Marketing time is an estimate of the time that might be required to sell a
real property interest at the appraised value. Marketing time is presumed to
start on the effective date of the appraisal. (Marketing time is subsequent to
the effective date of the appraisal, while the previously note exposure time is
presumed to precede the effective date of the appraisal.)
The estimate of marketing time uses some of the same data analyzed in the
process of estimating the reasonable exposure time, and it is not intended to be
a prediction of a date of sale.
- --------------------------------------------------------------------------------
-3-
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
Our estimate of an appropriate marketing time for the subject relates to a
sale of the property in its as-is condition. Based on our assessment of the
local real estate market and economic forces in general, coupled with
discussions with local and regional brokers and buyers/sellers of industrial
projects similar to the subject, we have concluded that the probable marketing
period for the subject property in today's environment would be 12 months.
- --------------------------------------------------------------------------------
-4-
<PAGE>
REGIONAL ANAYLSIS
- -----------------------------------------------------------------------------
Since real estate is an immobile asset, economic trends affecting its
locational quality in relation to other competing properties within its market
area will also have a direct effect on its value as an investment. To accurately
reflect such influences, it is necessary to examine the past and probable future
trends that may affect the economic structure of the market area and evaluate
the impact on the market potential of the subject.
REGIONAL AND LOCAL INFLUENCES
Mexico is a country struggling to modernize its infrastructure and reform its
political system. Although changes have been made, the process has been slow.
The joining of GATT known today as the World Trade Organization (WTO) in 1987
began the process of Mexico joining the free world. The signing of the North
American Free Agreement (NAFTA) in 1994 set in motion the reduction of tariffs
between Mexico and the United States. Since then Mexico has signed several free
trade agreements in Central and South America. The involvement of other
political parties besides the Partido Revolucionario Institucional (PRI) in the
governing of Mexico has created greater participation by the people. However,
problems persist in the southern states, such as Chiapas, where the indigenous
people continue to demand a voice in the political process.
Since the devaluation of the peso in 1994, Mexico has been attempting to
create stability in the financial markets. Over the last 20 years Mexico has
devalued its currency every six years. The massive $52 billion financial aid
package the United States and the International Monetary Fund loaned Mexico in
1995 created greater restrictions on the country's federal reserve bank. Since
then the pesos has floated freely. In order for Mexico to succeed, the
corruption must be uprooted and the judicial system reformed. Nevertheless,
Mexico's close proximity to the United States, its young, inexpensive labor
force and natural resources creates a great opportunity in tourism and
manufacturing that still have not been met.
ECONOMY
Latin American countries, especially those considered mature emerging
markets, held a profitable position during 1997. The Wall Street Journal
classified Latin America as the zone which generates the world's highest
profits, with Mexico categorized as a mature emergent market. By the close of
1997, almost $12 billion in international investments occurred in all of Mexico,
establishing the country as the third most popular country for foreign
investment. The GNP grew by 7.3 percent versus the government's 5.2 percent
projection. The inflation rate was 15.72 percent.
Mexico is the largest Spanish speaking country in the world. With respect to
land area, it is the third largest country in Latin America and the thirteenth
largest in the world. The United States is Mexico's largest trade partner, and
Mexico is the third largest trade partner of the United States after Canada and
Japan. The approval of NAFTA in 1994 between Mexico, the United States and
Canada created the largest and most lucrative trade zone in the world, with a
market of more than 400 million consumers. As other Latin American countries
continue to grow economically and are incorporated in free trade agreements with
Mexico, the Mexican economy will incur the most benefits due to its central
location and recent stabilized economy.
- --------------------------------------------------------------------------------
-5-
<PAGE>
REGIONAL ANAYLSIS
- -----------------------------------------------------------------------------
The economy in 1996 and 1997 was presented with a slow but constant
recuperation. At the beginning of 1995, a 30 percent devaluation of the
peso/dollar exchange rate was projected. But due to strong economic indicators
in the second part of the year, the peso stabilized and created a stimulating
force for accelerated recuperation, surpassing many previous predictions
surrounding the country's capacity for recovery. Further, in 1997, Mexico
reduced its short term external debt.
Mexico City remains as the most expensive city in the country. Conversely,
the city possessed the largest number of industrial and commercial
establishments, as well as representing approximately 30 percent of the average
GNP. Moreover, according to the American Chamber of Commerce, most companies
reported domestic sales volume increased during 1997, with almost one-third
indicating net operating profits had increased by more than 30 percent.
However, the real consumer buying capability has grown more slowly.
Santander, a Spanish banking group, predicted a consumer growth of around 2.5
percent for the year's end, and a jump in sales of approximately 10 percent, in
comparison to the previous year.
After World War II, Mexico based its economic growth on a system of import-
substituting industrialization. Barriers to imports protected domestic products
from foreign competition. Although the economy grew at average annual rates of 6
percent in the 1950s and 1960s, the limits to the import substitution model were
all too apparent by the 1982 crisis. With booming oil prices and foreign
borrowing or deficit spending foreclosed, the De la Madrid government began to
open one of the world's most closed economies to competition and to cut back the
role of the state in economic activity.
The next president, Carlos Salinas de Gotari (1988-94), stepped up the pace
of this policy, privatizing many government industries and the banks, which had
been nationalized in 1982 by De La Madrid's predecessor, Jose Lopez Portillo.
On January 1, 1994, Mexico entered the North American Free Trade Agreement
(NAFTA) with the U.S. and Canada, further reducing barriers to trade with Mexico
for U.S. and Canadian companies and removing many restrictions of foreign
investment.
The transformation of the economy begun by the De la Madrid administration
and accelerated during the Salinas six-year presidential term brought inflation
down from 159.2 percent in 1987 to 7 percent in 1994 and produced an average
annual growth rate of 3 percent between 1985 and 1994. Mexico, the darling of
the international financial community, seemed poised to take full advantage of
its recently granted membership in the Organization for Economic Cooperation and
Development (OECD).
In 1994, a presidential election year, several social and political problems
in Mexico shook investor confidence. Organized uprisings among indigenous groups
in Chiapas, the assassination of the Institutional Revolutionary Party (Partido
Revolucionario Institucional, PRI) presidential candidate Luis Donaldo Colosio
and the murder of PRI Secretary General Jose Francisco Ruiz Massieu, all sent
tremors through Mexican financial markets.
- --------------------------------------------------------------------------------
-6-
<PAGE>
REGIONAL ANAYLSIS
- -----------------------------------------------------------------------------
A massive exodus of capital precipitated a balance of payments crisis.
Without capital inflows, Mexico could no longer sustain a current account
deficit the size of 1994's; about 8 percent of GDP. The country's reserve
position left the government with no other option than to let the peso float.
Fondo Bancario de Proteccion al Ahorro (FOBAPROA), the Mexican equivalent of the
U. S. FDIC, has since taken $43 billion in real estate properties as the result
of the previous pesos devaluation and is now responsible for management and
disposition.
The harsh, painful adjustment sparked by the devaluation (on December 19,
1994 a dollar cost 3.4 pesos; at the end of 1995 it cost 7.7 pesos) and the
economic policies required to forestall falling back into the vicious
devaluation/inflation spirals of the past provoked the sharpest economic
contraction since the Great Depression.
The economy began to recover by late 1995, accelerated rapidly in 1996 with
growth of over 5 percent for the year and declined to 4.5 percent for 1997. It
is expected that this growth will end 1998 at 4.0 percent annual growth. In
addition, exchange rate volatility has since eased and inflation has fallen from
an annual rate of over 51.9 percent in the aftermath of the devaluation to 27.7
percent at the end of 1996. By May 1997 inflation fell below 1 percent per
month for the first time since December 1994. Inflation ended 1997 at 16.0
percent and is estimated at 11.5 percent in 1998.
The recovery was, however, unevenly distributed. On the external side
improvement was immense. Besides overcoming the liquidity crunch, Mexico
succeeded in shifting a large trade deficit of $6.4 billion in 1994 to a surplus
of more than $6.4 billion in 1996. Mexico's access to international markets was
restored in mid-1995 when the Mexican authorities took advantage of the
opportunity to issue market debt in order to prepay the rescue package. By
January 1997, the portion of the rescue package owed to the United States was
repaid in full and $5 billion of the $12.4 billion owed to the IMF was pre-paid.
Mexico was also able to build up foreign exchange reserves to pre-crisis levels,
from $4 billion in January 1995 to $22 billion on July 18, 1997. The current
account deficit also shrunk from over 7 percent of GDP in 1994 ($30 billion) to
0.4 percent in 1996 ($1.4 billion).
As the United States' third largest trading partner, Mexico represents a
thriving market for U.S. products. Not only does Mexico offer a large market
for intermediate and capital goods produced in the U.S. and Canada, but it also
offers a growing market for consumer goods.
Intermediate goods, such as parts, supplies and raw materials used in
manufacturing, account for 78.8 percent of imports, and capital goods, such as
manufacturing equipment, account for 78.8 percent of imports, and capital goods,
such as manufacturing equipment, account for another 13.4 percent. The fact
that these two groups compose over 92 percent of Mexico's imports reflects the
country's developing industrial base. Among the main importers of these goods
are Mexico's manufacturing and maquiladora industries and the Mexican
government.
Although Mexico was hit by a severe economic crisis in 1995/96, its huge
consumer market is beginning to show signs of strong recovery. Due to the
introduction of free market
- --------------------------------------------------------------------------------
-7-
<PAGE>
REGIONAL ANAYLSIS
- -----------------------------------------------------------------------------
policies and the recent expansion of many well-known retail chains in Mexico,
consumers are enjoying access to a wide variety of foreign goods and services.
GOVERNMENT PRIVATIZATION
From 1997 until 2000, most of Mexico's remaining public transportation will
be privatized, including fifty-eight airports, nine ports, five rail concessions
and a dozen municipal transit systems. The long-distance telecommunications
market has already been opened to competition. In 1997, the government announced
a $100 billion toll road modernization program, $15-20 billion of which will be
invested before the year 2000 to modernize Mexico's transportation
infrastructure. Mexico's government sustained IVA (Impuesto al Valor Agregado)
at 15 percent and adjusted its budget for 1998 due to fluctuations of oil
prices, because oil is Mexico's main export product.
Mexico privatized billions of dollars in state-owned industries in the
1990's, and began a steady process of opening trade that culminated with the
approval of NAFTA. However, continued progress on privatizations has been slow
and cumbersome. A Mexican-US rail consortium, Transportacion Ferroviaria
Mexicana (TFM), only recently took control of Mexico's most important railway
line in a $1.4 billion deal that completed the country's most difficult sell-
off. The long-awaited petrochemical privatization was watered down last year.
The state-owned airports are next on the list to be sold.
A $100 million investment was recently announced by the government for a
railroad modernization program, with an estimated $15 to $20 billion to be
invested before 2000 to modernize Mexico's transportation infrastructure.
TRENDS
The government's new National Program of Financing for Development 1997-2000
(Programa Nacional de Financiamiento de Desarrollo, Pronafide) is the first
multiyear plan and has broadened the range of policy goals to include targets
for national savings, social welfare expenditures and educational attainment. It
is designed to ensure GDP growth of 5.6 percent by the year 2000. To achieve
this goal, the plan calls for raising the country's total savings rate (internal
savings, external savings and depreciation rate) by more than four percentage
points to 25.5 percent of GDP in 2000 from 20.9 percent in 1996.
According to government and industry statistics, private consumption is in
fact on the rebound, albeit at a meager rate--2 percent in the first quarter of
the year. Overall consumption rose 4.5 percent in 1997.
In preparation for increased demand, companies in 1999 will continue to
expect to invest more. In 1997 alone, companies poured 44 percent more into
physical plant improvements and expansion, acquisition of new businesses, real
estate, research and development, and personnel training than they did in 1996.
In 1997, respondents increased investment in these areas by an additional 32
percent.
EMPLOYMENT PROJECTIONS
Reflecting the trends in sectoral performance, manufacturing companies will
experienced investment level increases at a slower pace in 1997 (44.5 percent)
and 1998 (26.7 percent)
- --------------------------------------------------------------------------------
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<PAGE>
REGIONAL ANAYLSIS
- -----------------------------------------------------------------------------
than in 1996 (57.4 percent). 1996 was one of the first years when the
sector's strongest members first looked beyond the frail domestic market and
focused their eyes on the lucrative export market. The bulk of investment in
this sector will be seen in the expansion and construction of new physical plant
and the acquisition of equipment.
The services and retail sectors on the other hand saw 1997 as the "get-ready"
year. Service-oriented companies geared up for greater business by investing an
average of 56.1 percent more than in 1996. As could be expected, the vast
majority of the sector's investment (72.4 percent) was in the training of its
workforce to provide better-quality service.
The retail sector, one of the most affected by the travails of the economic
recession, is betting on slow but sure increased consumption levels between now
and the end of the six-year presidential term, or sexenio, by investing more in
new facilities and employee training. Survey respondents to the American Chamber
of Commerce study indicated investment in the sector grew by an average of 31.3
percent in 1997 and an additional 24.9 percent in 1998. Fully half of
respondents belonging to the sector indicated they are channel funds toward the
construction of new facilities. Confirming this data, the country's retail trade
association, the ANTAD, said its members invested a total of $2.95 billion in
new and expanded stores over the last two years. An even greater number of
respondents (69.2 percent), however, said they invested more to train their
human resources--a sign that greater competition has forced retailers to provide
not only better choices and prices, but also better service.
Companies in all three sectors also supported their growth with new employees
as well. Manufacturers and service companies increased their workforces by an
average of 43 percent in 1997, and by 51 percent in 1998. Retailers hired 9.1
percent more workers in 1998 and 9.5 percent more in 1998. The government
estimates that close to one million new jobs were created in 1998 alone.
Overall, the employment outlook is extremely bright and should continue to grow
above U.S. levels.
INFRASTRUCTURE
We have provided an overview of the transportation and utility infrastructure
of the community in order to provide further insight into the economic viability
of the country.
AIRPORTS
Mexico boasts the most highly developed airport infrastructure in Latin
America with 83 public airports, of which 53 are international. Mexico has 32
international agreements that permit reciprocal service to 12 countries
throughout the Americas, 13 in Europe and seven in Asia. Deregulation in recent
years warranted an increase in the number of carriers, route expansion, more
competitive pricing and a growing number of passengers. Privatization of
Mexico's 58 existing airports, in groups of two or three, began in the second
quarter of 1997.
PORTS
Mexico has a total of 76 seaports and nine river ports. Of those, 22 ports
are located in the country's major production and consumption centers, and
handle the bulk of national and international activity. The remaining ports are
dedicated to fishing and tourism. Port activity is highly concentrated in six
ports: Salina Cruz, Lazaro Cardenas, Manzanillo on the Pacific Coast and
Coatzacoalcos, Veracruz and Tampico/Altamira on the Gulf of Mexico. Total cargo
traffic
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<PAGE>
REGIONAL ANAYLSIS
- -----------------------------------------------------------------------------
through the port network increased 25.8 percent from 1996 to 1997, with
significant increases in both imports and exports.
HIGHWAYS
Mexican highways are divided into toll roads and toll-free roads. About one
third of the overall highway system is paved. Most of the paved roads are part
of the federal highway system, which between 1989 and the end of this decade
will have increased by over 70 percent. Toll highways are generally four lanes,
modern and quite costly. In contrast, toll-free roads are usually two lanes and
in poor condition. The government maintains the country's web of toll-free roads
whereas the network of toll highways is operated by the Office of Federal
Bridges and Roads (Caminos y Puentes Federales, Capufe) or by private
concessionaires. Rural roads still represent an important element of regional
and local transit.
TELEPHONES
Telmex, once a government-owned monopoly, was privatized in 1991 and is now
the fastest-growing telephone company in the world. The concession granted to
Telmex in 1990, defined the company's operating areas and set clear service
targets. The concession permitted the new owner a near monopoly for six years,
but competition for long distance services began in August 1996 and the bidding
on local frequencies began in October 1997. The long distance telephone networks
in Mexico are mostly fiber optic and totally digital. Local switching is also
digital and is more widespread than in many developed countries.
WATER
The National Drinking Water and Sewage Program (Programa Nacional de Agua
Potable y Alcantarillado), launched in 1990 by the National Water Commission
Comision Nacional del Agua, CNA), achieved nearly 100-percent availability of
potable water in medium-sized cities by 1992. It also increased the sewage
treatment coverage by one third, reaching 90 percent in major cities and 80
percent in medium-sized cities. Nonetheless 16.4 percent of the Mexican
population does not have access to potable water and 33.0 percent do not have
adequate sewage.
Water experts estimate that approximately $7 billion will be needed to
complete and expand current water projects and to construct new wastewater
collection and treatment systems. Since federal and local government budget
allocations for water projects are insufficient, much of the funding will need
to come from private sources of financing.
DEMOGRAPHICS
Presently, nearly 42 million of the 95 million Mexican citizens live in
poverty, with the national minimum wage at $26.45 pesos per day (approximately
$3.23 U.S.). Less than 20 percent of the population earns more than $5,125 pesos
per month ($625 U.S. per month). Furthermore, the World Bank estimated that 42
percent of Mexico's economic population is employed in the informal sector.
Approximately 56.8 percent of the Mexican population is under the age of 25
years, and six of every 10 citizens reside in cities. However, this trend is
changing, as the growth rate of the four main Mexican cities decreased to 1.8
percent from the 2.0 percent national average. One of the biggest problems
facing communities is adequately housing residents.
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<PAGE>
REGIONAL ANAYLSIS
- -----------------------------------------------------------------------------
Consorcio ARA, residential developers, reported Mexico's housing deficit was
calculated at around six to eight million residences. In order to meet the basic
demands of the rapidly growing population, the housing inventory will have to
grow by roughly 777,000 units per year. During the past year, the metropolitan
areas averaged 4.52 residents per unit, slightly below the national average of
4.65 residents per unit. Meanwhile, 86 percent of metropolitan housing stock has
access to water, and 84 percent has access to sanitary services and drainage.
However, nearly one million homes do not have electricity and/or potable water,
although the percentage of homes with electricity rose from 58.9 percent to 93.2
percent between 1970 and 1995.
SCHOOLS/EDUCATION
There are many private institutions that offer quality education from
kindergarten to university. Many of them are bilingual, with the best
institutions concentrated in the economic centers of Mexico City, Guadalajara
and Monterrey.
SUMMARY
The common border of Mexico with the United States represents a unique
locational perspective that in the long term will benefit both countries. Mexico
is replacing many far east countries as a preferred manufacturing location, and
for good reason. Labor costs are similar and transportation costs are reduced to
North and South American countries. Additionally, the labor market is becoming
well schooled, with recent developments consisting of state of the art
facilities where skilled labor savings can also be found.
Mexico is taking the appropriate steps to become a free market society that
can effectively operate in a global economy. Society and government has reacted
positively to these changes, thus Mexico should remain one of the fastest
growing economies, with some of the highest profit potentials, of any country in
the world.
Near term forecasts project continued government and economic growth, at
reasonable levels. Population forecasts slightly above 2.0 percent are expected,
while growth in housing should substantially exceed this level due to current
inadequate supply. Municipal services will continue to expand and the monetary
system is expected to remain stable, with future inflation increases anticipated
at five to eight percent annually. Further, foreign investment will remain at
some of the highest levels of any country in the world.
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<PAGE>
MAQUILADORA ANYLYSIS
- -----------------------------------------------------------------------------
In this analysis, we will analyze the business of manufacturing within
Mexico, then detail an overview of the industrial market within the community
and the maquiladora market in specific. A maquiladora is defined as an in-bond
light manufacturing facility located in Mexico. It is typically associated with
a company's raw materials being transported to the maquiladora where the product
is manufactured, then the finished product is shipped to the retailer or
consumer.
MANUFACTURING IN MEXICO
Mexican manufacturers generally range from small to medium-size companies. Of
the country's almost 120,000 manufacturing companies, approximately 98 percent
are micro, small or medium-size businesses, all with fewer than 250 employees.
However, almost all materials used to manufacture chemical products, electrical
and electronic components, textiles and footwear are imported from the U.S. Less
than 2 percent of these materials are produced in Mexico.
U.S. companies in Mexico purchase more raw materials from the U.S. than from
Mexico, which means U.S. companies tend to have the inside track for supplying
materials to their Mexican subsidiaries and other U.S. companies in Mexico.
Buying criteria, such as terms of payment, quality standards and delivery time,
are similar to U.S. standards. The top 10 states in terms of the number of
medium and large manufacturing operations are:
1. The State of Mexico
2. The Federal District
3. Nuevo Leon
4. Baja California Norte
5. Chihuahua
6. Jalisco
7. Guanajuato
8. Coahuila
9. Puebla
10. Tamaulipas
THE MAQUILADORA INDUSTRY
Maquiladora plants are twin plants that utilize imported basic American
products and convert them into the finished export merchandise ready for U.S.
and international retailers. This allows American firms to compete with other
foreign companies. The majority of the 300 maquiladora companies that in recent
years have been establishing themselves in northern cities like Mexicali and
Ciudad Juarez are export companies. In the Baja region of central Mexico, larger
manufacturers rely on large developers like Hines and Group Accion to set up
infrastructure and construction so exporting can go straight from Mexico to the
desired country. In northeast Mexico, large developers like Finsa and a
subsidiary of Security Capital (a real estate investment trust) form the bulk of
new construction activity. They have just recently provided management of the
business operations in addition to facility construction. Regardless of the
location, these frontier communities did not previously have an established
public information sector or private brokerage firm to provide companies with
the various locational
- --------------------------------------------------------------------------------
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<PAGE>
MAQUILADORA ANYLYSIS
- -----------------------------------------------------------------------------
and business opportunities available to them. Thus, companies had to rely on
specific economic districts and the industrial park land owners for information.
Mexico's maquiladora industry continues its dynamic growth rate. This 32-year
old program is now Mexico's second largest source of foreign exchange revenue,
in excess of $6 billion. Maquiladora exports represent 45 percent of the total
Mexican manufactured exports. Maquiladoras started 1997 with a growth rate
exceeding 1996's by 16.7 percent, and it is projected that this growth rate will
remain constant throughout 1998. In comparison, the non-maquiladora
manufacturing sector is growing at a rate of 7.3 percent. From January to June
1997, the Mexican government approved permits for 283 new maquiladoras resulting
in 23,902 direct jobs. In total, there are currently 3,650 maquiladoras in
Mexico, accounting for more than 920,412 direct jobs. The new maquiladoras
represent the entire gambit of manufacturing procedures, including textiles,
furniture, automotive components, toys, sporting goods and chemicals.
SUMMARY OF THE MAQUILADORA INDUSTRY
MARCH 31, 1996 JUNE 31, 1997
-------------- -------------
Number of plants 2,288 3,650
Number of jobs 710,268 920,412
It is obvious this industrial market is expanding at a rapid pace; in fact,
it is exceeding the expansion of some of the fastest growing U.S. communities.
The industrial growth for maquiladoras versus the growth of the Mexican economy
is summarized below.
INDUSTRY GROWTH
MAQUILADORAS NATIONAL AVERAGE
------------ ----------------
First Quarter 1997 14.2% 5.7%
Breakdown by Location
Border Region 76.6%
Interior 23.4%
Recent trends indicate that of the new additions to the market, greater
numbers of maquiladora plants have moved from the border areas to the interior
of Mexico. This trend is generally due to the improvement of transportation
infrastructure, facilitating the export of maquiladora-manufactured goods and
enhancing access to the border region and the U.S. market. Also, many
maquiladora employers are finding lower turnover rates in the interior cities of
Mexico, such as Durango, Puebla, Queretaro and Yucatan. We have tracked the
building permits for new maquiladoras in the states of Baja California,
Coahuila, Chihuahua, Federal District, Guanajuato, Mexico, Nuevo Leon, Puebla,
Sonora, and Tamaulipas (shown in order from bottom to top). As can be seen, Baja
California and Chihuahua rank number one and two in total building permits.
Also, construction activity in Baja California, Coahuila, Federal District,
Guanajuato, Nuevo Leon, and Tamaulipas increased in 1997 over 1996 levels. More
non-North American investment is anticipated. With the passage of NAFTA and the
strict rules of origin, goods manufactured in North America have preferential
treatment as tariff and non-tariff barriers are eliminated for the signatory
countries. These rules have encouraged Asian and European firms that want to be
competitive in the North American market to invest in one of the signatory
countries. For example, Daimler Benz from Germany has invested in both the U.S.
and Mexico and Daewoo from Korea in Mexico.
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<PAGE>
MAQUILADORA ANYLYSIS
- -----------------------------------------------------------------------------
NEW MAQUILADORA PERMITS
January-June 1996/January-June 1997
[GRAPH APPEARS HERE]
Investments are finally targeting the Mexican market. The maquiladora
program was originally designed to allow the duty-free entry into Mexico of
parts and components which would then undergo some portion of the manufacturing
process and finally be re-exported with duties assessed only on the value added.
Until 1994, sales in Mexico from maquiladoras were strictly controlled and
essentially not permitted. However, since 1995, under the revised Federal Decree
for the Promotion and Operation of Maquiladora Export Industry (Decreto para el
Fomento y Operacion de la Industria Maquiladora de Exportacion), a maquiladora
can sell up to 65 percent of its total production in the Mexican market. This
percentage will increase over the next five years until 2001 when maquiladora
sales in the domestic market will have no limits. This option adds a new
dimension to the long-term strategies for existing maquiladoras and potential
new investment.
While turnover is still extremely high, efforts to reverse this trend are
slowly showing results. Companies are trying a variety of incentives to retain
employees, from cash bonuses based on production to more creative incentives,
such as giving away popular consumer products. Companies that invest in employee
incentives, meal programs, medical benefits and social programs are having
turnovers as low as many U.S. companies.
According to March 1997 figures, the average daily salary of maquiladora
personnel was $105.21 pesos (approximately US$13), approximately four times the
national average daily wage. Obviously, this rate is competitive with many Asian
countries and well below U.S. and Canadian levels. As such, this provides
companies with high labor costs significant cost savings when relocating
manufacturing to Mexico. However, as will be discussed in more detail within the
Cost Approach section of this report, building costs are similar to or higher
than U.S. costs due to the lack of speculative buildings added to the market.
This provides no measurable savings in the warehousing of goods compared to the
U.S.
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<PAGE>
MAQUILADORA ANYLYSIS
- -----------------------------------------------------------------------------
The economic recession of 1995 in Mexico, during which the peso lost over 50
percent of its value, brought domestic growth and investment to a drastic halt.
But it also had the impact of lowering the costs of operation for those foreign
firms which have revenue in foreign currency. While the rest of the Mexican
economy experienced negative growth rates, the export sectors, primarily the
maquiladora industry, experienced positive growth rates. In the Maquiladora
market, rents have the option to be paid in pesos and/or dollars. Typically,
rent is paid in dollars and management fees in pesos. Additionally, most foreign
companies form a joint venture with a Mexican national, or a Mexican company, to
provide a slightly more favorable tax treatment. Salaries are typically also
paid in pesos, except for the production managers and executives, who are paid
in dollars. Historically, salaries were paid in cash, but companies are now
installing ATM in their facilities and employees have the ability to collect all
or a portion of their paycheck and bank the rest. This is an interesting
transition, as it is extremely important to the long-term economic viability of
the people that personal savings increase.
In the wake of the previous crisis, the prospects for investment have a long-
term positive prospectus. Efforts need to be dedicated to ensuring that
infrastructure limitations at the border do not impede the flow of goods and
people both north and southbound. As trilateral trade among the signatory
members of NAFTA exceeds $400 billion, 70 percent of which crosses from one
country to the other through the land-based ports of entry (truck and/or rail),
there needs to be a trilateral approach to developing and enhancing north/south
trade corridors. This currently is a difficult and time consuming process.
<TABLE>
<CAPTION>
IMPORT AND EXPORT COMPARISONS
==================================================================================================================
Jan.-June
1995 % 1996 % 1997 %
==================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
U.S. EXPORTS
- ------------
Mexico 46,292 7.92 56,792 9.09 32,715 9.63
Canada 127,226 21.76 134,210 21.47 75,195 22.13
Non-NAFTA Countries 411,224 70.32 434,076 69.44 231,866 68.24
------- ----- ------- ----- ------- -----
Total 584,742 100 625,075 100 339,776 100
U.S. IMPORTS
- ------------
Mexico 62,101 8.35 74,297 9.34 40,923 8.3
Canada 144,370 19.42 155,893 19.60 83,952 20.05
Non-NAFTA Countries 537,072 72.23 565,099 71.06 291,732 71.65
------- ----- ------- ----- ------- -----
Total 743,543 100 795,289 100 416,607 100
==================================================================================================================
MEXICAN EXPORTS
- ---------------
U.S. 66,273 88.32 80,540 83.9 44,538 84.97
Canada 1,987 2.5 2,171 2.26 1,087 2.07
Non-NAFTA Countries 11,282 14.18 13,289 13.84 6,795 12.96
------- ----- ------- ----- ------- -----
Total 79,542 100 96,000 100 52,420 100
MEXICAN IMPORTS
- ---------------
U.S. 53,902 74.4 67,555 75.51 37,504 74.52
Canada 1,34 1.90 1,744 1.95 932 1.85
Non-NAFTA Countries 17,1777 23.70 20,170 22.54 11,893 23.63
------- ----- ------- ----- ------- -----
Total 72,453 100 89,469 100 50,329 100
===============================================================================================================
</TABLE>
Source: Banco de Mexico and U.S. Department of Commerce
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<PAGE>
MAQUILADORA ANYLYSIS
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Regardless of NAFTA, Mexico is negotiating for other trade agreements.
Similar types of agreements with five other countries have been consummated and
are just beginning with the European Union and Mercosur (consists of Brazil,
Argentina, Paraguay and Uruguay and is seen as one of the fastest growing trade
accords in the world). When these negotiations are concluded in 1998, the
European Union could easily replace the U.S. as Mexico's largest trading
partner.
The National Foreign Investment Commission (Comision Nacional de Inversiones
Extranjeras, CNIE) within the Secretariat of Commerce and Industrial Development
(Secretaria de Comercio y Fomento Industrial, Secofi) regulates foreign
investment and can authorize majority foreign investment in areas in which
foreign capital cannot automatically exceed 49 percent.
CHANGES TO THE FOREIGN INVESTMENT LAW
Recent amendments to Mexico's Foreign Investment Law further liberalize the
regulation of foreign investment in Mexico to conform with recent privatization
initiatives and consolidate relevant provisions previously found in other laws
and regulations. Certain reporting and procedural requirements are clarified
and, in some instances, relaxed. Additionally, in many cases in which prior
government approval is still required, it is deemed to have been granted if not
denied within a specified time frame. The most significant changes to foreign
investments are as follows:
* For the first time, foreign entities may directly acquire land, provided
it is outside Mexico's restricted zones (coastal and border areas).
* The calculation of foreign investment in a restricted enterprise will no
longer take into account minority foreign participation in the entity or
entities which own or would own such enterprise, provided such entities
are controlled by Mexican nationals.
* Limits on foreign investment in financial group holding companies, banks,
stock brokerage houses and stock market specialists are raised from 30
percent to 49 percent, although Mexican laws regulating financial
institutions permit U.S. and Canadian financial institutions to own up to
100 percent of qualified Mexican affiliates and acquire up to 100 percent
of all but Mexico's three largest financial institutions. The foreign
investment limit applicable to companies formed to manage Mexico's newly-
created retirement funds (Afores) is set at 49 percent.
* The types of basic telecommunications services subject to the 49 percent
limit on foreign investment have been clarified by tying the limitation of
services which require the award of a government operating concession,
with the exception of cellular telephone services, which can exceed such
percentage with prior approval from the CNIE.
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<PAGE>
MAQUILADORA ANYLYSIS
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* With prior governmental approval, entities with majority foreign
investment may now participate in the bidding for the privatization of the
operation of Mexico's airports, telecommunications, satellites and
railroads.
A summary of foreign investment characteristics indicate the U.S. generates
the highest investment, followed by Canada and The Netherlands. To date, this
investment totals $5.646 billion.
DISTRIBUTION OF DIRECT FOREIGN INVESTMENT
BY COUNTRY OF ORIGIN (1996)
--------------------------------
COUNTRY
--------------------------------
United States 66.0%
Canada 8.7%
The Netherlands 5.8%
India 5.1%
Germany 2.9%
Japan 1.7%
France 1.2%
Switzerland 1.2%
--------------------------------
Source: Secofi, General Office of Foreign Investment
ACQUISITION OF MEXICAN COMPANIES
There are no restrictions on the purchase of up to 40 percent, or a lower
percentage allowed for restricted activities, of the capital of companies
controlled by Mexicans at the time of the acquisition. However, the prior
approval of the CNIE is required when the total value of assets of the relevant
Mexican company exceeds an amount periodically established by the CNIE and
which, at the time of publication, was fixed at $85 million pesos ($10.625
million at an exchange rate of 8 pesos to $1).
COMMERCIAL LOANS
Despite incipient recovery, credit is still scarce and expensive in Mexico.
The current interest rate is between 20 and 30 percent, with limited access to
commercial bank financing by many prospective borrowers. It is important to note
that, particularly in the last six months, investment funds, both domestic and
international, have increased their interest in the Mexican market. There are
at least 10 different funds that are actively seeking opportunities to finance a
project or to inject capital in Mexican-based companies.
TAX MATTERS
Mexican tax law treats foreigners doing business "with" Mexico differently
than it treats those doing business "in" Mexico. Doing business with Mexico
suggests engaging in international trade directly from a foreign home office,
whereas doing business in Mexico suggests the additional step of establishing a
physical presence in Mexico and regularly engaging in commercial activities in
the country.
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<PAGE>
MAQUILADORA ANYLYSIS
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DOING BUSINESS "WITH" MEXICO
A foreign company can do business with Mexico from abroad in order to
minimize the tax and regulatory consequences arising from the establishment of a
presence in the country. When structuring operations in this way, however,
foreigners must be extremely careful to ensure that they do not create a
"permanent establishment" or a "fixed base" in Mexico as the income derived from
such entities is considered taxable.
DOING BUSINESS "IN" MEXICO
Foreigners may opt to do business in Mexico by employing a subordinate agent,
establishing a Mexican company, or acquiring stock in an existing Mexican
company. The use of any of these methods will create a permanent establishment
and has the following tax and regulatory consequences:
CORPORATE TAX -- A corporate tax of 34 percent must be paid annually on the
company's taxable profits. Such profits are calculated by deducting certain
allowed expenses from the total accruable income. Most of the company's
income is considered accruable for income tax purposes at the time invoices
are issued, or when goods or services are delivered to the buyer if no
invoice is issued. Basically, the allowed deductions are all discounts and/or
expenses deemed "strictly indispensable" for the carrying out of the
company's business.
TAX ON ASSETS -- There is a federal tax on corporate assets applied at a rate
of 1.8 percent. This tax is applied on the fixed, financial and current
assets of Mexican companies. This tax must be paid on an annual basis through
monthly provisional payments. The payment of the tax on assets is not
required during the pre-operational period of a company, the year in which
operations commence, the following two years of operation, or the year in
which it is liquidated.
VALUE ADDED TAX -- When the Mexican company transfers or leases goods, or
renders services in Mexico, it will be obligated to pay Value Added Tax
(Impuesto al Valor Agregado, IVA). This tax is 15 percent of the price of the
goods or services and can be transferred to the clients by including the tax
on its billing invoices. This rate is 10 percent within 20 kilometers of the
border of Mexico and in all of Baja California and Quintana Roo. However, if
such goods and services are to be exported from Mexico, the IVA is zero
percent.
Reductions in both the Value Added Tax and the Tax on Assets are up for
debate in 1998's fiscal reform.
PAYROLL TAXES -- The company is subject to a local and state payroll tax at a
rate that depends on the location of the working facilities. The federal
government also taxes corporations with social security fees that amount to a
minimum of 8.95 percent of the payroll, to be paid by the employer for old
age, death, child care, retirement and disability.
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MAQUILADORA ANYLYSIS
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WAREHOUSING
Warehousing in Mexico has experienced important changes in 1997. Control of
most of the warehousing sector is being passed from the government to private
hands, leading to improvements in both infrastructure and services. Still, fewer
and smaller facilities are available in Mexico than in the U.S.
Warehousing costs are usually paid monthly and are charged in terms of
space/area occupied. Also, any merchandise placed in a warehouse should be
insured. Basic insurance policies can be obtained directly through the warehouse
or by contracting a private insurance company for a more comprehensive policy.
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<PAGE>
MAQUILADORA ANYLYSIS
- -----------------------------------------------------------------------------
The maquiladora industry in the state of Chihuahua continues with its
tendency for growth. However, at the national level, the number of
establishments grew 12.8 percent, while the number in the state grew 8.3 percent
in 1997. Corresponding to employed personnel, it appears that growth at the
national level was 19.4 percent while the state of Chihuahua had 9.3 percent as
of the end of 1997. The last aggregate value increase at the national level was
40.0 percent and at the state level was 36.9 percent. Thus, it can be concluded
that the number of establishments and the relative employment increases are
similar, while proportionately more is being spent on those facilities. Again,
these increases are above those being experienced in the fastest growing U.S.
metropolitan communites.
Currently, the interior states of the country are growing at much greater
rates than those on the frontier (the border between the U.S. and Mexico). The
interior communities have aggressively sought foreign investments and have
become the most attractive of all communities which use intensive manual labor.
The difference is that the maquiladora that currently settles in the northern
frontier utilizes more U.S. technology and warrants the most skilled labor in
the manufacturing process. Thus, businesses that utilize intensive and cheap
manual labor are opting for the states in the center of the republic, such as
Durango, Aguascalientes, Guanajuato, Zacatecas and Yucatan.
The empoyers in the frontier communties provide the greatest increase in
salaries and grants/loans that has skewed the growth in national average
employment wages upward. This implies an above average increase in salaries paid
by the maquiladora. Another consideration is that 1997 reflects three
consecutive years of considerable growth, at some of the highest levels in the
30 years the maquiladora has been Mexico.
We have documented a breakdown of the maquiladora industry adjacent to the
U.S. border for discussion.
PARTICIPATION OF THE MAQUILADORA INDUSTRY
EXPORTATION FOR THE FRONTIER ENTITIES
OCTOBER 1997
<TABLE>
<CAPTION>
============================================================================================
Frontier Entities Establishments Employed Personnel Aggregate Value
============================================================================================
Millions Of
NUMBER % PEOPLE % Dollars %
============================================================================================
<S> <C> <C> <C> <C> <C> <C>
Chihuahua 413 14.6 249,535 26.3 212 26.8
Nuevo Leon 112 4.0 41,171 4.3 43 5.4
Sonora 232 8.2 83,748 8.8 55 6.9
Coahuila 253 9.0 81,576 8.6 56 7.1
Baja California 937 33.2 210,240 22.2 193 24.4
Tamaulipas 326 11.5 142,258 15.0 118 14.9
Other Entities 550 19.5 140,130 14.8 115 14.5
----- ----- ------- ----- --- -----
NATIONAL TOTAL 2,823 100.0 948,658 100.0 792 100.0
==========================================================================================
</TABLE>
Source: INEGI, Direccion General de Estadistica, Direccion de Estadisticas
Economicas
(General Site of Statistics, Site of Economic Statistics).
Note: The information presented corresponds to the month of October, 1997.
- --------------------------------------------------------------------------------
-20-
<PAGE>
MAQUILADORA ANYLYSIS
- -----------------------------------------------------------------------------
We have also examined some of the principle characteristics of the
maquiladora market for the last two years.
PRINCIPAL CHARACTERISTICS OF THE MAQUILADORA EXPORT INDUSTRY
STATE OF CHIHUAHUA
<TABLE>
<CAPTION>
=========================================================================================================
CONCEPT 1996 1997 VARIATION %
=========================================================================================================
<S> <C> <C> <C>
Number Of Establishments 372 403 8.3
Employed Personnel 215,423 240,345 11.6
Primary Import Material (Millions Of Dollars) 8,199 8,771 7.0
Aggregate Value (Millions Of Dollars) 1,855 2,540 36.9
National Totals (Millions Of Dollars) 99 210 112.1
Salaries, Pay And Grants/Loans (Millions Of Dollars) 1,013 1,353 33.6
Other (Milions Of Dollars) 743 977 31.5
=========================================================================================================
</TABLE>
Source: INEGI, Direccion General de Estadistica, Direccion de Estadisticas
Economicas (General Site of Statistics, Site of Economic Statistics).
Note: The figures corresponding to June 1997 are estimates made in CIEE and
are subject to change.
As previously indicated, the number of maquiladoras grew 8.3 percent, while
employment grew 11.6 percent. Given the amount of build-to-suit projects we
documented during our market inspection, it is reasonable to concluded that
growth in 1998 will at least equal or exceed 1997 levels. However, it should be
noted that a majority of all maquiladoras under construction or proposed are
preleased. Construction activity for the last two years in the two larges cities
in the state, Chihuahua and Juarez, is summarized below.
CONSTRUCTION LICENSES
CITIES OF CHIHUAHUA AND JUAREZ
(Square Feet)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
RESIDENTIAL COMMERCIAL INDUSTRIAL ENLARGEMENT OTHER TOTAL VARIATION
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CITY OF CHIHUAHUA
1996 1,548,633 446,024 346,655 306,348 149,801 2,797,460 -8.8
1997 2,316,606 520,052 246,630 418,478 87,565 3,589,332 28.3
- --------------------------------------------------------------------------------------------------------
CITY OF JUAREZ
1996 (9 months) 1,208,499 460,819 767,403 449,714 73,910 2,960,345 -21.6
1997 (9 months) 2,157,003 380,635 2,234,357 139,202 0 4,911,198 65.9
- --------------------------------------------------------------------------------------------------------
</TABLE>
As indicated, in 1997 Chihuahua experienced significant growth in the
construction industry. In the city of Chihuahua, the number of licenses
solicited before the municipal presidency increased 28.3 percent. However, this
was somewhat skewed between residential growth at 50 percent, the commercial
permits at 17 percent, and the enlargements by 37 percent. However, industrial
permits actually decreased 29 percent, primarily due to the lack of vacant land
for expansion rather than the previously noted socio-economic factors regarding
frontier versus interior located communities. Despite this, those maquiladoras
in the frontier communities, like Chihuahua, continue to expand.
- --------------------------------------------------------------------------------
-21-
<PAGE>
MAQUILADORA ANYLYSIS
- -----------------------------------------------------------------------------
In the city of Juarez, growth exceeds the city of Chihuahua in total square
foot and percentage increases. As indicated, this community experienced
significant increases in industrial and residential development, while declines
in commercial construction and enlargements were noted. The enhanced industrial
development in this community versus Chihuahua is also due to its larger
established industrial base.
Due to the recent changes in the economy, we felt it important to provide an
overview of the economics of the region. First, we have outlined recent changes
to the consumer price index for the country and the communities of Juarez,
Chihuahua and Parral/Jimenez.
GENERAL CHANGES OF INDEX OF PRICES TO THE CONSUMER
Basis 1994 = 100
<TABLE>
<CAPTION>
==============================================================================================================
PERIOD NATIONAL JUAREZ CHIHUAHUA PARRAL/JIMENEZ
==============================================================================================================
<S> <C> <C> <C> <C>
December 1996 27.69 26.65 26.51 27.02
December 1997 15.73 15.56 15.77 16.05
==============================================================================================================
</TABLE>
Source: Banco de Mexico (Bank of Mexico).
During 1997, the growth of the National Index of Prices to the Consumer
(Indice Nacional de Precios Consumidor) in the large communities of the state of
Chihuahua was generally similar to the national level: 15.73 percent at the
national level; 15.56 percent in the city of Juarez, and 15.77 percent for the
city of Chihuahua. This rate of annual inflation is approximately 11 percentage
points lower than 1996, substantiating the stability in the national economy has
transcended to the local levels. This stability can also be seen by the
importance of the maquiladora industry on trade for the frontier states.
- --------------------------------------------------------------------------------
-22-
<PAGE>
<TABLE>
<CAPTION>
MAQUILADORA INDUSTRY
- -----------------------------------------------------------------------------------------------------
COMMERCIAL BALANCE
FRONTIER STATES
January-August 1997 (Millions Of Dollars)
======================================================================================================
AGGREGATE VALUE
EXPORTS IMPORTS MAQUILADORADOR COMMERICAL
STATE (+) (-) INDUSTRY BALANCE
======================================================================================================
<S> <C> <C> <C> <C>
Chihuahua 213.0 681.2 1,592.9 1,124.7
B.C.N. 292.0 841.4 1,266.0 716.6
Tamaulipas 138.1 548.0 878.8 468.9
Sonora 367.2 445.0 387.9 310.1
Coahuila 216.0 593.5 370.4 -7.1
Nuevo Leon 470.0 2,284.0 301.0 -1,513.0
======================================================================================================
</TABLE>
SOURCE: Secretary of Commerce and Industrial Promotion, Delegation Chihuahua,
INEGI, Statistics from the Maquiladora Export Industry.
The participation in the frontier entities in national exports is only a
small allocation. They make up only 2.4 percent of the total exports of the
country, while these states import 8.0 percent of all national imports with
respect to aggregate value. However, they have a significant bearing on their
local economies and the maquiladora industry as a whole; as these frontier
states command 85.5 percent of the $4,797 million dollars generated by the
maquiladorador industry at the national level. The state of Chihuahua has the
greatest commercial balance of any state, while Nuevo Leon and Coahuila present
deficit amounts. Within this state, Juarez is one of the largest communities and
is a young vibrant city poised to take advantage of the North American Free
Agreement (NAFTA) with its proximity to the United States. The young, educated
labor force, coupled with the low wages, provides the competitive edge for the
maquiladora industry in this market.
SUMMARY
While the maquiladora market provides only a small part of the economic
make-up of the country, it provides significant manufacturing employment and
construction dollars to those communities adjacent to the U.S. border.
Maquiladora production managers indicated that fully 60 to 80 percent of all
their manufacturing employees are women, providing employment opportunities to a
segment of the market that previously was not provided jobs. Additionally, the
expanding maquiladora market has provided workers and managers with employment
opportunities at increased wages. As such, we anticipate management and skilled
labor costs to increase significantly in the next one to three years as the
market continues to expand. From an unskilled labor perspective, additional
opportunities will allow employees to relocate to firms with enhanced benefits
and should reduce unemployment levels.
The market expansion should also provide a sense of stability to those
firms that are considering relocating to Mexico but have not made the move.
Labor costs are at some of the lowest levels in the world and, with U.S.
influences, the population is rapidly gaining housing, savings and educational
opportunities previously not available. Coupled with the relatively young
population basis, Mexico, and particularly the frontier states, should continue
to effectively compete on an international basis for new manufacturing
opportunities.
- -------------------------------------------------------------------------------
-23-
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
This section will review the current status of the industrial market in
Mexico and Ciudad Juarez in order to analyze those factors that will influence
the future of the subject property. There were no available municipal
publications on Ciudad Juarez's industrial market. Information was obtained from
Cushman & Wakefield of Mexico/GCI, INEGI and interviews with Finsa, Best Real
Estate, Grupo Puebla and Dynatech.
REAL ESTATE OVERVIEW
Currently, small firms, which create the lion's share of new jobs in most
economies, do not have access to either the bank loan or international markets.
Therefore, most companies are wholly owned and have limited capital for research
and development, the purchase of new technology and for expansion. Further, they
have the inability to leverage their real estate over the long term; therefore,
a large percentage of the operating funds go for real estate.
Larger companies have a competitive advantage in financing their
facilities. They have the option to lease, buy someone else's previously
occupied facility (rarely available), or work with a developer on a build-to-
suit. The latter provides a facility that is specifically catered to the needs
of the manufacturer.
DEVELOPMENT/INVESTMENT
John Deere, Rhone Poulenc, Bimbo, Calsonic and 3M made strong investments
in the industrial sector during 1997 in Mexico but, although export companies
like these grew (maquiladora business grew approximately 70 percent between 1990
and 1996), most of Mexico's domestic industries remained unchanged.
The largest communities in the country, like Mexico City, have a diverse
industry base, with a predominance of auto parts, electronics, pharmaceutical,
textiles and consumer products. In Mexico City, type A industrial space is
normally build-to-suit; therefore, the supply of new speculative industrial
buildings remains very low. As a result of this shortage of space, the few
modern facilities within the city are rapidly acquired when they become
available.
This is also true of every frontier community we inspected and surveyed --
Hermosillo, Juarez, Chihuahua, Matamoros, and Reynosa. Although their economies
are not as diverse as Mexico City, continued market expansion has caused
similarities in industry base and also the same company with multiple locations.
This provides maquiladoras to be strategically located across the southern
border of the U.S. to provide lower transportation costs. It also allows
convenient access to shipping opportunities in both the Atlantic and Pacific
oceans.
OUTLOOK
Of the 3,650 maquiladora programs in mid-1997, 68 percent were at the
northern frontier of Mexico, and 32 percent in the country's interior. In the
automotive sector alone, between 1996 and 2000, production in Mexico is expected
to grow from 1.2 million to 1.85 million vehicles. This industry investment will
average $3 billion a year and provide significant incentive to communities
catering to these companies.
- --------------------------------------------------------------------------------
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
In contrast to the industrial growth of the northern and interior states,
heavy industry will definitely continue leaving Mexico City to outlying
communities. However, because the Mexico City metropolitan area still comprises
the largest consumer market, most companies will focus on locating suitable
spaces for distribution or service centers -- mainly in the northern submarkets
of the city or in cities close to the metropolitan area.
JUAREZ MARKET
The strength of the Juarez economy has created a sizable need for
industrial space. An advantage that Juarez offers over many other frontier
communities is its diversified and well trained workforce, as well an
established supporting infrastructure. The movement of companies into Juarez or
expanding their existing industrial space has increased the industrial inventory
by 6.36 million square feet from 1995 to 1997. Given current build-to-suit and
speculative projects, future growth should be similar to or exceed these recent
historical levels. Industrial development has become very active in the market
due to the lack of vacant maquiladora space. This is due to the market
consisting of primarily build-to-suit projects (developer constructs a building
for a tenant who buys it or leases it), and the minimal business turnover that
has occurred since maquiladoras where introduced into the community.
In an attempt to meet demand, 2.24 million square feet of new industrial
construction were completed in 1996. Only a few speculative projects were built
during First Quarter 1996, leaving most users through the remainder of the year
with build-to-suits or existing building options. As of May 1998, only 666,137
square feet of speculative space in seven buildings are under construction, and
64,196 square feet of build-to-suit leases were confirmed. In 1997, 874,705
square feet of known lease activity were confirmed in the market. This excludes
the +2 million square feet of build-to-suit activity where the potential tenant
purchased the building. The leasing activity, low vacancy rate, and high
absorption have triggered speculative building around Juarez beginning in the
second half of 1996 when 297,514 square feet were constructed. A list of
speculative building construction is noted on the following page.
Juarez industry has traditionally been oriented towards light manufacturing
(the maquiladora), yet during 1995 and 1996 distribution centers and high-tech
space began to appear. In 1997, the Delphi Division of General Motors announced
the expansion of 200,000 square feet to their existing design center, a high-
tech building in the Omega Industrial Park. During 1996, suppliers for the big
maquiladora plants in Juarez provided increased demand of industrial space in
the 15,000 to 30,000 square feet range which was previously not available. This
market trend of building industrial space less than 50,000 square feet is a new
trend precipitated by businesses entering the market at an initially small scale
and then expanding into larger spaces or constructing additions. This trend is
occurring throughout the frontier cities that cater to the maquiladora market.
The lack of available space with 22' clear heights or greater is another
building trend that has produced demand for new development. The supply has been
initiated by one U.S. developer who joined forces with local landowners in order
to build industrial facilities meeting U.S. standard specs. While these trends
are slowly being met by developers, it is the owners of the industrial parks who
control the supply for build-to-suit product, and product being built
================================================================================
-25-
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
Juarez speculative building summary
- --------------------------------------------------------------------------------
-26-
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
outside these parks is becoming more limited due to government restrictions and
social concerns.
The Juarez market consists mainly of freestanding industrial facilities
that were constructed specifically for the tenant. Many tenants and building
owners have remained in this market since their initial building occupancy and
have expanded as demand increases. It is rare to have maquiladoras vacant and
typically occurs when businesses require larger buildings for their operations
and relocate. A thorough view of the market indicated an occupancy of 98
percent, which consists of older, more non-functional buildings constructed in
the 1970s and 1980s. The new speculative buildings being added to the market
rarely remain vacant for three months following completion of construction.
The lack of available vacant space has prohibited many potential tenants
from entering the market. A build-to-suit takes nine to 12 months and many
manufacturers are finding alternative U.S., Asian or European locations to meet
immediate demand. The Juarez market did experience a reduction of net absorption
of approximately 25 percent in 1996, as compared to 1995, again a result of the
lack of available industrial space and developers delaying their speculative
buildings. All known speculative buildings built during the first nine months of
1996 were preleased or sold before completion of construction.
During 1996, the first U.S. developers started large scale construction in
Juarez, primarily on a build-to-suit basis. In 1997, two U.S. developers began
investing on speculative industrial buildings, primarily in the Southeast
Submarket.
Real estate financing is beginning to recognize the U.S. standards. New
U.S. lenders have begun to finance in Juarez, while the U.S. border banks and
Mexican banks are very interested to lend money to the industrial market. Title
insurance companies are currently working in Juarez providing the same title
insurance as in the United States. Every day more companies require
environmental studies for properties to be purchased or financed.
Most build-to-suit lease agreements are for five to 10 years, and the
developer will pay off the construction of the facility in approximately seven
years. This reflects an initial yield requirement (rental income as a percent of
total construction cost, including land) of at least 14 percent. Even leases
with the best credit tenants (Fortune 500 companies) warrant lease rates
exceeding 12.75 percent and range to a high of 16.0 percent. Almost all require
corporate business or personal guarantees. Buildings are rarely financed by the
owners and typically constructed under an all cash scenario. However, only the
largest developers in the community can obtain financing, with rates typically
14.0 to 18.0 percent with preleasing and corporate guarantees. However, on
speculative projects, financing rates climb to 18.0 or 22.0 percent.
In 1996, 23 percent of the projects in Juarez were for new companies coming
to town, compared to 11 in 1995. The remaining projects were expansions or
additions of new facilities, replacing undersized or outdated ones, as most
companies feel confident about the Mexican economy and political climate. In
1996, 75 percent of net absorption occurred from lease activities versus only 37
percent in 1995.
- --------------------------------------------------------------------------------
-27-
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
The estimated 1996 vacancy rate of 1.85 percent indicates the high demand
for existing product in Juarez, even though much of the previously built
inventory has functional issues that due to conform to current manufacturing
standards. However, new additions to the market and relocations have pushed 1997
vacancies to 2.07 percent.
Juarez remains one of the most attractive maquiladora markets to invest in.
Blue chip tenants and high-quality construction from reliable companies are
among the reasons why important money lenders, such as GE Capital and Heller
Financial, have committed to financing new projects. Thus, the long-term outlook
is for stability among existing tenants, with market expansion creating
additional occupancy alternatives previously not available. Further, if these
lenders can provide financing at levels below existing capitalization rates,
building costs and lease rates could decline.
According to the Cushman & Wakefield database, the maquiladora industry
employs over 180,000 people in the city of Juarez. The Juarez area consists of
an industrial inventory of approximately 422 maquiladoras encompassing over 38.9
million square feet that are divided into four submarkets -- Northeast,
Northwest, Southeast and Southwest. The submarkets are summarized in the
following chart, with addition discussion to follow. An expanded analysis was
provided of the subject's Southwest Submarket.
- --------------------------------------------------------------------------------
-28-
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
JUAREZ INDUSTRIAL MARKET OVERVIEW
<TABLE>
<CAPTION>
=====================================================================================================
SUBMARKET NORTHEAST SOUTHEAST SOUTHWEST NORTHWEST TOTAL
=====================================================================================================
<S> <C> <C> <C> <C> <C>
ESTIMATED INVENTORY (SF)
1996 10,959,666 6,293,336 3,649,941 14,048,182 34,951,124
1997 11,703,166 8,857,831 3,889,941 14,520,289 38,971,227
- -----------------------------------------------------------------------------------------------------
MAQUILADORA FACILITIES
1995 103 52 31 152 338
1996 121 66 37 180 404
1997 124 75 39 184 422
- -----------------------------------------------------------------------------------------------------
AVAILABLE SPACE
1995 0 0 0 182,554 182,554
1996 85,262 104,916 0 158,790 348,968
1997 318,951 157,951 111,068 218,985 806,955
- -----------------------------------------------------------------------------------------------------
ESTIMATED VACANCY RATE
1995 0.00% 0.00% 0.00% N/A N/A
1996 0.78% 1.67% 0.00% 1.13% 1.85%
1997 2.73% 1.78% 2.86% 1.51% 2.07%
- -----------------------------------------------------------------------------------------------------
NET ABSORPTION (SF)
1995 706,459 1,349,329 580,210 1,049,001 3,684,999
1996 993,069 737,456 143,142 813,998 2,687,665
1997 743,500 2,564,495 240,000 472,107 4,020,102
- -----------------------------------------------------------------------------------------------------
AVERAGE RENTAL RATE
1995 $4.90 $5.33 $5.10 $4.70 $5.02
1996 $5.09 $5.49 $5.00 $4.94 $5.17
1997 N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------
LEASING ACTIVITY (SF)
1995 N/A N/A N/A N/A N/A
1996 933,589 493,706 53,000 437,538 1,917,833
1997 391,500 1,092,495 115,000 187,107 1,786,102
- -----------------------------------------------------------------------------------------------------
UNDER CONSTRUCTION
1995 368,125 997,579 363,000 494,828 2,223,532
1996 0 156,598 0 140,916 297,514
1997 N/A N/A N/A N/A N/A
=====================================================================================================
</TABLE>
Source: Enrique Portillo of Cushman & Wakefield/GCI
It should be noted that not all industrial facilities in the community are
occupied by maquiladora operators. A summary of the industrial market for the
community indicates that the number of facilities increased 24.9 percent in the
last two years but only 4.5 percent in the last year. However, the total square
footage surveyed increased 11.5 percent, indicating that market additions
reflect larger buildings. Available space has also increased in 1997, reflecting
an increase in vacancies. However, the 1997 vacancy and absorption reflect only
a 2.4-month oversupply to reach a hypothetical 100 percent occupancy. As
previously noted, the 666,137 square feet of speculative space under
construction would extend absorption only another two months. Despite increased
vacancy, average rental rates during 1996 represented a 3.0 percent increase
compared to 1995. Current market leasing activity suggests that rental rates
have since stabilized or slightly declined as builders are able to reduce
construction costs and better leverage their financial structure.
In summary, these industrial market characteristics support a strong
industrial market, with statistics equaling some of the best levels experienced
in the highest growth communities in the
- --------------------------------------------------------------------------------
-29-
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
U.S. It is reported that 20 percent of the Fortune 500 companies are
represented in the Juarez market. Given the current economic climate, the Juarez
industrial market should outperform most U.S. metropolitan areas in terms of
construction, leasing activity and net absorption. However, continued market
efficiencies should cause rental rates to stabilize or slightly decline, and
speculative building activity should push vacancies slightly upward.
SOUTHWEST SUBMARKET
The Southwest Submarket is a relatively small industrial area in comparison
to the other older submarkets, and smaller industrial users are most prevalent.
The southwest area has land with existing infrastructure available within
industrial parks. Also included in this submarket is a high-intensity
industrially-zoned area dedicated for heavy and hazardous industries. The area
is attractive for trucking industry because of the easy highway access.
The Southwest Submarket represents 10 percent of the total inventory but
employs only seven percent of the Juarez employees in the maquiladora market.
The number of jobs per square foot of industrial space revealed that this area
is the lowest, with 4.1 people per 1,000 square feet of space.
Leasing activity in the Southwest Submarket totaled 53,000 square feet in
1996, and more than doubled to 115,000 square feet in 1997. However, the
submarket is made up of primarily build-to-suit owner/users. Net absorption
ranged from 143,142 to 580,210 square feet, with an average of 321,117 square
feet over the last three years. Almost 50 percent of the net absorption was
from new maquiladora operators entering the market and constructing facilities,
while over 27 percent was the result of expansions of existing facilities. The
reason for the decline in net absorption is that no large lease transactions or
building construction occurred in this area in 1996 or 1997.
The 1996 average industrial gross rental rate was $5.00 per square foot, a
2.0 percent decrease from year-end 1995. Recent submarket leases indicate market
rental rates have since stabilized.
As of May 1998, no speculative construction is planned for the southwest
submarket. The last speculative construction seen in this area was a 45,000
square foot project that was completed in 1996 and has since been leased. Major
employers based in the area include Zenith/Goldstar (subject property), Philips,
Siemens, Summitomo, Brown Jordan, Salter Labs, Murata, among others.
NORTHEAST SUBMARKET
The northeast market encompasses the area from Paseo Triunfo de la
Republica (or Tecnologico Avenue) continuing through San Lorenzo Avenue, on the
west to Teofilo Borunda Avenue (under construction on the south), and the
International Boundary of the Rio Bravo to the north. The northern boundary
extends to the east and continues to the Zaragoza International Bridge (port of
entry). Industrial buildings exist in the following areas:
Industrial Parks - Bermudez, Fuentes, Omega.
Industrial Areas - Befere, Neptuno, Vicente Guerrero.
- -------------------------------------------------------------------------------
-30-
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
Map of industrial parks, Juarez
- --------------------------------------------------------------------------------
-31-
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
SOUTHEAST SUBMARKET
The southeast market includes properties south of Teofilo Borunda Avenue
continuing to Zaragoza Avenue and the Zaragoza Bridge, and east of Tecnologico
Avenue (or Carr. Panamericana). This section includes Salvaracar and Zaragoza
suburban areas. Industrial buildings exist in the following areas:
Industrial Parks - Intermex, Rio Bravo, Salvarcar.
Industrial Areas - Tapioca, Salvarcar Industrial District, Las Torres.
SOUTHWEST SUBMARKET
The eastern boundary of this area is the Juarez Mountains. As they extend to
the far southwest, the north side is bounded by Ponciano Arriaga Av, and the
eastern boundary is Tecnologico Av. or Carr. Panamericana. Industrial buildings
exist in the following areas:
Industrial Parks - Aeropuerto, Aztecas, Panamericana, Zaragoza.
NORTHWEST SUBMARKET
The northwest market includes properties north of the Ponciano Arriaga Avenue
and the area immediately west of the Tecnologico Avenue (or Paseo Triunfo de la
Republica). The west boundary is the Juarez Mountains, and the Rio Bravo
International Boundary is to the north. Industrial buildings exist in the
following areas:
Industrial Parks - Fernandez, Gema, Gema 2, Juarez, Omega
Industrial Areas - Altavista, Juan Gabriel, R. Rivera Lara
SUBMARKET SUMMARY
The most critical issue affecting an employer is finding available
industrial land close to the work force. The reason for this is reducing
tardiness and employee turn over. This is causing new buildings to be located in
strategic areas. The subject has above average access and visibility on a major
arterial, with proximity to the community's residential base. As a result, the
subject is considered one of the best situated industrial sites in the community
and northern Mexico.
- --------------------------------------------------------------------------------
-32-
<PAGE>
NEIGHBORHOOD ANALYSIS
- --------------------------------------------------------------------------------
The subject property is located on the west side of Carretara Pan
Americana, within the Parque Industrial Aeropuerto (Airport Industrial Park) in
the city limits of Ciudad Juarez, Chihuahua, Mexico. This is west of the Abraham
Gonzalez International Airport, in the southern portion of the community. The
street frontage is the major north-south arterial within the community,
accessing the central business district to the north and provides for a major
U.S. border crossing with El Paso.
The neighborhood boundaries are Ponciano Arriaga to the north, Libramiento
Aeropuerto and the Juarez city limits to the south, the International Airport to
the east and the Juarez city limits to the west. The area is predominately
industrial based, with light manufacturing and warehousing within the
Panamericana Industrial Park to the south and the Aztecas Industrial Parks to
the north of the subject and the Aeropuerto Industrial Park, of which the
subject is a part. Residential development is situated sparingly throughout the
neighborhood, with most residences constructed north of the subject's industrial
park boundaries. Further, retail development is situated along the major
thoroughfares.
The Zenith facility, known as Zenco de Chihuahua, S.A. de C.V., is the
largest industrial facility in Juarez. It also is one of the largest employers
in the community. However, the Aeropuerto Industrial Park in which it is
situated is one of the smaller in the community. Immediately south is the larger
Panamericana Industrial Park, which also houses light manufacturing facilities.
Major employers within the neighborhood and other submarkets are noted on the
following page. The adjacent 32.3 acre industrial site west of the subject is
owned by Zenith and was originally purchased for building expansion. This site
extends to Boulevard Oscar Flores, a major north-south arterial that runs
through the Juarez central business district. The other industrial parks have
few remaining sites available for expansion. All industrial sites within the
subject and adjacent industrial parks have all municipal utilities, including
water, sewer, electric and telephone. Water for sprinkler systems are handled by
onsite water storage tanks, which is supplied on the subject site. Although the
subject is within the airport height and noise zones, flight patterns do not
cause air traffic to go over the subject facility. As such, noise levels are
typical of other industrial facilities.
Adjacent south of the subject property is single tenant industrial
buildings, typical of industrial facilities throughout the community.
Improvement ratios are typically 50 to 60 percent of the land area and parking
is approximately 5.0 spaces per 1,000 square feet for office areas and one space
per 1,000 square feet for industrial space. Buildings have air conditioned
office and manufacturing space, and evaporative cooling in the warehouse.
Carr. Panamericana provides for public transportation at the subject's
street front and is a typical municipal route. Other industrial parks in the
southeast portion of the community require industrial subdivision managers and
individual maquiladora operators to pay extra for public transportation to their
facilities. The location of the subject is convenient to the municipal work
force. One of the major forces driving Zenith in selecting the subject land
parcel was the opportunity to stay close to its employees thus reducing the
commute time. Coupled with the attractiveness of the industrial park in which
it is situated, the subject competes well with newly constructed buildings in
the community.
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<PAGE>
NEIGHBORHOOD ANALYSIS
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Insert chart of major employers in Juarez
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<PAGE>
PROPERTY DESCRIPTION
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SITE DESCRIPTION
This analysis will consider both the 44.214 acre building site and the
32.346 acre unimproved site.
Location: The sites are located along the west side of Carretera Pan
Americana, within the Parque Industrial Aeropuerto, C. P.
32690
Shape: Both sites are irregular
Area:
Building Site: 44.215 acres or 1,926,000 square feet
Excess Land: 32.346 acres or 1,409,000 square feet
Frontage:
Building Site: West side of Carretera Pan Americana and the north side of
Barranca Azul.
Excess Land: North side of Barranca Azul, immediately west of Barranca
Azul.
Topography/Terrain: The sites are generally level and at grade with the roadway
frontages, and a water retention basin has been improved
adjacent to the intersection of Carretera Pan Americana and
Barranca Azul on the building site.
Street Improvements:The subject building site has access from Carretera Pan
Americana and Barranca Azul, while the excess land has only
direct street frontage to Barranca Azul. Both streets are
improved with asphalt paving and concrete curbs. Carretera
Pan Americana is a major six lane, bi-directional arterial
and Barranca Azul is a two lane, bi-directional interior
neighborhood street.
Soil Conditions: We did not receive nor review a soil report. However, we
assume the soil's load-bearing capacity is sufficient to
support the existing structure. We did not observe any
evidence to the contrary during our physical inspection of
the property. The tract's drainage appears to be adequate.
Utilities: All standard utilities are available to the sites including
water, sewer, electricity, and telephone service.
Access: The building site is accessed via curb cuts along the west
side of Carretera Pan Americana and the north side of
Barranca Azul. A center turn lane is provided at the
entrance from Carretera Pan Americana. The vacant site has
no improved curb cuts, but does have frontage to Barranca
Azul.
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<PAGE>
PROPERTY DESCRIPTION
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Land Use Restrictions: We were not given a title report to review. We do not
know of any easements, encroachments, or restrictions
that would adversely affect the sites' use. However, we
recommend a title search to determine whether any
adverse conditions exist.
Flood Hazard: Ciudad Juarez receives less than 15 days with rain and
has an annual precipitation of less than 7 inches. Based
on our inspection of the sites, there is minimal
probability of flooding. Additionally, an on-site
retention basin has been improved on the building site.
Hazardous Substances: We noted no evidence of toxic waste during our
inspection of the site, although it was confirmed that
chemicals tanks and storage is being conducted. However,
it is important to note that we are not experts in this
field and therefore recommend the inspection of the
subject by an expert in the field of toxic waste. An
environmental assessment on the site was not made
available during the preparation of this report. This
appraisal is predicated on the assumption that hazardous
substances do not exist, however if concerns exist, we
recommend a site assessment be conducted.
Comments: Overall, the subject sites are well suited for their
intended use, light industrial development within an
established industrial park. Considering current land
use patterns in the neighborhood, the sites are typical
of the area and offer adequate functional utility, with
above average locational characteristics.
IMPROVEMENTS DESCRIPTION - ZENITH FACILITY ON THE BUILDING SITE
The subject property consists of one, one-story Class A industrial
structure having a building area of 904,000 square feet. The project was
completed in 1984 on a 44.215 acre site. However, at the time of purchase,
Zenith also purchased the adjacent 32.346 acres, which remains vacant. These two
sites are contiguous, but the 32.346 acres is considered excess land, with no
value enhancement for improvements. This analysis will only consider the
existing building improvements and respective site.
Based on a building area of 904,000 square feet and a building site of
44.215 acres, or 1,926,000 square feet, an improvement ratio of 47 percent is
indicated. The improvements are considered to be in average overall condition at
the time of inspection. The facility provides adequate open paved surface
parking along the eastern property boundary, adjacent to Carretera Pan
Americana. Representatives of Zenith provided the building area calculations,
building sizes and land area dimensions. A review of the limited building plans
provided appeared to indicate the dimensions to be accurate. The project is
currently 100 percent occupied by the owner/occupant. The following table
depicts the area of the building allocated by type of use.
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<PAGE>
PROPERTY DESCRIPTION
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==========================================================
SQUARE
USE FEET Percentage
==========================================================
Office 30,000 3.3
Warehouse 336,000 37.2
Manufacturing 378,000 41.8
Cafeteria 12,000 1.3
Total 904,000 100.0
==========================================================
The physical inspection coupled with a review of the building plans that
were provided by the client provided the basis for the following improvement
description.
GENERAL DATA
Year Built: 1984
BUILDING DESCRIPTION
Size: 904,000 square feet
CONSTRUCTION DETAIL
Foundation: Reinforced concrete slab
Walls: Masonry block and concrete tilt wall construction,
with painted finish. Decorative rock fascia has
been added at the front entrance to the offices.
Glass storefront is installed at the foyer.
Floors: Sealed concrete slab in warehouses, and
manufacturing, commercial grade carpet, ceramic
tile and vinyl in the office areas.
Roof Structure/Cover: Prefab metal trusses with high rib metal deck and
built up roof cover.
Windows: Aluminum fixed-pane windows of various sizes
Pedestrian Doors: Hollow metal exterior doors in the warehouse and
manufacturing areas; metal framed plate glass in
main entrance and hollow core wood doors in the
office
Loading Doors: There are 37 overhead doors with loading docks in
the two warehouse and one manufacturing areas.
Ceiling Height: 10 feet in the office area and 16 to 26 feet in
the warehouse and manufacturing areas.
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<PAGE>
PROPERTY DESCRIPTION
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MECHANICAL DETAIL
Heating and Cooling: The building has a roof-mounted, electrical force
cool air-conditioning units for the offices and
manufacturing area and evaporative coolers in the
warehouse area. A portion of the manufacturing area,
approximately 20,000 square foot, is equipped with a
clean room. This area has additional area scrubbers
with a reported 99.75 percent particle removal rate.
Plumbing Service: The building has separate restroom facilities for the
warehouse/manufacturing areas and smaller, private
bathrooms in the office. An electric water heater
supplies hot water to the facility.
Electrical Service: Electric service is assumed to meet all local
municipality code.
Fire Protection: Fully sprinkler system with a self contained holding
tank installed on-site. A water well has also on-site
and can be used to replenish the fire sprinkler
system.
Security Protection: Security cameras outside the facility, fenced lot
with two guard gates and security alarms installed
throughout the building. Full time security personal
are on-site.
INTERIOR DETAIL
Floor Covering: Offices feature ceramic tile, vinyl and carpet
coverings; warehouse and manufacturing has exposed
concrete slab
Interior Walls: Painted and textured gypsum board in the offices
Ceiling: Nine-foot ceilings with 2' x 4' or 2' x 2' suspended
tile in the offices; no finish in warehouses except
for insulation
Lighting: Suspended fluorescent lights in warehouse and
manufacturing; recessed fluorescent fixtures in
office suites
HAZARDOUS SUBSTANCES: We are not aware of any other potentially hazardous
materials (such as formaldehyde foam insulation,
asbestos insulation, radon gas emitting materials, or
other potentially hazardous materials) which may be
used in the construction of the improvements. The
improvements are built of modern materials and
typical of what is currently constructed. However, we
are not qualified to detect such
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<PAGE>
PROPERTY DESCRIPTION
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materials and urge the client to employ an expert
in the field to determine if such hazardous
materials are present.
AMERICANS WITH DISABILITIES
ACT COMPLIANCE: The subject property is in Mexico and is not
subject to the American with Disabilities Act
(ADA). We have assumed the improvements are not
under the jurisdiction of compliance and
therefore, no modifications are required.
SITE IMPROVEMENTS
On-site Parking: The site improvements consist of concrete curbs
and sidewalks, chemical and water storage tanks,
chain link perimeter fencing with barb wire, iron
gates, two guard houses, security lighting
attached to the building and on pole mounts, water
well, and security cameras. The site has asphalt
paved spaces along the eastern property boundary.
Landscaping: The property has small trees, shrubs and grass
along the front of the building, at landscaped
islands in the parking lot and at the water
retention basin.
COMMENTS: The subject was completed in 1984 and the
improvements are considered to be in average
condition. The roof cover was reportedly replaced
in 1994 and reportedly has a 15 year guarantee.
The normal life expectancy of a building of this
type is considered to be 45 years. Because of the
average condition and above average maintenance of
the facility, the effective age is less than the
actual age of 14 years. We have estimated the
effective age at 10 years, and remaining economic
life at 35 years. The quality of the subject
improvements, including the layout and functional
utility, are rated average.
PERSONAL PROPERTY INCLUDED: No personal property within the building was
included in the analysis.
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<PAGE>
ZONING
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The subject site is zoned Light Manufacturing, by the state of Ciudad
Juarez. The "Licencia de Uso de Suelo" which is the zoning permit to construct
the subject improvements was issued by the government on upon completion of
construction and reissued annually. The subject improvements appeared to comply
with all the requirements establish by the state of Chihuahua law for urban
development under article 5to. Fracion II y 125 de la Ley 101 de Desarollo
Urbano para el Esatado de Chihuahua. In Mexico, a property could be zoned a
certain classification but if it does not have the license for the certain use
or the "Licencia de Uso de Suelo", it would be in violation and the user could
be forced to cease operations. Municipal officers in Chihuahua indicated that
the property is in compliance. The subject property is zoned light manufacturing
use and is also reportedly in compliance with all zoning requirements.
Additionally, local building contractors indicated that zoning requirements
permit a maximum improvement ratio of 60 percent of the land area.
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<PAGE>
REAL ESTATE ASSESSMENTS AND TAXES
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REAL ESTATE TAXES AND ASSESSMENTS
The subject property was constructed in 1984 and periodically assessed for
tax purposes. However, the subject is a single tenant building and taxes are the
responsibility of the tenant. The tenant, in this case the owner, has paid all
previous real estate taxes. Because of the lack of comparative buildings in the
city of Ciudad Juarez and the state of Chihuahua, and that under this analysis
all real estate taxes would be the responsibility of the tenant (does not affect
the income to the owner), we have not attempted to estimate the reasonableness
of the subject's real estate tax. Further, the local taxing and assessment
office could not provide us with an estimate of the subject's real estate taxes.
Real Estate taxes in Mexico are very low compared to the United States. It is
unlikely that the subject would be assessed and taxed based on the estimation of
market value concluded within this report.
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<PAGE>
HIGHEST AND BEST USE
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HIGHEST AND BEST USE OF SITE
According to the Dictionary of Real Estate Appraisal, Third Edition (1993), a
publication of the Appraisal Institute, The highest and best use of the site as
though vacant is defined as:
Among all reasonable, alternative uses, the use that yields the highest
present land value, after payments are made for labor, capital, and
coordination. The use of a property based on the assumption that the parcel
of land is vacant or can be made vacant by demolishing any improvements.
We evaluated the site's highest and best use both as if vacant and as
currently improved. The highest and best use must meet four criteria. The use
must be:
(1) Legally permissible;
(2) Physically possible;
(3) Financially feasible; and
(4) Maximally productive.
AS IF VACANT
LEGALLY PERMISSIBLE
The first test concerns permitted uses. In the case of the subject, we are
analyzing two building sites, one 44.215 acre site improved with an industrial
building and one vacant 32.346 acre site adjacent west of the building site.
According to our understanding of the zoning ordinance noted earlier, the sites
may be improved with structures that accommodate a variety of light
manufacturing, office and accessory uses. As previously reported, the subject
sites appear to be a legal and conforming use.
We would note there are no intended changes in land use regulations for the
sites or the immediate area of the neighborhood. Therefore, if vacant, the
subject sites could be improved with a similar use as currently exists on the
subject building site or adjacent single tenant industrial improvements within
the Aeropuerto or Panamericana industrial parks. Therefore, we view zoning as
imposing no measurable valuation constraints and buildings as large as 60
percent of the site area could be improved. Additionally, there are no known
deed restrictions that would prohibit development.
PHYSICALLY POSSIBLE
The second test is what is physically possible. As discussed in the Property
Description, the site's size, soil, topography, etc., does not physically limit
each sites use. Their size is large enough to accommodate most permitted uses
under current zoning. The sites are fully improved, provided with all utilities,
have level topography and above average accessibility. Thus, there are no
physical barriers that would restrict their development.
FINANCIALLY FEASIBLE
Based on our analysis, the Ciudad Juarez real estate market has shown stable
to slightly increasing vacancies, stable rental rates and substantial growth in
new supply. Because of
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<PAGE>
HIGHEST AND BEST USE
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steady growth of the local economy after the economic crisis of 1994, an
increased demand for space, coupled with a majority of increases in inventory
were build-to-suit projects, large scale construction has occurred in the market
and construction costs have climbed steadily downward. This is also due to
increased market competition.
The subject sites are situated in one of the smallest submarkets in the
community; however, their above average accessibility, street visibility and
location in a desirable industrial submarket provide them with above average
accessibility.
The feasibility of a new project depends on the desire of a company to locate
in the city. The industrial market has been driven by built-to-suit projects and
little speculative space has been constructed. Based on year-end 1997 vacancy
and 1997 absorption levels, a 5.6 months supply within the submarket and a 2.4
months oversupply in all of Juarez are indicated to reach a hypothetical 100
percent occupancy. The submarket rental rates at $5.00 by year end 1997, were
3.4 percent below the Juarez average of $5.17, however, when considering typical
owner expenses and turnkey build-to-suit costs of $26 to $32 per square foot,
including land, the first year rate of return ranges from 14.7 to 18.1 percent,
supporting feasibility. However, the financial feasibility of any project will
depend on the continued desire of a firm to move to Ciudad Juarez, and
indications are that future demand will at least be similar to historical
levels.
Ciudad Juarez has a feasibility based on its established reputation as being
one of the largest maquiladora markets, its skilled employment and population
stability that many border towns do not offer international companies. New
companies entering this market are finding out that a relocation from the U.S.
to Ciudad Juarez, increases productivity at some of the lowest labor costs in
the world. The result of operations in facilities that could be constructed on
the subject site, could provide labor cost savings to cover the cost of a
building in one to three years.
MAXIMALLY PRODUCTIVE
In our opinion, the improvement of the subject sites with light industrial
uses would be physically possible and legally permissible, and financially
feasible, even under a speculative construction basis. However, yield rates
would be increased if an owner occupant was predetermined. However, many
potential manufacturers cannot meet building demands from existing inventory in
Ciudad Juarez, or other northern Mexico communities oriented toward large
industrial occupancies and have been unwilling to wait for a lengthy build-to-
suit transaction. Thus, the maximally productive use of the site would be for
the development of light industrial space oriented towards single tenant
occupancy.
CONCLUSION - AS IF VACANT
The highest and best use of the subject sites, as if vacant, is believed to
be for light industrial development. The sites benefit from a location with
proximity to a young labor force, the international airport, and major
arterials. The metropolitan area has shown continued stability in attracting
maquiladora companies to the city. In addition, a build-to-suit development is
always feasible, as the cost and profit requirements of the developer are being
met by market rent levels and construction costs.
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<PAGE>
HIGHEST AND BEST USE
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AS IMPROVED - EXISTING INDUSTRIAL FACILITY
LEGALLY PERMISSIBLE
As previously stated the subject's zoning permits light industrial uses. It
appears the improved components of the subject site are a legal and conforming
use, thereby satisfying the legal permissibility criterion.
PHYSICALLY POSSIBLE
As previously stated in the Property Description section of this report, the
overall design, layout and condition of the improvements are adequate and
functional. Therefore, in view of the subject's zoning and physical
characteristics, the existing development is considered to satisfy the
physically possible criterion of highest and best use as improved.
FINANCIALLY FEASIBLE
Since the subject was constructed as an owner occupied facility, it has
incurred no vacancy since its construction. General real estate operating
expenses are reported to be typical of larger industrial facilities in the
region. In addition, the space is sufficiently functional to allow an occupant,
with potential modification to the interior, to also generate sufficient income
to exceed expenses. Therefore, the continued use of the subject as a single
tenant facility is viable.
MAXIMALLY PRODUCTIVE
The subject improvements have been concluded as being physically supportable,
legally permissible and financially feasible. Demolition and/or significant
renovation are not considered to be financially feasible alternatives.
Therefore, as no other utilization of the improvements would result in a higher
value, it has been determined the maximally productive use is as improved.
CONCLUSION
Based on our analysis, we believe the current use of the site, as improved,
with a single- occupant (preferably an owner) industrial building consisting of
a combination of office and manufacturing/warehouse space is a proper use of the
site within the definition of highest and best use.
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<PAGE>
VALUATION METHODOLOGY
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Appraisers have three approaches available to them in valuing improved
property: the Cost Approach, the Sales Comparison Approach and the Income
Approach. In most instances, the real property interest being appraised (e.g.,
fee simple, leased fee or leasehold) will dictate the validity of a particular
approach.
The subject property is located in the city of Ciudad Juarez, state of
Chihuahua, Mexico. The subject manufacturing facility was constructed for the
owner/tenant in 1984. Furthermore, the subject property is owned by a U.S.
corporation that also has facilities in the U.S., as are most major maquiladora
facilities in Ciudad Juarez. Previously, most projects were built by the
specific company, with the use of a local building contractor, and occupied by
the owner. However, in the last few years, the demand in the rental market has
increased and lending institutions are just now starting to provide financial
leverage to building investors. Based on these facts, all three approaches to
estimate value, Cost Approach, Sales Comparison Approach and Income Approach
will be used in our analysis.
A detailed Cost Approach was performed, although the older building age makes
estimating depreciation somewhat subjective. Improved sales of similar
facilities to perform a Sales Comparison Approach were also found in Ciudad
Juarez and additional research uncovered sales throughout the Frontier
communities of northern Mexico that could have also be used for comparisons. The
recently negotiated lease activity and properties available for lease, including
speculative facilities recently completed or under construction were found in
abundance within the community of Ciudad Juarez. Thus, only local market rental
comparisons were relied on in estimating market rent and deriving a value via
the Income Approach.
The appraisal process is concluded by a review and re-examinations of each of
the approaches to value that have been employed. Consideration is given to the
type and reliability of data used, and the applicability of each approach.
Finally, the approaches are reconciled and a final value conclusion is
estimated.
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<PAGE>
COST APPROACH
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METHODOLOGY
This approach to value consists of an analysis of the physical value of the
property. The principle of substitution, which forms the underlying rationale of
this approach, holds that no prudent person will pay more for a property than
the amount with which he can obtain, by purchase of a site and construction of a
building, without undue delay, a property of equal desirability and utility.
In the Cost Approach, the following ten steps are typically employed to reach
an estimate of value:
(1) Estimate the value of the land as though vacant and available to be
developed to its highest and best use;
(2) Estimate the replacement cost of the primary structure(s) as of the
effective appraisal date. The estimate includes both direct (hard) costs
and indirect (soft) costs;
(3) Estimate other costs (indirect costs) incurred after construction to
bring the new, vacant primary structure(s) up to market conditions and
occupancy levels;
(4) Estimate an appropriate entrepreneurial profit from an analysis of the
market;
(5) Add estimated replacement or reproduction cost, indirect costs, and the
entrepreneurial profit, often expressed as a percentage of total direct
and indirect costs, to arrive at the total replacement or reproduction
cost of the primary structure(s);
(6) Estimate the amount of accrued depreciation in the structure, which is
divided into three major categories; physical deterioration, functional
obsolescence, and external obsolescence;
(7) Deduct the estimated accrued depreciation from the total reproduction or
replacement cost of the primary structure(s) to derive an estimate of
the depreciated replacement cost;
(8) Estimate replacement costs and depreciation for any accessory buildings
and site improvements, and then deduct the estimated depreciation from
the replacement costs of these improvements. Site improvements and minor
buildings are often appraised at their net value, i.e., directly on a
depreciated cost basis;
(9) Add the depreciated replacement costs of the primary structure(s), the
accessory improvements, and the site improvements to obtain the
estimated total depreciated replacement cost of all the improvements;
and
(10) Add the site value to the total depreciated replacement cost of all the
improvements to arrive at the indicated value of the fee simple interest
in the property.
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<PAGE>
COST APPROACH
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LAND VALUATION
Depending on the specific appraisal assignment and/or the value being sought,
any of the following methods may be used to value land that is vacant or
considered to be unimproved or vacant.
The first method is the Sales Comparison Approach, which is the process of
analyzing sales of reasonably similar, recently sold sites in order to derive an
indication of the most reasonable and probable market value of the land being
appraised.
The second method is the Land Residual Approach, which is a valuation
technique based upon the premise that income can be divided between land and
improvements, and that the residual income to the land can then be capitalized
into a value.
A third procedure, the Subdivision Development Method, may sometimes be used
to estimate the value of vacant, usually undivided land, through a process of
analyzing the cost to development (including profit) and interest carry relative
to the anticipated gross income from the retail sales of individual lots or
tracts.
The fourth and fifth methods, the Allocation and Extraction methods, which
are two techniques that permit the distribution of the total value or sales
price of a property between land and building.
The last procedure is the Ground Rent Capitalization method, where ground
rents can be capitalized at an appropriate rate to indicate the market value of
a site.
Under the right circumstances, any of the preceding methods may be useful in
forming the basis of a valid estimate of land value. However, given the
availability of sales data, the Sales Comparison Approach is considered to be
the best approach toward valuing the subject site. The most widely used and most
market-oriented unit of comparison for properties such as the subject is the
sales price per square foot. All of the comparable sales were compared on this
basis and adjustments were made to the various comparables. On the following
page is a summary of the sales and listings we found most comparable to the
subject. These are a culmination of reviewing all known industrial subdivision
activity in the community in the last three years. All are situated within the
city limits of Ciudad Juarez.
As noted earlier, the subject sites are zoned for industrial development
under the jurisdiction of Ciudad Juarez. The two contiguous sites are similar in
location, access, visibility, development potential and differ only slightly in
size. This analysis will consider both the subject sites, a provide individual
values at the conclusion of this analysis.
According to our highest and best use analysis, we have concluded single-
tenant industrial use would be the most likely development for the subject
sites. Accordingly, a search was conducted for comparable land sales deemed to
be conducive to similar development.
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<PAGE>
COST APPROACH
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COMPARABLE LAND SALES
FROM END OF REPORT
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<PAGE>
COST APPROACH
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The comparables analyzed include six of the largest land sales zoned for
industrial development that have occurred in Juarez in the last 36 months. The
preceding table depicts a summary of the land comparables.
Note that certain adjustments to the sales will be made for comparison
purposes, but a degree of subjectivity is involved. We were unable to support
the magnitude of the adjustments by paired sales analysis, but the adjustments
do reflect our thought processes in comparing one transaction with another.
PROPERTY RIGHTS CONVEYED
All of the comparable sales involved vacant parcels of land unencumbered by
any leases. Therefore, all of the sales set forth herein represent the transfer
of the fee simple estate. Consequently, no adjustments are warranted for
differences in property rights conveyed.
SELLER FINANCING/CASH EQUIVALENCY
The sales were purchased on an all cash, or cash equivalent basis. Since we
are valuing the subject site based on a cash equivalent sale, no adjustment is
necessary.
CONDITIONS OF SALE
Sometimes sales involve certain elements, which motivate the buyer or seller
to pay or accept more or less than the market value of the property. When such
influences differ from typical market conditions, adjustments are required. All
of the comparables were subject to normal (or typical) conditions of sale and
required no adjustment.
MARKET CONDITIONS
An adjustment for market conditions, often referred to as a time adjustment,
reflects a change in the market from the sale date of the comparable to the
valuation date of the subject property. An analysis of real estate trends
indicates that the market for Ciudad Juarez has become significantly stronger
since the December 1994 devaluation of the Mexican peso.
Since of mid-1995 oldest sale comparable, rental rates on improved product
has increased less than 3.0 percent annually, well below the rate of inflation.
However, net absorption has increased significantly, but the increased market
activity has caused vacancies to increase in light of initial speculative
building projects being constructed. But construction costs have declined due to
the competitiveness of the market. It is difficult to measure these factors
relative to changes in land value over the last 36 months.
A review of 14 land sales that have occurred since 1995, indicated an average
industrial land price of $3.82 per square foot in 1995 for three sales, $4.25 in
1996 for two sales and $2.74 per square foot in 1997 for nine sales. As
indicated, activity increased in 1997, but the average price per square foot
fell. However, this occurred primarily due to new activity being at the
peripheral of urban development, within the Southeast Submarket. Thus this
relates more to locational variations rather than a decline in land pricing.
Another consideration is for changes in economic characteristics of the
community, particularly as they relate to the value of the peso. In 1995, the
average exchange rate was 6.4,
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<PAGE>
COST APPROACH
- -----------------------------------------------------------------------------
increasing to 7.6 in 1996, 7.9 in 1997 and increasing substantially to 9.1 in
1998. At the date of inspection, the peso was trading at 10.7 for each U.S.
dollar. This change directly affects the economics of Mexican real estate and
the economy. Because of the economic characteristics of the community, coupled
with increased land supply at lower costs situated at the peripheral of the
community, a downward adjustment for changes in market conditions was supported.
LOCATION
An analysis of location involves factors such as proximity to a labor force,
major thoroughfares, surrounding influences, and area amenities. The proximity
to a labor force is critical in a country like Mexico that does not have a good
public transportation system and few industrial employees have automobiles.
Because of the subject's more urban location and built-out industrial
neighborhood, no land sale could be confirmed within the Southwest Submarket. In
fact, all but one of the last 21 land sales that have occurred since 1994 in
Juarez were situated in the Southeast Submarket. This is primarily due to the
lack of vacant industrial sites in the other submarkets. All of the comparables
considered in this analysis occurred in the Southeast Submarket, considered
somewhat more peripheral in location and a greater distance to employment base,
we have applied an upward adjustment to all of the comparables.
ACCESS/VISIBILITY
For most industrial properties, easy access, visibility and exposure to a
major arterial are helpful but are not paramount for developmental success.
However, properties may differ in terms of frontage, access to a heavily
traveled arterial or highway access. Values for vacant industrial land are
influenced by access to highways. It is our opinion that no adjustments to the
comparables are warranted.
ZONING
Adjustments for zoning can be related to several issues, including density,
site coverage (floor area ratio), other restrictions, such as open space
requirements, etc. The main focus of adjustment under the zoning category would
be for use restrictions. As all of the comparable sales are industrially zoned
and would allow a similar industrial development as what exists on the subject
site, no adjustment is warranted.
UTILITY
The analysis of site utility considers such physical characteristics as
shape, depth, frontage, plottage, corner influence, topography, zoning, the
availability of utility services, and encumbrances, i.e. the overall usability
of the land. The shape of a property has the potential to restrict the overall
utility. The lack or presence of easements and/or restrictions must also be
considered in the comparison process.
As described previously, the subject site is rectangular in shape but has a
level topography that does not affect the costs of development. All the sales
have level topography, which does not increase the costs of development relative
to the subject. None of the comparables have any adverse physical factors, such
as flood plain, easements, encroachments, or obvious environmental problems,
etc., that influenced their respective purchase prices. Like the subject,
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<PAGE>
COST APPROACH
- -----------------------------------------------------------------------------
each of the comparables offer adequate shape, depth and the availability of
utility services. As a result, no adjustments were applied.
DENSITY/SIZE
The subject encompasses a 44.215 acre building site and 32.346 acres of
excess land; whereas, the comparables range in size from 4.13 to 49.36 acres.
Generally, the rule of quantity discount dictates that the larger the size, the
smaller the price per unit, all other factors being equal. However, to a certain
degree, a larger site will allow greater site flexibility in terms of design and
layout and may result in lower development costs because of the economies of
scale. The land comparables did not support the need for an adjustment due to
variations in size. The following table illustrates the adjustments made to the
land comparables.
<TABLE>
<CAPTION>
=================================================================================================================================
LAND COMPARABLES 1 2 3 4 5 6
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Unadjusted Sale Price $3,357,120 $630,000 $5,375,000 $4,390,848 $1,420,000 $3,466,500
Property Rights Conveyed 0% 0% 0% 0% 0% 0%
Financing Terms 0% 0% 0% 0% 0% 0%
Condition of Sales 0% 0% 0% 0% 0% 0%
Market Conditions -20% -20% -20% -20% -30% -40%
---------- -------- ---------- ---------- ---------- ----------
Total Adjustments -20% -20% -20% -20% -30% -40%
---------- -------- ---------- ---------- ---------- ----------
Adjusted Sale Price $2,685,696 $504,000 $4,300,000 $3,512,678 $ 994,000 $2,079,900
Adjusted Price/ Sq. Ft. $ 2.60 $ 2.80 $ 2.00 $ 2.88 $ 2.45 $ 2.08
Locational & Physical Adjustments
Location +5% +5% +20% 0% +5% +5%
Access/Visibility 0% 0% 0% 0% 0% 0%
Zoning 0% 0% 0% 0% 0% 0%
Utility 0% 0% 0% 0% 0% 0%
Density/size 0% 0% 0% 0% 0% 0%
---------- -------- ---------- ---------- ---------- ----------
Total Adjustments +5% +5% +20% 0% +5% +5%
---------- -------- ---------- ---------- ---------- ----------
FINAL ADJUSTED PRICE SQ. FT. $ 2.73 $ 2.94 $ 2.40 $ 2.88 $ 2.57 $ 2.18
- ---------------------------------------------------------------------------------------------------------------------------------
AVERAGE PRICE PER SQ. FT. $ 2.67
=================================================================================================================================
</TABLE>
The comparable properties range from cash equivalent prices of $2.50 to $3.60
per square foot before the adjustment process. The indicated value of the
subject property after making the necessary adjustments, results in a value
ranging from $2.18 to $2.94 per foot, with an average of $2.67 per square foot.
Sale L-4 is most similar to the subject and produced an adjusted square foot
value of $2.88, very similar to the adjusted price average. Further, it is well
bracketed by the other comparables.
We have found two listings within the Juarez market which have similar
economic characteristics as the subject, as they represent excess land adjacent
to an existing industrial building. One is within the Southwest submarket,
adjacent to the Hasbro building. It is available for $3.50 per square foot. The
other is in the Northwest submarket, adjacent to the Carpenter building. It is
available for $3.00 per square foot. These available sites suggest a market
value around $3.00 per square foot.
We have estimated the subject's market value of $2.90 per square foot for
both subject sites. This is only slightly above the average adjusted square foot
price and considers most
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<PAGE>
COST APPROACH
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weight was given to the adjusted sale price of Sale L-4. Based upon the
subject's highest and best use, it is our opinion the aggregate value of the
subject sites are calculated as follows:
BUILDING SITE - 44.215 ACRES
1,926,000 Square Feet x $2.90/Square Feet = $5,585,400
Rounded $5,590,000
EXCESS LAND - 32.346 ACRES
1,409,000 Square Feet x $2.90/Square Feet = $4,086,100
Rounded $4,090,000
The excess land value will also be added to the value conclusions within the
Sales Comparison and Income approaches.
COST OF IMPROVEMENTS
The subject improvements were evaluated in terms of type of construction,
design, and building materials to arrive at an estimate of replacement cost.
The cost estimate is inclusive of indirect costs such as architectural and
engineering fees, legal fees, inspection fees and closing costs, administrative
overhead, the contractor's overhead and profit, as well as the developer's
entrepreneurial profit. All direct costs for the base structure and tenant
improvements, and the following indirect costs:
1. Plans, specifications, site improvements, and building permits,
including working engineers' and architects' fees;
2. Normal fees and interest on funds during the construction period;
3. Sales taxes on materials; and
4. Contractor's overhead and profit that includes workmen's compensation,
fire and liability insurance, unemployment insurance, etc.
Our estimate of replacement cost new for the subject improvements is based on
information provided by local developers, general contractors and internal
information obtained by Cushman & Wakefield/GCI on recently constructed
industrial projects. The interviews with the developers and general contractors
included an itemized discussion of the applicable costs associated with
developing the respective project. Additional consideration for soft costs not
considered in the budget included administrative and legal.
Because of the high cost of funds associated with lending institutions in
Mexico, that few developer's have access to construction financing, that U.S.
financing in Mexico is well below their internal lending institutional levels
and that many developers build with cash, construction interest costs were not
considered in the analysis.
Because of similarities in tenants, builders and construction material costs
throughout the Frontier communities, recently constructed facilities from the
city of Chihuahua, also in the state of Chihuahua, and Hermosillo, in the state
of Sonora, was considered. A summary of these recent construction projects are
summarized:
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<PAGE>
COST APPROACH
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<TABLE>
<CAPTION>
=================================================================================================================================
BUILDING BUILDING SIZE/ COST/
LOCATION TENANT/BUILDER DESCRIPTION COST SQ. FT. SQ. FT.
=================================================================================================================================
<S> <C> <C> <C> <C> <C>
Slavarcar Corridor Nationwide 10% office, 30' clear, $1,250,000 50,000 $25.00
Juarez, Chihuahua Processing AC/Evap
Bermudas Ind. Park N/A 10% office, 30' clear, $2,300,000 100,000 $23.00
Juarez, Chihuahua AC/Evap
Sin Tierra Intermex 10% office, 30' clear, $1,150,000 50,000 $23.00
Chihuahua, Chihuahua AC/Evap
C.U.M. McCulloch 15% office, 22' clear, $6,396,936 254,960 $25.09
Hermosillo, Sonora AC/Evap, Mezzanine
Las Americas Ind. Park Genesis Building Shell, no slab $1,000,000 50,000 $20.00
Chihuahua, Chihuahua
Las Americas Ind. Park SOFI Building Shell $1,200,000 100,000 $12.00
Chihuahua, Chihuahua
Complejo De Industrial John Deere 28% office, 22' clear, $5,600,000 106,993 $52.34
Chihuahua, Chihuahua AC/Evap
====================================================================================================================================
</TABLE>
The cost comparables suggest a direct building cost range of $23.00 to $25.09
per square foot for an industrial building with 10 to 15 percent office finish,
22 to 30 foot clear height, and AC/Evap throughout the building. A building
shell, which excludes any office allocations or measurable partitions, ranges
from $12.00 to $20.00 per square foot. Industrial building construction with
extensive office allocation and upscale manufacturing finish amounts to $52.34
per square foot.
The subject is equipped with an office/cafeteria finish of approximately five
percent, 16 to 26 foot truss heights and standard manufacturing interior finish.
The subject does have approximately 20,000 square feet of the manufacturing
converted to a clean room, providing for air scrubbers in the HVAC system. This
would increase a comparative cost only slightly.
Given the subject's physical characteristics, a cost within the $23.00 to
$25.09 per square foot cost for typical industrial buildings with 10 to 15
percent office finish, 22 to 30 foot clear height, and AC/Evap is appropriate
for the subject. Given its comparatively large size, and reduced interior
finish, we have allocated a replacement cost of $23.00 per square foot, or
$20,792,000 when applied to the 904,000 square foot gross building area.
DEVELOPER'S PROFIT
Developer's profit is difficult to measure in the Frontier communities of
Mexico, due to many developer's owning the industrial park (land), build-to-
suits have an additional profit percentage on either sales or leases, and
developer's are typically the intended tenant of the facility. Only until the
last two years were speculative buildings being constructed where developer's
profit could be accurately measured, however, few developer's have access to the
necessary capital to conduct this on a large scale. Currently, Security Capital
is one of the only developer's conducting build-to-suits throughout the country.
Based on recently constructed projects, developer's profit is ranging from 12
to 20 percent of total project costs. In cases where profit falls around 12
percent, the developer also has equity in the land that increases their return.
However, the market has recently become more
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<PAGE>
COST APPROACH
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competitive, requiring slight reductions in developer's profits to the range of
12 to 16 percent. Only those developers with construction financing below 12
percent or provide build-to-suit buildings that are subsequently leased at rates
above $5.25 per square foot, can their yields increase above 18 percent.
The project developer should anticipate a 12 percent profit on the total
building cost, excluding land. This is at the lower end of the range, due to the
comparatively large building size. The inclusion of a 12 percent developer's
profit reflects the entrepreneurial profit/incentive to construct the project
and is inherent in supporting the development feasibility for income producing
properties.
ESTIMATE OF ACCRUED DEPRECIATION
Accrued depreciation is the difference between the cost new of improvements
and the current value of those improvements. Depreciation includes value losses
in three basic categories: (1) physical deterioration, (2) functional
obsolescence, and (3) external obsolescence.
The subject improvements are estimated to have an overall economic life
expectancy of approximately 45 years. Based on our observations, the effective
age of the improvements is 10 years. Therefore, the remaining economic life of
the improvements is 35 years. The use of the economic age-life method of
estimating deterioration projects a deduction of 24.4 percent (11 years/45
years).
Functional or external depreciation was not considered due to the nature of
the building improvements and their modern design.
SUMMARY OF THE COST APPROACH
Total Cost Improvement $20,792,000
Plus: Developer's Profit +2,495,040
Less: Accrued Depreciation (Cost only) -5,082,489
-----------
Depreciated Value of the Improvements $18,204,551
Add: Land Value
Building Site 5,590,000
Excess Land 4,090,000
-----------
Total Property Value $27,884,551
Rounded to: $27,900,000
This value estimate equates to a square foot value of $30.85 and $26.32 if
excess land is excluded.
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<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
METHODOLOGY
In the Sales Comparison Approach, we estimated value by comparing this
property with similar, recently sold properties in the Frontier communities of
northern Mexico. Inherent in this approach is the principle of substitution,
which holds that when a property is replaceable in the market, its value tends
to be set at the cost of acquiring an equally desirable substitute property,
assuming that no costly delay is encountered in making the substitution.
By analyzing sales that qualify as arm's-length transactions between willing
and knowledgeable buyers and sellers, we can identify value and price trends.
The basic steps involved in the application of this approach are as follows:
(1) Researching recent, relevant property sales and current offerings
throughout the competitive area;
(2) Selecting and analyzing those properties considered most similar to the
subject, considering changes in economic conditions that may have
occurred between the sale date and the date of value, and other physical,
functional or locational factors;
(3) Identifying the sales that include favorable financing and calculate the
cash equivalent price;
(4) Reducing the sale prices to common units of comparison, such as price per
square foot of building area (in this case gross leasable area);
(5) Making appropriate adjustments between the comparable properties and the
property appraised; and
(6) Interpreting the adjusted sales data and draw a logical value conclusion.
The most widely used and market-oriented unit of comparison for properties
such as the subject is the sales price per square foot. All comparable sales
were analyzed on this basis. We present on the following page a summary of the
improved properties we compared with the subject property.
ANALYSIS OF SALES
Our market investigations began with an investigation of improved sales that
had occurred in the Ciudad Juarez area over the last several years. However, due
to low vacancy resulting from minimal tenant turnover, that most build to suit
projects have the original tenant still occupying the property and that all
speculative buildings being constructed are for lease, few sales have occurred
within the immediate community of Juarez. The building sales investigation was
expanded to include a search of industrial sales in northern Mexico communities
that also offer similar typed industrial projects, primarily Chihuahua (within
the state of Chihuahua), Matamoros, and Reynosa. The criterion we used was
improved sales of modern manufacturing facilities that are appropriate for
maquiladora operations.
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<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
Insert sales from Addenda
- -----------------------------------------------------------------------------
-56-
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
Our search included interviews with the following brokerage firms; Enrique
Portillo with Cushman & Wakefield/GCI, CB Commercial and Binswanger. We also
interviewed the managers of the major industrial parks within the respective
communities, the maquiladora managers of most of the property sales and
industrial developers with Security Capital and Finsa.
This sales search uncovered 12 sales and two listings within the respective
communities that could be used for comparison. These sales are of typical
maquiladora industrial facilities which ranged in size from 25,390 to 229,327
square feet and in effective age from new to 17 years. All, but Sale 10 and 12,
are designed for single tenant occupancy. Sale 12 is a six building portfolio
which was purchased by a single investor.
One of the comparables was still under construction at the time of inspection
and represent build-to-suit transactions, as do tthree other comparables.
Because of the lack of improved inventory available for sale or lease,
maquiladora and typical industrial users typically employ a developer to
construct a facility, which they will buy upon completion. This provides the
developer with a sure sale and provides the buyer with a building designed for
their specific manufacturing use. Many buyers have had to default to this
process due to the absence of available buildings, the lack of market knowledge,
real estate surveys and individuals knowledgeable of all segments of the market.
With respect to the overall analysis, it appears the variance in sale prices
is primarily associated with the quality of the building, if the build-to-suit
design created added building costs and if the building is vacant. A vacant
building within these markets reflects a somewhat distressed sale that the
market discounts substantially. However, it is important to address each
property in terms of the conventional sequence of adjustments relative to the
subject. The following analysis primarily concentrates on differences meriting
adjustment.
PROPERTY RIGHTS CONVEYED
All but Sale 10 are single tenant facilities that were vacant at the time of
sale or purchased as an owner occupant and sold in fee simple. The fee simple
interest of the subject is also under consideration. Sale 10 was a two tenant
facility with contract lease rates at market levels. Sale 12 was six buildings
purchased under a sale-leaseback agreement. A market rent equivalency
adjustment is not appropriate for these two sales and no adjustment is warranted
for property rights conveyed.
SELLER FINANCING/CASH EQUIVALENCY
According to our conversations with parties familiar with the transactions,
the financing for the sales were cash to the seller. No adjustment is warranted
for financing.
CONDITIONS OF SALE
We identified no special motivational conditions concerning the comparable
sales. Therefore, in our opinion, no adjustments are warranted for special
motivational conditions.
TIME (MARKET CONDITIONS)
Changes in market conditions may be caused by fluctuations in supply and
demand, inflation, deflation or other factors. Market conditions generally
change over time and,
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<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
therefore, changes in market conditions from specific past sales should be
considered when making a comparative analysis of the property at the valuation
date.
Another consideration is for changes in economic characteristics of the
community, particularly as they relate to the value of the peso. In 1995, the
average exchange rate was 6.4, increasing to 7.6 in 1996, 7.9 in 1997 and
increasing substantially to 9.1 in 1998. At the date of inspection, the peso was
trading at 10.7 for each U.S. dollar. This change directly affects the economics
of Mexican real estate and the economy. Because of the economic characteristics
of the community, coupled with increased land supply at lower costs situated at
the peripheral of the community, a downward adjustment for changes in market
conditions was supported.
This is further compounded by the consolidation of the REIT industry. REIT
stock prices have declined substantially in the last four months and were
previously a major investor in the market, with Security Capital being one of
the largest. They were constructing speculative buildings in the market which
reportedly they may not be able to finish or remain in an ownership position due
to their high yield requirements (around 18 percent). If they vacate the market,
they could provide some vacant buildings at reduced pricing to the market.
Because of the economic characteristics of the community, coupled with increased
land supply at lower costs situated at the peripheral of the community, a
downward adjustment for changes in market conditions was supported.
OTHER
The additional adjustments needed for the comparables are described for each
property, with most involving location, condition, age/quality issues or
economic characteristics. All sales will be analyzed after the adjustment for
excess land, if appropriate. The chart at the end of this analysis will then
summarize the comparisons.
Sales 1, 2 and 3 are situated in the community of Chihuahua, also within the
state of Chihuahua. Although considered a Frontier community, it is closer to
the interior of the country than any communities where sales were included. The
result is a lower labor cost, lower employee turnover and slightly lower land
values. Two of the Sales, 1 and 3, produced the lowest square foot prices of the
comparables. However, Sale 2, a build-to-suit produced the highest square foot
price of the comparables. But this is due to the enhanced physical
characteristics of the facility, rather than a superior location. These sales
must be adjusted downward due to the subject's larger size. As a result of the
size adjustment and given recent demand for the subject, these sales tend to
appropriately bracket a market value range for the subject.
Sales 4 and 5 are situated in Matamoros, a maquiladora community immediately
south of Brownsville, Texas. Because of the smaller community and industrial
market, coupled with minimal competition within the market, has caused building
costs to remain above those in Juarez. As such, building sale prices are higher
than those reflected in Juarez. These sales are adjusted downward as a result.
Sales 6, 7,8 and 9 are situated in Juarez, with generally similar locational
characteristics. No adjustment is necessary.
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<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
Sales 10 and 11 are situated in Reynosa, a maquiladora community immediately
south of McAllen, Texas. Although a smaller community and industrial market,
substantially increased demand has caused increased developer competition,
including speculative buildings being added to this market. However, building
costs remain above those in Juarez. As such, building sale prices are higher
than those reflected in Juarez. These sales are adjusted downward as a result.
Sale 1 reflects an older transaction within Chihuahua that was vacant at the
time of sale. It is also one of the largest buildings in the community and
reflected a building with considerable physical deterioration. The buyer
subsequently remodeled the interior at considerable cost. The $17.44 per square
foot price reflects the sale of a vacant building in need of remodeling. It is
inferior to the subject in physical characteristics, but warrants an offsetting
adjustment for the subject's larger size. As a result, only a slight upward
adjustment is warranted.
Sale 2 consists of the John Deere Cos. recently completed 107,000 square foot
light assembly/distribution/office facility. This project opened in April 1997
and took about 9 months to complete. The construction cost was $5,600,000 or
$52.34 per square foot, however the project had 30,000 square feet of office
(28%) build-out and some specialized tenant improvements. This facility is
located in the Parque De Complejo De Industrial and according to our source is
located on arguably the best site within the park. The facility is situated on
77 acres, which was purchased for $3,700,000 or $1.10 per square foot. A
considerable portion of the land area is excess land and could be resold. An
adjustment was made to the price, however at $54.63 per square foot reflects a
newer facility with no physical deterioration, has a higher office finish and
generally represents a superior facility. Thus, the subject warrants a market
value well below $54.63 per square foot.
Sale 3 consists of a building totaling 92,000 square feet and is situated on
250,000 square feet of land. The initial asking price was $2,300,000,while the
contracted sale price was $1,750,000, or $19.02 per square foot of building
area. The building was marketed for approximately 12 months and sold in the fall
of 1997. This vacant building was approximately 10 percent office build-out,
fully sprinklered, had ground mounted air washers (100 percent), a cafeteria and
a functional open production area. There is some added land for expansion, but
its proximity to the building would make a sale difficult, therefore no excess
was considered. At $19.02 per square foot, this comparable warrants similar
comparison, as the inferior location is offset by its smaller size.
Sales 4 and 5 reflect industrial building purchases of similar facilities in
Matamoros. They range in price from $32.31 to $34.75 per square foot, but a
downward adjustment is warranted for increased building costs in this community
and their smaller size. These sales also reflect newer construction, with less
physical deterioration. In summary, the subject warrants a market value well
below $32.31 per square foot, as indicated by these sales.
Sales 6, 7, 8 and 9 are situated in Juarez, with Sales 6 and 8 located within
the Bermudas Industrial Park and Sale 7 within the Salvacar Corridor. Sale 6 is
the listing of a 25,390 square foot industrial facility than is 17 years old and
has noted functional deficiencies, including low ceiling heights and partitioned
interior. All are considerably smaller buildings. At a lower price range of
$25.60 per square foot, this price warrants a further downward adjustment to
reflect
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SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
the subject's market value. Sale 7 is a new facility and Sale 8 is under
construction, both build-to-suit projects where the buyer is purchasing the
property upon completion of construction. Sale 9 is a 1998 sale of an owner
occupied building considered superior in physical attributes to the subject. At
$44.23, $31.00 and $46.54, they represent the upper range of pricing in the
Juarez industrial market and warrant large downward adjustments to reflect the
market value of the subject.
Sales 10 and 11 are industrial facilities situated in Reynosa. Sale 10 is an 8
year old facility, 83,000 square foot in size and the only multitenant facility
considered for comparison. It has a higher office finish and is completely air
conditioned. At $50.60 per square foot, this represents the extreme upper market
value of maquiladoras in the Frontier communities. Sale 11 is a new build-to-
suit facility that was purchased by the tenant at construction completion. At
$34.00 per square foot, a downward adjustment is made to reflect the market
value of the subject.
Sale 12 is the sale-leaseback of six industrial buildings within Juarez. The
buyer's motivation was a 14.47 percent capitalization rate, which reflected a
value of $36.77 per square foot. While the improvements encompass 485,126 square
feet, this sale reflects a superior comparison to the subject.
SUMMARY
Overall, Sale 1 at $17.44 represents an inferior comparison, Sale 3 at $19.02
is the only similar comparison and Sale 6 at $25.60 reflects a superior
comparison. The remaining sales reflect a square foot price range of $31.00 to
$54.63 reflect superior comparisons. Thus, a market value between $17.44 to
$25.60 per square foot is appropriate for the subject. Discussions with
industrial brokers from the respective firms previously noted indicated that
this is a reliable indication of market value for the subject.
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<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
IMPROVED SALES COMPARISON
<TABLE>
<CAPTION>
================================================================================================
SALES OVERALL RATING
COMP. PRICE RELATIVE TO
NO. PROPERTY PER SF* THE SUBJECT *
================================================================================================
<S> <C> <C> <C>
1 Av. Miguel de Cervante No. 140 $17.44 Inferior
Chihuahua, Mexico
------------------------------------------------------------------------------------------------
2 Parque de Complejo de Industrial $54.63 Superior
Chihuahua, Mexico
------------------------------------------------------------------------------------------------
3 Los Americas (Neilson Building) $19.02 Similar
Chihuahua, Mexico
------------------------------------------------------------------------------------------------
4 NEC Av. Ohio and Av. Del Obreno $32.31 Superior
Matamoros, Mexico
------------------------------------------------------------------------------------------------
5 Av. Poniente $34.75 Superior
Matamoros, Mexico
------------------------------------------------------------------------------------------------
6 Boulevard Gomez Morin $25.60 Superior
Juarez, Mexico
------------------------------------------------------------------------------------------------
7 Avenue de las Torres $44.23 Superior
Juarez, Mexico
------------------------------------------------------------------------------------------------
8 Bermudas Industrial Park $31.00 Superior
Juarez, Mexico
------------------------------------------------------------------------------------------------
9 Johnson Controls $46.54 Superior
Juarez, Mexico
------------------------------------------------------------------------------------------------
10 Parque Industrial Park $50.60 Superior
Reynosa, Mexico
------------------------------------------------------------------------------------------------
11 Finsa Industrial Park $34.00 Superior
Reynosa, Mexico
------------------------------------------------------------------------------------------------
12 6 industrial buildings $36.77 Superior
Juarez, Mexico
================================================================================================
</TABLE>
*The rating evaluation considers the net effect of all adjustments on a
per unit after the exclusion of excess land
The appraiser conducted an appraisal on the subject in May of 1998. At that
time, a market value estimate of $31,130,000 and a liquidation value of
$28,500,000. The market value considered a 12 to 18 month marketing period,
while liquidation value considered only a six month marketing period. However,
since that appraisal was conducted, a number of factors support a decline in the
market value:
1) A 25.0 percent decline in the value of the peso has occurred since the
previous date of appraisal. This directly affects the value of real estate in
Mexico.
2) The world capital markets contracted substantially in October and
November 1998. Although the capital markets are recovering, the contraction has
still limited the number of potential purchasers (particularly REITs), increased
the cost of loans (even though the prime interest rate has decreased) and made
secondary markets, like Juarez, less desirable for real estate financing. Bob
Burnand with Cushman & Wakefield's Financial Services Group indicated that real
estate prices still remain 10 to 15 percent below those levels immediately prior
to October 1998.
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SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
3) At the time of the initial appraisal, we could find no industrial
building over 300,000 square foot building had ever been marketed, much less
sold in the entire country of Mexico. Our surveys included the largest brokerage
firms throughout Mexico and those specific to Juarez. Further, we also surveyed
the largest industrial developers in the country, and those active in Juarez.
Because of the lack of large facility transactions, a great deal of subjectivity
had to be employed in the previous analysis.
However, since the initial appraisal, the subject building has been
marketed for sale. A number of investors and potential users have looked into
purchasing the property. Most of the investment purchasers expressed preliminary
interest in the $13,000,000 to $15,000,000 range. However, only one potential
user has made an offer for the subject, allocating $18,750,000 for the real
estate. This tends to suggest that the market, even after considering the
devaluation of the peso and the contraction in the capital markets, is requiring
a larger discount for the building size than previously expected.
Based on the preceding analysis, an estimated value of $18.00 per square
foot is considered reasonable for the subject building improvements and
respective building site. We have included the estimated market value of the
subject's excess land to arrive at a market value of the fee simple interest in
the subject property. Therefore, the subject's total value via the sales price
per square foot of building area methodology is:
904,000 Square Feet x $18.00/Square Feet = $ 16,272,000
Add: Excess Land Value + 4,090,000
------------
Market Value by the Sales Comparison Approach $ 20,362,000
Rounded $ 20,000,000
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<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
The subject facility contains approximately 904,000 square feet. The
quality of construction is considered to be average for this facility
considering its age and architectural style. The subject was designed for
single-tenant occupancy, specific to the current tenant's needs. Although the
market has historically consisted of owner occupied buildings, speculative
facilities only available for lease and build-to-suit facilities that are
leased, rather than sold to the user are now prevalent in the market. Therefore,
using the Income Approach can provide a reasonable estimate of market value for
the subject. Below, we have discussed the process used to estimate market value.
Properties such as the subject have been leased on a triple net basis, with
the tenant paying all operating expenses. If available, the subject would lease
on a triple net basis and reflect a market rental rate similar to other leased
and available industrial projects in the Juarez industrial market. We,
therefore, have elected to look at lease rates with triple net terms. In an
effort to estimate market rent for the subject, a search was conducted of only
industrial facilities which were leased or available for lease in Juarez and
could provide a general indication of market rent.
Our search uncovered 55 lease comparables that have occurred since the
beginning of 1995. There are also seven speculative buildings under construction
that will come available from May to December 1998 and are currently available
for lease. We concentrated on leased facilities over 95,000 square feet in size
for comparison. This information is shown in the Industrial Rent Comparable
Summary below.
- --------------------------------------------------------------------------------
-63-
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
INDUSTRIAL RENT COMPARABLE SUMMARY
<TABLE>
<CAPTION>
======================================================================================================================
TENANT/ BUILDING TERM LEASE ANNUAL LEASE
COMP LOCATION SIZE (SF) (YEARS) DATE RATE (NNN)
======================================================================================================================
<S> <C> <C> <C> <C> <C>
1 Ademco Corporation 150,000 5 1996 $5.50
Fuentas Industrial Park
----------------------------------------------------------------------------------------------------------------------
2 Johnson & Johnson 116,000 5 1996 $6.00
Rio Bravo Industrial Park
----------------------------------------------------------------------------------------------------------------------
3 Foamex 113,327 7 1996 $4.40
Bermudez Industrial Park
----------------------------------------------------------------------------------------------------------------------
4 Berg Electronics 103,000 5 1996 $5.00
Intermex Industrial Park
----------------------------------------------------------------------------------------------------------------------
5 Alcoa Fujicura 100,000 3 1997 $5.00
Neptuna Industrial Avenue
----------------------------------------------------------------------------------------------------------------------
6 Vishay Intertechnology 100,000 10 1997 $5.62
Los Torres Industrial Avenue
----------------------------------------------------------------------------------------------------------------------
7 Seven Oaks 113,327 5 1997 $4.60
Omega Industrial Park
----------------------------------------------------------------------------------------------------------------------
8 Vishay Intertechnology 100,000 10 1997 $5.62
Carte Blanca
----------------------------------------------------------------------------------------------------------------------
9 Federal Mogul 102,000 10 1997 $5.88
Omega Industrial Park
----------------------------------------------------------------------------------------------------------------------
10 IDI (developer) 205,000 Available November $5.00
Libramiento (Aeropuerto) 1998
----------------------------------------------------------------------------------------------------------------------
11 Siete Robles 113,086 Available January $5.30
Omega Industrial Park 1999
----------------------------------------------------------------------------------------------------------------------
12 Kokopeli 161,000 Available January $3.50
Bermudez Industrial Park 1999
----------------------------------------------------------------------------------------------------------------------
SUBJ. Carretera Pan Americana, 904,000 --- January ---
Aeropuerto Industrial Park 1999
======================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
-64-
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
Trying to compare the rent comparables on a point-by-point basis to the
individual subject improvements is difficult, since some are build-to-suit
arrangements were the tenant provided some of the capital associated with
construction. However, to the best of our knowledge, the lease rates are current
and reflect the leasing activity of improved industrial properties. The subject
is occupied by an owner/user. Therefore, the comparables are discussed in a
general manner.
The comparables are all smaller than the subject. However, these properties
have physical amenities that are generally similar to the subject. Age, clear
height and percent office build-out also vary, but the market data does not
present a clear rental rate variation for these differences. As previously
noted, that market has discounted the subject due to its large size.
Rent Comparables 1, 7 and 9 are situated in the north part of the
community, with close proximity to the U.S. border crossing and the community's
residential base. They produced a range in rental rates from $4.60 to $5.88 per
square foot. Rent Comparables 2, 4, 6 and 8 are situated in the southeast part
of the community, further from the U.S. border crossing and the community's
residential base, but is the area with the most industrial growth in the
community. They produced a range in rental rates from $5.00 to $6.00 per square
foot. Rent Comparables 3 and 5 are situated in the northeast part of the
community, with close proximity to the U.S. border crossing and the community's
residential base. They produced a range in rental rates from $4.40 to $5.00 per
square foot. Rental Comparable 10 is the only industrial facility within the
subject's industrial park, and at $5.00 per square foot, provides a typical
market rate for an industrial building, with a large downward adjustment
warranted due to the subject's larger size.
A quantitative comparison of these properties with the subject property
would be very subjective, particularly relating to an adjustment for the
subject's large size. However, utilizing a rate similar to Rental Comparable
12's rate of $3.50, we have concluded that the subject's reasonable market rent
is $3.50 per square foot.
VACANCY
Vacancy rates in the Juarez industrial market were discussed in the Market
Analysis section. Vacancy rates have increased slightly in the city and
subject's submarket in the last three years, standing at 2.07 and 2.86 percent,
respectively at the end of 1997. However, preliminary year end 1998 numbers show
an increase of at least one percent and we expect occupancy levels will increase
slightly in Juarez in the next 12 months, primarily due to the consolidations in
the capital/REIT markets and the declines in global economies. Because the
subject is configured for single-tenant occupancy and represents one of the
largest buildings in the market, we would expect long term leases with
considerable downtime between leases. Therefore, we have projected stabilized
vacancy to be 7.5 percent.
EXPENSES
We have estimated market rent on a triple net basis. Therefore, the
landlord is responsible for a limited amount of expenses. These expenses are
listed and discussed below.
Management - Professional management fees were obtained from Cushman &
Wakefield/GCI and Finsa. Reportedly, management fees range between 0.5
percent and 2.0 percent of effective gross income for multitenant
industrial
- --------------------------------------------------------------------------------
-65-
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
facilities and a flat fee of $75,000 to $150,000 for the management of
industrial parks with 20 to 40 facilities. We assume professional
management will be required in the operation of this property on a limited
basis. Therefore, we estimate management expense at 1.0 percent.
Reserves for Replacement - This item is for replacement of major building
components, such as air conditioners, roofing, plumbing, etc. This expense
item usually ranges between $0.02 and $0.08 per square foot of building
area. We have allocated $0.05 per square foot of total building area per
year, or $45,200 annually.
Miscellaneous - This expense category includes legal and accounting
services, real estate taxes and insurance costs during periods of vacancy,
telephone and other expense items not included in other classifications.
This expense item is estimated to be 2.0 percent of effective gross income.
Following is an Income and Expense Summary using the above discussed income
and expense items.
INCOME AND EXPENSE SUMMARY
<TABLE>
<S> <C>
Potential Gross Income
904,000 S.F. @ $3.50/S.F./Year $3,164,000
Less Vacancy (7.5%) -237,300
----------
Effective Gross Income $2,926,700
Less Operating Expenses:
Management (1%) $ 29,267
Reserves ($0.05/S.F.) 45,200
Miscellaneous (2%) 58,534
----------
Total Operating Expenses -133,001
----------
NET OPERATING INCOME $2,793,699
</TABLE>
DIRECT CAPITALIZATION
Direct capitalization is used whereby we have assumed all the improvements
are leased at a market rental rate, with the appropriate deductions for vacancy
and owners expenses under net lease terms. Because some of the sales used in our
analysis were owner/user properties, capitalization rates were not always
available. However, those sales were capitalization rates could be obtained are
summarized:
SUMMARY OF OVERALL CAPITALIZATION RATES
=========================================
SALE CAPITALIZATION RATE
=========================================
I-4 15.7%
-----------------------------------------
I-5 14.3%
-----------------------------------------
I-10 11.6%
-----------------------------------------
I-12 14.5%
=========================================
- --------------------------------------------------------------------------------
-66-
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
Sale I-4 reflects the purchase of a vacant building that was subsequently
leased. At 15.7 percent, this reflects the appropriate overall rate for a vacant
building in the Frontier communities oriented toward maquiladora occupancy. Sale
I-5 produced an overall rate of 14.3 percent, based on the asking lease rate at
the time of purchase. The potential tenant actually decided to purchase the
facility and conducted some remodeling at their cost. The seller would have had
to provide this additional cost if the buyer would have leased the facility,
which would have pushed the rental rate upward. Thus, a 14.3 percent overall
rate reflects the low end of the range. The buyer and seller of Sale I-10
indicated that the purchase price was above market levels. This was due to some
internal motivations, which could not be confirmed, and pushed the overall rate
downward. An overall rate of 11.6 percent is unrealistically low to use in
capitalizing net income into value within the Mexico industrial market. Sale I-
12 was the purchase of six buildings occupied by five tenants. This purchase has
considerably more income stability than the subject.
Another way of deriving overall rates is through the analysis of build-to-
suit facilities, where the facility upon completion is subsequently leased to
the tenant. Examples of industrial facilities currently under construction and
available for lease are summarized:
BUILD-TO-SUIT ANALYSIS
CONSTRUCTION COSTS, INCOME ANALYSIS AND RESULTING OVERALL RATE
<TABLE>
<CAPTION>
BUILDING PROJECT APPROXIMATE OVERALL
COMP PROJECT SIZE (SF) COST NET INCOME* RATE
=============================================================================================================================
<S> <C> <C> <C> <C> <C>
1 Morelea, Juarez 60,000 $2,400,000 $313,140 13.0%
- -----------------------------------------------------------------------------------------------------------------------------
2 Salvacar Industrial Park, Juarez 63,504 $2,032,128 $340,400 16.8%
- -----------------------------------------------------------------------------------------------------------------------------
3 Juan Gabriel, Juarez 84,000 $2,772,000 $470,000 17.0%
- -----------------------------------------------------------------------------------------------------------------------------
4 Magnatec, Reynosa 136,690 $5,640,000 $710,420 12.6%
=================================================================================================================================
</TABLE>
*Net income is based on asking or contract rent, market vacancy and expenses.
Developers are obtaining overall rates of 12.6 percent to 17.0 percent on
their build-to-suit projects. However, many own the industrial park and enhance
their yields considerably due to a lower cost basis in the land. The average
rate for the four comparables noted is 14.9 percent, versus 14.0 percent for the
four sales previously noted. It can be concluded that developers are making an
additional yield around 1.0 percent. It can be concluded that capitalization
rates for industrial product ranges from 11.6 percent to 17.0 percent for
institutional-grade properties. Given the subject's large size, we have selected
an overall rate of 17.0 percent as applied below.
DIRECT CAPITALIZATION
<TABLE>
======================================================================
<S> <C>
Net Operating Income $ 2,793,699
----------------------------------------------------------------------
Divided by Overall Capitalization Rate 17.0%
----------------------------------------------------------------------
Indicated Value $16,433,523
----------------------------------------------------------------------
Plus: Excess Land Value 4,090,000
----------------------------------------------------------------------
Market Value by the Income Approach $20,523,524
----------------------------------------------------------------------
Rounded to: $20,500,000
======================================================================
</TABLE>
- --------------------------------------------------------------------------------
-67-
<PAGE>
RECONCILITATION AND FINAL VALUE CONCLUSION
- --------------------------------------------------------------------------------
Value indications for the subject property by the approaches to value are
indicated as follows:
Cost Approach $27,900,000
Sales Comparison Approach $20,000,000
Income Approach $20,500,000
In the reconciliation, each approach to value is reviewed in order to
determine the reliability of the data in each and to weigh that approach best
represents the actions of typical users and investors in the market.
The Cost Approach is generally a very reliable estimate of value in a stable
economy and when the subject is new construction with little or no depreciation
to be estimated. However, the subject property has suffered from some physical
deterioration due to its physical and effective age. Regardless, the
availability of cost information was reliable and land comparables provided a
reliable land value estimate. Because a particular purchaser of the subject
would rely less on this approach, we have given it least consideration. It is
also obvious by its higher value estimate, that the market is penalizing the
building for its large size and would tend to represent a form of incurable
functional obsolescence that could only be measured by this market resistance.
The Sales Comparison Approach is based on the principle of substitution,
which implies that a prudent person will not pay more to buy a property than it
would cost to buy a comparable substitute property. The subject property, as
improved, was compared with other industrial building sales. The lack of
uniformity in the market made it somewhat difficult to objectively adjust the
comparables. However, their was adequate sales transactions to rely on, and
their square foot prices bracketed an appropriate value indication for the
subject. Based on the availability and reliability of the data, coupled with the
fact that the subject would likely be purchased by an owner user, the sales
comparison approach was given most emphasis in the estimation of market value.
Given its size, the subject is less suited to an analysis by direct
capitalization. However, a substantial amount of market data was available that
could be relied upon. If the subject were bought and sold in the investment
market, this approach is very reliable. However, given its single tenant
orientation, coupled with its large size, the subject is less desirable to the
investment market. Thus, we have given it secondary consideration.
Therefore, giving most weight to the indication of value via the Sales
Comparison Approach, it is our opinion that the market value of the fee simple
estate in the subject property, contingent upon the assumptions inherent in this
report, as of January 13, 1998, is:
TWENTY MILLION DOLLARS
$20,000,000
- --------------------------------------------------------------------------------
-68-
<PAGE>
RECONCILITATION AND FINAL VALUE CONCLUSION
- --------------------------------------------------------------------------------
MARKETING TIME
Marketing time is an estimate of the time that might be required to sell a
real property interest at the appraised value. Marketing time is presumed to
start on the effective date of the appraisal. Marketing time is subsequent to
the effective date of the appraisal, whereas exposure time, as defined below, is
presumed to precede the effective date of the appraisal. The estimate of
marketing time uses some of the same data analyzed in the process of estimating
the reasonable exposure time and is not intended to be a prediction of a date of
sale.
We have concluded that a marketing period of 12 months would be required in
order to sell the subject property. This reflects the marketing time exhibited
by the sale which have been included. The value conclusion expressed in this
report is based on the current market conditions, but the large size and length
of time required to conduct due diligence would extend the marketing period to
at least 12 months.
EXPOSURE TIME
Under paragraph 3 of the Definition of Market Value, the value estimate
presumes that "...a reasonable time is allowed for exposure in the open market."
Exposure time is defined as the estimated length of time the property interest
being appraised would have been offered on the market prior to the hypothetical
consummation of a sale at the market value on the effective date of the
appraisal. Exposure time is presumed to precede the effective date of the
appraisal. We have estimated the appropriate exposure time for the subject
property to be approximately 12 months.
- --------------------------------------------------------------------------------
-69-
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
-------------------------------------------------------------------------------
Appraisal means the appraisal report and opinion of value stated therein; or
the letter opinion of value, to which these Assumptions and Limiting Conditions
are annexed.
Property means the subject of the Appraisal.
C&W means Cushman & Wakefield, Inc., or its subsidiary that issued the
Appraisal.
Appraiser(s) means the employees of C&W who prepared and signed the
Appraisal.
The Appraisal has been made subject to the following assumptions and
limiting conditions:
(1) No responsibility is assumed for the legal description or for any matters
that are legal in nature. Title to the Property is assumed to be good and
marketable and the Property is assumed to be free and clear of all liens
unless otherwise stated. No survey of the Property was undertaken.
(2) The information contained in the Appraisal or upon which the Appraisal is
based, has been gathered from sources the Appraiser assumes to be reliable
and accurate. The owner of the Property may have provided some of such
information. Neither the Appraiser nor C&W shall be responsible for the
accuracy or completeness of such information, including the correctness of
estimates, opinions, dimensions, sketches, exhibits and other factual
matters. The Appraisal and the opinion of value stated therein is as of the
date stated in the Appraisal. Changes since that date in external and market
factors can significantly affect property value.
(3) The Appraisal is to be used in whole and not in part. No part of the
Appraisal shall be used in conjunction with any other appraisal. Possession
of the appraisal, or a copy thereof, does not carry with it the right of
publication. Publication of the Appraisal or any portion thereof without the
prior written consent of C&W is prohibited. Except as may be otherwise
expressly stated in the letter of engagement to prepare the Appraisal, C&W
does not permit use of the Appraisal by any person other than the party to
whom it is addressed or for purposes other than that for which it was
prepared. If written permission is given by C&W to use the Appraisal, the
Appraisal must be used in its entirety and only with proper written
qualification as approved by C&W. No part of the appraisal or the identity
of the Appraiser shall be conveyed to the public through advertising, public
relations, news, sales or other media or used in any material without C&W's
prior written consent. Reference to the Appraisal Institute or to the MAI
designation is prohibited.
(4) The Appraiser shall not be required to give testimony in any court or
administrative proceeding relating to the Property or the Appraisal.
(5) The Appraisal assumes (a) responsible ownership and competent management of
the Property; (b) there are no hidden or unapparent conditions of the
Property, subsoil or structures that render the Property more or less
valuable (no responsibility is assumed for such conditions or for arranging
for engineering studies that may be required to
- --------------------------------------------------------------------------------
-70-
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
discover them); (c) full compliance with all applicable federal, state and
local zoning and environmental regulations and laws, unless noncompliance
is stated, defined and considered in the Appraisal; and (d) all required
licenses, certificates of occupancy and other governmental consents have
been or can be obtained and renewed for any use on which the value estimate
contained in the Appraisal is based.
(6) The Appraiser or other person identified in the Appraisal bases the
physical condition of the improvements considered by the Appraisal on
visual inspection. C&W assumes no responsibility for the soundness of
structural members nor for the condition of mechanical equipment, plumbing
or electrical components.
(7) The projected potential gross income referred to in the Appraisal may be
based on lease summaries provided by the owner or third parties. The
Appraiser has not reviewed lease documents and assumes no responsibility
for the authenticity or completeness of lease information provided by
others or the bona fides of actual leases. C&W suggests that legal advice
be obtained regarding the interpretation of lease provisions and the
contractual rights of parties.
(8) The projections of income and expenses are not predictions of the future.
Rather, they are the Appraiser's best estimates of current market thinking
on future income and expenses. The Appraiser and C&W make no warranty or
representation that these projections will materialize. The real estate
market is constantly fluctuating and changing. It is not the Appraiser's
task to predict or in any way warrant the conditions of a future real
estate market; the Appraiser can only reflect what the investment
community, as of the date of the Appraisal, envisions for the future in
terms of rental rates, expenses, and supply and demand.
(9) Unless otherwise stated in the Appraisal, the existence of potentially
hazardous or toxic materials which may have been used in the construction
or maintenance or operation of the improvements or may be located at or
about the Property was not considered in arriving at the opinion of value
stated in the Appraisal. These materials (such as formaldehyde foam
insulation, asbestos insulation, various soil contaminants, and other
potentially hazardous materials) may affect the value of the Property. The
Appraisers are not qualified to detect such substances and C&W urges that
an expert in this field be employed to determine the economic impact of
these matters on the opinion of value stated in the Appraisal.
(10) If the Appraisal is submitted to a lender or investor with the prior
approval of C&W, such party should consider the Appraisal as one factor,
together with its independent investment considerations and underwriting
criteria, in its overall investment decision.
(11) Unless otherwise stated in the appraisal, compliance with the requirements
of the Americans With Disabilities Act of 1990 (ADA) has not been
considered in arriving at the opinion of value stated in the appraisal.
Failure to comply with the requirements of the ADA may negatively affect
the value of the property. C&W recommends that an expert in this field be
employed.
- --------------------------------------------------------------------------------
-71-
<PAGE>
CERTIFICATION OF APPRAISAL
- --------------------------------------------------------------------------------
We certify that, to the best of our knowledge and belief:
(1) Michael L. Miller, MAI, has inspected the property and prepared the
report.
(2) The statements of fact contained in this report are true and correct.
(3) The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions, and are our
personal, unbiased professional analyses, opinions, and conclusions.
(4) We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
(5) Our compensation is not contingent upon the reporting of a
predetermined value or direction in value that favors the cause of the
client, the amount of the value estimate, the attainment of a
stipulated result, or the occurrence of a subsequent event. The
appraisal assignment was not based on a requested minimum valuation, a
specific valuation or the approval of a loan.
(6) No one provided significant professional assistance to the persons
signing this report.
(7) Our analyses, opinions, and conclusions were developed, and this
report has been prepared, in conformity with the Uniform Standards of
Professional Appraisal Practice of the Appraisal Foundation and the
Code of Professional Ethics and the Standards of Professional
Appraisal Practice of the Appraisal Institute.
(8) The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
(9) As of the date of this report, Michael L. Miller, MAI has completed
requirements of the continuing education program of the Appraisal
Institute.
(10) We have sufficient knowledge and expertise to appraise the subject
property.
Michael L. Miller, MAI
Director
Valuation Advisory Services
- --------------------------------------------------------------------------------
-72-
<PAGE>
ADDENDA
- --------------------------------------------------------------------------------
Subject Photographs
Legal Description
Building Plans
Qualifications of Appraiser
- --------------------------------------------------------------------------------
-73-
<PAGE>
ZENCO DE CHIHUAHUA, S.A. DE C.V. (ZENITH)
Carretera Pan Americana
Parque Industrial Aeropuerto
COMPARABLE LAND SALES
<TABLE>
<CAPTION>
===================================================================================================================
Land Street Location, Industrial Location Sale Price Per Land Land
Sale Submarket/Buyer, City, State Date Sale Price Square Foot Acres Square Feet
===================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1 Santiago Blancas, Intermex 1997 $ 3,357,120 $ 3.25 23.71 1,032,960
SE/Hubbell Electronics
Juarez, Chihuahua, Mexico
- -------------------------------------------------------------------------------------------------------------------
2 Avenue Zaragoza, Rio Bravo 1997 $ 630,000 $ 3.50 4.13 180,000
SE/Cambridge Realty
Juarez, Chihuahua, Mexico
- -------------------------------------------------------------------------------------------------------------------
3 Salvacar Corridor 1997 $ 5,375,000 $ 2.50 49.36 2,150,000
SE/Kitcher Electronics
Juarez, Chihuahua, Mexico
- -------------------------------------------------------------------------------------------------------------------
4 Laibramiento Aeropuerto, Salvacar 1997 $ 4,390,848 $ 3.60 28.00 1,219,680
SE/Security Capital
Juarez, Chihuahua, Mexico
- -------------------------------------------------------------------------------------------------------------------
5 Avenue Zaragoza, Rio Bravo 1996 $ 1,420,000 $ 3.50 9.31 405,736
SE/Cambridge Realty
Juarez, Chihuahua, Mexico
- -------------------------------------------------------------------------------------------------------------------
6 Avenue de las Torres, Intermex 1995 $ 3,466,500 $ 3.46 23.00 1,001,880
SE/Scientific Atlanta
Juarez, Chihuahua, Mexico
- -------------------------------------------------------------------------------------------------------------------
Subj. Carretera Pan Americana, Aeropuerto N/A --- --- 44.215 1,926,000
SW/Zenith 32.346 1,409,000
Juarez, Chihuahua, Mexico
==================================================================================================================
<CAPTION>
===================================================================================================
Land Street Location, Industrial Location Sale
Sale Submarket/Buyer, City, State Date Comments
===================================================================================================
<S> <C> <C> <C>
1 Santiago Blancas, Intermex 1997 Latter 1997 transaction, purchase
SE/Hubbell Electronics by Hubbel Electronics to construct
Juarez, Chihuahua, Mexico owner/user industrial building
- ---------------------------------------------------------------------------------------------------
2 Avenue Zaragoza, Rio Bravo 1997 Mid-1997 transaction, purchase by
SE/Cambridge Realty Cambridge Realty Partners to
Juarez, Chihuahua, Mexico construction building for Lear
Corporation lease
- ---------------------------------------------------------------------------------------------------
3 Salvacar Corridor 1997 Mid-1997 transaction, purchase by
SE/Kitcher Electronics Kitcher Electronics to construct
Juarez, Chihuahua, Mexico owner/user building
- ---------------------------------------------------------------------------------------------------
4 Laibramiento Aeropuerto, Salvacar 1997 Security Capital purchase to
SE/Security Capital construct spec industrial building
Juarez, Chihuahua, Mexico for lease
- ---------------------------------------------------------------------------------------------------
5 Avenue Zaragoza, Rio Bravo 1996 Mid-1996 transaction, purchase by
SE/Cambridge Realty Cambridge Realty Partners to
Juarez, Chihuahua, Mexico construct building for Johnson &
Johnson lease
- --------------------------------------------------------------------------------------------------
6 Avenue de las Torres, Intermex 1995 Latter-1995 transaction, purchase
SE/Scientific Atlanta by Scientific Atlanta to construct
Juarez, Chihuahua, Mexico owner/user industrial building
- --------------------------------------------------------------------------------------------------
Subj. Carretera Pan Americana, Aeropuerto N/A Larger site improved with Zenith
SW/Zenith owner/user facility, smaller
Juarez, Chihuahua, Mexico remains unimproved.
==================================================================================================
</TABLE>
<PAGE>
ZENCO DE CHIHUAHUA, S.A. DE C.V. (ZENITH)
Carretera Pan Americana
Parque Industrial Aeropuerto
COMPARABLE BUILDING SALES
<TABLE>
<CAPTION>
SALE BLDG. SIZE (SQ. PRICE PERCENT EFFECT.
NO. LOCATION/TENANT DATE FT.) SALE PRICE SQ. FT. FINISH AGE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 Av. Miguel de Cervante No. 140 March 229,327 $ 4,000,000 $17.44 15% 11 yrs.
Chihuahua, Mexico Vacant 1996
- -----------------------------------------------------------------------------------------------------------------------------
2 Parque de Complejo de Industrial April 107,000 $ 9,300,000 $86.92 28% New
Chihuahua, Mexico John Deere 1997 $ 5,845,868* $54.63*
- -----------------------------------------------------------------------------------------------------------------------------
3 Los Americas (Neilson Building) Late-1997 92,000 $ 1,750,000 $19.02 10% 10 yrs.
Parque Industrial Los Americas
Chihuahua, Mexico D&B to Am.
Industries
- -----------------------------------------------------------------------------------------------------------------------------
4 NEC Av. Ohio and Av. Del Obreno July 35,596 $ 1,650,000 $46.35 10% 7 yrs.
Parque Industrial del Norte 1995 $ 1,150,000* $32.31* 80% AC
Matamoros, Mexico Daniel
Industries
- -----------------------------------------------------------------------------------------------------------------------------
5 Av. Poniente January 46,960 $ 1,597,000 $34.75 100% AC 3 yrs.
Ciudad Industrial, 1995
Matamoros, Mexico
United Technologies
- -----------------------------------------------------------------------------------------------------------------------------
6 Boulevard Gomez Morin Available 25,390 $ 650,000 $25.60 10% 17 yrs.
Juarez, Mexico Vacant
- -----------------------------------------------------------------------------------------------------------------------------
7 Avenue de las Torres February 52,000 $ 2,300,000 $44.23 10% New
Salvarcar Corridor 1998
Juarez, Mexico National
Processing Company
- -----------------------------------------------------------------------------------------------------------------------------
8 Bermudas Industrial Park June 100,000 $ 3,100,000 $31.00 10% Under
Juarez, Mexico Build-to-Suit 1998
- -----------------------------------------------------------------------------------------------------------------------------
9 Southeast Submarket February 52,645 $ 2,450,000 $46.54 20% 7yrs.
Juarez, Mexico Johnson Controls 1998
- -----------------------------------------------------------------------------------------------------------------------------
10 Parque Industrial Park Mid- 83,000 $ 4,200,000 $50.60 15% 8 yrs
Reynosa, Mexico Data Comp 1996
- -----------------------------------------------------------------------------------------------------------------------------
11 Finsa Industrial Park June 50,000 $ 1,700,000 $34.00 10% New
Reynosa, Mexico AMMEX 1998
- -----------------------------------------------------------------------------------------------------------------------------
12 6 Industrial Buildings November 485,126 $17,840,000 $36.77 15% 5-10 yr
Juarez, Mexico A.O. Smith, 1998
Mannesmann, American Yazaky,
Johnson Matthey, Thomson
- -----------------------------------------------------------------------------------------------------------------------------
Subj. Carretera Pan Americana, --- 904,000 --- --- 5% 10 yrs
Aeropuerto Industrial Park
Juarez, Mexico Zenith
=============================================================================================================================
<CAPTION>
NO. LOCATION/TENANT OCCUPANCY COMMENTS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 Av. Miguel de Cervante No. 140 Vacant Distressed sale of vacant building
Chihuahua, Mexico Vacant
2 Parque de Complejo de Industrial Owner-occupant 77 acre site purchased for $3.7M,
Chihuahua, Mexico John Deere Build-to-suit for owner/tenant
3 Los Americas (Neilson Building) Owner-occupant Asking price was $2,100,000, 12
Parque Industrial Los Americas month marketing period, 250,000 SF
Chihuahua, Mexico D&B to Am. site, sprinklered, cafeteria
Industries
4 NEC Av. Ohio and Av. Del Obreno Investor 9.14 acres of excess land, masonry
Parque Industrial del Norte bldg., good condition
Matamoros, Mexico Daniel
Industries
5 Av. Poniente Owner-occupant Buyer offered $0.44/SF/Mo. Lease
Ciudad Industrial, prior to purchase, masonry/metal
Matamoros, Mexico constr.
United Technologies
6 Boulevard Gomez Morin Vacant Brick and concrete building with
Juarez, Mexico Vacant 10' clear. Functional deficiencies
noted
7 Avenue de las Torres Owner-occupant Evap. Warehouse, Restra walls, tin
Salvarcar Corridor roof, 2 docks, Build-to-suit for
Juarez, Mexico National owner/ tenant
Processing Company
8 Bermudas Industrial Park Owner-occupant Build-to-suit for owner/tenant;
Juarez, Mexico Build-to-Suit not completed at inspection
9 Southeast Submarket Owner-occupant Tilt and masonry, B-U roof,
Juarez, Mexico Johnson Controls manufacturing bldg.
10 Parque Industrial Park 100% 2-tenant bldg., 26,900 SF recently
Reynosa, Mexico Data Comp 68%** vacated; $0.52 avg. lease rate; OAR
11.6%
11 Finsa Industrial Park Owner-occupant Build-to-suit for owner/tenant;
Reynosa, Mexico AMMEX not completed at inspection
12 6 Industrial Buildings Owner-occupants Sale-leaseback of a 6 building
Juarez, Mexico A.O. Smith, portfolio to a single buyer
Mannesmann, American Yazaky,
Johnson Matthey, Thomson
Subj. Carretera Pan Americana, Owner-occupant Build-to-suit for owner/tenant,
Aeropuerto Industrial Park excess land
Juarez, Mexico Zenith
=========================================================================================================================
</TABLE>
* Adjusted to reflect exclusion of excess land ** Current occupancy
82
<PAGE>
STATE OF CHIHUAHUA
Important factors to the state of Chihuahua are employment growth, which
provides expansion and new entry of the industrial manufacturing companies which
operate maquiladoras. On the following chart we have outlined the employment for
the State for the 24-month period from, January 1996 to December 1997.
STATE OF CHIHUAHUA
INDICATORS OF EMPLOYMENT
1996 - 1997
<TABLE>
<CAPTION>
ZONES JAN. FEB. MARCH APRIL MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996
PERMANENT 511,250 517,072 520,770 524,011 528,010 534,060 536,506 543,956 552,074 565,107 565,445 562,533
EVENTUAL 19,255 20,886 19,067 16,806 17,281 19,284 21,253 21,421 21,668 23,487 29,293 32,459
TOTAL 530,505 537,958 539,837 540,817 545,219 553,334 557,759 565,377 573,742 588,594 594,738 594,992
1997
PERMANENT 558,758 570,808 573,375 580,125 586,595 588,088 N/AV 596,544 604,436 617,428 620,799 615,071
EVENTUAL 27,813 24,893 23,803 26,904 29,144 29,394 N/AV N/AP N/AP N/AP N/AP N/AP
TOTAL 586,571 595,701 597,178 607,029 615,739 617,482 N/AV N/AP N/AP N/AP N/AP N/AP
<CAPTION>
ZONES VARIATION
%
<S> <C>
1996
PERMANENT 9.4
EVENTUAL 76.1
TOTAL 11.7
1997
PERMANENT 9.3
EVENTUAL N/AP
TOTAL N/AP
</TABLE>
Eventual: Excludes the seasonally insured of the country. N/AP: Does not apply.
N/AV: Not available.
Source: Instituto Mexicano del Seguro Social (IMSS); Mexican Social Security
Institute
<PAGE>
[BAR CHART APPEARS HERE]
<PAGE>
EXHIBIT 99 M
--------------------------------------------------
COMPLETE APPRAISAL OF REAL PROPERTY
ZENCO DE CHIHUAHUA, S.A. DE C.V.
An Industrial Manufacturing/Warehouse Facility
Carretera Pan Americana
Parque Industrial Aeropuerto
C.P. 32690
Ciudad Juarez, Chihuahua, Mexico
C & W Appraisal File No. 98-9084
--------------------------------------------------
IN A COMPLETE FORMAT
As of May 29, 1998
Prepared For:
PPM FINANCE, INC.
Attention: Ms. Barbara Buck
Suite 1200
225 West Wacker Drive
Chicago, Illinois 60025
and
ZENITH ELECTRONICS CORPORATION
Attention: Ms. Beverly Wyckoff
1000 Milwaukee Avenue
Glenview, Illinois 60025
Prepared By:
CUSHMAN & WAKEFIELD OF ARIZONA, INC.
Valuation & Consulting Services
Suite 300
1850 North Central Avenue
Phoenix, Arizona 85004-4540
<PAGE>
June 12, 1998
PPM FINANCE, INC.
Attention: Ms. Barbara Buck
Suite 1200
225 West Wacker Drive
Chicago, Illinois 60025
and
ZENITH ELECTRONICS CORPORATION
Attention: Ms. Beverly Wyckoff
1000 Milwaukee Avenue
Glenview, Illinois 60025
Re: Complete Appraisal of Real Property
Zenco de Chihuahua, S.A. de C.V.
An Industrial Manufacturing/Warehouse Facility
Carretera Pan Americana
Parque Industrial Aeropuerto
C.P. 32690
Ciudad Juarez, Chihuahua, Mexico
Dear Ms. Buck and Ms. Wyckoff:
In fulfillment of our agreement as outlined in the Letter of Engagement,
Cushman & Wakefield of Arizona, Inc., is pleased to transmit our report
estimating the market value of the fee simple interest in the subject property
as is.
As specified in the Letter of Engagement, the value opinion reported is
qualified by certain assumptions, limiting conditions, certifications and
definitions, which are set forth in the report. This is a complete appraisal
prepared in accordance with the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
This report was prepared for the client, and it is intended only for the
specified use of the client. It may not be distributed to, or relied upon by,
other persons or entities without written permission of Cushman & Wakefield of
Arizona, Inc.
The subject consists of a single tenant industrial building encompassing
904,000 square feet. The facility is utilized by a subsidiary of Zenith for the
manufacturing and warehousing of televisions. The improvements were constructed
in 1984 and are in average condition, with no major deferred maintenance noted.
<PAGE>
Ms. Buck and Ms. Wyckoff
June 12, 1998
Page 2
Because of the site size and placement of the improvements on the
industrial site, we have allocated 44.215 acres for the building site and 32.346
acres as excess land that could be sold and developed with another industrial
facility unrelated to the existing improvements.
Michael L. Miller, MAI inspected the subject property and prepared the
report. As a result of our analysis, we have formed an opinion that the market
value of the fee simple estate in the manufacturing facility, which includes
excess land valued at $5,280,000, subject to the assumptions, limiting
conditions, certifications and definitions, as of May 29, 1998, is:
FEE SIMPLE INTEREST
-------------------
THIRTY-ONE MILLION ONE HUNDRED THIRTY THOUSAND DOLLARS
$31,130,000
At the request of the client, we have estimated the liquidation value of
the subject property. This assumes a six month sale period, which is less than
the estimated marketing period if sold at the market value previously noted.
This estimate of liquidation value, as of the date of appraisal and assuming a
six month sale period, is:
LIQUIDATION VALUE
-----------------
TWENTY-EIGHT MILLION FIVE HUNDRED THOUSAND DOLLARS
$28,500,000
This letter is invalid as an opinion of value if detached from the report,
which contains the text, exhibits, and an Addendum.
Respectfully submitted,
CUSHMAN & WAKEFIELD OF ARIZONA, INC.
Michael L. Miller, MAI
Director
Valuation Advisory Services
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
- --------------------------------------------------------------------------------
PROPERTY NAME: Zenco de Chihuahua, S.A. de C.V.
LOCATION: Carretara Pan Americana, Parque Industrial
Aeropuerto, C.P. 32690
Cuidad Juarez, Chihuahua, Mexico 185389
INTEREST APPRAISED: Fee simple estate
DATE OF VALUE: May 29, 1998
DATE OF INSPECTION: May 29, 1998
OWNERSHIP: Zenith
LAND AREA:
BUILDING SITE: 44.215 acres, or 1,926,000 square feet
EXCESS LAND: 32.346 acres, or 1,409,000 square feet
ZONING: Industrial (assembly non-contaminants)
HIGHEST AND BEST USE
If Vacant: Industrial development
As Improved: Continued single-tenant industrial use
IMPROVEMENTS
Type: Single-tenant industrial manufacturing and
warehouse building
Year Built: 1984
Type of Construction: Tilt wall and masonry block with roof truss
system
Gross Building Area: 904,000 square feet
Condition: Average
VALUE INDICATORS
MARKET VALUE
Cost Approach: $31,170,000
Land Value:
Building Site $ 7,220,000
Excess Land $ 5,280,000
Sales Comparison
Approach: $31,040,000 (includes $5,280,000 in excess
land value)
Income Approach: $31,330,000 (includes $5,280,000 in excess
land value)
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
- -------------------------------------------------------------------------------
CONCLUSION (INCLUSIVE OF EXCESS LAND)
Fee Simple (Market Value): $31,130,000
Liquidation Value: $28,500,000
ESTIMATED MARKETING TIME:
Fee Simple (Market Value): 12 to 18 months
Liquidation Value: Less than 6 months
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
INTRODUCTION............................................................... 1
Identification of Property........................................... 1
Property Ownership and Recent History................................ 1
Purpose and Function of the Appraisal................................ 1
Scope of the Appraisal............................................... 1
Date of Value and Property Inspection................................ 2
Property Rights Appraised............................................ 2
Definitions of Value, Interest Appraised, and Other Pertinent Terms.. 2
Legal Description.................................................... 3
Personal Property.................................................... 3
Reporting Guidelines................................................. 3
Marketing Time....................................................... 3
REGIONAL ANALYSIS.......................................................... 4
MAQUILADORA ANALYSIS....................................................... 12
MAQUILADORA INDUSTRY....................................................... 21
INDUSTRIAL MARKET ANALYSIS................................................. 25
NEIGHBORHOOD ANALYSIS...................................................... 34
PROPERTY DESCRIPTION....................................................... 36
Site Description..................................................... 36
Improvements Description............................................. 37
ZONING..................................................................... 41
REAL ESTATE ASSESSMENTS AND TAXES.......................................... 42
HIGHEST AND BEST USE....................................................... 43
VALUATION METHODOLOGY...................................................... 46
COST APPROACH.............................................................. 47
SALES COMPARISON APPROACH.................................................. 56
INCOME APPROACH............................................................ 63
RECONCILIATION AND FINAL VALUE ESTIMATE.................................... 67
AND LIMITING CONDITIONS.................................................... 69
CERTIFICATION OF APPRAISAL................................................. 71
ADDENDA.................................................................... 72
Subject Photographs
Legal Description
Building Plans
Qualifications of Appraiser
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
IDENTIFICATION OF PROPERTY
The subject property is known as the Zenco de Chihuahua, S.A. de C.V., a
subsidiary of Zenith. The improvements consists of an industrial
manufacturing/warehouse building totaling 904,000 square feet of gross building
area. The site contains 76.561 acres, which we have allocated as 44.215 acres
for the building site and 32.346 acres of excess land, which can be sold
separately. The physical address is Carretara Pan Americana, Parque Industrial
Aeropuerto, C. P. 32690, in the city of Cuidad Juarez, state of Chihuahua,
Mexico.
The subject property, situated within an established industrial park in
the southwest quadrant of the city of Cuidad Juarez. The subject has immediate
access to Carretera Pan Americana (Pan American Highway), a major thoroughfare
in the city. The neighborhood is predominantly industrial with residential
interspersed throughout.
PROPERTY OWNERSHIP AND RECENT HISTORY
The subject site was acquired by the current owners prior to 1984 and
subsequently constructed the improvements in 1984. Minor interior remodeling has
periodically occurred as demands on manufacturing has changed. No prior sales,
listings, or offers are known to have occurred in the last three years.
PURPOSE AND FUNCTION OF THE APPRAISAL
The purpose of the appraisal is to provide an estimate of the market value
of the fee simple interest in the subject property as is. At the request of the
client, we have estimated the liquidation value of the subject property. This
assumes a six month sale period, which is less than the estimated marketing
period if sold at the market value previously noted. It is our understanding the
appraisal will be utilized to assist in making management decisions relative to
financing.
SCOPE OF THE APPRAISAL
In the process of preparing this appraisal, we:
. Inspected the building and site improvements with the production manager.
. Drove every major street in the community and inspected all large
commercial, industrial and office facilities and all industrial parks
within the community.
. Conucted market research and analysis regarding the socio-economic makeup
of the country and the specific community where the subject is located.
. Prepared specific interviews and reviewed business and industrial
overviews prepared by Cushman & Wakefield of Mexico, Northern Mexico's
regional economic centers, real estate brokers, and industrial developers
in order to prepare a comprehensive overview of the maquiladora market.
. Conducted market research and analysis of occupancies, asking rents,
concessions, and operating expenses at competing properties. This included
phone conversations with industrial park managers, the individual
maquiladora production managers, area real estate brokers in the U.S. and
throughout Mexico. Further, we reviewed publications put out by the State,
the local economic development council and the U.S. sister city.
- -------------------------------------------------------------------------------
-1-
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
. Conducted market inquiries into recent sales of similar properties to
ascertain sales prices per square foot and capitalization rates. This
included reviewing all potential commercial and industrial transactions in
the community, a regional search in the City, State and a national search
of potential leases and sales
. Reviewed specific construction costs of projects recently completed, under
construction and proposed in order to substantiate a replacement cost
estimate. A land value estimate through a comparison of recent land sales
was conducted and after depreciation, used to derive a value via the Cost
Approach.
DATE OF VALUE AND PROPERTY INSPECTION
The date of value is May 29, 1998, the same as the date of inspection.
PROPERTY RIGHTS APPRAISED
Fee simple estate and liquidation value based on a six month marketing
period.
DEFINITION OF MARKET VALUE
The definition of market value taken from the Uniform Standards of
Professional Appraisal Practice, 1994 Edition, published by The Appraisal
Foundation, is as follows:
The most probable price which a property should bring in a competitive and
open market under all conditions requisite to a fair sale, the buyer and
seller each acting prudently and knowledgeably, and assuming the price is
not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title
from seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
EXPOSURE TIME
Under paragraph 3 of the Definition of Market Value, the value estimate
presumes that a reasonable time is allowed for exposure in the open
market. Exposure time is defined as the estimated length of time the
property interest being appraised would have been offered on the market
prior to the hypothetical consummation of a sale at the market value on
the effective date of the appraisal. Exposure time is presumed to
precede the effective date of the appraisal.
- -------------------------------------------------------------------------------
-2-
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
The following definitions of pertinent terms taken from the Dictionary of Real
Estate Appraisal, Third Edition (1993), published by The American Institute of
Real Estate Appraisers (now known as The Appraisal Institute), are as follows:
FEE SIMPLE ESTATE
Absolute ownership unencumbered by other interest or estate, subject
only to the limitations imposed by the governmental powers of taxation,
eminent domain, police power and escheat.
MARKET RENT
The rental income that a property would most probably command in the
open market; indicated by the current rents paid and asked for
comparable space as of the date of the appraisal.
CASH EQUIVALENT
A price expressed in terms of cash, as distinguished from a price
expressed totally or partly in terms of the face amounts of notes or
other securities that cannot be sold at their face amounts.
MARKET VALUE AS IS ON APPRAISAL DATE
The value of specific ownership rights to an identified parcel of real
estate as of the effective date of the appraisal; related to what
physically exists and is legally permissible and excludes all
assumptions concerning hypothetical market conditions or possible
rezoning.
LEGAL DESCRIPTION
A legal description is found the Addenda.
PERSONAL PROPERTY
There is no noted personal property associated with the operations of the
subject property that would require value consideration in the analysis of the
real estate.
REPORTING GUIDELINES
Throughout this report, all figures will be reported in United States (US)
dollars, unless specifically specified as pesos. All sizes will also be reported
in square footage or in acres.
MARKETING TIME
Marketing time is an estimate of the time that might be required to sell a
real property interest at the appraised value. Marketing time is presumed to
start on the effective date of the appraisal. (Marketing time is subsequent to
the effective date of the appraisal, while the previously note exposure time is
presumed to precede the effective date of the appraisal.)
The estimate of marketing time uses some of the same data analyzed in the
process of estimating the reasonable exposure time, and it is not intended to be
a prediction of a date of sale.
- -------------------------------------------------------------------------------
-3-
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
Our estimate of an appropriate marketing time for the subject relates to a
sale of the property in its as-is condition. Based on our assessment of the
local real estate market and economic forces in general coupled with discussions
with local and regional brokers and buyers/sellers of industrial projects
similar to the subject, we have concluded that the probable marketing period for
the subject property in today's environment would 12 to 18 months.
- --------------------------------------------------------------------------------
-4-
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
Since real estate is an immobile asset, economic trends affecting its
locational quality in relation to other competing properties within its market
area will also have a direct effect on its value as an investment. To accurately
reflect such influences, it is necessary to examine the past and probable future
trends that may affect the economic structure of the market area and evaluate
the impact on the market potential of the subject.
REGIONAL AND LOCAL INFLUENCES
Mexico is a country struggling to modernize its infrastructure and reform
its political system. Although changes have been made, the process has been
slow. The joining of GATT known today as the World Trade Organization (WTO) in
1987 began the process of Mexico joining the free world. The signing of the
North American Free Agreement (NAFTA) in 1994 set in motion the reduction of
tariffs between Mexico and the United States. Since then Mexico has signed
several free trade agreements in Central and South America. The involvement of
other political parties besides the Partido Revolucionario Institucional (PRI)
in the governing of Mexico has created greater participation by the people.
However, problems persist in the southern states, such as Chiapas, where the
indigenous people continue to demand a voice in the political process.
Since the devaluation of the peso in 1994, Mexico has been attempting to
create stability in the financial markets. Over the last 20 years Mexico has
devalued its currency every six years. The massive $52 billion financial aid
package the United States and the International Monetary Fund loaned Mexico in
1995 created greater restrictions on the country's federal reserve bank. Since
then the pesos has floated freely. In order for Mexico to succeed, the
corruption must be uprooted and the judicial system reformed. Nevertheless,
Mexico's close proximity to the United States, its young, inexpensive labor
force and natural resources creates a great opportunity in tourism and
manufacturing that still have not been met.
ECONOMY
Latin American countries, especially those considered mature emerging
markets, held a profitable position during 1997. The Wall Street Journal
classified Latin America as the zone which generates the world's highest
profits, with Mexico categorized as a mature emergent market. By the close of
1997, almost $12 billion in international investments occurred in all of Mexico,
establishing the country as the third most popular country for foreign
investment. The GNP grew by 7.3 percent versus the government's 5.2 percent
projection. The inflation rate was 15.72 percent.
Mexico is the largest Spanish speaking country in the world. With respect
to land area, it is the third largest country in Latin America and the
thirteenth largest in the world. The United States is Mexico's largest trade
partner, and Mexico is the third largest trade partner of the United States
after Canada and Japan. The approval of NAFTA in 1994 between Mexico, the United
States and Canada created the largest and most lucrative trade zone in the
world, with a market of more than 400 million consumers. As other Latin American
countries continue to grow economically and are incorporated in free trade
agreements with Mexico, the Mexican economy will incur the most benefits due to
its central location and recent stabilized economy.
- --------------------------------------------------------------------------------
-5-
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
The economy in 1996 and 1997 was presented with a slow but constant
recuperation. At the beginning of 1995, a 30 percent devaluation of the
peso/dollar exchange rate was projected. But due to strong economic indicators
in the second part of the year, the peso stabilized and created a stimulating
force for accelerated recuperation, surpassing many previous predictions
surrounding the country's capacity for recovery. Further, in 1997, Mexico
reduced its short term external debt.
Mexico City remains as the most expensive city in the country. Conversely,
the city possessed the largest number of industrial and commercial
establishments, as well as representing approximately 30 percent of the average
GNP. Moreover, according to the American Chamber of Commerce, most companies
reported domestic sales volume increased during 1997, with almost one-third
indicating net operating profits had increased by more than 30 percent.
However, the real consumer buying capability has grown more slowly.
Santander, a Spanish banking group, predicted a consumer growth of around 2.5
percent for the year's end, and a jump in sales of approximately 10 percent, in
comparison to the previous year.
After World War II, Mexico based its economic growth on a system of import-
substituting industrialization. Barriers to imports protected domestic products
from foreign competition. Although the economy grew at average annual rates of 6
percent in the 1950s and 1960s, the limits to the import substitution model were
all too apparent by the 1982 crisis. With booming oil prices and foreign
borrowing or deficit spending foreclosed, the De la Madrid government began to
open one of the world's most closed economies to competition and to cut back the
role of the state in economic activity.
The next president, Carlos Salinas de Gotari (1988-94), stepped up the pace
of this policy, privatizing many government industries and the banks, which had
been nationalized in 1982 by De La Madrid's predecessor, Jose Lopez Portillo.
On January 1, 1994, Mexico entered the North American Free Trade Agreement
(NAFTA) with the U.S. and Canada, further reducing barriers to trade with Mexico
for U.S. and Canadian companies and removing many restrictions of foreign
investment.
The transformation of the economy begun by the De la Madrid administration
and accelerated during the Salinas six-year presidential term brought inflation
down from 159.2 percent in 1987 to 7 percent in 1994 and produced an average
annual growth rate of 3 percent between 1985 and 1994. Mexico, the darling of
the international financial community, seemed poised to take full advantage of
its recently granted membership in the Organization for Economic Cooperation and
Development (OECD).
In 1994, a presidential election year, several social and political
problems in Mexico shook investor confidence. Organized uprisings among
indigenous groups in Chiapas, the assassination of the Institutional
Revolutionary Party (Partido Revolucionario Institucional, PRI) presidential
candidate Luis Donaldo Colosio and the murder of PRI Secretary General Jose
Francisco Ruiz Massieu, all sent tremors through Mexican financial markets.
- --------------------------------------------------------------------------------
-6-
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
A massive exodus of capital precipitated a balance of payments crisis.
Without capital inflows, Mexico could no longer sustain a current account
deficit the size of 1994's; about 8 percent of GDP. The country's reserve
position left the government with no other option than to let the peso float.
Fondo Bancario de Proteccion al Ahorro (FOBAPROA), the Mexican equivalent of the
U. S. FDIC, has since taken $43 billion in real estate properties as the result
of the previous pesos devaluation and is now responsible for management and
disposition.
The harsh, painful adjustment sparked by the devaluation (on December 19,
1994 a dollar cost 3.4 pesos; at the end of 1995 it cost 7.7 pesos) and the
economic policies required to forestall falling back into the vicious
devaluation/inflation spirals of the past provoked the sharpest economic
contraction since the Great Depression.
The economy began to recover by late 1995, accelerated rapidly in 1996 with
growth of over 5 percent for the year and declined to 4.5 percent for 1997. It
is expected that this growth will continue in 1998 with 4.0 percent annual
growth. In addition, exchange rate volatility has since eased and inflation has
fallen from an annual rate of over 51.9 percent in the aftermath of the
devaluation to 27.7 percent at the end of 1996. By May 1997 inflation fell below
1 percent per month for the first time since December 1994. Inflation forecasts
for the end of 1997 are 16.0 percent and 11.5 percent in 1998.
The recovery was, however, unevenly distributed. On the external side
improvement was immense. Besides overcoming the liquidity crunch, Mexico
succeeded in shifting a large trade deficit of $6.4 billion in 1994 to a surplus
of more than $6.4 billion in 1996. Mexico's access to international markets was
restored in mid-1995 when the Mexican authorities took advantage of the
opportunity to issue market debt in order to prepay the rescue package. By
January 1997, the portion of the rescue package owed to the United States was
repaid in full and $5 billion of the $12.4 billion owed to the IMF was pre-paid.
Mexico was also able to build up foreign exchange reserves to pre-crisis levels,
from $4 billion in January 1995 to $22 billion on July 18, 1997. The current
account deficit also shrunk from over 7 percent of GDP in 1994 ($30 billion) to
0.4 percent in 1996 ($1.4 billion).
As the United States' third largest trading partner, Mexico represents a
thriving market for U.S. products. Not only does Mexico offer a large market for
intermediate and capital goods produced in the U.S. and Canada, but it also
offers a growing market for consumer goods.
Intermediate goods, such as parts, supplies and raw materials used in
manufacturing, account for 78.8 percent of imports, and capital goods, such as
manufacturing equipment, account for 78.8 percent of imports, and capital goods,
such as manufacturing equipment, account for another 13.4 percent. The fact that
these two groups compose over 92 percent of Mexico's imports reflects the
country's developing industrial base. Among the main importers of these goods
are Mexico's manufacturing and maquiladora industries and the Mexican
government.
Although Mexico was hit by a severe economic crisis in 1995/96, its huge
consumer market is beginning to show signs of strong recovery. Due to the
introduction of free market
- --------------------------------------------------------------------------------
-7-
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
policies and the recent expansion of many well-known retail chains in Mexico,
consumers are enjoying access to a wide variety of foreign goods and services.
GOVERNMENT PRIVATIZATION
From 1997 until 2000, most of Mexico's remaining public transportation will
be privatized, including fifty-eight airports, nine ports, five rail concessions
and a dozen municipal transit systems. The long-distance telecommunications
market has already been opened to competition. In 1997, the government announced
a $100 billion toll road modernization program, $15-20 billion of which will be
invested before the year 2000 to modernize Mexico's transportation
infrastructure. Mexico's government sustained IVA (Impuesto al Valor Agregado)
at 15 percent and adjusted its budget for 1998 due to fluctuations of oil
prices, because oil is Mexico's main export product.
Mexico privatized billions of dollars in state-owned industries in the
1990's, and began a steady process of opening trade that culminated with the
approval of NAFTA. However, continued progress on privatizations has been slow
and cumbersome. A Mexican-US rail consortium, Transportacion Ferroviaria
Mexicana (TFM), only recently took control of Mexico's most important railway
line in a $1.4 billion deal that completed the country's most difficult sell-
off. The long-awaited petrochemical privatization was watered down last year.
The state-owned airports are next on the list to be sold.
A $100 million investment was recently announced by the government for a
railroad modernization program, with an estimated $15 to $20 billion to be
invested before 2000 to modernize Mexico's transportation infrastructure.
TRENDS
The government's new National Program of Financing for Development 1997-
2000 (Programa Nacional de Financiamiento de Desarrollo, Pronafide) is the first
multiyear plan and has broadened the range of policy goals to include targets
for national savings, social welfare expenditures and educational attainment. It
is designed to ensure GDP growth of 5.6 percent by the year 2000. To achieve
this goal, the plan calls for raising the country's total savings rate (internal
savings, external savings and depreciation rate) by more than four percentage
points to 25.5. percent of GDP in 2000 from 20.9 percent in 1996.
According to government and industry statistics, private consumption is in
fact on the rebound, albeit at a meager rate--2 percent in the first quarter of
the year. Overall consumption rose 4 percent in the first half of 1997 and
should rise by 5 percent in the second half, compared to the same periods a year
earlier.
In preparation for increased demand, companies this year and next expect to
invest more. In 1997 alone, companies will pour 44 percent more into physical
plant improvements and expansion, acquisition of new businesses, real estate,
research and development, and personnel training than they did in 1996. Next
year, respondents expect to increase investment in these areas by an additional
32 percent.
- --------------------------------------------------------------------------------
-8-
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
EMPLOYMENT PROJECTIONS
Reflecting the trends in sectoral performance, manufacturing companies will
see their investment levels increase at a slower pace in 1997 (44.5 percent) and
1998 (26.7 percent) than in 1996 (57.4 percent). 1996 was one of the first
year's when the sector's strongest members first looked beyond the frail
domestic market and focused their eyes on the lucrative export market. The bulk
of investment in this sector will be seen in the expansion and construction of
new physical plant and the acquisition of equipment.
The services and retail sectors on the other hand saw 1997 as the "get-
ready" year. Service-oriented companies are especially gearing up for greater
business by investing an average of 56.1 percent more than in 1996. As could be
expected, the vast majority of the sector's investment (72.4 percent) will be in
the training of its workforce to provide better-quality service.
The retail sector, one of the most affected by the travails of the economic
recession, is betting on slow but sure increased consumption levels between now
and the end of the six-year presidential term, or sexenio, by investing more
this year in new facilities and employee training. Survey respondents to the
American Chamber of Commerce study indicated investment in the sector will grow
by an average of 31.3 percent in 1997 and an additional 24.9 percent in 1998.
Fully half of respondents belonging to the sector indicated they will channel
funds toward the construction of new facilities. Confirming this data, the
country's retail trade association, the ANTAD, said its members plan to invest a
total of $2.95 billion in new and expanded stores over the next two years. An
even greater number of respondents (69.2 percent), however, said they will
invest more to train their human resources--a sign that greater competition has
forced retailers to provide not only better choices and prices, but also better
service.
Companies in all three sectors also plan to support their growth with new
employees as well. Manufacturers and service companies expect to increase their
workforces by an average of 43 percent in 1997, and by 51 percent in 1998.
Retailers plan to hire 9.1 percent more workers in 1998 and 9.5 percent more in
1998. The government estimates that close to one million new jobs will be
created in 1998 alone. Overall, the employment outlook is extremely bright and
should continue to grow above U.S. levels.
INFRASTRUCTURE
We have provided an overview of the transportation and utility
infrastructure of the community in order to provide further insight into the
economic viability of the country.
AIRPORTS
Mexico boasts the most highly developed airport infrastructure in Latin
America with 83 public airports, of which 53 are international. Mexico has 32
international agreements which permit reciprocal service to 12 countries
throughout the Americas, 13 in Europe and seven in Asia. Deregulation in recent
years warranted an increase in the number of carriers, route expansion, more
competitive pricing and a growing number of passengers. Privatization of
Mexico's 58 existing airports, in groups of two or three, began in the second
quarter of 1997.
- --------------------------------------------------------------------------------
-9-
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
PORTS
Mexico has a total of 76 seaports and nine river ports. Of those, 22 ports
are located in the country's major production and consumption centers, and
handle the bulk of national and international activity. The remaining ports are
dedicated to fishing and tourism. Port activity is highly concentrated in six
ports: Salina Cruz, Lazaro Cardenas, Manzanillo on the Pacific Coast and
Coatzacoalcos, Veracruz and Tampico/Altamira on the Gulf of Mexico. Total cargo
traffic through the port network increased 25.8 percent from 1996 to 1997, with
significant increases in both imports and exports.
HIGHWAYS
Mexican highways are divided into toll roads and toll-free roads. About one
third of the overall highway system is paved. Most of the paved roads are part
of the federal highway system, which between 1989 and the end of this decade
will have increased by over 70 percent. Toll highways are generally four lanes,
modern and quite costly. In contrast, toll-free roads are usually two lanes and
in poor condition. The government maintains the country's web of toll-free roads
whereas the network of toll highways is operated by the Office of Federal
Bridges and Roads (Caminos y Puentes Federales, Capufe) or by private
concessionaires. Rural roads still represent an important element of regional
and local transit.
TELEPHONES
Telmex, once a government-owned monopoly, was privatized in 1991 and is now
the fastest-growing telephone company in the world. The concession granted to
Telmex in 1990, defined the company's operating areas and set clear service
targets. The concession permitted the new owner a near monopoly for six years,
but competition for long distance services began in August 1996 and the bidding
on local frequencies will begin in October 1997. The long distance telephone
networks in Mexico are mostly fiber optic and totally digital. Local switching
is also digital and is more widespread than in many developed countries.
WATER
The National Drinking Water and Sewage Program (Programa Nacional de Agua
Potable y Alcantarillado), launched in 1990 by the National Water Commission
Comision Nacional del Agua, CNA), achieved nearly 100-percent availability of
potable water in medium-sized cities by 1992. It also increased the sewage
treatment coverage by one third, reaching 90 percent in major cities and 80
percent in medium-sized cities. Nonetheless 16.4 percent of the Mexican
population does not have access to potable water and 33.0 percent do not have
adequate sewage.
Water experts estimate that approximately $7 billion will be needed to
complete and expand current water projects and to construct new wastewater
collection and treatment systems. Since federal and local government budget
allocations for water projects are insufficient, much of the funding will need
to come from private sources of financing.
DEMOGRAPHICS
Presently, nearly 42 million of the 95 million Mexican citizens live in
poverty, with the national minimum wage at $26.45 pesos per day (approximately
$3.23 U.S.). Less than 20 percent of the population earns more than $5,125 pesos
per month ($625 U.S. per month).
- --------------------------------------------------------------------------------
-10-
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
Furthermore, the World Bank estimated that 42 percent of Mexico's economic
population is employed in the informal sector.
Approximately 56.8 percent of the Mexican population is under the age of
25 years, and six of every 10 citizens reside in cities. However, this trend is
changing, as the growth rate of the four main Mexican cities decreased to 1.8
percent from the 2.0 percent national average. One of the biggest problems
facing communities is adequately housing residents.
Consorcio ARA, residential developers, reported Mexico's housing deficit
was calculated at around six to eight million residences. In order to meet the
basic demands of the rapidly growing population, the housing inventory will have
to grow by roughly 777,000 units per year. During the past year, the
metropolitan areas averaged 4.52 residents per unit, slightly below the national
average of 4.65 residents per unit. Meanwhile, 86 percent of metropolitan
housing stock has access to water, and 84 percent has access to sanitary
services and drainage. However, nearly one million homes do not have electricity
and/or potable water, although the percentage of homes with electricity rose
from 58.9 percent to 93.2 percent between 1970 and 1995.
SCHOOLS/EDUCATION
There are many private institutions that offer quality education from
kindergarten to university. Many of them are bilingual, with the best
institutions concentrated in the economic centers of Mexico City, Guadalajara
and Monterrey.
SUMMARY
The common border of Mexico with the United States represents a unique
locational perspective that in the long term will benefit both countries. Mexico
is replacing many far east countries as a preferred manufacturing location, and
for good reason. Labor costs are similar and transportation costs are reduced to
North and South American countries. Additionally, the labor market is becoming
well schooled, with recent developments consisting of state of the art
facilities where skilled labor savings can also be found.
Mexico is taking the appropriate steps to become a free market society that
can effectively operate in a global economy. Society and government has reacted
positively to these changes, thus Mexico should remain one of the fastest
growing economies, with some of the highest profit potentials, of any country in
the world.
Near term forecasts project continued government and economic growth, at
reasonable levels. Population forecasts slightly above 2.0 percent are expected,
while growth in housing should substantially exceed this level due to current
inadequate supply. Municipal services will continue to expand and the monetary
system is expected to remain stable, with future inflation increases anticipated
at five to eight percent annually. Further, foreign investment will remain at
some of the highest levels of any country in the world.
- --------------------------------------------------------------------------------
-11-
<PAGE>
MAQUILADORA ANALYSIS
- --------------------------------------------------------------------------------
In this analysis, we will analyze the business of manufacturing within
Mexico, then detail an overview of the industrial market within the community
and the maquiladora market in specific. A maquiladora is defined as an in-bond
light manufacturing facility located in Mexico. It is typically associated with
a company's raw materials being transported to the maquiladora where the product
is manufactured, then the finished product is shipped to the retailer or
consumer.
MANUFACTURING IN MEXICO
Mexican manufacturers generally range from small to medium-size companies.
Of the country's almost 120,000 manufacturing companies, approximately 98
percent are micro, small or medium-size businesses, all with fewer than 250
employees. However, almost all materials used to manufacture chemical products,
electrical and electronic components, textiles and footwear are imported from
the U.S. Less than 2 percent of these materials are produced in Mexico.
U.S. companies in Mexico purchase more raw materials from the U.S. than
from Mexico, which means U.S. companies tend to have the inside track for
supplying materials to their Mexican subsidiaries and other U.S. companies in
Mexico. Buying criteria, such as terms of payment, quality standards and
delivery time, are similar to U.S. standards. The top 10 states in terms of the
number of medium and large manufacturing operations are:
1. The State of Mexico
2. The Federal District
3. Nuevo Leon
4. Baja California Norte
5. Chihuahua
6. Jalisco
7. Guanajuato
8. Coahuila
9. Puebla
10. Tamaulipas
THE MAQUILADORA INDUSTRY
Maquiladora plants are twin plants that utilize imported basic American
products and convert them into the finished export merchandise ready for U.S.
and international retailers. This allows American firms to compete with other
foreign companies. The majority of the 300 maquiladora companies that in recent
years have been establishing themselves in northern cities like Mexicali and
Ciudad Juarez are export companies. In the Baja region of central Mexico, larger
manufacturers rely on large developers like Hines and Group Accion to set up
infrastructure and construction so exporting can go straight from Mexico to the
desired country. In northeast Mexico, large developers like Finsa and a
subsidiary of Security Capital (a real estate investment trust) form the bulk of
new construction activity. They have just recently provided management of the
business operations in addition to facility construction. Regardless of the
location, these frontier communities did not previously have an established
public information sector or private brokerage firm to provide companies with
the various locational
- --------------------------------------------------------------------------------
-12-
<PAGE>
MAQUILADORA ANALYSIS
- --------------------------------------------------------------------------------
and business opportunities available to them. Thus, companies had to rely on
specific economic districts and the industrial park land owners for information.
Mexico's maquiladora industry continues its dynamic growth rate. This 32-year
old program is now Mexico's second largest source of foreign exchange revenue,
in excess of $6 billion. Maquiladora exports represent 45 percent of the total
Mexican manufactured exports. Maquiladoras started 1997 with a growth rate
exceeding 1996's by 16.7 percent, and it is projected that this growth rate will
remain constant throughout 1998. In comparison, the non-maquiladora
manufacturing sector is growing at a rate of 7.3 percent. From January to June
1997, the Mexican government approved permits for 283 new maquiladoras resulting
in 23,902 direct jobs. In total, there are currently 3,650 maquiladoras in
Mexico, accounting for more than 920,412 direct jobs. The new maquiladoras
represent the entire gambit of manufacturing procedures, including textiles,
furniture, automotive components, toys, sporting goods and chemicals.
SUMMARY OF THE MAQUILADORA INDUSTRY
<TABLE>
<CAPTION>
MARCH 31, 1996 JUNE 31, 1997
-------------- -------------
<S> <C> <C>
Number of plants 2,288 3,650
Number of jobs 710,268 920,412
</TABLE>
It is obvious this industrial market is expanding at a rapid pace; in fact,
it is exceeding the expansion of some of the fastest growing U.S. communities.
The industrial growth for maquiladoras versus the growth of the Mexican economy
is summarized below.
<TABLE>
<CAPTION>
INDUSTRY GROWTH
MAQUILADORAS NATIONAL AVERAGE
------------ ----------------
<S> <C> <C>
First Quarter 1997 14.2% 5.7%
Breakdown by Location
Border Region 76.6%
Interior 23.4%
</TABLE>
Recent trends indicate that of the new additions to the market, greater
numbers of maquiladora plants have moved from the border areas to the interior
of Mexico. This trend is generally due to the improvement of transportation
infrastructure, facilitating the export of maquiladora-manufactured goods and
enhancing access to the border region and the U.S. market. Also, many
maquiladora employers are finding lower turnover rates in the interior cities of
Mexico, such as Durango, Puebla, Queretaro and Yucatan. We have tracked the
building permits for new maquiladoras in the states of Baja California,
Coahuila, Chihuahua, Federal District, Guanajuato, Mexico, Nuevo Leon, Puebla,
Sonora, and Tamaulipas (shown in order from bottom to top). As can be seen, Baja
California and Chihuahua rank number one and two in total building permits.
Also, construction activity in Baja California, Coahuila, Federal District,
Guanajuato, Nuevo Leon, and Tamaulipas increased in 1997 over 1996 levels. More
non-North American investment is anticipated. With the passage of NAFTA and the
strict rules of origin, goods manufactured in North America have preferential
treatment as tariff and non-tariff barriers are eliminated for the signatory
countries. These rules have encouraged Asian and European firms that want to be
competitive in the North American market to invest in one of the signatory
countries. For example, Daimler Benz from Germany has invested in both the U.S.
and Mexico and Daewoo from Korea in Mexico.
- --------------------------------------------------------------------------------
-13-
<PAGE>
MAQUILADORA ANALYSIS
- --------------------------------------------------------------------------------
NEW MAQUILADORA PERMITS
January-June 1996/Januay-June 1997
[GRAPH APPEARS HERE]
Investments are finally targeting the Mexican market. The maquiladora
program was originally designed to allow the duty-free entry into Mexico of
parts and components which would then undergo some portion of the manufacturing
process and finally be re-exported with duties assessed only on the value added.
Until 1994, sales in Mexico from maquiladoras were strictly controlled and
essentially not permitted. However, since 1995, under the revised Federal Decree
for the Promotion and Operation of Maquiladora Export Industry (Decreto para el
Fomento y Operacion de la Industria Maquiladora de Exportacion), a maquiladora
can sell up to 65 percent of its total production in the Mexican market. This
percentage will increase over the next five years until 2001 when maquiladora
sales in the domestic market will have no limits. This option adds a new
dimension to the long-term strategies for existing maquiladoras and potential
new investment.
While turnover is still extremely high, efforts to reverse this trend are
slowly showing results. Companies are trying a variety of incentives to retain
employees, from cash bonuses based on production to more creative incentives,
such as giving away popular consumer products. Companies that invest in employee
incentives, meal programs, medical benefits and social programs are having
turnovers as low as many U.S. companies.
According to March 1997 figures, the average daily salary of maquiladora
personnel was $105.21 pesos (approximately US$13), approximately four times the
national average daily wage. Obviously, this rate is competitive with many Asian
countries and well below U.S. and Canadian levels. As such, this provides
companies with high labor costs significant cost savings when relocating
manufacturing to Mexico. However, as will be discussed in more detail within the
Cost Approach section of this report, building costs are similar to or higher
than U.S. costs due to the lack of speculative buildings added to the market.
This provides no measurable savings in the warehousing of goods compared to the
U.S.
- --------------------------------------------------------------------------------
-14-
<PAGE>
MAQUILADORA ANALYSIS
- --------------------------------------------------------------------------------
The economic recession of 1995 in Mexico, during which the peso lost over
50 percent of its value, brought domestic growth and investment to a drastic
halt. But it also had the impact of lowering the costs of operation for those
foreign firms which have revenue in foreign currency. While the rest of the
Mexican economy experienced negative growth rates, the export sectors, primarily
the maquiladora industry, experienced positive growth rates. In the Maquiladora
market, rents have the option to be paid in pesos and/or dollars. Typically,
rent is paid in dollars and management fees in pesos. Additionally, most foreign
companies form a joint venture with a Mexican national, or a Mexican company, to
provide a slightly more favorable tax treatment. Salaries are typically also
paid in pesos, except for the production managers and executives, who are paid
in dollars. Historically, salaries were paid in cash, but companies are now
installing ATM in their facilities and employees have the ability to collect all
or a portion of their paycheck and bank the rest. This is an interesting
transition, as it is extremely important to the long-term economic viability of
the people that personal savings increase.
In the wake of the previous crisis, the prospects for investment have a
long-term positive prospectus. Efforts need to be dedicated to ensuring that
infrastructure limitations at the border do not impede the flow of goods and
people both north and southbound. As trilateral trade among the signatory
members of NAFTA exceeds $400 billion, 70 percent of which crosses from one
country to the other through the land-based ports of entry (truck and/or rail),
there needs to be a trilateral approach to developing and enhancing north/south
trade corridors.
This currently is a difficult and time consuming process.
<TABLE>
<CAPTION>
IMPORT AND EXPORT COMPARISONS
=======================================================================================
JAN.-JUNE
1995 % 1996 % 1997 %
=======================================================================================
<S> <C> <C> <C> <C> <C> <C>
U.S. EXPORTS
- ------------
Mexico 46,292 7.92 56,792 9.09 32,715 9.63
Canada 127,226 21.76 134,210 21.47 75,195 22.13
Non-NAFTA Countries 411,224 70.32 434,076 69.44 231,866 68.24
------- ----- ------- ----- ------- -----
Total 584,742 100 625,075 100 339,776 100
U.S. IMPORTS
- ------------
Mexico 62,101 8.35 74,297 9.34 40,923 8.3
Canada 144,370 19.42 155,893 19.60 83,952 20.05
Non-NAFTA Countries 537,072 72.23 565,099 71.06 291,732 71.65
------- ----- ------- ----- ------- -----
Total 743,543 100 795,289 100 416,607 100
=======================================================================================
MEXICAN EXPORTS
- ---------------
U.S. 66,273 88.32 80,540 83.9 44,538 84.97
Canada 1,987 2.5 2,171 2.26 1,087 2.07
Non-NAFTA Countries 11,282 14.18 13,289 13.84 6,795 12.96
------ ----- ------ ----- ----- -----
Total 79,542 100 96,000 100 52,420 100
MEXICAN IMPORTS
- ---------------
U.S. 53,902 74.4 67,555 75.51 37,504 74.52
Canada 1,34 1.90 1,744 1.95 932 1.85
Non-NAFTA Countries 17,1777 23.70 20,170 22.54 11,893 23.63
------- ----- ------ ----- ------ -----
Total 72,453 100 89,469 100 50,329 100
=======================================================================================
</TABLE>
Source: Banco de Mexico and U.S. Department of Commerce
- --------------------------------------------------------------------------------
-15-
<PAGE>
MAQUILADORA ANALYSIS
- --------------------------------------------------------------------------------
Regardless of NAFTA, Mexico is negotiating for other trade agreements.
Similar types of agreements with five other countries have been consummated and
are just beginning with the European Union and Mercosur (consists of Brazil,
Argentina, Paraguay and Uruguay and is seen as one of the fastest growing trade
accords in the world). When these negotiations are concluded in 1998, the
European Union could easily replace the U.S. as Mexico's largest trading
partner.
The National Foreign Investment Commission (Comision Nacional de
Inversiones Extranjeras, CNIE) within the Secretariat of Commerce and Industrial
Development (Secretaria de Comercio y Fomento Industrial, Secofi) regulates
foreign investment and can authorize majority foreign investment in areas in
which foreign capital cannot automatically exceed 49 percent.
CHANGES TO THE FOREIGN INVESTMENT LAW
Recent amendments to Mexico's Foreign Investment Law further liberalize
the regulation of foreign investment in Mexico to conform with recent
privatization initiatives and consolidate relevant provisions previously found
in other laws and regulations. Certain reporting and procedural requirements are
clarified and, in some instances, relaxed. Additionally, in many cases in which
prior government approval is still required, it is deemed to have been granted
if not denied within a specified time frame. The most significant changes to
foreign investments are as follows:
* For the first time, foreign entities may directly acquire land,
provided it is outside Mexico's restricted zones (coastal and border
areas).
* The calculation of foreign investment in a restricted enterprise will
no longer take into account minority foreign participation in the
entity or entities which own or would own such enterprise, provided
such entities are controlled by Mexican nationals.
* Limits on foreign investment in financial group holding companies,
banks, stock brokerage houses and stock market specialists are raised
from 30 percent to 49 percent, although Mexican laws regulating
financial institutions permit U.S. and Canadian financial
institutions to own up to 100 percent of qualified Mexican affiliates
and acquire up to 100 percent of all but Mexico's three largest
financial institutions. The foreign investment limit applicable to
companies formed to manage Mexico's newly-created retirement funds
(Afores) is set at 49 percent.
* The types of basic telecommunications services subject to the 49
percent limit on foreign investment have been clarified by tying the
limitation of services which require the award of a government
operating concession, with the exception of cellular telephone
services, which can exceed such percentage with prior approval from
the CNIE.
- --------------------------------------------------------------------------------
-16-
<PAGE>
MAQUILADORA ANALYSIS
- --------------------------------------------------------------------------------
* With prior governmental approval, entities with majority foreign
investment may now participate in the bidding for the privatization
of the operation of Mexico's airports, telecommunications, satellites
and railroads.
A summary of foreign investment characteristics indicate the U.S.
generates the highest investment, followed by Canada and The Netherlands. To
date, this investment totals $5.646 billion.
DISTRIBUTION OF DIRECT FOREIGN INVESTMENT
BY COUNTRY OF ORIGIN (1996)
-----------------------------------
COUNTRY
-----------------------------------
United States 66.0%
Canada 8.7%
The Netherlands 5.8%
India 5.1%
Germany 2.9%
Japan 1.7%
France 1.2%
Switzerland 1.2%
-----------------------------------
Source: Secofi, General Office of Foreign Investment
ACQUISITION OF MEXICAN COMPANIES
There are no restrictions on the purchase of up to 40 percent, or a lower
percentage allowed for restricted activities, of the capital of companies
controlled by Mexicans at the time of the acquisition. However, the prior
approval of the CNIE is required when the total value of assets of the relevant
Mexican company exceeds an amount periodically established by the CNIE and
which, at the time of publication, was fixed at $85 million pesos ($10.625
million at an exchange rate of 8 pesos to $1).
COMMERCIAL LOANS
Despite incipient recovery, credit is still scarce and expensive in
Mexico. The current interest rate is between 20 and 30 percent, with limited
access to commercial bank financing by many prospective borrowers. It is
important to note that, particularly in the last six months, investment funds,
both domestic and international, have increased their interest in the Mexican
market. There are at least 10 different funds that are actively seeking
opportunities to finance a project or to inject capital in Mexican-based
companies.
TAX MATTERS
Mexican tax law treats foreigners doing business "with" Mexico differently
than it treats those doing business "in" Mexico. Doing business with Mexico
suggests engaging in international trade directly from a foreign home office,
whereas doing business in Mexico suggests the additional step of establishing a
physical presence in Mexico and regularly engaging in commercial activities in
the country.
- --------------------------------------------------------------------------------
-17-
<PAGE>
MAQUILADORA ANALYSIS
- --------------------------------------------------------------------------------
DOING BUSINESS "WITH" MEXICO
A foreign company can do business with Mexico from abroad in order to
minimize the tax and regulatory consequences arising from the establishment of a
presence in the country. When structuring operations in this way, however,
foreigners must be extremely careful to ensure that they do not create a
"permanent establishment" or a "fixed base" in Mexico as the income derived from
such entities is considered taxable.
DOING BUSINESS "IN" MEXICO
Foreigners may opt to do business in Mexico by employing a subordinate
agent, establishing a Mexican company, or acquiring stock in an existing Mexican
company. The use of any of these methods will create a permanent establishment
and has the following tax and regulatory consequences:
CORPORATE TAX -- A corporate tax of 34 percent must be paid annually on
the company's taxable profits. Such profits are calculated by deducting
certain allowed expenses from the total accruable income. Most of the
company's income is considered accruable for income tax purposes at the
time invoices are issued, or when goods or services are delivered to the
buyer if no invoice is issued. Basically, the allowed deductions are all
discounts and/or expenses deemed "strictly indispensable" for the carrying
out of the company's business.
TAX ON ASSETS -- There is a federal tax on corporate assets applied at a
rate of 1.8 percent. This tax is applied on the fixed, financial and
current assets of Mexican companies. This tax must be paid on an annual
basis through monthly provisional payments. The payment of the tax on
assets is not required during the pre-operational period of a company, the
year in which operations commence, the following two years of operation,
or the year in which it is liquidated.
VALUE ADDED TAX -- When the Mexican company transfers or leases goods, or
renders services in Mexico, it will be obligated to pay Value Added Tax
(Impuesto al Valor Agregado, IVA). This tax is 15 percent of the price of
the goods or services and can be transferred to the clients by including
the tax on its billing invoices. This rate is 10 percent within 20
kilometers of the border of Mexico and in all of Baja California and
Quintana Roo. However, if such goods and services are to be exported from
Mexico, the IVA is zero percent.
Reductions in both the Value Added Tax and the Tax on Assets are up for
debate in 1998's fiscal reform.
PAYROLL TAXES -- The company is subject to a local and state payroll tax
at a rate that depends on the location of the working facilities. The
federal government also taxes corporations with social security fees that
amount to a minimum of 8.95 percent of the payroll, to be paid by the
employer for old age, death, child care, retirement and disability.
- --------------------------------------------------------------------------------
-18-
<PAGE>
MAQUILADORA ANALYSIS
- --------------------------------------------------------------------------------
WAREHOUSING
Warehousing in Mexico has experienced important changes in 1997. Control
of most of the warehousing sector is being passed from the government to private
hands, leading to improvements in both infrastructure and services. Still, fewer
and smaller facilities are available in Mexico than in the U.S.
Warehousing costs are usually paid monthly and are charged in terms of
space/area occupied. Also, any merchandise placed in a warehouse should be
insured. Basic insurance policies can be obtained directly through the warehouse
or by contracting a private insurance company for a more comprehensive policy.
- --------------------------------------------------------------------------------
-19-
<PAGE>
MAQUILADORA INDUSTRY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
-20-
<PAGE>
MAQUILADORA INDUSTRY
- --------------------------------------------------------------------------------
The maquiladora industry in the state of Chihuahua continues with its
tendency for growth. However, at the national level, the number of
establishments grew 12.8 percent, while the number in the state grew 8.3 percent
in 1997. Corresponding to employed personnel, it appears that growth at the
national level was 19.4 percent while the state of Chihuahua had 9.3 percent as
of the end of 1997. The last aggregate value increase at the national level was
40.0 percent and at the state level was 36.9 percent. Thus, it can be concluded
that the number of establishments and the relative employment increases are
similar, while proportionately more is being spent on those facilities. Again,
these increases are above those being experienced in the fastest growing U.S.
metropolitan communites.
Currently, the interior states of the country are growing at much greater
rates than those on the frontier (the border between the U.S. and Mexico). The
interior communities have aggressively sought foreign investments and have
become the most attractive of all communities which use intensive manual labor.
The difference is that the maquiladora that currently settles in the northern
frontier utilizes more U.S. technology and warrants the most skilled labor in
the manufacturing process. Thus, businesses that utilize intensive and cheap
manual labor are opting for the states in the center of the republic, such as
Durango, Aguascalientes, Guanajuato, Zacatecas and Yucatan.
The empoyers in the frontier communties provide the greatest increase in
salaries and grants/loans that has skewed the growth in national average
employment wages upward. This implies an above average increase in salaries paid
by the maquiladora. Another consideration is that 1997 reflects three
consecutive years of considerable growth, at some of the highest levels in the
30 years the maquiladora has been Mexico.
We have documented a breakdown of the maquiladora industry adjacent to the
U.S. border for discussion.
PARTICIPATION OF THE MAQUILADORA INDUSTRY
EXPORTATION FOR THE FRONTIER ENTITIES
OCTOBER 1997
<TABLE>
<CAPTION>
===========================================================================================
FRONTIER ENTITIES ESTABLISHMENTS EMPLOYED PERSONNEL AGGREGATE VALUE
===========================================================================================
MILLIONS OF
NUMBER % PEOPLE % DOLLARS %
===========================================================================================
<S> <C> <C> <C> <C> <C> <C>
Chihuahua 413 14.6 249,535 26.3 212 26.8
Nuevo Leon 112 4.0 41,171 4.3 43 5.4
Sonora 232 8.2 83,748 8.8 55 6.9
Coahuila 253 9.0 81,576 8.6 56 7.1
Baja California 937 33.2 210,240 22.2 193 24.4
Tamaulipas 326 11.5 142,258 15.0 118 14.9
Other Entities 550 19.5 140,130 14.8 115 14.5
----- ----- ------- ----- --- -----
NATIONAL TOTAL 2,823 100.0 948,658 100.0 792 100.0
===========================================================================================
</TABLE>
Source: INEGI, Direccion General de Estadistica, Direccion de Estadisticas
Economicas (General Site of Statistics, Site of Economic Statistics).
Note: The information presented corresponds to the month of October, 1997.
- --------------------------------------------------------------------------------
-21-
<PAGE>
MAQUILADORA INDUSTRY
- --------------------------------------------------------------------------------
We have also examined some of the principle characteristics of the
maquiladora market for the last two years.
PRINCIPAL CHARACTERISTICS OF THE MAQUILADORA EXPORT INDUSTRY
STATE OF CHIHUAHUA
JUNE 1996 - JUNE 1997
<TABLE>
<CAPTION>
==========================================================================================================
CONCEPT 1996 1997 VARIATION %
==========================================================================================================
<S> <C> <C> <C>
Number Of Establishments 372 403 8.3
Employed Personnel 215,423 240,345 11.6
Primary Import Material (Millions Of Dollars) 8,199 8,771 7.0
Aggregate Value (Millions Of Dollars) 1,855 2,540 36.9
National Totals (Millions Of Dollars) 99 210 112.1
Salaries, Pay And Grants/Loans (Millions Of Dollars) 1,013 1,353 33.6
Other (Millions Of Dollars) 743 977 31.5
==========================================================================================================
</TABLE>
Source: INEGI, Direccion General de Estadistica, Direccion de
Estadisticas Economicas (General Site of Statistics, Site of
Economic Statistics).
Note: The figures corresponding to June 1997 are estimates made in CIEE
and are subject to change.
As previously indicated, the number of maquiladoras grew 8.3 percent,
while employment grew 11.6 percent. Given the amount of build-to-suit projects
we documented during our market inspection, it is reasonable to concluded that
growth in 1998 will at least equal or exceed 1997 levels. However, it should be
noted that a majority of all maquiladoras under construction or proposed are
preleased. Construction activity for the last two years in the two larges cities
in the state, Chihuahua and Juarez, is summarized below.
CONSTRUCTION LICENSES
CITIES OF CHIHUAHUA AND JUAREZ
(Square Feet)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
RESIDENTIAL COMMERCIAL INDUSTRIAL ENLARGEMENT OTHER TOTAL VARIATION
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CITY OF CHIHUAHUA
1996 1,548,633 446,024 346,655 306,348 149,801 2,797,460 -8.8
1997 2,316,606 520,052 246,630 418,478 87,565 3,589,332 28.3
- ------------------------------------------------------------------------------------------------------------------
CITY OF JUAREZ
1996 (9 months) 1,208,499 460,819 767,403 449,714 73,910 2,960,345 -21.6
1997 (9 months) 2,157,003 380,635 2,234,357 139,202 0 4,911,198 65.9
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
As indicated, in 1997 Chihuahua experienced significant growth in the
construction industry. In the city of Chihuahua, the number of licenses
solicited before the municipal presidency increased 28.3 percent. However, this
was somewhat skewed between residential growth at 50 percent, the commercial
permits at 17 percent, and the enlargements by 37 percent. However, industrial
permits actually decreased 29 percent, primarily due to the lack of vacant land
for expansion rather than the previously noted socio-economic factors regarding
frontier versus interior located communities. Despite this, those maquiladoras
in the frontier communities, like Chihuahua, continue to expand.
- --------------------------------------------------------------------------------
-22-
<PAGE>
MAQUILADORA INDUSTRY
- --------------------------------------------------------------------------------
In the city of Juarez, growth exceeds the city of Chihuahua in total square
foot and percentage increases. As indicated, this community experienced
significant increases in industrial and residential development, while declines
in commercial construction and enlargements were noted. The enhanced industrial
development in this community versus Chihuahua is also due to its larger
established industrial base.
Due to the recent changes in the economy, we felt it important to provide
an overview of the economics of the region. First, we have outlined recent
changes to the consumer price index for the country and the communities of
Juarez, Chihuahua and Parral/Jimenez.
GENERAL CHANGES OF INDEX OF PRICES TO THE CONSUMER
Basis 1994 = 100
<TABLE>
<CAPTION>
====================================================================================================================
PERIOD NATIONAL JUAREZ CHIHUAHUA PARRAL/JIMENEZ
====================================================================================================================
<S> <C> <C> <C> <C>
December 1996 27.69 26.65 26.51 27.02
December 1997 15.73 15.56 15.77 16.05
====================================================================================================================
</TABLE>
Source: Banco de Mexico (Bank of Mexico).
During 1997, the growth of the National Index of Prices to the Consumer
(Indice Nacional de Precios Consumidor) in the large communities of the state of
Chihuahua was generally similar to the national level: 15.73 percent at the
national level; 15.56 percent in the city of Juarez, and 15.77 percent for the
city of Chihuahua. This rate of annual inflation is approximately 11 percentage
points lower than 1996, substantiating the stability in the national economy has
transcended to the local levels. This stability can also be seen by the
importance of the maquiladora industry on trade for the frontier states.
- --------------------------------------------------------------------------------
-23-
<PAGE>
MAQUILADORA INDUSTRY
- --------------------------------------------------------------------------------
COMMERCIAL BALANCE
FRONTIER STATES
January-August 1997 (Millions Of Dollars)
<TABLE>
<CAPTION>
=====================================================================================================================
AGGREGATE VALUE
EXPORTS IMPORTS MAQUILADORADOR COMMERICAL
STATE (+) (-) INDUSTRY BALANCE
=====================================================================================================================
<S> <C> <C> <C> <C>
Chihuahua 213.0 681.2 1,592.9 1,124.7
B.C.N. 292.0 841.4 1,266.0 716.6
Tamaulipas 138.1 548.0 878.8 468.9
Sonora 367.2 445.0 387.9 310.1
Coahuila 216.0 593.5 370.4 -7.1
Nuevo Leon 470.0 2,284.0 301.0 -1,513.0
=====================================================================================================================
</TABLE>
SOURCE: Secretary of Commerce and Industrial Promotion, Delegation Chihuahua,
INEGI, Statistics from the Maquiladora Export Industry.
The participation in the frontier entities in national exports is only a
small allocation. They make up only 2.4 percent of the total exports of the
country, while these states import 8.0 percent of all national imports with
respect to aggregate value. However, they have a significant bearing on their
local economies and the maquiladora industry as a whole; as these frontier
states command 85.5 percent of the $4,797 million dollars generated by the
maquiladorador industry at the national level. The state of Chihuahua has the
greatest commercial balance of any state, while Nuevo Leon and Coahuila present
deficit amounts. Within this state, Juarez is one of the largest communities and
is a young vibrant city poised to take advantage of the North American Free
Agreement (NAFTA) with its proximity to the United States. The young, educated
labor force, coupled with the low wages, provides the competitive edge for the
maquiladora industry in this market.
SUMMARY
While the maquiladora market provides only a small part of the economic
make-up of the country, it provides significant manufacturing employment and
construction dollars to those communities adjacent to the U.S. border.
Maquiladora production managers indicated that fully 60 to 80 percent of all
their manufacturing employees are women, providing employment opportunities to a
segment of the market that previously was not provided jobs. Additionally, the
expanding maquiladora market has provided workers and managers with employment
opportunities at increased wages. As such, we anticipate management and skilled
labor costs to increase significantly in the next one to three years as the
market continues to expand. From an unskilled labor perspective, additional
opportunities will allow employees to relocate to firms with enhanced benefits
and should reduce unemployment levels.
The market expansion should also provide a sense of stability to those
firms that are considering relocating to Mexico but have not made the move.
Labor costs are at some of the lowest levels in the world and, with U.S.
influences, the population is rapidly gaining housing, savings and educational
opportunities previously not available. Coupled with the relatively young
population basis, Mexico, and particularly the frontier states, should continue
to effectively compete on an international basis for new manufacturing
opportunities.
- --------------------------------------------------------------------------------
-24-
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
This section will review the current status of the industrial market in
Mexico and Cuidad Juarez in order to analyze those factors that will influence
the future of the subject property. There were no available municipal
publications on Cuidad Juarez's industrial market. Information was obtained from
Cushman & Wakefield of Mexico/GCI, INEGI and interviews with Finsa, Best Real
Estate, Grupo Puebla and Dynatech.
REAL ESTATE OVERVIEW
Currently, small firms, which create the lion's share of new jobs in most
economies, do not have access to either the bank loan or international markets.
Therefore, most companies are wholly owned and have limited capital for research
and development, the purchase of new technology and for expansion. Further, they
have the inability to leverage their real estate over the long term; therefore,
a large percentage of the operating funds go for real estate.
Larger companies have a competitive advantage in financing their
facilities. They have the option to lease, buy someone else's previously
occupied facility (rarely available), or work with a developer on a
build-to-suit. The latter provides a facility that is specifically catered to
the needs of the manufacturer.
DEVELOPMENT/INVESTMENT
John Deere, Rhone Poulenc, Bimbo, Calsonic and 3M made strong investments
in the industrial sector during 1997 in Mexico but, although export companies
like these grew (maquiladora business grew approximately 70 percent between 1990
and 1996), most of Mexico's domestic industries remained unchanged.
The largest communities in the country, like Mexico City, have a diverse
industry base, with a predominance of auto parts, electronics, pharmaceutical,
textiles and consumer products. In Mexico City, type A industrial space is
normally build-to-suit; therefore, the supply of new speculative industrial
buildings remains very low. As a result of this shortage of space, the few
modern facilities within the city are rapidly acquired when they become
available.
This is also true of every frontier community we inspected and surveyed --
Hermosillo, Juarez, Chihuahua, Matamoros, and Reynosa. Although their economies
are not as diverse as Mexico City, continued market expansion has caused
similarities in industry base and also the same company with multiple locations.
This provides maquiladoras to be strategically located across the southern
border of the U.S. to provide lower transportation costs. It also allows
convenient access to shipping opportunities in both the Atlantic and Pacific
oceans.
OUTLOOK
Of the 3,650 maquiladora programs in mid-1997, 68 percent were at the
northern frontier of Mexico, and 32 percent in the country's interior. In the
automotive sector alone, between 1996 and 2000, production in Mexico is expected
to grow from 1.2 million to 1.85 million vehicles. This industry investment will
average $3 billion a year and provide significant incentive to communities
catering to these companies.
- --------------------------------------------------------------------------------
-25-
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
In contrast to the industrial growth of the northern and interior states,
heavy industry will definitely continue leaving Mexico City to outlying
communities. However, because the Mexico City metropolitan area still comprises
the largest consumer market, most companies will focus on locating suitable
spaces for distribution or service centers -- mainly in the northern submarkets
of the city or in cities close to the metropolitan area.
JUAREZ MARKET
The strength of the Juarez economy has created a sizable need for
industrial space. An advantage that Juarez offers over many other frontier
communities is its diversified and well trained workforce, as well an
established supporting infrastructure. The movement of companies into Juarez or
expanding their existing industrial space has increased the industrial inventory
by 6.36 million square feet from 1995 to 1997. Given current build-to-suit and
speculative projects, future growth should be similar to or exceed these recent
historical levels. Industrial development has become very active in the market
due to the lack of vacant maquiladora space. This is due to the market
consisting of primarily build-to-suit projects (developer constructs a building
for a tenant who buys it or leases it), and the minimal business turnover that
has occurred since maquiladoras where introduced into the community.
In an attempt to meet demand, 2.24 million square feet of new industrial
construction were completed in 1996. Only a few speculative projects were built
during First Quarter 1996, leaving most users through the remainder of the year
with build-to-suits or existing building options. As of May 1998, only 666,137
square feet of speculative space in seven buildings are under construction, and
64,196 square feet of build-to-suit leases were confirmed. In 1997, 874,705
square feet of known lease activity were confirmed in the market. This excludes
the +2 million square feet of build-to-suit activity where the potential tenant
purchased the building. The leasing activity, low vacancy rate, and high
absorption have triggered speculative building around Juarez beginning in the
second half of 1996 when 297,514 square feet were constructed. A list of
speculative building construction is noted on the following page.
Juarez industry has traditionally been oriented towards light
manufacturing (the maquiladora), yet during 1995 and 1996 distribution centers
and high-tech space began to appear. In 1997, the Delphi Division of General
Motors announced the expansion of 200,000 square feet to their existing design
center, a high-tech building in the Omega Industrial Park. During 1996,
suppliers for the big maquiladora plants in Juarez provided increased demand of
industrial space in the 15,000 to 30,000 square feet range which was previously
not available. This market trend of building industrial space less than 50,000
square feet is a new trend precipitated by businesses entering the market at an
initially small scale and then expanding into larger spaces or constructing
additions. This trend is occurring throughout the frontier cities that cater to
the maquiladora market.
The lack of available space with 22' clear heights or greater is another
building trend that has produced demand for new development. The supply has been
initiated by one U.S. developer who joined forces with local landowners in order
to build industrial facilities meeting U.S. standard specs. While these trends
are slowly being met by developers, it is the owners of the industrial parks who
control the supply for build-to-suit product, and product being built
- --------------------------------------------------------------------------------
-26-
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
Juarez speculative building summary
- --------------------------------------------------------------------------------
-27-
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
outside these parks is becoming more limited due to government restrictions and
social concerns.
The Juarez market consists mainly of freestanding industrial facilities
that were constructed specifically for the tenant. Many tenants and building
owners have remained in this market since their initial building occupancy and
have expanded as demand increases. It is rare to have maquiladoras vacant and
typically occurs when businesses require larger buildings for their operations
and relocate. A thorough view of the market indicated an occupancy of 98
percent, which consists of older, more non-functional buildings constructed in
the 1970s and 1980s. The new speculative buildings being added to the market
rarely remain vacant for three months following completion of construction.
The lack of available vacant space has prohibited many potential tenants
from entering the market. A build-to-suit takes nine to 12 months and many
manufacturers are finding alternative U.S., Asian or European locations to meet
immediate demand. The Juarez market did experience a reduction of net absorption
of approximately 25 percent in 1996, as compared to 1995, again a result of the
lack of available industrial space and developers delaying their speculative
buildings. All known speculative buildings built during the first nine months of
1996 were preleased or sold before completion of construction.
During 1996, the first U.S. developers started large scale construction in
Juarez, primarily on a build-to-suit basis. In 1997, two U.S. developers began
investing on speculative industrial buildings, primarily in the Southeast
Submarket.
Real estate financing is beginning to recognize the U.S. standards. New
U.S. lenders have begun to finance in Juarez, while the U.S. border banks and
Mexican banks are very interested to lend money to the industrial market. Title
insurance companies are currently working in Juarez providing the same title
insurance as in the United States. Every day more companies require
environmental studies for properties to be purchased or financed.
Most build-to-suit lease agreements are for five to 10 years, and the
developer will pay off the construction of the facility in approximately seven
years. This reflects an initial yield requirement (rental income as a percent of
total construction cost, including land) of at least 14 percent. Even leases
with the best credit tenants (Fortune 500 companies) warrant lease rates
exceeding 12.75 percent and range to a high of 16.0 percent. Almost all require
corporate business or personal guarantees. Buildings are rarely financed by the
owners and typically constructed under an all cash scenario. However, only the
largest developers in the community can obtain financing, with rates typically
14.0 to 18.0 percent with preleasing and corporate guarantees. However, on
speculative projects, financing rates climb to 18.0 or 22.0 percent.
In 1996, 23 percent of the projects in Juarez were for new companies
coming to town, compared to 11 in 1995. The remaining projects were expansions
or additions of new facilities, replacing undersized or outdated ones, as most
companies feel confident about the Mexican economy and political climate. In
1996, 75 percent of net absorption occurred from lease activities versus only 37
percent in 1995.
- --------------------------------------------------------------------------------
-28-
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
The estimated 1996 vacancy rate of 1.85 percent indicates the high demand
for existing product in Juarez, even though much of the previously built
inventory has functional issues that due to conform to current manufacturing
standards. However, new additions to the market and relocations have pushed 1997
vacancies to 2.07 percent.
Juarez remains one of the most attractive maquiladora markets to invest
in. Blue chip tenants and high-quality construction from reliable companies are
among the reasons why important money lenders, such as GE Capital and Heller
Financial, have committed to financing new projects. Thus, the long-term outlook
is for stability among existing tenants, with market expansion creating
additional occupancy alternatives previously not available. Further, if these
lenders can provide financing at levels below existing capitalization rates,
building costs and lease rates could decline.
According to the Cushman & Wakefield database, the maquiladora industry
employs over 180,000 people in the city of Juarez. The Juarez area consists of
an industrial inventory of approximately 422 maquiladoras encompassing over 38.9
million square feet that are divided into four submarkets -- Northeast,
Northwest, Southeast and Southwest. The submarkets are summarized in the
following chart, with addition discussion to follow. An expanded analysis was
provided of the subject's Southwest Submarket.
- --------------------------------------------------------------------------------
-29-
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
JUAREZ INDUSTRIAL MARKET OVERVIEW
<TABLE>
<CAPTION>
===================================================================================================================
SUBMARKET NORTHEAST SOUTHEAST SOUTHWEST NORTHWEST TOTAL
===================================================================================================================
<S> <C> <C> <C> <C> <C>
ESTIMATED INVENTORY (SF)
1996 10,959,666 6,293,336 3,649,941 14,048,182 34,951,124
1997 11,703,166 8,857,831 3,889,941 14,520,289 38,971,227
- ------------------------------------------------------------------------------------------------------------------
MAQUILADORA FACILITIES
1995 103 52 31 152 338
1996 121 66 37 180 404
1997 124 75 39 184 422
- ------------------------------------------------------------------------------------------------------------------
AVAILABLE SPACE
1995 0 0 0 182,554 182,554
1996 85,262 104,916 0 158,790 348,968
1997 318,951 157,951 111,068 218,985 806,955
- ------------------------------------------------------------------------------------------------------------------
ESTIMATED VACANCY RATE
1995 0.00% 0.00% 0.00% N/A N/A
1996 0.78% 1.67% 0.00% 1.13% 1.85%
1997 2.73% 1.78% 2.86% 1.51% 2.07%
- ------------------------------------------------------------------------------------------------------------------
NET ABSORPTION (SF)
1995 706,459 1,349,329 580,210 1,049,001 3,684,999
1996 993,069 737,456 143,142 813,998 2,687,665
1997 743,500 2,564,495 240,000 472,107 4,020,102
- ------------------------------------------------------------------------------------------------------------------
AVERAGE RENTAL RATE
1995 $4.90 $5.33 $5.10 $4.70 $5.02
1996 $5.09 $5.49 $5.00 $4.94 $5.17
1997 N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------
LEASING ACTIVITY (SF)
1995 N/A N/A N/A N/A N/A
1996 933,589 493,706 53,000 437,538 1,917,833
1997 391,500 1,092,495 115,000 187,107 1,786,102
- ------------------------------------------------------------------------------------------------------------------
UNDER CONSTRUCTION
1995 368,125 997,579 363,000 494,828 2,223,532
1996 0 156,598 0 140,916 297,514
1997 N/A N/A N/A N/A N/A
=================================================================================================================
</TABLE>
Source: Enrique Portillo of Cushman & Wakefield/GCI
It should be noted that not all industrial facilities in the community are
occupied by maquiladora operators. A summary of the industrial market for the
community indicates that the number of facilities increased 24.9 percent in the
last two years but only 4.5 percent in the last year. However, the total square
footage surveyed increased 11.5 percent, indicating that market additions
reflect larger buildings. Available space has also increased in 1997, reflecting
an increase in vacancies. However, the 1997 vacancy and absorption reflect only
a 2.4-month oversupply to reach a hypothetical 100 percent occupancy. As
previously noted, the 666,137 square feet of speculative space under
construction would extend absorption only another two months. Despite increased
vacancy, average rental rates during 1996 represented a 3.0 percent increase
compared to 1995. Current market leasing activity suggests that rental rates
have since stabilized or slightly declined as builders are able to reduce
construction costs and better leverage their financial structure.
In summary, these industrial market characteristics support a strong
industrial market, with statistics equaling some of the best levels experienced
in the highest growth communities in the
- --------------------------------------------------------------------------------
-30-
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
U.S. It is reported that 20 percent of the Fortune 500 companies are
represented in the Juarez market. Given the current economic climate, the Juarez
industrial market should outperform most U.S. metropolitan areas in terms of
construction, leasing activity and net absorption. However, continued market
efficiencies should cause rental rates to stabilize or slightly decline, and
speculative building activity should push vacancies slightly upward.
SOUTHWEST SUBMARKET
The Southwest Submarket is a relatively small industrial area in
comparison to the other older submarkets, and smaller industrial users are most
prevalent. The southwest area has land with existing infrastructure available
within industrial parks. Also included in this submarket is a high-intensity
industrially-zoned area dedicated for heavy and hazardous industries. The area
is attractive for trucking industry because of the easy highway access.
The Southwest Submarket represents 10 percent of the total inventory but
employs only seven percent of the Juarez employees in the maquiladora market.
The number of jobs per square foot of industrial space revealed that this area
is the lowest, with 4.1 people per 1,000 square feet of space.
Leasing activity in the Southwest Submarket totaled 53,000 square feet in
1996, and more than doubled to 115,000 square feet in 1997. However, the
submarket is made up of primarily build-to-suit owner/users. Net absorption
ranged from 143,142 to 580,210 square feet, with an average of 321,117 square
feet over the last three years. Almost 50 percent of the net absorption was from
new maquiladora operators entering the market and constructing facilities, while
over 27 percent was the result of expansions of existing facilities. The reason
for the decline in net absorption is that no large lease transactions or
building construction occurred in this area in 1996 or 1997.
The 1996 average industrial gross rental rate was $5.00 per square foot, a
2.0 percent decrease from year-end 1995. Recent submarket leases indicate market
rental rates have since stabilized.
As of May 1998, no speculative construction is planned for the southwest
submarket. The last speculative construction seen in this area was a 45,000
square foot project that was completed in 1996 and has since been leased. Major
employers based in the area include Zenith/Goldstar (subject property), Philips,
Siemens, Summitomo, Brown Jordan, Salter Labs, Murata, among others.
NORTHEAST SUBMARKET
The northeast market encompasses the area from Paseo Triunfo de la
Republica (or Tecnologico Avenue) continuing through San Lorenzo Avenue, on the
west to Teofilo Borunda Avenue (under construction on the south), and the
International Boundary of the Rio Bravo to the north. The northern boundary
extends to the east and continues to the Zaragoza International Bridge (port of
entry). Industrial buildings exist in the following areas:
Industrial Parks - Bermudez, Fuentes, Omega.
Industrial Areas - Befere, Neptuno, Vicente Guerrero.
- --------------------------------------------------------------------------------
-31-
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
Map of industrial parks, Juarez
- --------------------------------------------------------------------------------
-32-
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
SOUTHEAST SUBMARKET
The southeast market includes properties south of Teofilo Borunda Avenue
continuing to Zaragoza Avenue and the Zaragoza Bridge, and east of Tecnologico
Avenue (or Carr. Panamericana). This section includes Salvaracar and Zaragoza
suburban areas. Industrial buildings exist in the following areas:
Industrial Parks - Intermex, Rio Bravo, Salvarcar.
Industrial Areas - Tapioca, Salvarcar Industrial District, Las Torres.
SOUTHWEST SUBMARKET
The eastern boundary of this area is the Juarez Mountains. As they extend to the
far southwest, the north side is bounded by Ponciano Arriaga Av, and the eastern
boundary is Tecnologico Av. or Carr. Panamericana. Industrial buildings exist in
the following areas:
Industrial Parks - Aeropuerto, Aztecas, Panamericano, Zaragoza.
NORTHWEST SUBMARKET
The northwest market includes properties north of the Ponciano Arriaga Avenue
and the area immediately west of the Tecnologico Avenue (or Paseo Triunfo de la
Republica). The west boundary is the Juarez Mountains, and the Rio Bravo
International Boundary is to the north. Industrial buildings exist in the
following areas:
Industrial Parks - Fernandez, Gema, Gema 2, Juarez, Omega
Industrial Areas - Altavista, Juan Gabriel, R. Rivera Lara
SUBMARKET SUMMARY
The most critical issue affecting an employer is finding available
industrial land close to the work force. The reason for this is reducing
tardiness and employee turn over. This is causing new buildings to be located in
strategic areas. The subject has above average access and visibility on a major
arterial, with proximity to the community's residential base. As a result, the
subject is considered one of the best situated industrial sites in the community
and northern Mexico.
- --------------------------------------------------------------------------------
-33-
<PAGE>
NEIGHBORHOOD ANALYSIS
- --------------------------------------------------------------------------------
The subject property is located on the west side of Carretara Pan
Americana, within the Parque Industrial Aeropuerto (Airport Industrial Park) in
the city limits of Cuidad Juarez, Chihuahua, Mexico. This is west of the Abraham
Gonzalez International Airport, in the southern portion of the community. The
street frontage is the major north-south arterial within the community,
accessing the central business district to the north and provides for a major
U.S. border crossing with El Paso.
The neighborhood boundaries are Ponciano Arriaga to the north, Libramiento
Aeropuerto and the Juarez city limits to the south, the International Airport to
the east and the Juarez city limits to the west. The area is predominately
industrial based, with light manufacturing and warehousing within the
Panamericano Industrial Park to the south and the Aztecas Industrial Parks to
the north of the subject and the Aeropuerto Industrial Park, of which the
subject is a part. Residential development is situated sparingly throughout the
neighborhood, with most residences constructed north of the subject's industrial
park boundaries. Further, retail development is situated along the major
thoroughfares.
The Zenith facility, known as Zenco de Chihuahua, S.A. de C.V., is the
largest industrial facility in Juarez. It also is one of the largest employers
in the community. However, the Aeropuerto Industrial Park in which it is
situated is one of the smaller in the community. Immediately south is the larger
Panamericano Industrial Park, which also houses light manufacturing facilities.
Major employers within the neighborhood and other submarkets are noted on the
following page. The adjacent 32.3 acre industrial site west of the subject is
owned by Zenith and was originally purchased for building expansion. This site
extends to Boulevard Oscar Flores, a major north-south arterial that runs
through the Juarez central business district. The other industrial parks have
few remaining sites available for expansion. All industrial sites within the
subject and adjacent industrial parks have all municipal utilities, including
water, sewer, electric and telephone. Water for sprinkler systems are handled by
onsite water storage tanks, which is supplied on the subject site. Although the
subject is within the airport height and noise zones, flight patterns do not
cause air traffic to go over the subject facility. As such, noise levels are
typical of other industrial facilities.
Adjacent south of the subject property is single tenant industrial
buildings, typical of industrial facilities throughout the community.
Improvement ratios are typically 50 to 60 percent of the land area and parking
is approximately 5.0 spaces per 1,000 square feet for office areas and one space
per 1,000 square feet for industrial space. Buildings have air conditioned
office and manufacturing space, and evaporative cooling in the warehouse.
Carr. Panamericana provides for public transportation at the subject's
street front and is a typical municipal route. Other industrial parks in the
southeast portion of the community require industrial subdivision managers and
individual maquiladora operators to pay extra for public transportation to their
facilities. The location of the subject is convenient to the municipal work
force. One of the major forces driving Zenith in selecting the subject land
parcel was the opportunity to stay close to its employees thus reducing the
commute time. Coupled with the attractiveness of the industrial park in which it
is situated, the subject competes well with newly constructed buildings in the
community.
- --------------------------------------------------------------------------------
-34-
<PAGE>
NEIGHBORHOOD ANALYSIS
- --------------------------------------------------------------------------------
Insert chart of major employers in Juarez
- --------------------------------------------------------------------------------
-35-
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
SITE DESCRIPTION
This analysis will consider both the 44.214 acre building site and the
32.346 acre unimproved site.
Location: The sites are located along the west side of
Carretera Pan Americana, within the Parque
Industrial Aeropuerto, C. P. 32690
Shape: Both sites are irregular
Area:
Building Site: 44.215 acres or 1,926,000 square feet
Excess Land: 32.346 acres or 1,409,000 square feet
Frontage:
Building Site: West side of Carretera Pan Americana and the
north side of Barranca Azul.
Excess Land: North side of Barranca Azul, immediately west
of Barranca Azul.
Topography/Terrain: The sites are generally level and at grade
with the roadway frontages, and a water
retention basin has been improved adjacent
to the intersection of Carretera Pan
Americana and Barranca Azul on the building
site.
Street Improvements: The subject building site has access from Carretera
Pan Americana and Barranca Azul, while the excess
land has only direct street frontage to Barranca
Azul. Both streets are improved with asphalt paving
and concrete curbs. Carretera Pan Americana is a
major six lane, bi-directional arterial and Barranca
Azul is a two lane, bi-directional interior
neighborhood street.
Soil Conditions: We did not receive nor review a soil report. However,
we assume the soil's load-bearing capacity is
sufficient to support the existing structure. We did
not observe any evidence to the contrary during our
physical inspection of the property. The tract's
drainage appears to be adequate.
Utilities: All standard utilities are available to the sites
including water, sewer, electricity, and telephone
service.
Access: The building site is accessed via curb cuts
along the west side of Carretera Pan Americana and
the north side of Barranca Azul. A center turn
lane is provided at the entrance from Carretera
Pan Americana. The vacant site has no improved
curb cuts, but does have frontage to Barranca Azul.
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<PAGE>
PROPERTY DESCRIPTION
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Land Use Restrictions: We were not given a title report to review. We do not
know of any easements, encroachments, or restrictions
that would adversely affect the sites' use. However,
we recommend a title search to determine whether any
adverse conditions exist.
Flood Hazard: Cuidad Juarez receives less than 15 days with
rain and has an annual precipitation of less than 7
inches. Based on our inspection of the sites, there
is minimal probability of flooding. Additionally, an
on-site retention basin has been improved on the
building site.
Hazardous Substances: We noted no evidence of toxic waste during our
inspection of the site, although it was confirmed
that chemicals tanks and storage is being conducted.
However, it is important to note that we are not
experts in this field and therefore recommend the
inspection of the subject by an expert in the field
of toxic waste. An environmental assessment on the
site was not made available during the preparation of
this report. This appraisal is predicated on the
assumption that hazardous substances do not exist,
however if concerns exist, we recommend a site
assessment be conducted.
Comments: Overall, the subject sites are well suited for their
intended use, light industrial development within an
established industrial park. Considering current land
use patterns in the neighborhood, the sites are
typical of the area and offer adequate functional
utility, with above average locational
characteristics.
IMPROVEMENTS DESCRIPTION - ZENITH FACILITY ON THE BUILDING SITE
The subject property consists of one, one-story Class A industrial
structure having a building area of 904,000 square feet. The project was
completed in 1984 on a 44.215 acre site. However, at the time of purchase,
Zenith also purchased the adjacent 32.346 acres, which remains vacant. These two
sites are contiguous, but the 32.346 acres is considered excess land, with no
value enhancement for improvements. This analysis will only consider the
existing building improvements and respective site.
Based on a building area of 904,000 square feet and a building site of
44.215 acres, or 1,926,000 square feet, an improvement ratio of 47 percent is
indicated. The improvements are considered to be in average overall condition at
the time of inspection. The facility provides adequate open paved surface
parking along the eastern property boundary, adjacent to Carretera Pan
Americana. Representatives of Zenith provided the building area calculations,
building sizes and land area dimensions. A review of the limited building plans
provided appeared to indicate the dimensions to be accurate. The project is
currently 100 percent occupied by the owner/occupant. The following table
depicts the area of the building allocated by type of use.
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<PAGE>
PROPERTY DESCRIPTION
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==================================================
SQUARE
USE FEET PERCENTAGE
==================================================
Office 30,000 3.3
Warehouse 336,000 37.2
Manufacturing 378,000 41.8
Cafeteria 12,000 1.3
Total 904,000 100.0
==================================================
The physical inspection coupled with a review of the building plans that
were provided by the client provided the basis for the following improvement
description.
GENERAL DATA
Year Built: 1984
BUILDING DESCRIPTION
Size: 904,000 square feet
CONSTRUCTION DETAIL
Foundation: Reinforced concrete slab
Walls: Masonry block and concrete tilt wall
construction, with painted finish.
Decorative rock fascia has been added
at the front entrance to the offices.
Glass storefront is installed at the
foyer.
Floors: Sealed concrete slab in warehouses, and
manufacturing, commercial grade carpet,
ceramic tile and vinyl in the office
areas.
Roof Structure/Cover: Prefab metal trusses with high rib
metal deck and built up roof cover.
Windows: Aluminum fixed-pane windows of
various sizes
Pedestrian Doors: Hollow metal exterior doors in the
warehouse and manufacturing areas;
metal framed plate glass in main
entrance and hollow core wood doors in
the office
Loading Doors: There are 37 overhead doors with
loading docks in the two warehouse and
one manufacturing areas.
Ceiling Height: 10 feet in the office area and 16 to 26
feet in the warehouse and manufacturing
areas.
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<PAGE>
PROPERTY DESCRIPTION
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MECHANICAL DETAIL
Heating and Cooling: The building has a roof-mounted,
electrical force cool air-conditioning
units for the offices and manufacturing
area and evaporative coolers in the
warehouse area. A portion of the
manufacturing area, approximately 20,000
square foot, is equipped with a clean
room. This area has additional area
scrubbers with a reported 99.75 percent
particle removal rate.
Plumbing Service: The building has separate restroom
facilities for the
warehouse/manufacturing areas and
smaller, private bathrooms in the office.
An electric water heater supp lies hot
water to the facility.
Electrical Service: Electric service is assumed to meet all
local municipality code.
Fire Protection: Fully sprinkler system with a self
contained holding tank installed on-site.
A water well has also on-site and can be
used to replenish the fire sprinkler
system.
Security Protection: Security cameras outside the facility,
fenced lot with two guard gates and
security alarms installed throughout the
building. Full time security personal are
on-site.
INTERIOR DETAIL
Floor Covering: Offices feature ceramic tile, vinyl and
carpet coverings; warehouse and
manufacturing has exposed concrete slab
Interior Walls: Painted and textured gypsum board in
the offices
Ceiling: Nine-foot ceilings with 2' x 4' or 2' x
2' suspended tile in the offices; no
finish in warehouses except for
insulation
Lighting: Suspended fluorescent lights in warehouse
and manufacturing; recessed fluorescent
fixtures in office suites
HAZARDOUS SUBSTANCES: We are not aware of any other potentially
hazardous materials (such as formaldehyde
foam insulation, asbestos insulation,
radon gas emitting materials, or other
potentially hazardous materials) which
may be used in the construction of the
improvements. The improvements are built
of modern materials and typical of what
is currently constructed. However, we are
not qualified to detect such
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<PAGE>
PROPERTY DESCRIPTION
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materials and urge the client to
employ an expert in the field to
determine if such hazardous
materials are present.
AMERICANS WITH DISABILITIES
ACT COMPLIANCE: The subject property is in Mexico
and is not subject to the American
with Disabilities Act (ADA). We
have assumed the improvements are
not under the jurisdiction of
compliance and therefore, no
modifications are required.
SITE IMPROVEMENTS
On-site Parking: The site improvements consist of
concrete curbs and sidewalks,
chemical and water storage tanks,
chain link perimeter fencing with
barb wire, iron gates, two guard
houses, security lighting attached
to the building and on pole
mounts, water well, and security
cameras. The site has asphalt
paved spaces along the eastern
property boundary.
Landscaping: The property has small trees,
shrubs and grass along the front of
the building, at landscaped islands
in the parking lot and at the water
retention basin.
COMMENTS: The subject was completed in 1984
and the improvements are considered
to be in average condition. The
roof cover was reportedly replaced
in 1994 and reportedly has a 15
year guarantee. The normal life
expectancy of a building of this
type is considered to be 45 years.
Because of the average condition
and above average maintenance of
the facility, the effective age is
less than the actual age of 14
years.We have estimated the
effective age at 10 years, and
remaining economic life at 35
years. The quality of the subject
improvements, including the layout
and functional utility, are rated
average.
PERSONAL PROPERTY INCLUDED: No personal property within the
building was included in the
analysis.
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<PAGE>
ZONING
- --------------------------------------------------------------------------------
The subject site is zoned Light Manufacturing, by the state of Cuidad
Juarez. The "Licencia de Uso de Suelo" which is the zoning permit to construct
the subject improvements was issued by the government on upon completion of
construction and reissued annually. The subject improvements appeared to comply
with all the requirements establish by the state of Chihuahua law for urban
development under article 5to. Fracion II y 125 de la Ley 101 de Desarollo
Urbano para el Esatado de Chihuahua. In Mexico, a property could be zoned a
certain classification but if it does not have the license for the certain use
or the "Licencia de Uso de Suelo", it would be in violation and the user could
be forced to cease operations. Municipal officers in Chihuahua indicated that
the property is in compliance. The subject property is zoned light manufacturing
use and is also reportedly in compliance with all zoning requirements.
Additionally, local building contractors indicated that zoning requirements
permit a maximum improvement ratio of 60 percent of the land area.
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<PAGE>
REAL ESTATE ASSESSMENTS AND TAXES
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REAL ESTATE TAXES AND ASSESSMENTS
The subject property was constructed in 1984 and periodically assessed for
tax purposes. However, the subject is a single tenant building and taxes are the
responsibility of the tenant. The tenant, in this case the owner, has paid all
previous real estate taxes. Because of the lack of comparative buildings in the
city of Cuidad Juarez and the state of Chihuahua, and that under this analysis
all real estate taxes would be the responsibility of the tenant (does not affect
the income to the owner), we have not attempted to estimate the reasonableness
of the subject's real estate tax. Further, the local taxing and assessment
office could not provide us with an estimate of the subject's real estate taxes.
Real Estate taxes in Mexico are very low compared to the United States. It
is unlikely that the subject would be assessed and taxed based on the estimation
of market value concluded within this report.
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<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
HIGHEST AND BEST USE OF SITE
According to the Dictionary of Real Estate Appraisal, Third Edition (1993),
a publication of the Appraisal Institute, The highest and best use of the site
as though vacant is defined as:
Among all reasonable, alternative uses, the use that yields the highest
present land value, after payments are made for labor, capital, and
coordination. The use of a property based on the assumption that the parcel
of land is vacant or can be made vacant by demolishing any improvements.
We evaluated the site's highest and best use both as if vacant and as
currently improved. The highest and best use must meet four criteria. The use
must be:
(1) Legally permissible;
(2) Physically possible;
(3) Financially feasible; and
(4) Maximally productive.
AS IF VACANT
LEGALLY PERMISSIBLE
The first test concerns permitted uses. In the case of the subject, we are
analyzing two building sites, one 44.215 acre site improved with an industrial
building and one vacant 32.346 acre site adjacent west of the building site.
According to our understanding of the zoning ordinance noted earlier, the sites
may be improved with structures that accommodate a variety of light
manufacturing, office and accessory uses. As previously reported, the subject
sites appear to be a legal and conforming use.
We would note there are no intended changes in land use regulations for the
sites or the immediate area of the neighborhood. Therefore, if vacant, the
subject sites could be improved with a similar use as currently exists on the
subject building site or adjacent single tenant industrial improvements within
the Aeropuerto or Panamericano industrial parks. Therefore, we view zoning as
imposing no measurable valuation constraints and buildings as large as 60
percent of the site area could be improved. Additionally, there are no known
deed restrictions that would prohibit development.
PHYSICALLY POSSIBLE
The second test is what is physically possible. As discussed in the
Property Description, the site's size, soil, topography, etc., does not
physically limit each sites use. Their size is large enough to accommodate most
permitted uses under current zoning. The sites are fully improved, provided with
all utilities, have level topography and above average accessibility. Thus,
there are no physical barriers that would restrict their development.
FINANCIALLY FEASIBLE
Based on our analysis, the Cuidad Juarez real estate market has shown
stable to slightly increasing vacancies, stable rental rates and substantial
growth in new supply. Because of
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<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
steady growth of the local economy after the economic crisis of 1994, an
increased demand for space, coupled with a majority of increases in inventory
were build-to-suit projects, large scale construction has occurred in the market
and construction costs have climbed steadily downward. This is also due to
increased market competition.
The subject sites are situated in one of the smallest submarkets in the
community, however their above average accessibility, street visibility and
location in a desirable industrial submarket provide them with above average
accessibility.
The feasibility of a new project depends on the desire of a company to
locate in the city. The industrial market has been driven by built-to-suit
projects and little speculative space has been constructed. Based on year-end
1997 vacancy and 1997 absorption levels, a 5.6 months supply within the
submarket and a 2.4 months oversupply in all of Juarez are indicated to reach a
hypothetical 100 percent occupancy. The submarket rental rates at $5.00 by year
end 1997, were 3.4 percent below the Juarez average of $5.17, however, when
considering typical owner expenses and turnkey build-to-suit costs of $26 to $32
per square foot, including land, the first year rate of return ranges from 14.7
to 18.1 percent, supporting feasibility. However, the financial feasibility of
any project will depend on the continued desire of a firm to move to Cuidad
Juarez, and indications are that future demand will at least be similar to
historical levels.
Cuidad Juarez has a feasibility based on its established reputation as
being one of the largest maquiladora markets, its skilled employment and
population stability that many border towns do not offer international
companies. New companies entering this market are finding out that a relocation
from the U.S. to Cuidad Juarez, increases productivity at some of the lowest
labor costs in the world. The result of operations in facilities that could be
constructed on the subject site, could provide labor cost savings to cover the
cost of a building in one to three years.
MAXIMALLY PRODUCTIVE
In our opinion, the improvement of the subject sites with light industrial
uses would be physically possible and legally permissible, and financially
feasible, even under a speculative construction basis. However, yield rates
would be increased if an owner occupant was predetermined. However, many
potential manufacturers cannot meet building demands from existing inventory in
Cuidad Juarez, or other northern Mexico communities oriented toward large
industrial occupancies and have been unwilling to wait for a lengthy build-to-
suit transaction. Thus, the maximally productive use of the site would be for
the development of light industrial space oriented towards single tenant
occupancy.
CONCLUSION - AS IF VACANT
The highest and best use of the subject sites, as if vacant, is believed
to be for light industrial development. The sites benefit from a location with
proximity to a young labor force, the international airport, and major
arterials. The metropolitan area has shown continued stability in attracting
maquiladora companies to the city. In addition, a build-to-suit development is
always feasible, as the cost and profit requirements of the developer are being
met by market rent levels and construction costs.
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<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
AS IMPROVED - EXISTING INDUSTRIAL FACILITY
LEGALLY PERMISSIBLE
As previously stated the subject's zoning permits light industrial uses. It
appears the improved components of the subject site are a legal and conforming
use, thereby satisfying the legal permissibility criterion.
PHYSICALLY POSSIBLE
As previously stated in the Property Description section of this report,
the overall design, layout and condition of the improvements are adequate and
functional. Therefore, in view of the subject's zoning and physical
characteristics, the existing development is considered to satisfy the
physically possible criterion of highest and best use as improved.
FINANCIALLY FEASIBLE
Since the subject was constructed as an owner occupied facility, it has
incurred no vacancy since its construction. General real estate operating
expenses are reported to be typical of larger industrial facilities in the
region. In addition, the space is sufficiently functional to allow an occupant,
with potential modification to the interior, to also generate sufficient income
to exceed expenses. Therefore, the continued use of the subject as a single
tenant facility is viable.
MAXIMALLY PRODUCTIVE
The subject improvements have been concluded as being physically
supportable, legally permissible and financially feasible. Demolition and/or
significant renovation are not considered to be financially feasible
alternatives. Therefore, as no other utilization of the improvements would
result in a higher value, it has been determined the maximally productive use is
as improved.
CONCLUSION
Based on our analysis, we believe the current use of the site, as improved,
with a single- occupant (preferably an owner) industrial building consisting of
a combination of office and manufacturing/warehouse space is a proper use of the
site within the definition of highest and best use.
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<PAGE>
VALUATION METHODOLOGY
- -------------------------------------------------------------------------------
Appraisers have three approaches available to them in valuing improved
property: the Cost Approach, the Sales Comparison Approach and the Income
Approach. In most instances, the real property interest being appraised (e.g.,
fee simple, leased fee or leasehold) will dictate the validity of a particular
approach.
The subject property is located in the city of Cuidad Juarez, state of
Chihuahua, Mexico. The subject manufacturing facility was constructed for the
owner/tenant in 1984. Furthermore, the subject property is owned by a U.S.
corporation that also has facilities in the U.S., as are most major maquiladora
facilities in Cuidad Juarez. Previously, most projects were built by the
specific company, with the use of a local building contractor, and occupied by
the owner. However, in the last few years, the demand in the rental market has
increased and lending institutions are just now starting to provide financial
leverage to building investors. Based on these facts, all three approaches to
estimate value, Cost Approach, Sales Comparison Approach and Income Approach
will be used in our analysis.
A detailed Cost Approach was performed, although the older building age
makes estimating depreciation somewhat subjective. Improved sales of similar
facilities to perform a Sales Comparison Approach were also found in Cuidad
Juarez and additional research uncovered sales throughout the Frontier
communities of northern Mexico that could have also be used for comparisons. The
recently negotiated lease activity and properties available for lease, including
speculative facilities recently completed or under construction were found in
abundance within the community of Cuidad Juarez. Thus, only local market rental
comparisons were relied on in estimating market rent and deriving a value via
the Income Approach.
The appraisal process is concluded by a review and re-examinations of each
of the approaches to value that have been employed. Consideration is given to
the type and reliability of data used, and the applicability of each approach.
Finally, the approaches are reconciled and a final value conclusion is
estimated.
The reconciled market value of the fee simple interest has then been re-
examined in order to estimate if any deductions need to be undertaken to
estimate a liquidation value. At the owners request, a liquidation considers a
six month sale period.
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<PAGE>
COST APPROACH
- -------------------------------------------------------------------------------
METHODOLOGY
This approach to value consists of an analysis of the physical value of the
property. The principle of substitution, which forms the underlying rationale of
this approach, holds that no prudent person will pay more for a property than
the amount with which he can obtain, by purchase of a site and construction of a
building, without undue delay, a property of equal desirability and utility.
In the Cost Approach, the following ten steps are typically employed to
reach an estimate of value:
(1) Estimate the value of the land as though vacant and available to be
developed to its highest and best use;
(2) Estimate the replacement cost of the primary structure(s) as of the
effective appraisal date. The estimate includes both direct (hard)
costs and indirect (soft) costs;
(3) Estimate other costs (indirect costs) incurred after construction to
bring the new, vacant primary structure(s) up to market
conditions and occupancy levels;
(4) Estimate an appropriate entrepreneurial profit from an analysis of
the market;
(5) Add estimated replacement or reproduction cost, indirect costs, and
the entrepreneurial profit, often expressed as a percentage of total
direct and indirect costs, to arrive at the total replacement or
reproduction cost of the primary structure(s);
(6) Estimate the amount of accrued depreciation in the structure, which
is divided into three major categories; physical deterioration,
functional obsolescence, and external obsolescence;
(7) Deduct the estimated accrued depreciation from the total reproduction
or replacement cost of the primary structure(s) to derive an estimate
of the depreciated replacement cost;
(8) Estimate replacement costs and depreciation for any accessory
buildings and site improvements, and then deduct the estimated
depreciation from the replacement costs of these improvements. Site
improvements and minor buildings are often appraised at their net
value, i.e., directly on a depreciated cost basis;
(9) Add the depreciated replacement costs of the primary structure(s),
the accessory improvements, and the site improvements to obtain the
estimated total depreciated replacement cost of all the improvements;
and
(10) Add the site value to the total depreciated replacement cost of all
the improvements to arrive at the indicated value of the fee simple
interest in the property.
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<PAGE>
COST APPROACH
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LAND VALUATION
Depending on the specific appraisal assignment and/or the value being
sought, any of the following methods may be used to value land that is vacant or
considered to be unimproved or vacant.
The first method is the Sales Comparison Approach, which is the process of
analyzing sales of reasonably similar, recently sold sites in order to derive an
indication of the most reasonable and probable market value of the land being
appraised.
The second method is the Land Residual Approach, which is a valuation
technique based upon the premise that income can be divided between land and
improvements, and that the residual income to the land can then be capitalized
into a value.
A third procedure, the Subdivision Development Method, may sometimes be
used to estimate the value of vacant, usually undivided land, through a process
of analyzing the cost to development (including profit) and interest carry
relative to the anticipated gross income from the retail sales of individual
lots or tracts.
The fourth and fifth methods, the Allocation and Extraction methods, which
are two techniques that permit the distribution of the total value or sales
price of a property between land and building.
The last procedure is the Ground Rent Capitalization method, where ground
rents can be capitalized at an appropriate rate to indicate the market value of
a site.
Under the right circumstances, any of the preceding methods may be useful
in forming the basis of a valid estimate of land value. However, given the
availability of sales data, the Sales Comparison Approach is considered to be
the best approach toward valuing the subject site. The most widely used and most
market-oriented unit of comparison for properties such as the subject is the
sales price per square foot. All of the comparable sales were compared on this
basis and adjustments were made to the various comparables. On the following
page is a summary of the sales and listings we found most comparable to the
subject. These are a culmination of reviewing all known industrial subdivision
activity in the community in the last three years. All are situated within the
city limits of Cuidad Juarez.
As noted earlier, the subject sites are zoned for industrial development
under the jurisdiction of Cuidad Juarez. The two contiguous sites are similar in
location, access, visibility, development potential and differ only slightly in
size. This analysis will consider both the subject sites, a provide individual
values at the conclusion of this analysis.
According to our highest and best use analysis, we have concluded single-
tenant industrial use would be the most likely development for the subject
sites. Accordingly, a search was conducted for comparable land sales deemed to
be conducive to similar development.
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<PAGE>
COST APPROACH
- -------------------------------------------------------------------------------
COMPARABLE LAND SALES
FROM END OF REPORT
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<PAGE>
COST APPROACH
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The comparables analyzed include six of the largest land sales zoned for
industrial development that have occurred in Juarez in the last 36 months. The
preceding table depicts a summary of the land comparables.
Note that certain adjustments to the sales will be made for comparison
purposes, but a degree of subjectivity is involved. We were unable to support
the magnitude of the adjustments by paired sales analysis, but the adjustments
do reflect our thought processes in comparing one transaction with another.
PROPERTY RIGHTS CONVEYED
All of the comparable sales involved vacant parcels of land unencumbered by
any leases. Therefore, all of the sales set forth herein represent the transfer
of the fee simple estate. Consequently, no adjustments are warranted for
differences in property rights conveyed.
SELLER FINANCING/CASH EQUIVALENCY
The sales were purchased on an all cash, or cash equivalent basis. Since we
are valuing the subject site based on a cash equivalent sale, no adjustment is
necessary.
CONDITIONS OF SALE
Sometimes sales involve certain elements, which motivate the buyer or
seller to pay or accept more or less than the market value of the property. When
such influences differ from typical market conditions, adjustments are required.
All of the comparables were subject to normal (or typical) conditions of sale
and required no adjustment.
MARKET CONDITIONS
An adjustment for market conditions, often referred to as a time
adjustment, reflects a change in the market from the sale date of the comparable
to the valuation date of the subject property. An analysis of real estate trends
indicates that the market for Cuidad Juarez has become significantly stronger
since the December 1994 devaluation of the Mexican peso.
Since of mid-1995 oldest sale comparable, rental rates on improved product
has increased less than 3.0 percent annually, well below the rate of inflation.
However, net absorption has increased significantly, but the increased market
activity has caused vacancies to increase in light of initial speculative
building projects being constructed. But construction costs have declined due to
the competitiveness of the market. It is difficult to measure these factors
relative to changes in land value over the last 36 months.
A review of 14 land sales that have occurred since 1995, indicated an
average industrial land price of $3.82 per square foot in 1995 for three sales,
$4.25 in 1996 for two sales and $2.74 per square foot in 1997 for nine sales. As
indicated, activity increased in 1997, but the average price per square foot
fell. However, this occurred primarily due to new activity being at the
peripheral of urban development, within the Southeast Submarket. Thus this
relates more to locational variations rather than a decline in land pricing.
Therefore, an adjustment for changes in market conditions could not be
supported.
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<PAGE>
COST APPROACH
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LOCATION
An analysis of location involves factors such as proximity to a labor
force, major thoroughfares, surrounding influences, and area amenities. The
proximity to a labor force is critical in a country like Mexico that does not
have a good public transportation system and few industrial employees have
automobiles.
Because of the subject's more urban location and built-out industrial
neighborhood, no land sale could be confirmed within the Southwest A. In
fact, all but one of the last 21 land sales that have occurred since 1994 in
Juarez were situated in the Southeast Submarket. This is primarily due to the
lack of vacant industrial sites in the other submarkets. All of the comparables
considered in this analysis occurred in the Southeast Submarket, considered
somewhat more peripheral in location and a greater distance to employment base,
we have applied an upward adjustment to all of the comparables.
ACCESS/VISIBILITY
For most industrial properties, easy access, visibility and exposure to a
major arterial are helpful but are not paramount for developmental success.
However, properties may differ in terms of frontage, access to a heavily
traveled arterial or highway access. Values for vacant industrial land are
influenced by access to highways. It is our opinion that no adjustments to the
comparables are warranted.
ZONING
Adjustments for zoning can be related to several issues, including
density, site coverage (floor area ratio), other restrictions, such as open
space requirements, etc. The main focus of adjustment under the zoning category
would be for use restrictions. As all of the comparable sales are industrially
zoned and would allow a similar industrial development as what exists on the
subject site, no adjustment is warranted.
UTILITY
The analysis of site utility considers such physical characteristics as
shape, depth, frontage, plottage, corner influence, topography, zoning, the
availability of utility services, and encumbrances, i.e. the overall usability
of the land. The shape of a property has the potential to restrict the overall
utility. The lack or presence of easements and/or restrictions must also be
considered in the comparison process.
As described previously, the subject site is rectangular in shape but has
a level topography that does not affect the costs of development. All the sales
have level topography, which does not increase the costs of development relative
to the subject. None of the comparables have any adverse physical factors, such
as flood plain, easements, encroachments, or obvious environmental problems,
etc., that influenced their respective purchase prices. Like the subject, each
of the comparables offer adequate shape, depth and the availability of utility
services. As a result, no adjustments were applied.
DENSITY/SIZE
The subject encompasses a 44,215 acre building site and 32.346 acres of
excess land; whereas, the comparables range in size from 4.13 to 49.36 acres.
Generally, the rule of
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<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
quantity discount dictates that the larger the size, the smaller the price per
unit, all other factors being equal. However, to a certain degree, a larger site
will allow greater site flexibility in terms of design and layout and may result
in lower development costs because of the economies of scale. The land
comparables did not support the need for an adjustment due to variations in
size. The following table illustrates the adjustments made to the land
comparables.
<TABLE>
<CAPTION>
=====================================================================================================================
LAND COMPARABLES 1 2 3 4 5 6
=====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Unadjusted Sale Price $3,357,120 $630,000 $5,375,000 $4,390,848 $1,420,000 $3,466,500
Property Rights Conveyed 0% 0% 0% 0% 0% 0%
Financing Terms 0% 0% 0% 0% 0% 0%
Condition of Sales 0% 0% 0% 0% 0% 0%
Market Conditions 0% 0% 0% 0% 0% 0%
-- -- -- -- -- --
Total Adjustments 0% 0% 0% 0% 0% 0%
-- -- -- -- -- --
Adjusted Sale Price $3,357,120 $630,000 $5,375,000 $4,390,848 $1,420,000 $3,466,500
Adjusted Price/ Sq. Ft. $3.25 $3.50 $2.50 $3.60 $3.50 $3.46
Locational & Physical Adjustments
Location +10% +10% +40% +5% +10% +10%
Access/Visibility 0% 0% 0% 0% 0% 0%
Zoning 0% 0% 0% 0% 0% 0%
Utility 0% 0% 0% 0% 0% 0%
Density/size 0% 0% 0% 0% 0% 0%
-- -- -- -- -- --
Total Adjustments +10% +10% +40% +5% +10% +10%
---- ---- ---- --- ---- ----
FINAL ADJUSTED PRICE SQ. FT. $3.58 $3.85 $3.50 $3.78 $3.85 $3.81
- ---------------------------------------------------------------------------------------------------------------------
AVERAGE PRICE PER SQ. FT. $3.73
=====================================================================================================================
</TABLE>
The comparable properties range from cash equivalent prices of $2.50 to
$3.60 per square foot before the adjustment process. The indicated value of the
subject property after making the necessary adjustments, results in a value
ranging from $3.50 to $3.85 per foot, with an average of $3.73 per square foot.
Sale L-4 is most similar to the subject and produced an adjusted square foot
value of $3.78, very similar to the adjusted price average. Further, it is well
bracketed by the other comparables.
We have estimated the subject's market value of $3.75 per square foot for
both subject sites. This is only slightly above the average adjusted square foot
price and considers most weight was given to the adjusted sale price of Sale
L-4. Based upon the subject's highest and best use, it is our opinion the
aggregate value of the subject sites are calculated as follows:
BUILDING SITE - 44.215 ACRES
1,926,000 Square Feet x $3.75/Square Feet = $7,222,500
Rounded $7,220,000
EXCESS LAND - 32.346 ACRES
1,409,000 Square Feet x $3.75/Square Feet = $5,283,750
Rounded $5,280,000
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<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
The excess land value will also be added to the value conclusions within
the Sales Comparison and Income approaches.
COST OF IMPROVEMENTS
The subject improvements were evaluated in terms of type of construction,
design, and building materials to arrive at an estimate of replacement cost. The
cost estimate is inclusive of indirect costs such as architectural and
engineering fees, legal fees, inspection fees and closing costs, administrative
overhead, the contractor's overhead and profit, as well as the developer's
entrepreneurial profit. All direct costs for the base structure and tenant
improvements, and the following indirect costs:
1. Plans, specifications, site improvements, and building permits,
including working engineers' and architects' fees;
2. Normal fees and interest on funds during the construction period;
3. Sales taxes on materials; and
4. Contractor's overhead and profit that includes workmen's
compensation, fire and liability insurance, unemployment insurance,
etc.
Our estimate of replacement cost new for the subject improvements is based
on information provided by local developers, general contractors and internal
information obtained by Cushman & Wakefield/GCI on recently constructed
industrial projects. The interviews with the developers and general contractors
included an itemized discussion of the applicable costs associated with
developing the respective project. Additional consideration for soft costs not
considered in the budget included administrative and legal.
Because of the high cost of funds associated with lending institutions in
Mexico, that few developer's have access to construction financing, that U.S.
financing in Mexico is well below their internal lending institutional levels
and that many developers build with cash, construction interest costs were not
considered in the analysis.
Because of similarities in tenants, builders and construction material
costs throughout the Frontier communities, recently constructed facilities from
the city of Chihuahua, also in the state of Chihuahua, and Hermosillo, in the
state of Sonora, was considered. A summary of these recent construction projects
are summarized:
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COST APPROACH
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<TABLE>
<CAPTION>
=========================== ================== ========================== =============== =========== =============
BUILDING BUILDING SIZE/ COST/
LOCATION TENANT/BUILDER DESCRIPTION COST SQ. FT. SQ. FT.
=========================== ================== ========================== =============== =========== =============
<S> <C> <C> <C> <C> <C>
Slavarcar Corridor Nationwide 10% office, 30' clear, $1,250,000 50,000 $25.00
Juarez, Chihuahua Processing AC/Evap
Bermudas Ind. Park N/A 10% office, 30' clear, $2,300,000 100,000 $23.00
Juarez, Chihuahua AC/Evap
Sin Tierra Intermex 10% office, 30' clear, $1,150,000 50,000 $23.00
Chihuahua, Chihuahua AC/Evap
C.U.M. McCulloch 15% office, 22' clear, $6,396,936 254,960 $25.09
Hermosillo, Sonora AC/Evap, Mezzanine
Las Americas Ind. Park Genesis Building Shell, no slab $1,000,000 50,000 $20.00
Chihuahua, Chihuahua
Las Americas Ind. Park SOFI Building Shell $1,200,000 100,000 $12.00
Chihuahua, Chihuahua
Complejo De Industrial John Deere 28% office, 22' clear, $5,600,000 106,993 $52.34
Chihuahua, Chihuahua AC/Evap
=========================== ================== ========================== =============== =========== =============
</TABLE>
The cost comparables suggest a direct building cost range of $23.00 to
$25.09 per square foot for an industrial building with 10 to 15 percent office
finish, 22 to 30 foot clear height, and AC/Evap throughout the building. A
building shell, which excludes any office allocations or measurable partitions,
ranges from $12.00 to $20.00 per square foot. Industrial building construction
with extensive office allocation and upscale manufacturing finish amounts to
$52.34 per square foot.
The subject is equipped with an office/cafeteria finish of approximately
five percent, 16 to 26 foot truss heights and standard manufacturing interior
finish. The subject does have approximately 20,000 square feet of the
manufacturing converted to a clean room, providing for air scrubbers in the HVAC
system. This would increase a comparative cost only slightly.
Given the subject's physical characteristics, a cost within the $23.00 to
$25.09 per square foot cost for typical industrial buildings with 10 to 15
percent office finish, 22 to 30 foot clear height, and AC/Evap is appropriate
for the subject. Given its comparatively large size, and reduced interior
finish, we have allocated a replacement cost of $23.00 per square foot, or
$20,792,000 when applied to the 904,000 square foot gross building area.
DEVELOPER'S PROFIT
Developer's profit is difficult to measure in the Frontier communities of
Mexico, due to many developer's owning the industrial park (land),
build-to-suits have an additional profit percentage on either sales or leases,
and developer's are typically the intended tenant of the facility. Only until
the last two years were speculative buildings being constructed where
developer's profit could be accurately measured, however, few developer's have
access to the necessary capital to conduct this on a large scale. Currently,
Security Capital is one of the only developer's conducting build-to-suits
throughout the country.
Based on recently constructed projects, developer's profit is ranging from
12 to 20 percent of total project costs. In cases where profit falls around 12
percent, the developer also has equity in the land that increases their return.
However, the market has recently become more
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<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
competitive, requiring slight reductions in developer's profits to the range of
12 to 16 percent. Only those developers with construction financing below 12
percent or provide build-to-suit buildings that are subsequently leased at rates
above $5.25 per square foot, can their yields increase above 18 percent.
The project developer should anticipate a 12 percent profit on the total
building cost, excluding land. This is at the lower end of the range, due to the
comparatively large building size. The inclusion of a 12 percent developer's
profit reflects the entrepreneurial profit/incentive to construct the project
and is inherent in supporting the development feasibility for income producing
properties.
ESTIMATE OF ACCRUED DEPRECIATION
Accrued depreciation is the difference between the cost new of
improvements and the current value of those improvements. Depreciation includes
value losses in three basic categories: (1) physical deterioration, (2)
functional obsolescence, and (3) external obsolescence.
The subject improvements are estimated to have an overall economic life
expectancy of approximately 45 years. Based on our observations, the effective
age of the improvements is 10 years. Therefore, the remaining economic life of
the improvements is 35 years. The use of the economic age-life method of
estimating deterioration projects a deduction of 22.2 percent (10 years/45
years).
Functional or external depreciation was not considered due to the nature
of the building improvements and their modern design.
SUMMARY OF THE COST APPROACH
Total Cost Improvement $20,792,000
Plus: Developer's Profit +2,495,040
Less: Accrued Depreciation (Cost only) -4,615,824
----------
Depreciated Value of the Improvements $18,671,216
Add: Land Value
Building Site 7,220,000
Excess Land 5,280,000
----------
Total Property Value $31,171,216
Rounded to: $31,170,000
This value estimate equates to a square foot value of $34.48 and $28.64 if
excess land is excluded.
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<PAGE>
SALES COMPARISON APPROACH
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METHODOLOGY
In the Sales Comparison Approach, we estimated value by comparing this
property with similar, recently sold properties in the Frontier communities of
northern Mexico. Inherent in this approach is the principle of substitution,
which holds that when a property is replaceable in the market, its value tends
to be set at the cost of acquiring an equally desirable substitute property,
assuming that no costly delay is encountered in making the substitution.
By analyzing sales that qualify as arm's-length transactions between
willing and knowledgeable buyers and sellers, we can identify value and price
trends. The basic steps involved in the application of this approach are as
follows:
(1) Researching recent, relevant property sales and current offerings
throughout the competitive area;
(2) Selecting and analyzing those properties considered most similar to
the subject, considering changes in economic conditions that may have
occurred between the sale date and the date of value, and other
physical, functional or locational factors;
(3) Identifying the sales that include favorable financing and calculate
the cash equivalent price;
(4) Reducing the sale prices to common units of comparison, such as price
per square foot of building area (in this case gross leasable area);
(5) Making appropriate adjustments between the comparable properties and
the property appraised; and
(6) Interpreting the adjusted sales data and draw a logical value
conclusion.
The most widely used and market-oriented unit of comparison for properties
such as the subject is the sales price per square foot. All comparable sales
were analyzed on this basis. We present on the following page a summary of the
improved properties we compared with the subject property.
ANALYSIS OF SALES
Our market investigations began with an investigation of improved sales
that had occurred in the Cuidad Juarez area over the last several years.
However, due to low vacancy resulting from minimal tenant turnover, that most
build to suit projects have the original tenant still occupying the property and
that all speculative buildings being constructed are for lease, few sales have
occurred within the immediate community of Juarez. The building sales
investigation was expanded to include a search of industrial sales in northern
Mexico communities that also offer similar typed industrial projects, primarily
Chihuahua (within the state of Chihuahua), Matamoros, and Reynosa. The criterion
we used was improved sales of modern manufacturing facilities that are
appropriate for maquiladora operations.
- --------------------------------------------------------------------------------
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<PAGE>
SALES COMPARISON APPROACH
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- --------------------------------------------------------------------------------
-57-
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
Our search included interviews with the following brokerage firms; Enrique
Portillo with Cushman & Wakefield/GCI, CB Commercial and Binswanger. We also
interviewed the managers of the major industrial parks within the respective
communities, the maquiladora managers of most of the property sales and
industrial developers with Security Capital and Finsa.
This sales search uncovered nine sales and two listings within the
respective communities that could be used for comparison. These sales are of
typical maquiladora industrial facilities which ranged in size from 25,390 to
229,327 square feet and in effective age from new to 17 years. All, but Sale 10,
are designed for single tenant occupancy.
Two of the comparables were actually under construction at the time of
inspection and represent build-to-suit transactions, as do two other
comparables. Because of the lack of improved inventory available for sale or
lease, maquiladora and typical industrial users typically employ a developer to
construct a facility, which they will buy upon completion. This provides the
developer with a sure sale and provides the buyer with a building designed for
their specific manufacturing use. Many buyers have had to default to this
process due to the absence of available buildings, the lack of market knowledge,
real estate surveys and individuals knowledgeable of all segments of the market.
With respect to the overall analysis, it appears the variance in sale
prices is primarily associated with the quality of the building, if the
build-to-suit design created added building costs and if the building is vacant.
A vacant building within these markets reflects a somewhat distressed sale that
the market discounts substantially. However, it is important to address each
property in terms of the conventional sequence of adjustments relative to the
subject. The following analysis primarily concentrates on differences meriting
adjustment.
PROPERTY RIGHTS CONVEYED
All but Sale 10 are single tenant facilities that were vacant at the time
of sale or purchased as an owner occupant and sold in fee simple. The fee simple
interest of the subject is also under consideration. Sale 10 was a two tenant
facility with contract lease rates at market levels. A market rent equivalency
adjustment is not appropriate and no adjustment is warranted for property rights
conveyed.
SELLER FINANCING/CASH EQUIVALENCY
According to our conversations with parties familiar with the
transactions, the financing for the sales were cash to the seller. No adjustment
is warranted for financing.
CONDITIONS OF SALE
We identified no special motivational conditions concerning the comparable
sales. Therefore, in our opinion, no adjustments are warranted for special
motivational conditions.
TIME (MARKET CONDITIONS)
Changes in market conditions may be caused by fluctuations in supply and
demand, inflation, deflation or other factors. Market conditions generally
change over time and,
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<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
therefore, changes in market conditions from specific past sales should be
considered when making a comparative analysis of the property at the valuation
date.
Only sales that occurred after the devaluation of the peso in December
1994 were considered in this analysis. The sales reflect transactions occurring
from January 1995 to two projects currently available. Although demand continues
to increase in all of the communities in which the sales are situated,
adjustments for changes in market conditions cannot be substantiated.
OTHER
The additional adjustments needed for the comparables are described for
each property, with most involving location, condition, age/quality issues or
economic characteristics. All sales will be analyzed after the adjustment for
excess land, if appropriate. The chart at the end of this analysis will then
summarize the comparisons.
Sales 1, 2 and 3 are situated in the community of Chihuahua, also within
the state of Chihuahua. Although considered a Frontier community, it is closer
to the interior of the country than any communities where sales were included.
The result is a lower labor cost, lower employee turnover and slightly lower
land values. Two of the Sales, 1 and 3, produced the lowest square foot prices
of the comparables. However, Sale 2, a build-to-suit produced the highest square
foot price of the comparables. But this is due to the enhanced physical
characteristics of the facility, rather than a superior location. As a result of
the previous discussion, these sales were adjusted upward to reflect their
location in a community with lower industrial costs.
Sales 4 and 5 are situated in Matamoros, a maquiladora community
immediately south of Brownsville, Texas. Because of the smaller community and
industrial market, coupled with minimal competition within the market, has
caused building costs to remain above those in Juarez. As such, building sale
prices are higher than those reflected in Juarez. These sales are adjusted
downward as a result.
Sales 6, 7 and 8 are situated in Juarez, with generally similar locational
characteristics. No adjustment is necessary.
Sales 9, 10 and 11 are situated in Reynosa, a maquiladora community
immediately south of McAllen, Texas. Although a smaller community and industrial
market, substantially increased demand has caused increase developer
competition, including speculative buildings being added to this market.
However, building costs remain above those in Juarez. As such, building sale
prices are higher than those reflected in Juarez. These sales are adjusted
downward as a result.
Sale 1 reflects an older transaction within Chihuahua that was vacant at
the time of sale. It is also one of the largest buildings in the community and
reflected a building with considerable physical deterioration. The buyer
subsequently remodeled the interior at considerable cost. The $17.44 per square
foot price reflects the sale of a vacant building in need of remodeling. It is
inferior to the subject in physical characteristics. As a result of this
comparable's location in an
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-59-
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
inferior market, coupled with its inferior physical characteristics, a large
upward adjustment is warranted.
Sale 2 consists of the John Deere Cos. recently completed 107,000 square
foot light assembly/distribution/office facility. This project opened in April
1997 and took about 9 months to complete. The construction cost was $5,600,000
or $52.34 per square foot, however the project had 30,000 square feet of office
(28%) build-out and some specialized tenant improvements. This facility is
located in the Parque De Complejo De Industrial and according to our source is
located on arguably the best site within the park. The facility is situated on
77 acres, which was purchased for $3,700,000 or $1.10 per square foot. A
considerable portion of the land area is excess land and could be resold. An
adjustment was made to the price, however at $54.63 per square foot reflects a
newer facility with no physical deterioration, has a higher office finish and
generally represents a superior facility. Thus, the subject warrants a market
value well below $54.63 per square foot.
Sale 3 consists of a building totaling 92,000 square feet and is situated
on 250,000 square feet of land. The initial asking price was $2,300,000,while
the contracted sale price was $1,750,000, or $19.02 per square foot of building
area. The building was marketed for approximately 12 months and sold in the fall
of 1997. This vacant building was approximately 10% office build-out, fully
sprinklered, had ground mounted air washers (100%), a cafeteria and a functional
open production area. There is some added land for expansion, but its proximity
to the building would make a sale difficult, therefore no excess was considered.
At $19.02 per square foot, this comparable warrants an upward adjustment for its
location in an inferior market to reflect the market value of the subject.
Sales 4 and 5 reflect industrial building purchases of similar facilities
in Matamoros. They range in price from $32.31 to $34.75 per square foot, but a
downward adjustment of 5 to 10 percent is warranted for increased building costs
in this community. These sales also reflect newer construction, with less
physical deterioration. In summary, the subject warrants a market value below
$32.31 per square foot, as indicated by these sales. Applying a downward
adjustment of 15 percent to these sales due to their superior characteristics,
supports a market value range for the subject of $27.46 to $29.54 per square
foot.
Sales 6, 7 and 8 are situated in Juarez, with Sales 6 and 8 located within
the Bermudas Industrial Park and Sale 7 within the Salvacar Corridor. Sale 6 is
the listing of a 25,390 square foot industrial facility than is 17 years old and
has noted functional deficiencies, including low ceiling heights and partitioned
interior. At $25.60 per square foot, this price represents the extreme lower
range of what is appropriate for industrial facilities in Juarez and warrants an
upward adjustment to reflect the market value of the subject. Sale 7 is a new
facility and Sale 8 is under construction, both build-to-suit projects where the
buyer is purchasing the property upon completion of construction. At $44.23 and
$31.00, they represent the upper range of pricing in the Juarez industrial
market and warrant a downward adjustment to reflect the market value of the
subject.
Sales 9, 10 and 11 are industrial facilities situated in Reynosa. Sale 9
reflects a vacant 83,000 square foot building that is available for sale. Its
square foot asking price is less reliable
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<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
for comparison. Sale 10 is an 8 year old facility, also 83,000 square foot in
size and the only multitenant facility considered for comparison. It has a
higher office finish and is completely air conditioned. At $50.60 per square
foot, this represents the extreme upper market value of maquiladoras in the
Frontier communities. Sale 11 is a build-to-suit facility that is under
construction and will be purchased by the tenant at completion. At $34.00 per
square foot, a downward adjustment is made to reflect the market value of the
subject.
SUMMARY
Overall, Sales 1, 3 and 6 at $17.44, $19.02 and $25.60 reflect inferior
comparisons and warrant upward adjustments to reflect the market value of the
subject. The remaining sales reflect a square foot price range of $31.00 to
$54.63 reflect superior comparisons. Thus, a market value between $25.60 to
$31.00 per square foot is appropriate for the subject. Discussions with
industrial brokers from the respective firms previously noted indicated that
this is a reliable indication of market value for the subject.
IMPROVED SALES COMPARISON
<TABLE>
<CAPTION>
=========== ============================================ ================= =================
SALES OVERALL RATING
COMP. PRICE RELATIVE TO
NO. PROPERTY PER SF* THE SUBJECT *
=========== ============================================ ================= =================
<S> <C> <C> <C>
1 Av. Miguel de Cervante No. 140 $17.44 Inferior
Chihuahua, Mexico
----------- -------------------------------------------- ----------------- -----------------
2 Parque de Complejo de Industrial $54.63 Superior
Chihuahua, Mexico
----------- -------------------------------------------- ----------------- -----------------
3 Los Americas (Neilson Building) $19.02 Inferior
Chihuahua, Mexico
----------- -------------------------------------------- ----------------- -----------------
4 NEC Av. Ohio and Av. Del Obreno $32.31 Superior
Matamoros, Mexico
----------- -------------------------------------------- ----------------- -----------------
5 Av. Poniente $34.75 Superior
Matamoros, Mexico
----------- -------------------------------------------- ----------------- -----------------
6 Boulevard Gomez Morin $25.60 Inferior
Juarez, Mexico
----------- -------------------------------------------- ----------------- -----------------
7 Avenue de las Torres $44.23 Superior
Juarez, Mexico
----------- -------------------------------------------- ----------------- -----------------
8 Bermudas Industrial Park $31.00 Superior
Juarez, Mexico
----------- -------------------------------------------- ----------------- -----------------
9 Cleo Building $ Superior
Reynosa, Mexico
----------- -------------------------------------------- ----------------- -----------------
10 Parque Industrial Park $50.60 Superior
Reynosa, Mexico
----------- -------------------------------------------- ----------------- -----------------
11 Finsa Industrial Park $34.00 Superior
Reynosa, Mexico
=========== ============================================ ================= =================
</TABLE>
*The rating evaluation considers the net effect of all adjustments on a per
unit after the exclusion of excess land
Based on the preceding analysis, an estimated value of $28.50 per square foot
is considered reasonable for the subject building improvements and respective
building site. We
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<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
have included the estimated market value of the subject's excess land to arrive
at a market value of the fee simple interest in the subject property. Therefore,
the subject's total value via the sales price per square foot of building area
methodology is:
904,000 Square Feet x $28.50/Square Feet = $25,764,000
Add: Excess Land Value + 5,280,000
------------
Market Value by the Sales Comparison Approach $31,044,000
Rounded $31,040,000
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-62-
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
The subject facility contains approximately 904,000 square feet. The
quality of construction is considered to be average for this facility
considering its age and architectural style. The subject was designed for
single-tenant occupancy, specific to the current tenant's needs. Although the
market has historically consisted of owner occupied buildings, speculative
facilities only available for lease and build-to-suit facilities that are
leased, rather than sold to the user are now prevalent in the market. Therefore,
using the Income Approach can provide a reasonable estimate of market value for
the subject. Below, we have discussed the process used to estimate market value.
Properties such as the subject have been leased on a triple net basis,
with the tenant paying all operating expenses. If available, the subject would
lease on a triple net basis and reflect a market rental rate similar to other
leased and available industrial projects in the Juarez industrial market. We,
therefore, have elected to look at lease rates with triple net terms. In an
effort to estimate market rent for the subject, a search was conducted of only
industrial facilities which were leased or available for lease in Juarez and
could provide a general indication of market rent.
Our search uncovered 33 lease comparables that have occurred since the
beginning of 1995 and May 1998. There are also seven speculative buildings under
construction that will come available from May to November 1998 and are
currently available for lease. We concentrated on leased facilities over 95,000
square feet in size for comparison. This information is shown in the Industrial
Rent Comparable Summary below.
INDUSTRIAL RENT COMPARABLE SUMMARY
<TABLE>
<CAPTION>
============== ==================================== ============ ============== ============= ==================
TENANT/ BUILDING TERM LEASE ANNUAL LEASE
COMP LOCATION SIZE (SF) (YEARS) DATE RATE (NNN)
============== ==================================== ============ ============== ============= ==================
<S> <C> <C> <C> <C> <C>
1 Ademco Corporation 150,000 5 1996 $5.50
Fuentas Industrial Park
- -------------- ------------------------------------ ------------ -------------- ------------- ------------------
2 Johnson & Johnson 116,000 5 1996 $6.00
Rio Bravo Industrial Park
- -------------- ------------------------------------ ------------ -------------- ------------- ------------------
3 Foamex 113,327 7 1996 $4.40
Bermudez Industrial Park
- -------------- ------------------------------------ ------------ -------------- ------------- ------------------
4 Berg Electronics 103,000 5 1996 $5.00
Intermex Industrial Park
- -------------- ------------------------------------ ------------ -------------- ------------- ------------------
5 Alcoa Fujicura 100,000 3 1997 $5.00
Neptuna Industrial Avenue
- -------------- ------------------------------------ ------------ -------------- ------------- ------------------
6 Vishay Intertechnology 100,000 10 1997 $5.62
Los Torres Industrial Avenue
- -------------- ------------------------------------ ------------ -------------- ------------- ------------------
7 Seven Oaks 113,327 5 1997 $4.60
Omega Industrial Park
- -------------- ------------------------------------ ------------ -------------- ------------- ------------------
8 Vishay Intertechnology 100,000 10 1997 $5.62
Carte Blanca
- -------------- ------------------------------------ ------------ -------------- ------------- ------------------
9 Federal Mogul 102,000 10 1997 $5.88
Omega Industrial Park
- -------------- ------------------------------------ ------------ -------------- ------------- ------------------
10 IDI (developer) 205,000 Available November $5.00
Libramiento (Aeropuerto) 1998
- -------------- ------------------------------------ ------------ -------------- ------------- ------------------
SUBJ. Carretera Pan Americana, 904,000 --- June ---
Aeropuerto Industrial Park 1998
============== ==================================== ============ ============== ============= ==================
</TABLE>
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INCOME APPROACH
- --------------------------------------------------------------------------------
Trying to compare the rent comparables on a point-by-point basis to the
individual subject improvements is difficult, since some are build-to-suit
arrangements were the tenant provided some of the capital associated with
construction. However, to the best of our knowledge, the lease rates are current
and reflect the leasing activity of improved industrial properties. The subject
is occupied by an owner/user. Therefore, the comparables are discussed in a
general manner.
The comparables are all smaller than the subject. However, these
properties have physical amenities that are generally similar to the subject.
Age, clear height and percent office build-out also vary, but the market data
does not present a clear rental rate variation for these differences.
Rent Comparables 1, 7 and 9 are situated in the north part of the
community, with close proximity to the U.S. border crossing and the community's
residential base. They produced a range in rental rates from $4.60 to $5.88 per
square foot. Rent Comparables 2, 4, 6 and 8 are situated in the southeast part
of the community, further from the U.S. border crossing and the community's
residential base, but is the area with the most industrial growth in the
community. They produced a range in rental rates from $5.00 to $6.00 per square
foot. Rent Comparables 3 and 5 are situated in the northeast part of the
community, with close proximity to the U.S. border crossing and the community's
residential base. They produced a range in rental rates from $4.40 to $5.00 per
square foot. Rental Comparable 10 is the only industrial facility within the
subject's industrial park, and at $5.00 per square foot, provides a reasonable
estimate of market rent, with a slight downward adjustment due to the subject's
larger size.
A quantitative comparison of these properties with the subject property
would be very subjective, particularly relating to an adjustment for the
subject's large size. However, utilizing a slight downward adjustment to Rental
Comparable 10's rate of $5.00, we have concluded that the subject's reasonable
market rent is $4.80 per square foot. Only Comparables 3 and 7 produced lower
rental rates, which is appropriate since they are inferior comparisons.
VACANCY
Vacancy rates in the Juarez industrial market were discussed in the Market
Analysis section. Vacancy rates have increased slightly in the city and
subject's submarket in the last three years, currently standing at 2.07 and 2.86
percent, respectively. However, we expect occupancy levels will increase
slightly in Juarez in the next 12 months, although it is unlikely that the
subject's submarket will be affected. Because the subject is configured for
single-tenant occupancy, we would not expect turnover to be high over a typical
holding period. Therefore, we have projected stabilized vacancy to be 3.0
percent.
EXPENSES
We have estimated market rent on a triple net basis. Therefore, the
landlord is responsible for a limited amount of expenses. These expenses are
listed and discussed below.
Management - Professional management fees were obtained from Cushman &
Wakefield/GCI and Finsa. Reportedly, management fees range between 0.5
percent and 2.0 percent of effective gross income for multitenant
industrial
- --------------------------------------------------------------------------------
-64-
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
facilities and a flat fee of $75,000 to $150,000 for the management of
industrial parks with 20 to 40 facilities. We assume professional
management will be required in the operation of this property on a
limited basis. Therefore, we estimate management expense at 1.0
percent.
Reserves for Replacement - This item is for replacement of major
building components, such as air conditioners, roofing, plumbing, etc.
This expense item usually ranges between $0.02 and $0.08 per square
foot of building area. We have allocated $0.05 per square foot of total
building area per year, or $45,200 annually.
Miscellaneous - This expense category includes legal and accounting
services, real estate taxes and insurance costs during periods of
vacancy, telephone and other expense items not included in other
classifications. This expense item is estimated to be 2.0 percent of
effective gross income.
Following is an Income and Expense Summary using the above discussed
income and expense items.
INCOME AND EXPENSE SUMMARY
<TABLE>
<S> <C> <C>
Potential Gross Income
904,000 S.F. @ $4.80/S.F./Year $4,339,200
Less Vacancy (3%) -130,176
----------
Effective Gross Income $4,209,024
Less Operating Expenses:
Management (1%) $42,090
Reserves ($0.05/S.F.) 45,200
Miscellaneous (2%) 84,180
-------
Total Operating Expenses -171,470
----------
NET OPERATING INCOME $4,037,554
</TABLE>
DIRECT CAPITALIZATION
Direct capitalization is used whereby we have assumed all the improvements
are leased at a market rental rate, with the appropriate deductions for vacancy
and owners expenses under net lease terms. Because some of the sales used in our
analysis were owner/user properties, capitalization rates were not always
available. However, those sales were capitalization rates could be obtained are
summarized:
SUMMARY OF OVERALL CAPITALIZATION RATES
=======================================
SALE CAPITALIZATION RATE
=======================================
I-4 15.7%
=======================================
I-5 14.3%
=======================================
I-10 11.6%
=======================================
- --------------------------------------------------------------------------------
-65-
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
Sale I-4 reflects the purchase of a vacant building that was subsequently
leased. At 15.7 percent, this reflects the appropriate overall rate for a vacant
building in the Frontier communities oriented toward maquiladora occupancy. Sale
I-5 produced an overall rate of 14.3 percent, based on the asking lease rate at
the time of purchase. The potential tenant actually decided to purchase the
facility and conducted some remodeling at their cost. The seller would have had
to provide this additional cost if the buyer would have leased the facility,
which would have pushed the rental rate upward. Thus, a 14.3 percent overall
rate reflects the low end of the range. The buyer and seller of Sale I-10
indicated that the purchase price was above market levels. This was due to some
internal motivations, which could not be confirmed, and pushed the overall rate
downward. An overall rate of 11.6 percent is unrealistically low to use in
capitalizing net income into value within the Mexico industrial market.
Another way of deriving overall rates is through the analysis of
build-to-suit facilities, where the facility upon completion is subsequently
leased to the tenant. Examples of industrial facilities currently under
construction and available for lease are summarized:
BUILD-TO-SUIT ANALYSIS
CONSTRUCTION COSTS, INCOME ANALYSIS AND RESULTING OVERALL RATE
<TABLE>
<CAPTION>
============== ================================= ============ =============== ================ =============
BUILDING PROJECT APPROXIMATE OVERALL
COMP PROJECT SIZE (SF) COST NET INCOME* RATE
============== ================================= ============ =============== ================ =============
<S> <C> <C> <C> <C> <C>
1 Morelea, Juarez 60,000 $2,400,000 $313,140 13.0%
- -------------- --------------------------------- ------------ --------------- ---------------- -------------
2 Salvacar Industrial Park, Juarez 63,504 $2,032,128 $340,400 16.8%
- -------------- --------------------------------- ------------ --------------- ---------------- -------------
3 Juan Gabriel, Juarez 84,000 $2,772,000 $470,000 17.0%
- -------------- --------------------------------- ------------ --------------- ---------------- -------------
4 Magnatec, Reynosa 136,690 $5,640,000 $710,420 12.6%
============== ================================= ============ =============== ================ =============
</TABLE>
*Net income is based on asking or contract rent, market vacancy and
expenses.
Developers are obtaining overall rates of 12.6 percent to 17.0 percent on
their build-to-suit projects. However, many own the industrial park and enhance
their yields considerably due to a lower cost basis in the land. The average
rate for the four comparables noted is 14.9 percent, versus 13.9 percent for the
three sales previously noted. It can be concluded that developers are making an
additional yield around 1.0 percent. It can be concluded that capitalization
rates for industrial product ranges from 11.6 percent to 17.0 percent for
institutional-grade properties. Given the subject's location, configuration,
construction type and historical use, we have selected an overall rate of 15.5
percent as applied below.
<TABLE>
<CAPTION>
DIRECT CAPITALIZATION
========================================== ==================================
<S> <C>
Net Operating Income $4,037,554
------------------------------------------ -----------------------------------
Divided by Overall Capitalization Rate 15.5%
------------------------------------------ -----------------------------------
Indicated Value $26,048,735
------------------------------------------ -----------------------------------
Plus: Excess Land Value 5,280,000
------------------------------------------ -----------------------------------
Market Value by the Income Approach $31,328,735
------------------------------------------ -----------------------------------
Rounded to: $31,330,000
========================================== ===================================
</TABLE>
Thus, the value indication, via Income Approach, of the subject is
estimated to be $31,330,000 on a cash equivalent basis.
- --------------------------------------------------------------------------------
-66-
<PAGE>
RECONCILIATION AND FINAL VALUE CONCLUSION
- --------------------------------------------------------------------------------
Value indications for the subject property by the approaches to value are
indicated as follows:
Cost Approach $31,170,000
Sales Comparison Approach $31,040,000
Income Approach $31,330,000
In the reconciliation, each approach to value is reviewed in order to
determine the reliability of the data in each and to weigh that approach best
represents the actions of typical users and investors in the market.
The Cost Approach is generally a very reliable estimate of value in a
stable economy and when the subject is new construction with little or no
depreciation to be estimated. However, the subject property has suffered from
some physical deterioration due to its physical and effective age. Regardless,
the availability of cost information was reliable and land comparables provided
a reliable land value estimate. Because a particular purchaser of the subject
would rely less on this approach, we have given it least consideration.
The Sales Comparison Approach is based on the principle of substitution,
which implies that a prudent person will not pay more to buy a property than it
would cost to buy a comparable substitute property. The subject property, as
improved, was compared with other industrial building sales. The lack of
uniformity in the market made it somewhat difficult to objectively adjust the
comparables. However, their was adequate sales transactions to rely on, and
their square foot prices bracketed an appropriate value indication for the
subject. Based on the availability and reliability of the data, coupled with the
fact that the subject would likely be purchased by an owner user, the sales
comparison approach was given most emphasis in the estimation of market value.
Given its size, the subject is less suited to an analysis by direct
capitalization. However, a substantial amount of market data was available that
could be relied upon. If the subject were bought and sold in the investment
market, this approach is very reliable. However, given its single tenant
orientation, coupled with its large size, the subject is less desirable to the
investment market. Thus, we have given it secondary consideration.
Therefore, giving most weight to the indication of value via the Sales
Comparison Approach, it is our opinion that the market value of the fee simple
estate in the subject property, contingent upon the assumptions inherent in this
report, as of May 29, 1998, is:
THIRTY-ONE MILLION ONE HUNDRED THIRTY THOUSAND DOLLARS
$31,130,000
MARKETING TIME
Marketing time is an estimate of the time that might be required to sell a
real property interest at the appraised value. Marketing time is presumed to
start on the effective date of the appraisal. Marketing time is subsequent to
the effective date of the appraisal, whereas
- --------------------------------------------------------------------------------
-67-
<PAGE>
RECONCILIATION AND FINAL VALUE CONCLUSION
- --------------------------------------------------------------------------------
exposure time, as defined below, is presumed to precede the effective date of
the appraisal. The estimate of marketing time uses some of the same data
analyzed in the process of estimating the reasonable exposure time and is not
intended to be a prediction of a date of sale.
We have concluded that a marketing period of 12 to 18 months would be
required in order to sell the subject property. This reflects the marketing time
exhibited by the sale which have been included. The value conclusion expressed
in this report is based on the current market conditions, but the large size and
length of time required to conduct due diligence would extend the marketing
period to at least 12 months.
EXPOSURE TIME
Under paragraph 3 of the Definition of Market Value, the value estimate
presumes that "...a reasonable time is allowed for exposure in the open market."
Exposure time is defined as the estimated length of time the property interest
being appraised would have been offered on the market prior to the hypothetical
consummation of a sale at the market value on the effective date of the
appraisal. Exposure time is presumed to precede the effective date of the
appraisal. We have estimated the appropriate exposure time for the subject
property to be approximately 12 to 18 months.
LIQUIDATION VALUE
At the request of the client, we have estimated the liquidation value of
the subject property. This assumes a six month sale period, which is less than
the estimated marketing period if sold at the market value previously noted.
Considerable due diligence would need to be conducted in order to complete a
transaction within this period, requiring additional costs associated with the
transaction. Further, an intense international marketing campaign would have to
be undertaken and potential purchasers targeted within one to two months.
Because few firms have this capability, a deduction to the market value would be
required.
Enrique Portillo with Cushman & Wakefield/GCI indicated a deduction of
$2.00 to $5.00 per square foot would be required to entice a buyer to close in
such a quick period. This would substantiate a deduction of approximately
$1,800,000 to $4,500,000 and reduce the market value estimate to a range of
$26,630,000 to $29,330,000, or a midpoint of $27,980,000. However, the lack of
existing vacant product in the market would provide additional incentive to
market participants and we have estimated the liquidation value at the upper
range of the adjusted values. Therefore, the estimate of liquidation value, as
of the date of appraisal and assuming a six month sale period, is:
TWENTY-EIGHT MILLION FIVE HUNDRED THOUSAND DOLLARS
$28,500,000
- --------------------------------------------------------------------------------
-68-
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
Appraisal means the appraisal report and opinion of value stated therein;
or the letter opinion of value, to which these Assumptions and Limiting
Conditions are annexed.
Property means the subject of the Appraisal.
C&W means Cushman & Wakefield, Inc., or its subsidiary that issued the
Appraisal.
Appraiser(s) means the employees of C&W who prepared and signed the
Appraisal.
The Appraisal has been made subject to the following assumptions and
limiting conditions:
(1) No responsibility is assumed for the legal description or for any
matters that are legal in nature. Title to the Property is assumed to be
good and marketable and the Property is assumed to be free and clear of
all liens unless otherwise stated. No survey of the Property was
undertaken.
(2) The information contained in the Appraisal or upon which the Appraisal
is based, has been gathered from sources the Appraiser assumes to be
reliable and accurate. The owner of the Property may have provided some
of such information. Neither the Appraiser nor C&W shall be responsible
for the accuracy or completeness of such information, including the
correctness of estimates, opinions, dimensions, sketches, exhibits and
other factual matters. The Appraisal and the opinion of value stated
therein is as of the date stated in the Appraisal. Changes since that
date in external and market factors can significantly affect property
value.
(3) The Appraisal is to be used in whole and not in part. No part of the
Appraisal shall be used in conjunction with any other appraisal.
Possession of the appraisal, or a copy thereof, does not carry with it
the right of publication. Publication of the Appraisal or any portion
thereof without the prior written consent of C&W is prohibited. Except
as may be otherwise expressly stated in the letter of engagement to
prepare the Appraisal, C&W does not permit use of the Appraisal by any
person other than the party to whom it is addressed or for purposes
other than that for which it was prepared. If written permission is
given by C&W to use the Appraisal, the Appraisal must be used in its
entirety and only with proper written qualification as approved by C&W.
No part of the appraisal or the identity of the Appraiser shall be
conveyed to the public through advertising, public relations, news,
sales or other media or used in any material without C&W's prior written
consent. Reference to the Appraisal Institute or to the MAI designation
is prohibited.
(4) The Appraiser shall not be required to give testimony in any court or
administrative proceeding relating to the Property or the Appraisal.
(5) he Appraisal assumes (a) responsible ownership and competent management
of the Property; (b) there are no hidden or unapparent conditions of the
Property, subsoil or structures that render the Property more or less
valuable (no responsibility is assumed for such conditions or for
arranging for engineering studies that may be required to
- --------------------------------------------------------------------------------
-69-
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
discover them); (c) full compliance with all applicable federal, state
and local zoning and environmental regulations and laws, unless
noncompliance is stated, defined and considered in the Appraisal; and
(d) all required licenses, certificates of occupancy and other
governmental consents have been or can be obtained and renewed for any
use on which the value estimate contained in the Appraisal is based.
(6) The Appraiser or other person identified in the Appraisal bases the
physical condition of the improvements considered by the Appraisal on
visual inspection. C&W assumes no responsibility for the soundness of
structural members nor for the condition of mechanical equipment,
plumbing or electrical components.
(7) The projected potential gross income referred to in the Appraisal may be
based on lease summaries provided by the owner or third parties. The
Appraiser has not reviewed lease documents and assumes no responsibility
for the authenticity or completeness of lease information provided by
others or the bona fides of actual leases. C&W suggests that legal
advice be obtained regarding the interpretation of lease provisions and
the contractual rights of parties.
(8) The projections of income and expenses are not predictions of the
future. Rather, they are the Appraiser's best estimates of current
market thinking on future income and expenses. The Appraiser and C&W
make no warranty or representation that these projections will
materialize. The real estate market is constantly fluctuating and
changing. It is not the Appraiser's task to predict or in any way
warrant the conditions of a future real estate market; the Appraiser can
only reflect what the investment community, as of the date of the
Appraisal, envisions for the future in terms of rental rates, expenses,
and supply and demand.
(9) Unless otherwise stated in the Appraisal, the existence of potentially
hazardous or toxic materials which may have been used in the
construction or maintenance or operation of the improvements or may be
located at or about the Property was not considered in arriving at the
opinion of value stated in the Appraisal. These materials (such as
formaldehyde foam insulation, asbestos insulation, various soil
contaminants, and other potentially hazardous materials) may affect the
value of the Property. The Appraisers are not qualified to detect such
substances and C&W urges that an expert in this field be employed to
determine the economic impact of these matters on the opinion of value
stated in the Appraisal.
(10) Ifthe Appraisal is submitted to a lender or investor with the prior
approval of C&W, such party should consider the Appraisal as one factor,
together with its independent investment considerations and underwriting
criteria, in its overall investment decision.
(11) Unless otherwise stated in the appraisal, compliance with the
requirements of the Americans With Disabilities Act of 1990 (ADA) has
not been considered in arriving at the opinion of value stated in the
appraisal. Failure to comply with the requirements of the ADA may
negatively affect the value of the property. C&W recommends that an
expert in this field be employed.
- --------------------------------------------------------------------------------
-70-
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
We certify that, to the best of our knowledge and belief:
(1) Michael L. Miller, MAI, has inspected the property and prepared the
report.
(2) The statements of fact contained in this report are true and correct.
(3) The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions, and are our personal,
unbiased professional analyses, opinions, and conclusions.
(4) We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
(5) Our compensation is not contingent upon the reporting of a
predetermined value or direction in value that favors the cause of the
client, the amount of the value estimate, the attainment of a
stipulated result, or the occurrence of a subsequent event. The
appraisal assignment was not based on a requested minimum valuation, a
specific valuation or the approval of a loan.
(6) No one provided significant professional assistance to the persons
signing this report.
(7) Our analyses, opinions, and conclusions were developed, and this report
has been prepared, in conformity with the Uniform Standards of
Professional Appraisal Practice of the Appraisal Foundation and the
Code of Professional Ethics and the Standards of Professional Appraisal
Practice of the Appraisal Institute.
(8) The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
(9) As of the date of this report, Michael L. Miller, MAI has completed
requirements of the continuing education program of the Appraisal
Institute.
(10) We have sufficient knowledge and expertise to appraise the subject
property.
Michael L. Miller, MAI
Director
Valuation Advisory Services
- --------------------------------------------------------------------------------
-71-
<PAGE>
ADDENDA
- --------------------------------------------------------------------------------
Subject Photographs
Location Map
Building Plans
Qualifications of Appraiser
- --------------------------------------------------------------------------------
-72-
<PAGE>
ZENCO DE CHIHUAHUA, S.A. DE C.V. (ZENITH)
Carretera Pan Americana
Parque Industrial Aeropuerto
COMPARABLE LAND SALES
<TABLE>
<CAPTION>
==================================================================================================================================
Land Street Location, Industrial Location Sale Price Per Land Land
Sale Submarket/Buyer, City, State Date Sale Price Square Foot Acres Square Feet
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1 Santiago Blancas, Intermex 1997 $3,357,120 $3.25 23.71 1,032,960
SE/Hubbell Electronics
Juarez, Chihuahua, Mexico
- ----------------------------------------------------------------------------------------------------------------------------------
2 Avenue Zaragoza, Rio Bravo 1997 $630,000 $3.50 4.13 180,000
SE/Cambridge Realty
Juarez, Chihuahua, Mexico
- ----------------------------------------------------------------------------------------------------------------------------------
3 Salvacar Corridor 1997 $5,375,000 $2.50 49.36 2,150,000
SE/Kitcher Electronics
Juarez, Chihuahua, Mexico
- ----------------------------------------------------------------------------------------------------------------------------------
4 Laibramiento Aeropuerto, Salvacar 1997 $4,390,848 $3.60 28.00 1,219,680
SE/Security Capital
Juarez, Chihuahua, Mexico
- ----------------------------------------------------------------------------------------------------------------------------------
5 Avenue Zaragoza, Rio Bravo 1996 $1,420,000 $3.50 9.31 405,736
SE/Cambridge Realty
Juarez, Chihuahua, Mexico
- ----------------------------------------------------------------------------------------------------------------------------------
6 Avenue de las Torres, Intermex 1995 $3,466,500 $3.46 23.00 1,001,880
SE/Scientific Atlanta
Juarez, Chihuahua, Mexico
- ----------------------------------------------------------------------------------------------------------------------------------
Subj. Carretera Pan Americana, Aeropuerto N/A --- --- 44.215 1,926,000
SW/Zenith 32.346 1,409,000
Juarez, Chihuahua, Mexico
==================================================================================================================================
<CAPTION>
======================================================
Land
Sale Comments
======================================================
<S> <C>
1 Latter 1997 transaction, purchase by
Hubbel Electronics to construct
owner/user industrial building
- ------------------------------------------------------
2 Mid-1997 transaction, purchase by
Cambridge Realty Partners to
construct building for Lear
Corporation lease
- ------------------------------------------------------
3 Mid-1997 transaction, purchase by
Kitcher Electronics to construct
owner/user building
- ------------------------------------------------------
4 Security Capital purchase to
construct spec industrial building
for lease
- ------------------------------------------------------
5 Mid-1996 transaction, purchase by
Cambridge Realty Partners to
construct building for Johnson &
Johnson lease
- ------------------------------------------------------
6 Latter-1995 transaction, purchase by
Scientific Atlanta to construct
owner/user industrial building
- ------------------------------------------------------
Subj. Larger site improved with Zenith
owner/user facility, smaller remains
unimproved.
======================================================
</TABLE>
<PAGE>
ZENCO DE CHIHUAHUA, S.A. DE C.V. (ZENITH)
Carretera Pan Americana
Parque Industrial Aeropuerto
COMPARABLE BUILDING SALES
<TABLE>
<CAPTION>
====================================================================================================================================
SALE BLDG. SIZE PRICE PERCENT EFFECT.
NO. LOCATION/TENANT DATE (SQ.FT.) SALE PRICE SQ. FT. FINISH AGE OCCUPANCY
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 Av. Miguel de Cervante No. 140 March 229,327 $4,000,000 $17.44 15% 11 yrs. Vacant
Chihuahua, Mexico Vacant 1996
- -----------------------------------------------------------------------------------------------------------------------------------
2 Parque de Complejo de Industrial April 107,000 $9,300,000 $86.92 28% New Owner-
Chihuahua, Mexico John Deere 1997 $5,845,868* $54.63* occupant
- -----------------------------------------------------------------------------------------------------------------------------------
3 Los Americas (Neilson Building) Late-1997 92,000 $1,750,000 $19.02 10% 10 yrs. Owner-
Parque Industrial Los Americas occupant
Chihuahua, Mexico D&B to Am. Industries
- -----------------------------------------------------------------------------------------------------------------------------------
4 NEC Av. Ohio and Av. Del Obreno July 35,596 $1,650,000 $46.35 10% 7 yrs. Investor
Parque Industrial del Norte 1995 $1,150,000* $32.31* 80% AC
Matamoros, Mexico Daniel Industries
- -----------------------------------------------------------------------------------------------------------------------------------
5 Av. Poniente January 46,960 $1,597,000 $34.75 100% AC 3 yrs. Owner-
Ciudad Industrial, 1995 occupant
Matamoros, Mexico United Technologies
- -----------------------------------------------------------------------------------------------------------------------------------
6 Boulevard Gomez Morin Available 25,390 $ 650,000 $25.60 10% 17 yrs. Vacant
Juarez, Mexico Vacant
- -----------------------------------------------------------------------------------------------------------------------------------
7 Avenue de las Torres February 52,000 $2,300,000 $44.23 10% New Owner-
Salvarcar Corridor 1998 occupant
Juarez, Mexico National Processing
Company
- -----------------------------------------------------------------------------------------------------------------------------------
8 Bermudas Industrial Park June 100,000 $3,100,000 $31.00 10% Under Owner-
Juarez, Mexico Build-to-Suit 1998 Constr. occupant
- -----------------------------------------------------------------------------------------------------------------------------------
9 Cleo Building Available 83,000 $ $ 5% 7yrs. Vacant
Parque Industrial Park
Reynosa, Mexico Cleo
- -----------------------------------------------------------------------------------------------------------------------------------
10 Parque Industrial Park Mid- 83,000 $4,200,000 $50.60 15% 8 yrs 100%
Reynosa, Mexico Data Comp 1996 68%**
- -----------------------------------------------------------------------------------------------------------------------------------
11 Finsa Industrial Park June 50,000 $1,700,000 $34.00 10% New Owner-
Reynosa, Mexico AMMEX 1998 occupant
- -----------------------------------------------------------------------------------------------------------------------------------
Subj. Carretera Pan Americana, N/A 904,000 --- --- 5% 10 yrs Owner-
Aeropuerto Industrial Park occupant
Juarez, Mexico Zenith
===================================================================================================================================
<CAPTION>
==========================================================
NO. COMMENTS
==========================================================
<S> <C>
1 Distressed sale of vacant
building
- ----------------------------------------------------------
2 77 acre site purchased for
$3.7M, Build-to-suit for
owner/tenant
- ----------------------------------------------------------
3 Asking price was $2,100,000,
12 month marketing period,
250,000 SF site, sprinklered,
cafeteria
- ----------------------------------------------------------
4 9.1 4 acres of excess land,
masonry bldg., good
condition
- ----------------------------------------------------------
5 Buyer offered $0.44/SF/Mo.
Lease prior to purchase,
masonry/metal constr.
- ----------------------------------------------------------
6 Brick and concrete building
with 10' clear. Functional
deficiencies noted.
- ----------------------------------------------------------
7 Evap. Warehouse, Restra
walls, tin roof, 2 docks, Build-
to-suit for owner/ tenant
- ----------------------------------------------------------
8 Build-to-suit for owner/tenant;
not completed at inspection
- ----------------------------------------------------------
9 Tilt and masonry, B-U roof,
manufacturing bldg.
- ----------------------------------------------------------
10 2-tenant bldg., 26,900 SF
recently vacated; $0.52
avg. lease rate; 11.6% OAR
- ----------------------------------------------------------
11 Build-to-suit for owner/tenant;
not completed at inspection
- ----------------------------------------------------------
Subj. Build-to-suit for owner/tenant,
excess land
==========================================================
</TABLE>
*Adjusted to reflect exclusion of excess land ** Current occupancy
<PAGE>
STATE OF CHIHUAHUA
Important factors to the state of Chihuahua are employment growth, which
provides expansion and new entry of the industrial manufacturing companies which
operate maquiladoras. On the following chart we have outlined the employment for
the State for the 24-month period from January 1996 to December 1997.
STATE OF CHIHUAHUA
INDICATORS OF EMPLOYMENT
1996 - 1997
<TABLE>
<CAPTION>
ZONES JAN. FEB. MARCH APRIL MAY JUNE JULY AUG. SEPT. OCT. NOV.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996
PERMANENT 511,250 517,072 520,770 524,011 528,010 534,060 536,506 543,956 552,074 565,107 565,445
EVENTUAL 19,255 20,886 19,067 16,806 17,281 19,284 21,253 21,421 21,668 23,487 29,293
TOTAL 530,505 537,958 539,837 540,817 545,219 553,334 557,759 565,377 573,742 588,594 594,738
1997
PERMANENT 558,758 570,808 573,375 580,125 586,595 588,088 N/AV 596,544 604,436 617,428 620,799
EVENTUAL 27,813 24,893 23,803 26,904 29,144 29,394 N/AV N/AP N/AP N/AP N/AP
TOTAL 586,571 595,701 597,178 607,029 615,739 617,482 N/AV N/AP N/AP N/AP N/AP
<CAPTION>
ZONES DEC. VARIATION
%
<S> <C> <C>
1996
PERMANENT 562,533 9.4
EVENTUAL 32,459 76.1
TOTAL 594,992 11.7
1997
PERMANENT 615,071 9.3
EVENTUAL N/AP N/AP
TOTAL N/AP N/AP
</TABLE>
Eventual: Excludes the seasonally insured of the country. N/AP: Does not apply.
N/AV: Not available.
Source: Instituto Mexicano del Seguro Social (IMSS); Mexican Social Security
Institute
<PAGE>
[BAR CHART APPEARS HERE]
<PAGE>
EXHIBIT 99N
=================================================
COMPLETE APPRAISAL
OF REAL PROPERTY
ZENITH ELECTRONICS CORPORATION
RAULAND PICTURE TUBE DIVISION
PLANT #25
2407 West North Avenue
Melrose Park, Cook County, Illinois
=================================================
IN A SELF-CONTAINED FORMAT
As of MAY 21, 1998
Prepared For:
PPM FINANCE, INC.
225 West Wacker Drive, Suite 1200
Chicago, Illinois 60606
And
ZENITH ELECTRONICS CORPORATION
1000 Milwaukee Avenue
Glenview, Illinois 60625
Prepared By:
CUSHMAN & WAKEFIELD OF ILLINOIS, INC.
Valuation Advisory Services
455 North Cityfront Plaza Drive, Suite 2800
Chicago, Illinois 60611-5555
<PAGE>
June 11, 1998
Ms. Barbra Buck
PPM FINANCE, INC.
225 West Wacker Drive, Suite 1200
Chicago, Illinois 60606
And
Ms. Beverly Wyckoff, Esq.
ZENITH ELECTRONICS CORPORATION
1000 Milwaukee Avenue
Glenview, Illinois 60625
RE: COMPLETE APPRAISAL OF REAL PROPERTY
ZENITH ELECTRONICS CORPORATION
RAULAND PICTURE TUBE DIVISION
Plant #25
2407 West North Avenue
Melrose Park, Cook County, Illinois
Dear Ms. Buck and Ms. Wyckoff:
In fulfillment of our agreement as outlined in the Letter of Engagement,
Cushman & Wakefield of Illinois, Inc. is pleased to transmit our appraisal
report estimating the market value and the quick sale or liquidation value of
the fee simple estate in the referenced real estate property.
This report has been prepared for PPM Finance, Inc. and Zenith Electronics
Corporation and is intended only for the specified use of said Clients. It may
not be distributed to or relied upon by other persons or entities without
written permission of Cushman & Wakefield of Illinois, Inc.
The property was inspected by and the report was prepared by David O. Conroy.
Stanley R. Dennis, Jr., MAI, has reviewed the report, and is in concurrence with
the findings herein, but did not inspect the property.
<PAGE>
June 11, 1998 Page 2
As a result of our analysis, we have formed an opinion that the market value
of the fee simple estate in the subject property, subject to the assumptions,
limiting conditions, certifications and definitions, as of May 21, 1998, was:
TWO MILLION EIGHT HUNDRED TWENTY-FIVE THOUSAND DOLLARS
$2,825,000
The marketing period for the subject property is estimated to be
approximately 12 months, which we believe (through conversations with area
brokers and survey data) to be representative for an industrial property of this
type.
As a result of our analysis, we have formed an opinion that the quick sale or
liquidation value of the fee simple estate in the referenced property, subject
to the assumptions, limiting conditions, certifications, and definitions, as of
May 21, 1998 was:
TWO MILLION FIVE HUNDRED FIFTY THOUSAND DOLLARS
$2,550,000
In our analysis of the subject property under quick sale or liquidation value
scenario, the marketing time associated with this scenario is estimated to be 6
months or less.
This letter is invalid as an opinion of value if detached from the report,
which contains the text, exhibits, and an Addenda.
Respectively submitted,
CUSHMAN & WAKEFIELD OF ILLINOIS, INC.
David O. Conroy
Senior Appraiser
Illinois Certification No. 153-001128
Stanley R. Dennis, Jr., MAI
Managing Director
Illinois Certification No. 153-000686
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
================================================================================
NAME: Zenith Electronics Corporation Rauland
Picture Tube Division - Plant #25
LOCATION: 2407 West North Avenue
Melrose Park, Cook County, Illinois
AUDITOR'S PARCEL NUMBERS: 12-34-300-004
12-34-304-002
INTEREST APPRAISED: Fee simple estate
DATE OF VALUE: May 21, 1998
OWNERSHIP: Zenith Electronics Corporation
LAND AREA: The land area of the site under analysis
is approximately 955,344 square feet, or
21.93 acres.
ZONING: The subject site is located within a
zoning district designated as a G,
Industrial District, by the Village of
Melrose Park.
HIGHEST AND BEST USE
If Vacant: Industrial development
As Improved: Demolition of the existing improvement
and redevelopment of the site for
industrial use.
IMPROVEMENTS
Type: Industrial manufacturing facility
Year Built: Early 1950's, with additions in
approximately 1968, 1979, 1980, 1985,
1986 and 1996.
Gross Building Area: 748,300 square feet
Construction: Masonry, insulated metal and concrete
tilt-up, over a steel frame.
Condition: Average condition for its age.
MARKET VALUE INDICATION
LAND VALUATION: $2,825,000
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
================================================================================
RESULTING INDICATOR
Price Per Square Foot: $2.96 per square foot of land area
ESTIMATED MARKETING TIME: 12 months
QUICK SALE OR LIQUIDATION VALUE: $2,550,000
Price Per Square Foot: $2.67 per square foot of land area
ESTIMATED MARKETING TIME: 6 months
SPECIAL ASSUMPTIONS: 1. This appraisal report was prepared in
conformity with the requirements of the
Code of Ethics and Standards of
Professional Practice of the Appraisal
Institute.
2. Information regarding the subject
property was provided to us by Zenith
Electronics Corporation and is assumed
to be accurate.
3. As of the date of inspection, the
subject property was a manufacturing
plant with large amounts of
manufacturing equipment, and conveyors
built within the building. We are
assuming that all these items will be
removed.
4. The gross building area of 748,300
square feet does not include a 182,000
square foot basement area.
5. No environmental audits were provided
to the appraisers. We have assumed the
subject property to be free of
environmental hazards. The appraisers
are not qualified to detect such
substances and Cushman & Wakefield urges
that an expert in this field be employed
to determine the presence, if any, of
any such toxic materials.
6. Please refer to the list of
additional assumptions and limiting
conditions included at the end of this
report.
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
<S> <C>
PHOTOGRAPHS OF SUBJECT PROPERTY............................................ 1
INTRODUCTION............................................................... 9
REGIONAL ANALYSIS.......................................................... 15
NEIGHBORHOOD ANALYSIS...................................................... 27
INDUSTRIAL MARKET ANALYSIS................................................. 28
PROPERTY DESCRIPTION....................................................... 37
REAL PROPERTY TAXES AND ASSESSMENTS........................................ 43
ZONING..................................................................... 44
HIGHEST AND BEST USE....................................................... 45
QUICK SALE VALUE ESTIMATE.................................................. 60
ASSUMPTIONS AND LIMITING CONDITIONS........................................ 61
CERTIFICATION OF APPROVAL.................................................. 65
ADDENDA.................................................................... 66
Legal Description
Land Sale Data Sheets
Qualifications of Appraisers
</TABLE>
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
[PHOTOGRAPH APPEARS HERE]
=====================================================================
=====================================================================
VIEW LOOKING WEST ALONG NORTH AVENUE, SUBJECT IS TO RIGHT
[PHOTOGRAPH APPEARS HERE]
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VIEW LOOKING SOUTH ALONG 25/th/AVENUE, SUBJECT IS TO LEFT
1
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
[PHOTOGRAPH APPEARS HERE]
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=====================================================================
VIEW LOOKING NORTHEAST AT NEW OFFICE ADDITION FROM CORNER OF NORTH AVENUE
[PHOTOGRAPH APPEARS HERE]
=====================================================================
=====================================================================
VIEW LOOKING WEST AT ORIGINAL OFFICE SECTION FROM NORTH AVENUE
2
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
[PHOTOGRAPHS APPEARS HERE]
=====================================================================
=====================================================================
VIEW FROM 25/th/ AVENUE TOWARD WEST SIDE OF PLANT AND OFFICE SECTIONS
[PHOTOGRAPHS APPEARS HERE]
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VIEW OF RECEIVING DOCK AREA ALONG WEST SIDE OF BUILDING
3
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
[PHOTOGRAPH APPEARS HERE]
=====================================================================
=====================================================================
VIEW OF WEST SIDE OF PLANT
[PHOTPGRAPH APPEARS HERE]
=====================================================================
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VIEW OF RECESSED SHIPPING DOORS ALONG WEST SIDE OF PLANT
4
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
[PHOTOGRAPH APPEARS HERE]
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VIEW OF NORTH PROPERTY LINE, RAIL YARD TO LEFT, SUBJECT PLANT TO RIGHT
[PHOTOGRAPH APPEARS HERE]
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VIEW OF EAST PROPERTY LINE, SUBJECT BUILDING TO RIGHT
5
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
[PHOTPGRAPH APPEARS HERE]
=====================================================================
=====================================================================
VIEW OF EAST SIDE OF SUBJECT'S BUILDING
[PHOTGRAPH APPEARS HERE]
=====================================================================
=====================================================================
INTERIOR VIEW OF NEWEST INDUSTRIAL ADDITION ALONG WEST SIDE OF PLANT
6
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
[PHOTOGRAPH APPEARS HERE]
=====================================================================
=====================================================================
INTERIOR VIEW OF MANUFACTURING AREA
[PHOTOGRAPH APPEARS HERE]
=====================================================================
=====================================================================
INTERIOR VIEW OF MANUFACTURING AREA
7
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
[PHOTOGRAPH APPEARS HERE]
=====================================================================
=====================================================================
INTERIOR VIEW OF MANUFACTURING AREA
[PHOTOGRAPH APPEARS HERE]
=====================================================================
=====================================================================
INTERIOR VIEW OF BASEMENT AREA
8
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
PROPERTY DESCRIPTION
The subject property consists of a heavy manufacturing plant facility. The
gross building area for the first and second floors amounts to approximately
748,300 square feet. In addition, there is a 182,000-square foot basement area
not included in the gross building area. The building was constructed in
sections from the early 1950's through the mid-1990's. The site area contains
21.93 acres. The property address is 2407 West North Avenue, Melrose Park,
Illinois. The Cook County assessors property PIN numbers are 12-34-300-004 and
12-34-304-002.
PROPERTY OWNERSHIP AND RECENT HISTORY
According to information supplied by the property's owner, Zenith Electronics
Corporation, the property was purchased in approximately 1965 and remodeled for
use by their Rauland Picture Tube Division. They have made numerous additions
in approximately 1968, 1979, 1980, 1985, 1986 and 1996.
COMPETENCY PROVISION
We are aware of the competency provision by the USPAP and the authors of this
report meet the standards. David O. Conroy inspected the subject property,
researched, and analyzed the pertinent market information, and wrote the report,
under the supervision of Stanley R. Dennis, Jr., MAI. It is our opinion that we
are fully competent to perform this appraisal, due to the fact that:
1. The appraisers have full knowledge and experience in the nature of this
assignment.
2. All necessary and appropriate steps have been taken in order to complete the
assignment competently.
3. There is no lack of knowledge, or experience that would prohibit this
assignment to be completed in a professional competent manner or where a
biased or misleading opinion of value would be rendered.
PURPOSE AND FUNCTION OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value and the quick
sale or liquidation value of the fee simple estate in the subject property as of
May 21, 1998, the date
9
<PAGE>
of inspection. The function of this appraisal is to assist our clients, PPM
Finance, Inc., and Zenith Electronics Corporation, in an evaluation of the real
estate asset for possible sale.
10
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
SCOPE OF THE APPRAISAL
In the process of preparing this appraisal, I met with Mr. Uday P. Nadkarni,
Director - Industrial Engineering and Facilities, Mr. Charles Svitak, Manager -
Facilities Engineering and Energy, and Mr. Edward Reszke, Manager - Distribution
and Warehousing. I inspected the exterior and interior of the subject property,
and reviewed interior plans. The appraisers conducted market research into the
demand for older industrial facilities, gathered information on the sale of
vacant land and older industrial buildings, and conducted a highest and best use
analysis of the subject property. The appraisers concluded the highest and best
use for the property is to be for redevelopment with a new industrial building.
The appraisers therefore concluded a value estimate of the land less demolition
cost of the existing improvement.
DATE OF VALUE AND PROPERTY INSPECTION
The date of value is May 21, 1998, which is the date of the property
inspection.
PROPERTY RIGHTS APPRAISED
Fee simple estate.
DEFINITIONS OF VALUE, INTEREST APPRAISED AND OTHER PERTINENT TERMS
The definition of market value in accordance with the Uniform Standards of
Professional Appraisal Practice (USPAP), 1996 Edition, published by The
Appraisal Foundation, is as follows:
The most probable price which a property should bring in a competitive and
open market under all conditions requisite to a fair sale, the buyer and
seller, each acting prudently and knowledgeably, and assuming the price is
not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title from
seller to buyer under conditions whereby:
1. Buyer and seller are typically motivated;
2. Both parties are well informed or well advised, and acting in what they
consider their own best interests;
3. A reasonable time is allowed for exposure in the open market;
4. Payment is made in terms of cash in U.S. dollars or in terms of financial
arrangements comparable thereto; and
11
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
5. The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions granted by
anyone associated with the sale.
Definitions of pertinent terms taken from the Dictionary of Real Estate
Appraisal, Third Edition (1993), published by the Appraisal Institute, are as
follows:
FEE SIMPLE ESTATE
Absolute ownership unencumbered by any other interest or estate; subject only
to the limitations imposed by the governmental powers of taxation, eminent
domain, police power and escheat.
QUICK SALE
Quick sale or liquidation value reflects a sale within a six-month period.
CASH EQUIVALENT
A price expressed in terms of cash, as distinguished from a price expressed
totally or partly in terms of the face amounts of notes or other securities
that cannot be sold at their face amounts.
Definitions of other terms taken from various are as follows:
MARKET VALUE AS IS ON APPRAISAL DATE
The market value of a property in the condition observed upon inspection and
as it physically and legally exists without hypothetical conditions,
assumptions, or qualifications as of the date the appraisal is prepared.
MARKETING TIME
Marketing time is an estimate of the time that might be required to sell a
real property interest at the appraised value. Marketing time is presumed to
start on the effective date of the appraisal. Marketing time is subsequent to
the effective date of the appraisal, whereas exposure time, as defined below
is presumed to precede the effective date of the appraisal. The estimate of
marketing time uses some of their same data analyzed in the process of
estimating the reasonable exposure time and is not intended to be a
predication of a date of sale.
12
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
We have concluded that a marketing period of approximately 12 months would be
required in order to sell the subject property under the market value
premise. The market value conclusion expressed in this report is based on
current market conditions. Our market value estimate should not be
interpreted as being representative of the final price at which the property
might sell throughout the entire marketing period, due to uncertain market
conditions.
EXPOSURE TIME
Under Paragraph 3 of the Definition of Market Value, the value estimate
presumes that "A reasonable time is allowed for exposure in the open market".
Exposure time is defined as the estimated length of time the property
interest being appraised would have been offered on the market prior to the
hypothetical consummation of a sale at the market value on the effective date
of the appraisal. Exposure time is presumed to precede the effective date of
the appraisal.
We have estimated the appropriate exposure time for the subject property to
be approximately 12 months under the market value premise.
LEGAL DESCRIPTION
The legal description of the subject property is included in the Addenda
section of this report. The legal description was taken from materials provided
by the client. It should be noted that the legal description of the site has not
been verified with legal counsel. We suggest that such verification be obtained
prior to utilizing said legal description in any legal document or conveyance.
Cushman & Wakefield assumes no responsibility for the accuracy or legality of
said legal description.
13
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
REGIONAL AREA MAP
14
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
CHICAGO METROPOLITAN AREA
This section evaluates general demographic and economic trends in the
property's regional location to determine the outlook for the overall market
based upon comparison of projected population, employment and other trends with
actual historical data. The Chicago Consolidated Metropolitan Statistical Area
(CMSA), located at the southwestern tip of Lake Michigan, is the Midwest's
financial, commercial, transportation, and industrial center. As defined by the
United States Census Bureau, the Chicago CMSA includes a total of eleven
counties: eight in Illinois, two in Indiana, and one in Wisconsin. As a whole,
the Chicago CMSA covers a territory of 5,660 square miles.
POPULATION
The population of the Chicago Metropolitan Area is the third largest in the
nation, behind New York and greater Los Angeles. The historical and projected
population growth trends for the six primary counties in the Chicago
Metropolitan area are summarized in TABLE A below.
<TABLE>
<CAPTION>
====================================================================================================================
TABLE A
CHICAGO METROPOLITAN AREA
POPULATION STATISTICS - 1980 THRU 2006
======================================================================================================================
ANNUAL ANNUAL
% CHANGE % CHANGE
COUNTY 1980 1996 1980-1996 2006 1996-2006
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cook 5,254,000 5,136,800 -0.14% 5,086,800 -0.08%
Chicago 3,005,000 2,762,000 -0.53% N/A N/A
Suburban 2,249,000 2,374,800 0.34% N/A N/A
DuPage 659,000 857,800 1.66% 925,800 0.90%
Kane 278,000 353,300 1.51% 374,800 0.37%
Lake 440,000 570,600 1.64% 624,000 0.88%
McHenry 148,000 225,700 2.67% 273,600 1.27%
Will 324,000 415,800 1.57% 499,600 1.21%
Total 7,103,000 7,560,000 0.39% 7,784,600 0.25%
- ----------------------------------------------------------------------------------------------------------------------
SOURCE: WOODS & POOLE ECONOMICS, INC.
======================================================================================================================
</TABLE>
As summarized in TABLE A, the City of Chicago had an estimated population of
2.762 million in 1996, a decrease of 243,000 residents since 1980, when the
population was estimated at approximately 3.005 million people. However, the
decline in urban population since 1980 was more than offset by a significant
growth in the suburban population.
15
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
The population shift from the city to the suburbs becomes evident when one
looks at the county population as a percentage of the total population. These
figures, as well as projections for the year 2006, are presented below in TABLE
B as follows:
<TABLE>
<CAPTION>
===============================================================================
TABLE B
POPULATION AS A PERCENTAGE OF THE TOTAL
================================================================================
COUNTY 1980 1996 2006/(1)/
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Cook: 74.0% 68.0% 65.8%
Chicago 42.3% 36.5% -
Suburbs 31.6% 31.4% -
DuPage 9.3% 11.4% 12.1%
Kane 3.9% 4.7% 4.7%
Lake 6.2% 7.6% 8.0%
McHenry 2.1% 3.0% 3.3%
Will 4.6% 5.5% 6.1%
--------------------------------------------------------------------------------
/(1)/ Projected
================================================================================
</TABLE>
The preceding table shows a steady migration from the city toward the suburbs.
The collar counties of DuPage, Kane, Lake, McHenry, and Will increased their
share of the regional population from 26.1 percent in 1980 to 32.2 percent in
1996. Their share of the population is expected to further increase to 34.2
percent by the year 2006. The population shift from the city to suburban areas
is common among most major cities throughout the Great Lakes and Northeastern
regions, and is expected to continue for the foreseeable future.
TRANSPORTATION
AIR TRANSPORTATION
Chicago is one of the primary transportation hubs in the United States.
O'Hare International Airport is the busiest in the world, handling approximately
67.25 million passengers in 1995. The substantial increase in air traffic is
attributed to several factors, which include the deregulation of the airline
industry, the establishment of regional "hubs" by major airlines, and the
economic expansion into global markets. United Airlines rebuilt their terminal
in 1987 at a cost of $500 million; American Airlines also expanded and upgraded
their facility in 1990, the $329 million project was intended to provide more
space for airline operations and to provide greater convenience and comfort for
their passengers. Finally, the new 1.1 million square foot International
Terminal at O'Hare was completed in 1992. The new terminal increased
international passenger travel from 6.76 million in 1993 to 9.89 million in
1995, or 15.0 percent.
16
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
Midway Airport, located in the southwest portion of the city, serves as a
secondary airport which has become an increasingly popular alternative to
O'Hare. From 1980 to 1990, passenger volumes increased significantly, rising
from 600,000 passengers to nearly 9.0 million passengers. Passenger volumes fell
to 7.3 million in 1991 and to 4.6 million in 1992 as Midway Airlines, the
primary carrier at the time, filed for bankruptcy. In 1991, Midway Airport was
serviced by four only carriers, Comair, Northwest, Southwest and USAir; however,
during 1992 and 1993, twelve new airline carriers were added, including America
West, Midway Airlines, MarkAir, TWA, and Continental. According to information
compiled by the Chicago Department of Aviation, 6.76 million passengers traveled
through Midway Airport in 1993, 9.54 million in 1994 and 9.89 in 1995. The
newest CTA rail line, which links Midway Airport to the Chicago Loop was
completed in 1993. The $500.0 million project provides daily transportation for
approximately 50,000 southwest side residents. Benefiting from a new Midway
Airlines, a surging Southwest Airlines and the local operations of 15 other
carriers, Midway Airport is expected to see passenger volume continue to
increase.
According to an article in Crain's Chicago Business, city officials are
considering options to expand Midway Airport's terminal operations. Their
choices include replacing Midway Airport's 47-year old terminal with a larger
one or expanding the current structure. Reportedly, the city anticipated
construction to commence in 1996, with new terminal operations in four years,
however, at present, no construction has been started. The city has also
purchased three land parcels situated east of Cicero Avenue to accommodate
expanded parking. According to the city officials, the cost of the project would
be borne by the airport's carriers and federal sources, not by city taxpayers.
While the expansion would ease air traffic into Chicago; the proximity of
residential development around Midway Airport limits the size and flight
schedule of aircraft utilizing the airport. Therefore, in the end, the terminal
expansion would serve to safeguard Midway's position as a thriving second-tier
airport, rather than significantly expand its customer base.
GROUND TRANSPORTATION
Several major expressways and interstate highways pass through the Chicago
area. Interstate 88 and 290 are the main routes to cities along the East-West
corridor. Interstate 55 provides access to the southwestern cities. Cities to
the north and northwest are accessed via Interstates 90 and 94; and finally,
north-south travel between the western suburbs is facilitated by Interstate 294
and 355. In total, the Chicago area has over 630
17
<PAGE>
REGIONAL ANALYSIS
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miles of expressways. Within the metropolitan area, commuter transportation is
facilitated by rail lines, rapid transit systems, bus lines and expressway
systems.
Suburban Chicago is served by eleven radial Metra rail lines originating from
the Central Business District. The 507-mile Metra system serves 227 stations in
six counties in Illinois: Cook, Lake, DuPage, Will, McHenry and Kane and Kenosha
County in Wisconsin. Ridership on Metra totaled 73.2 million in 1995, a slight
decrease from the 74.7 million riders in 1994. The exhibit on the facing page
details the areas serviced by Metra's transportation network in the Chicago
Metropolitan Area. The urban areas of Chicago are served by sixteen elevated
rail lines and a number of bus routes. Just over 135.3 million people used the
"El" and 306 million used the bus routes as a mode of transportation in 1995.
According to the RTA, 442.7 million people utilized some form of public
transportation in 1995; a 5.9 percent decrease from 1994.
EMPLOYMENT
The Chicago economy, like most major metropolitan areas, began as a
manufacturing center. However, today the Chicago economic growth is no longer
primarily based on the manufacturing sector, but is distributed among wholesale
and retail trade, health care, education, and financial services. TABLE C,
below, summarizes the diversity of employment for the eleven county Consolidated
Metropolitan Statistical Area.
<TABLE>
<CAPTION>
==========================================================================================
TABLE C
CHICAGO METROPOLITAN AREA EMPLOYMENT STATISTICS: 1996 - 2006
==========================================================================================
COMPOUND GROWTH
1996 PERCENT 2006 PERCENT 1996-2006
INDUSTRY GROUP EMPLOYMENT OF TOTAL EMPLOYMENT OF TOTAL
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mining/Agriculture 40,160 0.8% 47,710 0.9% 1.74%
Manufacturing 728,980 14.5% 701,260 13.1% -0.39%
Construction 236,610 4.7% 244,450 4.6% 0.33%
TCU (1) 285,860 5.7% 307,410 5.7% 0.73%
Trade 1,106,870 22.0% 1,162,370 21.7% 0.49%
FIRE 468,730 9.3% 532,870 10.0% 1.29%
Services 1,592,010 31.7% 1,803,700 33.7% 1.26%
Government 558,340 11.1% 545,920 10.1% -0.22%
- --------------------------------------------------------------------------------------------
TOTAL 5,030,540 100.00% 5,357,150 100.0% 0.63%
- ---------------------------------------------------------------------------------------------
SOURCE: WOODS & POOLE ECONOMICS, INC.
/(1)/ TRANSPORTATION, COMMUNICATIONS & UTILITIES
==========================================================================================
</TABLE>
18
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
The local employment picture is expected to follow historical trends as the
Chicago MSA enters the next decade. The service sector will continue to lead
employment, the manufacturing sector will shrink and overall job growth will
remain steady. Employment increases in the communications sector are considered
a sure bet; however, expected utility deregulation will dampen long-term growth
prospects for this industry. According to Woods & Poole, the services and FIRE
industries should continue to lead employment growth during the next ten years.
These projections are supported by the steady increase in the number of area
small businesses, the contribution of local universities and MSA's ability to
capitalize on increased international trade.
In 1996, the number of jobs in Cook County accounted for 62.8 percent of
total employment for the eleven county area. Similar to the population trends
previously discussed, the collar counties are also projected to increase their
share of total employment. This distribution is summarized in TABLE D below.
<TABLE>
<CAPTION>
===========================================================================================
TABLE D
CHICAGO METROPOLITAN AREA
EMPLOYMENT STATISTICS: 1996 - 2006
==============================================================================================
1996 2006
INDUSTRY GROUP EMPLOYMENT EMPLOYMENT
----------------------------------------------------------------------------------------------
<S> <C> <C>
Cook County 62.8% 59.8%
DuPage County 12.3% 13.5%
Kane County 3.7% 3.8%
Lake County 6.3% 7.3%
McHenry County 2.0% 2.2%
Will County 3.0% 3.2%
Other Counties 9.9% 10.1%
----------------------------------------------------------------------------------------------
TOTAL/(1)/ 100% 100%
----------------------------------------------------------------------------------------------
SOURCE: WOODS & POOLE
/(1)/ FOR THE 11-COUNTY CSMA
==============================================================================================
</TABLE>
Chicago is a leading corporate headquarters location. A number of Fortune 500
firms are headquartered in the Chicago area. Many other firms also have regional
headquarters in the Chicago area. Among the largest firms headquartered in
Chicago are: Sears, Roebuck & Company, Amoco, Sara Lee, United Airlines, and
Motorola. The
19
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
presence of a large number of corporate headquarters in the area is indicative
of the strength of the local support network and general business climate.
Chicago's top five public company employers in 1995 were the Sears, Roebuck
& Company, McDonald's Corporation, Sara Lee Corporation, Motorola, Inc., and UAL
Corporation. A list of the largest public and private companies, by 1995
revenues, is presented in EXHIBIT A on the following facing page.
Chicago is also a world leader in the trading of commodities, stock
options, currency and interest rate futures. The City has four major financial
exchanges including the Chicago Board of Trade, the Chicago Board Options
Exchange, the Chicago Mercantile Exchange and the Midwest Stock Exchange. Eighty
percent of the world's commodities are traded through three of Chicago's
exchanges.
UNEMPLOYMENT
The average annual unemployment rates for the six-county metropolitan area
are summarized below in TABLE E. From 1988 to 1993, Cook, Kane, and Will County
had unemployment rates higher than the national average, while DuPage and Lake
County were consistently lower. Only McHenry County had unemployment rates
similar to the national average during that time period. Since year-end 1994,
unemployment rates in the six-county metropolitan area have generally been below
the average for the nation.
<TABLE>
<CAPTION>
======================================================================================
TABLE E
AVERAGE ANNUAL UNEMPLOYMENT RATE
SIX-COUNTY CHICAGO METROPOLITAN AREA
======================================================================================
Cook DuPage Kane Lake McHenry Will U.S.
Year County County County County County County Illinois Avg.
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1988 6.7% 3.8% 5.4% 4.3% 4.8% 7.3% 6.8% 5.5%
1988 5.9% 3.3% 5.5% 3.9% 4.5% 6.3% 6.0% 5.3%
1990 6.3% 3.6% 5.9% 3.9% 5.3% 6.4% 6.2% 5.5%
1991 7.2% 4.8% 7.5% 4.6% 7.1% 7.4% 7.1% 6.7%
1992 7.8% 5.1% 8.0% 4.8% 6.6% 7.8% 7.5% 7.4%
1993 7.8% 5.1% 7.6% 4.9% 6.4% 7.4% 7.4% 6.4%
1994 4.2% 2.8% 4.6% 3.8% 3.9% 4.8% 4.2% 5.1%
1995 5.5% 3.4% 5.0% 4.0% 4.1% 5.3% 5.2% 5.6%
1996 5.5% 3.4% 4.9% 4.0% 4.0% 5.2% 5.3% 5.4%
Jul-97 4.8% 2.8% 3.8% 3.3% 2.9% 4.2% 4.6% 5.0%
</TABLE>
20
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SOURCE: ILLINOIS DEPARTMENT OF EMPLOYMENT SECURITY
================================================================================
21
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
EXHIBIT A
METROPOLITAN CHICAGO'S LARGEST PUBLIC COMPANIES
RANKED BY 1995 REVENUES
====================================================================================================================================
NET NUMBER OF
REVENUES EMPLOYEES
NAME CITY 1995 (000'S) 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sears Roebuck & Co. Hoffman Estates $34,925.0 359,700
- ------------------------------------------------------------------------------------------------------------------------------------
Amoco Corp. Chicago $27,066.0 42,689
- ------------------------------------------------------------------------------------------------------------------------------------
Motorola Inc. Schaumburg $27,037.0 142,000
- ------------------------------------------------------------------------------------------------------------------------------------
Allstate Corp. Northbrook $22,793.3 44,3000
- ------------------------------------------------------------------------------------------------------------------------------------
Sara Lee Corp. Chicago $17,719.0 149,100
- ------------------------------------------------------------------------------------------------------------------------------------
Caterpillar, Inc. Peoria $16,072.0 54,352
- ------------------------------------------------------------------------------------------------------------------------------------
UAL Corp. Elk Grove Township $14,943.0 77,900
- ------------------------------------------------------------------------------------------------------------------------------------
CNA Financial Corp. Chicago $14,699.7 15,600
- ------------------------------------------------------------------------------------------------------------------------------------
Ameritech Corp. Chicago $13,427.8 65,345
- ------------------------------------------------------------------------------------------------------------------------------------
Archer Daniels Midland Co. Decatur $12,671.8 14,833
- ------------------------------------------------------------------------------------------------------------------------------------
Walgreen Co. Deerfield $10,395.0 68,800
- ------------------------------------------------------------------------------------------------------------------------------------
Deere & Co. Moline $10,291.0 33,375
- ------------------------------------------------------------------------------------------------------------------------------------
WMX Technologies, Inc. Oakbrook $10,247.6 74,400
- ------------------------------------------------------------------------------------------------------------------------------------
Abbott Laboratories Abbott Park $10,012.1 50,241
- ------------------------------------------------------------------------------------------------------------------------------------
McDonald's Corp. Oakbrook $ 9,794.5 183,000
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
=======================================================================================================================
METROPOLITAN CHICAGO'S LARGEST PRIVATE COMPANIES
RANKED BY 1995 REVENUES
=======================================================================================================================
NAME NET REVENUES 1995 NUMBER OF EMPLOYEES 1995
(000's)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Montgomery Ward Holding Co. $7,085.0 54,800
------------------------------------------------------------------------------------------------------------------------
Marmon Group $6,000.0 28,000
------------------------------------------------------------------------------------------------------------------------
Alliant Foodservice, Inc. $4,225.7 9,000
------------------------------------------------------------------------------------------------------------------------
Topco Associates, Inc. $3,700.0 402
------------------------------------------------------------------------------------------------------------------------
Kemper National Insurance Cos. $3,400.0 8,837
------------------------------------------------------------------------------------------------------------------------
Hyatt Hotels Corp. $2,700.0 40,000
------------------------------------------------------------------------------------------------------------------------
Ace Hardware Corp. $2,440.0 3,929
------------------------------------------------------------------------------------------------------------------------
Cotter & Company $2,437.0 4,195
------------------------------------------------------------------------------------------------------------------------
Budget Rent a Car Corp. $2,430.0 24,000
------------------------------------------------------------------------------------------------------------------------
OSI Industries, Inc. $2,000.0 575
========================================================================================================================
</TABLE>
22
<PAGE>
REGIONAL ANALYSIS
================================================================================
After three years of relatively high unemployment rates throughout the Chicago
Metropolitan Area, the labor market improved significantly during 1994.
According to Crain's Chicago Business, economic recovery in the Chicago area is
expected to be stronger than other areas of the country, largely due to the
strong export of capital goods.
TOURISM
Chicago has long been a destination for tourists. The potential for additions
to the number of visitors coming to the Chicago area on an annual basis has been
enhanced of late, as the possibility of riverboat gambling to the City of
Chicago area continues to be explored. Navy Pier and North Pier, located in the
southern portion of the North Michigan Avenue Corridor, offer a variety of
cultural and maritime events during the summer months. The $190.0 million
redevelopment of Navy Pier incorporates many additional uses in a variety of new
facilities to serve the city and tourist populations. These include the Family
Pavilion anchored by the 50,000 square foot Chicago Children's Museum; Navy Pier
Gardens; Festival Hall, an enclosed parking facility for 1,200 automobiles; new
restaurants; an 18,000 square foot beer garden and a 25,000 square foot
ballroom. Additional tourist attractions include at Navy Pier include the
Skyline Stage, a 1,500 seat theater; a large screen theater with a five-story
high by eighty feet wide screen; and a 150 foot Ferris wheel. While attendance
at Navy Pier has exceeded initial expectations; according to a December 17, 1996
article in Crain's Chicago Business, North Pier has never performed to
expectations. While the 280,000 square feet of office space is well occupied;
the 160,000 square feet of retail space has suffered. The Baja Beach Club, a
nightclub and restaurant which serves as an anchor tenant, is currently
operating under Chapter 11 bankruptcy; and the Children's' Museum, considered a
traffic generator, moved to Navy Pier. North Pier is currently on the block and
is expected to transact between $25.0 to $35.0 million; considerably less than
the original $70.0 million redevelopment cost. Additional tourist attractions
in the Chicago Metropolitan Area include the Six Flags Great America Amusement
Park, Sears Tower, the John Hancock Building, which is currently renovating
their skydeck, Shedd Aquarium, Museum of Science and Industry, the Adler
Planetarium, the Art Institute, Michigan Avenue and the lakefront.
Chicago Bears owner, Michael McCaskey, is seeking a new stadium for his
football team after the 1999 season. According to Crain's Chicago Business,
after nine months of relentlessly selling a do-or-die deadline of early 1996 for
a new stadium plan, McCaskey extended the team's deadline for another year. The
extension came as plans for the
24
<PAGE>
REGIONAL ANALYSIS
================================================================================
Northwest Indiana football stadium complex died and political support for the
proposed $415.0 million, 72,000 seat domed facility near McCormick Place in
Chicago is questionable. A decision will have to be made by the end of this
season because the design and construction of a new stadium will take at least
three years.
State Street, the historic shopping street where no automobiles have been
allowed for years, was recently renovated. State Street is home to the flagship
Marshall Fields store, as well as many other large and small retailers. The
Chicago Transportation Department spent $30.0 million to renovate the street and
open it to auto traffic. In an effort to preserve sidewalk space and encourage
pedestrian traffic, the street width was maintained at 16 feet. Automobile
traffic will be limited, with turn lanes at various intersections to enable
drivers to turn onto cross streets.
SUMMARY
In summary, Chicago's status as a world class city is due to a variety of
inherent strengths, including: its excellent transportation system, central
geographic location, well educated work force, commodities and futures
exchanges, and its numerous cultural, educational and recreational amenities.
In addition, the municipality of the City of Chicago is generally healthy
financially, and the administration under Mayor Richard M. Daley, Jr. is
considered helpful toward business and development. Because of these factors,
the area ranked 11th among all metropolitan areas in terms of business climate,
according to a recent survey of chief executives across the nation. This same
survey, conducted by Cushman & Wakefield, Inc., also found that the Chicago area
"is still tops on access to markets and raw materials, and has improved its rank
position on the cost and availability of industrial labor, quality of life for
employees, government climate, and the cost and availability of both office
space and industrial sites with existing uses."
Although the Chicago area will continue to be subject to national economic
trends and conditions, the diversity of the local economy will insulate the area
from volatile economic swings. Overall, the Chicago area is expected to
continue its trend of economic growth. The continuation of Chicago's healthy
business climate, as well as its economic stability, should ensure a favorable
environment for real estate development and investment over the long-term.
25
<PAGE>
REGIONAL ANALYSIS
================================================================================
insert neighborhood map
26
<PAGE>
NEIGHBORHOOD ANALYSIS
================================================================================
MELROSE PARK
The subject property is located in the near western suburban community of
Melrose Park, located approximately three miles west of the western edge of the
city of Chicago and approximately 15 miles west of the Central Business District
of Chicago. The village limits of Melrose Park can generally be defined as Lake
Street to the south, Mannheim Road (U.S. Route 45) to the west, Armitage Avenue
to the north, and First Avenue to the east. North Avenue is a main east/west
thoroughfare that bisects the village. 25th Avenue and Broadway Avenue are both
north/south highway arteries that bisect the village. Railroads that serve the
village include Union Pacific Railroad and the Indiana Harbor Belt Railroad.
Other main highway arteries near Melrose Park include Harlem Avenue (U.S. Route
43), a major north/south artery located approximately one mile east of the
village. Access to the Eisenhower expressway is via Mannheim Road, 25th Avenue,
and Broadway Avenue. Access to Interstate 294 is via North Avenue.
The subject property is situated in the north central portion of the village
at the northeast corner of North Avenue and 25th Avenue. This is a mixed
industrial-commercial section of Melrose Park. North Avenue, at this location,
is predominantly developed with industrial and retail users. The border of the
subject property can be defined as Indiana Harbor Belt Railroad to the north,
25th Avenue to the west, North Avenue on the south and the Ford Motor Company
warehouse and Jewel Foods warehouse to the east. North Avenue, at the subject's
location, is a four-lane commercial thoroughfare with signalized intersection
and turning lanes. 25th Avenue is a four-lane north/south road crossing North
Avenue at the subject's location. 25th Avenue rises as it goes north over the
Indiana Harbor Belt Railroad. Melrose Park is considered a mature community and
is fully developed. Generally, industrial and commercial development is along
either sides of North Avenue with industrial developments behind it and to the
north and residential development behind the commercial development to the
south.
In summary, the subject is located in an area well suited for industrial-
commercial development. Real estate values are anticipated to increase at a
moderate, but steady, pace. Overall, the economy of the immediate area is
anticipated to continue to be stable.
27
<PAGE>
INDUSTRIAL MARKET ANALYSIS
================================================================================
METROPOLITAN CHICAGO MARKET OVERVIEW
According to Cushman & Wakefield's Research Services Department, the total
inventory of industrial space in the Chicago area is about 900 million square
feet. Given the degree of user ownership, vacancy statistics for Chicago area
industrial properties are difficult to estimate. However, according to Cushman
& Wakefield's First Quarter, 1998 Industrial Market Report, approximately 62.1
million square feet of industrial space is currently available throughout the
metropolitan area, implying an overall vacancy rate of 7.1 percent. Note,
however, that some of this vacant space includes older, obsolete industrial
facilities. The breakdown of available industrial space, by submarket within
the Chicago MSA, is summarized in the following table.
<TABLE>
<CAPTION>
====================================================================================================
CHICAGO MSA INDUSTRIAL MARKET SUMMARY
1ST QUARTER 1998
====================================================================================================
TOTAL AVAILABLE
TOTAL INDUSTRIAL INDUSTRIAL SPACE (SF) VACANCY RATE %
SUBMARKET SPACE (SF)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Chicago North 109,090,599 5,820,831 5.3%
Chicago South 132,580,230 9,577,568 7.2%
Western Cook Cty 95,222,329 7,039,406 7.4%
South Suburbs 77,732,814 5,397,041 6.9%
Northern Cook Cty 39,516,385 1,938,880 4.9%
NORTHWEST COOK CTY 90,956,768 6,437,457 7.1%
Northern Fox Valley 15,400,127 610,395 4.0%
Northeast DuPage Cty 70,593,799 6,324,399 9.0%
Southern DuPage Cty 14,332,527 830,565 5.8%
Central DuPage Cty 27,195,443 2,159,424 7.9%
Southern Fox Valley 57,707,418 5,535,667 9.6%
Lake County 70,407,701 6,395,539 9.1%
McHenry County 23,465,165 700,915 3.0%
Western Kane Cty 9,305,572 354,307 3.8%
Will County 39,532,0924 3,033,875 7.7%
- ----------------------------------------------------------------------------------------------------
Year-End 1995 828,858,907 59,745,952 7.2%
Year-End 1996 838,354,939 62,199,229 7.4%
Year End 1997 872,773,890 62,148,026 7.1%
1/ST/ QUARTER 1998 873,038,969 62,156,269 7.1%
====================================================================================================
</TABLE>
28
<PAGE>
insert page for metro market ovw
29
<PAGE>
INDUSTRIAL MARKET ANALYSIS
================================================================================
Over the past few years, continued improvement within the regional and
national economies have spurred a significant amount of industrial growth in the
Chicago metropolitan area. This is a marked change from the uncertainty which
arose from the weak economy prevalent in the late-1980's and early-1990's.
Discussions with knowledgeable market participants, and review of relevant
market surveys, indicate that a greater level of absorption of existing
industrial inventory and reduced development of new space resulted in the
overall stabilization of industrial property values and rental rates in 1993 and
1994. This trend continued through 1996, although market-wide vacancy levels
were somewhat offset by substantial inventories of new construction which began
to come on-line in late 1996. Graphically presented on the facing page is a
summary of the Chicago Metropolitan Industrial Inventory Vacancy, Historical
Sales and Leasing Activity as reported by Cushman & Wakefield. This chart
illustrates 1997 industrial leasing and sales activity and construction
completion through the First Quarter of 1998.
The beneficiaries of market stabilization and recovery within the industrial
sector have been mixed and depend upon the particular submarket and industrial
property type. Demand for some manufacturing facilities, and particularly those
located in the city center, has remained flat or continued to deteriorate in
terms of market position. The largest inventory of available space is located
in the city and within western portions of Cook County. The lowest levels of
available industrial inventory are reported in the Northeast DuPage County area,
availability is especially limited among good-quality properties in close
proximity to the Chicago O'Hare International Airport, with the strongest demand
generally in warehouse and distribution facilities.
Statistics prepared through the First Quarter of 1998 by Cushman & Wakefield
suggest a similar circumstance. Generally, all of the Chicago metropolitan area
industrial submarkets tracked by Cushman & Wakefield have demonstrated improved
sales and leasing activity with a slowing of construction completions.
30
<PAGE>
INDUSTRIAL MARKET ANALYSIS
================================================================================
CHICAGO METROPOLITAN AREA
DEVELOPMENT ACTIVITY
Institutional investors continue to have a strong appetite for newer, fully-
leased, warehouse/distribution space within the Chicago metropolitan area. This
institutional demand is especially pronounced in select areas such as Carol
Stream, Hanover Park and Bolingbrook. The result has been a continued boom in
speculative construction within the strongest industrial submarkets in the
Chicago area. The bulk of this new construction was started in 1995 when
industrial market conditions (i.e., rental and vacancy rates) were optimal to
support new speculative development, especially given the high levels of demand
at that time coupled with the fairly limited alternatives for users seeking new
or expanded operations areas.
Discussions with local area brokers indicates that the Melrose Park and
Northwest Cook County area remains one of the most highly sought after
industrial locales within the Chicago MSA. This area continues to attract new
companies from alternate locations within the metropolitan area.
INVESTOR EXPECTATIONS
The investment community continues to place a premium on quality, industrial
projects. The increase in available capital for investment has resulted in
downward pressure on yield rates. Institutional investors continue to favor
high-cube distribution facilities. Investor demand for fully-leased, well-
located, institutional-quality industrial facilities has placed downward
pressure on going-in capitalization rates. Investors indicate that this product
class is most frequently situated in growth markets, most notably, DuPage, Lake
and Will Counties. Market participants report that the recent influx of buyers
attracted to the Chicago area industrial market are expected to continue to
drive investment activity.
NORTHWEST COOK COUNTY SUBMARKET
The subject property consists of a heavy industrial building located in the
Village of Melrose Park within the Northwest Cook County industrial submarket
(as delineated by Cushman & Wakefield).
This submarket is bounded to the east by I-294, west by Barrington Road,
south by DuPage County, north by Lake County. The market is comprised of a high
concentration of industrial buildings in established industrial areas with rail
service and trucking routes. Also,
31
<PAGE>
INDUSTRIAL MARKET ANALYSIS
================================================================================
this market's close proximity to O'Hare Airport continues to attract tenants.
The Northwest Cook County submarket includes one of the largest industrial parks
in the country, Centex Industrial Park, located in the densely industrialized
community of Elk Grove.
<TABLE>
<CAPTION>
==========================================================================================
NORTHWEST COOK COUNTY INDUSTRIAL SUBMARKET
Available Industrial Space (SF)
- ------------------------------------------------------------------------------------------
Warehouse/ % % Office/ %
SURVEY DATE Distribution Change Manufacturing Change Service Change
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
4th Qtr. 1989 3,634,629 - - - 1,666,087 - - - 803,716 - - -
4th Qtr. 1990 4,792,137 31.8% 2,415,394 45.0% 1,879,163 133.8%
4th Qtr. 1991 6,676,565 39.3% 2,697,301 11.7% 1,860,463 -1.0%
4th Qtr. 1992 6,048,064 - 9.4% 3,010,287 11.6% 1,643,195 -11.7%
4th Qtr. 1993 5,344,742 -11.6% 3,239,872 7.6% 1,471,051 -10.5%
4th Qtr. 1994 4,772,461 -10.7% 3,171,676 -2.1% 1,281,392 -12.9%
4th Qtr. 1995 3,413,936 -28.5% 2,075,541 -34.6% 1,266,687 -0.11%
4th Qtr. 1996 4,377,367 28.2% 2,401,929 15.7% 1,256,989 -0.08%
4th Qtr. 1997 4,408,827 0.07% 1,871,473 -22.1% 866,899 -31.0%
1st Qrt. 1998 3,689,143 -16.3% 1,936,958 3.5% 811,356 -6.4%
- ------------------------------------------------------------------------------------------
Source: Cushman & Wakefield Market Research Services
==========================================================================================
</TABLE>
This submarket experienced a significant increase in available space from
1989 to 1991. Recent trends indicate that the amount of available
warehouse/distribution space has been declining since 1991. The supply of
manufacturing space had been increasing steadily until 1993, and has dropped
steadily through the Fourth Quarter, 1997. This submarket also experienced a
significant increase in office/service space from 1989 to 1991, but the
availability of this product type has been declining since 1991.
Industrial leasing activity within the Northwest Cook County submarket
totaled nearly 858,000 square feet through the first quarter 1998. Meanwhile,
sales activity within this submarket for first quarter 1998 reached 828,000
square feet.
The following chart contains a summary of average net industrial rental rates
generally found in the Northwest Cook County submarket for each property type.
Please note that the actual rates for specific buildings can vary considerably
and can be outside the ranges presented.
32
<PAGE>
INDUSTRIAL MARKET ANALYSIS
================================================================================
<TABLE>
<CAPTION>
NORTHWEST COOK COUNTY INDUSTRIAL SUBMARKET
Rental Survey
(First Quarter 1998)
===================================================================
PROPERTY TYPE AVERAGE NET ASKING
RENTAL RATE
===================================================================
<S> <C>
Warehouse/Distribution $4.37
Manufacturing $4.18
Office/Service $7.98
===================================================================
</TABLE>
The Northwest Cook County industrial submarket has suffered from the real
estate tax differential with nearby DuPage County. This is especially
significant for the communities bordering DuPage County, because of their
proximity to concentrations of more modern business and industrial parks in
neighboring communities located in DuPage County. Real estate taxes for
industrial properties located in DuPage County tend to range from under $1.00 to
$2.00 per square foot. This is significant when compared to Cook County
(including Melrose Park) for industrial properties, which shoulder a real estate
tax expense of $2.00 to $3.00 per square foot, or more.
Discussions with Cushman & Wakefield industrial brokers indicate that,
despite the current disadvantage of real estate taxes on the industrial
properties versus similar properties in DuPage County, demand could be found for
the western Cook County properties because of their location and setting. It is
believed that demand for space exists at a rental rate which is partially
adjusted for the real estate tax differential.
Discussions with active brokers indicate that the Cook County real estate tax
rate tends to put downward pressure on industrial rental rates in the local
area, relative to those of adjacent communities located in DuPage County. The
downward pressure on rental rates is a function of the requirement to remain
competitive in terms of overall cost of occupancy to prospective tenants.
Market participants indicate that increases in real estate taxes have offset any
improvement in gross rental rates within the subject's market.
33
<PAGE>
INDUSTRIAL MARKET ANALYSIS
================================================================================
The subject neighborhood has seen considerable market activity in the past
few years; a good portion of the market activity is related to entities moving
within the area. As stated, industrial land uses in the immediate area are
generally divided among warehouse and manufacturing facilities. The facilities
vary from large, single- and multi-tenant buildings, typically containing
200,000 square feet or more to smaller owner-occupied properties of less than
100,000 square feet. Most of the older, single-user properties are being sold
to investors who are converting them into tenant-occupied properties. There is
also a market for many of the properties with buildings that are 30 to 50 years
in age. These buildings are being torn down and the sites redeveloped with more
functional industrial facilities. An example is the industrial sale at 1600
North 25th Avenue, which involves the tear-down of a 420,000 square foot plant
and the redevelopment of the site by Opus North of a 501,600 square foot
warehouse distribution facility. This property is located three blocks south of
the subject. Michael Svoboda, of CB-Richard Ellis, the broker in this
transaction, said the property was on the market for 12 months. Opus North
plans on having the new building up by spring 1999. He reported leasing
interest in the new building is high and that the Melrose Park and Franklin Park
areas are ready for this type of redevelopment, as many of the large older
properties reach the end of their physical and economic life. We have also
contacted Michael Fonda, Brenden Kelly and Keith Puritz, all of Cushman &
Wakefield's industrial brokerage division. They agreed with Mr. Svoboda and
further stated that buildings constructed in the 1970's are being converted to
multi-tenant use. Properties constructed in the 1950's or 1960's are generally
in poor physical condition and have functional problems such as low ceiling
clearances that are not cost-effective to convert. Therefore, these properties
are generally redevelopment candidates, with new industrial buildings, generally
warehouse/distribution buildings.
SUMMARY
Overall, the metropolitan Chicago industrial market has experienced
substantial improvement in vacancies, rental rates, and an increase in activity
in the last year. Industrial real estate remains a favorite among investors.
However, market participants indicate the fringe areas of Cook County will
continue to lose market share to adjacent communities associated with a lower
real estate tax burden. Over the long-term, we feel, as supported by local
market participants, that the good market fundamentals of the immediate market
area will remain stable, as long as property pricing is competitive. We feel
older - 1970-1980 vintage - owner-occupied industrial properties will continue
to be converted to multi-tenant properties as the market adjusts and
manufacturers move to the more modern facilities in
34
<PAGE>
INDUSTRIAL MARKET ANALYSIS
================================================================================
DuPage, Lake, and Will Counties. The older 1950-1960 vintage industrial
properties will start to be torn down and redeveloped with large
warehouse/distribution facilities.
35
<PAGE>
INDUSTRIAL MARKET ANALYSIS
================================================================================
insert plat survey
36
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
SITE DESCRIPTION
Location: 2407 West North Avenue, Melrose Park, Cook County, Illinois
Assessor's Parcel
Numbers: 12-34-300-004
12-34-304-002
Shape: Irregular -- see the Assessor's Tax Map on facing page.
Area: 955,344 square feet, or 21.93 acres.
Frontage: Approximately 570 feet along North Avenue and approximately
300 feet at grade frontage along 25th Avenue.
Topography: The site is generally level and at street grade.
Street North Avenue is a four-lane street, with center refuge turn
Improvements: lanes. 25th Avenue is four-lane street, with turn lanes.
Both streets are asphalt paved with concrete curbs and
gutters, street lighting and sidewalks. 25th Avenue rises to
above grade and becomes a bridge over the Indiana Harbor
Belt Railroad tracks to the north.
Soil Conditions: We were not provided with a soil survey. Therefore, we
assume that the soil's load-bearing capacity is sufficient
to support the existing structure. We observed no evidence
to the contrary during our physical inspection of the
property.
Utilities: All typical utilities are available at the subject property.
Water: Village of Melrose Park
Sewer: Metropolitan Sanitation District
Electricity: Commonwealth Edison
Gas: Northern Illinois Gas Company
Telephone: Ameritech
Access: Direct access to the subject property is provided via North
Avenue and 25th Avenue. Both streets access Interstate 290
and provide good access to the area's highway system.
Land Use We were not given a title report to review. As far as we
Restrictions: know, no easements, encroachments, or restrictions adversely
affect the sites' use.
37
<PAGE>
Insert survey
38
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Flood Hazard: According to the Community Panel No. 17031C0386F, National
Flood Insurance Rate Map, effective September 19, 1997, the
subject property is in Flood Hazard Zone X, which is
considered an area of minimal flooding and outside the five
hundred year flood plain. Also, there is a culvert on the
subject property that empties to the Salt Creek culvert that
crosses the subject property.
Hazardous No evidence of hazardous substances or toxic waste was noted
Substances: during our inspection of the site. The existence of
potentially hazardous or toxic material which may be located
at or about the subject property was not considered in
arriving at the opinion of value. The appraisers are not
qualified to detect such substances and Cushman & Wakefield
urges that an expert in this field be employed to determine
the presence, if any, of any such toxic materials.
Comments: Overall, the subject site is functionally adequate and well-
suited for the existing land use.
IMPROVEMENTS DESCRIPTION
The subject is a heavy industrial building. This facility was originally
constructed in the early 1950's and has had many additions. Zenith has added
sections in approximately 1968, 1979, 1980, 1985, 1986 and 1996. The subject is
a one- and two-story manufacturing facility of 748,300 square feet of gross
building area, with 552,000 square feet of first floor area representing 73.8
percent gross building. The second story section has 196,300 square feet, or
26.2 percent of the building area. There is also a basement area of 182,000
square feet that is not counted in the building's gross useable building area.
The office and laboratory component amounts to 110,575 square feet, which
equates to 14.8 percent of the gross building area, with 17,600 square feet on
the first floor and 92,975 square feet on the second floor. The land-to-
building ratio equates to 1.28:1 of gross building area. Zenith occupies the
entire building (see Site Plan on facing page. This plan does not show the
latest additions to the building's west side).
CONSTRUCTION DETAIL
Foundations: Concrete spread footings and continuous perimeter footings.
Framing: Steel framework of columns, beams and open-web bar joists.
Bay Spacing: Varies - by addition. Some are 20' x 30', 25' x 40', 27' x
35'.
Clearance: Clear interior heights in the industrial section vary from
10, 12, 14 and 18 feet, with approximately 90 percent of the
building having a ceiling clearance of 14 feet or less. The
manufacturing and assembly lines lower the ceiling clearance
even more. Office
39
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
areas are finished to 8 foot ceiling heights with acoustical
panels. Basement ceiling clearance is 7.5 feet.
40
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Floors: The flooring has reinforced concrete on compacted stone or
fill, sealed with coat of cure/sealer.
Walls: Exterior wall finish includes concrete block walls, tilt-up
concrete panels and insulated metal panels.
Roof Structure: All steel construction of truss girders, steel joist and
metal decking with a membrane roof covering or foam covering
or built-up system.
Windows: Insulated pane glass in anodized aluminum frames, located
along the office portions of the building.
Pedestrian
Doors: Metal hollow core doors in metal frames.
Loading Doors: All dock-high doors are on the building's west elevation and
consist of a seven-bay shipping section and a four-bay
receiving section. All spaces have levelors. There are two
grade-level drive-in doors on the east side and north side
of the building.
Rail: Yes, but not active.
MECHANICAL DETAIL
Heating and Hot water gas fired boilers provide heat to the
Cooling: industrial and office components. Additional boilers are
used in the production process. Ceiling mounted air
conditioning units provide cooling to the office areas.
Electrical 22,500 KVA - three transformers; 7,500 KVA each.
Service: 16 substations.
Fire Protection: Eighty percent of the facility is sprinklered for fire
protection.
INTERIOR DETAIL
Floor Covering: Office area typically of carpet or vinyl tile.
Walls: Office area typically of painted gypsum boards.
Ceilings: Office area typically of lay-in acoustical tile ceiling.
Lighting: Fluorescent light fixtures for the office floor areas.
Fluorescent and high intensity light fixtures in industrial
areas.
Doors: Interior: Hollow core, wood doors in metal frames.
41
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Exterior: Hollow core, metal doors in metal frames.
SITE IMPROVEMENTS
On-Site Parking: The parking areas are asphalt paved and include regular and
handicapped parking of approximately 570 spaces. Zenith, in
addition, has ground leases for additional parking under the
elevated 25th Avenue bridge. Copies of the leases were not
provided to the appraisers. The need for extra parking
would only be required if a similar manufacturing use that
required a very large employee base were to be continued at
this location,
Landscaping: Limited landscaping of sod and plants.
Comments: The quality of the subject improvements is rated average to
good; the layout and functional plan are rated poor. The
ceiling heights are 10, 12, 14 and 18 feet, with over 90
percent of the plant having a ceiling height of 14 feet or
under.
The facility consists of numerous building additions of
varying sizes, shapes, ceiling heights and column spacing.
This severely limits the utility of the building under an
alternate industrial use. Also, the building has only
eleven dock-high doors, which limits the building's overall
utility.
42
<PAGE>
REAL PROPERTY TAXES AND ASSESSMENTS
- --------------------------------------------------------------------------------
Real estate taxes and assessments for the subject are issued by Cook County.
Cook County assesses commercial property at 38.0 percent of the assessor's
opinion of market value. Real estate taxes are paid one year in arrears;
therefore, the 1996 taxes are payable in 1997.
In determining the real estate taxes payable for the subject, the County
applies a state equalization factor to the assessed valuation in order to
establish an equalized valuation. State equalization factors are designed to
compensate for differences in the assessment practices in each county in
Illinois. The tax rate is then applied to the state equalization factor to
determine the gross taxes payable. The chart below shows the assessed
valuation, tax rate and total real estate taxes for the subject property.
<TABLE>
<CAPTION>
===========================================================================================================
1996 REAL ESTATE AND ASSESSMENTS PAYABLE IN 1997
===========================================================================================================
PARCEL NUMBER ASSESSED VALUATION EQUALIZED VALUE TAX RATE REAL ESTATE TAXES TAXES PER SF
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12-34-300-004 $ 443,440 $ 954,150 8.390 $ 80,053.20
- -----------------------------------------------------------------------------------------------------------
12-34-304-002 $2,928,145 $4,333,286 8.390 $363,562.62
- -----------------------------------------------------------------------------------------------------------
TOTAL $3,371,582 $5,287,436 8.390 $443,615.82 $0.59
- -----------------------------------------------------------------------------------------------------------
===========================================================================================================
</TABLE>
Based on our market value estimate, herein, we feel the subject property is
over assessed.
43
<PAGE>
ZONING
- --------------------------------------------------------------------------------
The subject property lies within the G Industrial District. The G Industrial
District allows a variety of uses, including, but not limited to, manufacturing,
warehousing, office, and other uses. The following table summarizes some of the
major requirements under the G Industrial District. In addition to this
requirement summary, the respective zoning ordinances should be consulted for
more detail on the district's requirements.
<TABLE>
<CAPTION>
===================================================================
REQUIREMENT G INDUSTRIAL DISTRICT
===================================================================
<S> <C>
Max. Lot Coverage 90%
Max. Floor Area Ratio 0.9:1
Max. Height 75 feet
Min. Front Yard 25 feet
Min. Rear Yard 10 feet
Min. Side Yard 3 feet
===================================================================
</TABLE>
Based upon our review of the subject property, as improved, it appears to
represent legal and conforming use under the applicable zoning guidelines.
We know of no deed restrictions, private or public, that further limit the
subject property's use. We cannot guarantee that no such restrictions exist.
Deed restrictions are a legal matter and only a title examination by an attorney
or title company can usually uncover such restrictive covenants. Thus, we
recommend a title search to be conducted determine if any such restrictions do
exist.
44
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
According to the Dictionary of Real Estate Appraisal, Third Edition (1993),
published by the Appraisal Institute, the highest and best use is defined as:
The reasonably probable and legal use of vacant land or an improved property,
which is physically possible, appropriately supported, financially feasible,
and that results in the highest value. The four criteria the highest and best
use must meet are legal permissibility, physical possibility, financial
feasibility, and maximum profitability.
We evaluated the site highest and best use, both as if vacant and as
improved. The highest and best use must meet four criteria. The use must be (1)
legally permissible, (2) physically possible, (3) financially feasible, and (4)
maximally productive.
The highest and best use of the land, as if vacant and available for
development, may differ from the highest and best use of the property as if
improved; this is true when the existing improvements do not constitute an
appropriate use. The existing use will continue until the land in its highest
and best use exceeds the sum of the value of the entire property in its existing
use plus the cost to remove the improvements. Therefore, our analysis of
highest and best use considers the property under two assumptions: land as if
vacant for development and the land as improved.
HIGHEST AND BEST USE AS VACANT
LEGALLY PERMISSIBLE
Regardless of how favorable the physical attributes of a property are or how
feasible and productive a use might be for a given site, the legal
permissibility of uses has to be given due consideration. As discussed in the
Zoning section of this report, the subject site is zoned to permit improvement
with structures that accommodate a variety of uses, including manufacturing,
warehousing, office, etc. Existing zoning ordinance and easements do not appear
to constrain the development potential of the subject site. Furthermore, there
do not appear to be any private restrictions that would hinder the development
of the property.
PHYSICALLY POSSIBLE
Physical aspects of a site impose an additional constraint on the possible
uses of the property. Size, shape and topography are key determinants of those
uses which are physically possible to develop.
45
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
As discussed in the Property Description section of this report, the size,
soil, and topography are not believed to physically limit the use of the subject
site. The site contains 955,344 square feet, or 21.93 acres. The site is large
enough to accommodate several forms of real estate development, including
industrial, manufacturing, office or retail. We were not provided with a soil
survey report for the subject property; therefore, this report has assumed that
soil conditions are adequate to support all likely and typical uses of the site.
The critical municipal utilities (i.e., water and sanitary sewer) are available
to the site and, thus, should not impede development. Although a variety of
uses could physically be placed on the subject properties, their location,
coupled with surrounding land uses, would suggest some type of industrial use
would be most appropriate for the sites.
FINANCIALLY FEASIBLE & MAXIMALLY PRODUCTIVE
The third and fourth constraints concern what is financially feasible on the
one hand and maximally productive of the other. The adjacent land uses and
access to major ground transportation routes have a direct bearing on the
development potential for the subject site. The subject is located along two
main highway arteries (North Avenue and 25th Avenue) and the size of the parcel
(21.93 acres) provide a natural location for industrial development. In
addition, the adjacent development to the east is industrial and the subject's
current use is industrial. Retail development is not considered due to the
physical limitations of access by only west bound cars on North Avenue and the
limited access and visibility from 25th Avenue, which elevates as it goes north
and becomes a bridge over railroad tracks. Also, the depth of the site would
require a retail development that would have poor site visibility from North
Avenue and 25th Avenue. The feasibility of industrial development for the
subject is further supported by its direct proximity to Chicago O'Hare
International Airport and the Interstate Highway System (I-290). This direct
proximity presents a "natural fit" as a location for light industrial,
warehousing and distribution concerns which have a regional or national focus.
The Northwest Cook County industrial submarket has posted declining vacancy
rates over the past several years and is currently 7.1 percent and this
generally will spur new development. The submarket continues to post healthy
leasing and sales volume figures.
As such, given the current and historical demand for industrial space in the
subject's submarket, the most maximally productive use of the site is to develop
the subject property with a warehouse, distribution, or light industrial
building.
46
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
CONCLUDED HIGHEST AND BEST USE AS VACANT
In conclusion, an industrial facility would conform to all zoning
requirements, would be physically possible and would provide a maximum return to
the investor. Thus, the highest and best use of the subject site, assuming it
to be vacant and available for development, would be for future development with
an industrial building.
HIGHEST AND BEST USE AS IMPROVED
LEGALLY PERMISSIBLE
In relation to the legal considerations of the subject site, as presently
improved, based upon our review and analysis of the prevailing zoning and land
use ordinances of the subject property, it is our opinion that the existing
improvement and site utilization are in legal conformance with land use
regulations.
PHYSICALLY POSSIBLE
Relative to physical considerations, the subject site is improved with a
total of 748,300 square feet of first and second floor building area. The first
floor building area contains 552,000 square feet and represents 73.8 percent of
the building area and is used for manufacturing and office use. The second
floor area of 196,300 square feet represents 26.2 percent of the building area
and is finished for office, laboratory, cafeteria, men's and women's locker
rooms and miscellaneous manufacturing support areas. Much of the second floor
is closed and not being used by Zenith. The building's average age is estimated
at 30 years. The subject property exhibits a land-to-building ratio of 1.27:1,
based on gross building area, which is considered below modern industrial
standards of 2.00:1 to 2.50:1.
The subject property suffers from a number of physical and functional
problems that impact on its utility and value to another industrial user. The
physical problems are not maintenance related, but structural in nature.
. The ceiling clearance of 10, 12 and 14 feet affects approximately 90 percent
of the plant. Only the 1996 addition has 18-foot clear ceilings.
. Because of the numerous irregular shaped building additions, the column
spacings do not match and bay sizes vary significantly.
. The second floor space is in four locations across the building and amounts
to 196,300 square feet. The second floor has 92,975 square feet of office and
lab
47
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
space along the far south side of the building and 103,325 square feet of
manufacturing support area located in three sections of the manufacturing
component of the plant. The total second floor area amounts to 26.2 percent
of the gross building area of 748,300 square feet. This amount is
significantly higher than in modern industrial plants where generally only
the office component has second floor space. The second floor, as
constructed, significantly limits the first floor use below.
. The office component amounts to 17,600 square feet on the first floor and
92,975 square feet on the second floor. These total 110,575 square feet, or
14.4 percent of the gross building area. This percentage, again, is
significantly higher than is normally associated with a modern industrial
facility.
. The new C.D.T. production line that was constructed in the plant in 1996
involved the removal of approximately 45,000 square feet of the concrete
floor within the first floor. The new floor was lowered by about four feet.
This lower floor area would have to be filled in and a new grade level
concrete floor installed for any new occupants of the building.
. The facility has eleven dock-high doors and two drive-in doors, an amount
significantly below the requirements of a building this size.
. There are numerous enclosed rooms in the production area, many of full
masonry construction. These would have to be demolished in order to open the
plant area.
Except for the filling of the C.D.T. floor area and adding of dock-high
doors, the problems of low ceiling clearances, column spacing, and high
percentage of second floor area and office areas cannot be corrected in a cost-
effective manner and are considered major functional problems that impact on the
property's ability to be adapted as a single- or multi-tenant industrial
property.
Based on our observation, the functional problems discussed above adversely
affect the utility or continued use of the subject improvements.
FINANCIALLY FEASIBLE & MAXIMALLY PRODUCTIVE
The subject's functional problems have affected the building's utility as a
manufacturing building. The low ceiling clearances limit its use for an
assembly plant. Column spacing also varies erratically and has affected the
current assembly line operations. Zenith has "lived" with these problems, but
they cannot be corrected. With today's industrial manufacturer requiring
ceiling clearances of 24 to 30 feet and today's warehouse/distribution building
have 28 to over
48
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
32 foot clear ceiling heights, the subject building would not be acceptable to
the typical user of a 500,000 square foot building.
As for the conversion of the building to multi-tenant industrial use, ceiling
clearance and column spacing requirement would be adequate for some users. But,
the buildings poor layout, limited amount of dock-high doors, concentration of
office space and the large second floor areas are issues that severely impact
the desirability and marketability of the building and affect the building's
value when it is compared to other properties in the marketplace. Currently,
Melrose Park and adjacent Franklin Park have a number of older industrial
buildings that are being converted and renovated for multi-tenant use and would
compete directly with the subject. Alternately, some older facilities are being
demolished and the sites are being redeveloped with new state-of-the-art
warehouse/distribution buildings, including the facility at 1600 North 25th
Avenue, in Melrose Park, described as Land Sale L-1 in the Land Valuation
section of this report.
Based on the preceding analysis of the subject property as improved, the
highest and best use of the property is the redevelopment of the site requiring
the demolition of the existing building and construction with a large high
clearance warehouse/distribution facility of approximately 500,000 square feet
and ceiling clearances of 30 feet. The redevelopment at 1600 North 25/th/x
Avenue, three blocks south of the subject, involves the demolition of an older,
420,435-square foot industrial building. Opus North, the buyer, will construct a
new 501,600-square foot warehouse with 30-foot clear ceilings on the 1,014,077-
square foot site. The resultant land-to-building ratio will be 2.03:1. As was
discussed in the Industrial Market Analysis section of this report, a number of
industrial brokers were contacted regarding the demand in the market for a
property with similar physical and functional characteristics as the subject.
They all believed that there is very limited demand for such a large property
with such substantial functional problems. The brokers also felt that demand
exists for the redevelopment of older facilities with new high bay
warehouse/distribution buildings.
CONCLUDED HIGHEST AND BEST USE AS IMPROVED
Therefore, the existing subject building improvement is considered no longer
functional and to have reached the end of its economic life. Consequently, the
building should be demolished and the site redeveloped with an approximate
475,000 to 500,000 square foot warehouse distribution building with land-to-
building ratio of 1.91:1 to 2.00:1. Our concluded highest and best use requires
the demolition costs subtracted from the land value, as if
49
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
vacant. What follows is the land valuation of the subject property with the
demolition cost subtracted, resulting in a final value estimate for the subject
property.
LAND VALUATION
We used the Sales Comparison Approach to estimate land value. In this
method, we analyzed prices buyers have recently paid for similar sites in the
subject's competing area. Our value estimate was derived from prices of recently
sold comparable industrial sites, which offer similar locational attributes. In
making comparisons, we adjusted the sales prices for differences between the
subject and the comparable properties. Presented on the following facing page
is a summary of pertinent details of sold sites that we compared with the
subject site. A map identifying the locations of each of the respective land
sales utilized in this analysis is presented on the subsequent facing page. The
following is a detailed discussion of each of the land sales utilized in
estimating the market value of the subject site, as if vacant, and available for
development. Full details of each comparable land sale is included in the
Addenda section of this report.
COMPARABLE LAND SALE L-1 is located 1600 North 25/th/ Avenue, Melrose Park,
Illinois. This is the sale of an old industrial facility that is being
purchased by Opus North, a developer. The existing building is being
demolished and the site will be developed with a new 501,600 warehouse
distribution building. The former building was a 420,435 square foot
manufacturing plant. The property sale is to close in August 1998 for
approximately $4,265,000. The site contains 24.48 acres, or 1,066,349 square
feet. The land is zoned industrial. The sale price equates to $4.00 per
square foot of land area.
COMPARABLE LAND SALE L-2 is located at 1060 East Irving Park Road,
Bensenville, Illinois. The site contains 3.55 acres, or 154,638 square feet.
The property is zoned industrial. The site is rectangular in shape, level
and at street grade. The property was sold for $750,000, which equates to
$4.85 per square foot of land area. This sale was part of an assemblage of
60 acres for the construction of a 1,000,000 square foot warehouse facility.
COMPARABLE LAND SALE L-3 is located at the Northeast corner of Williams and
Belmont Avenues, Franklin Park, Illinois. The site is rectangular in shape,
level and at street grade. The site is zoned industrial. The purchaser will
construct a 200,000 square foot warehouse building that is to be leased to
Life Fitness. The site contains 8.89 acres, or 387,242 square feet. The
purchase price was $2,108,000. The sale
50
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
took place on January 26, 1996. The indicated sale price per square foot of
land area was $5.42.
COMPARABLE LAND SALE L-4 is located at 50 South Mannheim Road, Hillside,
Illinois. This site contains 6.0 acres or 261,360 square feet. The site is
rectangular in shape, level and at street grade. The property is zoned
industrial. A 155,000 square foot industrial building was demolished by the
seller to re-develop the site. The property sold on January 2, 1996 for
$1,315,000, or $5.03 per square foot of land area.
51
<PAGE>
<TABLE>
<CAPTION>
======================================================================================================================
SUMMARY OF COMPARABLE INDUSTRIAL LAND SALES
- ----------------------------------------------------------------------------------------------------------------------
COMP SIZE/AC
NO. LOCATION SALE DATE SALE PRICE SIZE/SF ZONING PRICE/SF
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
L-1 1600 North 25/th/ Avenue Under $4,265,000 24.48 AC Industrial $4.00
------------
/(1)/
Melrose Park, Illinois contract 1,066,349 SF
- ----------------------------------------------------------------------------------------------------------------------
L-2 1060 East Irving Park Road 5/96 $ 750,000 3.55 AC Manufacturing $4.85
------------
Bensenville, Illinois 154,638 SF
- ----------------------------------------------------------------------------------------------------------------------
L-3 NWC of Williams and Belmont 1/96 $2,100,000 8.89 AC Industrial $5.42
------------
Franklin Park, Illinois 387,248 SF
- ----------------------------------------------------------------------------------------------------------------------
L-4 50 South Mannhein Road 1/96 $1,315,000 6.0 AC Industrial $5.03
------------
Hillside, Illinois 261,360 SF
- ----------------------------------------------------------------------------------------------------------------------
SUBJECT 2407 West North Avenue -- -- 21.93 AC Industrial --
------------
Melrose Park, Illinois 955,344 SF
======================================================================================================================
</TABLE>
/(1)/ This was the sale of a 420,435 square foot industrial building on a
1,066,349 square foot site. The buyer will demolish the building. The
value of scrap will pay for demolition according to the selling broker.
The selling price of the property is reported to be approximately
$4,265,000. The sale is expected to close in August 1998.
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
The appraisers searched the subject's market area for recent land
transactions. Several land sales were identified and considered for comparison
of the subject site within the Western Cook County Area. The enclosed land
sales represent, to our knowledge, the most recent and comparable land sales
within the subject's market area, with which draw reference to the subject site.
53
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
Insert comparable land sales map
54
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
Land prices of our comparable sales range from $4.00 to $5.42 per square
foot, with an average unit sales price per square foot of land area of $4.83.
The comparable sales range in size from 154,638 square feet (3.55 acres) to
1,066,349 square feet (24.48 acres), with an average size of 467,399 square
feet, or approximately 10.73 acres.
The values of land parcels are influenced by various factors. The
fundamental factors believed to be of particular significance in this instance
are: passage of time, size, location, zoning, utility, highest and best use,
and accessibility. These items must be carefully weighed in a comparative
market analysis so reasonable value adjustments may be applied.
Typically, larger tracts of land tend to sell at lower unit sales prices than
their smaller counterparts, all other factors being equal. The analysis of
utility considers such physical characteristics as shape, depth, frontage,
corner influences, topography, zoning, and the availability of utility services.
The analysis of location considers such factors as exposure or visibility,
accessibility, and the quality of the surrounding area. The analysis of passage
of time considers such factors as appreciation in land values over time.
The comparables presented in this analysis are considered the most pertinent
information available, and are believed to provide a reasonable basis with which
to form an opinion of land value for the subject site, as if vacant, and
available for development. We attempted to quantify the various adjustments;
however, due to the varying factors associated with the sales, quantified
adjustments are difficult at best. The most market-oriented unit of comparison
for properties such as the subject is the sales price per square foot of land
area. All comparable sales were analyzed on this basis.
It should be noted, that the qualitative analysis which follows is primarily
for informational purposes; the intent being to assist the reader in the thought
process used to compare the dissimilarities of the sales to the subject, with
the ultimate result being a plausible market value conclusion. However, because
the trading of real estate occurs in a very imperfect market, coupled with the
fact that no two land sales are exactly alike, the use of paired sales to derive
quantifiable adjustments, though preferable in theory, is not generally
practical in the marketplace. The reasons being that even in the most ideal
circumstances, the quality and uniformity of data is insufficient to produce
accurate results, not to mention the intangible factor of motivation. As such,
the data could conceivably be manipulated to producing varying results.
Therefore, the reader should be cautioned that
55
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
the adjustments set forth herein are not to be construed as absolute, but are
provided as a visual aid in demonstrating the logic and reasonableness of the
conclusion.
56
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
TERMS OF SALE
All of the land sales cited within this section were arms-length transactions,
therefore, no adjustment for terms of sale were considered to be warranted.
MARKET CONDITIONS
This adjustment, which is also referred to as the "time adjustment" reflects
the change in market conditions from the sale date of a comparable to the
valuation date of the subject. Industrial real estate market conditions in
Chicago Metropolitan Area have continued to improve, resulting in continued
improvement in market conditions and land values since comparable land sales L-
2, L-3 and L-4 were negotiated. A 3.0 percent annual adjustment is made.
LOCATION
Comparable sales L-3 and L-4 have superior locations and downward adjustments
was made. Comparable sales L-1 and L-2 are of similar locations and no
adjustment was made.
UTILITY (PHYSICAL CHARACTERISTICS)
The analysis of utility considers such factors as shape, depth, frontage,
plottage, topography, zoning, and the availability of utility services. All of
the land sales considered having similar utility aspects in relation to the
subject site and, therefore, no adjustments for physical characteristics were
required.
SIZE
The site area of the subject is 955,344 square feet, or 21.93 acres, whereas
the comparable sale parcels L-2, L-3, and L-4 range in size from 154,638 to
387,248 square feet. Generally, sites in this size range are sold for larger
sales prices per square foot and an upward adjustment was made. Comparable sale
L-1 is similar in size to the subject and no adjustment was made.
57
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
=============================================================================================================================
QUALITATIVE ADJUSTMENT CHART
COMPARABLE LAND SALES
=============================================================================================================================
COMP NO. SALE TERMS MARKET CONDITIONS CUMULATIVE LOCATION SIZE UTILITY CUMULATIVE
PRICE OF SALE ADJUSTMENT ADJUSTMENT
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
L-1 $4.00 Arms-length Similar $4.00 Similar Similar Similar Similar
0% 0% 0% 0% 0% 0%
$4.00
- -----------------------------------------------------------------------------------------------------------------------------
L-2 $4.85 Arms-length Inferior $5.14 Similar Superior Similar Superior
0% +6% 0% -20% 0% -20%
$4.11
- -----------------------------------------------------------------------------------------------------------------------------
L-3 $5.42 Arms-length Inferior $5.85 Superior Superior Similar Superior
0% +8% -5% -20% 0% -25%
$4.39
- -----------------------------------------------------------------------------------------------------------------------------
L-4 $5.03 Arms-length Inferior $5.43 Superior Superior Similar Superior
0% +8% -5% -20% 0% -25%
$4.07
=============================================================================================================================
</TABLE>
The adjusted comparable sales prices range from $4.00 to $4.39 per square
foot, with an average adjusted sales price of $4.14. We feel the value would
fall within the value range, therefore, applying an estimated $4.00 to $4.30 per
square foot value range results in the following overall value estimates for the
subject property.
<TABLE>
<CAPTION>
=================================================================
LAND VALUATION
=================================================================
UNIT SALES
LAND AREA X PRICE/SF = ESTIMATED VALUE
-----------------------------------------------------------------
<S> <C> <C>
955,344 SF x $4.00 = $3,821,276
955,344 SF x $4.30 = $4,107,979
=================================================================
</TABLE>
We believe the value of the subject site would lie near the mid-aspect of the
above indicated range, or $3,950,000, or $4.13 per square foot.
58
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
In determining the cost of demolition, we reviewed Marshall Valuation Service,
that reflected general information on costs of $2.45 to $3.60 per square foot of
building area. We also contacted Michael Svoboda of CB-Richard Ellis, the broker
in the sale of a 420,000-square foot industrial building in Melrose Park, to
Opus North. The building was recently demolished and he said the demolition
costs were paid for by the value of the scrap material. We then contacted
Michael Fonda and Brenden Kelly of Cushman & Wakefield's industrial brokerage
division. They were recently involved in the demolition of a large industrial
property and these demolition costs were approximately $1.50 per square foot of
building area. Based on the data presented above, we feel that $1.50 per square
foot is reasonable and we have chosen to use this amount as a basis for our
demolition cost estimate.
From the above value estimate, we have subtracted our estimated demolition
cost of $1,125,000, or $1.50 per square foot of the 748,300-square foot
building. The final value estimate equates to $2,825,000.
Therefore, based on the above indicated, the land value of the subject
property equates to $2,825,000.
59
<PAGE>
QUICK SALE VALUE ESTIMATE
- --------------------------------------------------------------------------------
We have provided in our valuation a quick sale or orderly liquidation value
estimate of the subject property. A quick sale is estimated as a sale within a
six-month period.
In considering the question of value under a quick sale concept, there is a
great degree of subjectivity and judgement involved in this estimate.
No scientific method or "rule of thumb" exists in applying this discount.
Therefore, we have attempted to subjectively consider the potential buyer for
this property and determine a reasonable discount given the relative
marketability of the property and other factors.
Industrial brokers were contacted in the subject's market area and, although
no specific examples were discussed, they believe a discount range of 5 to 20
percent from the market value would be most likely under a quick sale scenario.
We believe an approximate 10 percent discount from the market value to be a
reasonable allowance to account for a quick sale of the subject property.
Therefore, after considering all factors pertinent under a quick sale or
orderly liquidation sale concept, it is our opinion that the quick sale value of
the subject property, as of May 21, 1998, was:
TWO MILLION FIVE HUNDRED FIFTY THOUSAND DOLLARS
$2,550,000
60
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
"Appraisal" means the appraisal report and opinion of value stated therein; or
the letter opinion of value, to which these Assumptions and Limiting Conditions
are annexed.
"Property" means the subject of the Appraisal.
"C&W" means Cushman & Wakefield, Inc. or its subsidiary which issued the
Appraisal.
This appraisal has been made subject to the following assumptions and limiting
conditions:
1. No responsibility is assumed for the legal description or for any matters
which are legal in nature. Title to the Property is assumed to be good and
marketable and the Property is assumed to be free and clear of all liens
unless otherwise stated. No survey of the Property was undertaken.
2. The information contained in the Appraisal or upon which the Appraisal is
based has been gathered from sources the Appraiser assumes to be reliable and
accurate. Some of such information may have been provided by the owner of
the Property. Neither the Appraisers nor C&W shall be responsible for the
accuracy or completeness of such information, including the correctness of
estimates, opinions, dimensions, sketches, exhibits and other factual
matters. The Appraisal and the opinion of value stated therein is as of the
date stated in the Appraisal. Changes since that date in external and market
factors can significantly affect property value.
3. The appraisal is to be used in whole and not in part. No part of the
Appraisal shall be used in conjunction with any other appraisal. Possession
of the Appraisal, or a copy thereof, does not carry with it the right of
publication. Publication of the Appraisal or any portion thereof without the
prior written consent of C&W is prohibited. Except as may be otherwise
expressly stated in the letter of engagement to prepare the Appraisal, C&W
does not permit use of the Appraisal by any person other than the party to
whom it is addressed or for purposes other than those for which it was
prepared. If written permission is given by C&W to use the Appraisal, the
Appraisal must be used in its entirety and only with proper written
qualification as approved by C&W. No part of the Appraisal or the identity
of the Appraiser shall be conveyed to the public through advertising, public
relations, news media or used in any material (other than in judicial or
61
<PAGE>
non-judicial proceedings involving Zenith) without C&W's prior written
consent. Reference to the Appraisal Institute or to the MAI designation is
prohibited.
62
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
4. The Appraisal assumes (a) responsible ownership and competent management of
the Property; (b) there are no hidden or unapparent conditions of the
Property, subsoil or structures that render the Property more or less
valuable (no responsibility is assumed for such conditions or for arranging
for engineering studies that may be required to discover them); (c) full
compliance with all applicable federal, state and local zoning and
environmental regulations and laws, unless noncompliance is stated, defined
and considered in the Appraisal; and (d) all required licenses, certificates
of occupancy and other governmental consents have been or can be obtained and
renewed for any use on which the value estimate contained in the Appraisal is
based.
5. The physical condition of the improvements considered by the Appraisal is
based on visual inspection by the Appraiser or other person identified in the
Appraisal. C&W assumes no responsibility for the soundness of structural
members nor for the condition of mechanical equipment, plumbing or electrical
components.
6. The projected potential gross income referred to in the Appraisal may be
based on lease summaries provided by the owner or third parties. The
Appraiser has not reviewed lease documents and assumes no responsibility for
the authenticity or completeness of lease information provided by others or
the bona fides of actual lease. C&W suggests that legal advice be obtained
regarding the interpretation of lease provisions and the contractual rights
of parties.
7. The projections of income and expenses are not predictions of the future.
Rather, they are the Appraiser's best estimates of current market thinking on
future income and expenses. The Appraiser and C&W make no warranty or
representation that these projections will materialize. The real estate
market is constantly fluctuating and changing. It is not the Appraisers' task
to predict or in any way warrant the conditions of a future real estate
market; the Appraiser can only reflect what the investment community, as of
the date of the Appraisal, envisions for the future in terms of rental rates,
expenses, supply, and demand.
8. Unless otherwise stated in the Appraisal, the existence of potentially
hazardous or toxic materials which may have been used in the construction or
maintenance or operation of the improvements or may be located at or about
the Property was not considered in arriving at the opinion of value stated in
the Appraisal. These materials (such as
63
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ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
formaldehyde foam insulation, asbestos insulation, various soil
contaminants, and other potentially hazardous materials) may affect the
value of the Property. The Appraisers are not qualified to detect such
substances and C&W urges that an expert in this field be employed to
determine the economic impact of these matters on the opinion of value
stated in the Appraisal.
9. If the Appraisal is submitted to a lender or investor with the prior
approval of C&W, such party should consider the Appraisal as one factor,
together with its independent investment considerations and underwriting
criteria, in its overall investment decision.
10. Unless otherwise stated in the Appraisal, compliance with the requirements
of the Americans with Disabilities Act of 1990 (ADA) has not been considered
in arriving at the opinion of value stated in the Appraisal. Failure to
comply with the requirements of the ADA may negatively affect the value of
the property. C&W recommends that an expert in this field be employed.
11. Please note that prior to the use of the Appraisal report, our value
conclusion, or our firm name as part of, or to be referenced in, any
offering or other material intended for the review of others to be submitted
to others (other than in connection with judicial or non-judicial
proceedings involving Zenith), except as otherwise provided in our letter of
engagement, our permission is granted on the condition that we be provided
with an indemnification agreement in a form and content satisfactory to us,
by parties satisfactory to us. Notwithstanding the foregoing, prospective
institutional lenders may rely on and use the appraisal reports in their
entirety for purposes of a first mortgage loan transaction with Zenith.
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<PAGE>
CERTIFICATION OF APPROVAL
- --------------------------------------------------------------------------------
We certify that, to the best of our knowledge and belief:
1. David O. Conroy, inspected the property and prepared the report and Stanley
R. Dennis, Jr., MAI, has reviewed and approved the report, but did not
inspect the property.
2. The statements of fact contained in this report are true and correct.
3. The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are our personal, unbiased
professional analyses, opinions, and conclusions.
4. We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with respect
to the parties involved.
5. Our compensation is not contingent on an action or event (such as the
approval of a loan) resulting from the analyses, opinions, or conclusions in,
or the use of, this report. The appraisal assignment was not based on a
requested minimum valuation, a specific valuation, or the approval of a loan.
6. Our analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the Uniform Standards of Professional
Appraisal Practice of the Appraisal Foundation and the Code of Ethics and
Standards of Professional Practice of the Appraisal Institute.
7. No one provided significant professional assistance to the persons signing
this report.
8. The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
9. As of the date of this report, Stanley R. Dennis, Jr., MAI has completed the
requirements of the continuing education program of the Appraisal Institute.
David O. Conroy Stanley R. Dennis, Jr., MAI
Senior Appraiser Managing Director
Illinois Certification No. 153-001128 Illinois Certification No. 153-000686
65
<PAGE>
ADDENDA
- --------------------------------------------------------------------------------
LEGAL DESCRIPTION
COMPARABLE LAND SALES
APPRAISER QUALIFICATIONS
66
<PAGE>
COMPARABLE LAND SALES DATA SHEETS
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L-1
Location: 1600 North 25th Avenue
Melrose Park, Illinois
Grantor: PDM Structural Group
Grantee: Opus North
Date of Sale: Under contract -- expected to close in August 1998
Size: 1,066,349 square feet, or 24.48 acres
Shape: Rectangular
Utilities: All present
Topography: Level, at street grade
Zoning: Industrial
Sale Price: $4,265,000
Unit Price/SF: $4.00
Comments: Opus North is buying an old industrial property
for redevelopment. The property was improved with
a 420,435-square foot industrial building. The
building was demolished after the property was
under contract to sell. The new building is to be
a 501,600-square foot warehouse/distribution
building with 30-foot clear ceiling height.
<PAGE>
COMPARABLE LAND SALES DATA SHEETS
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L-2
Location: 1060 East Irving Park Road
Bensonville, Illinois
Grantor: Nelsen Wire & Steel, Inc.
Grantee: Security Capital Industrial Trust
Date of Sale: May 14, 1996
Size: 154,638 square feet, or 3.55 acres
Shape: Rectangular
Utilities: All present
Topography: Level, at street grade
Zoning: Industrial
Pin Number: 12-18-300-010, -019
Recording Data: 96-365883
Sale Price: $750,000
Unit Price/SF: $4.85
<PAGE>
COMPARABLE LAND SALES DATA SHEETS
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L-3
Location: Northwest Corner of
Williams & Belmont Avenues
Franklin Park, Illinois
Grantor: RMP-1 LLC
Grantee: American National Bank,
as Trustee, #120682-1
Date of Sale: January 26, 1996
Size: 387,248 square feet, or 8.89 acres
Shape: Rectangular
Utilities: All present
Topography: Level, at street grade
Zoning: Industrial
Pin Number: 12-20-401-002, -016, -017
Recording Data: 96-071751
Sale Price: $2,100,000
Unit Price/SF: $5.42
Comments: The buyer is developing a build-to-suite
warehouse/distribution facility with Life Fitness
as tenant.
<PAGE>
COMPARABLE LAND SALES DATA SHEETS
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L-4
Location: 50 S. Mannheim Road
Hillsdale, Illinois
Grantee: Harris Bank Barrington
Trust # 11-50
Date of Sale: January 2, 1996
Size: 261,360 square feet, or 6.0 acres
Shape: Rectangular
Utilities: All present
Topography: Level, at street grade
Zoning: Industrial
Pin Number: 15-17-404-025
Recording Data: 96-002370
Sale Price: $1,315,000
Unit Price/SF: $5.03
Comments: The seller demolished a 155,000-square foot
industrial building. The buyer is to subdivide the
property and construct an industrial building and
a retail store.
<PAGE>
EXHIBIT 99O
------------------------------------------------------------
COMPLETE APPRAISAL OF REAL PROPERTY
CABLEPRODUCTOS DE CHIHUAHUA, S.A. DE C.V.
An Industrial Manufacturing/Warehouse Facility
Prolongacion Avenue de Las Americas
Parque Industrial Las Americas
Chihuahua, Chihuahua, Mexico
C & W Appraisal File No. 98-90842
------------------------------------------------------------
IN A COMPLETE FORMAT
As of May 29, 1998
Prepared For:
PPM FINANCE, INC.
Attention: Ms. Barbara Buck
Suite 1200
225 West Wacker Drive
Chicago, Illinois 60025
and
ZENITH ELECTRONICS CORPORATION
Attention: Ms. Beverly Wyckoff
1000 Milwaukee Avenue
Glenview, Illinois 60025
Prepared By:
CUSHMAN & WAKEFIELD OF ARIZONA, INC.
Valuation & Consulting Services
Suite 300
1850 North Central Avenue
Phoenix, Arizona 85004-4540
<PAGE>
June 12, 1998
PPM FINANCE, INC.
Attention: Ms. Barbara Buck
Suite 1200
225 West Wacker Drive
Chicago, Illinois 60025
and
ZENITH ELECTRONICS CORPORATION
Attention: Ms. Beverly Wyckoff
1000 Milwaukee Avenue
Glenview, Illinois 60025
Re: Complete Appraisal of Real Property
Cableproductos de Chihuahua, S.A. de C.V.
An Industrial Manufacturing/Warehouse Facility
Prolongacion Avenue de Las Americas
Parque Industrial Las Americas
Chihuahua, Chihuahua, Mexico
Dear Ms. Buck and Ms. Wyckoff:
In fulfillment of our agreement as outlined in the Letter of Engagement,
Cushman & Wakefield of Arizona, Inc., is pleased to transmit our report
estimating the market value of the fee simple interest in the subject property
as is.
As specified in the Letter of Engagement, the value opinion reported is
qualified by certain assumptions, limiting conditions, certifications and
definitions, which are set forth in the report. This is a complete appraisal
prepared in accordance with the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
This report was prepared for the client, and it is intended only for the
specified use of the client. It may not be distributed to, or relied upon by,
other persons or entities without written permission of Cushman & Wakefield of
Arizona, Inc.
The subject consists of a single tenant industrial facility encompassing
three buildings with 245,686 square feet on two sites separated by a street. The
facility is utilized by a subsidiary of Zenith for the manufacturing and
warehousing of cable descrambler boxes. The improvements were constructed in
1982 to 1989 and are in average condition, with no major deferred maintenance
noted.
<PAGE>
Ms. Buck and Ms. Wyckoff
June 12, 1998
Page 2
Although the improvements reflect only a 30 percent site coverage, we have
not considered any excess land, but reflected this low ratio within the
valuation processes of the individual approaches.
Michael L. Miller, MAI inspected the subject property and prepared the
report. As a result of our analysis, we have formed an opinion that the market
value of the fee simple estate in the manufacturing facility, subject to the
assumptions, limiting conditions, certifications and definitions, as of May 29,
1998, is:
FEE SIMPLE INTEREST
-------------------
SIX MILLION FOUR HUNDRED THIRTY THOUSAND DOLLARS
$6,430,000
At the request of the client, we have estimated the liquidation value of
the subject property. This assumes a six month sale period, which is less than
the estimated marketing period if sold at the market value previously noted.
This estimate of liquidation value, as of the date of appraisal and assuming a
six month sale period, is:
LIQUIDATION VALUE
-----------------
FIVE MILLION SEVEN HUNDRED THOUSAND DOLLARS
$5,700,000
This letter is invalid as an opinion of value if detached from the report,
which contains the text, exhibits, and an Addendum.
Respectfully submitted,
CUSHMAN & WAKEFIELD OF ARIZONA, INC.
Michael L. Miller, MAI
Director
Valuation Advisory Services
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
- --------------------------------------------------------------------------------
PROPERTY NAME: Cableproductos de Chihuahua, S.A.
de C.V.
LOCATION: Prolongacion Avenue de Las
Americas, Parque Industrial Las
Americas Chihuahua, Chihuahua,
Mexico 185389
INTEREST APPRAISED: Fee simple estate
DATE OF VALUE: May 29, 1998
DATE OF INSPECTION: May 29, 1998
OWNERSHIP: Zenith
LAND AREA (BOTH SITES): 18.89 acres or 822,848 square feet
Plant 4 and 4b: 16.02 acres or 697,831 square feet
Plant 11: 2.87 acres or 125,017 square feet
ZONING: Industrial (assembly non-
contaminants)
HIGHEST AND BEST USE
If Vacant: Industrial development
As Improved: Continued single-tenant industrial
use
IMPROVEMENTS
Type: Single-tenant industrial
manufacturing and warehouse
building
Year Built: 1982 to 1989
Type of Construction: Tilt wall and masonry block with
roof truss system and built-up
cover
Gross Building Area (3 buildings): 245,686 square feet
Plant 4: 141,546 square feet
Plant 4b: 50,000 square feet
Plant 11: 54,140 square feet
Condition: Average
VALUE INDICATORS
MARKET VALUE
Cost Approach: $6,750,000
Land Value: $2,060,000
Sales Comparison Approach: $6,260,000
Income Approach: $6,790,000
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
- --------------------------------------------------------------------------------
VALUE CONCLUSION (INCLUSIVE OF )
Fee Simple (Market Value): $6,430,000
Liquidation Value: $5,700,000
ESTIMATED MARKETING TIME:
Fee Simple (Market Value): 12 to 18 months
Liquidation Value: Less than 6 months
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
<S> <C>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
INTRODUCTION .............................................................................. 1
Identification of Property............................................................... 1
Property Ownership and Recent History.................................................... 1
Purpose and Function of the Appraisal.................................................... 1
Scope of the Appraisal................................................................... 1
Date of Value and Property Inspection.................................................... 2
Property Rights Appraised................................................................ 2
Definitions of Value, Interest Appraised, and Other Pertinent Terms...................... 2
Legal Description........................................................................ 3
Personal Property........................................................................ 3
Reporting Guidelines..................................................................... 3
Marketing Time........................................................................... 3
REGIONAL ANALYSIS.............................................................................. 5
MAQUILADORA ANALYSIS........................................................................... 12
MAQUILADORA INDUSTRY........................................................................... 21
INDUSTRIAL MARKET ANALYSIS..................................................................... 26
NEIGHBORHOOD ANALYSIS.......................................................................... 32
PROPERTY DESCRIPTION........................................................................... 34
Site Description......................................................................... 34
Improvements Description................................................................. 35
ZONING......................................................................................... 39
REAL ESTATE ASSESSMENTS AND TAXES.............................................................. 40
HIGHEST AND BEST USE........................................................................... 41
VALUATION METHODOLOGY.......................................................................... 44
COST APPROACH.................................................................................. 45
SALES COMPARISON APPROACH...................................................................... 54
INCOME APPROACH................................................................................ 60
RECONCILIATION AND FINAL VALUE ESTIMATE........................................................ 64
ASSUMPTIONS AND LIMITING CONDITIONS............................................................ 66
CERTIFICATION OF APPRAISAL..................................................................... 68
ADDENDA........................................................................................ 72
Subject Photographs
Legal Description
Building Plans
Qualifications of Appraiser
</TABLE>
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
IDENTIFICATION OF PROPERTY
The subject property is known as the Cableproductos de Chihuahua, S.A. de
C.V., a subsidiary of Zenith. The improvements consist of three industrial
manufacturing/warehouse buildings totaling 245,686 square feet of gross building
area. The site consists of two contiguous parcels of land separated by a street
and contains 18.89 acres. The physical address is Prolongacion Avenue de Las
Americas, Parque Industrial Las Americas, in the city of Chihuahua, state of
Chihuahua, Mexico.
The subject property is within an established industrial park in the
southwest quadrant of the city of Chihuahua. The subject has immediate access to
Avenida Homero, a major circular thoroughfare in the city. The neighborhood is
predominantly industrial with residential interspersed at the peripheral.
PROPERTY OWNERSHIP AND RECENT HISTORY
The subject site was acquired by the current owners prior to 1982 and
subsequently constructed the improvements in 1982 to 1989. Minor interior
remodeling has periodically occurred as demands on manufacturing have changed.
It was reported that an offer was made by an adjacent property owner within the
last year, but terms could not be confirmed. No prior sales, listings, or offers
are known to have occurred in the last three years.
We were provided a property description of the property prepared on May
15, 1998 by Baker & McKenzie of Juarez, Mexico. A copy of this is included in
the Addenda and outlines the recorded descriptions of the subject property and
the Zenith property in Juarez, Mexico.
PURPOSE AND FUNCTION OF THE APPRAISAL
The purpose of the appraisal is to provide an estimate of the market value
of the fee simple interest in the subject property as is. At the request of the
client, we have estimated the liquidation value of the subject property. This
assumes a six month sale period, which is less than the estimated marketing
period if sold at the market value previously noted. It is our understanding the
appraisal will be utilized to assist in making management decisions relative to
financing.
SCOPE OF THE APPRAISAL
In the process of preparing this appraisal, we:
. Inspected the building and site improvements with the production manager.
. Drove every major street in the community and inspected all large
commercial, industrial and office facilities, and all industrial parks
within the community.
. Conducted market research and analysis regarding the socio-economic makeup
of the country and the specific community where the subject is located.
. Prepared specific interviews and reviewed business and industrial overviews
prepared by Cushman & Wakefield/GCI, Northern Mexico's regional economic
centers, real estate brokers, and industrial developers in order to prepare
a comprehensive overview of the maquiladora market.
- --------------------------------------------------------------------------------
-1-
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
. Conducted market research and analysis of occupancies, asking rents,
concessions, and operating expenses at competing properties. This included
phone conversations with industrial park managers, the individual
maquiladora production managers, area real estate brokers in the U.S. and
throughout Mexico. Further, we reviewed publications put out by the state,
the local economic development council and the U.S. sister city.
. Conducted market inquiries into recent sales of similar properties to
ascertain sales prices per square foot and capitalization rates. This
included reviewing all potential commercial and industrial transactions in
the community, a regional search in the city, state and a national search
of potential leases and sales of maquiladoras in the country.
. Reviewed specific construction costs of projects recently completed, under
construction and proposed in order to substantiate a replacement cost
estimate. A land value estimate through a comparison of recent land sales
was conducted and after depreciation, used to derive a value via the Cost
Approach.
DATE OF VALUE AND PROPERTY INSPECTION
The date of value is May 29, 1998, the same as the date of inspection.
PROPERTY RIGHTS APPRAISED
Fee simple estate and liquidation value based on a six-month marketing
period.
DEFINITION OF MARKET VALUE
The definition of market value taken from the Uniform Standards of
Professional Appraisal Practice, 1994 Edition, published by The Appraisal
Foundation, is as follows:
The most probable price which a property should bring in a competitive and
open market under all conditions requisite to a fair sale, the buyer and
seller each acting prudently and knowledgeably, and assuming the price is
not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title
from seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales
concessions granted by anyone associated with the sale.
- --------------------------------------------------------------------------------
-2-
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
EXPOSURE TIME
Under paragraph 3 of the Definition of Market Value, the value estimate
presumes that a reasonable time is allowed for exposure in the open
market. Exposure time is defined as the estimated length of time the
property interest being appraised would have been offered on the market
prior to the hypothetical consummation of a sale at the market value on
the effective date of the appraisal. Exposure time is presumed to
precede the effective date of the appraisal.
The following definitions of pertinent terms taken from the Dictionary of
Real Estate Appraisal, Third Edition (1993), published by The American Institute
of Real Estate Appraisers (now known as The Appraisal Institute), are as
follows:
FEE SIMPLE ESTATE
Absolute ownership unencumbered by other interest or estate, subject
only to the limitations imposed by the governmental powers of taxation,
eminent domain, police power and escheat.
MARKET RENT
The rental income that a property would most probably command in the
open market; indicated by the current rents paid and asked for
comparable space as of the date of the appraisal.
CASH EQUIVALENT
A price expressed in terms of cash, as distinguished from a price
expressed totally or partly in terms of the face amounts of notes or
other securities that cannot be sold at their face amounts.
MARKET VALUE AS IS ON APPRAISAL DATE
The value of specific ownership rights to an identified parcel of real
estate as of the effective date of the appraisal; related to what
physically exists and is legally permissible and excludes all
assumptions concerning hypothetical market conditions or possible
rezoning.
LEGAL DESCRIPTION
A legal description is found the Addenda.
PERSONAL PROPERTY
There is no noted personal property associated with the operations of the
subject property that would require value consideration in the analysis of the
real estate.
REPORTING GUIDELINES
Throughout this report, all figures will be reported in United States (US)
dollars, unless specifically specified as pesos. All sizes will also be reported
in square footage or in acres.
MARKETING TIME
Marketing time is an estimate of the time that might be required to sell a
real property interest at the appraised value. Marketing time is presumed to
start on the effective date of the
- --------------------------------------------------------------------------------
-3-
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
appraisal. (Marketing time is subsequent to the effective date of the appraisal,
while the previously note exposure time is presumed to precede the effective
date of the appraisal.)
The estimate of marketing time uses some of the same data analyzed in the
process of estimating the reasonable exposure time, and it is not intended to be
a prediction of a date of sale.
Our estimate of an appropriate marketing time for the subject relates to a
sale of the property in its as-is condition. Based on our assessment of the
local real estate market and economic forces in general, coupled with
discussions with local and regional brokers and buyers/sellers of industrial
projects similar to the subject, we have concluded that the probable marketing
period for the subject property in today's environment would 12 to 18 months.
- --------------------------------------------------------------------------------
-4-
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
Since real estate is an immobile asset, economic trends affecting its
locational quality in relation to other competing properties within its market
area will also have a direct effect on its value as an investment. To accurately
reflect such influences, it is necessary to examine the past and probable future
trends that may affect the economic structure of the market area and evaluate
the impact on the market potential of the subject.
REGIONAL AND LOCAL INFLUENCES
Mexico is a country struggling to modernize its infrastructure and reform
its political system. Although changes have been made, the process has been
slow. The joining of GATT known today as the World Trade Organization (WTO) in
1987 began the process of Mexico joining the free world. The signing of the
North American Free Agreement (NAFTA) in 1994 set in motion the reduction of
tariffs between Mexico and the United States. Since then Mexico has signed
several free trade agreements in Central and South America. The involvement of
other political parties besides the Partido Revolucionario Institucional (PRI)
in the governing of Mexico has created greater participation by the people.
However, problems persist in the southern states, such as Chiapas, where the
indigenous people continue to demand a voice in the political process.
Since the devaluation of the peso in 1994, Mexico has been attempting to
create stability in the financial markets. Over the last 20 years Mexico has
devalued its currency every six years. The massive $52 billion financial aid
package the United States and the International Monetary Fund loaned Mexico in
1995 created greater restrictions on the country's federal reserve bank. Since
then the pesos has floated freely. In order for Mexico to succeed, the
corruption must be uprooted and the judicial system reformed. Nevertheless,
Mexico's close proximity to the United States, its young, inexpensive labor
force and natural resources creates a great opportunity in tourism and
manufacturing that still have not been met.
ECONOMY
Latin American countries, especially those considered mature emerging
markets, held a profitable position during 1997. The Wall Street Journal
classified Latin America as the zone which generates the world's highest
profits, with Mexico categorized as a mature emergent market. By the close of
1997, almost $12 billion in international investments occurred in all of Mexico,
establishing the country as the third most popular country for foreign
investment. The GNP grew by 7.3 percent versus the government's 5.2 percent
projection. The inflation rate was 15.72 percent.
Mexico is the largest Spanish speaking country in the world. With respect
to land area, it is the third largest country in Latin America and the
thirteenth largest in the world. The United States is Mexico's largest trade
partner, and Mexico is the third largest trade partner of the United States
after Canada and Japan. The approval of NAFTA in 1994 between Mexico, the United
States and Canada created the largest and most lucrative trade zone in the
world, with a market of more than 400 million consumers. As other Latin American
countries continue to grow economically and are incorporated in free trade
agreements with Mexico, the Mexican economy will incur the most benefits due to
its central location and recent stabilized economy.
The economy in 1996 and 1997 was presented with a slow but constant
recuperation. At the beginning of 1995, a 30 percent devaluation of the
peso/dollar exchange rate was
- --------------------------------------------------------------------------------
-5-
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
projected. But due to strong economic indicators in the second part of the year,
the peso stabilized and created a stimulating force for accelerated
recuperation, surpassing many previous predictions surrounding the country's
capacity for recovery. Further, in 1997, Mexico reduced its short term external
debt.
Mexico City remains as the most expensive city in the country. Conversely,
the city possessed the largest number of industrial and commercial
establishments, as well as representing approximately 30 percent of the average
GNP. Moreover, according to the American Chamber of Commerce, most companies
reported domestic sales volume increased during 1997, with almost one-third
indicating net operating profits had increased by more than 30 percent.
However, the real consumer buying capability has grown more slowly.
Santander, a Spanish banking group, predicted a consumer growth of around 2.5
percent for the year's end, and a jump in sales of approximately 10 percent, in
comparison to the previous year.
After World War II, Mexico based its economic growth on a system of
import-substituting industrialization. Barriers to imports protected domestic
products from foreign competition. Although the economy grew at average annual
rates of 6 percent in the 1950s and 1960s, the limits to the import substitution
model were all too apparent by the 1982 crisis. With booming oil prices and
foreign borrowing or deficit spending foreclosed, the De la Madrid government
began to open one of the world's most closed economies to competition and to cut
back the role of the state in economic activity.
The next president, Carlos Salinas de Gotari (1988-94), stepped up the
pace of this policy, privatizing many government industries and the banks, which
had been nationalized in 1982 by De La Madrid's predecessor, Jose Lopez
Portillo.
On January 1, 1994, Mexico entered the North American Free Trade Agreement
(NAFTA) with the U.S. and Canada, further reducing barriers to trade with Mexico
for U.S. and Canadian companies and removing many restrictions of foreign
investment.
The transformation of the economy begun by the De la Madrid administration
and accelerated during the Salinas six-year presidential term brought inflation
down from 159.2 percent in 1987 to 7 percent in 1994 and produced an average
annual growth rate of 3 percent between 1985 and 1994. Mexico, the darling of
the international financial community, seemed poised to take full advantage of
its recently granted membership in the Organization for Economic Cooperation and
Development (OECD).
In 1994, a presidential election year, several social and political
problems in Mexico shook investor confidence. Organized uprisings among
indigenous groups in Chiapas, the assassination of the Institutional
Revolutionary Party (Partido Revolucionario Institucional, PRI) presidential
candidate Luis Donaldo Colosio and the murder of PRI Secretary General Jose
Francisco Ruiz Massieu, all sent tremors through Mexican financial markets.
A massive exodus of capital precipitated a balance of payments crisis.
Without capital inflows, Mexico could no longer sustain a current account
deficit the size of 1994's; about 8
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<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
percent of GDP. The country's reserve position left the government with no other
option than to let the peso float. Fondo Bancario de Proteccion al Ahorro
(FOBAPROA), the Mexican equivalent of the U. S. FDIC, has since taken $43
billion in real estate properties as the result of the previous pesos
devaluation and is now responsible for management and disposition.
The harsh, painful adjustment sparked by the devaluation (on December 19,
1994 a dollar cost 3.4 pesos; at the end of 1995 it cost 7.7 pesos) and the
economic policies required to forestall falling back into the vicious
devaluation/inflation spirals of the past provoked the sharpest economic
contraction since the Great Depression.
The economy began to recover by late 1995, accelerated rapidly in 1996
with growth of over 5 percent for the year and declined to 4.5 percent for 1997.
It is expected that this growth will continue in 1998 with 4.0 percent annual
growth. In addition, exchange rate volatility has since eased and inflation has
fallen from an annual rate of over 51.9 percent in the aftermath of the
devaluation to 27.7 percent at the end of 1996. By May 1997 inflation fell below
1 percent per month for the first time since December 1994. Inflation forecasts
for the end of 1997 are 16.0 percent and 11.5 percent in 1998.
The recovery was, however, unevenly distributed. On the external side
improvement was immense. Besides overcoming the liquidity crunch, Mexico
succeeded in shifting a large trade deficit of $6.4 billion in 1994 to a surplus
of more than $6.4 billion in 1996. Mexico's access to international markets was
restored in mid-1995 when the Mexican authorities took advantage of the
opportunity to issue market debt in order to prepay the rescue package. By
January 1997, the portion of the rescue package owed to the United States was
repaid in full and $5 billion of the $12.4 billion owed to the IMF was pre-paid.
Mexico was also able to build up foreign exchange reserves to pre-crisis levels,
from $4 billion in January 1995 to $22 billion on July 18, 1997. The current
account deficit also shrunk from over 7 percent of GDP in 1994 ($30 billion) to
0.4 percent in 1996 ($1.4 billion).
As the United States' third largest trading partner, Mexico represents a
thriving market for U.S. products. Not only does Mexico offer a large market for
intermediate and capital goods produced in the U.S. and Canada, but it also
offers a growing market for consumer goods.
Intermediate goods, such as parts, supplies and raw materials used in
manufacturing, account for 78.8 percent of imports, and capital goods, such as
manufacturing equipment, account for 78.8 percent of imports, and capital goods,
such as manufacturing equipment, account for another 13.4 percent. The fact that
these two groups compose over 92 percent of Mexico's imports reflects the
country's developing industrial base. Among the main importers of these goods
are Mexico's manufacturing and maquiladora industries and the Mexican
government.
Although Mexico was hit by a severe economic crisis in 1995/96, its huge
consumer market is beginning to show signs of strong recovery. Due to the
introduction of free market policies and the recent expansion of many well-known
retail chains in Mexico, consumers are enjoying access to a wide variety of
foreign goods and services.
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<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
GOVERNMENT PRIVATIZATION
From 1997 until 2000, most of Mexico's remaining public transportation
will be privatized, including fifty-eight airports, nine ports, five rail
concessions and a dozen municipal transit systems. The long-distance
telecommunications market has already been opened to competition. In 1997, the
government announced a $100 billion toll road modernization program, $15-20
billion of which will be invested before the year 2000 to modernize Mexico's
transportation infrastructure. Mexico's government sustained IVA (Impuesto al
Valor Agregado) at 15 percent and adjusted its budget for 1998 due to
fluctuations of oil prices, because oil is Mexico's main export product.
Mexico privatized billions of dollars in state-owned industries in the
1990's, and began a steady process of opening trade that culminated with the
approval of NAFTA. However, continued progress on privatizations has been slow
and cumbersome. A Mexican-US rail consortium, Transportacion Ferroviaria
Mexicana (TFM), only recently took control of Mexico's most important railway
line in a $1.4 billion deal that completed the country's most difficult
sell-off. The long-awaited petrochemical privatization was watered down last
year. The state-owned airports are next on the list to be sold.
A $100 million investment was recently announced by the government for a
railroad modernization program, with an estimated $15 to $20 billion to be
invested before 2000 to modernize Mexico's transportation infrastructure.
TRENDS
The government's new National Program of Financing for Development
1997-2000 (Programa Nacional de Financiamiento de Desarrollo, Pronafide) is the
first multiyear plan and has broadened the range of policy goals to include
targets for national savings, social welfare expenditures and educational
attainment. It is designed to ensure GDP growth of 5.6 percent by the year 2000.
To achieve this goal, the plan calls for raising the country's total savings
rate (internal savings, external savings and depreciation rate) by more than
four percentage points to 25.5. percent of GDP in 2000 from 20.9 percent in
1996.
According to government and industry statistics, private consumption is in
fact on the rebound, albeit at a meager rate -- 2 percent in the first quarter
of the year. Overall consumption rose 4 percent in the first half of 1997 and
should rise by 5 percent in the second half, compared to the same periods a year
earlier.
In preparation for increased demand, companies this year and next expect
to invest more. In 1997 alone, companies will pour 44 percent more into physical
plant improvements and expansion, acquisition of new businesses, real estate,
research and development, and personnel training than they did in 1996. Next
year, respondents expect to increase investment in these areas by an additional
32 percent.
EMPLOYMENT PROJECTIONS
Reflecting the trends in sectoral performance, manufacturing companies
will see their investment levels increase at a slower pace in 1997 (44.5
percent) and 1998 (26.7 percent) than in 1996 (57.4 percent). 1996 was one of
the first year's when the sector's strongest members first looked beyond the
frail domestic market and focused their eyes on the lucrative
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-8-
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
export market. The bulk of investment in this sector will be seen in the
expansion and construction of new physical plant and the acquisition of
equipment.
The services and retail sectors on the other hand saw 1997 as the
"get-ready" year. Service-oriented companies are especially gearing up for
greater business by investing an average of 56.1 percent more than in 1996. As
could be expected, the vast majority of the sector's investment (72.4 percent)
will be in the training of its workforce to provide better-quality service.
The retail sector, one of the most affected by the travails of the
economic recession, is betting on slow but sure increased consumption levels
between now and the end of the six-year presidential term, or sexenio, by
investing more this year in new facilities and employee training. Survey
respondents to the American Chamber of Commerce study indicated investment in
the sector will grow by an average of 31.3 percent in 1997 and an additional
24.9 percent in 1998. Fully half of respondents belonging to the sector
indicated they will channel funds toward the construction of new facilities.
Confirming this data, the country's retail trade association, the ANTAD, said
its members plan to invest a total of $2.95 billion in new and expanded stores
over the next two years. An even greater number of respondents (69.2 percent),
however, said they will invest more to train their human resources--a sign that
greater competition has forced retailers to provide not only better choices and
prices, but also better service.
Companies in all three sectors also plan to support their growth with new
employees as well. Manufacturers and service companies expect to increase their
workforces by an average of 43 percent in 1997, and by 51 percent in 1998.
Retailers plan to hire 9.1 percent more workers in 1998 and 9.5 percent more in
1998. The government estimates that close to one million new jobs will be
created in 1998 alone. Overall, the employment outlook is extremely bright and
should continue to grow above U.S. levels.
INFRASTRUCTURE
We have provided an overview of the transportation and utility
infrastructure of the community in order to provide further insight into the
economic viability of the country.
AIRPORTS
Mexico boasts the most highly developed airport infrastructure in Latin
America with 83 public airports, of which 53 are international. Mexico has 32
international agreements which permit reciprocal service to 12 countries
throughout the Americas, 13 in Europe and seven in Asia. Deregulation in recent
years warranted an increase in the number of carriers, route expansion, more
competitive pricing and a growing number of passengers. Privatization of
Mexico's 58 existing airports, in groups of two or three, began in the second
quarter of 1997.
PORTS
Mexico has a total of 76 seaports and nine river ports. Of those, 22 ports
are located in the country's major production and consumption centers, and
handle the bulk of national and international activity. The remaining ports are
dedicated to fishing and tourism. Port activity is highly concentrated in six
ports: Salina Cruz, Lazaro Cardenas, Manzanillo on the Pacific Coast and
Coatzacoalcos, Veracruz and Tampico/Altamira on the Gulf of Mexico. Total cargo
traffic
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<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
through the port network increased 25.8 percent from 1996 to 1997, with
significant increases in both imports and exports.
HIGHWAYS
Mexican highways are divided into toll roads and toll-free roads. About
one third of the overall highway system is paved. Most of the paved roads are
part of the federal highway system, which between 1989 and the end of this
decade will have increased by over 70 percent. Toll highways are generally four
lanes, modern and quite costly. In contrast, toll-free roads are usually two
lanes and in poor condition. The government maintains the country's web of
toll-free roads whereas the network of toll highways is operated by the Office
of Federal Bridges and Roads (Caminos y Puentes Federales, Capufe) or by private
concessionaires. Rural roads still represent an important element of regional
and local transit.
TELEPHONES
Telmex, once a government-owned monopoly, was privatized in 1991 and is
now the fastest-growing telephone company in the world. The concession granted
to Telmex in 1990, defined the company's operating areas and set clear service
targets. The concession permitted the new owner a near monopoly for six years,
but competition for long distance services began in August 1996 and the bidding
on local frequencies will begin in October 1997. The long distance telephone
networks in Mexico are mostly fiber optic and totally digital. Local switching
is also digital and is more widespread than in many developed countries.
WATER
The National Drinking Water and Sewage Program (Programa Nacional de Agua
Potable y Alcantarillado), launched in 1990 by the National Water Commission
Comision Nacional del Agua, CNA), achieved nearly 100-percent availability of
potable water in medium-sized cities by 1992. It also increased the sewage
treatment coverage by one third, reaching 90 percent in major cities and 80
percent in medium-sized cities. Nonetheless 16.4 percent of the Mexican
population does not have access to potable water and 33.0 percent do not have
adequate sewage.
Water experts estimate that approximately $7 billion will be needed to
complete and expand current water projects and to construct new wastewater
collection and treatment systems. Since federal and local government budget
allocations for water projects are insufficient, much of the funding will need
to come from private sources of financing.
DEMOGRAPHICS
Presently, nearly 42 million of the 95 million Mexican citizens live in
poverty, with the national minimum wage at $26.45 pesos per day (approximately
$3.23 U.S.). Less than 20 percent of the population earns more than $5,125 pesos
per month ($625 U.S. per month). Furthermore, the World Bank estimated that 42
percent of Mexico's economic population is employed in the informal sector.
Approximately 56.8 percent of the Mexican population is under the age of
25 years, and six of every 10 citizens reside in cities. However, this trend is
changing, as the growth rate of the four main Mexican cities decreased to 1.8
percent from the 2.0 percent national average. One of the biggest problems
facing communities is adequately housing residents.
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<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
Consorcio ARA, residential developers, reported Mexico's housing deficit
was calculated at around six to eight million residences. In order to meet the
basic demands of the rapidly growing population, the housing inventory will have
to grow by roughly 777,000 units per year. During the past year, the
metropolitan areas averaged 4.52 residents per unit, slightly below the national
average of 4.65 residents per unit. Meanwhile, 86 percent of metropolitan
housing stock has access to water, and 84 percent has access to sanitary
services and drainage. However, nearly one million homes do not have electricity
and/or potable water, although the percentage of homes with electricity rose
from 58.9 percent to 93.2 percent between 1970 and 1995.
SCHOOLS/EDUCATION
There are many private institutions that offer quality education from
kindergarten to university. Many of them are bilingual, with the best
institutions concentrated in the economic centers of Mexico City, Guadalajara
and Monterrey.
SUMMARY
The common border of Mexico with the United States represents a unique
locational perspective that in the long term will benefit both countries. Mexico
is replacing many far east countries as a preferred manufacturing location, and
for good reason. Labor costs are similar and transportation costs are reduced to
North and South American countries. Additionally, the labor market is becoming
well schooled, with recent developments consisting of state of the art
facilities where skilled labor savings can also be found.
Mexico is taking the appropriate steps to become a free market society
that can effectively operate in a global economy. Society and government has
reacted positively to these changes, thus Mexico should remain one of the
fastest growing economies, with some of the highest profit potentials, of any
country in the world.
Near term forecasts project continued government and economic growth, at
reasonable levels. Population forecasts slightly above 2.0 percent are expected,
while growth in housing should substantially exceed this level due to current
inadequate supply. Municipal services will continue to expand and the monetary
system is expected to remain stable, with future inflation increases anticipated
at five to eight percent annually. Further, foreign investment will remain at
some of the highest levels of any country in the world.
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<PAGE>
MAQUILADORA ANALYSIS
- --------------------------------------------------------------------------------
In this analysis, we will analyze the business of manufacturing within
Mexico, then detail an overview of the industrial market within the community
and the maquiladora market in specific. A maquiladora is defined as an in-bond
light manufacturing facility located in Mexico. It is typically associated with
a company's raw materials being transported to the maquiladora where the product
is manufactured, then the finished product is shipped to the retailer or
consumer.
MANUFACTURING IN MEXICO
Mexican manufacturers generally range from small to medium-size companies.
Of the country's almost 120,000 manufacturing companies, approximately 98
percent are micro, small or medium-size businesses, all with fewer than 250
employees. However, almost all materials used to manufacture chemical products,
electrical and electronic components, textiles and footwear are imported from
the U.S. Less than 2 percent of these materials are produced in Mexico.
U.S. companies in Mexico purchase more raw materials from the U.S. than
from Mexico, which means U.S. companies tend to have the inside track for
supplying materials to their Mexican subsidiaries and other U.S. companies in
Mexico. Buying criteria, such as terms of payment, quality standards and
delivery time, are similar to U.S. standards. The top 10 states in terms of the
number of medium and large manufacturing operations are:
1. The State of Mexico
2. The Federal District
3. Nuevo Leon
4. Baja California Norte
5. Chihuahua
6. Jalisco
7. Guanajuato
8. Coahuila
9. Puebla
10. Tamaulipas
THE MAQUILADORA INDUSTRY
Maquiladora plants are twin plants that utilize imported basic American
products and convert them into the finished export merchandise ready for U.S.
and international retailers. This allows American firms to compete with other
foreign companies. The majority of the 300 maquiladora companies that in recent
years have been establishing themselves in northern cities like Mexicali and
Ciudad Juarez are export companies. In the Baja region of central Mexico, larger
manufacturers rely on large developers like Hines and Group Accion to set up
infrastructure and construction so exporting can go straight from Mexico to the
desired country. In northeast Mexico, large developers like Finsa and a
subsidiary of Security Capital (a real estate investment trust) form the bulk of
new construction activity. They have just recently provided management of the
business operations in addition to facility construction. Regardless of the
location, these frontier communities did not previously have an established
public information sector or private brokerage firm to provide companies with
the various locational and business opportunities available to them. Thus,
companies had to rely on specific economic districts and the industrial park
land owners for information.
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<PAGE>
MAQUILADORA ANALYSIS
- --------------------------------------------------------------------------------
Mexico's maquiladora industry continues its dynamic growth rate. This
32-year old program is now Mexico's second largest source of foreign exchange
revenue, in excess of $6 billion. Maquiladora exports represent 45 percent of
the total Mexican manufactured exports. Maquiladoras started 1997 with a growth
rate exceeding 1996's by 16.7 percent, and it is projected that this growth rate
will remain constant throughout 1998. In comparison, the non-maquiladora
manufacturing sector is growing at a rate of 7.3 percent. From January to June
1997, the Mexican government approved permits for 283 new maquiladoras resulting
in 23,902 direct jobs. In total, there are currently 3,650 maquiladoras in
Mexico, accounting for more than 920,412 direct jobs. The new maquiladoras
represent the entire gambit of manufacturing procedures, including textiles,
furniture, automotive components, toys, sporting goods and chemicals.
SUMMARY OF THE MAQUILADORA INDUSTRY
MARCH 31, 1996 JUNE 31, 1997
-------------- -------------
Number of plants 2,288 3,650
Number of jobs 710,268 920,412
It is obvious this industrial market is expanding at a rapid pace; in
fact, it is exceeding the expansion of some of the fastest growing U.S.
communities. The industrial growth for maquiladoras versus the growth of the
Mexican economy is summarized below.
INDUSTRY GROWTH
MAQUILADORAS NATIONAL AVERAGE
------------ ----------------
First Quarter 1997 14.2% 5.7%
Breakdown by Location
Border Region 76.6%
Interior 23.4%
Recent trends indicate that of the new additions to the market, greater
numbers of maquiladora plants have moved from the border areas to the interior
of Mexico. This trend is generally due to the improvement of transportation
infrastructure, facilitating the export of maquiladora-manufactured goods and
enhancing access to the border region and the U.S. market. Also, many
maquiladora employers are finding lower turnover rates in the interior cities of
Mexico, such as Durango, Puebla, Queretaro and Yucatan. We have tracked the
building permits for new maquiladoras in the states of Baja California,
Coahuila, Chihuahua, Federal District, Guanajuato, Mexico, Nuevo Leon, Puebla,
Sonora, and Tamaulipas (shown in order from bottom to top).
As can be seen, Baja California and Chihuahua rank number one and two in
total building permits. Also, construction activity in Baja California,
Coahuila, Federal District, Guanajuato, Nuevo Leon, and Tamaulipas increased in
1997 over 1996 levels. More non-North American investment is anticipated. With
the passage of NAFTA and the strict rules of origin, goods manufactured in North
America have preferential treatment as tariff and non-tariff barriers are
eliminated for the signatory countries. These rules have encouraged Asian and
European firms that want to be competitive in the North American market to
invest in one of the signatory countries. For example, Daimler Benz from Germany
has invested in both the U.S. and Mexico and Daewoo from Korea in Mexico.
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<PAGE>
MAQUILADORA ANALYSIS
- --------------------------------------------------------------------------------
NEW MAQUILADORA PERMITS
January-June 1996/January-June 1997
[GRAPH APPEARS HERE]
Investments are finally targeting the Mexican market. The maquiladora
program was originally designed to allow the duty-free entry into Mexico of
parts and components which would then undergo some portion of the manufacturing
process and finally be re-exported with duties assessed only on the value added.
Until 1994, sales in Mexico from maquiladoras were strictly controlled and
essentially not permitted. However, since 1995, under the revised Federal Decree
for the Promotion and Operation of Maquiladora Export Industry (Decreto para el
Fomento y Operacion de la Industria Maquiladora de Exportacion), a maquiladora
can sell up to 65 percent of its total production in the Mexican market. This
percentage will increase over the next five years until 2001 when maquiladora
sales in the domestic market will have no limits. This option adds a new
dimension to the long-term strategies for existing maquiladoras and potential
new investment.
While turnover is still extremely high, efforts to reverse this trend are
slowly showing results. Companies are trying a variety of incentives to retain
employees, from cash bonuses based on production to more creative incentives,
such as giving away popular consumer products. Companies that invest in employee
incentives, meal programs, medical benefits and social programs are having
turnovers as low as many U.S. companies.
According to March 1997 figures, the average daily salary of maquiladora
personnel was $105.21 pesos (approximately US$13), approximately four times the
national average daily wage. Obviously, this rate is competitive with many Asian
countries and well below U.S. and Canadian levels. As such, this provides
companies with high labor costs significant cost savings when relocating
manufacturing to Mexico. However, as will be discussed in more detail within the
Cost Approach section of this report, building costs are similar to or higher
than U.S. costs due to the lack of speculative buildings added to the market.
This provides no measurable savings in the warehousing of goods compared to the
U.S.
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<PAGE>
MAQUILADORA ANALYSIS
- --------------------------------------------------------------------------------
The economic recession of 1995 in Mexico, during which the peso lost over
50 percent of its value, brought domestic growth and investment to a drastic
halt. But it also had the impact of lowering the costs of operation for those
foreign firms which have revenue in foreign currency. While the rest of the
Mexican economy experienced negative growth rates, the export sectors, primarily
the maquiladora industry, experienced positive growth rates.
In the Maquiladora market, rents have the option to be paid in pesos
and/or dollars. Typically, rent is paid in dollars and management fees in pesos.
Additionally, most foreign companies form a joint venture with a Mexican
national, or a Mexican company, to provide a slightly more favorable tax
treatment. Salaries are typically also paid in pesos, except for the production
managers and executives, who are paid in dollars. Historically, salaries were
paid in cash, but companies are now installing ATM in their facilities and
employees have the ability to collect all or a portion of their paycheck and
bank the rest. This is an interesting transition, as it is extremely important
to the long-term economic viability of the people that personal savings
increase.
In the wake of the previous crisis, the prospects for investment have a
long-term positive prospectus. Efforts need to be dedicated to ensuring that
infrastructure limitations at the border do not impede the flow of goods and
people both north and southbound. As trilateral trade among the signatory
members of NAFTA exceeds $400 billion, 70 percent of which crosses from one
country to the other through the land-based ports of entry (truck and/or rail),
there needs to be a trilateral approach to developing and enhancing north/south
trade corridors. This currently is a difficult and time consuming process.
IMPORT AND EXPORT COMPARISONS
<TABLE>
<CAPTION>
=================================================================================================================
JAN-JUNE
1995 % 1996 % 1997 %
=================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
U.S. EXPORTS
- ------------
Mexico 46,292 7.92 56,792 9.09 32,715 9.63
Canada 127,226 21.76 134,210 21.47 75,195 22.13
Non-NAFTA Countries 411,224 70.32 434,076 69.44 231,866 68.24
------- ----- ------- ----- ------- -----
Total 584,742 100 625,075 100 339,776 100
U.S. IMPORTS
- ------------
Mexico 62,101 8.35 74,297 9.34 40,923 8.3
Canada 144,370 19.42 155,893 19.60 83,952 20.05
Non-NAFTA Countries 537,072 72.23 565,099 71.06 291,732 71.65
------- ----- ------- ----- ------- -----
Total 743,543 100 795,289 100 416,607 100
=================================================================================================================
MEXICAN EXPORTS
- ---------------
U.S. 66,273 88.32 80,540 83.9 44,538 84.97
Canada 1,987 2.5 2,171 2.26 1,087 2.07
Non-NAFTA Countries 11,282 14.18 13,289 13.84 6,795 12.96
------ ----- ------ ----- ----- -----
Total 79,542 100 96,000 100 52,420 100
MEXICAN IMPORTS
- ---------------
U.S. 53,902 74.4 67,555 75.51 37,504 74.52
Canada 1,34 1.90 1,744 1.95 932 1.85
Non-NAFTA Countries 17,1777 23.70 20,170 22.54 11,893 23.63
------- ----- ------ ----- ------ -----
Total 72,453 100 89,469 100 50,329 100
=================================================================================================================
</TABLE>
Source: Banco de Mexico and U.S. Department of Commerce
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<PAGE>
MAQUILADORA ANALYSIS
- --------------------------------------------------------------------------------
Regardless of NAFTA, Mexico is negotiating for other trade agreements.
Similar types of agreements with five other countries have been consummated and
are just beginning with the European Union and Mercosur (consists of Brazil,
Argentina, Paraguay and Uruguay and is seen as one of the fastest growing trade
accords in the world). When these negotiations are concluded in 1998, the
European Union could easily replace the U.S. as Mexico's largest trading
partner.
The National Foreign Investment Commission (Comision Nacional de
Inversiones Extranjeras, CNIE) within the Secretariat of Commerce and Industrial
Development (Secretaria de Comercio y Fomento Industrial, Secofi) regulates
foreign investment and can authorize majority foreign investment in areas in
which foreign capital cannot automatically exceed 49 percent.
CHANGES TO THE FOREIGN INVESTMENT LAW
Recent amendments to Mexico's Foreign Investment Law further liberalize
the regulation of foreign investment in Mexico to conform with recent
privatization initiatives and consolidate relevant provisions previously found
in other laws and regulations. Certain reporting and procedural requirements are
clarified and, in some instances, relaxed. Additionally, in many cases in which
prior government approval is still required, it is deemed to have been granted
if not denied within a specified time frame. The most significant changes to
foreign investments are as follows:
* For the first time, foreign entities may directly acquire land,
provided it is outside Mexico's restricted zones (coastal and border
areas).
* The calculation of foreign investment in a restricted enterprise will
no longer take into account minority foreign participation in the
entity or entities which own or would own such enterprise, provided
such entities are controlled by Mexican nationals.
* Limits on foreign investment in financial group holding companies,
banks, stock brokerage houses and stock market specialists are raised
from 30 percent to 49 percent, although Mexican laws regulating
financial institutions permit U.S. and Canadian financial
institutions to own up to 100 percent of qualified Mexican affiliates
and acquire up to 100 percent of all but Mexico's three largest
financial institutions. The foreign investment limit applicable to
companies formed to manage Mexico's newly-created retirement funds
(Afores) is set at 49 percent.
* The types of basic telecommunications services subject to the 49
percent limit on foreign investment have been clarified by tying the
limitation of services which require the award of a government
operating concession, with the exception of cellular telephone
services, which can exceed such percentage with prior approval from
the CNIE.
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<PAGE>
MAQUILADORA ANALYSIS
- --------------------------------------------------------------------------------
* With prior government approval, entities with majority foreign
investment may now participate in the bidding for the privatization
of the operation of Mexico's airports, telecommunications, satellites
and railroads.
A summary of foreign investment characteristics indicate the U.S.
generates the highest investment, followed by Canada and The Netherlands. To
date, this investment totals $5.646 billion.
DISTRIBUTION OF DIRECT FOREIGN INVESTMENT
BY COUNTRY OF ORIGIN (1996)
--------------------------------------
COUNTRY
United States 66.0%
Canada 8.7%
The Netherlands 5.8%
India 5.1%
Germany 2.9%
Japan 1.7%
France 1.2%
Switzerland 1.2%
--------------------------------------
Source: Secofi, General Office of Foreign Investment
ACQUISITION OF MEXICAN COMPANIES
There are no restrictions on the purchase of up to 40 percent, or a lower
percentage allowed for restricted activities, of the capital of companies
controlled by Mexicans at the time of the acquisition. However, the prior
approval of the CNIE is required when the total value of assets of the relevant
Mexican company exceeds an amount periodically established by the CNIE and
which, at the time of publication, was fixed at $85 million pesos ($10.625
million at an exchange rate of 8 pesos to $1US).
COMMERCIAL LOANS
Despite incipient recovery, credit is still scarce and expensive in
Mexico. The current interest rate is between 20 and 30 percent, with limited
access to commercial bank financing by many prospective borrowers. It is
important to note that, particularly in the last six months, investment funds,
both domestic and international, have increased their interest in the Mexican
market. There are at least 10 different funds that are actively seeking
opportunities to finance a project or to inject capital in Mexican-based
companies.
TAX MATTERS
Mexican tax law treats foreigners doing business "with" Mexico differently
than it treats those doing business "in" Mexico. Doing business with Mexico
suggests engaging in international trade directly from a foreign home office,
whereas doing business in Mexico suggests the additional step of establishing a
physical presence in Mexico and regularly engaging in commercial activities in
the country.
DOING BUSINESS "WITH" MEXICO
A foreign company can do business with Mexico from abroad in order to
minimize the tax and regulatory consequences arising from the establishment of a
presence in the country.
- --------------------------------------------------------------------------------
-17-
<PAGE>
MAQUILADORA ANALYSIS
- --------------------------------------------------------------------------------
When structuring operations in this way, however, foreigners must be extremely
careful to ensure that they do not create a "permanent establishment" or a
"fixed base" in Mexico as the income derived from such entities is considered
taxable.
DOING BUSINESS "IN" MEXICO
Foreigners may opt to do business in Mexico by employing a subordinate
agent, establishing a Mexican company, or acquiring stock in an existing Mexican
company. The use of any of these methods will create a permanent establishment
and has the following tax and regulatory consequences:
CORPORATE TAX -- A corporate tax of 34 percent must be paid annually on
the company's taxable profits. Such profits are calculated by deducting
certain allowed expenses from the total accruable income. Most of the
company's income is considered accruable for income tax purposes at the
time invoices are issued, or when goods or services are delivered to the
buyer if no invoice is issued. Basically, the allowed deductions are all
discounts and/or expenses deemed "strictly indispensable" for the carrying
out of the company's business.
TAX ON ASSETS -- There is a federal tax on corporate assets applied at a
rate of 1.8 percent. This tax is applied on the fixed, financial and
current assets of Mexican companies. This tax must be paid on an annual
basis through monthly provisional payments. The payment of the tax on
assets is not required during the pre-operational period of a company, the
year in which operations commence, the following two years of operation,
or the year in which it is liquidated.
VALUE ADDED TAX -- When the Mexican company transfers or leases goods, or
renders services in Mexico, it will be obligated to pay Value Added Tax
(Impuesto al Valor Agregado, IVA). This tax is 15 percent of the price of
the goods or services and can be transferred to the clients by including
the tax on its billing invoices. This rate is 10 percent within 20
kilometers of the border of Mexico and in all of Baja California and
Quintana Roo. However, if such goods and services are to be exported from
Mexico, the IVA is zero percent.
Reductions in both the Value Added Tax and the Tax on Assets are up for
debate in 1998's fiscal reform.
PAYROLL TAXES -- The company is subject to a local and state payroll tax
at a rate that depends on the location of the working facilities. The
federal government also taxes corporations with social security fees that
amount to a minimum of 8.95 percent of the payroll, to be paid by the
employer for old age, death, child care, retirement and disability.
- --------------------------------------------------------------------------------
-18-
<PAGE>
MAQUILADORA ANALYSIS
- --------------------------------------------------------------------------------
WAREHOUSING
Warehousing in Mexico has experienced important changes in 1997. Control
of most of the warehousing sector is being passed from the government to private
hands, leading to improvements in both infrastructure and services. Still, fewer
and smaller facilities are available in Mexico than in the U.S.
Warehousing costs are usually paid monthly and are charged in terms of
space/area occupied. Also, any merchandise placed in a warehouse should be
insured. Basic insurance policies can be obtained directly through the warehouse
or by contracting a private insurance company for a more comprehensive policy.
- --------------------------------------------------------------------------------
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<PAGE>
MAQUILADORA ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
-20-
<PAGE>
MAQUILADORA INDUSTRY
- -------------------------------------------------------------------------------
The maquiladora industry in the state of Chihuahua continues with its
tendency for growth. However, at the national level, the number of
establishments grew 12.8 percent, while the number in the state grew 8.3 percent
in 1997. Corresponding to employed personnel, it appears that growth at the
national level was 19.4 percent while the state of Chihuahua had 9.3 percent as
of the end of 1997. The last aggregate value increase at the national level was
40.0 percent and at the state level was 36.9 percent. Thus, it can be concluded
that the number of establishments and the relative employment increases are
similar, while more than proportionate increases are being spent on those
facilities. Again, these increases are above those being experienced in the
fastest growing U.S. metropolitan communites.
Currently, the interior states of the country are growing at much greater
rates than those on the frontier (the border between the U.S. and Mexico). The
interior communities have aggressively sought foreign investments and have
become the most attractive of all communities which use intensive manual labor.
The difference is that the maquiladora that currently settles in the northern
frontier utilizes more U.S. technology and warrants the most skilled labor in
the manufacturing process. Thus, businesses that utilize intensive and cheap
manual labor are opting for the states in the center of the republic, such as
Durango, Aguascalientes, Guanajuato, Zacatecas and Yucatan.
The empoyers in the frontier communties provide the greatest increase in
salaries and grants/loans that has skewed the growth in national average
employment wages upward. This implies an above average increase in salaries paid
by the maquiladora. Another consideration is that 1997 reflects three
consecutive years of considerable growth, at some of the highest levels in the
30 years the maquiladora has been Mexico.
We have documented a breakdown of the maquiladora industry adjacent to the
U.S. border for discussion.
PARTICIPATION OF THE MAQUILADORA INDUSTRY
EXPORTATION FOR THE FRONTIER ENTITIES
OCTOBER 1997
<TABLE>
<CAPTION>
==============================================================================================================
FRONTIER ENTITIES ESTABLISHMENTS EMPLOYED PERSONNEL AGGREGATE VALUE
==============================================================================================================
MILLIONS OF
NUMBER % PEOPLE % DOLLARS %
==============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Chihuahua 413 14.6 249,535 26.3 212 26.8
Nuevo Leon 112 4.0 41,171 4.3 43 5.4
Sonora 232 8.2 83,748 8.8 55 6.9
Coahuila 253 9.0 81,576 8.6 56 7.1
Baja California 937 33.2 210,240 22.2 193 24.4
Tamaulipas 326 11.5 142,258 15.0 118 14.9
Other Entities 550 19.5 140,130 14.8 115 14.5
----- ----- ------- ----- --- -----
NATIONAL TOTAL 2,823 100.0 948,658 100.0 792 100.0
==============================================================================================================
</TABLE>
Source: INEGI, Direccion General de Estadistica, Direccion de Estadisticas
Economicas (General Site of Statistics, Site of Economic Statistics).
Note: The information presented corresponds to the month of October, 1997.
- --------------------------------------------------------------------------------
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<PAGE>
MAQUILADORA INDUSTRY
- --------------------------------------------------------------------------------
We have also examined some of the principle characteristics of the
maquiladora market for the last two years.
PRINCIPAL CHARACTERISTICS OF THE MAQUILADORA EXPORT INDUSTRY
STATE OF CHIHUAHUA
JUNE 1996 - JUNE 1997
<TABLE>
<CAPTION>
=======================================================================================================
CONCEPT 1996 1997 VARIATION %
<S> <C> <C> <C>
Number Of Establishments 372 403 8.3
Employed Personnel 215,423 240,345 11.6
Primary Import Material (Millions Of Dollars) 8,199 8,771 7.0
Aggregate Value (Millions Of Dollars) 1,855 2,540 36.9
National Totals (Millions Of Dollars) 99 210 112.1
Salaries, Pay And Grants/Loans (Millions Of Dollars) 1,013 1,353 33.6
Other (Milions Of Dollars) 743 977 31.5
=======================================================================================================
</TABLE>
Source: INEGI, Direccion General de Estadistica, Direccion de
Estadisticas Economicas (General Site of Statistics, Site of
Economic Statistics).
Note: The figures corresponding to June 1997 are estimates made in CIEE
and are subject to change.
As previously indicated, the number of maquiladoras grew 8.3 percent,
while employment grew 11.6 percent. Given the amount of build-to-suit projects
we documented during our market inspection, it is reasonable to concluded that
growth in 1998 will at least equal or exceed 1997 levels. However, it should be
noted that a majority of all maquiladoras under construction or proposed are
preleased. Construction activity for the last two years in the two larges cities
in the state, Chihuahua and Juarez, is summarized below.
CONSTRUCTION LICENSES
CITIES OF CHIHUAHUA AND JUAREZ
(Square Feet)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
RESIDENTIAL COMMERCIAL INDUSTRIAL ENLARGEMENT OTHER TOTAL VARIATION
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CITY OF CHIHUAHUA
1996 1,548,633 446,024 346,655 306,348 149,801 2,797,460 -8.8
1997 2,316,606 520,052 246,630 418,478 87,565 3,589,332 28.3
- -------------------------------------------------------------------------------------------------------------------
CITY OF JUAREZ
1996 (9 months) 1,208,499 460,819 767,403 449,714 73,910 2,960,345 -21.6
1997 (9 months) 2,157,003 380,635 2,234,357 139,202 0 4,911,198 65.9
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
As indicated, in 1997 Chihuahua experienced significant growth in the
construction industry. In the city of Chihuahua, the number of licenses
solicited before the municipal presidency increased 28.3 percent. However, this
was somewhat skewed between residential growth at 50 percent, the commercial
permits at 17 percent, and the enlargements by 37 percent. However, industrial
permits actually decreased 29 percent, primarily due to the lack of vacant land
for expansion rather than the previously noted socio-economic factors regarding
frontier versus interior located communities. Despite this, those maquiladoras
in the frontier communities, like Chihuahua, continue to expand.
- --------------------------------------------------------------------------------
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<PAGE>
MAQUILADORA INDUSTRY
- --------------------------------------------------------------------------------
In the city of Juarez, growth exceeds the city of Chihuahua in total
square foot and percentage increases. As indicated, this community experienced
significant increases in industrial and residential development, while declines
in commercial construction and enlargements were noted. The enhanced industrial
development in this community versus Chihuahua is also due to its larger
established industrial base.
Due to the recent changes in the economy, we felt it important to provide
an overview of the economics of the region. First, we have outlined recent
changes to the consumer price index for the country and the communities of
Juarez, Chihuahua and Parral/Jimenez.
GENERAL CHANGES OF INDEX OF PRICES TO THE CONSUMER
Basis 1994 = 100
<TABLE>
<CAPTION>
================================================================================================================
PERIOD NATIONAL JUAREZ CHIHUAHUA PARRAL/JIMENEZ
================================================================================================================
<S> <C> <C> <C> <C>
December 1996 27.69 26.65 26.51 27.02
December 1997 15.73 15.56 15.77 16.05
================================================================================================================
</TABLE>
Source: Banco de Mexico (Bank of Mexico).
During 1997, the growth of the National Index of Prices to the Consumer
(Indice Nacional de Precios Consumidor) in the large communities of the state of
Chihuahua was generally similar to the national level: 15.73 percent at the
national level; 15.56 percent in the city of Juarez, and 15.77 percent for the
city of Chihuahua. This rate of annual inflation is approximately 11 percentage
points lower than 1996, substantiating the stability in the national economy has
transcended to the local levels. This stability can also be seen by the
importance of the maquiladora industry on trade for the frontier states.
- --------------------------------------------------------------------------------
-23-
<PAGE>
MAQUILADORA INDUSTRY
- --------------------------------------------------------------------------------
COMMERCIAL BALANCE
FRONTIER STATES
January-August 1997 (Millions Of Dollars)
<TABLE>
<CAPTION>
===================================================================================================================
AGGREGATE VALUE
MAQUILADORADOR
STATE EXPORTS (+) IMPORTS (-) INDUSTRY COMMERICAL BALANCE
===================================================================================================================
<S> <C> <C> <C> <C>
Chihuahua 213.0 681.2 1,592.9 1,124.7
B.C.N. 292.0 841.4 1,266.0 716.6
Tamaulipas 138.1 548.0 878.8 468.9
Sonora 367.2 445.0 387.9 310.1
Coahuila 216.0 593.5 370.4 -7.1
Nuevo Leon 470.0 2,284.0 301.0 -1,513.0
===================================================================================================================
</TABLE>
SOURCE: Secretary of Commerce and Industrial Promotion, Delegation Chihuahua,
INEGI, Statistics from the Maquiladora Export Industry.
The participation in the frontier entities in national exports is only a
small allocation. They make up only 2.4 percent of the total exports of the
country, while these states import 8.0 percent of all national imports with
respect to aggregate value. However, they have a significant bearing on their
local economies and the maquiladora industry as a whole; as these frontier
states command 85.5 percent of the $4,797 million dollars generated by the
maquiladorador industry at the national level. The state of Chihuahua has the
greatest commercial balance of any state, while Nuevo Leon and Coahuila present
deficit amounts. Within this state, Juarez is one of the largest communities and
is a young vibrant city poised to take advantage of the North American Free
Agreement (NAFTA) with its proximity to the United States. Chihuahua is situated
at the southern portion of the state and benefits from a more established
residential base, with a lower cost of living. Both communities provide a young,
educated labor force, and coupled with the low wages, provides the competitive
edge for the maquiladora industry in frontier states.
SUMMARY
While the maquiladora market provides only a small part of the economic
make-up of the country, it provides significant manufacturing employment and
construction dollars to those communities adjacent to the U.S. border.
Maquiladora production managers indicated that fully 60 to 80 percent of all
their manufacturing employees are women, providing employment opportunities to a
segment of the market that previously was not provided jobs. Additionally, the
expanding maquiladora market has provided workers and managers with employment
opportunities at increased wages. As such, we anticipate management and skilled
labor costs to increase significantly in the next one to three years as the
market continues to expand. From an unskilled labor perspective, additional
opportunities will allow employees to relocate to firms with enhanced benefits
and should reduce unemployment levels.
The 1997 estimate population for Chihuahua is 671,196, a 26.5 percent
increase since 1990. The population is expected to grow another 10.6 percent, to
742,223 by the year 2000. This compares to growth in Juarez using a 1997 base
population of 1,112,281, which grew 39.3 percent since 1990 and expected to grow
another 15.3 percent through the year 2000. While
- --------------------------------------------------------------------------------
-24-
<PAGE>
MAQUILADORA INDUSTRY
- --------------------------------------------------------------------------------
the Chihuahua population is expected to grow at lower levels than Juarez, the
growth rates are at some of the fastest levels of any community in Mexico and
the U.S.
The market expansion should also provide a sense of stability to those
firms that are considering relocating to Mexico but have not made the move.
Labor costs are at some of the lowest levels in the world and, with U.S.
influences, the population is rapidly gaining housing, savings and educational
opportunities previously not available. Coupled with the relatively young
population basis, Mexico, and particularly the frontier states, should continue
to effectively compete on an international basis for new manufacturing
opportunities.
- --------------------------------------------------------------------------------
25
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
This section will review the current status of the industrial market in
Mexico, Cuidad Juarez and Chihuahua in order to analyze those factors that will
influence the future of the subject property. There were no available municipal
publications on Chihuahua's industrial market, therefore direct research had to
be conducted to derive market information. More detailed information is
available on the Juarez market, primarily due to Cushman & Wakefield/GCI's
annual market surveys since 1985. Because this information provides additional
insight into industrial demand in the state of Chihuahua, it was included.
Information was obtained from Cushman & Wakefield of Mexico/GCI, INEGI and
interviews with Finsa, Best Real Estate, Grupo Puebla and Dynatech.
REAL ESTATE OVERVIEW
Currently, small firms, which create the lion's share of new jobs in most
economies, do not have access to either the bank loan or international markets.
Therefore, most companies are wholly owned and have limited capital for research
and development, the purchase of new technology and for expansion. Further, they
have the inability to leverage their real estate over the long term; therefore,
a large percentage of the operating funds go for real estate. Larger companies
have a competitive advantage in financing their facilities. They have the option
to lease, buy someone else's previously occupied facility (rarely available), or
work with a developer on a build-to-suit. The latter provides a facility that is
specifically catered to the needs of the manufacturer.
DEVELOPMENT/INVESTMENT
John Deere, Rhone Poulenc, Bimbo, Calsonic and 3M made strong investments
in the industrial sector during 1997 in Mexico but, although export companies
like these grew (maquiladora business grew approximately 70 percent between 1990
and 1996), most of Mexico's domestic industries remained unchanged.
The largest communities in the country, like Mexico City, have a diverse
industry base, with a predominance of auto parts, electronics, pharmaceutical,
textiles and consumer products. In Mexico City, type A industrial space is
normally build-to-suit; therefore, the supply of new speculative industrial
buildings remains very low. As a result of this shortage of space, the few
modern facilities within the city are rapidly acquired when they become
available. This is also true of every frontier community we inspected and
surveyed -- Hermosillo, Juarez, Chihuahua, Matamoros, and Reynosa. Although
their economies are not as diverse as Mexico City, continued market expansion
has caused similarities in industry base and also the same company with multiple
locations. This provides maquiladoras to be strategically located across the
southern border of the U.S. to provide lower transportation costs. It also
allows convenient access to shipping opportunities in both the Atlantic and
Pacific oceans.
OUTLOOK
Of the 3,650 maquiladora programs in mid-1997, 68 percent were at the
northern frontier of Mexico, and 32 percent in the country's interior. In the
automotive sector alone, between 1996 and 2000, production in Mexico is expected
to grow from 1.2 million to 1.85 million vehicles. This industry investment will
average $3 billion a year and provide significant incentive to communities
catering to these companies. In contrast to the industrial growth of the
northern and interior states, heavy industry will definitely continue leaving
Mexico City to outlying communities. However, because the Mexico City
metropolitan area still comprises the
- --------------------------------------------------------------------------------
-26-
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
largest consumer market, most companies will focus on locating suitable spaces
for distribution or service centers -- mainly in the northern submarkets of the
city or in cities close to the metropolitan area.
CHIHUAHUA MARKET
Chihuahua, being situated approximately 250 miles south of Juarez/El Paso,
provides it some of the economic characteristics inherent with cities at the
interior of the country: stable population base, low cost of living, adequate
housing and large percentage of young workers. Some maquiladora manufacturers
favor Chihuahua over Juarez because Juarez has a more transient population,
higher employee turnover (approximately nine percent for Juarez versus less than
three percent in Chihuahua) and less established social structure. The strength
of the Juarez market is its large size, but this also provides some problems
that companies can overcome in Chihuahua, with only minimal increases in
shipping costs.
The movement of companies into Juarez or expanding their existing
industrial space has increased the industrial inventory by 6.36 million square
feet from 1995 to 1997. In Chihuahua, inventory has increased 593,285 square
feet from 1996 to 1998, primarily in build-to-suit facilities. Proportionately
more speculative construction is occurring in Juarez than Chihuahua. Given
current build-to-suit projects in both communities and speculative projects
Juarez, future growth should be similar to or exceed these recent historical
levels. Industrial development has become very active in the market due to the
lack of vacant maquiladora space. This is due to the market consisting of
primarily build-to-suit projects (developer constructs a building for a tenant
who buys it or leases it), and the minimal business turnover that has occurred
since maquiladoras where introduced into the community.
There are four major industrial parks located in the city of Chihuahua and
all four are located in the western and northern quadrants of the city. The
majority of the sites within three parks have sold, while land is abundantly
available in the fourth, as it has just recently been developed. It is obvious
that supply is lagging demand in terms of improved industrial lots and improved
buildings that are vacant and available for occupancy. Following is a summary of
these four parks:
The first industrial park, in which the subject is located, is called
"Parque Industrial Las Americas" and is on the east side of Preriferico De La
Juventud, at the intersection of Avenida De Las Americas. This industrial park
is exclusively American companies and contains approximately 35 facilities. Upon
physical inspection of the industrial park there were less than five vacant land
sites; however, no marketing signs were available. It was reported these were
excess land purchases of existing maquiladora facilities that are kept for their
expansion. There were no new buildings under construction and vacancies within
existing buildings appeared to be less than five percent. Facilities in this
industrial park and the other parks pay quarterly dues to AMEACH, which is the
association governing maquiladoras in Chihuahua.
The second industrial park is called "El Saucito" and is on the east side
of Preriferico De La Juventud, approximately one mile north of the subject
industrial park. This park currently contains seven industrial facilities with
no vacancy. There are vacant land sites available within the park, however
pricing was not available. TRW is currently under construction on a two-
building facility totaling 286,000 square feet, which is scheduled to open in
August 1998.
- --------------------------------------------------------------------------------
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<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
The third industrial park is called "Parques De Complejo De Industrial"
and is at the northeast corner of Carretera Juarez (Interstate 45) and Avenida
Homero. According to our sources, recent building costs within the park have
ranged from $24.00 to $27.00 per square foot. Typical construction
characteristics would include a build-to-suit building with 15 percent office
finish, evaporative cooling of 85 percent, a cafeteria/kitchen, fire-protection
but not fire-sprinklered and a six to nine month construction period. Rents
range from $4.75 to $5.00 per square foot, triple net, with annual CPI bumps and
7-year minimum lease term. This industrial park is the largest in the community,
in terms of land area. This park, also known as "Promotora," is the only state
owned park of the four parks noted. The state currently owns less than five
percent of the available land inventory. This park contains approximately 20
industrial facilities and no building vacancies were noted. Available land for
new construction is priced in the $2.25 to $3.00 per square foot range, and 50
percent building coverage is standard. There was one building under construction
at the time of inspection.
The fourth industrial park is the recently opened "Impulso Parque
Industrial." This park is located on the east side of Carretera Juarez
(Interstate 45), approximately 10 miles north of downtown Chihuahua. The park
encompasses 940,000 square meters and has been subdivided into 80 improved lots.
There are two existing facilities located within the park with at least one
other planned for construction by year-end 1998. According to C.P. Gilberto
Fernandez Leo, manager of the park, smaller lots are listed for sale at $3.00
per square foot and $2.45 per square foot for larger sites. Allowable building
densities range from 70 percent for smaller lots to 60 percent for medium and
larger lots. New construction costs, excluding land, range from approximately
$18.00 to $25.00 per square foot. Concerning build-to-suit projects, rental
rates are $5.25 per square foot per year with a minimum 7-year lease term.
Some include a tenant option to buy the building after 7 years.
SUBMARKET SUMMARY
In summary, land values within the Chihuahua maquiladora industrial market
typically range from $2.25-$3.00 per square foot. Building costs range from
$20.00 to $27.00 per square foot depending on build-out and characteristics.
Rental rates range from $4.75 to $5.25 per square foot, triple-net with minimum
7-year lease terms. It is apparent that most new companies looking for a
maquiladora facility in Chihuahua, build new. Whether buying the land and
developing a facility themselves or doing a build-to-suit for purchase or lease
back, a company would prefer a new facility built to their specifications.
Overall, the market exhibits very few vacant buildings for sale or lease. An
overall vacancy factor less than three percent for existing buildings is
reasonable in the Chihuahua market. This considers a total of 80 buildings
situated within the four industrial parks that were surveyed. (it was estimated
approximately 80 maquiladoras are within industrial parks in Chihuahua.) Major
employers in the city include Motorola, Ford, Interceramic, Datatech, John
Deere, Stanley, and TRW. A summary of the maquiladora plants are included on the
following pages.
In conclusion, recent industrial park improvement is providing needed land
sites available for immediate construction, however, scarcity of existing
buildings for sale and a lack of speculative industrial facilities under
construction is providing a cap on supply. This would prevent a manufacturer to
enter this market within six to nine months, due to build-to-suit construction
being one of the only options.
- --------------------------------------------------------------------------------
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<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
Include associacion de maquiladoras 1 of 3
- --------------------------------------------------------------------------------
-29-
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
2 of 3
- --------------------------------------------------------------------------------
-30-
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
3 of 3
- --------------------------------------------------------------------------------
-31-
<PAGE>
NEIGHBORHOOD ANALYSIS
- --------------------------------------------------------------------------------
The subject property is on the west side of Prolongacion Avenue de Las
Americas, S/N, within the Parque Industrial Las Americas in the city limits of
Chihuahua, Chihuahua, Mexico. This is immediately east of the Avenida Homero,
the major arterial that circles the city. The subject's street frontage is on
two interior neighborhood streets within the industrial park, with convenient
access to the community's residential base.
The industrial neighborhood boundaries are Co. NVO Paraiso to the north,
Los Mez Quites to the south, C. Socialismo to the east and the Avenida Homero to
the west. The area is the first industrial park within the community,
established in the late 1970s. It consists of industrial based, U.S. based
companies with light manufacturing and warehousing.
Residential development is situated outside the immediate industrial
district's boundaries. Most residents commute to the subject industrial park via
public transportation or walk, and few have their owner transportation.
The Zenith facility, known as Cableproductos de Chihuahua, S.A. de C.V.,
is one of the larger industrial facilities in Chihuahua and the industrial park.
All industrial sites within the subject industrial park has all municipal
utilities, including water, sewer, electric and telephone. Water for sprinkler
systems within buildings are handled by onsite water storage tanks, which is
supplied on the subject site.
Adjacent to the subject property are single tenant industrial buildings,
typical of industrial facilities throughout the other three industrial parks.
Improvement ratios are typically 50 to 70 percent of the land area and parking
is approximately 5.0 spaces per 1,000 square feet for office areas and one space
per 1,000 square feet for industrial space. Buildings have air conditioned
office and manufacturing space, and evaporative cooling in the warehouse.
Chihuahua, as an industrial location is superior to many Frontier
communities. First, employee turnover is less due to the stability of long term
area residents. Next, the quality of life is superior to most other maquiladora
locations due to established permanent subdivisions, rather than temporary
housing to meet immediate or temporary employment needs. Another incentive is
that cost of labor is less due to the cost of goods and services to service
employees.
The location of the subject is convenient to the municipal work force. One
of the major forces driving Zenith and other maquiladora operators in selecting
the subject industrial subdivision was the opportunity to stay close to its
employees, thus reducing the commute time. It was also one of the few locations
at the time that industrial facilities could be constructed within an
established park. Coupled with the attractiveness of the industrial park in
which it is situated, the subject competes well with newly constructed buildings
in the community.
- --------------------------------------------------------------------------------
-32-
<PAGE>
NEIGHBORHOOD ANALYSIS
- --------------------------------------------------------------------------------
Insert chart of major employers in Chihuahua
- --------------------------------------------------------------------------------
-33-
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
SITE DESCRIPTION
Location: The site is actually two contiguous sites
separated by an interior neighborhood street.
The sites are located at the northwest and
southwest corners of Avendia Prolongacion De
Las Americas and Circuito 5 within the Parque
Industrial Las Americas.
Shape: Both are slightly irregular
Area:
(Plant 4): 16.02 acres or 697,910 square feet
(Plant 11): 2.87 acres or 125,132 square feet
Frontage: Along the west side of Avenida Prolongacion
De Las Americas, and the north and south
sides of Circuito 4 and 5
Depth: Not available
Topography/Terrain: The sites are generally level and at grade
with the roadway frontages.
Street Improvements: The subject site (plant 4) has access from
Avenida Prolongacion De Las Americas, a
secondary road that dead-ends at the site of
plant 11 which has access from Circuito 5.
Soil Conditions: We did not receive nor review a soil report.
However, we assume the soil's load-bearing
capacity is sufficient to support the
existing structures. We did not observe any
evidence to the contrary during our physical
inspection of the property. The tract's
drainage appears to be adequate.
Utilities: All standard utilities are available to the
site including water, sewer, electricity, and
telephone service. Propane gas is delivered
to the site and stored in an above ground
propane tank. Two above ground water tanks
service the sprinkler systems for the
buildings.
Access: The property is accessed via curb cuts along
Avenida Prolongacion De Las Americas and
Circuito 5.
Land Use Restrictions: We were not given a title report to review,
but were provided a property description of
the property prepared by Baker & McKenzie. We
did not discover easements, encroachments, or
restrictions that would adversely affect the
site's use. However, we recommend a title
review to determine whether any adverse
conditions exist.
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<PAGE>
PROPERTY DESCRIPTION
- -------------------------------------------------------------------------------
Flood Hazard: Chihuahua receives less than 20 days with
rain and has an annual precipitation of less
than 10 inches. Based on our inspection of
the site, there is minimal probability of
flooding.
Hazardous Substances: We noted no evidence of toxic waste during
our inspection of the sites. It should be
noted that chemicals is stored on-site.
However, it is important to note that we are
not experts in this field and therefore
recommend the inspection of the subject by
an expert in the field of toxic waste. No
environmental assessment of the site was
provided but is recommended.
Comments: Overall, the subject site is well suited for
its current use. Considering current land
use patterns in the neighborhood, the site
is typical of the area and offers adequate
functional utility, with above average
locational characteristics for the existing
development.
IMPROVEMENTS DESCRIPTION - ZENITH FACILITY ON THE BUILDING SITE
The subject property consists of three, one-story industrial buildings
having a building area of 245,686 square feet. Plant 4 was constructed between
1982 and 1986, with the addition of Plant 4b in 1989. They are situated on a
16.02-acre site. Plant 11 was constructed in 1985 on the adjacent 2.87 acre
site. Based on a building area of 245,686 square feet and a building site of
18.89 acres, or 822,848 square feet, an improvement ratio of 30 percent is
indicated. The improvements are considered to be in average overall condition at
the time of inspection. The facility provides adequate open paved surface
parking along the eastern property boundary, adjacent to Prolongacon Avenue de
Las Americas. Representatives of Zenith provided the building area calculations,
building sizes and land area dimensions. A review of the limited building plans
provided appeared to indicate the dimensions to be accurate. The project is
currently 100 percent occupied by the owner/occupant. The following table
depicts the area of the building allocated by type of use.
===========================================================
USE SQUARE FEET PERCENTAGE
===========================================================
Office/cafeteria/baths
Plant 4 41,246*
Plant 4b 2,380
Plant 11 7,300 21%
-----------------------------------------------------------
Warehouse
Plant 4 9,200
Plant 4b 47,620
Plant 11 15,840 30%
-----------------------------------------------------------
Manufacturing
Plant 4 88,000
Plant 11 31,000 48%
-----------------------------------------------------------
Maintenance
Plant 4 3,100 1%
-----------------------------------------------------------
Total 245,686 100%
===========================================================
* Only 12,300 square feet is office area.
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-35-
<PAGE>
PROPERTY DESCRIPTION
- -------------------------------------------------------------------------------
The physical inspection coupled with a review of the building plans that
were provided by the client provided the basis for the following improvement
description.
GENERAL DATA
Year Built:
Plant 4: 1982 and 1986 (north expansion)
Plant 4b: 1989
Plant 11: 1985
CONSTRUCTION DETAIL (Similar among all three buildings, unless noted)
Foundation: Reinforced concrete
Floors: 6 inches concrete reported; sealed concrete
slab in warehouses, and manufacturing,
commercial grade carpet, ceramic tile and
granite in the office areas
Walls: Masonry block and concrete tilt wall
construction, with painted finish.
Decorative fascia has been added at the
front entrance to the offices. Glass
storefront is installed at the foyer.
Roof Structure/Cover: Rows of semicircular domes galvanized sheet
steel with EPDM cover
Windows: Aluminum fixed-pane windows of various sizes
Pedestrian Doors: Hollow metal exterior doors in the warehouse
and manufacturing areas; metal framed plate
glass in main entrance and hollow core wood
doors in the office
Loading Doors: 2 in Plant 4, five in Plant 4b, and 7 in
Plant 11
Ceiling Height:
Plant 4: 19' to 25'4"
Plant 4b: 14' to 25'
Plant 11: 12' to 20'
MECHANICAL DETAIL
Heating and Cooling:
Production Areas: Evaporative System
Offices: Refrigeration Units
Diesel Heating System
Plumbing Service: Water supplied by industrial park (2 wells);
municipal sewer
Electrical Service:
Plant 4: Supplied by federal power commission (CFE)
2000 KVA transformers
Plant 4b: Supplied by federal power commission (CFE)
150 KVA transformers
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<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Plant 11: Supplied by federal power commission (CFE)
1550 KVA transformers
Fire Protection: Sprinkler Automatic System
Security Protection: Security cameras inside the facility, fenced
lot with guard gate and security alarms
installed throughout the building. Full time
security personal are on-site.
INTERIOR DETAIL
Floor Covering: Offices feature ceramic tile, vinyl and
carpet coverings; warehouse and
manufacturing has exposed concrete slab
Interior Walls: Painted and textured gypsum board in the
offices
Ceiling: Nine-foot ceilings with 2' x 4' or 2' x 2'
suspended tile in the offices; no finish in
warehouses except for insulation
Lighting: Suspended fluorescent lights in warehouse
and manufacturing; recessed fluorescent
fixtures in office suites
Rest Rooms:
Plant 4: Male: 17 total on 5 locations, Female: 31
total in 5 locations
Plant 4b: Male: 2, Female: 3
Plant 11: Male: 19 total on 4 locations, Female: 31
total in 4 locations
HAZARDOUS SUBSTANCES: We are not aware of any other potentially
hazardous materials (such as formaldehyde
foam insulation, asbestos insulation, radon
gas emitting materials, or other potentially
hazardous materials) which may be used in
the construction of the improvements. The
improvements are new and its is believed all
modern materials were used. However, we are
not qualified to detect such materials and
urge the client to employ an expert in the
field to determine if such hazardous
materials are present.
AMERICANS WITH
DISABILITIES ACT: The subject property is in Mexico and is not
subject to the Americans with Disabilities
Act (ADA). The ADA became effective January
26, 1992 in the United States. A physical
inspection of the subject revealed a ramp at
the entrance of the property. However the
access to the second floor offices and
mezzanine areas there is by way of stairs.
We have assumed the improvements do not meet
the requirements of this act, although the
building is not under the jurisdiction of
compliance and, therefore, no modifications
are required.
- --------------------------------------------------------------------------------
-37-
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
SITE IMPROVEMENTS
On-site Parking:
Plant 4: 80 cars
Plant 4b: 110 cars
Plant 11: 30 cars
Landscaping: The property has small trees, shrubs and
grass along the front of the building, at
landscaped islands in the parking lot and at
the water retention basin.
COMMENTS: The subject was completed in 1982 to 1989
and the improvements are considered to be in
average condition. The roof cover was
reportedly replaced in 1994 and reportedly
has a 15 year guarantee. The normal life
expectancy of a building of this type is
considered to be 45 years. Although the
facility is in average condition and
experiencing average maintenance, the
effective age is the same as the actual age
of approximately 10 years. We have estimated
the effective age at 10 years, and remaining
economic life at 35 years. The quality of
the subject improvements, including the
layout and functional utility, are rated
average.
PERSONAL PROPERTY
INCLUDED: No personal property within the building was
included in the analysis.
- -------------------------------------------------------------------------------
-38-
<PAGE>
ZONING
- -------------------------------------------------------------------------------
The subject site is zoned Light Manufacturing, by the state of
Chihuahua. The "Licencia de Uso de Suelo" which is the zoning permit to
construct the subject improvements was issued by the government on upon
completion of construction and reissued annually. Further, we have reviewed the
"Certificado de la Seccion Septima" which reflects the legal survey of the
property. The subject improvements appeared to comply with all the requirements
establish by the state of Chihuahua law for urban development under article 5to.
Fracion II y 125 de la Ley 101 de Desarollo Urbano para el Esatado de Chihuahua.
In Mexico, a property could be zoned a certain classification but if it does not
have the license for the certain use or the "Licencia de Uso de Suelo", it would
be in violation and the user could be forced to cease operations. Municipal
officers in Chihuahua indicated that the property is in compliance. The subject
property is zoned light manufacturing use and is also reportedly in compliance
with all zoning requirements. Additionally, local building contractors indicated
that zoning requirements permit a maximum improvement ratio of 70 percent of the
land area.
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<PAGE>
REAL ESTATE ASSESSMENTS AND TAXES
- -------------------------------------------------------------------------------
REAL ESTATE TAXES AND ASSESSMENTS
The subject property was constructed in 1982 to 1989 and periodically
assessed for tax purposes. However, the subject is a single tenant facility and
taxes are the responsibility of the tenant. The tenant, in this case the owner,
has reportedly paid all previous real estate taxes. Because of the lack of
comparative buildings in the city of Chihuahua and the state of Chihuahua, and
that under this analysis all real estate taxes would be the responsibility of
the tenant (does not affect the income to the owner), we have not attempted to
estimate the reasonableness of the subject's real estate tax. Further, the local
taxing and assessment office could not provide us with an estimate of the
subject's real estate taxes.
Real estate taxes in Mexico are very low compared to the United States. It
is unlikely that the subject would be assessed and taxed based on the estimation
of market value concluded within this report.
- --------------------------------------------------------------------------------
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<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
HIGHEST AND BEST USE OF SITE
According to the Dictionary of Real Estate Appraisal, Third Edition
(1993), a publication of the Appraisal Institute, The highest and best use of
the site as though vacant is defined as:
Among all reasonable, alternative uses, the use that yields the highest
present land value, after payments are made for labor, capital, and
coordination. The use of a property based on the assumption that the parcel
of land is vacant or can be made vacant by demolishing any improvements.
We evaluated the site's highest and best use both as if vacant and as
currently improved. The highest and best use must meet four criteria. The use
must be:
(1) Legally permissible;
(2) Physically possible;
(3) Financially feasible; and
(4) Maximally productive.
AS IF VACANT
LEGALLY PERMISSIBLE
The first test concerns permitted uses. In the case of the subject, we are
analyzing two contiguous building sites, one of 16.02 acres and the other of
2.87 acres, for a total 18.89 acre site improved with three industrial
buildings. According to our understanding of the zoning ordinance noted earlier,
the sites may be improved with structures that accommodate a variety of light
manufacturing, office and accessory uses. As previously reported, the subject
sites appear to be a legal and conforming use.
We would note there are no intended changes in land use regulations for
the sites or the immediate area of the neighborhood. Therefore, if vacant, the
subject sites could be improved with a similar use as currently exists or
adjacent single tenant industrial improvements within the Las Americas
industrial park. Therefore, we view zoning as imposing no measurable valuation
constraints and within this industrial subdivision, buildings as large as 60
percent of the site area could be improved. Additionally, there are no known
deed restrictions that would prohibit development.
PHYSICALLY POSSIBLE
The second test is what is physically possible. As discussed in the
Property Description, the site's size, soil, topography, etc., does not
physically limit each sites use. Their size is large enough to accommodate most
permitted uses under current zoning. The sites are fully improved, provided with
all utilities, have level topography and above average accessibility. Thus,
there are no physical barriers that would restrict their development.
FINANCIALLY FEASIBLE
Based on our analysis, the Chihuahua real estate market has shown stable
vacancies, stable rental rates and substantial growth in new supply. Because of
steady growth of the local economy after the economic crisis of 1994, an
increased demand for space has caused large
- --------------------------------------------------------------------------------
-41-
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
scale build-to-suit construction to occur in the market. However, speculative
building construction has yet to be undertaken on a large scale.
The subject sites are situated in one of the smaller industrial
subdivisions in the community, however their average accessibility, the high
level of build-out in the subdivision and location in a desirable industrial
submarket provide them with above average accessibility. Further, new buildings
could not be immediately added to the submarket which would adversely affect the
feasibility of constructing on the subject sites,
The feasibility of a new project depends on the desire of a company to
locate in the city. The industrial market has been driven by only built-to-suit
projects. Vacancy is less than three percent and only one new subdivision is
offering industrial lots which could provide large scale additions to the
market. Rental rates and occupancy levels are expected to remain stable in the
near term and it is unlikely that large scale speculative construction will be
undertaken in the foreseeable future. Current construction costs of $26 to $30
per square foot, including land, and market rental rates support a first year
rate of return in the range of 14.0 to 18.0 percent, supporting feasibility.
However, the financial feasibility of any project will depend on the continued
desire of a firm to move to Chihuahua and indications are that future demand
will at least be similar to historical levels.
Chihuahua has a feasibility based on its established reputation as being
one a stable community with established residential base. It has a skilled
employment base and population stability that many border towns do not offer
international companies. New companies entering this market are finding out that
a relocation from the U.S. to Chihuahua and even Juarez to Chihuahua, increases
productivity at lower labor costs. The result of moving operations from the U.S.
to facilities that could be constructed on the subject site, could provide labor
cost savings to cover the cost of a building in one to three years.
MAXIMALLY PRODUCTIVE
In our opinion, the improvement of the subject sites with light industrial
uses would be physically possible and legally permissible, and financially
feasible, even under a speculative construction basis. However, yield rates
would be increased if an owner occupant was been predetermined. However, many
potential manufacturers cannot meet building demands from existing inventory in
Chihuahua, or other northern Mexico communities oriented toward large industrial
occupancies and have been unwilling to wait for a lengthy build-to-suit
transaction. Thus, the maximally productive use of the site would be for the
development of light industrial space oriented towards single tenant occupancy
either on a build-to-suit, or speculative basis.
CONCLUSION - AS IF VACANT
The highest and best use of the subject sites, as if vacant, is believed
to be for light industrial development. The sites benefit from a location with
proximity to the community's labor force and major arterials. The metropolitan
area has shown continued stability in attracting maquiladora companies to the
city. In addition, a build-to-suit development is always feasible, as the cost
and profit requirements of the developer are being met by market rent levels and
construction costs.
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-42-
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
AS IMPROVED
LEGALLY PERMISSIBLE
As previously stated the subject's zoning permits light industrial uses.
It appears the improved components of the subject site are a legal and
conforming use, thereby satisfying the legal permissibility criterion.
PHYSICALLY POSSIBLE
As previously stated in the Property Description section of this report,
the overall design, layout and condition of the improvements are adequate and
functional. Therefore, in view of the subject's zoning and physical
characteristics, the existing development is considered to satisfy the
physically possible criterion of highest and best use as improved.
FINANCIALLY FEASIBLE
Since the subject was constructed as an owner occupied facility, it has
incurred no vacancy since its construction. General real estate operating
expenses are reported to be typical of larger industrial facilities in the
region. In addition, the space is sufficiently functional to allow an occupant,
with potential modification to the interior if needed, to also generate
sufficient income to exceed expenses. The subject facility, consisting of three
buildings on two industrial sites, could also be modified, or site partitioned
to accommodate from one to three tenants. While multitenant facilities are not
typical of the market, rental rates would support the economic feasibility of
such a division. Therefore, the continued use of the subject as a single tenant
facility or partitioning the property to accommodate two to three tenants are
financially viable alternatives. However, single tenant usage is most likely
given the propensity of this use in the market.
MAXIMALLY PRODUCTIVE
The subject improvements have been concluded as being physically
supportable, legally permissible and financially feasible. Demolition and/or
significant renovation are not considered to be financially feasible
alternatives. Therefore, as no other utilization of the improvements would
result in a higher value, it has been determined the maximally productive use is
as improved.
CONCLUSION
Based on our analysis, we believe the current use of the site, as
improved, with a single- occupant (preferably an owner), or if simultaneous
demand is evident, leasing as a two to three tenant facility. The three
industrial buildings consist of a combination of office and
manufacturing/warehouse space which is a proper use of the site within the
definition of highest and best use.
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<PAGE>
VALUATION METHODOLOGY
- --------------------------------------------------------------------------------
Appraisers have three approaches available to them in valuing improved
property: the Cost Approach, the Sales Comparison Approach and the Income
Approach. In most instances, the real property interest being appraised (e.g.,
fee simple, leased fee or leasehold) will dictate the validity of a particular
approach.
The subject property is located in the city of Chihuahua, state of
Chihuahua, Mexico. The subject manufacturing facility was constructed for the
owner/tenant in 1982 to 1989. Furthermore, the subject property is owned by a
U.S. corporation that also has facilities in the U.S., as are most major
maquiladora facilities in Chihuahua. In fact, the subject's industrial park is
oriented toward U.S. industrial building ownership. Projects within this market
were built by the specific company, with the use of a local building contractor,
and occupied by the owner. However, in the last few years, other maquiladora
markets have experienced increase speculative development and build-to-suit
projects oriented for lease, rather than sale. The demand in the rental market
in Frontier cities has increased and lending institutions are just now starting
to provide financial leverage to building investors. Based on these facts, all
three approaches to estimate value, Cost Approach, Sales Comparison Approach and
Income Approach will be used in our analysis.
A detailed Cost Approach was performed, although the older building age
makes estimating depreciation somewhat subjective. Improved sales of similar
facilities to perform a Sales Comparison Approach were also found in Chihuahua
and additional research uncovered sales throughout the Frontier communities of
northern Mexico that could have also be used for comparisons. The recently
negotiated lease activity and properties available for lease were limited in the
community, as most facilities are owner occupied. Therefore, we relied on
additional lease activity within Cuidad Juarez for rental comparison within the
Income Approach.
The appraisal process is concluded by a review and re-examinations of each
of the approaches to value that have been employed. Consideration is given to
the type and reliability of data used, and the applicability of each approach.
Finally, the approaches are reconciled and a final value conclusion is
estimated.
The reconciled market value of the fee simple interest has then been
re-examined in order to estimate if any deductions need to be undertaken to
estimate a liquidation value. At the owners request, a liquidation considers a
six month sale period.
- --------------------------------------------------------------------------------
-44-
<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
METHODOLOGY
This approach to value consists of an analysis of the physical value of
the property. The principle of substitution, which forms the underlying
rationale of this approach, holds that no prudent person will pay more for a
property than the amount with which he can obtain, by purchase of a site and
construction of a building, without undue delay, a property of equal
desirability and utility.
In the Cost Approach, the following ten steps are typically employed to
reach an estimate of value:
(1) Estimate the value of the land as though vacant and available to be
developed to its highest and best use;
(2) Estimate the replacement cost of the primary structure(s) as of the
effective appraisal date. The estimate includes both direct (hard)
costs and indirect (soft) costs;
(3) Estimate other costs (indirect costs) incurred after construction
to bring the new, vacant primary structure(s) up to market
conditions and occupancy levels;
(4) Estimate an appropriate entrepreneurial profit from an analysis of
the market;
(5) Add estimated replacement or reproduction cost, indirect costs, and
the entrepreneurial profit, often expressed as a percentage of
total direct and indirect costs, to arrive at the total replacement
or reproduction cost of the primary structure(s);
(6) Estimate the amount of accrued depreciation in the structure, which
is divided into three major categories; physical deterioration,
functional obsolescence, and external obsolescence;
(7) Deduct the estimated accrued depreciation from the total
reproduction or replacement cost of the primary structure(s) to
derive an estimate of the depreciated replacement cost;
(8) Estimate replacement costs and depreciation for any accessory
buildings and site improvements, and then deduct the estimated
depreciation from the replacement costs of these improvements. Site
improvements and minor buildings are often appraised at their net
value, i.e., directly on a depreciated cost basis;
(9) Add the depreciated replacement costs of the primary structure(s),
the accessory improvements, and the site improvements to obtain the
estimated total depreciated replacement cost of all the
improvements; and
(10) Add the site value to the total depreciated replacement cost of all
the improvements to arrive at the indicated value of the fee simple
interest in the property.
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<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
LAND VALUATION
Depending on the specific appraisal assignment and/or the value being
sought, any of the following methods may be used to value land that is vacant or
considered to be unimproved or vacant.
The first method is the Sales Comparison Approach, which is the process of
analyzing sales of reasonably similar, recently sold sites in order to derive an
indication of the most reasonable and probable market value of the land being
appraised.
The second method is the Land Residual Approach, which is a valuation
technique based upon the premise that income can be divided between land and
improvements, and that the residual income to the land can then be capitalized
into a value.
A third procedure, the Subdivision Development Method, may sometimes be
used to estimate the value of vacant, usually undivided land, through a process
of analyzing the cost to development (including profit) and interest carry
relative to the anticipated gross income from the retail sales of individual
lots or tracts.
The fourth and fifth methods, the Allocation and Extraction methods, which
are two techniques that permit the distribution of the total value or sales
price of a property between land and building.
The last procedure is the Ground Rent Capitalization method, where ground
rents can be capitalized at an appropriate rate to indicate the market value of
a site.
Under the right circumstances, any of the preceding methods may be useful
in forming the basis of a valid estimate of land value. However, given the
availability of sales data, the Sales Comparison Approach is considered to be
the best approach toward valuing the subject site. The most widely used and most
market-oriented unit of comparison for properties such as the subject is the
sales price per square foot. All of the comparable sales were compared on this
basis and adjustments were made to the various comparables. On the following
page is a summary of the sales and listings we found most comparable to the
subject. These are a culmination of reviewing all known industrial subdivision
activity in the community in the last two years. All are situated within
established industrial parks in the city limits of Chihuahua.
As noted earlier, the subject sites are zoned for industrial development
under the jurisdiction of Chihuahua. The two contiguous subject sites are
similar in location, access, visibility, development potential and differ only
in size. This analysis will consider the two subject sites as a single
development parcel and provide a single value indication.
According to our highest and best use analysis, we have concluded
single-tenant industrial use would be the most likely development for the
subject development parcel. Accordingly, a search was conducted for comparable
land sales deemed to be conducive to similar development.
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<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
COMPARABLE LAND SALES
FROM END OF REPORT
- --------------------------------------------------------------------------------
-47-
<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
The comparables analyzed include two listings and two sales zoned for
industrial development in Chihuahua. The sales have occurred in the last 12
months. The preceding table depicts a summary of the land comparables.
Note that certain adjustments to the sales will be made for comparison
purposes, but a degree of subjectivity is involved. We were unable to support
the magnitude of the adjustments by paired sales analysis, but the adjustments
do reflect our thought processes in comparing one transaction with another.
PROPERTY RIGHTS CONVEYED
All of the comparable sales involved vacant parcels of land unencumbered
by any leases. Therefore, all of the sales set forth herein represent the
transfer of the fee simple estate. Consequently, no adjustments are warranted
for differences in property rights conveyed.
SELLER FINANCING/CASH EQUIVALENCY
The sales were purchased on an all cash, or cash equivalent basis. Since
we are valuing the subject site based on a cash equivalent sale, no adjustment
is necessary.
CONDITIONS OF SALE
Sometimes sales involve certain elements, which motivate the buyer or
seller to pay or accept more or less than the market value of the property. When
such influences differ from typical market conditions, adjustments are required.
All of the sale comparables were subject to normal (or typical) conditions of
sale and required no adjustment. The two listings reflect price levels that are
not negotiable with the seller.
MARKET CONDITIONS
An adjustment for market conditions, often referred to as a time
adjustment, reflects a change in the market from the sale date of the comparable
to the valuation date of the subject property. An analysis of real estate trends
indicates that the market for Chihuahua has remained stable in terms of land
pricing. The listings reflect current price levels that buyers would be required
to pay, to obtain industrial zoned land within an industrial park. Therefore, an
adjustment for changes in market conditions could not be supported.
LOCATION
An analysis of location involves factors such as proximity to a labor
force, major thoroughfares, surrounding influences, and area amenities. The
proximity to a labor force is critical in a country like Mexico that does not
have a good public transportation system and few industrial employees have
automobiles.
Because of the subject's more urban location and built-out industrial
neighborhood, only one land sale could be confirmed within the subject's
industrial park. However, there are only four parks within the community and
except for Sale L-4, the comparables due not substantiate an adjustment for
location. Sale L-4's relatively low price is due to its comparatively large
size.
ACCESS/VISIBILITY
For most industrial properties, easy access, visibility and exposure to a
major arterial are helpful but are not paramount for developmental success.
However, properties may differ in
- --------------------------------------------------------------------------------
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<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
terms of frontage, access to a heavily traveled arterial or highway access.
Values for vacant industrial land are influenced by access to highways. It is
our opinion that no adjustments to the comparables are warranted.
ZONING
Adjustments for zoning can be related to several issues, including
density, site coverage (floor area ratio), other restrictions, such as open
space requirements, etc. The main focus of adjustment under the zoning category
would be for use restrictions. As all of the comparable sales are industrially
zoned and would allow a similar industrial development as what exists on the
subject site, no adjustment is warranted.
UTILITY
The analysis of site utility considers such physical characteristics as
shape, depth, frontage, plottage, corner influence, topography, zoning, the
availability of utility services, and encumbrances, i.e. the overall usability
of the land. The shape of a property has the potential to restrict the overall
utility. The lack or presence of easements and/or restrictions must also be
considered in the comparison process.
As described previously, the subject site is irregular in shape and has a
level topography that does not affect the costs of development. All the sales
have typical configuration and a level topography, which does not increase the
costs of development relative to the subject. None of the comparables have any
adverse physical factors, such as flood plain, easements, encroachments, or
obvious environmental problems, etc., that influenced their respective purchase
prices. Like the subject, each of the comparables offer adequate shape, depth
and the availability of utility services. As a result, no adjustments were
applied.
DENSITY/SIZE
The subject encompasses a 18.89 acre building parcel; whereas, the
comparables range in size from 2.87 to 77.00 acres. Generally, the rule of
quantity discount dictates that the larger the size, the smaller the price per
unit, all other factors being equal. As indicated by Comparables L-1 and L-2,
and the sale price of Sale L-4, the market does differentiate between size and
unit price. Obviously, Sale L-4, at 77 acres, is considerably larger than the
subject, warranting a large upward adjustment. Sale L-3, at 2.87 acres, is
smaller than the subject, warranting a downward adjustment to its $2.80 square
foot price. However, it is logical to conclude a land value for the subject
between the list prices of Comparables L-1 and L-2, or $3.00 to $2.45 per square
foot, respectively.
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<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
The following table illustrates the adjustments made to the land
comparables.
<TABLE>
<CAPTION>
============================================================================================
LAND COMPARABLES 1 2 3 4
============================================================================================
<S> <C> <C> <C> <C>
Unadjusted Sale Price $745,350 $2,668,050 $350,000 $3,700,000
Property Rights Conveyed 0% 0% 0% 0%
Financing Terms 0% 0% 0% 0%
Condition of Sales 0% 0% 0% 0%
Market Conditions 0% 0% 0% 0%
-- -- -- --
Total Adjustments 0% 0% 0% 0%
-- -- -- --
Adjusted Sale Price $745,350 $2,668,050 $350,000 $3,700,000
Adjusted Price/ Sq. Ft. $3.00 $2.45 $2.80 $1.10
Locational & Physical Adjustments
Location 0% 0% 0% 0%
Access/Visibility 0% 0% 0% 0%
Zoning 0% 0% 0% 0%
Utility 0% 0% 0% 0%
Density/size -10% +10% -10% +250%
---- ---- ---- -----
Total Adjustments -10% +10% -10% +250%
---- ---- ---- -----
FINAL ADJUSTED PRICE SQ. FT. $2.70 $2.70 $2.52 $2.75
--------------------------------------------------------------------------------------------
AVERAGE PRICE PER SQ. FT. $2.67
============================================================================================
</TABLE>
The comparable properties range from cash equivalent prices of $1.10 to
$2.80 per square foot before the adjustment process. The indicated value of the
subject property after making the necessary adjustments, results in a value
ranging from $2.52 to $2.75 per foot, with an average of $2.52 per square foot.
Sale L-4 is least reliable to estimate the subject's market value due to the
large adjustment required. However, Comparables L-1 and L-2 reflected listing
prices which have not yet been obtained. Thus, the subject's market value should
fall below the adjusted price of $2.70 and slightly below the $2.67 adjusted
average price. Therefore, we have put most emphasis on the $2.52 square foot
price of Sale L-3.
We have estimated the subject's market value of $2.50 per square foot for
the subject parcel. This is only slightly below the average adjusted square foot
price and considers most weight was given to the adjusted price of Sale L-3.
Based upon the subject's highest and best use, it is our opinion the aggregate
value of the subject sites are calculated as follows:
822,848 Square Feet x $2.50/Square Feet = $2,057,120
ROUNDED $2,060,000
COST OF IMPROVEMENTS
The subject improvements were evaluated in terms of type of construction,
design, and building materials to arrive at an estimate of replacement cost. The
cost estimate is inclusive of indirect costs such as architectural and
engineering fees, legal fees, inspection fees and closing costs, administrative
overhead, the contractor's overhead and profit, as well as the developer's
entrepreneurial profit. All direct costs for the base structure and tenant
improvements, and the following indirect costs:
1. Plans, specifications, site improvements, and building permits,
including working engineers' and architects' fees;
- --------------------------------------------------------------------------------
-50-
<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
2. Normal fees and interest on funds during the construction period;
3. Sales taxes on materials; and
4. Contractor's overhead and profit that includes workmen's compensation,
fire and liability insurance, unemployment insurance, etc.
Our estimate of replacement cost new for the subject improvements is based
on information provided by local developers, general contractors and internal
information obtained by Cushman & Wakefield/GCI on recently constructed
industrial projects. The interviews with the developers and general contractors
included an itemized discussion of the applicable costs associated with
developing the respective project. Additional consideration for profit was also
included.
Because of the high cost of funds associated with lending institutions in
Mexico, that few developer's have access to construction financing, that U.S.
financing in Mexico is well below Mexico's internal lending institutional levels
and that many developers build with cash, construction interest costs were not
considered in the analysis.
Because of similarities in tenants, builders and construction material
costs throughout the Frontier communities; recently constructed facilities from
the city of Juarez, also in the state of Chihuahua, and Hermosillo, in the state
of Sonora, was considered. A summary of these recent construction projects are
summarized:
<TABLE>
<CAPTION>
=================================================================================================================
BUILDING BUILDING SIZE/ COST/
LOCATION TENANT/BUILDER DESCRIPTION COST SQ. FT. SQ. FT.
=================================================================================================================
<S> <C> <C> <C> <C> <C>
Salvarcar Corridor Nationwide 10% office, 30' clear, $1,250,000 50,000 $25.00
Juarez, Chihuahua Processing AC/Evap
Bermudas Ind. Park N/A 10% office, 30' clear, $2,300,000 100,000 $23.00
Juarez, Chihuahua AC/Evap
Sin Tierra Intermex 10% office, 30' clear, $1,150,000 50,000 $23.00
Chihuahua, Chihuahua AC/Evap
C.U.M. McCulloch 15% office, 22' clear, $6,396,936 254,960 $25.09
Hermosillo, Sonora AC/Evap, Mezzanine
Las Americas Ind. Park Genesis Building Shell, no slab $1,000,000 50,000 $20.00
Chihuahua, Chihuahua
Las Americas Ind. Park SOFI Building Shell $1,200,000 100,000 $12.00
Chihuahua, Chihuahua
Complejo De Industrial John Deere 28% office, 22' clear, $5,600,000 106,993 $52.34
Chihuahua, Chihuahua AC/Evap
=================================================================================================================
</TABLE>
The cost comparables suggest a direct building cost range of $23.00 to
$25.09 per square foot for an industrial building with 10 to 15 percent office
finish, 22 to 30 foot clear height, and AC/Evap throughout the building. A
building shell, which excludes any office allocations or measurable partitions,
ranges from $12.00 to $20.00 per square foot. Industrial building construction
with extensive office allocation and upscale manufacturing finish amounts to
$52.34 per square foot.
The subject is equipped with an office/cafeteria finish of approximately
21 percent, however, most of this area is partitioned for uses other than
office. The office allocation is actually only 9 percent. The subject has 12 to
25 foot truss heights and standard manufacturing
- --------------------------------------------------------------------------------
-51-
<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
interior finish. The subject does have a portion of the manufacturing area
converted to a clean room, providing for air scrubbers in the HVAC system. This
would increase a comparative cost only slightly.
Given the subject's physical characteristics, a cost slightly below the
$23.00 to $25.09 per square foot cost for typical industrial buildings with 10
to 15 percent office finish, 22 to 30 foot clear height, and AC/Evap is
appropriate for the subject. We have allocated a replacement cost of $21.00 per
square foot, or $5,160,000 rounded, when applied to the 245,686 square foot
gross building area.
DEVELOPER'S PROFIT
Developer's profit is difficult to measure in the Frontier communities of
Mexico, due to many developer's owning the industrial park (land),
build-to-suits have an additional profit percentage on either sales or leases,
and developer's are typically the intended tenant of the facility. Only until
the last two years were speculative buildings being constructed in the Frontier
communities where developer's profit could be accurately measured, however, few
developer's have access to the necessary capital to conduct this on a large
scale. Currently, Security Capital is one of the only developer's conducting
build-to-suits throughout the country.
Based on recently constructed projects, developer's profit is ranging from
12 to 20 percent of total project costs. In cases where profit falls around 12
percent, the developer also has equity in the land that increases their return.
The subject market has remained stable due to the concentration of build-to-suit
activity, thus developer's profits range from 13 to 15 percent. Few developers
in Chihuahua have the financial leverage to increase their yields.
The project developer should anticipate a 13 percent profit on the total
building cost, excluding land. This is at the low point of the range, given the
market's characteristics. The inclusion of a 13 percent developer's profit
reflects the entrepreneurial profit/incentive to construct the project and is
inherent in supporting the development feasibility for income producing
properties.
ESTIMATE OF ACCRUED DEPRECIATION
Accrued depreciation is the difference between the cost new of
improvements and the current value of those improvements. Depreciation includes
value losses in three basic categories: (1) physical deterioration, (2)
functional obsolescence, and (3) external obsolescence.
The subject improvements are estimated to have an overall economic life
expectancy of approximately 45 years. Based on our observations, the effective
age of the improvements is 10 years. Therefore, the remaining economic life of
the improvements is 35 years. The use of the economic age-life method of
estimating deterioration projects a deduction of 22.2 percent (10 years/45
years).
Functional or external depreciation was not considered due to the nature
of the building improvements and their modern design.
- --------------------------------------------------------------------------------
-52-
<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
SUMMARY OF THE COST APPROACH
<TABLE>
<S> <C>
Total Cost Improvement $5,160,000
Plus: Developer's Profit +670,800
Less: Accrued Depreciation (Cost only) -1,145,520
----------
Depreciated Value of the Improvements $4,685,280
Add: Land Value 2,060,000
----------
Total Property Value $6,745,280
Rounded to: $6,750,000
</TABLE>
This value estimate equates to a square foot value of $27.47.
- --------------------------------------------------------------------------------
-53-
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
METHODOLOGY
In the Sales Comparison Approach, we estimated value by comparing this
property with similar, recently sold properties in the Frontier communities of
northern Mexico. Inherent in this approach is the principle of substitution,
which holds that when a property is replaceable in the market, its value tends
to be set at the cost of acquiring an equally desirable substitute property,
assuming that no costly delay is encountered in making the substitution.
By analyzing sales that qualify as arm's-length transactions between
willing and knowledgeable buyers and sellers, we can identify value and price
trends. The basic steps involved in the application of this approach are as
follows:
(1) Researching recent, relevant property sales and current offerings
throughout the competitive area;
(2) Selecting and analyzing those properties considered most similar to
the subject, considering changes in economic conditions that may have
occurred between the sale date and the date of value, and other
physical, functional or locational factors;
(3) Identifying the sales that include favorable financing and calculate
the cash equivalent price;
(4) Reducing the sale prices to common units of comparison, such as price
per square foot of building area (in this case gross leasable area);
(5) Making appropriate adjustments between the comparable properties and
the property appraised; and
(6) Interpreting the adjusted sales data and draw a logical value
conclusion.
The most widely used and market-oriented unit of comparison for properties
such as the subject is the sales price per square foot. All comparable sales
were analyzed on this basis. We present on the following page a summary of the
improved properties we compared with the subject property.
ANALYSIS OF SALES
Our market investigations began with an investigation of improved sales
that had occurred in the Chihuahua and Cuidad Juarez areas over the last several
years. However, due to low vacancy resulting from minimal tenant turnover, that
most build to suit projects have the original tenant still occupying the
property and that all speculative buildings being constructed are for lease, few
sales have occurred within the immediate community of Chihuahua. The building
sales investigation was expanded to include a search of industrial sales in
northern Mexico communities that also offer similar typed industrial projects,
primarily Juarez (within the state of Chihuahua), Matamoros, and Reynosa. The
criterion we used was improved sales of modern manufacturing facilities that are
appropriate for maquiladora operations.
- --------------------------------------------------------------------------------
-54-
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
Insert improved sales summary at the end of this report
- --------------------------------------------------------------------------------
-55-
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
Our search included interviews with the following brokerage firms; Enrique
Portillo with Cushman & Wakefield/GCI, CB Commercial and Binswanger. We also
interviewed the managers of the major industrial parks within the respective
communities, the maquiladora managers of most of the property sales and
industrial developers with Security Capital and Finsa.
This sales search uncovered nine sales and two listings within the
respective communities that could be used for comparison. These sales are of
typical maquiladora industrial facilities which ranged in size from 25,390 to
229,327 square feet and in effective age from new to 17 years. All, but Sale 10,
are designed for single tenant occupancy.
Two of the comparables were actually under construction at the time of
inspection and represent build-to-suit transactions, as do two other
comparables. Because of the lack of improved inventory available for sale or
lease, maquiladora and typical industrial users typically employ a developer to
construct a facility, which they will buy upon completion. This provides the
developer with a sure sale and provides the buyer with a building designed for
their specific manufacturing use. Many buyers have had to default to this
process due to the absence of available buildings, the lack of market knowledge,
real estate surveys and individuals knowledgeable of all segments of the market.
With respect to the overall analysis, it appears the variance in sale
prices is primarily associated with the quality of the building, if the
build-to-suit design created added building costs and if the building is vacant.
A vacant building within these markets reflects a somewhat distressed sale that
the market discounts substantially. However, it is important to address each
property in terms of the conventional sequence of adjustments relative to the
subject. The following analysis primarily concentrates on differences meriting
adjustment.
PROPERTY RIGHTS CONVEYED
All but Sale 10 are single tenant facilities that were vacant at the time
of sale or purchased as an owner occupant and sold in fee simple. The fee simple
interest of the subject is also under consideration. Sale 10 was a two tenant
facility with contract lease rates at market levels. A market rent equivalency
adjustment is not appropriate and no adjustment is warranted for property rights
conveyed.
SELLER FINANCING/CASH EQUIVALENCY
According to our conversations with parties familiar with the
transactions, the financing for the sales were cash to the seller. No adjustment
is warranted for financing.
CONDITIONS OF SALE
We identified no special motivational conditions concerning the comparable
sales. Therefore, in our opinion, no adjustments are warranted for special
motivational conditions.
TIME (MARKET CONDITIONS)
Changes in market conditions may be caused by fluctuations in supply and
demand, inflation, deflation or other factors. Market conditions generally
change over time and, therefore, changes in market conditions from specific past
sales should be considered when making a comparative analysis of the property at
the valuation date.
- --------------------------------------------------------------------------------
-56-
<PAGE>
Only sales that occurred after the devaluation of the peso in December
1994 were considered in this analysis. The sales reflect transactions occurring
from January 1995 to two projects currently available. Although demand continues
to increase in all of the communities in which the sales are situated,
adjustments for changes in market conditions cannot be substantiated.
OTHER
The additional adjustments needed for the comparables are described for
each property, with most involving location, condition, age/quality issues or
economic characteristics. All sales will be analyzed after the adjustment for
excess land, if appropriate. The chart at the end of this analysis will then
summarize the comparisons.
Sales 1, 2 and 3 are situated within the subject's community and reflect
sales with similar location. Sales 4 and 5 are situated in Matamoros, a
maquiladora community immediately south of Brownsville, Texas. Because of the
smaller community and industrial market, coupled with minimal competition within
the market, has caused building costs to remain above those in Chihuahua. As
such, building sale prices are higher than those reflected in Chihuahua. These
sales are adjusted downward as a result.
Sales 6, 7 and 8 are situated in Juarez, with generally higher land cost
basis. A downward adjustment for location is also necessary to reflect the
larger community and industrial market size.
Sales 9, 10 and 11 are situated in Reynosa, a maquiladora community
immediately south of McAllen, Texas. Although a smaller community and industrial
market, substantially increased demand has caused increase developer
competition, including speculative buildings being added to this market.
However, building costs remain above those in Chihuahua. As such, building sale
prices are higher than those reflected in Chihuahua. These sales are adjusted
downward as a result.
Sale 1 reflects an older transaction within Chihuahua that was vacant at
the time of sale. It is also one of the larger buildings in the community and
reflected a building with considerable physical deterioration. The buyer
subsequently remodeled the interior at considerable cost. The $17.44 per square
foot price reflects the sale of a vacant building in need of remodeling. It is
inferior to the subject in physical characteristics. As a result of this
comparable's inferior physical characteristics, an upward adjustment is
warranted.
Sale 2 consists of the John Deere Cos. recently completed 107,000 square
foot light assembly/distribution/office facility. This project opened in April
1997 and took about 9 months to complete. The construction cost was $5,600,000
or $52.34 per square foot, however the project had 30,000 square feet of office
(28%) build-out and some specialized tenant improvements. This facility is
located in the Parque De Complejo De Industrial and according to our source is
located on arguably the best site within the park. The facility is situated on
77 acres, which was purchased for $3,700,000 or $1.10 per square foot. A
considerable portion of the land area is excess land and could be resold. An
adjustment was made to the price, however at $54.63 per square foot reflects a
newer facility with no physical deterioration, has a
- --------------------------------------------------------------------------------
-57-
<PAGE>
higher office finish and generally represents a superior facility. Thus, the
subject warrants a market value well below $54.63 per square foot.
Sale 3 consists of a building totaling 92,000 square feet and is situated
on 250,000 square feet of land. The initial asking price was $2,300,000,while
the contracted sale price was $1,750,000, or $19.02 per square foot of building
area. The building was marketed for approximately 12 months and sold in the fall
of 1997. This vacant building was approximately 10 percent office build-out,
fully sprinklered, had ground mounted air washers (100 percent), a cafeteria and
a functional open production area. There is some added land for expansion, but
its proximity to the building would make a sale difficult, therefore no excess
was considered. At $19.02 per square foot, this comparable warrants a comparable
similar to the subject.
Sales 4 and 5 reflect industrial building purchases of similar facilities
in Matamoros. They range in price from $32.31 to $34.75 per square foot, but a
downward adjustment of 5 to 10 percent is warranted for increased building costs
in this community. These sales also reflect newer construction, with less
physical deterioration. In summary, the subject warrants a market value below
$32.31 per square foot, as indicated by these sales. Applying a downward
adjustment of 25 percent to these sales due to their superior characteristics,
supports a market value range for the subject of $24.23 to $26.06 per square
foot.
Sales 6, 7 and 8 are situated in Juarez, with Sales 6 and 8 located within
the Bermudas Industrial Park and Sale 7 within the Salvacar Corridor. Sale 6 is
the listing of a 25,390 square foot industrial facility than is 17 years old and
has noted functional deficiencies, including low ceiling heights and partitioned
interior. However, the adjustment for inferior physical characteristics is
offset by the superior land value. At $25.60 per square foot, this price
represents an appropriate market value for the subject. Sale 7 is a new facility
and Sale 8 is under construction, both build-to-suit projects where the buyer is
purchasing the property upon completion of construction. At $44.23 and $31.00,
they represent superior locations and physical characteristics that warrant a
large downward adjustment to reflect the market value of the subject.
Sales 9, 10 and 11 are industrial facilities situated in Reynosa. Sale 9
reflects a vacant 83,000 square foot building that is available for sale. Its
square foot asking price is less reliable for comparison. Sale 10 is an 8 year
old facility, also 83,000 square foot in size and the only multitenant facility
considered for comparison. It has a higher office finish and is completely air
conditioned. At $50.60 per square foot, this represents the extreme upper market
value of maquiladoras in the Frontier communities. Sale 11 is a build-to-suit
facility that is under construction and will be purchased by the tenant at
completion. At $34.00 per square foot, a downward adjustment is made to reflect
the market value of the subject.
SUMMARY
Overall, Sales 3 and 6 at $19.02 and $25.60 reflect similar comparisons.
Sale 1, at $17.44 reflects an inferior comparison. The remaining sales reflect a
square foot price range of $31.00 to $54.63 reflect superior comparisons. Thus,
a market value between $25.60 to $31.00 per square foot is appropriate for the
subject. Discussions with industrial brokers from the respective firms
previously noted indicated that this is a reliable indication of market value
for the subject.
- --------------------------------------------------------------------------------
-58-
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IMPROVED SALES COMPARISON
===============================================================================================
SALES OVERALL RATING
COMP. PRICE RELATIVE TO
NO. PROPERTY PER SF* THE SUBJECT *
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 Av. Miguel de Cervante No. 140 $17.44 Inferior
Chihuahua, Mexico
-----------------------------------------------------------------------------------------------
2 Parque de Complejo de Industrial $54.63 Superior
Chihuahua, Mexico
-----------------------------------------------------------------------------------------------
3 Los Americas (Neilson Building) $19.02 Similar
Chihuahua, Mexico
-----------------------------------------------------------------------------------------------
4 NEC Av. Ohio and Av. Del Obreno $32.31 Superior
Matamoros, Mexico
-----------------------------------------------------------------------------------------------
5 Av. Poniente $34.75 Superior
Matamoros, Mexico
-----------------------------------------------------------------------------------------------
6 Boulevard Gomez Morin $25.60 Similar
Juarez, Mexico
-----------------------------------------------------------------------------------------------
7 Avenue de las Torres $44.23 Superior
Juarez, Mexico
-----------------------------------------------------------------------------------------------
8 Bermudas Industrial Park $31.00 Superior
Juarez, Mexico
-----------------------------------------------------------------------------------------------
9 Cleo Building $34.00 Superior
Reynosa, Mexico
-----------------------------------------------------------------------------------------------
10 Parque Industrial Park $50.60 Superior
Reynosa, Mexico
-----------------------------------------------------------------------------------------------
11 Finsa Industrial Park $34.00 Superior
Reynosa, Mexico
===============================================================================================
</TABLE>
*The rating evaluation considers the net effect of all adjustments on a
per unit after the exclusion of excess land
Comparables 3 and 6, at $19.02 to $25.60 per square foot, reflect the most
similar comparisons. However, there are few building opportunities in Chihuahua
and if available, the subject would be considered a very desirable facility to a
maquiladora operator. As such, we have given most emphasis to the $25.60 square
foot price of Sale 6.
Based on the preceding analysis, an estimated value of $25.50 per square
foot is considered reasonable for the subject building improvements and
respective building site. We have included the estimated market value of the
subject's to arrive at a market value of the fee simple interest in the subject
property. Therefore, the subject's total value via the sales price per square
foot of building area methodology is:
245,686 Square Feet x $25.50/Square Feet = $6,264,993
Rounded $6,260,000
- --------------------------------------------------------------------------------
-59-
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
The subject facility contains approximately 245,686 square feet. The
quality of construction is considered to be average for this facility
considering its age and architectural style. The subject was designed for
single-tenant occupancy, specific to the current tenant's needs. The market
consists primarily of owner occupied buildings and build-to-suit facilities that
are sold or leased. Therefore, using the Income Approach can provide an estimate
of market value for the subject, but considered less reliable than the Cost or
Sales Comparison approaches. Below, we have discussed the process used to
estimate market value.
Properties such as the subject have been leased on a triple net basis,
with the tenant paying all operating expenses. If available, the subject would
lease on a triple net basis and reflect a market rental rate similar to other
leased and available industrial projects in the Chihuahua and Juarez industrial
markets. We, therefore, have elected to look at lease rates with triple net
terms. In an effort to estimate market rent for the subject, a search was
conducted of only industrial facilities which were leased or available for lease
in Chihuahua and Juarez and could provide a general indication of market rent.
Our search uncovered 33 lease comparables in Juarez and two within one
industrial park in Chihuahua that have occurred since the beginning of 1995.
There are also seven speculative buildings in Juarez under construction that
will come available from May to November 1998 and are currently available for
lease. We concentrated on leased facilities over 95,000 square feet in size for
comparison. This information is shown in the Industrial Rent Comparable Summary
below.
INDUSTRIAL RENT COMPARABLE SUMMARY
<TABLE>
<CAPTION>
================================================================================================================
TENANT/ BUILDING TERM LEASE ANNUAL LEASE
COMP LOCATION SIZE (SF) (YEARS) DATE RATE (NNN)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Ademco Corporation 150,000 5 1996 $5.50
Fuentas Industrial Park, Juarez
- ----------------------------------------------------------------------------------------------------------------
2 Johnson & Johnson 116,000 5 1996 $6.00
Rio Bravo Industrial Park, Juarez
- ----------------------------------------------------------------------------------------------------------------
3 Foamex 113,327 7 1996 $4.40
Bermudez Industrial Park, Juarez
- ----------------------------------------------------------------------------------------------------------------
4 Berg Electronics 103,000 5 1996 $5.00
Intermex Industrial Park, Juarez
- ----------------------------------------------------------------------------------------------------------------
5 Alcoa Fujicura 100,000 3 1997 $5.00
Neptuna Industrial Avenue, Juarez
- ----------------------------------------------------------------------------------------------------------------
6 Vishay Intertechnology 100,000 10 1997 $5.62
Los Torres Industrial Ave., Juarez
- ----------------------------------------------------------------------------------------------------------------
7 Seven Oaks 113,327 5 1997 $4.60
Omega Industrial Park, Juarez
- ----------------------------------------------------------------------------------------------------------------
8 Vishay Intertechnology 100,000 10 1997 $5.62
Carte Blanca, Juarez
- ----------------------------------------------------------------------------------------------------------------
9 Federal Mogul 102,000 10 1997 $5.88
Omega Industrial Park, Juarez
- ----------------------------------------------------------------------------------------------------------------
10 Parequest de Complejo de 40,000 - 7 1997 $4.75 - $5.00
Industrial, Chihuahua 120,000
- ----------------------------------------------------------------------------------------------------------------
SUBJ. Prolongacion Avenue De Las 245,686 --- --- ---
Americas, S/N, Chihuahua
Las Americas Industrial Park
=================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
-60-
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
Trying to compare the rent comparables on a point-by-point basis to the
individual subject improvements is difficult, since some are build-to-suit
arrangements were the tenant provided some of the capital associated with
construction. However, to the best of our knowledge, the lease rates are current
and reflect the leasing activity of improved industrial properties. The subject
is occupied by an owner/user. Therefore, the comparables are discussed in a
general manner.
The comparables are all smaller than the subject. However, these
properties have physical amenities that are generally similar to the subject.
Those in Juarez are superior in location due to high land cost basis, but the
three leases (represented as Comparable 10) within the Parequest de Complejo de
Industrial in Chihuahua have lease rates similar to those in Juarez. On an
investment basis, little differentiation exists between the two communities.
Age, clear height and percent office build-out also vary, but the market data
does not present a clear rental rate variation for these differences.
Rent Comparables 1, 7 and 9 are situated in the north part of Juarez, with
close proximity to the U.S. border crossing and the community's residential
base. They produced a range in rental rates from $4.60 to $5.88 per square foot.
Rent Comparables 2, 4, 6 and 8 are situated in the southeast part of Juarez,
further from the U.S. border crossing and the community's residential base, but
is the area with the most industrial growth in the community. They produced a
range in rental rates from $5.00 to $6.00 per square foot. Rent Comparables 3
and 5 are situated in the northeast part of Juarez, with close proximity to the
U.S. border crossing and the community's residential base. They produced a range
in rental rates from $4.40 to $5.00 per square foot. Rental Comparable 10 is
actually three leases negotiated in Chihuahua in 1997 at rates of $4.75 to $5.00
per square foot. This provides the most reasonable estimate of market rent, and
is supported by the specific lease comparables negotiated in Juarez.
A quantitative comparison of these properties with the subject property
would be very subjective, particularly relating to an adjustment for the
subject's large size. However, utilizing a Rental Comparable 10's rate range of
$4.75 to $5.00, we have concluded that the subject's reasonable market rent is
$4.75 per square foot. Only Comparables 3 and 7 produced lower rental rates,
which is appropriate since they are inferior comparisons.
VACANCY
Vacancy rates in the Chihuahua industrial market were discussed in the
Market Analysis section. Vacancy rates have remained in the two to four percent
range and our physical observations revealed a vacancy around three percent. We
expect occupancy levels will remain stable, due to new construction being
primarily build-to-suit activity. Because the subject is configured for
single-tenant occupancy, we would not expect turnover to be high over a typical
holding period. Therefore, we have projected stabilized vacancy to be 3.0
percent.
EXPENSES
We have estimated market rent on a triple net basis. Therefore, the
landlord is responsible for a limited amount of expenses. These expenses are
listed and discussed below.
Management - Professional management fees were obtained from Cushman &
Wakefield/GCI and Finsa. Reportedly, management fees range between 0.5
- --------------------------------------------------------------------------------
-61-
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
percent and 2.0 percent of effective gross income for multitenant
industrial facilities and a flat fee of $75,000 to $150,000 for the
management of industrial parks with 20 to 40 facilities. We assume
professional management will be required in the operation of this
property on a limited basis. Therefore, we estimate management expense
at 1.0 percent.
Reserves for Replacement - This item is for replacement of major
building components, such as air conditioners, roofing, plumbing, etc.
This expense item usually ranges between $0.02 and $0.08 per square
foot of building area. We have allocated $0.05 per square foot of total
building area per year, or $12,284 annually.
Miscellaneous - This expense category includes legal and accounting
services, real estate taxes and insurance costs during periods of
vacancy, telephone and other expense items not included in other
classifications. This expense item is estimated to be 2.0 percent of
effective gross income.
Following is an Income and Expense Summary using the above discussed
income and expense items.
INCOME AND EXPENSE SUMMARY
Potential Gross Income
245,686 S.F. @ $4.75/S.F./Year $1,167,009
Less Vacancy (3%) - 35,010
------
Effective Gross Income $1,131,998
Less Operating Expenses:
Management (1%) $11,320
Reserves ($0.05/S.F.) 12,284
Miscellaneous (2%) 22,640
------
Total Operating Expenses -46,244
----------
NET OPERATING INCOME $1,085,754
DIRECT CAPITALIZATION
Direct capitalization is used whereby we have assumed all the improvements
are leased at a market rental rate, with the appropriate deductions for vacancy
and owners expenses under net lease terms. Because some of the sales used in our
analysis were owner/user properties, capitalization rates were not always
available. However, those sales were capitalization rates could be obtained are
summarized:
SUMMARY OF OVERALL CAPITALIZATION RATES
===================================================
SALE CAPITALIZATION RATE
---------------------------------------------------
I-4 15.7%
---------------------------------------------------
I-5 14.3%
---------------------------------------------------
I-10 11.6%
===================================================
- --------------------------------------------------------------------------------
-62-
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
Sale I-4 reflects the purchase of a vacant building that was subsequently
leased. At 15.7 percent, this reflects the appropriate overall rate for a vacant
building in the Frontier communities oriented toward maquiladora occupancy. Sale
I-5 produced an overall rate of 14.3 percent, based on the asking lease rate at
the time of purchase. The potential tenant actually decided to purchase the
facility and conducted some remodeling at their cost. The seller would have had
to provide this additional cost if the buyer would have leased the facility,
which would have pushed the rental rate upward. Thus, a 14.3 percent overall
rate reflects the low end of the range. The buyer and seller of Sale I-10
indicated that the purchase price was above market levels. This was due to some
internal motivations, which could not be confirmed, and pushed the overall rate
downward. An overall rate of 11.6 percent is unrealistically low to use in
capitalizing net income into value within the Mexico industrial market.
Another way of deriving overall rates is through the analysis of
build-to-suit facilities, where the facility upon completion is subsequently
leased to the tenant. Examples of industrial facilities currently under
construction and available for lease are summarized:
BUILD-TO-SUIT ANALYSIS
CONSTRUCTION COSTS, INCOME ANALYSIS AND RESULTING OVERALL RATE
<TABLE>
<CAPTION>
=================================================================================================================
BUILDING PROJECT APPROXIMATE OVERALL
COMP PROJECT SIZE (SF) COST NET INCOME* RATE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Morelea, Juarez 60,000 $2,400,000 $313,140 13.0%
- -----------------------------------------------------------------------------------------------------------------
2 Salvacar Industrial Park, Juarez 63,504 $2,032,128 $340,400 16.8%
- -----------------------------------------------------------------------------------------------------------------
3 Juan Gabriel, Juarez 84,000 $2,772,000 $470,000 17.0%
- -----------------------------------------------------------------------------------------------------------------
4 Magnatec, Reynosa 136,690 $5,640,000 $710,420 12.6%
=================================================================================================================
</TABLE>
*Net income is based on asking or contract rent, market vacancy and
expenses.
Developers are obtaining overall rates of 12.6 percent to 17.0 percent on
their build-to-suit projects. However, many own the industrial park and enhance
their yields considerably due to a lower cost basis in the land. The average
rate for the four comparables noted is 14.9 percent, versus 13.9 percent for the
three sales previously noted. It can be concluded that developers are making an
additional yield around 1.0 percent.
It can be concluded that capitalization rates for industrial product
ranges from 11.6 percent to 17.0 percent for institutional-grade properties.
Given the subject's location, configuration, construction type and historical
use, we have selected an overall rate of 16.0 percent as applied below.
DIRECT CAPITALIZATION
==================================================================
Net Operating Income $1,085,754
------------------------------------------------------------------
Divided by Overall Capitalization Rate 16.0%
------------------------------------------------------------------
Indicated Value $6,785,963
------------------------------------------------------------------
Rounded to: $6,790,000
------------------------------------------------------------------
Thus, the value indication, via Income Approach, of the subject is
estimated to be $6,790,000 on a cash equivalent basis.
- --------------------------------------------------------------------------------
-63-
<PAGE>
RECONCILIATION AND FINAL VALUE CONCLUSION
- --------------------------------------------------------------------------------
Value indications for the subject property by the approaches to value are
indicated as follows:
Cost Approach $6,750,000
Sales Comparison Approach $6,260,000
Income Approach $6,790,000
In the reconciliation, each approach to value is reviewed in order to
determine the reliability of the data in each and to weigh that approach best
represents the actions of typical users and investors in the market.
The Cost Approach is generally a very reliable estimate of value in a
stable economy and when the subject is new construction with little or no
depreciation to be estimated. However, the subject property has suffered from
some physical deterioration due to its physical and effective age. Regardless,
the availability of cost information was reliable and land comparables provided
a reliable land value estimate. Because a particular purchaser of the subject
would rely less on this approach, we have given it least consideration.
The Sales Comparison Approach is based on the principle of substitution,
which implies that a prudent person will not pay more to buy a property than it
would cost to buy a comparable substitute property. The subject property, as
improved, was compared with other industrial building sales. The lack of
uniformity in the market made it somewhat difficult to objectively adjust the
comparables. However, there was adequate sales transactions to rely on, and the
square foot prices bracketed an appropriate value indication for the subject.
Based on the availability and reliability of the data, coupled with the fact
that the subject would likely be purchased by an owner user, the sales
comparison approach was given most emphasis in the estimation of market value.
Given its size and the lack of investment sales occurring in Chihuahua,
the subject is less suited to an analysis by direct capitalization. However, a
substantial amount of market data was available that could be relied upon. If
the subject were bought and sold in the investment market, this approach is very
reliable. However, given its single tenant orientation, coupled with its large
size, the subject is less desirable to the investment market. Thus, we have
given it secondary consideration.
Therefore, giving most weight to the indication of value via the Sales
Comparison Approach, it is our opinion that the market value of the fee simple
estate in the subject property, contingent upon the assumptions inherent in this
report, as of May 29, 1998, is:
SIX MILLION FOUR HUNDRED THIRTY THOUSAND DOLLARS
$6,430,000
- --------------------------------------------------------------------------------
-64-
<PAGE>
RECONCILIATION AND FINAL VALUE CONCLUSION
- --------------------------------------------------------------------------------
MARKETING TIME
Marketing time is an estimate of the time that might be required to sell a
real property interest at the appraised value. Marketing time is presumed to
start on the effective date of the appraisal. Marketing time is subsequent to
the effective date of the appraisal, whereas exposure time, as defined below, is
presumed to precede the effective date of the appraisal. The estimate of
marketing time uses some of the same data analyzed in the process of estimating
the reasonable exposure time and is not intended to be a prediction of a date of
sale.
We have concluded that a marketing period of 12 to 18 months would be
required in order to sell the subject property. This reflects the marketing time
exhibited by the sale which have been included. The value conclusion expressed
in this report is based on the current market conditions, but the large size and
length of time required to conduct due diligence would extend the marketing
period to at least 12 months.
EXPOSURE TIME
Under paragraph 3 of the Definition of Market Value, the value estimate
presumes that "...a reasonable time is allowed for exposure in the open market."
Exposure time is defined as the estimated length of time the property interest
being appraised would have been offered on the market prior to the hypothetical
consummation of a sale at the market value on the effective date of the
appraisal. Exposure time is presumed to precede the effective date of the
appraisal. We have estimated the appropriate exposure time for the subject
property to be approximately 12 to 18 months.
LIQUIDATION VALUE
At the request of the client, we have estimated the liquidation value of
the subject property. This assumes a six month sale period, which is less than
the estimated marketing period if sold at the market value previously noted.
Considerable due diligence would need to be conducted in order to complete a
transaction within this period, requiring additional costs associated with the
transaction. Further, an intense international marketing campaign would have to
be undertaken and potential purchasers targeted within one to two months.
Because few firms have this capability, a deduction to the market value would be
required.
Enrique Portillo with Cushman & Wakefield/GCI indicated a deduction of
$2.00 to $5.00 per square foot would be required to entice a buyer to close in
such a quick period. This would substantiate a deduction of approximately
$490,000 to $1,230,000 and reduce the market value estimate to a range of
$5,200,000 to $5,940,000, or a midpoint of $5,570,000. However, the lack of
existing vacant product in the market would provide additional incentive to
market participants and we have estimated the liquidation value at the upper
range of the adjusted values. Therefore, the estimate of liquidation value, as
of the date of appraisal and assuming a six month sale period, is:
FIVE MILLION SEVEN HUNDRED THOUSAND DOLLARS
$5,700,000
- --------------------------------------------------------------------------------
-65-
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
- -------------------------------------------------------------------------------
Appraisal means the appraisal report and opinion of value stated therein;
or the letter opinion of value, to which these Assumptions and Limiting
Conditions are annexed.
Property means the subject of the Appraisal.
C&W means Cushman & Wakefield, Inc., or its subsidiary that issued the
Appraisal.
Appraiser(s) means the employees of C&W who prepared and signed the
Appraisal.
The Appraisal has been made subject to the following assumptions and
limiting conditions:
(1) No responsibility is assumed for the legal description or for any
matters that are legal in nature. Title to the Property is assumed to be
good and marketable and the Property is assumed to be free and clear of
all liens unless otherwise stated. No survey of the Property was
undertaken.
(2) The information contained in the Appraisal or upon which the Appraisal
is based, has been gathered from sources the Appraiser assumes to be
reliable and accurate. The owner of the Property may have provided some
of such information. Neither the Appraiser nor C&W shall be responsible
for the accuracy or completeness of such information, including the
correctness of estimates, opinions, dimensions, sketches, exhibits and
other factual matters. The Appraisal and the opinion of value stated
therein is as of the date stated in the Appraisal. Changes since that
date in external and market factors can significantly affect property
value.
(3) The Appraisal is to be used in whole and not in part. No part of the
Appraisal shall be used in conjunction with any other appraisal.
Possession of the appraisal, or a copy thereof, does not carry with it
the right of publication. Publication of the Appraisal or any portion
thereof without the prior written consent of C&W is prohibited. Except
as may be otherwise expressly stated in the letter of engagement to
prepare the Appraisal, C&W does not permit use of the Appraisal by any
person other than the party to whom it is addressed or for purposes
other than that for which it was prepared. If written permission is
given by C&W to use the Appraisal, the Appraisal must be used in its
entirety and only with proper written qualification as approved by C&W.
No part of the appraisal or the identity of the Appraiser shall be
conveyed to the public through advertising, public relations, news,
sales or other media or used in any material without C&W's prior written
consent. Reference to the Appraisal Institute or to the MAI designation
is prohibited.
(4) The Appraiser shall not be required to give testimony in any court or
administrative proceeding relating to the Property or the Appraisal.
(5) The Appraisal assumes (a) responsible ownership and competent management
of the Property; (b) there are no hidden or unapparent conditions of the
Property, subsoil or structures that render the Property more or less
valuable (no responsibility is assumed for such conditions or for
arranging for engineering studies that may be required to
- --------------------------------------------------------------------------------
-66-
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
discover them); (c) full compliance with all applicable federal, state
and local zoning and environmental regulations and laws, unless
noncompliance is stated, defined and considered in the Appraisal; and
(d) all required licenses, certificates of occupancy and other
governmental consents have been or can be obtained and renewed for any
use on which the value estimate contained in the Appraisal is based.
(6) The Appraiser or other person identified in the Appraisal bases the
physical condition of the improvements considered by the Appraisal on
visual inspection. C&W assumes no responsibility for the soundness of
structural members nor for the condition of mechanical equipment,
plumbing or electrical components.
(7) The projected potential gross income referred to in the Appraisal may be
based on lease summaries provided by the owner or third parties. The
Appraiser has not reviewed lease documents and assumes no responsibility
for the authenticity or completeness of lease information provided by
others or the bona fides of actual leases. C&W suggests that legal
advice be obtained regarding the interpretation of lease provisions and
the contractual rights of parties.
(8) The projections of income and expenses are not predictions of the
future. Rather, they are the Appraiser's best estimates of current
market thinking on future income and expenses. The Appraiser and C&W
make no warranty or representation that these projections will
materialize. The real estate market is constantly fluctuating and
changing. It is not the Appraiser's task to predict or in any way
warrant the conditions of a future real estate market; the Appraiser can
only reflect what the investment community, as of the date of the
Appraisal, envisions for the future in terms of rental rates, expenses,
and supply and demand.
(9) Unless otherwise stated in the Appraisal, the existence of potentially
hazardous or toxic materials which may have been used in the
construction or maintenance or operation of the improvements or may be
located at or about the Property was not considered in arriving at the
opinion of value stated in the Appraisal. These materials (such as
formaldehyde foam insulation, asbestos insulation, various soil
contaminants, and other potentially hazardous materials) may affect the
value of the Property. The Appraisers are not qualified to detect such
substances and C&W urges that an expert in this field be employed to
determine the economic impact of these matters on the opinion of value
stated in the Appraisal.
(10) If the Appraisal is submitted to a lender or investor with the prior
approval of C&W, such party should consider the Appraisal as one factor,
together with its independent investment considerations and underwriting
criteria, in its overall investment decision.
(11) Unless otherwise stated in the appraisal, compliance with the
requirements of the Americans With Disabilities Act of 1990 (ADA) has
not been considered in arriving at the opinion of value stated in the
appraisal. Failure to comply with the requirements of the ADA may
negatively affect the value of the property. C&W recommends that an
expert in this field be employed.
- --------------------------------------------------------------------------------
-67-
<PAGE>
CERTIFICATION OF APPRAISAL
- --------------------------------------------------------------------------------
We certify that, to the best of our knowledge and belief:
(1) Michael L. Miller, MAI, has inspected the property and prepared the
report.
(2) The statements of fact contained in this report are true and correct.
(3) The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions, and are our personal,
unbiased professional analyses, opinions, and conclusions.
(4) We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
(5) Our compensation is not contingent upon the reporting of a
predetermined value or direction in value that favors the cause of the
client, the amount of the value estimate, the attainment of a
stipulated result, or the occurrence of a subsequent event. The
appraisal assignment was not based on a requested minimum valuation, a
specific valuation or the approval of a loan.
(6) Only Adrian Slater provided significant professional assistance to the
persons signing this report. He assisted in collecting market data
only.
(7) Our analyses, opinions, and conclusions were developed, and this report
has been prepared, in conformity with the Uniform Standards of
Professional Appraisal Practice of the Appraisal Foundation and the
Code of Professional Ethics and the Standards of Professional Appraisal
Practice of the Appraisal Institute.
(8) The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
(9) As of the date of this report, Michael L. Miller, MAI has completed
requirements of the continuing education program of the Appraisal
Institute.
(10) We have sufficient knowledge and expertise to appraise the subject
property.
Michael L. Miller, MAI
Director
Valuation Advisory Services
- --------------------------------------------------------------------------------
-68-
<PAGE>
ADDENDA
- --------------------------------------------------------------------------------
Subject Photographs
Location Map
Building Plans
Qualifications of Appraiser
- --------------------------------------------------------------------------------
-69-
<PAGE>
CABLEPRODUCTOS DE CHIHUAHUA, S.A. DE C.V. (ZENITH)
Prolongacion Avenue De Las Americas, S/N
Parque Industrial Las Americas
COMPARABLE LAND SALES
<TABLE>
<CAPTION>
===================================================================================================================================
Land Street Location, Industrial Location Sale Price Per Land Land
Sale Buyer, City, State Date Sale Price Square Foot Acres Square Feet
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1 Carretera Juarez Available $754,350 $3.00 5.77 251,450
Available
Chihuahua, Chihuahua, Mexico
- -----------------------------------------------------------------------------------------------------------------------------------
2 Carretera Juarez Available $2,668,050 $2.45 25.00 1,089,000
Available
Chihuahua, Chihuahua, Mexico
- -----------------------------------------------------------------------------------------------------------------------------------
3 Parque Industrial Las Americas 1997 $350,000 $2.80 2.87 125,000
SOFI
Chihuahua, Chihuahua, Mexico
- -----------------------------------------------------------------------------------------------------------------------------------
4 Parque De Complejo de Industrial 1997 $3,700,000 $1.10 77.00 3,354,120
John Deere
Chihuahua, Chihuahua, Mexico
- -----------------------------------------------------------------------------------------------------------------------------------
Subj. Prolongacion Avenue De Las Americas, N/A --- --- 18.89 822,848
S/N, Las Americas
Zenith
Chihuahua, Chihuahua, Mexico
===================================================================================================================================
<CAPTION>
=======================================================================
Land
Sale Comments
=======================================================================
<S> <C>
1 This reflects one of the smaller
lots within the newly developed
industrial park, in the north part
of the city.
- -----------------------------------------------------------------------
2 This reflects one of the larger lots
within the newly developed
industrial park, in the north part
of the city.
- -----------------------------------------------------------------------
3 1997 transaction, purchase by SOFI
who constructed 100,000 SF, 2-st.
facility as a build-to-suit.
- -----------------------------------------------------------------------
4 1997 transaction, purchase by Deere
who constructed owner/user building;
excess land evident
- -----------------------------------------------------------------------
Subj. Within Parque Industrial Las
Americas, two contiguous sites,
average locational aspects.
=======================================================================
</TABLE>
77
<PAGE>
CABLEPRODUCTOS DE CHIHUAHUA, S.A. DE C.V. (ZENITH)
Prolongacion Avenue De Las Americas, S/N
Parque Industrial Las Americas
COMPARABLE BUILDING SALES
<TABLE>
<CAPTION>
=================================================================================================================================
SALE BLDG. SIZE PRICE PERCENT EFFECT.
NO. LOCATION/TENANT DATE (SQ. FT.) SALE PRICE SQ. FT. FINISH AGE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 Av. Miguel de Cervante No. 140 March 229,327 $4,000,000 $17.44 15% 11 yrs.
Chihuahua, Mexico Vacant 1996
- ---------------------------------------------------------------------------------------------------------------------------------
2 Parque de Complejo de Industrial April 107,000 $9,300,000 $86.92 28% New
Chihuahua, Mexico John Deere 1997 $5,845,868* $54.63*
- ---------------------------------------------------------------------------------------------------------------------------------
3 Los Americas (Neilson Building) Late-1997 92,000 $1,750,000 $19.02 10% 10 yrs.
Parque Industrial Los Americas
Chihuahua, Mexico D&B to Am. Industries
- ---------------------------------------------------------------------------------------------------------------------------------
4 NEC Av. Ohio and Av. Del Obreno July 35,596 $1,650,000 $46.35 10% 7 yrs.
Parque Industrial del Norte 1995 $1,150,000* $32.31* 80% AC
Matamoros, Mexico Daniel Industries
- ---------------------------------------------------------------------------------------------------------------------------------
5 Av. Poniente January 46,960 $1,597,000 $34.75 100% AC 3 yrs.
Ciudad Industrial, 1995
Matamoros, Mexico United Technologies
- ---------------------------------------------------------------------------------------------------------------------------------
6 Boulevard Gomez Morin Available 25,390 $ 650,000 $25.60 10% 17 yrs.
Juarez, Mexico Vacant
- ---------------------------------------------------------------------------------------------------------------------------------
7 Avenue de las Torres February 52,000 $2,300,000 $44.23 10% New
Salvarcar Corridor 1998
Juarez, Mexico National Processing
Company
- ---------------------------------------------------------------------------------------------------------------------------------
8 Bermudas Industrial Park June 100,000 $3,100,000 $31.00 10% Under
Juarez, Mexico Build-to-Suit 1998 Constr.
- ---------------------------------------------------------------------------------------------------------------------------------
9 Cleo Building Available 83,000 $2,822,000 $34.00 5% 7yrs.
Parque Industrial Park
Reynosa, Mexico Cleo
- ---------------------------------------------------------------------------------------------------------------------------------
10 Parque Industrial Park Mid- 83,000 $4,200,000 $50.60 15% 8 yrs
Reynosa, Mexico Data Comp 1996
- ---------------------------------------------------------------------------------------------------------------------------------
11 Finsa Industrial Park June 50,000 $1,700,000 $34.00 10% New
Reynosa, Mexico AMMEX 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Subj. Prolongacion Avenue De Las Americas, S/N, N/A 245,686 --- --- 5% 10 yrs
Las Americas Industrial Park
Chihuahua, Mexico Zenith
=================================================================================================================================
<CAPTION>
==============================================================================================================
NO. LOCATION/TENANT OCCUPANCY COMMENTS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 Av. Miguel de Cervante No. 140 Vacant Distressed sale of vacant
Chihuahua, Mexico Vacant building
- --------------------------------------------------------------------------------------------------------------
2 Parque de Complejo de Industrial Owner- 77 acre site purchased for
Chihuahua, Mexico John Deere occupant $3.7M, Build-to-suit for
owner/tenant
- --------------------------------------------------------------------------------------------------------------
3 Los Americas (Neilson Building) Owner- Asking price was $2,100,000,
Parque Industrial Los Americas occupant 12 month marketing period,
Chihuahua, Mexico D&B to Am. Industries 250,000 SF site, sprinklered,
cafeteria
- --------------------------------------------------------------------------------------------------------------
4 NEC Av. Ohio and Av. Del Obreno Investor 9.14 acres of excess land,
Parque Industrial del Norte masonry bldg., good
Matamoros, Mexico Daniel Industries condition
- --------------------------------------------------------------------------------------------------------------
5 Av. Poniente Owner- Buyer offered $0.44/SF/Mo.
Ciudad Industrial, occupant Lease prior to purchase,
Matamoros, Mexico United Technologies masonry/metal constr.
- --------------------------------------------------------------------------------------------------------------
6 Boulevard Gomez Morin Vacant Brick and concrete building
Juarez, Mexico Vacant with 10' clear. Functional
deficiencies noted.
- --------------------------------------------------------------------------------------------------------------
7 Avenue de las Torres Owner- Evap. Warehouse, Restra
Salvarcar Corridor occupant walls, tin roof, 2 docks,
Juarez, Mexico National Processing Build-to-suit for owner/
Company tenant
- --------------------------------------------------------------------------------------------------------------
8 Bermudas Industrial Park Owner- Build-to-suit for owner/tenant;
Juarez, Mexico Build-to-Suit occupant not completed at inspection
- --------------------------------------------------------------------------------------------------------------
9 Cleo Building Vacant Tilt and masonry, B-U roof,
Parque Industrial Park manufacturing bldg.
Reynosa, Mexico Cleo
- --------------------------------------------------------------------------------------------------------------
10 Parque Industrial Park 100% 2-tenant bldg., 26,900 SF
Reynosa, Mexico Data Comp 68%** recently vacated; $0.52 avg.
lease rate; 11.6% OAR
- --------------------------------------------------------------------------------------------------------------
11 Finsa Industrial Park Owner- Build-to-suit for owner/tenant;
Reynosa, Mexico AMMEX occupant not completed at inspection
- --------------------------------------------------------------------------------------------------------------
Subj. Prolongacion Avenue De Las Americas, S/N, Owner- Build-to-suit for owner/tenant,
Las Americas Industrial Park occupant
Chihuahua, Mexico Zenith
==============================================================================================================
</TABLE>
*Adjusted to reflect exclusion of excess land **Current occupancy
<PAGE>
STATE OF CHIHUAHUA
Important factors to the state of Chihuahua are employment growth, which
provides expansion and new entry of the industrial manufacturing companies which
operates maquiladoras. On the following chart we have outlined the employment
for the state for the 24-month period from January 1996 to December 1997.
STATE OF CHIHUAHUA
INDICATORS OF EMPLOYMENT
1996 - 1997
<TABLE>
<CAPTION>
ZONES JAN. FEB. MARCH APRIL MAY JUNE JULY
<S> <C> <C> <C> <C> <C> <C> <C>
1996
PERMANENT 511,250 517,072 520,770 524,011 528,010 534,060 536,506
EVENTUAL 19,255 20,886 19,067 16,806 17,281 19,284 21,253
TOTAL 530,505 537,958 539,837 540,817 545,219 553,334 557,759
1997
PERMANENT 558,758 570,808 573,375 580,125 586,595 588,088 N/AV
EVENTUAL 27,813 24,893 23,803 26,904 29,144 29,394 N/AV
TOTAL 586,571 595,701 597,178 607,029 615,739 617,482 N/AV
<CAPTION>
ZONES AUG. SEPT. OCT. NOV. DEC. VARIATION
%
<S> <C> <C> <C> <C> <C> <C>
1996
PERMANENT 543,956 552,074 565,107 565,445 562,533 9.4
EVENTUAL 21,421 21,668 23,487 29,293 32,459 76.1
TOTAL 565,377 573,742 588,594 594,738 594,992 11.7
1997
PERMANENT 596,544 604,436 617,428 620,799 615,071 9.3
EVENTUAL N/AP N/AP N/AP N/AP N/AP N/AP
TOTAL N/AP N/AP N/AP N/AP N/AP N/AP
</TABLE>
Eventual: Excludes the seasonally insured of the country. N/AP: Does not apply.
N/AV: Not available. Source: Instituto Mexicano del Seguro Social (IMSS);
Mexican Social Security Institute
<PAGE>
GRAPH APPEARS HERE
<PAGE>
EXHIBIT 99P
=================================================================
COMPLETE APPRAISAL
OF REAL PROPERTY
ZENITH CORPORATE HEADQUARTERS FACILITY
1000 Milwaukee Avenue
Glenview, Cook County, Illinois
=================================================================
IN A SELF-CONTAINED REPORT
As of October 1, 1998
Prepared For:
ZENITH ELECTRONICS CORPORATION
1000 Milwaukee Avenue
Glenview, Illinois 60025
Prepared By:
CUSHMAN & WAKEFIELD OF ILLINOIS, INC.
Valuation Advisory Services
455 North Cityfront Plaza Drive, Suite 2800
Chicago, Illinois 60611
<PAGE>
April 7, 1999
Mr. Richard F. Vitkus
ZENITH ELECTRONICS CORPORATION
Senior Vice President &
General Counsel
1000 North Milwaukee Avenue
Glenview, Illinois 60025
RE: APPRAISAL OF REAL PROPERTY
Zenith Corporate Headquarters Facility
1000 Milwaukee Avenue
Glenview, Cook County, Illinois
Dear Mr. Vitkus:
In fulfillment of our agreement as outlined in the Letter of Engagement,
Cushman & Wakefield of Illinois, Inc. is pleased to transmit our report
estimating the market value and quick sale of the fee simple estate in the above
referenced real property. This is a complete appraisal prepared in accordance
with the Uniform Standards of Professional Appraisal Practice of the Appraisal
Foundation and the Appraisal Institute, including the Competency Provision. The
results of the appraisal are being conveyed in a self-contained report. This
report represents an update of our appraisal report dated June 1, 1998.
As specified in the Letter of Engagement, the value opinion reported below
is qualified by certain assumptions, limiting conditions, certifications, and
definitions, which are set forth in the report.
This report was prepared for Zenith Electronics Corporation, and it is
intended only for the specified use of said Client. Zenith Electronics
Corporation may also share the report as part of a Lending Group. It may not be
distributed to or relied upon by other persons or entities without written
permission of the Appraiser.
This report was prepared in accordance with the Uniform Standards of
Professional Practice adopted by the Appraisal Standards Board of the Appraisal
Foundation and the Code of Ethics and Uniform Standards of Professional
Appraisal Practice (USPAP).
<PAGE>
Mr. Vitkus
April 7, 1999
Page Two of Three
The property was inspected by Jeffrey A. Piehl and Michael J. Schaeffer.
The report was prepared by Jeffrey A. Piehl and Michael J. Schaeffer, under the
supervision of Stanley R. Dennis, Jr., MAI.
As a result of our analysis, we have formed an opinion that the market
value of the fee simple interest in the above referenced real property, subject
to the assumptions, limiting conditions, certifications, and definitions, as of
October 1, 1998, was:
TWENTY-ONE MILLION FIVE HUNDRED THOUSAND DOLLARS
$21,500,000
Further, it is our opinion that the market value of the fee simple interest
in the surplus land area which is associated with the subject property, subject
to the assumptions, limiting conditions, certifications, and definitions, as of
October 1, 1998, was:
THREE MILLION DOLLARS
$3,000,000
As such, it is our opinion that the aggregate market value of the combined
fee simple interests in the subject property, subject to the assumptions,
limiting conditions, certifications, and definitions, as of October 1, 1998,
was:
TWENTY-FOUR MILLION FIVE HUNDRED THOUSAND DOLLARS
$24,500,000
As a result of our analysis, we have formed an opinion that the quick sale
or liquidation value of the fee simple estate in the referenced property,
subject to the assumptions, limiting conditions, certifications, and
definitions, as of October 1, 1998 was:
TWENTY-MILLION EIGHT HUNDRED THOUSAND DOLLARS
$20,800,000
In our analysis of the subject property under quick sale or liquidation
value scenario, the marketing time associated with this scenario is estimated to
be six months or less.
<PAGE>
Mr. Vitkus
April 7, 1999
Page Three of Three
This letter is invalid as an opinion of value if detached from the report,
which contains the text, exhibits, and an Addenda.
Respectfully submitted,
CUSHMAN & WAKEFIELD OF ILLINOIS, INC.
Jeffrey A. Piehl
Associate Appraiser
Michael J. Schaeffer
Director
Illinois Certification No. 153-000885
Stanley R. Dennis, Jr., MAI
Managing Director
Illinois Certification No. 153-000686
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
- --------------------------------------------------------------------------------
PROPERTY NAME: Zenith Corporate Headquarters Facility
LOCATION: 1000 Milwaukee Avenue
Glenview, Cook County, Illinois
The subject property is specifically situated
along the east side of Interstate 294 (I-
294), approximately one-quarter mile south of
it's overpass of Milwaukee Avenue. The street
address of the subject property is 1000
Milwaukee Avenue, Glenview, Illinois.
ASSESSOR'S PARCEL NUMBERS: 14-32-105-005-0000
INTEREST APPRAISED: Fee simple interest
DATE OF VALUE: October 1, 1998
OWNERSHIP: As of the date of analysis, the property is
currently entitled to Zenith Corporation.
LAND AREA: Based on the ALTA/ACSM land title survey,
prepared by Tri-L Survey, Inc., dated
December 22, 1994, the total land area of the
subject property is 39.821 acres. The site
has additional development potential,
estimated at 177,000 square feet of gross
building area (see Highest and Best Use
analysis for full details).
ZONING: According to the City of Glenview, the
improvements, are currently zoned I-1,
Limited Commercial District. A complete
discussion regarding the subject property's
zoning classification is included in the
Zoning section of this report and reference
is made thereto.
HIGHEST AND BEST USE
If Vacant: Office development.
As Improved: Multi-tenant office building (see Highest and
Best Use)
IMPROVEMENTS
Type: The subject property building is considered
to be in average condition.
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
- --------------------------------------------------------------------------------
The subject improvements represent a single-
tenant, Class B headquarters office building
occupied by Zenith. The improvements consist
of a seven-story building (plus basement
level), containing 401,000 square feet of net
rentable building area, situated on
approximately 39.821 acres of land area.
OPERATING DATA AND FORECASTS
CURRENT OCCUPANCY: The subject property is currently 100 percent
occupied by Zenith.
SALES COMPARISON APPROACH: $21,850,000
Income Approach--Discounted Cash Flow - Fee Simple Interest
<TABLE>
<CAPTION>
======================================================================
FEE-SIMPLE INTEREST
ZENITH CORPORATE HEADQUARTERS OFFICE BUILDING
======================================================================
BASIC ASSUMPTION
----------------------------------------------------------------------
<S> <C>
NRA: 401,000 SF 401,000 SF, or 100% of total NRA
----------------------------------------------------------------------
Income Growth Rate 3.50%, and subsequent years
for Market Rents
----------------------------------------------------------------------
Consumer Price Index 3.50%, and subsequent years
----------------------------------------------------------------------
Expense Growth Rate 3.50%, and subsequent years
----------------------------------------------------------------------
Market Rental Rates $14.00/SF, Net
----------------------------------------------------------------------
Escalations 3.0% annually
----------------------------------------------------------------------
Expense Provision Net
----------------------------------------------------------------------
Lease Term 7 years
----------------------------------------------------------------------
Tenant Improvements
Initial Build-Out $45.00/SF
Second Generation $15.00/SF
Renewal Tenant $7.50/SF
Speculative Tenant $10.13/SF
----------------------------------------------------------------------
Vacancy Between Tenants 6-Months Downtime
----------------------------------------------------------------------
Renewal Probability 65%
----------------------------------------------------------------------
Turnover Probability 35%
----------------------------------------------------------------------
Leasing Commissions 12.00% of the first year's base
New Tenants rent, and 4.50% thereafter
----------------------------------------------------------------------
Renewal Tenants 4.50%
----------------------------------------------------------------------
Absorption Schedule 24-Months
----------------------------------------------------------------------
Holding Period 10 years
----------------------------------------------------------------------
Year of Reversion 11th year
----------------------------------------------------------------------
Credit Loss Provision 3.0%, and subsequent years
----------------------------------------------------------------------
Alteration and Leasing First year of the lease term.
Commission Payout Method
----------------------------------------------------------------------
Terminal Overall Rate 9.75%
----------------------------------------------------------------------
Cost of Sale at Reversion 1.5%
----------------------------------------------------------------------
Discount Rate 13.50%
----------------------------------------------------------------------
Implied Going-In OAR N/A
======================================================================
</TABLE>
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
- --------------------------------------------------------------------------------
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
- --------------------------------------------------------------------------------
ESTIMATED MARKET VALUE - AS IS:
Income Approach: $21,500,000
Unit Value Indication: $53.62 per square foot of rentable
building area
ESTIMATED MARKET VALUE - AS IS: SURPLUS LAND AREA
Sales Comparison Approach: $3,000,000
Unit Value Indication: $17.00 per square foot of
developable building area
ESTIMATED MARKET VALUE - AS IS: IMPROVEMENTS & SURPLUS LAND AREA
Overall Value Indication: $24,500,000
Marketing Time: 12 months
Exposure Time: 12 months
QUICK SALE OR LIQUIDATION VALUE: $20,800,000 (Assumes a six-month
marketing period)
FLOOD HAZARD: According to the Flood Insurance
Rate Map, Community Panel Number
170054-0070-B dated April 15, 1981,
the subject property is located in
Zone C, an area determined to be an
area of minimal flooding.
SPECIAL ASSUMPTIONS: 1. This appraisal report was
prepared in conformity with the
requirements of the Code of Ethics
and Standards of Professional
Practice of the Appraisal
Institute.
2. The projections of income and
expenses, including the reversion
at time of resale, are not
predictions of the future. Rather,
they are the best estimate of
current market thinking of what
future trends will be. No warranty
or representation is made that
these projections will materialize.
The real estate market is
constantly fluctuating and
changing. It is not the task of the
appraiser to estimate the
conditions of a future real estate
market, but rather to reflect what
the investment community
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
- --------------------------------------------------------------------------------
envisions for the future in terms
of expectations of growth in rental
rates, expenses, and supply and
demand.
3. Information regarding the
building's size was provided to us
by Zenith and is assumed to be
accurate.
4. Our analysis of the subject
property assumes a transformation
from single-tenancy to multi-
tenancy. Costs associated with the
reconfiguration and renovation of
the subject property are detailed
in the Income Approach section of
this report.
5. Based on information provided
by Zenith, the subject property has
asbestos containing material in the
form of 153,000 square feet of
floor tile; 12,500 square feet of
material on the exterior wall of
the mechanical penthouse; and 500
square feet of pipe wrap on the
kiln exhaust duct. We were not
provided with a cost estimate for
the removal and remediation of the
asbestos containing material. In
order to estimate costs for the
removal and remediation of the
asbestos containing material, we
contacted the environmental firm of
Boelter & Yates, which specialize
in the removal and remediation of
asbestos containing material.
Boelter & Yates provided general
cost guidelines for the
removal/remediation of the asbestos
containing material. It is noted
that these costs are estimates
only, and should not be construed
as actual costs to cure.
6. Based on reconfiguration/build-
out cost estimates provided by JC
Anderson, Inc., we have utilized
$45.00 per square foot in our
analysis for the initial
reconfiguration/build-out of the
subject property. These costs were
estimated after several walk-
throughs of the subject property,
and reflect the most accurate
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
- --------------------------------------------------------------------------------
costs associated with the initial
reconfiguration/build-out of the
subject property.
7. It is assumed that the subject
property has zoning in-place for an
additional 177,000 square feet of
building area. This information is
provided for in the Annexation
Agreement between Zenith and the
City of Glenview. We have assumed
that an additional 177,000 square
feet of additional office space can
be built.
8. It is assumed that upon
retrofit of the interior of the
subject property, the subject
property will conform with ADA
requirements. Our analysis assumes
no additional costs associated to
comply with the Americans with
Disabilities Act of 1990. Cushman &
Wakefield assumes no responsibility
or opinion if the subject property
will comply with the requirements
of the Americans with Disabilities
Act of 1990. Cushman & Wakefield
recommends that an expert in this
field be employed in the final
determination of whether the
subject property complies with the
Americans with Disabilities Act of
1990.
9. Please refer to the complete
list of assumptions and limiting
conditions included at the end of
this report.
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
PHOTOGRAPHS OF SUBJECT PROPERTY........................................................................... 1
INTRODUCTION.............................................................................................. 9
REGIONAL ANALYSIS......................................................................................... 15
NEIGHBORHOOD ANALYSIS..................................................................................... 26
OFFICE MARKET ANALYSIS.................................................................................... 28
PROPERTY DESCRIPTION...................................................................................... 58
REAL PROPERTY TAXES AND ASSESSMENTS....................................................................... 72
ZONING.................................................................................................... 74
HIGHEST AND BEST USE...................................................................................... 75
VALUATION PROCESS......................................................................................... 79
LAND VALUATION............................................................................................ 82
SALES COMPARISON APPROACH................................................................................. 90
INCOME APPROACH........................................................................................... 105
RECONCILIATION AND FINAL VALUE ESTIMATE................................................................... 134
QUICK SALE VALUE ESTIMATE................................................................................. 137
ASSUMPTIONS AND LIMITING CONDITIONS....................................................................... 138
CERTIFICATION OF APPRAISAL................................................................................ 141
ADDENDA................................................................................................... 142
</TABLE>
Engagement Letter
State Appraisal Certification
Legal Description
Title Report
Annexation Agreement
Pro-Ject Assumptions Report
Pro-Ject Lease Abstract Report
Cushman & Wakefield's Investor Survey
Qualification of Appraisers
<PAGE>
AERIAL PHOTOGRAPH
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
=====================================================================
=====================================================================
EXTERIOR VIEW OF THE MAIN ENTRANCE LOBBY OF THE SUBJECT PROPERTY
=====================================================================
=====================================================================
EXTERIOR VIEW OF THE SUBJECT PROPERTY FACING WEST
1
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
====================================================================
====================================================================
EXTERIOR VIEW OF THE SUBJECT PROPERTY FACING NORTHWEST
====================================================================
====================================================================
EXTERIOR VIEW OF THE SUBJECT PROPERTY FACING NORTHEAST
2
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
====================================================================
====================================================================
EXTERIOR VIEW OF THE SUBJECT PROPERTY FACING SOUTHEAST
====================================================================
====================================================================
EXTERIOR VIEW OF THE SUBJECT PROPERTY FACING SOUTH (NOTE- LOBBY AREA IN
FOREGROUND)
3
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
==================================================================
==================================================================
INTERIOR VIEW OF THE SUBJECT PROPERTY LOADING DOCK AREA
==================================================================
==================================================================
INTERIOR VIEW OF THE SUBJECT PROPERTY LOBBY AREA
4
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
==================================================================
==================================================================
INTERIOR VIEW OF THE SUBJECT PROPERTY MECHANICAL PENTHOUSE FLOOR
==================================================================
==================================================================
INTERIOR VIEW OF THE SUBJECT PROPERTY LOWER LEVEL AREA
5
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
==================================================================
==================================================================
INTERIOR VIEW OF TYPICAL OFFICE FLOOR OF THE SUBJECT PROPERTY
==================================================================
==================================================================
INTERIOR VIEW OF A TYPICAL OFFICE FLOOR OF THE SUBJECT PROPERTY
6
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
===================================================================
===================================================================
INTERIOR VIEW OF A TYPICAL PRIVATE OFFICE AT THE SUBJECT PROPERTY
===================================================================
===================================================================
INTERIOR VIEW OF A TYPICAL CORRIDOR OF THE SUBJECT PROPERTY
7
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
==================================================================
==================================================================
EXTERIOR VIEW OF THE SUBJECT PROPERTY FACING SOUTHEAST
==================================================================
==================================================================
EXTERIOR VIEW OF THE SUBJECT PROPERTY FACING SOUTHWEST
8
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
IDENTIFICATION OF PROPERTY
The subject property under analysis consists of a corporate headquarters
office building currently occupied by Zenith. This seven-story (plus basement
level) corporate headquarters building, is considered to be a Class B office
building, and contains approximately 401,000 square feet of net rentable
building area (inclusive of 7,760 square feet of lobby area). The total gross
building area equates to 526,266 square feet. The subject property is situated
on approximately 39.821 acres, or 1,734,603 square feet of land area.
More specifically, the subject development is located along the east side
of I-294, approximately one-quarter mile south of its overpass of Milwaukee
Avenue, within the City of Glenview, Cook County, Illinois. The mailing address
of the subject property is 1000 Milwaukee Avenue, Glenview, Illinois.
COMPETENCY PROVISION
We are aware of the competency provision of the USPAP and the authors of
this report meet the standards. Jeffrey A. Piehl inspected the subject property.
Jeffrey A. Piehl and Michael J. Schaeffer researched, and analyzed the pertinent
market information, and wrote the appraisal report, under the supervision of
Stanley R. Dennis Jr., MAI. Stanley R. Dennis, Jr., MAI, Michael J. Schaeffer
and Jeffrey A. Piehl have extensive appraisal experience with corporate
headquarter properties nationally, as well as in the Chicago Metropolitan Area.
It is our opinion that we are fully competent to perform this appraisal,
due to the fact that:
1. The appraisers have full knowledge and experience in the nature of
this assignment.
2. All necessary and appropriate steps have been taken in order to
complete the assignment competently.
3. There is no lack of knowledge or experience that would prohibit this
assignment to be completed in a professional competent manner or
where a biased or misleading opinion of value would be rendered.
PROPERTY OWNERSHIP AND RECENT HISTORY
According to the title report issued by Commonwealth Land Title Insurance
Company, dated December 12, 1997, the underlying land area of the subject
property is vested in Zenith Corporation, a Delaware Corporation. To our
knowledge, and based
9
<PAGE>
on information provided by public records, no other transaction of the
underlying land area of the subject property has occurred over the last three
years.
10
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
It was reported by Zenith, that the subject property has been actively
marketed for sale since March, 1998. However, no asking price has been set with
the offering of the subject property. Based on information provided by
Insignia/ESG (listing broker), there have been several purchase offers for the
subject property. It was further reported by Mr. Jim Postweiler of Insignia/ESG,
that several purchase offers have been received on the property, and the
purchase offer most likely to be accepted by Zenith, has a transaction price of
between $27,000,000 and $28,000,000, with the property to be placed under
contract within approximately 30 days, and a closing anticipated for November
30, 1998.
PURPOSE AND FUNCTION OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value and the
quick sale or liquidation value of the fee simple estate of the subject
property.
SCOPE OF THE APPRAISAL
In the process of preparing this report, we inspected the subject site and
surrounding area, conducted market research into asking and actual rental rates
of comparable office space, obtained information regarding leases recently
negotiated in the marketplace, conducted market investigations, ascertained sale
prices of comparable properties, developed a value estimate by direct sales
comparison, and prepared a detailed discounted cash flow analysis for the
purpose of discounting a forecasted net income stream to a present value
estimate for the fee simple interest.
DATE OF VALUE AND PROPERTY INSPECTION
The date of our as is valuation is October 1, 1998. The date of property
inspection was May 28, 1998.
PROPERTY RIGHTS APPRAISED
Fee simple estate.
DEFINITIONS OF VALUE, INTEREST APPRAISED AND OTHER PERTINENT TERMS
The definition of market value taken from the Uniform Standards of
Professional Appraisal Practice of the Appraisal Foundation, and in accordance
with 12 C.F.R. 34, paragraph 34.42 of the OCC issued by the Comptroller of the
Currency, is as follows:
The most probable price which a property should bring in a competitive and
open market under all conditions requisite to a fair sale, the buyer and
seller, each acting prudently and knowledgeably, and assuming the price is
not affected by undue
11
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
stimulus. Implicit in this definition is the consummation of a sale as of
a specified date and the passing of title from seller to buyer under
conditions whereby:
1. Buyer and seller are typically motivated;
2. Both parties are well informed or well advised, and acting in what
they consider their own best interests;
3. A reasonable time is allowed for exposure in the open market;
4. Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
5. The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
Definitions of pertinent terms taken from the Dictionary of Real Estate
Appraisal, Third Edition (1993), published by the American Institute of Real
Estate Appraisers, are as follows:
FEE SIMPLE INTEREST
Absolute ownership unencumbered by any other interest or estate subject
only to the four powers of government.
QUICK SALE OR LIQUIDATION VALUE
Quick sale or liquidation value reflects a sale within a six-month period.
MARKET RENT
The rental income that a property would most probably command on the open
market; indicated by current rents paid and asked for comparable space as
of the date of the appraisal.
CASH EQUIVALENT VALUE
A price expressed in terms of cash, as distinguished from a price
expressed totally or partly in terms of the face amounts of notes or other
securities that cannot be sold at their face amounts.
DISCOUNTED CASH FLOW (DCF) ANALYSIS
The procedure in which a discount rate is applied to a set of projected
income streams and a reversion. The analyst specifies the quantity,
variability, timing, and duration of the income streams as well as the
quantity and timing of the reversion and discounts each to its present
value at a specified yield rate. DCF analysis can be applied with any
yield capitalization technique and may be performed on either a
lease-by-lease or aggregate basis.
Definitions of other terms taken from various sources, are as follows:
MARKETING TIME
12
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
Marketing time is an estimate of the time that might be required to sell a
real property interest at the appraised value. Marketing time is presumed
to start on the effective date of the appraisal. Marketing time is
subsequent to the effective date of the appraisal, whereas exposure time,
as defined below is presumed to precede the effective date of the
appraisal. The estimate of marketing time uses some of their same data
analyzed in the process of estimating the reasonable exposure time and is
not intended to be a predication of a date of sale.
We have concluded that a marketing period of approximately 12 months, or
less would be required in order to sell the subject property. The value
conclusion expressed in this report is based on current market conditions.
Our value estimate should not be interpreted as being representative of
the final price at which the property might sell throughout the entire
marketing period, due to uncertain market conditions.
EXPOSURE TIME
Under Paragraph 3 of the Definition of Market Value, the value estimate
presumes that "A reasonable time is allowed for exposure in the open
market". Exposure time is defined as the estimated length of time the
property interest being appraised would have been offered on the market
prior to the hypothetical consummation of a sale at the market value on
the effective date of the appraisal. Exposure time is presumed to precede
the effective date of the appraisal.
We have estimated the appropriate exposure time for the subject property
to be approximately 12 months, or less.
LEGAL DESCRIPTION
The subject property is located along the east side of I-294,
approximately one-quarter mile south of its overpass with Milwaukee
Avenue, in Glenview, Cook County, Illinois. The mailing address of the
subject property is 1000 Milwaukee Avenue, Glenview, Illinois. According
to the Cook County Assessor's office, the subject property is further
identified by parcel identification number 14-32-105-005-0000. Given the
subject's lengthy legal description, a copy of the subject's legal
description is provided for in the Title Report section, which is located
in the Addenda section of this report.
13
<PAGE>
REGIONAL MAP
14
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
CHICAGO METROPOLITAN AREA
The Chicago metropolitan area, located at the southwestern tip of Lake
Michigan, is the Midwest's financial, commercial, transportation, and industrial
center. As defined by the United States Census Bureau in 1997, the Chicago
Consolidated Metropolitan Statistical Area (CMSA) includes a total of thirteen
counties: ten in Illinois, two in Indiana, and one in Wisconsin. The counties in
Illinois that are part of the Chicago CMSA are as follows: Cook, DuPage, DeKalb,
Grundy, Kane, Kendall, Lake, McHenry, Will, and Kankakee. The Indiana counties
that are included in the Chicago CMSA are Lake and Porter counties. Kenosha
County in Wisconsin is part of the Chicago CMSA.
POPULATION
The population of the Chicago Metropolitan Area is the third largest in
the nation, behind New York and greater Los Angeles. The historical and
projected population growth trends for the thirteen county Chicago CMSA are
summarized in the table below.
<TABLE>
<CAPTION>
==================================================================================================================
CHICAGO CONSOLIDATED METROPOLITAN STATISTICAL AREA
POPULATION CHARACTERISTICS 1980-2002
- ------------------------------------------------------------------------------------------------------------------
ANNUAL % ANNUAL % ANNUAL %
COUNTY 1980 1990 CHANGE 1997 CHANGE 2002 CHANGE
1980-1990 1990-1997 1997-2002
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ILLINOIS
- ------------------------------------------------------------------------------------------------------------------
Cook 5,253,685 5,105,067 -0.29% 5,135,667 0.09% 5,147,000 0.04%
- ------------------------------------------------------------------------------------------------------------------
Chicago 3,003,961 2,783,726 -0.76% 2,709,148 -0.39% 2,677,000 -0.24%
- ------------------------------------------------------------------------------------------------------------------
DeKalb 74,624 77,932 0.44% 84,996 1.25% 88,000 0.70%
- ------------------------------------------------------------------------------------------------------------------
DuPage 658,835 781,666 1.72% 870,407 1.55% 903,000 0.74%
- ------------------------------------------------------------------------------------------------------------------
Grundy 30,582 32,337 0.56% 35,724 1.44% 37,000 0.71%
- ------------------------------------------------------------------------------------------------------------------
Kane 278,405 317,471 1.32% 372,670 2.32% 397,000 1.27%
- ------------------------------------------------------------------------------------------------------------------
Kankakee 102,926 96,255 -0.67% 103,229 1.01% 106,000 0.53%
- ------------------------------------------------------------------------------------------------------------------
Kendall 37,202 39,413 0.58% 47,534 2.71% 51,000 1.42%
- ------------------------------------------------------------------------------------------------------------------
Lake 440,372 516,418 1.61% 587,226 1.85% 617,000 0.99%
- ------------------------------------------------------------------------------------------------------------------
McHenry 147,897 183,241 2.17% 236,033 3.68% 257,000 1.72%
- ------------------------------------------------------------------------------------------------------------------
Will 324,460 357,313 0.97% 432,538 2.77% 466,000 1.50%
- ------------------------------------------------------------------------------------------------------------------
INDIANA
- ------------------------------------------------------------------------------------------------------------------
Lake 522,965 475,594 -0.94% 481,139 0.17% 481,000 -0.01%
- ------------------------------------------------------------------------------------------------------------------
Porter 119,816 128,932 0.74% 143,048 1.50% 148,000 0.68%
- ------------------------------------------------------------------------------------------------------------------
WISCONSIN
- ------------------------------------------------------------------------------------------------------------------
Kenosha 123,137 128,181 0.40% 141,346 1.41% 147,000 0.79%
- ------------------------------------------------------------------------------------------------------------------
TOTAL 8,114,906 8,239,820 0.15% 8,671,557 0.73% 8,845,000 0.40%
- ------------------------------------------------------------------------------------------------------------------
Source: Equifax National Decision Systems
==================================================================================================================
</TABLE>
15
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
As indicated in the table on the previous page, the total estimated
population of the Chicago CMSA in 1997 was 8,671,557. The population of the
Chicago CMSA increased .15 percent annually between 1980 and 1990, and increased
.73 percent annually between 1990 and 1997. The Chicago CMSA population is
expected to increase .40 percent annually between 1997 and 2002.
While the Chicago CMSA population has increased since 1980, the population
in the City of Chicago has consistently decreased. The Chicago suburban
population has grown significantly at the expense of population decreases in the
City of Chicago. Between 1980 and 1990, the City of Chicago population decreased
.76 percent annually. The Chicago population decreased .39 percent annually
between 1990 and 1997, and is expected to decrease .24 percent annually between
1997 and 2002. The population shift from the city to suburban areas is common
among most major cities located throughout the Great Lakes and Northeastern
regions, and is expected to continue in the foreseeable future.
TRANSPORTATION
AIR TRANSPORTATION
Chicago is one of the primary transportation hubs in the United States.
O'Hare International Airport is one of the busiest in the world, handling
approximately 69.2 million total passenger arrival and departures in 1996,
according to the Chicago Department of Aviation. Increased traffic at O'Hare
International Airport can be attributed to several factors: the deregulation of
the airline industry in the past decade, the development of "regional" hubs' by
major airlines, and the continued economic expansion of local and national
companies into global markets. O'Hare International Airport serves as a hub for
United Airlines. United Airlines is the busiest airline in the city, according
to the Chicago Department of Aviation, serving approximately 30 million
passengers in 1996.
According to Crain's Chicago Business, the City of Chicago plans to launch
a $1-billion dollar, five-year upgrade of O'Hare International Airports aging
infrastructure in 1998. Terminals 2 and 3 at the airport will be modernized, and
renovations include the expansion of ticketing areas and the addition of
elevators and escalators. In order to relieve rush-hour traffic congestion by
the airport there are plans to widen exits and the roadway leading to O'Hare,
and add more exits to remote parking lots and Mannheim Road. Upgrade plans also
include replacing an aged heating and cooling system, improving access to
skyrail transportation, and creating a new bus transportation center.
16
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
Midway Airport, located in the southwest portion of the city, serves as a
secondary airport in the Chicago metropolitan area and has become an
increasingly popular alternative to O'Hare International Airport. Major
commercial airlines serving Midway Airport include America West, American Trans
Air, Continental, Northwest, and Southwest. Southwest Airlines serves the
largest number of passengers at Midway Airport. According to the Chicago
Department of Aviation, Southwest Airlines served 5.1 million passengers at
Midway Airport in 1996.
Plans are under way to expand Midway Airport, which include adding a
terminal with 38 gates. Expansion plans will reportedly cost $722.0 million and
will be completed in 2003. The Chicago Sun Times in February 1998, reported
American Trans Air (ATA), the second largest carrier at Midway Airport, plans to
expand its business at Midway Airport. American Trans Air Airlines plans to add
500 people to its Chicago area workforce, and will occupy 12 of the 38 gates in
the new terminal to be completed in 2003. Three hundred of the new ATA employees
will be in reservations or customer service jobs. Two hundred of the new
employees will be hired for pilot or flight attendant jobs. Within 1998,
American Trans Air will also add non-stop service to more cities.
GROUND TRANSPORTATION
Several major expressways and interstate highways pass through the Chicago
area. Interstate 88 and 290 are the main routes to the cities along the
East-West Corridor. Interstate 55 provides access to the southwestern cities.
Cities to the north and northwest are accessed via Interstates 90 and 94; and
finally, north-south travel between the western suburbs is facilitated by
Interstates 294 and 355. In total, the Chicago area has over 630 miles of
expressways. Within the metropolitan area, rail lines, rapid transit systems,
bus lines and expressway systems facilitate commuter transportation.
EMPLOYMENT AND INCOME
The Chicago economy, like most major metropolitan areas, began as a
manufacturing center. Today, Chicago economic growth is no longer primarily
based in the manufacturing sector, but is distributed among the retail, FIRE
(finance, insurance, and real estate), and service industries. The table on the
following page summarizes the diversity of employment for the thirteen-county
Consolidated Metropolitan Statistical Area.
17
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
===============================================================================================================
CHICAGO METROPOLITAN AREA (13-COUNTY CMSA)
NON-FARM EMPLOYMENT STATISTICS 1997-2010
- ---------------------------------------------------------------------------------------------------------------
INDUSTRY 1980 PERCENT OF 1997 PERCENT OF 2010 PERCENT OF
GROUP EMPLOYMENT TOTAL EMPLOYMENT TOTAL EMPLOYMENT TOTAL
(000'S) (000'S) (000'S)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Construction 169.4 4.1% 234.8 4.7% 260.5 4.7%
- ---------------------------------------------------------------------------------------------------------------
Manufacturing 952.1 23.2% 719.3 14.3% 666.5 12.0%
- ---------------------------------------------------------------------------------------------------------------
TCPU/(1)/ 224.7 5.5% 291.8 5.8% 319.3 5.7%
- ---------------------------------------------------------------------------------------------------------------
Wholesale Trade 281.3 6.9% 310.0 6.2% 325.5 5.8%
- ---------------------------------------------------------------------------------------------------------------
Retail Trade 648.0 15.8% 814.7 16.2% 873.8 15.7%
- ---------------------------------------------------------------------------------------------------------------
FIRE/(2)/ 357.7 8.7% 476.8 9.5% 590.5 10.6%
- ---------------------------------------------------------------------------------------------------------------
Services 931.1 22.7% 1,616.8 32.2% 1,938.6 34.8%
- ---------------------------------------------------------------------------------------------------------------
Government 540.2 13.2% 557.7 11.1% 595.8 10.7%
- ---------------------------------------------------------------------------------------------------------------
TOTAL NON-FARM 4,104.5 100.0% 5,021.9 100.0% 5,570.5 100.0%
EMPLOYMENT
- ---------------------------------------------------------------------------------------------------------------
/(1)/ Transportation and Utilities
/(2)/ Finance, Insurance and Real Estate
===============================================================================================================
Source: Woods and Poole
===============================================================================================================
</TABLE>
In 1980, the majority of the labor force of the Chicago CMSA were employed
in the manufacturing and service industries. The manufacturing and service
industries accounted for 23.2 and 22.7 percent of total employment in 1980,
respectively. However, in 1997, manufacturing employment was only 14.3 percent
of total employment in the Chicago CMSA. The portion of the labor force in
manufacturing employment is expected to continue to decrease, and is expected to
be approximately 12 percent of the total employment in the year 2010. The
services industry, however, was 22.7 percent of the labor force in 1980, but
increased to 32.2 percent of the labor force in 1997. Employment in the service
industry is expected to increase to 34.8 percent by the year 2010.
The majority of the labor force in the Chicago CMSA in 1997 were employed
in Cook County, followed by DuPage County. Approximately 62.4 percent of the
labor force were employed in Cook County, and 12.8 percent of the labor force
were employed in DuPage County. In the year 2010, the percentage of the labor
force employed in Cook County is expected to decrease slightly to 58.6 percent,
however, the DuPage County labor force is expected to increase to 14.1 percent.
18
<PAGE>
The table below presents total non-farm employment per thousand in each of
the thirteen counties of the Chicago CMSA. The estimated total non-farm
employment in 1997 was 5,021,900 and the 2010 total estimated non-farm
employment is 5,570,500.
<TABLE>
<CAPTION>
============================================================================================
CHICAGO CONSOLIDATED METROPOLITAN STATISTICAL AREA
DISTRIBUTION OF TOTAL NON-FARM EMPLOYMENT
1997 AND 2010
--------------------------------------------------------------------------------------------
COUNTY 1997 PERCENT OF 2010 PERCENT OF
(000'S) TOTAL (000'S) TOTAL
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ILLINOIS
--------------------------------------------------------------------------------------
Cook 3,131.3 62.4% 3,265.9 58.6%
--------------------------------------------------------------------------------------
DeKalb 41.8 0.8% 47.3 0.8%
--------------------------------------------------------------------------------------
DuPage 643.9 12.8% 785.2 14.1%
--------------------------------------------------------------------------------------
Grundy 17.3 0.3% 20.4 0.4%
--------------------------------------------------------------------------------------
Kane 188.9 3.8% 212.6 3.8%
--------------------------------------------------------------------------------------
Kankakee 51.0 1.0% 59.2 1.1%
--------------------------------------------------------------------------------------
Kendall 16.2 0.3% 18.1 0.3%
--------------------------------------------------------------------------------------
Lake 311.4 6.2% 422.0 7.6%
--------------------------------------------------------------------------------------
McHenry 100.9 2.0% 127.8 2.3%
--------------------------------------------------------------------------------------
Will 153.4 3.1% 194.4 3.5%
--------------------------------------------------------------------------------------
INDIANA
--------------------------------------------------------------------------------------
Lake 237.5 4.7% 266.3 4.8%
--------------------------------------------------------------------------------------
Porter 69.1 1.4% 85.6 1.5%
--------------------------------------------------------------------------------------
WISCONSIN
--------------------------------------------------------------------------------------
Kenosha 59.2 1.2% 65.7 1.2%
--------------------------------------------------------------------------------------
TOTAL EMPLOYMENT 5,021.9 100.0% 5,570.5 100.0%
--------------------------------------------------------------------------------------
Source: Woods and Poole
======================================================================================
</TABLE>
As indicated in the table above, the 2010 employment distribution in
counties outside of Illinois, is expected to be similar to the 1997 employment
distribution.
Chicago is a leading corporate headquarters location. A number of Fortune
500 firms are headquartered in the Chicago area. Many other firms also have
regional headquarters in the Chicago area. Sears, Roebuck and Company, Amoco,
Motorola, and Allstate Corporation are among the largest publicly held companies
in the Chicago area. The presence of a large number of corporate headquarters in
the area is indicative of the strength of the local support network and general
business climate. The following tables present the largest public and private
companies in Chicago ranked by revenues.
19
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
=============================================================================================================
METROPOLITAN CHICAGO'S LARGEST PUBLIC COMPANIES
RANKED BY 1996 REVENUES
- ------------ --------------------- ---------------------------- -------------------------- ------------------
RANK NAME CITY 1996 NET REVENUES (IN NUMBER OF
MILLIONS) EMPLOYEES
- ------------ --------------------- ---------------------------- -------------------------- ------------------
<S> <C> <C> <C> <C>
1 Sears, Roebuck & Co. Hoffman Estates $38,236.0 335,000
- ------------ --------------------- ---------------------------- -------------------------- ------------------
2 Amoco Corp. Chicago $32,150.0 41,723
- ------------ --------------------- ---------------------------- -------------------------- ------------------
3 Motorola, Inc. Schaumburg $27,973.0 139,000
- ------------ --------------------- ---------------------------- -------------------------- ------------------
4 Allstate Corp. Northbrook $24,299 48,200
- ------------ --------------------- ---------------------------- -------------------------- ------------------
5 Sara Lee Corp. Chicago $18,624.0 135,300
- ------------ --------------------- ---------------------------- -------------------------- ------------------
6 CNA Financial Corp. Chicago $16,987.8 24,300
- ------------ --------------------- ---------------------------- -------------------------- ------------------
7 Caterpillar Inc. Peoria $16,522.0 57,026
- ------------ --------------------- ---------------------------- -------------------------- ------------------
8 UAL Corp. Elk Grove Township $16,362.0 87,628
- ------------ --------------------- ---------------------------- -------------------------- ------------------
9 Ameritech Corp. Chicago $14,917.0 66,128
- ------------ --------------------- ---------------------------- -------------------------- ------------------
10 Archer Daniels Decatur $13,314.0 14,811
Midland Co.
- ------------ --------------------- ---------------------------- -------------------------- ------------------
Source: Crain's Chicago Business, Top Business Lists 1998 Edition
=============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
=============================================================================================================
METROPOLITAN CHICAGO'S LARGEST PRIVATE COMPANIES
RANKED BY 1996 REVENUES
- ------------ --------------------- ---------------------------- -------------------------- ------------------
RANK NAME 1996 NET REVENUES NUMBER OF EMPLOYEES
(IN MILLIONS)
- ------------ --------------------- ---------------------------- -------------------------- ------------------
<S> <C> <C> <C> <C>
1 Montgomery Ward & Co. Chicago $6,618.0 62,579
- ------------ --------------------- ---------------------------- -------------------------- ------------------
2 Marmon Group Chicago $6,000.0 30,000
- ------------ --------------------- ---------------------------- -------------------------- ------------------
3 Alliant Foodservice Inc. Deerfield $4,500.0 9,400
- ------------ --------------------- ---------------------------- -------------------------- ------------------
4 Kemper Insurance Cos. Long Grove $3,913.0 10,068
- ------------ --------------------- ---------------------------- -------------------------- ------------------
5 Topco Associates Skokie $3,900.0 375
- ------------ --------------------- ---------------------------- -------------------------- ------------------
6 Hyatt Hotels Corp. Chicago $2,875.0 40,000
- ------------ --------------------- ---------------------------- -------------------------- ------------------
7 Ace Hardware Corp. Oak Brook $2,742.0 4,397
- ------------ --------------------- ---------------------------- -------------------------- ------------------
8 Cotter & Co. Chicago $2,441.7 3,470
- ------------ --------------------- ---------------------------- -------------------------- ------------------
9 Budget Rent A Car Corp. Lisle $2,400.0 24,000
- ------------ --------------------- ---------------------------- -------------------------- ------------------
10 Specialty Foods Corp. Rosemont $2,020.0 14,000
- ------------ --------------------- ---------------------------- -------------------------- ------------------
Source: Crain's Chicago Business, Top Business Lists 1998 Edition
=============================================================================================================
</TABLE>
The average annual unemployment rates for the nation, state, and
nine-county Chicago Primary Metropolitan Statistical Area (PMSA), since 1993 are
presented in the table on the next page.
20
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
=============================================================================================================
ANNUAL AVERAGE UNEMPLOYMENT RATES (NOT SEASONALLY ADJUSTED)
=============================================================================================================
AREA 1993 1994 1995 1996 1997(1)
=================== ================= ================= ================= ================= =================
<S> <C> <C> <C> <C> <C>
Illinois 7.5% 5.7% 5.2% 5.3% 4.3%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
U.S. 6.9% 6.1% 5.6% 5.4% 4.6%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
CHICAGO PMSA 7.3% 5.6% 5.1% 5.0% 4.1%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
=============================================================================================================
NINE-COUNTY CHICAGO PMSA DETAIL
=============================================================================================================
Cook, IL 8.0% 6.1% 5.5% 5.5% 4.7%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
DeKalb, IL 5.6% 4.2% 3.8% 4.3% 2.8%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
DuPage, IL 5.2% 3.9% 3.4% 3.4% 2.6%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Grundy, IL 10.5% 7.9% 7.6% 6.7% 5.3%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Kane, IL 6.9% 5.6% 5.0% 4.9% 3.9%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Kendall, IL 5.2% 4.5% 4.0% 4.1% 3.0%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Lake, IL 5.8% 4.9% 4.0% 4.0% 3.0%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
McHenry, IL 6.1% 4.6% 4.1% 4.0% 2.8%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Will, IL 7.3% 5.7% 5.3% 5.2% 4.1%
=============================================================================================================
Source: Northeastern Illinois Planning Commission; Illinois Department of Employment Security
(1) As of November, 1997
=============================================================================================================
</TABLE>
The average annual unemployment rate for the Chicago PMSA has consistently
decreased since 1993. Since 1994, the Chicago PMSA average annual unemployment
rates has been below the state and national average. For the month of November,
1997, the Chicago PMSA unemployment rate was also below the state and national
average.
According to Woods and Poole, the 1997 average per capita income in the
Chicago CMSA was $23,038. The 1997 mean household income was $64,392. The 1997
per capita income in the 13-county Chicago CMSA ranged $18,650 to $32,747 and
the 1997 means household income ranged from $49,239 to $90,867. DuPage and Lake
County lead the Chicago CMSA in per capita income and mean household income. The
1997 per capita income in DuPage was $32,747, while the Lake County per capita
income was $30,260. Mean household income in DuPage and Lake Counties were
$90,867 and $87,092, respectively. Per capita and mean household income
statistics for the 13-county Chicago CMSA, are presented in the table on the
following page.
21
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
======================================================================
1997 CHICAGO CMSA PER CAPITA INCOME STATISTICS
----------------------------------------------------------------------
COUNTY PER CAPITA INCOME MEAN HOUSEHOLD INCOME
----------------------------------------------------------------------
<S> <C> <C>
ILLINOIS
----------------------------------------------------------------------
Cook $25,287 $67,588
----------------------------------------------------------------------
DeKalb $18,650 $49,239
----------------------------------------------------------------------
DuPage $32,747 $90,867
----------------------------------------------------------------------
Grundy $22,463 $60,236
----------------------------------------------------------------------
Kane $22,920 $67,054
----------------------------------------------------------------------
Kankakee $18,912 $50,991
----------------------------------------------------------------------
Kendall $22,141 $65,234
----------------------------------------------------------------------
Lake $30,260 $87,092
----------------------------------------------------------------------
McHenry $23,913 $69,634
----------------------------------------------------------------------
Will $21,105 $63,333
----------------------------------------------------------------------
INDIANA
----------------------------------------------------------------------
Lake $19,492 $53,010
----------------------------------------------------------------------
Porter $22,024 $60,504
----------------------------------------------------------------------
WISCONSIN
----------------------------------------------------------------------
Kenosha $19,584 $52,310
----------------------------------------------------------------------
AVERAGE $23,038 $64,392
======================================================================
</TABLE>
The largest populated county in the Chicago CMSA, Cook County, had a 1997
per capita income of $25,287 and a mean household income of $67,588.
METROPOLITAN CHICAGO ECONOMY
As the home of four major financial exchanges, Chicago is the Midwest's
financial center. The financial exchanges located in the city include the
Chicago Board of Trade, Chicago Board Options Exchange, Chicago Mercantile
Exchange, and Midwest Stock Exchange. Eighty percent of the world's commodities
are traded through three of Chicago's exchanges.
According to data compiled by the Regional Economics Applications
Laboratory (REAL) at the University of Illinois at Urbana-Champaign for Crain's
Chicago Business, the economic growth rate in 1997 was approximately 3.7
percent. Although the 1998 economic growth rate is expected to be lower,
approximately 2.2 percent, every sector of the local economy is expected to
perform well. Inflation and unemployment rates are expected to remain steady,
residential and commercial real estate markets will boom, factory output will
increase and consumers will spend more.
22
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
The economic growth expected in 1998 is overshadowed by concerns of local
firms of domestic fallout from the troubled Asian economies and markets and
concerns about costs to retool computers for the year 2000, which are already
draining revenues of mid-sized companies. There are also concerns that the
current low unemployment will curtail growth. The tight labor market could spur
inflation as companies hike wages to attract new employees. Despite the above
concerns, economists observe consumer confidence in the economy remains strong,
and domestic companies are doing well.
For 1998, REAL projects industrial production will grow 3.9 percent, retail
sales will drop 2.9 percent, manufacturing jobs will grow 1.7 percent, and
non-manufacturing jobs will increase 0.6 percent. While the 1997 real estate
markets boomed, REAL projected new construction dropping 6.8 percent from the
1997's decade high levels. Developers and brokers, however, are optimistic that
the building boom and high absorption rates will continue in 1998.
TOURISM
Chicago has long been a tourist destination. According to the Chicago
Office of Tourism, Chicago tourism is thriving. In 1995, there were more than 26
million domestic and international leisure person-trips to the Chicago area. The
numerous attractions drawing people to Chicago include museums, theatres,
spectator sports, music concerts, gardens/parks, world famous architecture and
shopping districts, and festivals.
Popular museums in Chicago include the Adler Planetarium, the Art Institute
of Chicago, Field Museum of Natural History, and the John G. Shedd Aquarium.
Local, national, international celebrities often perform at the Goodman,
Chicago, Steppenwolf, and Auditorium theatres.
The City of Chicago is famous nationally and internationally for its
spectator sports. The most popular sports franchise in the city is the Chicago
Bulls basketball team. The Chicago Bulls share the United Center sports arena
with the Chicago Blackhawks, the city's national hockey league team. Football
fans can watch the Chicago Bears play at Soldier Field. The city is home to two
baseball teams, the Chicago Cubs and Chicago White Sox. The Chicago Cubs play at
Wrigley Field, and the Chicago White Sox play at Comiskey Park.
The landscape of the City of Chicago includes the designs of world famous
architects. Walking, bus, and boat architecture tours are available in the city
and suburbs. Frequently
23
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
visited buildings include the Sears Tower, John Hancock Observatory, Historic
Water Tower and various works of Frank Lloyd Wright.
Popular shopping destinations, restaurants, and entertainment are located
in the Gold Coast, State Street, and the Magnificent Mile. State Street is a
historic shopping district, which was once open only to pedestrian traffic.
State Street is home to the flagship Marshall Field's department store, as well
as many other retailers. The Chicago Transportation Department recently spent
$30.0 million to renovate the street and open it to automobile traffic.
The Magnificent Mile features glamorous shopping at Water Tower Place,
Chicago Place, and the 900 North Michigan Shops. Retailers in the Magnificent
Mile include Tiffany's, Bloomingdale's, Nike, Sony, Banana Republic, Eddie
Bauer, Chanel, Crate and Barrel, Saks Fifth Avenue, Neiman Marcus, and Lord and
Taylor. The City of Chicago recently approved the $500 million "North Bridge"
retail development project of the John Buck Company. The North Bridge
development area is bordered roughly by Ohio Street, Illinois Street, State
Street, and North Michigan Avenue. According to an article in the Chicago Sun
Times, a Nordstrom department store and Virgin Entertainment Megastore will
anchor the North Bridge retail development. North Bridge will also include a
shopping mall, 12-story hotel, parking garage, and the Walt Disney Company theme
park, Disney Quest. The Nordstrom department store is expected to be complete by
September, 2000.
SUMMARY
The economic outlook for the Chicago metropolitan area in the foreseeable
future is positive, with expected growth in the population and local economy. As
the Midwest's financial, commercial, and transportation center, Chicago offers
companies opportunities for continued growth. The large tourism industry in
Chicago also fuels economic growth. The stable economic climate in Chicago and
the numerous cultural and recreational opportunities, provide area residents
with a good quality of life. The continuation of Chicago's healthy business
climate, as well as its economic stability, should ensure a favorable
environment for real estate development and investment over the long-term.
24
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
Neighborhood map
25
<PAGE>
NEIGHBORHOOD ANALYSIS
- --------------------------------------------------------------------------------
NEIGHBORHOOD ANALYSIS
The subject property is located along the east side of Interstate 294,
approximately one-half mile south of it's overpass of Milwaukee Avenue, within
the City of Glenview, Illinois. Specifically, the subject property is located at
1000 Milwaukee Avenue, Glenview, Cook County, Illinois. The City of Glenview is
located approximately 15 miles northwest of the Chicago CBD.
The subject property's neighborhood is generally bounded by Interstate 294
to the west, the Glenview city limits to the east, Willow Road to the north, and
Central Road to the south. This area is primarily developed with office, retail
and residential uses.
The subject property is located along the east side of Interstate 294,
approximately one-quarter mile south of the Milwaukee Avenue overpass.
Developments in the immediate vicinity of the subject property include: vacant
land to the south of the subject property, followed by the Chicago-Northwestern
Railroad, Glenview Industrial Center, State Police Headquarters, Williamsburg
Court Apartments, and Cobblestone of Glenview. Interstate 294 is located
immediately west of the subject property, followed by the Cook County Forest
Preserve. Commercial development is located along Milwaukee Avenue, including
the Glenview Office Center, Devon Bank, Countryside Plaza Shopping Center,
various freestanding retail facilities, etc. Ridgewood Cemetery is located
approximately one-mile southeast of the subject property along Milwaukee Avenue,
while the Golf Mill Shopping Center is located further south along Milwaukee
Avenue at the intersection of Golf Road. Located north of the subject property
along Milwaukee Avenue near the intersection of Sanders Road are various
commercial developments including: Doubletree Hotel, Motel, Budgetel, Fairfield
Inn, Courtyard by Marriott, Howard Plaza, 2100 Sanders Road (office building),
Caremark Towers (office building), and various other freestanding commercial
buildings.
Glenview is known as an upscale suburban neighborhood, as single-family
residences range in price from approximately $150,000 to over $1,000,000 in
value. In addition, there are numerous luxury apartment complexes located within
the subject neighborhood, including: The Abbington of Glenview, Glencove Estates
and Michael Todd Terrace Apartments.
26
<PAGE>
NEIGHBORHOOD ANALYSIS
- --------------------------------------------------------------------------------
Transportation within the subject's immediate area is considered good, and
the subject is conveniently located in close proximity to the following major
roadways: Interstate 294, Milwaukee Avenue, Golf Road and Willow Road. In
addition, there are numerous secondary commercial arteries within the subject
neighborhood including: Pfingston Road, Central Road, Glenview Road and Lake
Avenue.
The subject's neighborhood is conveniently accessed and located
approximately 17 miles northwest of downtown Chicago. Interstate 294, which
forms the western boundary of the subject property, provides direct access to
through the north central portions of the Chicago metropolitan area. Local
access to the subject property is considered somewhat cumbersome, as the nearest
interchanges with I-294 are located approximately two-miles north and south of
the subject property at Willow Road and Golf Road, respectively.
SUMMARY
The subject property is well located within the City of Glenview, and
within the greater Chicago metropolitan area. Although the area is projected to
witness moderate levels of new population growth, the area has established
itself as a desirable location for business, as well as residential living. The
neighborhood is considered to have good access to the regional transportation
system as I-294 and various commercial roadways are located throughout the
neighborhood. These factors should allow the subject neighborhood to remain
competitive well into the foreseeable future.
27
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
INTRODUCTION
Historical supply and demand data for Chicago utilized in this analysis were
provided by the CHICAGO OFFICE MARKET REPORT, THIRD QUARTER 1998, prepared by
Cushman & Wakefield's Research Services. Our analysis includes a brief overview
of the entire Chicago office market, followed by an analysis of indicated demand
and a detailed discussion of the subject's competitive office market. Listed
below are terms and definitions utilized in our Office Market Analysis section,
as defined by Cushman & Wakefield's Research Services:
INVENTORY
Existing buildings, 25,000 square feet or more, with a Certificate of
Occupancy as of September 18, 1992, are included in inventory figures.
Excluded are owner-occupied buildings, government and medical facilities,
and buildings under construction or proposed.
UNDER CONSTRUCTION
Buildings which have had excavation commence up to the time they have
received a Certificate of Occupancy.
PROPOSED
Any planned buildings or assemblages that have not yet begun excavation.
Proposed developments contained within this report represent those, which in
all likelihood, will begin construction within the next three years. List
does not include all of the sites available for commercial development.
VACANCY RATES
(Overall Vacancy Rate) Available existing space in square feet divided by
the inventory in square feet. Includes both direct and sublet space unless
otherwise noted.
RENTAL RATE
Based on the gross (includes real estate taxes and operating expenses)
weighted average asking rate. Rental rate figures are computed by taking
each available block of space and multiplying it by the gross asking rental
rate. The sum of the values is divided by the total square feet available to
produce the Gross Weighted Average Rate.
NET ABSORPTION
The net change in occupied space for a given period of time. Figures exclude
sublet space and pre-leased space.
LEASING ACTIVITY
The total amount of leases signed during the period. Excludes pre-leasing
and renewals.
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
29
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
INSERT SUBMARKET MAP
30
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
THE CENTRAL BUSINESS DISTRICT (CBD)
The Chicago CBD is bounded by: Division Street to the north, Roosevelt Road
to the south, Lake Michigan to the east, and Halsted Street to the west.
NON-CBD
The suburban communities surrounding the core downtown area or CBD.
CHICAGO METROPOLITAN OFFICE MARKET OVERVIEW
As previously discussed, the Chicago economic base can best be
characterized by its wide employment diversification. The Chicago area has
significant employment in eight of the ten major industrial divisions. In
addition to Chicago's broad employment base, some of the nation's largest
corporate headquarters are located within the metropolitan area. The
metropolitan area of Chicago is still a preferred location for businesses and
professional organizations and other service industries requiring good
accessibility, an educated workforce, and affordable housing. Chicago was not
immune to the recessionary period from 1990 to 1992, but did generally fare
better than most major metropolitan areas.
As of the Third Quarter 1998, metropolitan Chicago contained
approximately 186.3 million square feet of rentable office space. Generally, the
Chicago office market is divided into seven submarkets, which include the
Central Business District and the Non-Central Business District comprised of the
O'Hare, Schaumburg, Oak Brook, Lisle/Naperville, Evanston/Skokie, and
Northbrook/Tri-State submarkets. The South Cook County submarket, which contains
less than 2.0 percent of the total inventory, is not included in this survey. A
market segmentation map presented on the facing page presents the office
submarkets in the suburban Chicago Metropolitan Area. The subject property is
situated in the Northbrook/Tri-State office submarket, defined as area one.
31
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
OFFICE SPACE INVENTORY
CENTRAL BUSINESS DISTRICT
The largest concentration of office space in the Chicago Metropolitan Area
is in the Central Business District, which accounts for approximately 60.70
percent of the total metropolitan inventory. With the exception of 300 East
Randolph, a 850,000 square foot single-tenant office building which was recently
completed, no new office space has been added to the market since 1992. Prior to
300 East Randolph, the last deliveries of office construction in downtown
Chicago occurred during the first two quarters of 1992. The Heller International
Tower, a 960,000 square foot office building located in the West Loop submarket,
was officially completed during the First Quarter of 1992. Three additional
buildings completed during the Second Quarter of 1992 include: the R.R.
Donnelley Building, containing 930,000 square feet; Chicago Title & Trust Center
I, containing 980,000 square feet; and the USG Building, containing
approximately 800,000 square feet. However, as a result of the increased demand
for downtown office space, new development becomes probable. An example of this
is 301 South Wacker, a 50-story, 1,300,000-square-foot, office tower which is
scheduled to break ground in 1998. The building is expected to be completed in
2000. Additionally, One North Wacker is slated to begin construction in 1998, by
the John Buck Company, pending an anchor tenant. In the Third Quarter 1998,
Union Tower, located at 550 West Van Buren Street, began construction and marked
the first new speculative office to break ground in downtown Chicago since 1990.
Union Tower will offer approximately 330,000 rentable square feet of Class A
space in the West Loop and is slated for occupancy in October, 1999.
NON-CENTRAL BUSINESS DISTRICT
The total office inventory in the Non-Central Business District increased
by 5.45 percent from its Third Quarter 1997 level of 69,459,330 to its present
level of 73,244,913 square feet. The statistics for each submarket comprising
the overall metropolitan Chicago office market are presented in the chart on the
facing page. While new office construction occurred in the Non-CBD submarket,
the absolute increase in office inventory was mitigated by decreases in a number
of submarkets. A reported decrease in total office inventory is a function of
foreclosures, functionally obsolete buildings, the purchase of a rental property
for owner-occupancy, or the conversion of an office building from multi- to
single-tenancy.
The Schaumburg and Oak Brook office submarkets of suburban Chicago continue
to lead the Non-Central Business District in total office inventory. Over 50.7
percent of
32
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
suburban office space is located in these two submarkets. Excellent
transportation linkages and proximity to local businesses have allowed these two
submarkets to maintain their position as primary commerce centers in the
suburban office market.
OFFICE SPACE ABSORPTION AND OVERALL VACANCY RATES
Historical net absorption and overall vacancy rates for the Central and
Non-Central Business Districts are presented as follows in the chart below.
<TABLE>
<CAPTION>
===================================================================================================================================
HISTORICAL NET ABSORPTION AND OVERALL VACANCY
CHICAGO METROPOLITAN AREA
===================================================================================================================================
SUBMARKET 1990 1991 1992 1993 1994 1995 1996 1997 3RD QTR 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CHICAGO CBD
- -----------------------------------------------------------------------------------------------------------------------------------
Absorption-SF
Total 22,751 (1,919,761) 941,501 424,841 1,910,753 1,460,305 5,336 1,792,592 875,174
Class A 1,453,395 (1,036,668) 1,342,231 1,309,936 2,176,766 1,874,533 382,394 699,027 1,078,814
Vacancy 16.00% 20.70% 21.80% 20.90% 18.80% 16.70% 16.70% 14.40% 12.60%
- -----------------------------------------------------------------------------------------------------------------------------------
CHICAGO NON-CBD
- -----------------------------------------------------------------------------------------------------------------------------------
Absorption-SF
Total 2,120,072 526,721 613,866 1,856,275 735,316 2,113,060 1,384,307 1,189,683 1,707,015
Class A 2,239,612 873,065 869,211 1,320,866 161,640 996,543 43,427 1,034,703 1,407,587
Vacancy 21.00% 22.90% 22.40% 21.00% 17.50% 13.90% 12.90% 12.00% 11.70%
===================================================================================================================================
</TABLE>
CENTRAL BUSINESS DISTRICT
The past year was definitely a year of high leasing activity, as a record
9,419,942 square feet of office space was leased. This represents a 62.0 percent
increase over 1996. In addition, 1997 net absorption posted a three-year high of
1,792,592 square feet. As a result, the overall vacancy rate decreased by 2.3
percentage points to its 1997 year-end level of 14.4 percent. This trend
continued during the Third Quarter of 1998, and as of September 1998, the
overall vacancy rate in the central business district stood at 12.6 percent.
The Class A overall vacancy rate plunged 3.2 percentage points in 1997, and
2.8 percentage points in the Third Quarter of 1998 to its present level of 6.0
percent, the lowest level in recorded history. This office submarket has faired
much better than the Class B or C submarkets. The Class B overall vacancy rate
decreased 2.1 percentage points in 1997, and decreased by 1.1 percentage points
in the Third Quarter 1998. The overall vacancy rate for Class C office space
remained relatively unchanged through 1997, but decreased by 2.7 percentage
points in the Third Quarter 1998.
33
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
The steady overall vacancy rate declines have dictated sharp increases in
rental rates for Class A and B office space. Class A asking rental rates
experienced a mid-year upswing, the first in ten years, increasing by $1.76 per
square foot in 1997. During the Third Quarter of 1998, the average Class A
asking rental rate increased by $4.52 per square foot, from $25.34 to $29.86 per
square foot of net rentable area. Due to increased demand in Class B space,
which resulted from the decreasing availability of Class A space, Class B rental
rates increased by $2.28 per square foot over the past year. This trend
continued during the Third Quarter of 1998, as the average asking rental rate
for Class B space increased by $3.32 per square foot, from $20.25 to $23.57 per
square foot of net rentable area. Rental rates for Class C space increased at a
modest $0.89 per square foot in 1997. During Third Quarter 1998, the average
asking rental rate for Class C space increased from $14.95 to $16.32 per square
foot.
The most significant leasing transactions which contributed to the robust
leasing activity observed in 1997 included LaSalle National Bank's 380,000
square foot renewal and expansion at 200 West Monroe and Commonwealth Edison's
lease of a 245,025 square foot sublease space at the AT&T Corporate Center,
located at 227 West Monroe Street. Other significant leasing transactions
included Andersen Consulting's 220,128 square foot lease at the Chicago Title
and Trust Building, located at 161 North Clark Street, Bank of America's 85,000-
square-foot lease at the Apparel Center, D'Acona & Pflaum's lease for 83,000
square feet at One Illinois Center, DraftWorlwide for 53,000 square feet at 633
St. Clair, and Arthur Andersen's lease for 40,000 square feet at 161 North
Clark. The First, Second, and Third Quarters of 1998 have resulted in some
strong leasing activity as evident by Upshot Advertising's 60,494 square foot
lease at Three Illinois Center, Ernest & Young's 57,800 square foot lease at
River Center, General Growth Properties lease for 50,000 square feet at 110
North Wacker Drive, and Trans Union lease of a 36,680 square foot sublease space
at 120 Riverside Plaza. Other significant lease transactions included Regus
Business Center Corporation's lease for 44,740 square feet at 200 South Wacker
Drive and Lucent's Technologies' 34,925 square-foot lease at 230 West Monroe
Street.
Four sales occurred in the CBD in the First and Second Quarters of 1997.
North Pier was sold to Cityfront LLC for approximately $26,000,000, Chestnut
Galleries was sold to an unknown source, 30 North LaSalle closed in June 1997,
and 120 North LaSalle closed in February 1997. During the Third Quarter 1997,
200 West Adams Street and 20 North Wacker Drive transacted. The Fourth Quarter
began and ended with the two largest office
34
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
transactions in the city's history. These involved 10 and 30 South Wacker Drive
and the Sears Tower, which were purchased by Equity Office Properties and
TrizecHahn, respectively. Eleven sales occurred in the CBD in the First, Second
and Third Quarters of 1998. The Amoco Building was effectively sold to
Blackstone Realty Advisors, Inc., for approximately $470,000,000, and Boulevard
Towers South was sold to R-A-K Group LLC for $150,000,000. Overseas Partners
Capital Corporation purchased Madison Plaza for approximately $196,000,000 and
Whitehall R.E. Fund/Archon Group LP purchased One North State Street for
$85,000,000. Prime Group Realty Trust purchased 208 South LaSalle Street and 122
South Michigan Avenue for $61,000,000 and $29,000,000 respectively. The Witkoff
Group purchased 225 North Michigan Avenue for $147,675,000. The Bankers
Building, 645 North Michigan Avenue, 175 West Jackson Boulevard, and 33 North
LaSallle Street also closed in 1998. Investors continue to re-focus their buying
energy on downtown Chicago and are aggressively bidding extraordinary amounts
for office buildings, which have increased dramatically in value over the past
few years.
As of Third Quarter 1998, the overall vacancy rate for the Chicago CBD
stood at 12.6 percent. The Central Loop and the East Loop office submarkets have
the highest overall vacancy rates within the CBD, with vacancy rates registering
13.7 and 18.2 percent, respectively. The North Michigan Avenue submarket
displayed the most significant improvement, decreasing from the Third-Quarter
1997 vacancy rate of 18.5 percent to its most current vacancy rate of 12.6
percent.
NON-CENTRAL BUSINESS DISTRICT
The suburban Chicago office market continued to tighten during 1997 by
posting a record-high leasing activity and strong net absorption. The year-end
1996 leasing activity totaled 5.9 million square feet. In comparison, the 1997
total leasing activity amounted to 8.0 million square feet. The scarcity of
available Class A office space has increased activity in the Class B office
submarket. Year-to-date leasing activity for 1998 amounts to 5,311,656 square
feet.
As of the Third Quarter 1998, the Non-CBD vacancy rate was 11.7 percent, a
0.3 percentage point decrease from the Third Quarter 1997 vacancy rate of 12.0
percent. Over 7.3 million square feet of leasing activity took place over the
last twelve months.
35
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
As vacancy rates have held steady between 11.2 and 12.2 over the last
twelve months, speculative office building construction has increased in the
suburban office market. As of Third Quarter 1998, a total of 54 office
buildings, containing a total of 7.83 million square feet were proposed in
Chicago's suburbs. In addition, 24 buildings were under construction,
representing over 2.6 million square feet of new office space. This information
is summarized in the chart on the following page.
36
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
=====================================================================
INVENTORY OF CLASS A SPACE UNDER CONSTRUCTION
SUBURBAN CHICAGO
---------------------------------------------------------------------
SUBMARKET NUMBER OF BUILDINGS INVENTORY
---------------------------------------------------------------------
<S> <C> <C>
O'Hare 0 0
---------------------------------------------------------------------
Schaumburg 5 705,230
---------------------------------------------------------------------
Oak Brook /(1)/ 6 675,603
---------------------------------------------------------------------
Lisle/Naperville 6 524,258
---------------------------------------------------------------------
Evanston/Skokie 0 0
---------------------------------------------------------------------
Northbrook/Tri-State 6 746,376
---------------------------------------------------------------------
TOTAL 24 2,651,467
=====================================================================
(1) Subject Submarket
=====================================================================
</TABLE>
The Schaumburg submarket has 5 proposed developments totaling over 700,000
square feet. With its close proximity to the tight O'Hare submarket, the lack of
available large blocks of Class A space within the O'Hare region will cause
tenants to spill over to this potential new construction, as well as to the
space being vacated by those tenants moving into build-to-suit buildings. As a
result, the vacancy rate of the Schaumburg submarket is expected to drop
substantially in the coming quarters.
The Oak Brook submarket is currently experiencing a surge of construction
activity in order to meet the high demand of the tenants currently in the market
for space. The largest building to break ground in the Third Quarter 1998 was
The Alter Group's 68,000 square foot Oak Creek located at 2050 Finley Road in
Downers Grove. Delivery for this building is expected in the first half of 1999.
There is currently 675,603 square feet of Class A space under construction, and
an additional 1,024,000 square feet of office space is proposed in this
submarket.
The most dominant characteristic of the Lisle/Naperville submarket is its
wealth of new construction. There are currently six office buildings totaling
524,258 square feet of Class A space under construction in this submarket. The
largest of the projects is Duke Realty Investments' Central Park of Lisle II, a
300,000 square foot office building in Lisle. Central Park of Lisle II recently
broke ground and delivery for this building is expected in the first half of
2000. As in the Oak Brook submarket, the reason behind the amount of new office
development is the lack of large blocks of available Class A space.
There are seven office buildings under construction in the Northbrook/Tri-
State submarket. These buildings contain a total of approximately 824,876 square
feet. Millbrook
37
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
Business Center broke ground on the first of two five-story buildings in early
December. This building is expected to be ready by February 1999. There are also
nine proposed projects in this submarket, totaling 1,229,520 square feet. These
include Opus North's Opus Landmark of Lake Forest I & II. A common element among
most of the new developments is their location within large business parks,
which allows for additional spec buildings, as well as build-to-suits.
CHICAGO SUBURBAN OFFICE MARKET
For market conditions and analytical purposes, Cushman & Wakefield's
Research Services divides the Chicago suburban office market into six separate
submarkets, which are presented in the chart below. The Chicago Suburban
district comprises approximately 39.30 percent of the office space inventory,
with the largest inventory being represented by the Schaumburg and Oak Brook
office submarkets.
======================================================
CHICAGO SUBURBAN
SUBMARKETS
------------------------------------------------------
1. O'Hare
2. Schaumburg
3. Oak Brook /(1)/
4. Lisle/Naperville
5. Evanston/Skokie
6. Northbrook/Tri-State
------------------------------------------------------
/(1)/ Subject Submarket.
======================================================
The Chicago Suburban office market covers a wide area that includes
portions of the North and Northwest sides of the City of Chicago, suburban Cook
County, and five other counties. It stretches from the Wisconsin border to the
north, Interstate 55 to the south, and as far west as Aurora, Illinois. Overall,
the suburban office market contains over 69 million square feet.
The subject property is located in the Oak Brook submarket. The total
inventory, overall vacancy rates and gross weighted average rental rates for
each of the six submarkets of suburban Chicago, for the Third Quarters of 1997
and 1998, respectively, are presented in the table on the following page.
38
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
=======================================================================================================
THIRD QUARTER 1997 VS THIRD QUARTER 1998
CHICAGO SUBURBAN OFFICE MARKET STATISTICS
- -------------------------------------------------------------------------------------------------------
THIRD QUARTER 1997 THIRD QUARTER 1998
- -------------------------------------------------------------------------------------------------------
SUBMARKET INVENTORY OVERALL ASKING INVENTORY OVERALL ASKING
VACANCY RENT/SF VACANCY RENT/SF
RATE RATE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Chicago Suburban 69,459,330 12.0% $19.81 73,244,913 11.7% $21.15
- -------------------------------------------------------------------------------------------------------
O'Hare 12,642,178 14.8% $17.60 12,789,509 14.5% $19.53
- -------------------------------------------------------------------------------------------------------
Schaumburg 18,129,917 13.3% $19.73 18,494,571 12.4% $20.63
- -------------------------------------------------------------------------------------------------------
Oak Brook/(1)/ 17,750,124 8.3% $21.21 18,662,558 9.6% $21.84
- -------------------------------------------------------------------------------------------------------
Lisle/Naperville 7,053,791 18.5% $21.24 7,743,406 14.7% $22.31
- -------------------------------------------------------------------------------------------------------
Evanston/Skokie 4,102,133 13.6% $21.13 4,204,133 8.8% $22.41
- -------------------------------------------------------------------------------------------------------
Northbrook/Tri-State 10,209,257 9.8% $21.01 11,350,706 9.8% $21.88
- -------------------------------------------------------------------------------------------------------
/(1)/ Subject Submarket.
=======================================================================================================
</TABLE>
NET ABSORPTION AND VACANCY
As of Third Quarter 1998, net absorption in the Non-CBD market stood at
1,707,015 square feet, which is higher than the net absorption level one year
ago, at 517,733 square feet.
As of Third Quarter 1998, one of the six suburban office submarkets, O'Hare
office submarkets, displayed a negative year-to-date absorption level of 42,584
square feet. Furthermore, the largest year-to-date 1998 net absorption is
registered in the Northbrook/Tri-State submarket of 811,982 square feet.
<TABLE>
<CAPTION>
==================================================================
NON-CBD NET ABSORPTION STATISTICS/SF
------------------------------------------------------------------
SUBMARKET THIRD QUARTER THIRD QUARTER
1997 1998
------------------------------------------------------------------
<S> <C> <C>
O'Hare 561,683 (42,584)
------------------------------------------------------------------
Schaumburg (322,267) 242,301
------------------------------------------------------------------
Oak Brook 450,346 152,632
------------------------------------------------------------------
Lisle/Naperville (341,614) 337,639
------------------------------------------------------------------
Evanston/Skokie (105,259) 205,045
------------------------------------------------------------------
Northbrook/Tri-State 274,844 811,982
------------------------------------------------------------------
OVERALL NON-CBD 517,733 1,707,015
------------------------------------------------------------------
</TABLE>
As of Third Quarter 1998, the overall vacancy rate in the Non-CBD submarket
was 11.7 percent, a decrease of 0.30 percent from the year-end 1997 overall Non-
CBD vacancy rate of 12.00 percent. The current vacancy rate is lower than the
Third Quarter 1997 rate of 12.0 percent. The Evanston/Skokie and Oak Brook
submarkets, for class B office space, have the lowest overall vacancy rates, as
of Third Quarter 1998. The highest overall
39
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
vacancy rate for class B office space, as of Third Quarter 1998, is represented
by the O'Hare submarket, which presently stands at an overall vacancy rate of
26.50 percent.
The overall vacancy rates for the six suburban office submarkets, for
Class A office space, for Third Quarter 1998 and Third Quarter 1997, are
summarized in the following chart.
<TABLE>
<CAPTION>
=============================================================================================
OVERALL VACANCY RATES
NON-CBD SUBMARKETS
=============================================================================================
THIRD QUARTER 1998 THIRD QUARTER 1997
---------------------------------------------------------------------------------------------
SUBMARKET OVERALL CLASS A OVERALL CLASS A
---------------------------------------------------------------------------------------------
Non-CBD 11.70% 9.70% 12.00% 9.80%
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
O'Hare 14.50% 3.70% 14.80% 7.50%
Schaumburg 12.40% 10.00% 13.30% 10.70%
Oak Brook/(1)/ 9.60% 10.60% 8.30% 8.50%
Lisle/Naperville 14.70% 17.90% 16.70% 11.60%
Evanston/Skokie 8.80% 6.90% 14.40% 6.50%
Northbrook/Tri-State 9.80% 6.90% 9.80% 8.80%
=============================================================================================
(1) Subject's office submarket.
=============================================================================================
</TABLE>
MAJOR LEASE TRANSACTIONS
Some of the most notable leases negotiated during 1997 and 1998 involved
buildings under construction. Examples of tenants choosing to pre-lease space at
buildings under construction include: Ft. James for 125,000 square feet at 1650
Lake Cook Road in Deerfield, and Mercedes Benz for 94,489 square feet at
Aboretum Lakes. Other large lease transactions involved Deutsche Financial who
signed up for 54,000 square feet at Highland Landmark I in Downers Grove,
Allstate Insurance who signed all of the 253,393 square feet at Riverwalk II in
Buffalo Grove, and IBM's 52,527 square feet of space at Westwood of Lisle II in
Lisle.
Due to the strong investment demand for office building sales, notable
investment sales closed during 1997 and through the first half of 1988 include
Continental Towers, Highland Landmark Phase I, Executive Towers West I, II, and
III, Corporate 500 Center, Columbia Center III, and Northern Trust Building.
More detailed information regarding the above office building transactions are
presented in the Sales Comparison Approach section of this report, and reference
is made thereto.
RENTAL RATES
Rental rates in the Suburban Chicago office market skyrocketed during
1996. Since the First Quarter of 1996, the average asking gross rental rate
increased from $18.98 to
40
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
$20.06 per square foot as of year-end 1997, a difference of $1.08 per square
foot. The upward trend experienced by average asking rental rates continued
during the beginning of this year. As of Third Quarter 1998, the average asking
rental rate was $21.15 per square foot. As of Third Quarter 1997, the average
asking gross rental rate for Class A office space in Suburban Chicago was $24.86
per square foot. This figure has increased to $25.44 per square foot as of Third
Quarter 1998, a difference of $0.60 per square foot. The substantial increase in
rental rates is a function of the diminished supply of Class B office space in
Suburban Chicago.
NORTHBROOK/TRI-STATE SUBMARKET
The subject property is located near the confluence of three suburban
submarkets, O'Hare, Northbrook-Tri-State, and Evanston/Skokie. Technically, the
subject property is located in the extreme northern portion of the O'Hare
submarket; however, a majority of properties which are considered to be direct
competition to the subject property are located within the Northbrook/Tri-State
submarket. As such, we have focused our analysis on the Northbrook/Tri-State
suburban office submarket. The Northbrook/Tri-State suburban office market is
primarily located in Lake County, although the submarket does extend south
beyond the county line to include a small portion of northern Cook County. The
submarket's tenant base is diverse; pharmaceutical and medical related firms
such as Abbott Laboratories and Baxter International, Inc. maintain a
substantial presence. In addition to the medical industry, companies such as
Whirlpool Financial, Gaylord Container, Brunswick and International Jensen have
located their corporate headquarters in this corridor.
NORTHBROOK/TRI-STATE OFFICE MARKET CHART
INVENTORY
With a 15.50 percent share of the total suburban inventory, the
Northbrook/Tri-State office submarket represents the fourth largest of the six
suburban office submarkets. The current inventory of the subject's submarket is
11,350,706 square feet. According to Cushman & Wakefield's Research Services, as
of October, 1998, there were six buildings presently under construction,
totaling approximately 746,376 square feet, in the Northbrook/Tri-State
submarket. The following table summarizes this information.
41
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
OFFICE BUILDINGS PRESENTLY UNDER CONSTRUCTION
NORTHBROOK/TRI-STATE SUBMARKET
THIRD QUARTER 1998
- --------------------------------------------------------------------------------------------------------------------
SQUARE # OF DELIVERY
BUILDING LOCATION FEET STORIES DATE DEVELOPER
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bannockburn Centre @ College Park Bannockburn 230,000 3 1999 Prentiss Properties
Bannockburn Corporate Centre Bannockburn 202,238 3 1999 Pizutti Development
Millbrook Lincolnshire 140,500 5 1998 MF Development Ptnrs.
Corporate Center of Northbrook Northbrook 125,000 6 1999 Lane Industries
440 North Lakeview Parkway Vernon Hills 36,638 1 1999 Pancor Construction
Greenleaf Center Gurnee 12,000 1 1998 Greenleaf Center
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
A summary of historical inventory, net absorption, and overall vacancy
rates from year-end 1991 through the Third Quarter of 1998, on a yearly basis,
is presented in the table below.
<TABLE>
<CAPTION>
==================================================================================================
NORTHBROOK/TRI-STATE OFFICE SUBMARKET
--------------------------------------------------------------------------------------------------
NET ABSORPTION (SF, VACANCY
DATE INVENTORY (SF) YTD) RATE
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year-End 1991 8,609,001 147,519 20.7%
Year-End 1992 9,125,669 264,350 19.3%
Year-End 1993 9,565,272 341,849 18.5%
Year-End 1994 9,612,872 207,482 16.3%
Year-End 1995 9,693,500 289,373 11.7%
Year-End 1996 9,803,257 23,545 13.7%
Year-End 1997 10,209,257 415,941 8.8%
Third Quarter 1998 11,350,706 811,982 9.8%
==================================================================================================
Average - 1991 TO 3/rd/ Qtr. 1998 312,755 14.9%
Average - 1995 TO 3/rd/ Qtr. 1998 385,210 11.0%
==================================================================================================
</TABLE>
VACANCY RATES
The overall vacancy rate in the Northbrook/Tri-State area, as of Third
Quarter 1998, equates to 9.8 percent of the total inventory, which is the near
the record low vacancy recorded for this submarket since Cushman & Wakefield
began tracking the market in 1987, of 8.6 percent, as of Third Quarter 1997.
Class A and B office space dominate the Northbrook/Tri-State submarket, with
Class C space comprising a nominal 7.94 percent of the total inventory. Both the
total inventory and vacant space in this submarket is skewed toward Class A and
Class B office space. Class A buildings currently represent 53.48 percent of the
total inventory, while they account for 45.97 percent of the total vacant space.
Class B buildings currently represent 38.58 percent of the total inventory, but
accounts for
42
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
47.58 percent of the total vacant space in the submarket. The subject property
is currently considered a Class B office building, however, upon retrofit, it is
assumed that the subject property will be a Class A-/B+ building. The current
Northbrook/Tri-State submarket vacancy rate of 9.8 percent falls near the lower
end of the non-CBD spectrum, accounting for the third lowest vacancy rate of the
six suburban submarkets (only the Oak Brook, 9.6 percent, and the
Evanston/Skokie, 8.8 percent, submarket registered lower overall vacancy rates).
Additionally, the Northbrook/Tri-State submarket's current vacancy rate of 9.8
percent is well below the overall non-CBD Third Quarter 1998 vacancy rate of
11.7 percent.
LEASING ACTIVITY
The Northbrook/Tri-State submarket registered a dramatic 1,742,962 square
feet of leasing activity during 1997. This represents the highest leasing
activity ever recorded within this submarket since 1987, when Cushman &
Wakefield began tracking this market area. Of the 1,742,962 square feet of
leasing activity recorded during 1997, approximately 71.73 percent, or 763,058
square feet, represents Class A leasing activity. Year-to-date 1998 remains
strong, as the Northbrook/Tri-State office submarket has accumulated 749,005
square feet of leasing activity.
Looking at historical statistics, year-end 1995 leasing activity totaled
1,248,601 square feet, the highest leasing activity ever experienced by the
Northbrook/Tri-State office submarket during a twelve month period, to date.
Year-end 1996 leasing activity totaled 985,959 square feet. Leasing activity for
year-end 1997 of 1,742,962 square feet surpassed the all time high benchmark
leasing activity of 1,248,601 square feet, for year-end 1995.
Although the subject's submarket witnessed a number of significant lease
transactions during 1996, several large blocks of contiguous space also became
available within the submarket during 1996. The largest block of space was put
on the market during Fourth Quarter 1996 when Washington National Insurance made
the entire 172,000 square foot 300 Tower Parkway Building at Lincolnshire
Corporate Center available for sublease. This space was taken back during First
Quarter 1998, as Accobrands recently signed a lease agreement for the entire
building.
During Second Quarter 1997, the Northbrook/Tri-State submarket registered
441,583 square feet of leasing activity. The largest lease transaction completed
during Second
43
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
Quarter 1997 was the 258,995 square foot pre-lease of the entire Riverwalk II
building located in Buffalo Grove. Allstate pre-leased the entire building,
which was recently completed, as of July, 1998. Allstate plans on consolidating
operations from multiple sites, including One North Arlington, where it will
vacate 120,000 square feet next year. At Deerbrook Corporate Center, Trans
Leasing International subleased 32,408 from O'Donnell, Wicklund, Pignozzi, &
Peterson. At Arborlake Center I, Netdox, a division of Deloitte & Touche,
subleased 31,700 square feet from NutraSweet. Clear Communication Corporation
leased 14,137 square feet at 200 Tri-State International and Berger & Goldstein
leased 11,679 square feet at the Hyatt Deerfield Campus. Lastly, Kemper leased
8,313 square feet at 300 Tri-State International.
Few large blocks of contiguous space were added to the market during 1997.
Of most significance, NCH Promotional Services vacated 54,984 square feet, or
two whole floors, at Tri-State International, in December, 1997. Several other
large transactions during 1997 included Tenneco Automotive's lease of 500 North
Field Parkway within the Conway Park office park. This 93,000 square foot Class
A lease commenced in August, 1997. This space was originally leased to Leaf,
Inc. in 1993, for an extended term of 18 years.
Leasing activity through the Third Quarter 1998 has continued to maintain a
strong pace, although at moderating levels, as 749,005 square feet of space was
leased. Two large leases in particular are the BT Office Products International,
Inc.'s 65,000 lease at Six Parkway North, in Deerfield. This 90,000 square foot
Class A building was recently completed as of June, 1998. Secondly, the 72,000
square foot lease by Favorite Brands International at the recently completed
Bannockburn Lake Office Plaza V. Another significant lease transaction during
1998 was the 125,000 square foot lease of 1650 Lake Cook Road by Fort James.
This Class A building was completed as of June, 1998.
As summarized in the following table, absorption of Class A office product
in the Northbrook/Tri-State submarket has historically outperformed Class B.
However, during 1994 and 1995, Class B space had exhibited the highest net
absorption rates ever experienced by this asset class within the Northbrook/Tri-
State submarket. Conversely, Class A space in this submarket during the same
time period witnessed the two lowest years of net absorption ever recorded. With
the exception of 1997, which witnessed a divergence between net absorption for
Class A and B space, net absorption for Class A and B space appears to be moving
in relative tandem, generally speaking. Market participants
44
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
agree that the recent success of Class B net absorption levels within this
submarket is a direct result of highly competitive rental rates, which
encouraged traditional Class C tenants to relocate into superior space at an
equal or slightly increased rate. Net absorption for Class B space has rebounded
substantially from 1997, as 89,773 square feet was absorbed through the first
three quarters of 1998. Meanwhile, Class A net absorption has remained strong,
with over 661,172 square feet of space absorbed during the first three quarters
of 1998.
<TABLE>
<CAPTION>
=============================================================================================
HISTORICAL ABSORPTION OF OFFICE SPACE
NORTHBROOK/TRI-STATE SUBMARKET
---------------------------------------------------------------------------------------------
YEAR YEAR-TO-DATE CLASS A CLASS B
NET ABSORPTION
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
12/88 689,629 864,060 26,158
12/89 515,493 477,025 (20,758)
12/90 479,182 515,787 (36,605)
12/91 147,519 105,249 (7,430)
12/92 264,350 337,793 (74,443)
12/93 341,849 450,159 (108,310)
12/94 207,482 13,159 132,688
12/95 289,373 72,203 221,224
12/96 23,545 23,692 (2,373)
12/97 415,941 393,223 (25,457)
9/98 811,982 661,172 89,773
=============================================================================================
</TABLE>
In addition, 746,376 million square feet of space is scheduled for
completion in 1998/99, of which all the space is reportedly speculative, with no
pre-leasing by tenants. The overall average annual net absorption for all office
space in the Northbrook/Tri-State submarket dating from 1988 through 1997 is
337,436 square feet. The overall average annual net absorption for Class A
office space in the Northbrook/Tri-State submarket dating from 1988 through 1997
is 325,235 square feet, while the overall average annual net absorption for
Class B space in the Northbrook/Tri-State submarket during the same time period
is 19,928 square feet. Based upon historical data and current market conditions,
and conservatively assuming an average absorption of 300,000 square feet per
year and a static market vacancy rate of 10.0 percent, there is a 1.92 year
supply of Class A office space currently available within the
Northbrook/Tri-State submarket. This supply includes the uncommitted space
relative to new deliveries of space for 1998/99. The table below illustrates
this calculation.
45
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
==================================================================================================
ABSORPTION OF AVAILABLE CLASS A/B SPACE
NORTHBROOK/TRI-STATE SUBMARKET
==================================================================================================
<S> <C>
Total Inventory/(1)/ 6,816,568 SF
Current Vacant Space/(2)/ 1,257,114 SF
Less: Stabilized Vacancy @ 10% 681,657 SF
------------
Vacant Space To Be Absorbed 575,457 SF
Divided By Average Annual Absorption 300,000 SF
Years of Supply 1.92 Years
1 - Existing inventory of 6,070,192 SF Plus 746,376 SF of new supply 1998.
2 - Existing vacant space of 510,738 SF plus 746,376 SF of uncommitted space of new
supply under construction. For 1998/99
==================================================================================================
</TABLE>
With the exception of a slight increase in the overall vacancy rate in
1996 and the Third Quarter 1998, the Northbrook/Tri-State submarket has
witnessed vacancy rate decreases annually since 1991. The overall vacancy rate
increased during the first three quarters of 1998, as over 1,140,000 square feet
of new space was added to the market. As the Northbrook/Tri-State submarket is
currently operating near stabilized levels (estimated to be 10.0 percent), new
development is expected. Currently, there is approximately 746,376 million
square feet of space planned to come on-line in 1998/99. As the submarket and
individual office properties remain at stabilized levels, overall increases in
rental rates will most likely result. As previously stated, the overall vacancy
rate in the Northbrook/Tri-State area is currently at 9.8 percent. The vacancy
rate for Class A space in the Northbrook/Tri-State submarket is currently at 6.9
percent, as of Third Quarter 1998, just 1.6 percent above the all-time low of
5.3 percent (Second Quarter, 1998).
46
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
HISTORICAL MARKET STATISTICS - NORTHBROOK/TRI-STATE SUBMARKET
OVERALL VS CLASS A
- ------------------------------------------------------------------------------------------------------------------
Year Inventory Vacancy Rate Annual Net Absorption Rental Rate
- ------------------------------------------------------------------------------------------------------------------
OVERALL
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1990 8,319,851 20.3% 479,182 $21.77
1991 8,609,001 20.7% 147,519 $22.21
1992 9,125,669 19.3% 264,350 $21.40
1993 9,565,272 18.5% 341,849 $20.11
1994 9,612,872 16.3% 207,482 $20.04
1995 9,693,500 11.7% 289,373 $20.39
1996 9,803,257 13.7% 23,545 $20.68
1997 10,209,257 8.8% 415,941 $20.19
Third Qtr. 1998 11,350,706 9.8% 811,982 $21.88
- ------------------------------------------------------------------------------------------------------------------
CLASS A
- ------------------------------------------------------------------------------------------------------------------
1990 7,023,717 20.4% 515,787 $22.78
1991 7,276,867 21.2% 105,249 $22.07
1992 7,793,535 18.6% 337,793 $22.11
1993 7,769,469 14.4% 450,159 $22.84
1994 5,570,299 14.2% 13,159 $24.32
1995 5,507,222 11.2% 72,203 $24.20
1996 4,917,799 14.4% 23,692 $23.70
1997 5,238,799 7.0% 393,223 $25.21
Third Qtr. 1998 6,070,192 6.9% 661,172 $25.73
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
RENTAL RATES
The overall weighted average gross rental rate per square foot in the
Northbrook/Tri-State submarket has primarily ranged between $20.00 to $22.00 per
square foot, since 1990. The current rate of $21.88 per square foot represents
an increase of 8.37 percent from the year-end 1997 rate of $20.19 per square
foot, but a slight decrease from the year-end 1991 rate of $22.21 per square
foot. Historical weighted average gross rental rates for Class A and Class B
office product, within the Northbrook/Tri-State submarket, are displayed in the
table below.
<TABLE>
<CAPTION>
========================================================================================================
WEIGHTED AVERAGE GROSS RENTAL RATE
--------------------------------------------------------------------------------------------------------
YEAR CLASS A CLASS B
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
12/90 $22.78 $15.01
12/91 $22.07 $17.18
12/92 $22.11 $18.40
12/93 $22.84 $16.68
12/94 $24.32 $17.37
12/95 $24.20 $17.56
12/96 $23.70 $19.44
12/97 $25.21 $17.44
Third Qtr. 1998 $25.73 $18.47
========================================================================================================
</TABLE>
47
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
Most suburban office buildings include a contractual rent adjustment in
the form of an increase based upon a percentage of the Consumer Price Index
increase or a stated annual step-up. The quoted Consumer Price Index adjustment
factor generally ranges from 20 to 40 percent, and the quoted annual rent
increases generally ranges from 2.0 to 3.0 percent.
Standard workletters of suburban Class A office buildings have increased
in the past two years, and currently range from $20.00 to $35.00 per square
foot, versus $20.00 to $30.00 per square foot. In addition, workletters for
Suburban Class B office buildings have also increased in the past two years, and
currently range from $15.00 to $30.00 per square foot, versus $10.00 to $20.00
per square foot. Discussions with suburban office leasing brokers and property
managers have indicated that, while rental rates and total concession packages
vary considerably from building to building and tenant to tenant, one major
trend has emerged. Specifically, as the face rental rate granted to tenants has
increased recently, a commensurate increase in the total concession package has
been offered. Two years ago, Class A office product was offering between $20.00
and $30.00 per square foot in tenant improvement allowances, while property
managers today typically quote tenant improvement allocations between $20.00 and
$35.00 per square foot, with the latter figure quoted for first generation
space.
COMPETING OFFICE PROPERTIES
In order to provide additional market-based assumptions regarding the
analysis of the subject property, we have also considered the competitive
environment of the subject, including comparable and competitive Class B office
buildings, based on conversations with knowledgeable and active market
participants within the Northbrook/Tri-State submarket. Our research revealed
five Class B suburban office buildings, which are considered to comprise the
known primary competition to the subject's office building over the short- to
intermediate-term. A map identifying the location of each property is presented
on the following facing page. The competing properties are detailed as follows
on the next few pages.
48
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
Insert Competing Properties Map
49
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
COMPETING PROPERTY NO. R-1
===================================================================
===================================================================
VIEW: 2100 SANDERS ROAD
COMPETING PROPERTY NO. R-1 is known as 2100 Sanders Road. This property is
approximately one-quarter mile west of I-294, along Sanders Road, in Northbrook,
Illinois. This property is situated across the street from the Caremark Towers I
& II office development. The building was constructed in 1986, and is owned by
Klaff Realty, LP. 2100 Sanders Road represents a three-story Class B suburban
office building containing a total net rentable area of 102,165 square feet.
2100 Sanders Road is currently 81.7 percent occupied with 18,702 square feet of
vacant space. The quoted net rental rate is currently $16.00 per square foot,
net, with an annual escalation of 3.0 percent. The 1998 taxes and operating
expenses were estimated to be $9.50 per square foot. Amenities at the property
include upgraded finishes, 24-hour access, nearby hotels and restaurants, and is
bordered on two sides by the Cook County Forest Preserve. The property has a
parking ratio of 3.21 per 1,000 square feet.
50
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
COMPETING PROPERTY NO. R-2
====================================================================
====================================================================
VIEW: CAREMARK TOWERS I & II
COMPETING PROPERTY NO. R-2 consists of two office buildings located at 2211 and
2215 Sanders Road in Northbrook, Illinois. Caremark Tower Two, which contains
190,000 square feet is fully occupied by Caremark Corp. a national healthcare
company. Caremark Tower One, which contains 166,331 square feet, is a
multi-tenant office building reported to be 91.8 percent occupied. Caremark
Tower I was constructed in 1979, and is five stories in height, while Caremark
Tower II was constructed in 1981, and is ten stories in height. The buildings
are located approximately one-half mile north of Interstate 294, along Sanders
Road. Caremark Tower I contains 15,265 square feet of vacant space, which
translates into an occupancy level of 91.8 percent. The quoted net rental rate
is currently $14.50 per square foot, net, with an annual escalation of 3.0
percent. The 1997 taxes and operating expenses were reported at $8.24 per square
foot. The two buildings have a combined, covered parking ratio of 3.60 per 1,000
square feet of space.
51
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
COMPETING PROPERTY NO. R-3
====================================================================
====================================================================
VIEW: 500 COMBINED CENTRE
COMPETING PROPERTY NO. R-3 is known as 500 Combined Centre, and is located at
500 Skokie Boulevard in Northbrook, Illinois. This property is situated along
the west side of Skokie Boulevard and is part of the Combined Centre office
complex. The Combined Centre contains three buildings constructed between 1979
and 1985. This six-story building contains 99,138 square feet of net rentable
area, and it was developed in 1979 and renovated in 1990. The current owner is
GE Investments Corporation and the management company is Hamilton partners.
Combined Centre 500 is currently 80.7 percent occupied with 19,134 square feet
of vacant space. The current asking rental rate is $13.00 per square foot, net.
This rental rate typically escalates by 3.0 percent per year. Taxes and
operating expenses at 500 Combined Centre are estimated to be $9.42 per square
foot for 1998. This building recently transacted in January 1997 (See Sales
Comparison and Income Approach). Amenities at this property include a banking
facility, conference facility, mail room, and nearby hotel.
52
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
COMPETING PROPERTY NO. R-4
=======================================================================
=======================================================================
VIEW: 707 COMBINED CENTRE
COMPETING PROPERTY NO. R-4 is known as 707 Combined Centre, and it is situated
along the west side of Skokie Boulevard, just north of its intersection with
Dundee Road, in Northbrook. The property's municipal address is 707 Skokie
Boulevard, Northbrook, Illinois. This property consists of a seven-story Class B
office building built in 1980, and renovated in 1986. 707 Combined Centre
contains a total of 119,793 square feet of net rentable area. The currently
quoted rental rate at 707 Combined Centre is $14.00 per square foot, net, with
an annual rent escalation rate of 3.0 percent. The building is currently 90.0
percent occupied with 11,981 square feet of vacant space. Taxes and operating
expenses at this property are estimated to be $9.48 per square foot for 1998.
Amenities at this property include an entrance atrium, exercise facilities and
on-site management. This building recently transacted in January, 1997 (See
Sales Comparison and Income Approach).
53
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
COMPETING PROPERTY NO. R-5
========================================================================
========================================================================
VIEW: 707 LAKE COOK ROAD
COMPETING PROPERTY NO. R-5 is known as 707 Lake Cook Road, and it is situated
along the south side of Lake-Cook Road, just west of its intersection with
Waukegan Road, in Deerfield. The property's municipal address is 707 Lake-Cook
Road, Deerfield, Illinois. 707 Lake-Cook Road was constructed in 1979 and
renovated in 1993, contains a total of 78,306 square feet. The property consists
of a single, three-story building with a ground-level lobby. 707 Lake-Cook Road
is currently 96.8 percent occupied with 2,497 square feet of vacant space. The
currently quoted rental rate is $19.75 per square foot, gross, with an annual
3.5 percent rent escalation. Operating expenses at 707 Lake-Cook Road amounted
to $8.15 per square foot in 1998, which results in a net rental rate of $11.60
per square foot. Amenities at this property include lower level storage, vending
room, and the adjacent Deerfield Metro Station. This building recently
transacted in January 1997 (See Sales Comparison and Income Approach).
54
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
According to a recent article published in the November 3, 1997 edition of
Crain's Chicago Business, the Chicago suburban office market is showing signs of
pent-up demand and developer's confidence in the market, as nearly 800,000
square feet of speculative office space will be completed in 1997, with another
1.25 million square feet of office space presently under construction for
completion in 1998, based on a report prepared by the Chicago CB Commercial Real
Estate Group Inc. As indicated by the preceding analysis, the Chicago suburban
office market has eased some of the "pent-up" demand for office space, with the
relatively strong levels of new construction that has occurred throughout the
suburban office markets. Furthermore, industry experts are expecting a larger
total for 1999. This office building boom marks a comeback from 1995, when no
speculative office space was built. According to Jeffrey S. Barrett, senior vice
president at CB Commercial, "The office space under construction doesn't exceed
current demand, which we estimate at about 2.0 million square feet." For
example, J. Randall Tieman, senior real estate director of Rosemont-based Opus
North Corporation stated that "pre-leasing demonstrates that there is a real
pent-up demand in today's market." Mr. Tieman's comment referenced the status of
the Opus North development known as Highland Landmark in Downers Grove, in which
the 250,000 square foot Class A speculative office building, which was completed
in October, 1997, was 85.0 percent pre-leased prior to completion. Construction
is now underway of Highland Landmark II, another 260,000 square foot Class A
speculative office building scheduled to be completed next year.
This pent-up demand is also being experienced in the subject's
Northbrook/Tri-State submarket, where Quadrangle is nearing completion of a
125,000 square foot, speculative, multi-tenant, Class A office building in
Deerfield, when the Fort James company came along and leased the entire
building, for a lease rate near that of the asking net rental rate of $16.25 per
square foot.
CONCLUSION
The Northbrook/Tri-State area has many positive factors which have
assisted it in becoming one of the primary office centers in the Chicago
metropolitan area, including affordable housing, abundant shopping, excellent
transportation systems and many other supporting amenities which attract office
workers. The Northbrook/Tri-State area is served by a convenient transportation
network, including two interstate highways (I-94 and I-294), several commuter
rail lines and convenient access to Chicago's O'Hare International Airport.
55
<PAGE>
OFFICE MARKET ANALYSIS
- --------------------------------------------------------------------------------
Although downtown Chicago continues to generate new tenants for suburban
Chicago, an increasing amount of leasing activity is due to the expansion of
firms which are already located in the area. Additionally, the continued shift
of the Chicago economy from a manufacturing base to a more service-oriented
base, has also helped increase demand for office space. Given continued improved
economic conditions, and considering the market position and locational
characteristics of the Northbrook/Tri-State corridor office market, we expect
this office market to remain one of the more dynamic suburban office submarkets
for the foreseeable future.
Investor activity for suburban office properties has also improved
dramatically during the past 18 months. Investor demand for well-located Class
A, as well as Class B suburban office properties is considered to be the
strongest in a number of years. Recent sales of Class A and B suburban office
buildings located in the Northbrook/Tri-State area, as well as recent sales of
Class A and B product throughout the metropolitan area, suggest a significant
improvement in property prices and required yield and capitalization rates.
Further discussions of the investor market for office properties will be
provided in the Income Approach section of this analysis.
56
<PAGE>
- --------------------------------------------------------------------------------
PLAT OF SURVEY
57
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
SITE DESCRIPTION
Location: The subject property is located
along the east side of I-294,
approximately one-quarter mile south
of the Milwaukee Avenue overpass,
within the City of Glenview, Cook
County, Illinois. The subject
property is specifically located at
1000 Milwaukee Avenue, Glenview,
Illinois.
Assessor's Parcel Numbers: According to the Cook County
Assessor's Office, the subject
property is identified by parcel
identification number 14-32-105-005-
0000. This is a new parcel number
for 1998.
Shape: The subject site is irregular in
shape (See Site Plan).
Area: Based on the ALTA/ACSM Land Title
Survey, prepared by Tri-L Survey,
Inc., dated December 22, 1994, the
subject property equates to 39.821
acres, or 1,734,603 square feet.
Frontage: The subject site has approximately
1,475 feet of frontage along the
east side of I-294. The subject
property has an average depth of
approximately 1,250 feet.
Topography: The subject site is generally level
as developed. A retention pond is
located in the south central portion
of the subject site.
Street Improvements: Interstate 294, which forms the
western boundary of the subject
site, is a six-lane, concrete-paved,
north-south aligned interstate
tollway, improved with concrete
center median. The subject site is
accessed by Zenith Drive, a two-
lane, asphalt-paved, roadway.
Milwaukee Avenue, which is located
approximately one-quarter mile east,
is a four-lane, asphalt-paved,
northwest-southeast aligned
58
<PAGE>
commercial roadway. The intersection
of Milwaukee Avenue and Zenith Drive
is signalized.
59
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Insert site plan
60
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Soil Conditions: We did not receive nor review a soil
report. However, we assume that the
soil's load-bearing capacity is
sufficient to support the proposed
structure. We observed no evidence
to the contrary during our physical
inspection of the property. The
parcel's drainage appears to be
adequate.
Utilities
Water: Water service is provided via a
private well, with back-up service
provided by the City of Glenview.
Sewer: Sewer service is provided by the
City of Glenview.
Electricity: Electricity is provided by
Commonwealth Edison Company.
Telephone: Primary telephone service is
provided by Ameritech.
Access: Accessibility to the subject site is
considered adequate via Milwaukee
Avenue. However, access via I-294 is
considered cumbersome, as the
nearest interchanges along I-294 are
located at Willow Road and Golf
Road, which are located
approximately two-miles north and
south of the subject property,
respectively.
Land Use Restrictions: We were provided with a title report
for review, dated December 12, 1997,
prepared by Commonwealth Land Title
Insurance Company. To our knowledge,
there are no easements,
encroachments, or restrictions that
adversely affect the site's use. We
recommend an attorney's opinion in
the final analysis whether any
adverse land use restrictions exist
on or about the subject site.
Cushman & Wakefield offers no
representation regarding any adverse
land use restrictions that may
affect the site's use.
Flood Hazard: According to Flood Insurance Rate
Map, Community Panel No. 170054-
0070-B, effective April 15, 1981,
the subject property under analysis
is located in Zone C, an area of
minimal flooding.
61
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Site Improvements: The subject site has a full
complement of site improvements
which include: concrete sidewalks,
professional landscaping, a
retention pond, landscaped
walkway's, and exterior lighting.
Hazardous Substances: Based on information provided by
Zenith, there is asbestos containing
material located at the subject
property in the form of
approximately 153,000 square feet of
asbestos containing floor tiles,
approximately 12,500 square feet of
asbestos containing material on the
exterior of the full floor
mechanical penthouse, and
approximately 500 square feet of
asbestos pipe covering on the kiln
exhaust duct. We are not aware of
any other potentially hazardous
materials which may have been used
in the construction of the
improvements. It is noted that we
were not provided with a cost
estimate for remediation of the
asbestos containing materials. We
have consulted Boelter & Yates to
estimate costs associated with the
remediation of the asbestos
containing materials in the subject
property. It is noted that the costs
provided are ballpark estimates
only, and were reported based on a
description of the asbestos
containing material, as provided by
Zenith. A detailed analysis of costs
associated with the remediation of
the asbestos containing materials
can be found in the Income Approach
section of this report.
Comments: The subject site has excellent
visibility from I-294, as the site
has approximately 1,475 linear feet
of frontage along the east side of
I-294. Accessibility to the subject
site is considered cumbersome from
I-294, as the nearest interchanges
along I-294 are located at Willow
Road and Golf Road, which are
located approximately two-miles
north and south, respectively.
Overall, the subject site is well
suited for its utilization, as a
seven-
62
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
story, suburban office building,
consistent with the zoning
requirements of the City of
Glenview.
On-site parking is available for
tenant use, with approximately 1,083
parking spaces provided for in the
surface parking lot, which provides
for a parking ratio of approximately
2.70 parking spaces per 1,000 square
feet of net rentable area. The
current parking ratio is considered
to be below standards for typical
suburban office buildings which
generally range from 3.00 to 4.00
parking spaces per 1,000 square feet
of net rentable area. It is a
special assumption of this report
that a minimum parking ratio of
approximately 3.50 parking spaces
per 1,000 square feet of net
rentable area is required at the
subject property, upon retrofit. As
such, we have allocated a capital
improvement cost to cover the
construction of an additional 400
surface parking spaces, which
results in an adjusted parking ratio
of 3.70 parking spaces per 1,000
square feet of net rentable area,
which is considered reasonable (see
Income Approach).
The developed floor-area-ratio (FAR)
of the subject property equates to
0.303:1, based on the subject's
existing gross building area of
526,266 square feet, and the
subject's gross site area of
1,734,603 square feet of land area.
However, the subject property is
reported to have zoning in-place for
an additional 177,000 square foot
office building (FAR) to be located
above the existing lobby. This is
considered to be surplus development
rights on an FAR basis. The
resultant FAR of the subject
property (inclusive of the
additional 177,000 square feet of
allowable building area) is 0.405:1,
as rounded. Typical FAR's for
suburban office buildings range from
0.25:1 to 0.50:1, and average
0.375:1. The subject property FAR is
considered reasonable. Applying an
FAR of 0.405:1 to the allowable
building area of 177,000 square feet
results in
63
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
a surplus land area of 437,037
square feet, or 440,000 square feet,
or 10.10 acres, as rounded.
64
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
IMPROVEMENTS DESCRIPTION
The subject improvements consist of a single-tenant, seven-story, Class B
corporate headquarters office building, containing approximately 401,000 square
feet of net rentable building area and 526,266 square feet of gross building
area, as provided by Zenith. Floor Plans are provided for reference on the
following facing pages.
GENERAL DATA
Year Built: The eight-story (inclusive of basement
level and full floor mechanical
penthouse), corporate headquarters
facility was constructed in 1974.
Building area: The subject property contains
approximately 401,000 square feet of net
rentable building area and 526,266
square feet of gross building area. The
net rentable area estimate is inclusive
of 7,760 square feet of lobby area. The
lobby area has been allocated to the
various floors as a per square foot
number, based on the individual floors
prorata share of net rentable building
area.
Building Height: The subject property is eight-stories in
height, including basement level, with a
full-floor mechanical penthouse on the
upper floor. It is noted that the
mechanical penthouse is not included in
our net rentable building area.
Construction Detail
Foundations: Reinforced concrete.
Framing: Structural steel columns and beams.
Ceiling Height: Finished ceiling heights are
approximately nine feet.
Floors: Reinforced concrete flooring.
Exterior: The exterior of the subject office
building is a combination of pre-cast
concrete, granite, and glass.
Windows: Windows are insulated tinted glass set
in aluminum frames.
65
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
66
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
INSERT FLOOR PLANS
67
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Loading Doors: The subject property has a single
shipping/receiving area, with five dock-
high spaces, and three drive-in doors
located in a common dock area.
Mechanical Detail
Heating and Cooling: Two, 1,350-ton, Carrier chillers provide
for adequate cooling. Two, HSI electric
boilers of 3,440 BTU's provide for
adequate heating. It is noted that the
HVAC system was originally designed to
handle an additional 177,000 square feet
of additional building area (see Special
Assumptions).
Electrical Service: The all electric building is supplied by
a 14,000-KVA electrical system. A 750-KW
generator is provided for back-up
service. Each floor is wired for
individual workstations.
Fire Protection: The improvements are fully sprinklered,
with the exception of half of the
mechanical penthouse floor, which has
smoke detectors located throughout.
Interior Detail
Floor Covering: Floors consist of various treatments
including carpeting, ceramic tile, and
vinyl tile.
Walls: Wall treatments include glass, ceramic
tile, gypsum board, and vinyl covered
gypsum board.
Lighting: Typically, strip fluorescent fixtures
with asymmetric reflectors. There are
also some incandescent track lighting,
decorative trim lighting, accent
lighting, and downlights.
Other: The subject property has an anechoic
chamber (completely sound proof),
located in the basement level.
68
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Insert building plans
69
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Site Improvements
On-Site Parking: The subject property currently has 1,083
surface parking spaces, which results in a
parking ratio of 2.70 parking spaces per
1,000 square feet of net rentable area. As
mentioned previously, the current parking
ratio of the subject property is below
typical standards of suburban office
buildings. As such, we have allocated a
capital improvement cost to accommodate the
construction of an additional 400 surface
parking spaces (see Income Approach). Upon
completion of the additional parking spaces,
the subject property will have a developed
parking ratio of 3.70 parking spaces per
1,000 square feet of net rentable building
area, which is considered reasonable.
Condition: The improvements are considered to be in
average condition.
Passenger Elevators
Number/Elevator Bank: Six-passenger elevators and one freight
elevator are available for tenant use.
Comments: In our opinion, based on the specifications
and drawings provided to the appraisers, as
well as our inspection of the subject
property, we believe the quality of the
subject property to be an average Class B
office building. In our analysis of the
subject property, we have assumed that the
subject property will be converted into a
multi-tenant facility. In order to make the
building presentable to prospective tenants,
our analysis assumes the interior of the
subject property will be completely
retrofitted. Generally speaking, the retrofit
is inclusive of a complete floor-to-ceiling
remodel (i.e., removal of all existing
interior demising and new build-out of the
interior). Upon completion of the retrofit,
the subject property is considered to be
reflective of a Class A-/B+ suburban office
building. Costs associated with the retrofit
are detailed in the Income Approach section
of this report, and the readers attention is
directed there.
70
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
The existing subject property parking lot is
considered to be in fair to average
condition, with numerous crack and potholes
noticed throughout. Our analysis assumes that
the existing parking lot will be
repaired/resurfaced (see Income Approach). In
addition, the existing landscaping at the
subject property is considered inadequate in
comparison to similar Class A-/B+ suburban
office buildings. In order to effectively
compete with similar office properties for
prospective tenants, the subject property
requires additional landscaping improvements.
As such, we have also allocated additional
capital improvement dollars for an upgrade of
the existing landscaping (see Income
Approach).
Visibility and identity of the improvements
is considered excellent, given the 1,475
square feet of linear frontage along I-294.
Access to the subject property is considered
somewhat cumbersome, however, as the nearest
interchanges with I-294 are located at Willow
and Golf Roads, which are located
approximately two miles north and south,
respectively.
71
<PAGE>
REAL PROPERTY TAXES AND ASSESSMENTS
- --------------------------------------------------------------------------------
The subject property is assessed for real estate tax purposes by the Cook
County Assessor's Office. The assessed value is based on 33.33 percent of the
Assessor's Opinion of the Fair Cash Value. Assessments are further subject to a
state equalization factor to make assessments uniform throughout the state. The
state equalization factor is adjusted each year and is applied to the concluded
assessed value to determine the equalized value, to which the tax rate is
applied. The 1997 equalization factor for Cook County is $2.1517. Real estate
taxes are paid in arrears; taxes are payable in two installments before June 1st
and September 1st of the respective year. The subject improvements are
identified by the following assessor's parcel number:
14-32-105-005-0000. The assessor's parcel number is new for 1998.
The tax parcel number, the assessed valuation, the state equalization
value and the total 1997 tax liability payable in 1998, regarding the subject
property, are presented in the table below.
<TABLE>
<CAPTION>
===============================================================================================================
REAL ESTATE TAXES
- ----------------------------------------------------------------------------------------------------------------
PARCEL NUMBER FAIR CASH STATE EQUALIZATION 1996 TAX LIABILITY
VALUE VALUATION PAYABLE IN 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
14-32-105-005-0000 $6,207,090 $2.1489 $1,140,568
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Based on the above, the total amount of real estate taxes payable in 1998,
for the subject property, amounts to $1,140,568. In our analysis, we have
stabilized real estate taxes for the subject property at $1,180,000 for
fiscal-year 1999.
72
<PAGE>
REAL PROPERTY TAXES AND ASSESSMENTS
- --------------------------------------------------------------------------------
ZONING MAP
73
<PAGE>
ZONING
- --------------------------------------------------------------------------------
According to the City of Glenview, the subject property is zoned I-1,
Limited Commercial District. According to the zoning ordinance, the
classification permits a variety of uses, such as: business, governmental, and
professional offices, data processing centers, radio and television studios,
public utility service use establishments, etc.
Restrictions in the I-1, Limited Commercial District are summarized as
follows: minimum front yard depth and setback of 100 feet, minimum side and rear
yard width and setback of 50 feet, maximum lot coverage of 33.333 percent and a
maximum building height of 35 feet. The building height may be exceeded by one
foot, for each ten feet of setback from the lot line, however, in no case can
the building height exceed 70 feet).
We are not experts in the interpretation of complex zoning ordinances, but
the subject property was reported to be a legal, non-conforming use. However, as
the subject property predates the zoning ordinance, it is considered to be in
conformance with the I-1 zoning ordinance.
Based upon information provided by Zenith, the subject property has
development rights for an additional 177,000 square feet of office space. In
addition, extensive planning, three dimensional models and substantial research
(including HVAC capability for an additional 177,000 square feet of space) has
been performed by Zenith for future space requirements. The additional space
would be constructed adjacent to and above the existing lobby area. It is a
special assumption of this report that the subject property has developmental
rights for an additional 177,000 square feet of office space (see Special
Assumptions).
We know of no deed restrictions, private or public, that further limit the
subject property's use. The research required to determine whether or not such
restrictions exist, however, is beyond the scope of this appraisal assignment.
Deed restrictions are a legal matter, and only a title examination by an
attorney or title company can usually uncover such restrictive covenants. Thus,
we recommend a title search to determine if any such restrictions do exist.
74
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
According to the Dictionary of Real Estate Appraisal, Third Edition (1993), a
publication of the Appraisal Institute, the highest and best use of the site as
though vacant is defined as:
Among all reasonable, alternative uses, the use that yields the highest
present land value, after payments are made for labor, capital and
coordination. The use of a property based on the assumption that the
parcel of land is vacant or can be made vacant by demolishing any
improvements.
Further, the highest and best use of the property as improved is defined
as:
The use that should be made of a property as it exists. An existing
property should be renovated or retained as is, so long as it continues to
contribute to the total market value of the property, or until the return
from a new improvement would more than offset the cost of demolishing the
existing building and constructing a new one.
We evaluated the site's highest and best use both as currently proposed
and as vacant. In both cases, highest and best use must meet four criteria. The
use must be (1) physically possible, (2) legally permissible, (3) financially
feasible, and (4) maximally productive.
HIGHEST AND BEST USE OF THE SUBJECT SITE - AS VACANT
The first test is what is physically possible. Our initial consideration
of the subject site, as vacant, concerns the land uses which are physically
possible on the subject parcel. The subject property contains approximately
1,734,603 square feet, or 39.821 acres of land area, with frontage and
visibility along I-294. The size and configuration of the site is felt to
provide suitable land development for a wide variety of land uses. Access is
considered adequate, due to the subject property's location just west of
Milwaukee Avenue along Zenith Drive. Street improvements, along Milwaukee Avenue
and Zenith Drive are also adequate. The physical characteristics of the site
provide for a wide range of potential land uses. Therefore, based on the above,
the subject site meets the first test of highest and best use, as vacant.
The second test is what is legally permissible. The subject site is zoned
I-1, Limited Commercial District, according to the City of Glenview. This zoning
classification permits office development. No change in zoning classification is
anticipated, and no significant deed restrictions or zoning laws would prevent
the site from being developed based on the permitted use, as previously cited in
our Zoning section of this report and reference is made thereto. Therefore,
based on the above, the subject site meets the second test of highest and best
use, as vacant.
75
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
The third test is what is financially feasible. As previously discussed in
our Office Market Analysis section of this report, office development appears to
be in demand, as evidenced by declining overall vacancy rates of the suburban
office market of metropolitan Chicago. The reader's attention is directed to our
Office Market Analysis section of this report for complete details regarding the
supply and demand forces, in relation to the subject. Therefore, based on the
above, the subject site meets the third test of highest and best use, as vacant.
The fourth test is what is maximally productive. The land sales located in
the Land Valuation section of the Cost Approach, clearly demonstrate that there
is demand for commercial development. Our concluded site value for the subject
property represents the most probable market value for the subject site, based
on our analysis presented in the Land Valuation section of this report. No
alternative use of the subject site meets the fourth test of highest and best
use. Occupancy levels, as indicated in our Office Market Analysis section of
this report, clearly demonstrate sufficient demand for office development.
Therefore, based on the above, the subject site meets the fourth test of highest
and best use, as vacant.
CONCLUSION OF HIGHEST AND BEST USE OF THE SUBJECT SITE - AS VACANT
Based on the above analysis, there exists a demand for the subject site.
The subject site's access, size and demand make it a desirable location for
commercial development, but more specifically, office use. The above analysis of
the subject site, as vacant, meets the four tests of highest and best use.
Therefore, in our opinion, the highest and best use of the subject site, as
vacant, is for office development.
HIGHEST AND BEST USE OF THE SUBJECT SITE - AS IMPROVED
Unlike the previous analysis of the subject site, as vacant, this analysis
considers the subject property as currently improved, with an evaluation as to
the physical, legal and financial appropriateness of the existing land use. This
analysis also considers whether the value of the site, as improved, exceeds the
value of the site, as vacant.
The first test is what is physically possible. Relative to the physical
considerations, the subject site, there are no apparent physical factors, such
as size, drainage, or other site characteristics that would adversely affect the
utility and/or existence of the subject improvements. Adequate accessibility is
provided, with excellent visibility provided via I-294. The subject property has
an existing parking ratio of 2.70 per 1,000 square feet of net rentable area,
which is below standards for typical suburban office buildings. The readers
attention is directed to the Income Approach section of this report for a
detailed discussion on additional parking requirements. The subject site's size
is more than adequate to accommodate the
76
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
subject improvements. Municipal utilities are also available, and street
improvements are adequate.
SURPLUS DEVELOPMENT POTENTIAL
The subject property, as improved, includes surplus development potential
considered appropriate for near-term office development given the strength of
the Northbrook-Tri-State office submarket. This is supported by numerous factors
including the fact that the existing improvements have a below-average
floor-area-ratio (FAR) of 0.303:1. Typically, suburban office building exhibit a
range in FARs between 0.35 and 0.45:1. It was reported by Zenith, that the
subject property has zoning rights for an additional 177,000 square feet of
building area, which results in a developable FAR of 0.405:1. Therefore, based
upon the current utilization of the subject site (as constructed), it appears
that the existing improvements represent an under utilization of the site.
Consequently, we have apportioned the total subject site into a primary and
surplus site area based on developed, or developable, building areas.
Based on information provided by Zenith, the site has potential for an
additional 177,000 square feet of building area. Therefore, including the
existing development, the site has a total development potential of
approximately 700,000 (526,266 + 177,000) square feet. Assuming another 177,000
square feet of building area were developed, the subject's FAR would rise to
0.405:1, which is within the previously established market range. Applying an
FAR of 0.405:1 to the allowable building area of 177,000 square feet results in
a surplus land area of square feet, or 440,000 square feet, or 10.10 acres, as
rounded, which forms the basis of the land area under appraisal.
The second test is what is legally permissible. The subject site is zoned
I-1, Limited Commercial District, which permits the development of corporate
headquarters facilities, among other office uses. Based upon our review of the
I-1 zoning classification, the subject property's development meets the test of
legal permissibility. The reader's attention is directed to the Zoning section
of this report, and reference is made thereto.
Demand is the most important criteria regarding financial feasibility. Our
research detailed in the Office Market Analysis section of this report, clearly
indicates that there is a demand for office development within the subject's
office submarket. Also, the Class A vacancy rate for the subject's
Northbrook/Tri-State submarket currently displays a vacancy rate of 7.70
percent, as of First Quarter 1998, while the overall vacancy rate for all
classes is at 9.90 percent. In addition, rental rates have been steadily rising
over the past 12 to 24 months. Based on this analysis, the subject site, as
presently improved, meets the test of financially feasibility.
77
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
The subject property was constructed in 1974 for use as a corporate
headquarters facility for the Zenith Electronics Corporation. Although the
subject property has been adequately maintained, the subject improvements appear
worn and dated. As such, our analysis is based upon a reconfiguration/retrofit
of the existing improvements from single-tenancy to multi-tenancy in order to
allow the subject property to effectively compete within the market. Again, the
readers attention is directed to the Income Approach section of this report for
a detailed discussion regarding the reconfiguration/retrofit of the subject
improvements.
The fourth test is what is maximally productive. The most important
criteria for this analysis is whether the subject property, as vacant, exceeds
the value of the property, as built. The three approaches to value estimated for
the subject property clearly demonstrate that the value of the improvements
exceeds the value of the site, as vacant. Our final conclusion of value exceeds
the value of the subject site, as vacant. No alternative use of the subject
property meets the four tests of highest and best use, as improved. Based on the
above, the subject property, as currently improved, meets the test of maximum
productivity.
CONCLUSION OF HIGHEST AND BEST USE OF THE SUBJECT PROPERTY - AS IMPROVED
Based on the above four tests of highest and best use, it is our opinion
that the subject property improvements as presently improved represents the
highest and best use of the site.
78
<PAGE>
VALUATION PROCESS
- --------------------------------------------------------------------------------
Appraisers typically use three approaches in valuing real property: the
Cost Approach, the Income Approach, and the Sales Comparison Approach. The type
and age of the property and the quantity and quality of data affect the
applicability of each approach in a specific appraisal situation.
COST APPROACH
The Cost Approach is a method whereby accrued depreciation is deducted
from the cost new of the improvements, and this is added to the land value. The
resultant figure indicates the value of the whole property. Generally, the land
value is obtained through the separate application of the Sales Comparison
Approach. Replacement cost new of the improvements is estimated on the basis of
current prices for the component parts of the building less depreciation,
computed after analyzing the disadvantages or deficiencies of the existing
building as compared to a new building. Adequate land transactions have occurred
within the subject's marketplace to reasonably estimate land value for the
subject site. However, given the advanced age and unique nature of the subject
improvements, it is our opinion that the reliability of this approach is
significantly reduced in this instance. Therefore, we have not utilized the Cost
Approach in this analysis.
SALES COMPARISON APPROACH
In the Sales Comparison Approach, the appraiser gathers data on sales of
comparable properties and analyzes the nature and condition of each sale, making
logical adjustments for dissimilar characteristics. Typically, a common
denominator is found such as price per square foot or an income multiplier. The
Sales Comparison Approach gives a good indication of value when sales of similar
properties are available. In this instance, there is sufficient data available
to utilize this approach.
INCOME APPROACH
The Income Approach is predicated upon the assumption that there is a
definite relationship between the amount of income the property will earn and
its value. This approach is based upon the principal that value is created by
the expectation of benefits derived from the future. Net income is converted
into value by the capitalization process. Because the subject is an
income-producing property, the Income Approach is particularly pertinent to this
appraisal.
The appraisal process is concluded by a review and re-examination of each
of the approaches to value that have been employed. Consideration is given to
the type and
79
<PAGE>
reliability of the data used, and the applicability of each approach. Finally,
the approaches are reconciled and a final value is concluded.
80
<PAGE>
Land sale map
81
<PAGE>
LAND VALUATION
- --------------------------------------------------------------------------------
LAND VALUATION
We used the Sales Comparison Approach to estimate land value. In this
method, we analyzed prices buyers have recently paid for similar sites in the
subject's competing area. Our value estimate was derived from prices of recently
sold comparable sites, which offer similar locational attributes. In making
comparisons, we adjusted the sales prices for differences between the subject
and the comparable properties. Presented on the following facing page is a
summary of pertinent details of sold sites that we compared with the subject
site. A map identifying the locations of each of the respective land sales
utilized in this analysis is presented on the facing page.
The following is a detailed discussion of each of the land sales utilized
in estimating the market value of the subject site, as if vacant and available
for development.
COMPARABLE LAND LISTING L-1 is located within the College Park at
Bannockburn office park, in Bannockburn, Lake County, Illinois. This site
has approximately 1,147 linear feet of frontage along Interstate 94, and
is the last remaining site within the park. This site contains
approximately 17.12 acres, or 745,747 square feet of land area. The
current listing price is $7,457,747, or approximately $10.00 per square
foot. Utilizing the planned build-out for the site of 250,000 square feet,
implies a price per FAR of $29.83 per square foot. This listing has
superior interstate access as compared to the subject site, and is located
within an attractive, planned business park setting. However, secondary
emphasis has been placed on this listing, because listings typically sell
for less than the asking price, and the fact that the most recent land
sale within the College Park at Bannockburn office park transacted on a
price per FAR of approximately $23.34 per square foot.
COMPARABLE LAND SALE L-2 is located along the west side of West Field
Court, within the Conway Park at Lake Forest, in Lake Forest, Lake County,
Illinois. The sale property also enjoys considerable exposure along the
east side of Interstate 94, however, there is no access to the parcel via
this roadway. This sale occurred in November of 1996 and comprised a site
area of 19.86 acres of developable land area. The seller was American
National Bank & Trust No. 100684-01, and the buyer was FD Limited
Partnership. The buyer subsequently developed the site with a 268,436
square foot Class A office building. The purchase price of the property
was $6,271,250, or approximately $7.25 per square foot, or $23.36 per FAR.
This sale enjoys superior locational characteristics relative to the
subject property.
82
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
COMPARABLE LAND SALES SUMMARY
====================================================================================================================================
Comp. Sale Size/AC Maximum FAR Price SF
------- ----------- --------
No. Location Date Sale Price Size/SF Dev. Density Zoning Price FAR
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
L-1 College Park at Bannockburn Current $7,457,472 17.12 AC 250,000 SF Office $10.00/SF
-------- ---------- ---------
W/S of Lakeside Drive Listing 745,747 SF 0.34:1 $29.83/FAR
Bannockburn, Lake County, Illinois
- ------------------------------------------------------------------------------------------------------------------------------------
L-2 Conway Park at Lake Forest 11/96 $6,271,250 19.86 AC 268,436 SF Office $7.25/SF
-------- ---------- --------
1900 West Field Court 865,041 SF 0.31:1 $23.36/FAR
Lake Forest, Lake County, Illinois
- ------------------------------------------------------------------------------------------------------------------------------------
L-3 Riverwoods Corporate Center 11/96 $7,300,000 25.09 AC 400,000 SF Office $6.68/SF
-------- ---------- --------
NWC of Lake-Cook Road & Saunders Road 1,092,920 SF 0.37:1 $18.25/FAR
Riverwoods, Lake County, Illinois
- ------------------------------------------------------------------------------------------------------------------------------------
L-4 Spring Lake Business Park 9/95 $1,787,395 7.20 AC 125,000 SF Office $5.70/SF
------- ---------- --------
425 Spring Lake Drive 313,632 SF 0.40:1 $14.30/FAR
Itasca, DuPage County, Illinois
- ------------------------------------------------------------------------------------------------------------------------------------
L-5 College Park at Bannockburn 8/95 $2,333,900 7.50 AC 100,000 SF Office $7.14/SF
------- ---------- --------
1000 Lakeside Drive 326,700 SF 0.31:1 $23.34/FAR
Bannockburn, Lake County, Illinois
====================================================================================================================================
Subj. Zenith Corporate Headquarters -- $ -- 39.821 AC 776,266 SF(1) Office $ --
--------- ----------
1000 Milwaukee Avenue 1,734,603 SF 0.45:1
Glenview, Cook County, Illinois
====================================================================================================================================
/(1)/: As Improved, the subject property comprises 526,266 square feet of gross building area. To this figure we have added the
estimated surplus development potential of 177,000 square feet of gross building area. While presented together above, the
market value of the primary and surplus site areas will be addressed individually later in this section.
==================================================================================================================================
</TABLE>
<PAGE>
LAND VALUATION
- --------------------------------------------------------------------------------
COMPARABLE LAND SALE L-3 is located at the northwest corner of Lake-Cook
and Saunders Roads, in the Riverwoods Corporate Center office park, within
the Village of Riverwoods, Lake County, Illinois. This sale occurred in
November of 1996 and comprised a net developable site area of 25.09 acres.
The seller was Riverwoods Partners Limited Partnership. The buyer, Novus
Credit Services (Dean Witter), intends on developing a 400,000 square foot
corporate headquarters for Dean Witter. The purchase price was $7,300,000,
or approximately $6.68 per square foot. The maximum build-out of the site
was reported to be approximately 400,000 square feet, which implies a
price per FAR of $18.25 per square foot. This sale is considered to have
similar locational characteristics as compared with the subject.
COMPARABLE LAND SALE L-4 is located at 425 Spring Lake Drive, within the
Spring Lake Business Park, Itasca, DuPage County, Illinois. This sale
occurred in September of 1995 and comprised a net developable site area of
7.20 acres. The buyer was American National Bank & Trust, and the seller
was Amli Partners, Ltd., 85-II. The site was subsequently developed with a
two-story, single-tenant, Class A office building. The building is
reported to have considerable expansion potential. The purchase price of
the property was $1,787,395, or approximately $5.70 per square foot. The
maximum build-out of the site was reported to be approximately 125,000
square feet, which implies a price per FAR of $14.30 per square foot.
Although this site has visibility from Interstate 290, access is
considered somewhat cumbersome, as the nearest interchanges with I-290 are
located at Lake Street and Thorndale Road. This sale is considered to be
inferior to the subject property in terms of location.
COMPARABLE LAND SALE L-5 is located along the west side of Lakeside Drive,
in the College Park at Bannockburn office park, at 1000 Lakeside Drive, in
the Village of Bannockburn, Lake County, Illinois. This sale occurred in
August of 1995 and comprised a net developable site area of 7.50 acres.
The seller was College Park Limited Partnership. The buyer, Bannockburn
Associates, LLC, subsequently developed the site with a single-tenant,
suburban office building which will be owner occupied. The building was
completed in 1997, is one-story in height, and reportedly consists of
60,000 square feet of office space. The building is reported to have
considerable expansion potential. The purchase price was $2,333,900, or
approximately $7.14 per square foot. The maximum build-out of the site was
reported to be approximately 100,000 square feet, which implies a price
per FAR of $23.34 per square foot. This sale is considered to have
superior locational characteristics as compared with the subject.
LAND SALE ANALYSIS
The FAR indications of our comparable sales data range from $14.30 to
$29.83 per square foot of FAR, with an average unit sales price per square foot
of FAR of $21.82. The comparable sales range in development potential from
100,000 to 400,000 square feet of building area, with an average development
potential of approximately 230,000 square feet of building area, as rounded. The
average floor area ratio for the comparables is approximately 0.35:1.
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<PAGE>
LAND VALUATION
- --------------------------------------------------------------------------------
The value of a land parcel is influenced by various factors. The
fundamental factors believed to be of particular significance in most instances
are: passage of time, size, location, zoning, utility, highest and best use, and
accessibility. These items must be carefully weighed in a comparative market
analysis so reasonable value adjustments may be applied.
Typically, larger tracts of land tend to sell at lower unit sales prices
than their smaller counterparts, all other factors being equal. The analysis of
utility considers such physical characteristics as shape, depth, frontage,
corner influences, topography and the availability of utility services. The
analysis of location considers such factors as exposure or visibility,
accessibility, and the quality of the surrounding area. The analysis of passage
of time considers such factors as appreciation in land values over time.
The comparables presented in this analysis are considered the most
pertinent information available, and are believed to provide a reasonable basis
with which to form an opinion of land value for the subject site, as if vacant
and available for development. We attempted to quantify the various adjustments;
however, due to the varying factors associated with the sales, quantified
adjustments are difficult at best. The most market-oriented unit of comparison
for parcels such as the subject is the sales price per acre of land area. All
comparable sales were analyzed on this basis.
It should be noted, that the qualitative analysis which follows is
primarily for informational purposes; the intent being to assist the reader in
the thought process used to compare the relative similarities and
dissimilarities of the sales to the subject, with the ultimate result being a
plausible market value conclusion. However, because the trading of real estate
occurs in a very imperfect market, coupled with the fact that no two land sales
are exactly alike, the use of paired sales to derive quantifiable adjustments,
though preferable in theory, is not generally practical in the marketplace. The
reasons being that even in the most ideal circumstances, the quality and
uniformity of data is insufficient to produce accurate results, not to mention
the intangible factor of motivation. As such, the data could conceivably be
manipulated to producing varying results. Therefore, the reader should be
cautioned that the adjustments set forth herein are not to be construed as
absolute, but are provided as a visual aid in demonstrating the logic and
reasonableness of the conclusion.
MARKET CONDITIONS
This adjustment, which is also referred to as the time adjustment reflects
the change in market conditions from the sale date of a comparable to the
valuation date of the subject. As
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<PAGE>
LAND VALUATION
- --------------------------------------------------------------------------------
discussed in the Office Market Analysis, the local market has continued to
witness relatively significant improvements in overall occupancy levels,
achieved rental rates, etc., over the past 12 to 24 months. As such, a 5.0
percent annual upward adjustment for this factor was made.
LOCATION
The analysis of location considers such factors as exposure, visibility,
proximity to major thoroughfares and the quality of the surrounding development.
Although the subject property has excellent visibility and exposure along I-294,
the subject property has cumbersome access characteristics, as the nearest
interchanges along I-294 are located approximately two miles north and south of
the subject property. Comparables L-1 and L-5 are located within the College
Park at Bannockburn office park, and are considered to have superior locational
characteristics as compared to the subject property, and a downward adjustment
is warranted. Comparable L-2 is located within the Conway Park at Lake Forest
office park, and is considered to have superior locational characteristics as
compared to the subject property, and a downward adjustment is warranted.
Comparable L-3 is located at the NWC of Lake-Cook Road and Saunders Road.
Although this sale does not have visibility along an interstate, it is
considered to have good access characteristics, as I-94 is located approximately
one-mile west along Lake-Cook Road. Overall, comparable L-3 is considered to
have similar locational characteristics as compared to the subject property and
no adjustment is warranted. Comparable L-4 is located within the Spring Lake
Business Park, which has cumbersome locational characteristics, similar to the
subject property, as the nearest interchanges with I-290 are located
approximately two miles north and south of the subject property. In addition,
the overall quality of development within the business park is considered
inferior to the subject property. Overall, comparable L-4 is considered to have
inferior locational characteristics as compared to the subject property, and an
upward adjustment is warranted.
SIZE
All other things being equal, smaller parcels of land typically sell for a
slight premium versus their larger counterparts. All the comparable land sales
are considered to be superior in size in comparison to the subject property, and
a downward adjustment is warranted.
UTILITY (PHYSICAL CHARACTERISTICS)
The analysis of utility considers such factors as shape, depth, frontage,
plottage, topography, and the availability of utility services. However, because
the main valuation indicator utilized in this analysis is the price per FAR
indication, it is our opinion that the
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<PAGE>
LAND VALUATION
- --------------------------------------------------------------------------------
necessity for utility adjustments is significantly reduced. Therefore, no
utility adjustments have been applied to the comparables.
The following chart represents an adjustment grid of our comparable sales
in relation to the subject site.
<TABLE>
<CAPTION>
================================================================================================================
LAND SALES ADJUSTMENT GRID
SALES COMPARED TO SUBJECT PROPERTY
- ----------------------------------------------------------------------------------------------------------------
NET INDICATED
SALE SALE MARKET ADJUSTED ADJUST- VALUE OF
NO. PRICE/FA CONDITIONS PRICE/FAR LOCATION UTILITY SIZE MENT SUBJECT/FAR
R
================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
L-1 $29.83 Superior $25.36 Superior Similar Superior Superior $17.75
- ----------------------------------------------------------------------------------------------------------------
-15% -10% 0% -20% -30%
================================================================================================================
L-2 $23.36 Inferior $24.53 Superior Similar Superior Superior $15.94
- ----------------------------------------------------------------------------------------------------------------
+5% -15% 0% -20% -35%
================================================================================================================
L-3 $18.25 Inferior $19.16 Similar Similar Superior Superior $17.26
- ----------------------------------------------------------------------------------------------------------------
+5% 0% 0% -10% -10%
================================================================================================================
L-4 $14.30 Inferior $15.73 Inferior Similar Superior Similar $15.73
- -----------------------------------------------------------------------------------------------------------------
+10% +20% 0% -20% 0%
================================================================================================================
L-5 $23.30 Inferior $25.63 Superior Similar Superior Superior $17.94
- ----------------------------------------------------------------------------------------------------------------
+10% -10% 0% -20% -30%
================================================================================================================
</TABLE>
CONCLUSION - LAND VALUE
The comparable land sales indicate an adjusted range of unit sales prices
from $15.73 to $17.94 per square foot of developable building area (FAR), with
an average adjusted sales price of $16.92 per FAR. Recall that on an unadjusted
basis, the average price per FAR was substantially higher at $21.82. After
considering all of the above factors in relation to the subject site, we believe
the value of the subject site would approximate $17.00 per square foot of
developable FAR. The total site value is summarized below:
<TABLE>
<CAPTION>
========================================================================================================
LAND VALUATION
--------------------------------------------------------------------------------------------------------
DEVELOPMENT
POTENTIAL X UNIT SALES PRICE/FAR = ESTIMATED VALUE
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
703,266 RSF x $17.00 = $11,950,000 (Rd)
========================================================================================================
</TABLE>
87
<PAGE>
LAND VALUATION
- --------------------------------------------------------------------------------
Based on the preceding information, we believe the market value of the
subject site is $11,950,000, as rounded.
88
<PAGE>
LAND VALUATION
- --------------------------------------------------------------------------------
PRIMARY AND SURPLUS LAND VALUE ALLOCATION
We have applied the estimated $17.00 per FAR to the primary and surplus
site components in order to obtain allocated land values as follows:
<TABLE>
<CAPTION>
===============================================================================================================
ALLOCATED LAND VALUATION
===============================================================================================================
ALLOCATED LAND DEVELOPMENT SALES ESTIMATED
AREA POTENTIAL X PRICE/FAR = VALUE AS ROUNDED
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Primary Site 526,266 GBA x $17.00 = $ 8,946,522 $ 8,950,000
Surplus Site 177,000 GBA x $17.00 = $ 3,009,000 $ 3,000,000
- ---------------------------------------------------------------------------------------------------------------
Total Site 703,266 GBA x $17.00 = $11,955,522 $11,950,000
===============================================================================================================
</TABLE>
Based upon the foregoing, the market value of the primary site, as vacant,
is estimated at $8,950,000, as rounded. The surplus land area (for future
expansion) has an estimated market value of $3,000,000, as rounded.
89
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
METHODOLOGY
In the Sales Comparison Approach, we estimated the value of the subject by
comparing it with similar, recently sold properties in the surrounding or
competing area. Inherent in this approach is the principle of substitution,
which holds that when a property is replaceable in the market, its value tends
to be set at the cost of acquiring an equally desirable substitute property,
assuming that no costly delay is encountered in making the substitution.
By analyzing sales that qualify as arms-length transactions between
willing and knowledgeable buyers and sellers, we can identify value and price
trends. The sold properties must be comparable to the subject in physical,
locational, and economic characteristics. The basic steps of this approach are:
1. research recent, relevant property sales and current offerings
throughout the competitive area;
2. select and analyze properties that are similar to the subject,
considering changes in economic conditions that may have occurred
between the sale date and the date of value, and other physical,
functional, or locational factors;
3. identify sales that include favorable financing and calculate the
cash equivalent price;
4. reduce the sale prices to a common unit of comparison such as price
per square foot of net rentable building area, gross income
multiplier;
5. make appropriate adjustments to the prices of the comparable
properties;
6. interpret the adjusted sales data and draw a logical value
conclusion.
The most widely-used and market-oriented unit of comparison for properties
such as the subject is the sales price per square foot of net rentable building
area. All comparable sales were analyzed on this basis. On the following page is
a summary of the improved, sold properties that we compared with the subject. A
map identifying the locations of each of the comparable properties in relation
to the subject is presented on a subsequent page.
90
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
SUMMARY OF COMPARABLE SUBURBAN OFFICE SALES
====================================================================================================================================
DATE OF SALES PRICE NET RENTABLE SALES PRICE/SF
COMP. SALE BUILDING AREA OF NRA
-------------
NO. LOCATION AGE
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
I-1 Motorola 9/97 $ 7,825,000 123,000 SF $63.62/SF
----------
5201 Tollview Drive 1975
Rolling Meadows, Illinois
- ------------------------------------------------------------------------------------------------------------------------------------
I-2 One Century Center 9/97 $19,875,000 213,348 SF $93.16/SF
----------
1750 East Golf Road 1985
Schaumburg, Illinois
- ------------------------------------------------------------------------------------------------------------------------------------
I-3 707 Lake Cook Road 2/97 $ 5,150,000 78,306 SF $65.77/SF
---------
Deerfield, Illinois 1979
- ------------------------------------------------------------------------------------------------------------------------------------
I-4 Combined Centre 1/97 $ 23,823,000 282,060 SF $84.46/SF
----------
500, 505, 707 Skokie Boulevard 1979-1985
Northbrook, Illinois
- ------------------------------------------------------------------------------------------------------------------------------------
I-5 100 Northwest Point Road 12/95 $ 17,500,000 234,000 SF $74.79/SF
----------
Elk Grove, Illinois 1984
- ------------------------------------------------------------------------------------------------------------------------------------
Subject Zenith --- --- 401,000 SF/(1)/ ---
----------
Headquarters Office Building 1974
1000 Milwaukee Avenue
Glenview, Cook County, Illinois
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
========================================================================
OAR % $NOI/SF
COMP.
NO.
========================================================================
<S> <C> <C>
I-1 N/A N/A
- ------------------------------------------------------------------------
I-2 5.72% $ 5.33/SF
- ------------------------------------------------------------------------
I-3 10.49% $ 6.90/SF
- ------------------------------------------------------------------------
I-4 10.07% $ 8.51/SF
- ------------------------------------------------------------------------
I-5 N/A N/A
- ------------------------------------------------------------------------
Subject --- $ 13.75/SF(1)
- ------------------------------------------------------------------------
(1) Subject's projected net operating income for Fiscal Year 2002
========================================================================
</TABLE>
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
SALES COMPARISON APPROACH ANALYSIS
Presented on the preceding page is a summary of recent suburban office
building transactions, from which price trends may be identified for the
extraction of value parameters. Comparability, in both physical and economic
characteristics, are the most important criteria in analyzing the sales in
relation to the subject property. However, it is also extremely important to
recognize the fact that office buildings of the subject's caliber are distinct
entities by virtue of age and design, visibility and accessibility, tenancy,
amenities, identity, and location. Thus, the Sales Comparison Approach, when
applied to a property such as the subject, can at best only outline the
parameters in which the typical investor operates.
The typical purchaser of the subject property includes both foreign and
domestic insurance companies, office building developers, and, pension funds.
The large capital requirements necessary to participate in this market and the
expertise demanded to successfully operate an investment of this type both limit
the number of active participants and, at the same time, expand the geographic
bounds of the marketplace to include the entire country, as well as foreign
investors.
Our investigations revealed five closed suburban office building sales.
Presented on the facing page is a summary of the improved, sold properties that
we compared with the subject property. The most widely-used and market-oriented
units of comparison for properties such as the subject are the sales price per
square foot of net rentable building area purchased, and the net income
multiplier extracted from an analysis of the sales. It is noted that several of
the sales presented are owner-user buildings, and were not generating income at
the time of sale, which does not allow for a net income multiplier analysis.
However, they are reflective of what investors are paying for large
institutional properties such as the subject property. The following is a
detailed discussion of each of our comparable sales. A map identifying the
locations of each of our comparable office building sales is presented on the
following page.
92
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
This is not a facing page it is a forward page.
COMPARABLE OFFICE BUILDING SALES map
93
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
IMPROVED PROPERTY SALE I-1
=====================================================================
=====================================================================
VIEW: MOTOROLA
IMPROVED PROPERTY SALE I-1, known as Motorola, is located at 5201 Tollview
Drive, Cook County, Illinois. Motorola purchased this Class B office
building from Hewlett-Packard Co., for a reported purchase price of
$7,825,000 in November, 1997. The terms of sale are reportedly all cash to
the seller; therefore, a cash equivalent sales price adjustment was not
required. The property was constructed in 1975, of good quality materials.
The three-story office building contains a total of 123,000 square feet of
net rentable building area, and is situated on 8.85 acres of land area. At
the time of sale, the office building was 100.0 percent occupied by
Hewlett-Packard, and will be subsequently occupied by Motorola. As this was
an owner-occupied building at the time of sale, there is no operating income
and expense information available. The property was considered to be in
average to good condition at the time of sale. The indicated unit sales
price per square foot is $63.62. The above information, was provided by and
verified by the purchaser, and COMPS, Inc., a research service. The recorded
document number is COC-66283-01-98, according to the Cook County Recorder of
Deeds.
94
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
IMPROVED PROPERTY SALE I-2
=====================================================================
=====================================================================
VIEW: ONE CENTURY CENTER
IMPROVED PROPERTY SALE I-2, is located at 1750 East Golf Road, in
Schaumburg, Cook County, Illinois. The 11-story, Class B office building was
constructed in 1985, and contains 213,348 square feet of net rentable
building area and is situated on 8.242 acres of land area. The building
transacted in September, 1997 for a reported purchase price of $19,875,000,
or $93.16 per square foot. The terms of sale were all cash to the seller;
therefore, a cash equivalent sales price adjustment was not required. The
grantor was Pioneer Life Insurance Co. and the grantee was Great Lakes REIT,
L.P. Based on the reported fiscal year 1997 net operating income of
$1,136,101, or $5.33 per square foot, a 5.72 percent capitalization rate is
indicated. The overall capitalization rate is below market levels, due to
several large, below market leases (approximately 23.0 percent of the
building) which are scheduled to roll over in 1998. The above information,
purchase price and terms of sale were provided by and verified by the
purchaser, Great Lakes REIT L.P., and COMPS, Inc., a research service. The
recorded document number is COC-61601-11-97, according to the Cook County
Recorder of Deeds.
95
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
IMPROVED PROPERTY SALE I-3
=====================================================================
=====================================================================
VIEW: 707 LAKE COOK ROAD
IMPROVED PROPERTY SALE I-3, is located at 707 Lake Cook Road, in Deerfield,
Lake County, Illinois. The three-story, multi-tenant, Class B office
building was constructed in 1979, and renovated in 1993, and is situated on
5.235 acres of land area. The building transacted in February, 1997 for a
reported purchase price of $5,150,000, or $65.77 per square foot. The terms
of sale were all cash to the seller; therefore, a cash equivalent sales
price adjustment was not required. The grantor was 707 Lake Cook Road, L.P.
and the grantee was United of Omaha Life Insurance Co. Based on the reported
fiscal year 1997 net operating income of $540,235, or $6.90 per square foot,
a 10.49 percent capitalization rate is indicated. The property was
considered to be in average to good condition at the time of sale. Tenants
are primarily local and regional, with Deloitte & Touche being the only
exception, occupying the entire second floor. The above information,
purchase price and terms of sale were provided by and verified by the
selling broker, and COMPS, Inc., a research service. The recorded document
number is COC-58953-07-97, according to the Cook County Recorder of Deeds.
96
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
IMPROVED PROPERTY SALE I-4
=====================================================================
=====================================================================
VIEW: COMBINED CENTRE
IMPROVED PROPERTY SALE I-4, is located at 500, 555 and 707 Skokie Boulevard,
and is known as Combined Centre. Combined Centre is a three building complex
located in the Village of Northbrook, Cook County, Illinois. The three
building Class B office complex contains approximately 282,060 square feet
of space constructed between 1979 and 1985, and is situated on 14.89 acres
of land area. The property transacted in January, 1997, for a reported
purchase price of $23,823,000, or $84.46 per square foot. The terms of sale
were all cash to the seller; therefore, a cash equivalent sales price
adjustment was not required. The grantor was Skokie Dundee Limited
Partnership and the grantee was Combined Centre RPF III and GE Investments.
At the time of purchase, the property was 95.6 percent occupied. Based on
the reported fiscal year 1997 net operating income of $2,398,976, or $8.51
per square foot, a 10.07 percent capitalization rate is indicated. The
property was considered to be in average to good condition at the time of
sale. The above information, purchase price and terms of sale were provided
by and verified by the selling broker, and COMPS, Inc., a research service.
The recorded document number is COC-53545-02-97, according to the Cook
County Recorder of Deeds.
97
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
IMPROVED PROPERTY SALE I-5
=====================================================================
=====================================================================
VIEW: ADP, INC.
IMPROVED PROPERTY SALE I-5, known as ADP, Inc., is located at 100 Northwest
Point Boulevard, Cook County, Illinois. ADP, Inc., purchased this Class B office
building from Digital Equipment Co., for a reported purchase price of
$17,500,000 in December, 1995. The terms of sale are reportedly all cash to the
seller; therefore, a cash equivalent sales price adjustment was not required.
The property was constructed in 1984, of good quality materials. The five-story
office building contains a total of 234,000 square feet of net rentable building
area, and is situated on 25.962 acres of land area. At the time of sale, the
office building was 100 percent occupied by Digital Equipment Co., and has
subsequently been occupied by ADP, Inc. As this was an owner occupied building
at the time of sale, there is no operating income and expense information
available. The property was considered to be in average to good condition at the
time of sale. The indicated unit sales price per square foot is $74.79. The
above information, was provided by and verified by the listing broker, and
COMPS, Inc., a research service. The recorded document number is
COC-50382-03-96, according to the Cook County Recorder of Deeds.
98
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
Since this approach relies on physical units of comparison, it requires an
adequate sample of recently sold properties that possess physical, economical
and financial comparability to the subject. Implicit in this definition of
comparability is the concept of utility, and that the motivation and needs of a
particular segment of market demand are comparably met or served.
What constitutes an adequate market sample is dependent on the type of
property and the market context. With respect to suburban office buildings,
there generally exists a relatively high degree of economic and financial
comparability, as well as reasonable physical comparability, together with a
level of sales activity sufficient to give credence to the Sales Comparison
Approach. A search of the Metropolitan Chicago suburban office market revealed
two single-tenant office building sales and three multi-tenant office building
sales, which are utilized within this analysis.
It is noted that comparability does not imply an identical or exact
duplicate, but rather the possession of a similar utility and affected by
similar supply and demand forces. As such, differences exist between the subject
and the comparables that must be considered in order to estimate an accurate
value for the subject property by this approach. These differences include: the
passage of time, or date of the transaction; location, which encompasses
differences in accessibility; type characteristics, including differences in
size and shape; and improvements characteristics, which include differences in
age, quality, condition, size and type of structure, amenities, as well as the
overall market perception of the property.
In addition to the consideration and adjustment necessary for location and
property characteristics, the most important factor of the subject relative to
the comparables is the net operating income per square foot. The net operating
income per square foot of building area is a significant variable and indicator.
Rent reflects such factors as age, quality, condition, location, etc., and net
operating income per square foot of building area measures the relative
productivity of the facility.
A more specific discussion regarding the comparables, as they relate to the
subject property within the valuation analysis by the per square foot technique,
is provided within the following pages.
As noted by the summary of comparable sales, the sales reflect a broad range
of price per square foot indices from $63.62 to $93.16 per square foot, with an
average unit sales price of approximately $76.36 per square foot. As displayed,
the sales price per square foot
99
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
indications vary due to variations in site location and exposure; improvement
design, quality, condition and age; image of the property; as well as type,
nature of tenancies, including the length of the lease terms; and, most
importantly, the level and quality of rent (income) which is determined
collectively through the market perception of the above noted factors.
While price levels on a per square foot basis implicitly contain both the
physical and economic factors affecting the real estate, these statistics do not
explicitly convey many of the details surrounding a specific property. Thus,
this single index to the valuation of the subject property has somewhat limited
direct application in this case. Comparability of both physical and economic
characteristics is the most important criteria in analyzing these sales in
relation to the subject property. However, it is also extremely important to
recognize that office buildings of the subject's caliber, are influenced by
location, accessibility, amenities, but more importantly, tenancies, lease terms
and conditions, and competency of management.
NET INCOME MULTIPLIER METHOD
In this case, we have identified a relationship between the net operating
income and the sales price of the property. The sales price per square foot
generally increases as the productivity ($NOI per square foot of NRA) of a
particular property increases. This is shown more clearly in the following table
where sales are arrayed according to net income per square foot. However, as can
be seen, some of the comparables display comparatively higher NOI's per square
foot, but lower prices paid on a square foot basis. This circumstance is
typically produced by the presence of above market leases, which will expire in
the initial years of an investor's projected holding period. Other variations in
the general relationship can occur when properties are in a non-stabilized, or
otherwise distressed condition when purchased.
==================================================================
NOI AS A FUNCTION OF $/SF
==================================================================
SALE NUMBER NOI/SF SALES PRICE/SF
==================================================================
I-2 $5.33/SF $93.16/SF
I-3 $6.90/SF $65.77/SF
I-4 $8.51/SF $84.46/SF
==================================================================
Subject $13.75/SF(1) - - -
==================================================================
/(1)/ Subject's net operating income estimated Fiscal Year 2002.
==================================================================
In the case of the subject property, which is currently 100 percent
occupied by Zenith, we have analyzed the property assuming a transformation from
single-tenancy to multi-tenancy, with a lease-up period of two years. As such,
the first-year existing net operating
100
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
income is below what investors would consider as being indicative of the
property's long-term stabilized results. In our analysis, we projected
stabilized net operating income levels for the subject property, defined as
representing the year of stabilized occupancy following lease-up of the subject
property, subsequent to multi-tenant conversion and renovation. This results in
a future stabilized value indication for the subject property (Fiscal-Year
2002). For the purposes of this analysis, we have utilized the stabilized net
operating income for the Fiscal-Year 2002, as presented above, which is
developed and discussed in the Income Approach section of this report.
The equation for the net income multiplier (NIM), which is the inverse of
the capitalization rate (OAR), is calculated as follows:
NIM = Sales Price
-----------
Net Operating Income
The range of net income multipliers and going-in capitalization rates
exhibited by the sales, are summarized in the following table.
==========================================================
GOING-IN NET INCOME
SALE OAR MULTIPLIER
==========================================================
I-2 5.72% 17.48x
I-3 10.49% 9.53x
I-4 10.07% 9.93x
==========================================================
The valuation of the subject property utilizing the net income multipliers
(NIM) from the comparable properties accounts for the disparity of the net
operating income per square foot between the comparables and the subject. Within
this technique, each of the adjusted NIM's are multiplied by the $NOI per square
foot of the subject, which produces an adjusted value indication for the
subject. The net operating income per square foot for the subject property is
calculated based on the first year rental rate, upon stabilization, of the
holding period, as detailed in the Income Approach section of this report. The
adjusted sales price per square foot technique regarding the subject property,
is presented below.
===================================================================
ZENITH
HEADQUARTERS OFFICE BUILDING
===================================================================
COMP. NET INCOME SUBJECT'S INDICATED
NO. MULTIPLIER NOI $/SF PRICE $/SF
-------------------------------------------------------------------
101
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
I-2 17.48x $13.75/SF $240.35/SF
I-3 9.53x $13.75/SF $131.04/SF
I-4 9.93x $13.75/SF $136.54/SF
--------------------------------------------------------------------
OVERALL AVERAGE 12.31X --- $169.31/SF
====================================================================
102
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
The adjusted market range for the subject property is from $131.04 to
$240.35 per square foot, with the average adjusted price per square foot at
$169.31. Of most significance, are Sales I-3 and I-4, multi-tenant office
buildings within the Chicago Metropolitan Area, with an adjusted sales price per
square foot indication of $131.04 and $136.54, respectively. These properties
represent sales which are considered most similar in regard to physical and
economic characteristics in comparison to the subject property. The upper-end of
the adjusted value range is set by I-2 at $240.35 per square foot, as a result
of its high net income multiplier, which is a reflection of the below market
leases that are scheduled to roll over in 1998. In the analysis of the subject
property, we utilized the net operating income per square foot estimated for the
subject property, estimated at $13.75 per square foot (per the Income Approach).
We believe a unit sales price per square foot for the subject property
would range from $140.00 to $145.00 per square foot of net rentable building
area. The preceding range indicated for the subject property, is within the
adjusted unit sales price per square foot indication of the preceding analysis,
utilizing the net income multiplier method. Therefore, based on the above, the
following range of value is indicated for the subject property, based on our
analysis presented herein.
=============================================================
ZENITH
HEADQUARTERS OFFICE BUILDING
-------------------------------------------------------------
SUBJECT'S X UNIT PRICE = ESTIMATED
NRA PER SF VALUE (ROUNDED)
-------------------------------------------------------------
401,000 x $140.00/SF = $56,140,000
401,000 x $145.00/SF = $58,145,000
=============================================================
Based on the above, we believe the future value of the subject property
(Fiscal-Year 2002), on a stabilized basis, lies towards the mid-aspect of the
above indicated range, or at $57,000,000, as rounded. Our estimated future value
of the subject property equates to a unit price per square foot indication of
$142.14. In our opinion, due to the subject's location, age and market position,
we believe our future value estimate of the subject property at $57,000,000, by
the Sales Comparison Approach, is reasonable and supportable.
The preceding analysis by the Sales Comparison Approach represents the
future market value of the subject on a stabilized basis. In order to determine
the value of the subject on an
103
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
as is basis, the costs associated with achieving a stabilized level of operation
must be deducted from the previously concluded upon stabilization value. These
stabilization costs include tenant improvement allowances, leasing commissions
and income loss during the stabilization period, and are inherent in the cash
flows prior to stabilization. By discounting the cash flow in years one through
four (including the reversion) by an appropriate discount rate of 16.0 percent
(inclusive of increased risks associated during the initial years of the holding
period), the present value of the subject property can be estimated. Please
refer to the Income Approach section of this report for information regarding
the cash flows in years one through four. The net present value calculation for
the subject property is as follows:
<TABLE>
<CAPTION>
========================================================================================================
PERIOD CASH FLOW PV FACTORS INDICATED CASH FLOW
<S> <C> <C> <C>
--------------------------------------------------------------------------------------------------------
Year 1 ($9,422,797) 0.862069 ($8,123,101)
--------------------------------------------------------------------------------------------------------
Year 2 ($9,795,350) 0.743163 ($7,279,542)
--------------------------------------------------------------------------------------------------------
Year 3 $4,291,897 0.640658 $2,749,638
--------------------------------------------------------------------------------------------------------
Year 4 $62,457,313 0.552291 $34,494,612
--------------------------------------------------------------------------------------------------------
TOTAL $21,841,607
$21,850,000 (ROUNDED)
========================================================================================================
</TABLE>
In the case of the subject property, which is currently 100 percent occupied
by Zenith, we have analyzed the property assuming a transformation from single-
tenancy to multi-tenancy, with a lease-up period of two years. As such, the
first-year existing net operating income is below what investors would consider
as being indicative of the property's long-term stabilized results. In our
analysis, we projected stabilized net operating income levels for the subject
property, defined as representing the year of stabilized occupancy following
lease-up of the subject property, subsequent to multi-tenant conversion and
renovation. This results in a future stabilized value indication for the subject
property (Fiscal-Year 2002). In order to determine the value of the subject on
an as is basis, the costs associated with achieving a stabilized level of
operation must be deducted from the previously concluded upon stabilization
value. These stabilization costs include tenant improvement allowances, leasing
commissions and income loss during the stabilization period, and are inherent in
the cash flows prior to stabilization. By discounting the cash flows by an
appropriate discount rate, the present value of the subject property can be
estimated. Considering the foregoing, the as is market value of the subject
property, via the Sales Comparison Approach, is $21,841,607, or $21,850,000, as
rounded.
104
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
INTRODUCTION
The Income Approach is based upon the economic principle that the value of a
property capable of producing income is the present worth of anticipated future
net benefits. The net income projected is translated into a present value
indication using the capitalization process. There are various methods of
capitalization that are based on inherent assumptions concerning the quality,
durability and pattern of the income projection.
Where the pattern of income is irregular due to existing leases that will
terminate at staggered, future dates, or to an absorption or stabilization
requirement on a newer development, the discounted cash flow analysis is the
most accurate.
Discounted cash flow analysis (DCF) is a method of estimating the present
worth of future cash flow expectancies by individually discounting each
anticipated collection at an appropriate discount rate. The indicated market
value by this approach is the accumulation of the present worth of future
projected years' net income (before income taxes and depreciation) and the
present worth of the reversion of the estimated property value at the end of the
projection period. The estimated value of the reversion at the end of the
projection period is based on the capitalization of the next year's projected
net income.
A second method of valuation, using the Income Approach, is to directly
capitalize a stabilized net income based on rates extracted from the market or
built up through mortgage equity analysis. This is a valid method of estimating
the market value of the property as of the achievement of stabilized operations.
However, our analysis of the subject property is based upon a transformation
from single-tenancy to multi-tenancy, as such, is operating below stabilized
levels during the initial years of the analysis. As such, we have not utilized
the direct capitalization method in our analysis.
DISCOUNTED CASH FLOW ANALYSIS
The application of the discounted cash flow analysis (DCF) produces an
estimate of value through an economic analysis of the subject property in which
the net income generated by the asset is converted to a capital sum at an
appropriate rate. First, the revenues which a fully informed investor can expect
the subject to produce over a specified time horizon are established through an
analysis of the rental market for similar properties. Second, the projected
expenses incurred in generating these gross revenues are deducted. Finally, the
residual net income is discounted into a capital sum at an appropriate rate
which is then indicative of the subject property's current value in the
marketplace.
105
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
In this Income Approach to the valuation of the market value of the fee
simple interest in the subject property, we utilized a 10-year holding period
for the investment, beginning October 1, 1998. Although an asset such as the
subject has a much longer useful life, an investment analysis becomes more
meaningful if limited to a time period considerably less than the real estate's
economic life, but of sufficient length for an investor. A 10-year holding
period for this investment is long enough to model the asset's performance, but
short enough to reasonably estimate the expected income and expenses of the real
estate.
The revenues and expenses which an informed investor may expect to incur
from the subject property will vary, over the holding period. Major investors
active in the market for this type of real estate establish certain parameters
in the computation of these cash flows and criteria for decision making which
this valuation analysis must include if it is to be truly market-oriented. These
current computational parameters are dependent upon market conditions in the
area of the subject property, as well as the market parameters for this type of
real estate which we view as being national in scale.
By forecasting the anticipated income stream and discounting future value at
reversion to current value, the capitalization process may be applied to derive
a value that an investor would pay to receive that particular income stream.
Typical investors price real estate on their expectations of the magnitude of
these benefits and their judgment of the risks involved. Our valuation endeavors
to reflect the most likely actions of typical buyers and sellers of property
interest similar to the subject.
An analytical real estate computer model that simulates the behavioral
aspects of the property and examines the results mathematically is employed for
the discounted cash flow analysis. In this instance, we utilized the PRO-JECT
Plus+ computer model. Since investors are the basis of the marketplace in which
the subject property will be bought and sold, this type of analysis is
particularly germane to the appraisal problem at hand.
A general outline summary of the major steps involved may be listed as
follows:
1) Analysis of the income stream: establishment of an economic (market)
rent for the space at lease turnover; probable renewals at market
rentals, and expected vacancy experience;
2) We believe six months is a reasonable amount of time for the removal of
hazardous materials and renovation/reconfiguration of the property for
prospective leasing to tenants (i.e., reconfiguration of the subject
property for multi-tenant use).
106
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
3) Derive an absorption analysis of vacant space upon removal of and
renovation of the subject property for prospective tenanting.
4) Analysis of projected escalation recovery income based upon an analysis
of the property's prospective rent structure;
5) A derivation of the most probable net operating income and pre-tax cash
flow (net operating income) less reserves, tenant improvements, leasing
commissions and any extraordinary expenses to be generated by the
property by subtracting all property expenses from the effective gross
income;
6) Estimation of a reversionary sales price based upon a capitalization of
the net operating income (before reserves, tenant improvements and
leasing commissions and other possible capital items).
Following is a detailed discussion of the components which form the basis of
this analysis.
POTENTIAL GROSS REVENUES
The total potential gross revenues generated by the subject property are
composed of a number of distinct elements; minimum rent determined by a
prospective lease agreement, and reimbursement of certain expenses incurred in
the ownership and operation of the real estate.
The minimum rent produced by the subject property is derived from that paid
by prospective tenants at the subject property, together with our assumptions
regarding market rent growth rates and expenses, as well as renewal
probabilities.
The rental income which an asset such as the subject property will generate
for an investor is analyzed as to its quality, quantity and durability. The
quality and probable duration of income will affect the amount of risk which an
informed investor may expect over the property's holding period. The segregation
of the income stream along these lines allows us to control the variables
related to the subject's forecasted performance with greater accuracy.
As indicated in the Property Description section of this report, the subject
property is a single-tenant corporate headquarters office building, comprised of
approximately 401,000 square feet of net rentable building area. However, our
analysis assumes the subject property will be renovated/reconfigured for multi-
tenant use. As such, we have focused our analysis to similar, Class B, multi-
tenant, suburban office buildings.
107
<PAGE>
<TABLE>
<CAPTION>
================================================================================================================================
RENTAL SURVEY OF COMPARABLE OFFICE BUILDINGS/PRIMARY COMPETITION
================================================================================================================================
- --------------------------------------------------------------------------------------------------------------------------------
QUOTED NET RENTAL RATE/SF YEAR BUILT STORY TOTAL SQUARE FEET AVAILABLE
------------------------- ------ ---------------------------
RENTAL NO. TERM HEIGHT OCCUPANCY RATE
NAME/LOCATION NRA
- --------------------------------------------------------------------------------------------------------------------------------
R-1 2100 Sanders Road $16.00/SF 1986 3-Stories 18,702 SF
--------- --------- ---------
Northbrook, Illinois 5-10 Years 102,165 SF 81.7%
- --------------------------------------------------------------------------------------------------------------------------------
R-2 Caremark Towers I $14.50/SF 1981 5-Stories 15,265 SF
--------- --------- ---------
2215 Sanders Road 5-10 Years 166,331 SF 91.8%
Northbrook, Illinois
- --------------------------------------------------------------------------------------------------------------------------------
R-3 500 Combined Centre $13.00/SF 1979 6-Stories 19,134 SF
--------- --------- ---------
500 Skokie Boulevard 5-10 Years 1990 Renv. 99,138 SF 80.7%
Northbrook, Illinois
- -------------------------------------------------------------------------------------------------------------------------------
R-4 707 Combined Centre $14.00/SF 1980 7-Stories 11,981 SF
--------- --------- ---------
707 Skokie Boulevard 5-10 Years 1986 Renv. 119,793 SF 90.0%
Northbrook, Illinois
- -------------------------------------------------------------------------------------------------------------------------------
R-5 707 Lake Cook Road $11.60/SF 1979 3-Stories 2,497 SF
--------- --------- --------
Deerfield, Illinois 5-Years 1993 Renv. 78,306 96.8%
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
OPERATING COMMENTS
RENTAL NO. EXPENSES
----------
NAME/LOCATION ANNUAL RENT
ESCALATIONS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
R-1 2100 Sanders Road $9.50/SF 2100 Sanders Road
--------
Northbrook, Illinois 3.0%/YR represents a three-story
Class B suburban office building
containing a total net rentable
area of 102,165 square feet.
Amenities include upgraded finishes,
24-hour access, and is bordered
on two sides by the Cook County
Forest Preserve. The property has
a parking ratio of 3.21 per 1,000
square feet.
- ----------------------------------------------------------------------------------------------------------
R-2 Caremark Towers I $8.24/SF Caremark Tower One is located across
--------
2215 Sanders Road 3.0%/YR Sanders Road from the 2100 Sanders
Northbrook, Illinois Road office building, and is part
of the Caremark Towers. Caremark
Tower II contains 190,000 square
feet, and is fully leased to Caremark.
Caremark Tower I has a covered parking
ratio of 3.60 per 1,000 square feet.
- ----------------------------------------------------------------------------------------------------------
R-3 500 Combined Centre $9.42/SF 500 Combined Centre represents a
--------
500 Skokie Boulevard 3.0%/YR six-story Class B suburban office
Northbrook, Illinois building containing a total net
rentable area of 99,138 square feet.
Amenities include a banking facility,
conference room, mail room, and nearby
hotel. The property has a parking ratio
of 4.09 per 1,000 square feet.
- ----------------------------------------------------------------------------------------------------------
R-4 707 Combined Centre $9.42/SF 707 Combined Centre represents a
--------
707 Skokie Boulevard 3.0%/YR
Northbrook, Illinois seven-story Class B suburban office
building containing a total net
rentable area of 119,793 square feet.
Amenities include an entrance atrium,
exercise facilities and on-site
management. The property has a parking
ratio of 4.20 per 1,000 square feet.
- ----------------------------------------------------------------------------------------------------------
R-5 707 Lake Cook Road $8.15/SF 707 Lake-Cook Road represents a
--------
Deerfield, Illinois 3.5%/YR three-story Class B suburban office
building containing a total net
rentable area of square feet.
Amenities include lower level storage,
and vending room, The property has
a parking
==========================================================================================================
</TABLE>
108
<PAGE>
================================================================================
ratio of 4.61 per 1,000
square feet.
================================================================================
Comparable rental map
109
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
In order to estimate the economic, or market rent, level for the subject
property, we have surveyed competing Class B office buildings within the
subject's office submarket, as well, we have obtained actual lease transactions
of large space users located within the Chicago Metropolitan Area. In estimating
the economic rent for the subject property, its location, quality, design and
functionality, age, amenities, and other pertinent factors were considered. A
summary of competing office buildings located within the subject's office
submarket is presented on the facing page.
The comparable rents have been reduced to a common unit of comparison; the
net rent per square foot of net rentable building area, whereby all operating
expenses are the responsibility of the tenant, which is consistent with
competing office properties within the subject's office submarket. The enclosed
competitive office buildings reflect a range of annual net rental rates from
approximately $11.60 to $16.00 per square foot, with an overall average net
rental rate of approximately $13.82 per square foot. Operating expenses of
competing office buildings range from $8.15 to $9.50 per square foot of net
rentable building area.
Although the preceding five comparable office buildings were considered in
estimating the market rent for the subject's office space, we have also analyzed
actual leases negotiated in the marketplace. Presented on the following facing
page is a summary of actual larger lease transactions of similar, suburban Class
B office buildings.
110
<PAGE>
<TABLE>
<CAPTION>
================================================================================================================================
SUMMARY OF COMPARABLE CLASS B MULTI-TENANT OFFICE BUILDING LEASES
- --------------------------------------------------------------------------------------------------------------------------------
TENANT LEASED NRA STORY CONTRACT RENTAL RATE
----- ---------- --------------------
RENTAL NO. LEASE DATE TOTAL NRA HEIGHT TENANT IMPROVEMENTS
---------- ------
NAME/LOCATION TERM YEAR BUILT
----------
LAND AREA
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
R-1 Favorite Brands International Favorite Brands International 75,000 3Stories $16.25
----------------------------- ------ -------- ------
Bannockburn Lake Office Plaza V August, 1998 105,000 1998 $35.00
------------ ----
Bannockburn, Illinois 10-Years N/A (1st/d/ Generation)
- --------------------------------------------------------------------------------------------------------------------------------
R-2 Ameritech Ameritech 62,000 2-Stories $14.14/NNN
--------- ------ --------- ----------
800 Jorie Boulevard January, 1998 126,508 1962/93 $10.00/SF
------------- -------
Oak Brook, Illinois 10-Years 7.26 Acres (2/nd/ Generation)
- --------------------------------------------------------------------------------------------------------------------------------
R-3 Med Partners Med Partners 15,361 2-Stories $16.50/NNN
------------ ------ --------- ----------
800 Jorie Boulevard December, 1997 126,508 1962/93 $25.00/SF
-------------- -------
Oak Brook, Illinois 5-Years 7.26 Acres (1/st/ Generation)
- --------------------------------------------------------------------------------------------------------------------------------
R-4 Next Link Next-Link 35,000 SF 2-Stories $14.65/NNN
--------- --------- --------- ----------
810 Jorie Boulevard October, 1997 69,365 SF 1962/92 (2/nd/ Generation)
------------- -------
Oak Brook, Illinois 5-years 4.23 Acres
- --------------------------------------------------------------------------------------------------------------------------------
R-5 Motorola Motorola 123,000 3-Stories $11.00/NNN
-------- ------- --------- ----------
5201 Tollview Drive September, 1997 123,000 1975 $7.00/SF
--------------- ----
Rolling Meadows, Illinois 5-Years 8.85 Acres (2/nd/ Generation)
- --------------------------------------------------------------------------------------------------------------------------------
R-6 Two National Plaza Illinois Institute of Art 26,772 SF 8-Stories $13.50/SF NNN
------------------------- --------- --------- -------------
1000 Plaza Drive September 1997 125,153 SF 1975 $30.00/SF
-------------- ----
Schaumburg, Illinois 12-years; 6.43 Acres (1/st/ Generation)
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------
OPERATING COMMENTS
RENTAL NO. EXPENSES
--------
ANNUAL RENT
ESCALATIONS
- -------------------------------------------------------------------------
<S> <C> <C>
R-1 $5.75 This is a ten-year lease by Favorite Brand's
-----
3.0%/YR International, in the recently completed
Bannockburn Lake Office Plaza V. A $35.00 per
square foot tenant improvement allowance was
provided to this first generation space. The
space was in shell form prior to the tenant
improvement allowance.
- -------------------------------------------------------------------------
R-2 $5.36/SF This is a ten-year renewal lease of
--------
3.0%/YR Ameritech's space within 800 Jorie Boulevard.
A $10.00 per square foot tenant improvement
allowance was provided to this second
generation space.
- -------------------------------------------------------------------------
R-3 $5.20/SF This is a five-year expansion lease of the
--------
$0.50/SF/YR remaining vacant space within the building.
This is first generation space, and is
reflected in the tenant improvement rate.
- -------------------------------------------------------------------------
R-4 $5.36/SF This is a five-year renewal lease of
--------
3.0%/YR Next-Link space. The space is second
generation, A parking ratio of 4.0 per 1,000
square feet is provided.
- -------------------------------------------------------------------------
R-5 $10.50/SF This is a five-year lease of a building
---------
$0.30/SF/YR purchased by Motorola. Motorola leased the
building to itself for accounting purposes.
It was reported that the lease is slightly
below market levels, due to the fact that
Motorola is the owner of the building.
- -------------------------------------------------------------------------
R-6 $7.50/SF This is a new lease within Two National
--------
2.5%/YR Plaza. The space required new build-out, and
was reported to be approximately $30.00 per
square foot. A parking ratio of 4.0 per 1,000
square feet is offered.
=========================================================================
</TABLE>
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
The enclosed comparable recently signed leases of large tenants situated in
Class B office buildings portrayed in our analysis reflect a rental rate range
of $11.00 to $16.50 per square foot, on a net basis, with an average net rental
rate of approximately $14.05 per square foot. Annual rent escalations range from
2.5 to 3.5 percent per year, while lease terms range from five to twelve years
in length. Operating expenses range from $5.20 to $10.50 per square foot, which
is consistent with our previously presented summary of competing office
buildings.
In estimating market rent for the subject property on a multi-tenant basis,
we relied on the lease transactions as provided, as well as the opinions and
comments by brokers active in the Northbrook/Tri-State office submarket
associated with national real estate firms such as: Cushman & Wakefield, CB
Commercial, Grubb & Ellis, Draper & Kramer, Hamilton Partners, Quadrangle, and
Opus North Corporation. Based on the comparable leases recently signed and
competing office buildings presented, we have estimated a market rental rate of
$14.00 per square foot for the subject property, net. This rate reflects a
seven-year lease term and an annual rental escalation rate of 3.0 percent.
The trend in recent years regarding the structure of office leases in
suburban Chicago is to negotiate them on a net basis, with all operating
expenses the responsibility of the tenant. As such, we have estimated the
subject's market rent levels for the office space at lease turnover on a net
basis, which is also consistent with the structure of a majority of office
leases in suburban Chicago. The above market rental rate estimated for the
subject property is utilized at speculative turnover, with no discount, aside
from alteration costs, which is consistent and verified by brokers active in the
marketplace.
LOWER LEVEL SPACE
The subject property contains 61,482 square feet of lower level space which
lacks windows. In estimating a market rent for this lower level space, we have
consulted several brokers active within the subject's submarket. It was reported
that similar lower level space leases for approximately 50.0 percent of market
rent for upper level floors. As such, we have estimated market rent for the
subject property lower level space at 50.0 percent of market rent for the upper
floors, or $7.00 per square foot, net.
CONCESSIONS
A developer has a variety of leasing strategies available to reduce the
effective rent which the tenant would ultimately pay. Two of the more common
methods involve free or
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<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
reduced rent and above standard tenant improvement allowances (TI's). Typically,
rent abatements are no longer being negotiated within the subject's market.
Therefore, we have not included rent abatements in our analysis. However, a
standard build-out allowance is included in our analysis, and is fully discussed
in the Tenant Alteration Costs section detailed hereafter.
RENT GROWTH RATE
According to the survey by Cushman & Wakefield's Valuation Advisory
Services, major investors active in the acquisition of suburban office
buildings, rental growth rates currently range from 2.0 to 5.0 percent , with
3.0 and 4.0 percent, respectively, being most prevalent on a stabilized basis,
depending upon the specific locational aspects of the property. Therefore,
consistent with growth rates utilized by investors active in the acquisition of
suburban office buildings, we have utilized a 3.5 percent market growth rate
assumption regarding increases in our estimated market rent level for the
subject property over the holding period.
RELEASING ASSUMPTION
Upon lease expiration, we estimated a 65.0 percent probability that an
existing tenant will renew their lease, and a 35.0 percent probability that an
existing tenant will vacate, upon lease expiration. We believe the preceding
turnover ratio is reasonable, given the planned multi-tenancy of the subject
property.
VACANCY AND COLLECTION LOSS
Investors are primarily interested in the revenues that an income-producing
property is likely to produce over a specified time period, rather than what it
could produce if it were 100 percent occupied, and the tenant was actually
paying rent in full and on time. It is normally a prudent practice to expect
some income loss as the tenant vacates, fails to pay rent, or pay rent late. In
our cash flow projection, we have utilized a credit loss factor of 3.0 percent,
which is applied to the total gross rental income, during the holding period.
ABSORPTION ANALYSIS
As of the date of our analysis, the subject property is 100 percent
occupied by the Zenith corporation. However, our analysis assumes that the
subject property will be renovated and reconfigured for multi-tenant occupancy.
We have accounted for six months of actual downtime prior to the first
prospective lease, in order to account for the reconfiguration and renovation of
the subject property for multi-tenancy. Based upon leasing activity and
absorption within the Northbrook/Tri-State submarket, which has averaged
approximately
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<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
244,180 square feet per year, since 1991, we have estimated a lease-up period of
approximately 24 months. Our absorption analysis is presented in the table on
the following page.
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<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
=================================================================
ZENITH CORPORATE HEADQUARTERS
ABSORPTION ANALYSIS
=================================================================
DATE LEASED FLOOR/SUITE # SF LEASED RENTAL RATE
-----------------------------------------------------------------
<S> <C> <C> <C>
3/99 Floor 1 53,339 SF $14.00
-----------------------------------------------------------------
TOTAL 53,339 SF
-----------------------------------------------------------------
6/99 Floor 2 58,166 SF $14.49
-----------------------------------------------------------------
TOTAL 58,166 SF
-----------------------------------------------------------------
9/99 Floor 3 58,166 SF $14.49
-----------------------------------------------------------------
TOTAL 58,166 SF
-----------------------------------------------------------------
12/99 Floor 4 58,166 SF $14.49
-----------------------------------------------------------------
TOTAL 58,166 SF
-----------------------------------------------------------------
3/2000 Floor 5 58,166 SF $14.49
-----------------------------------------------------------------
TOTAL 58,166 SF
-----------------------------------------------------------------
6/2000 Floor 6 58,166 SF $15.00
-----------------------------------------------------------------
TOTAL 58,166 SF
-----------------------------------------------------------------
9/2000 Lower Level 56,831 SF $ 7.50
-----------------------------------------------------------------
TOTAL 56,831 SF
=================================================================
TOTALS 401,000 SF
=================================================================
</TABLE>
MISCELLANEOUS AND OTHER REVENUE SOURCES
Miscellaneous and other income revenue sources that are typically generated
by similar Class B office buildings include: interest income, professional
services (net of expenses), storage, and miscellaneous sundry items. Since our
analysis of the subject property assumes a reconfiguration/renovation to multi-
tenant use, we did not include miscellaneous and other revenue sources in our
analysis of the subject property, during the holding period.
OPERATING EXPENSES
The total expenses incurred in the production of income at the subject
property, are divided into two categories; reimbursable and non-reimbursable
items. The major expenses which are reimbursable include: general operating
expenses, real estate taxes, and insurance. The non-reimbursable expense items
include management fees, reserves for replacements of short-lived capital
components, alteration costs, and leasing commissions.
It is noted that our analysis of the subject property assumes a
reconfiguration/renovation from a single-tenant, corporate headquarters building
into a multi-tenant office property and, as such, there are no historical
operating expenses on a multi-tenant basis. The various expenses incurred in the
operation of the subject property, have been estimated from
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<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
information provided by a number of sources, which include: competing suburban
office buildings located in the subject's office submarket; conversations with
local brokers and appraisers; Cushman & Wakefield's Management Services Group,
and information obtained from the BOMA Experience Exchange Report, published by
Building Owners and Managers Association International, a nationally recognized
publication. We have analyzed each item of expense individually and attempted to
project what the typical informed investor would consider reasonable.
EXPENSE GROWTH RATES
Expense growth rates are generally forecasted to be more consistent with
inflationary trends than they are with competitive market forces. Cushman &
Wakefield and Korpacz surveys show that investors generally perceive that
expenses will grow between 3.0 and 5.0 percent over a typical holding period. In
the most recent survey for each, the current mean ranged between 3.30 and 3.59
percent for annual growth. In our analysis, unless otherwise noted, expenses are
forecasted to grow by 3.50 percent during the holding period.
REIMBURSABLE OPERATING EXPENSES
We have analyzed each item of expense individually and attempted to project
what the typical investor in a property similar to the subject would consider
reasonable, based upon informed opinion, judgment and experience. The following
is a detailed summary and discussion of the reimbursable operating expenses
incurred in the operation of the subject property. It should be noted, that the
projected operating expenses for the subject property are estimated for
Calendar-Year 1998, and operating expenses for Fiscal-Year 1999 are slightly
higher due to our growth rate assumption. Again, reimbursable operating expenses
at the subject property include: general operating, insurance, real estate
taxes, and management fees which are detailed as follows:
GENERAL OPERATING EXPENSES - This expense category includes a myriad
of items related to the operation of both the interior and exterior
portions of the subject's office building. Included here would be
the annual cost of snow removal, common area utilities, janitorial
services, security, repairs and maintenance, legal and audit fees,
elevator maintenance contracts, pest control contracts, HVAC, trash
removal, office expenses, elevator and lobby maintenance, parking
lot maintenance, and other miscellaneous expenses. The general
operating expenses of comparable Class A office buildings range
from $4.00 to $5.00 per square foot. General operating expenses
projected in our analysis are estimated at $, or approximately
$4.50 per square foot. Furthermore, we have increased this expense
at our expense growth rate assumption of 3.50 percent over the
holding period, thereafter. It is noted that we have modeled the
operating expense categories which usually
116
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
are correlated to the occupancy level of the property (janitorial
and utilities), based upon $1.50 per square foot of unoccupied area,
and have included this expense item in the Operating Expense Loss
line item of our cash-flow, during our lease-up period.
INSURANCE - Typical insurance costs associated for a project of the
subject's caliber range from $0.15 to $0.20 per square foot of net
rentable building area. Therefore, we have estimated the insurance
expense for the subject property, at $65,075, which is equivalent
to $0.15 per square foot of net rentable building area. We believe
this amount is reasonable based on insurance costs of similar office
buildings. Furthermore, we have increased this expense item at our
expense growth rate assumption of 3.50 percent over the holding
period, thereafter.
REAL ESTATE TAXES - As previously presented in our Real Estate Taxes
and Assessments section of this report, we have relied upon actual
real estate taxes at the subject property for 1997, payable in 1998
of $1,140,568. In our analysis, we have stabilized this expense item
at $1,180,000 for 1999. Furthermore, we have increased this expense
item at our expense growth rate assumption of 3.50 percent over the
holding period, thereafter.
MANAGEMENT FEE - This expense represents the fee for management
responsibilities, whether provided by an outside company, or
ownership. This expense item includes rent collection, property
supervision, and budget preparation. Management fees for properties
similar in size and tenancy in relation to the subject typically
range from 3.0 to 6.0 percent of the effective gross income. In our
analysis, we have included management fees at 4.0 percent of effective
gross income, which is considered reasonable and supportable based
on the subject's current size and tenancy.
TOTAL REIMBURSABLE OPERATING EXPENSES
As previously cited, the preceding operating expenses are reimbursable. Our
operating expense amount estimated for the subject property, as of the date of
our analysis is approximately $8.25 per square foot. Our estimated operating
expense amount is consistent with actual operating expenses of comparable
suburban Class B multi-tenant office buildings which are considered competition,
and are presented on the following page.
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
=========================================================================
CORPORATE OFFICE BUILDINGS
-------------------------------------------------------------------------
OPERATING EXPENSES PER SF
-------------------------------------------------------------------------
<S> <C>
2100 Sanders Road $9.50/SF
-------------------------------------------------------------------------
Caremark Towers $8.24/SF
-------------------------------------------------------------------------
500 Combined Centre $9.42/SF
-------------------------------------------------------------------------
707 Combined Centre $9.48/SF
-------------------------------------------------------------------------
707 Lake Cook Road $8.15/SF
-------------------------------------------------------------------------
AVERAGE $8.96/SF
=========================================================================
</TABLE>
NON-REIMBURSABLE EXPENSES
The total annual non-reimbursable expenses of the subject property are
projected from accepted practices and industry standards. Again, we have
analyzed each item of expenditure in an attempt to project what the typical
investor in a property similar to the subject would consider reasonable, based
upon actual operations, informed opinion and experience.
ALTERATIONS - The principal component of this expense is ownership's
estimated cost to prepare the vacated building for tenant use.
Alteration costs regarding first and second generation office space
are detailed in our Office Market Analysis section of this report
and reference is made thereto. It is noted that first generation
space for the subject property includes full floor-to-ceiling
build-out, as our analysis assumes reconfiguration/renovation from
single-tenancy to multi-tenancy. The prospective purchaser of the
building has received several bids for cost of converting the subject
property from a single tenant corporate headquarters facility to a
multi-tenant office building. Bids for conversion were received from
J.C. Anderson, Inc., and Contracting Resources, Inc., and ranged from
$6,914,341 ($17.24 PSF) to $8,364,378 ($20.86 PSF). In addition to
the costs of conversion submitted by the two firms, an additional
$25.00 per square foot of net rentable area was added for interior
build-out of the subject space (tenant improvements). Therefore the
total estimated costs of conversion for the subject property range
from approximately $42.00 to $46.00 per square foot of net rentable
area. Based on the preceding, we have estimated the total costs of
conversion, including interior build-out at $45.00 per square foot
of net rentable building area for initial build-out (inclusive of
HVAC retrofit for transformation from single-tenancy to multi-tenancy);
$15.00 per square foot for second generation (new tenant upon
expiration of lease); $7.50 per square foot for a renewal tenant, and
$10.13 per square foot for a speculative tenant, which is equivalent
to 35.0 percent of the new tenant amount of $15.00 per square foot,
plus 65.0 percent of the renewal tenant amount of $7.50 per square foot.
Alteration costs for the lower level of the subject property are
estimated at $15.00 per square foot of net rentable building area for
initial build-out (inclusive of HVAC retrofit), and $5.00 per square
foot for renewals and speculative tenants.
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LEASING COMMISSIONS - For new tenants are estimated at 12.00 percent
of the first year's rent, and 4.50 percent of the remaining total
rent paid during the lease term; and 4.50 percent for lease renewals.
Total commissions are payable at the time of lease turnover. Our
estimated leasing commission schedule is consistent with leasing
commissions currently being paid in the marketplace, and also assumes
a commission and one-half, which is typical in the market.
REPLACEMENT RESERVES - It is customary and prudent to set aside an
amount annually for the replacement of short-lived capital items such
as the roof and certain mechanical items. We have estimated this
expense at $50,000 in calendar year 1998. Furthermore, we have
increased this expense at our expense growth rate assumption of 3.50
percent over the holding period, thereafter.
ADDITIONAL COSTS ASSOCIATED WITH RECONFIGURATION/RENOVATION
FROM SINGLE-TENANCY TO MULTI-TENANCY
As mentioned previously, our analysis of the subject property assumes a
reconfiguration/renovation from single-tenancy to multi-tenancy. In the case of
the subject property, there are extra costs associated with the transformation,
not including alteration costs associated with the interior build-out of the
property, including: added landscaping, additional parking requirements,
resurfacing of the existing parking area, and asbestos removal. It is noted that
the costs associated with the additional landscaping and parking lot resurfacing
and expansion are included under the same line item in our cash-flow.
LANDSCAPING - The subject property is considered to have adequate
landscaping for a single-tenant, corporate headquarters facility,
however, as a multi-tenant office building, the subject property
requires beautification in order to effectively compete with similar
Class B office properties. Our analysis includes a capital improvement
cost of $450,000 for additional landscaping.
PARKING LOT RE-SURFACING - As mentioned in the Property Description
section of this report, the existing parking area appears worn, and
cracked, with numerous potholes. Our analysis includes a capital
improvement cost of $550,000 for re-surfacing of the existing parking
lot (370,000 square feet of parking lot area x $1.50 per square foot
for re-surfacing costs).
ADDITIONAL PARKING REQUIREMENTS - As mentioned in the Property
Description section of this report, the subject property has a current
parking ratio of 2.50 per 1,000 square feet of net rentable area. This
is considered below typical standards for suburban office buildings
which typically range from 3.0 to 4.0 per 1,000 square feet of rentable
area. The subject property has approximately 140,000 square feet of site
area, which is located between the pond and existing parking lot, which
would provide for approximately 400 additional spaces (400 spaces x 350
square feet per space = 140,000 square feet). The addition of 400 parking
spaces would result in a
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INCOME APPROACH
- --------------------------------------------------------------------------------
parking ratio of 3.42 per 1,000 square feet of net rentable area, which
is consistent with typical standards for suburban office buildings. Our
analysis includes a capital improvement cost of $450,000 for additional
parking spaces ($1,125 per space x 400 spaces = $450,000).
ASBESTOS REMOVAL/REMEDIATION - The subject property has asbestos
containing material in the form of: 153,000 square feet of asbestos
containing floor tile, 12,500 square feet of asbestos containing
material on the exterior wall of the 7th floor mechanical penthouse,
and 500 square feet of asbestos pipe covering on the kiln exhaust duct.
It is noted that we were not provided with an estimate to remove or
remediate the asbestos containing material. In our analysis, we have
estimated costs associated with the remediation/removal of the asbestos
containing material by contacting the environmental firm of Boelter &
Yates, which specializes in the removal/remediation of asbestos
containing material. The cost estimates for the removal of the asbestos
containing material are ballpark figures only, and could vary
substantially upon further inspection by qualified personnel. In regards
to the 153,000 square feet of asbestos containing floor tile, it was
reported by Boelter & Yates that remediation costs typically average
$4.00 per square foot to remove asbestos containing floor tile. We have
assumed this cost to be accurate. By applying the remediation cost of
$4.00 per square foot, by 153,000 square feet results in a cost estimate
of $612,000.
In regards to the 12,500 square feet of asbestos containing material on
the exterior of the 7th floor mechanical penthouse, it was difficult to
ascertain a precise cost for remediation, due to the vagueness of the
description of the asbestos containing material. However, Boelter &
Yates indicated a range between $5.00 and $15.00 per square foot for the
remediation of the material. In our analysis, we have utilized a
remediation cost of $10.00 per square foot, which results in a
remediation cost estimate for the 12,500 square feet of asbestos
containing material on the 7th floor mechanical penthouse of $125,000.
In regards to the 500 square feet of asbestos pipe covering on the kiln
exhaust duct, Boelter & Yates estimated a remediation cost estimate of
$10.00 per square foot. By applying the remediation cost estimate of
$10.00 per square foot to the 500 square feet of asbestos pipe covering,
results in a remediation cost estimate of $5,000.
The combined remediation cost estimate for the remediation of the floor
tile, exterior wall tile, and pipe covering is $742,000, or $750,000 as
rounded. Again, it is noted that the cost estimates associated with the
removal/remediation of the asbestos containing material are ballpark
figures only, and should not be relied upon or utilized, without the
recommendation of qualified personnel.
CAPITALIZATION
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We converted net operating income into a value indication by means of the
discounted cash flow method.
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DISCOUNTED CASH FLOW ANALYSIS
Our valuation endeavored to reflect the most likely actions of typical
buyers and sellers in this market. We forecasted cash flows and discounted them
and the future property value at reversion to a present value at various
internal rates of return (yield rates) currently anticipated by investors in
similar-quality investments. The yield rate (internal rate of return or IRR) is
the single rate that discounts all future equity benefits (cash flows and equity
reversion) to an estimated present value. In the discounted cash flow analysis,
we employed the PRO-JECT PLUS computer program. This program simulates the
operating characteristics of the property and allows us to make a variety of
operating assumptions. We tried to reflect the most likely investment
assumptions of typical buyers and sellers in this particular market segment.
Analysis by the discounted cash flow method is examined over a holding
period that allows the investment to mature, the investor to recognize a return
commensurate with the risk taken and a recapture of the original investment.
Typical holding periods usually range from 10 to 20 years and are sufficient for
the majority of real estate such as the subject to meet the criteria noted
above. In the instance of the subject, we have analyzed the cash flows
anticipated over an 10-year holding period. Our analysis has been performed on a
fiscal year basis, commencing October 1, 1998.
A sale or reversion is deemed to occur at the end of the 10th year, based
upon capitalization of the following year's net operating income. This is based
upon the premise that a purchaser in the 10th year is buying the following
year's net income. Therefore, our analysis reflects this situation by
capitalizing the first year of the next holding period.
The present value was formulated by discounting the property cash flows at
various rates. The yield rate utilized to discount the projected cash flow and
eventual property reversion was based on an analysis of anticipated yield rates
of investors dealing in similar investments. The rates reflect acceptable
expectations of yields to be achieved by investors currently in the marketplace
shown in their current investment criteria and as extracted from the sales
presented in the Sales Comparison Approach.
A yield rate differs from an income rate, such as cash-on-cash (equity
dividend rate or cash flow after debt service), in that it takes into
consideration all equity benefits including the equity reversion at the time of
resale, in addition to annual cash flows. The internal rate of return is the
single-yield rate that discount all of the future equity benefits (cash flows
and equity reversion) to the original equity investment. The yield rates
currently accepted by
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INCOME APPROACH
- --------------------------------------------------------------------------------
investors in the market can be applied to a projected cash flow and reversion in
order to estimate the present value of the projected income stream, and
therefore, the value of the subject property, upon lease expiration.
Since any real estate investment must compete in the open market for
capital, it must be competitive with the various alternatives available in the
financial marketplace. In developing an appropriate risk rate for the subject,
we have given consideration to a number of different investment opportunities.
These other non-real estate alternatives are important to an equity investor
when contemplating an investment in real estate. These financial investments
included long-term rates such as Corporate AAA bonds and 30 year Treasury Bonds,
which are currently yielding about 6.15 and 5.90 percent, respectively, as of
the date of our analysis, according to the Wall Street Journal, dated October 1,
1998. In addition, consideration was also given to the current prime rate of
8.25 percent and the current discount rate of 4.75 percent.
Major investors in existing investment grade real estate such as office
buildings, shopping centers, and industrial facilities currently require equity
yield rates that typically range from 10.00 to 14.00 percent depending upon the
attraction, duration and quality of a project's cash flow, the type of property,
recent market activity, availability and terms of financing, risk perception,
tax benefit potential and future value considerations.
Obviously, with risk being commensurate with return, the more secure
income streams would tend to fall towards the lower-end of current yields, with
those properties containing more risk, falling towards the upper-end.
The residual cash flows annually generated by the subject property
comprise only the first part of the return which an investor will receive. The
second component of this investment return is the pre-tax cash proceeds from the
resale of the property at the end of a projected investment holding period.
Typically, investors will structure a provision in their analysis in the form of
a rate differential over a going-in capitalization rate in projecting a future
disposition price. The view is that the improvement is then older and the future
is more difficult to visualize, hence a slightly higher rate is warranted for
added risks in forecasting.
In the Sales Comparison Approach analysis, the sales of office properties
indicate a market range of overall rates from approximately 5.72 to 10.49
percent, which are presented as follows:
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INCOME APPROACH
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
================================================================================
OVERALL CAPITALIZATION RATES
================================================================================
SALE SALE
NO. OFFICE PROPERTIES DATE OAR
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
I-2 1750 East Golf Road, Schaumburg, IL 9/97 5.72%
- --------------------------------------------------------------------------------
I-3 707 Lake-Cook Road, Deerfield, IL 2/97 10.49%
- --------------------------------------------------------------------------------
I-4 500, 505, 707 Skokie Boulevard, 1/97 10.07%
Northbrook, IL
- --------------------------------------------------------------------------------
AVERAGE 8.76%
- --------------------------------------------------------------------------------
</TABLE>
The going-in, or first year, overall capitalization rates regarding the
sales listed above, range from 5.72 to 10.49 percent, with an average overall
capitalization rate of 8.76 percent. In addition, overall capitalization rates
for suburban office properties within the Chicago metropolitan area typically
range from 8.50 to 10.50 percent, with a majority of the overall capitalization
rates between 9.0 and 10.0 percent.
CUSHMAN & WAKEFIELD'S VALUATION ADVISORY SERVICES NATIONAL INVESTOR SURVEY
SPRING 1998 details the investment requirements of active investors in the
marketplace regarding suburban office buildings. Regarding suburban office
buildings, these investors require internal rates of return from 10.00 to 14.00
percent, with the average-low and average-high ranging from 11.20 to 11.80
percent, respectively. Going-in capitalization rates range from 7.50 to 11.00
percent, with the average-low and average-high ranging from 8.50 to 9.20
percent, respectively. Terminal capitalization rates range from 8.00 to 11.50
percent, with the average-low and average-high ranging from 9.00 to 9.60
percent, respectively. Growth rates for income and expenses range from 2.0 to
4.0 percent.
The table below summarizes CUSHMAN & WAKEFIELD'S VALUATION ADVISORY
SERVICES NATIONAL INVESTOR SURVEY SPRING 1998, regarding suburban office
buildings.
<TABLE>
<CAPTION>
================================================================================
CUSHMAN & WAKEFIELD'S VALUATION ADVISORY SERVICES SURVEY
SPRING 1998
SUBURBAN OFFICE BUILDINGS
================================================================================
OAR GROWTH RATES
------------------ -----------------------
NUMBER OF
RESPONSES IN OUT IRR INCOME EXPENSES
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
15 8.50-9.20% 9.00-9.60% 11.20-11.80% 3.10-3.80% 3.00-3.40%
</TABLE>
124
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INCOME APPROACH
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Overall Average 8.90% 9.30% 11.50% 3.50% 3.20%
================================================================================
125
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
Additional national investor surveys of investment parameters lend support to
Cushman & Wakefield's Investor Survey, regarding suburban office buildings.
NATIONAL SUBURBAN OFFICE MARKET INDICATORS, as of the Third Quarter 1998,
published by Peter F. Korpacz & Associates, Inc. is summarized in the table on
the following page.
<TABLE>
<CAPTION>
======================================================================
NATIONAL SUBURBAN OFFICE MARKET INDICATORS
THIRD QUARTER 1998
======================================================================
BASIS POINT CHANGE
RANGE AVERAGE/(1)/ SINCE LAST QUARTER
----------------------------------------------------------------------
<S> <C> <C> <C>
IRR 10.00% to 12.50% 11.14% -15
OAR/In 7.50% to 10.50% 9.05% 0
OAR/Out 8.00% to 11.00% 9.43% -12
----------------------------------------------------------------------
(1) Averages
======================================================================
CHICAGO OFFICE MARKET INDICATORS
THIRD QUARTER 1998
======================================================================
BASIS POINT CHANGE
RANGE AVERAGE/(1)/ SINCE LAST QUARTER
IRR 9.50% to 13.00% 10.79% -13
OAR/In 8.00% to 10.00% 9.06% 0
OAR/Out 8.00% to 10.25% 9.21% -3
----------------------------------------------------------------------
(1) Averages
----------------------------------------------------------------------
Source: Real Estate Investor Survey, Peter F. Korpacz & Associates
======================================================================
</TABLE>
Lastly, the Second Quarter 1998, CB COMMERCIAL NATIONAL REAL ESTATE INVESTOR
SURVEY indicates going-in capitalization rates for suburban office buildings
range from 7.80 to 10.5 percent, with going-out terminal capitalization rates
ranging from 8.50 to 12.00 percent. The average going-in rate for suburban
office buildings is 9.0 percent, and the average going-out rate is 9.55 percent.
The internal rate of return, or discount rate, ranges from 10.50 to 15.00
percent, with an average internal rate of return of 11.85 percent.
In discussions with investors active in the marketplace, it has been
disclosed that numerous investors have begun to re-analyze their investment
decisions within the past six months. In particular, investors have recently re-
analyzed their investment parameters with primary focus centering on yield rates
(IRR's) and overall rates (OAR's), and in some cases renegotiating a sales price
in order to consummate a transaction, or not closing on a property if a new
price could not be negotiated. The main reason for the recent "renegotiation" of
real estate purchase prices was reported to be caused by the downturn in capital
markets, and the increasing costs of acquiring capital, which directly affects
the yield rate, and indirectly affects the overall rate attributable to
purchases. Several deals, including the prospective purchases of the Amoco
Building, IBM Plaza, and 2 North LaSalle, are reported to have entered the
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<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
"renegotiation" phase, with the prospective purchasers re-analyzing their
re-sale parameters. In particular, primarily due to the increased costs of
acquiring capital, prospective purchasers have increased their terminal overall
rates, which has a direct effect of lowering their prospective re-sale values,
and the initial price at which investors are willing to acquire property.
In the case of the subject property this has reportedly occurred as well,
as the prospective purchaser has requested a reduction in the purchase price due
to the downturn in the capital markets, and also due to increased costs of
converting the property from single-tenancy to multi-tenancy. Our selection of a
yield rate and overall rate have reflected the recent turmoil witnessed within
the marketplace, and are considered to be reflective of a typical investors
decision making process.
The wide range of investment parameters reflected in each of the preceding
investor surveys regarding suburban office buildings, indicate that property
risk and yield are assessed to a particular investment property based on a
variety of variables. Risk is the primary determinant, and the risk variables
include: whether the property is purchased for cash or will be leveraged;
whether current contract rents are significantly above or below current market
rents; the amount and timing of tenant roll-overs; the risk associated with
leasing-up vacant space and the strength of the market during the lease-up
period; the duration of the cash flow, and its ability to increase with
inflation along with the creditworthiness of the existing tenancy; investor
demand for the property type; the diversification of the metropolitan area; the
property's location within the local market and the supply and demand for the
property type within that market; and the effective age of the property.
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INCOME APPROACH
- --------------------------------------------------------------------------------
Our selection of the investment parameters utilized to estimate the market
value of the subject property, was based on the preceding data, including
Cushman & Wakefield's National Investor Survey, and national investor surveys
provided by CB Commercial and Korpacz. In our selection of the investment
parameters utilized to estimate the market value of the subject property, we
have also consulted members of Cushman & Wakefield's Financial Services Group,
who are active in the acquisition and disposition of office properties
nationally, and rates derived from actual sales, as indicated in our Sales
Comparison Approach.
Based on the above, in our analysis of the subject property, we discounted
the cash flows to be received by an equity investor, over the holding period,
from 13.25 to 13.75 percent, at 25 basis point intervals, with the mid-aspect of
the range at 13.50 percent, which is towards the upper end of the indicated
range, but is considered reasonable, given the high level of risk associated
with the conversion of the subject property from single-tenancy to
multi-tenancy. This range of discount rates reflects both investment market
conditions and our assumptions reflecting increases in the subject property's
net operating income over the holding period. In our analysis, we have selected
a range of terminal capitalization rates from 9.50 to 10.00 percent, in order to
estimate the value of the subject property at reversion. The preceding
investment parameters are within the overall range of investors surveys
previously cited and within the range of investment parameters of participants
currently active in the acquisition and disposition of office properties similar
to the subject's.
In the discounted cash flow analysis, we employed the PRO-JECT PLUS
computer program. This program simulates the operating characteristics of the
subject property, and allows us to make a variety of operating assumptions. We
tried to reflect the most likely assumptions of typical buyers and sellers in
this particular market segment. In the computer model used to analyze this
property, we may be following basic cash flow assumptions, presented as follows:
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INCOME APPROACH
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
============================================================================================
FEE-SIMPLE INTEREST
ZENITH CORPORATE HEADQUARTERS OFFICE BUILDING
============================================================================================
BASIC ASSUMPTION
------------------------------- ------------------------------------------------------------
<S> <C>
NRA: 401,000 SF 401,000 SF, or 100% of total NRA
------------------------------- ------------------------------------------------------------
Income Growth Rate 3.50%, and subsequent years
for Market Rents
------------------------------- ------------------------------------------------------------
Consumer Price Index 3.50%, and subsequent years
------------------------------- ------------------------------------------------------------
Expense Growth Rate 3.50%, and subsequent years
------------------------------- ------------------------------------------------------------
Market Rental Rates $14.00/SF, Net
------------------------------- ------------------------------------------------------------
Escalations 3.0% annually
------------------------------- ------------------------------------------------------------
Expense Provision Net
------------------------------- ------------------------------------------------------------
Lease Term 7 years
------------------------------- ------------------------------------------------------------
Tenant Improvements
Initial Build-Out $45.00/SF
Second Generation $15.00/SF
Renewal Tenant $ 7.50/SF
Speculative Tenant $10.13/SF
------------------------------- ------------------------------------------------------------
Vacancy Between Tenants 6 Months
------------------------------- ------------------------------------------------------------
Renewal Probability 65%
------------------------------- ------------------------------------------------------------
Turnover Probability 35%
------------------------------- ------------------------------------------------------------
Leasing Commissions 12.00% of the first year's base rent, and 4.50% thereafter
New Tenants
------------------------------- ------------------------------------------------------------
Renewal Tenants 4.50%
------------------------------- ------------------------------------------------------------
Absorption Schedule 24 months
------------------------------- ------------------------------------------------------------
Holding Period 10 years
------------------------------- ------------------------------------------------------------
Year of Reversion 11th year
------------------------------- ------------------------------------------------------------
Credit Loss Provision 3.00%, and subsequent years
------------------------------- ------------------------------------------------------------
Alteration and Leasing First year of the lease term.
Commission Payout Method
------------------------------- ------------------------------------------------------------
Terminal Overall Rate 9.75%
------------------------------- ------------------------------------------------------------
Cost of Sale at Reversion 1.5%
------------------------------- ------------------------------------------------------------
Discount Rate 13.5%
------------------------------- ------------------------------------------------------------
Implied Going-In OAR N/A
=============================== ============================================================
</TABLE>
129
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
(1) The pro forma is based on an 10-year holding period beginning October 1,
1998.
(2) Analysis of the forecasted income stream; establishment of an economic
rent level for the vacant space; projection of future revenues annually
for an 10-year holding period through calendar-year 2008.
(3) Our growth rate assumption for operating expenses, and market rental rate
increases, are estimated at 3.50 percent during the holding period.
(4) A projection of future property expenses based upon comparable office
buildings in the subject's submarket, and expense information provided by
BOMA.
(5) Reimbursable operating expenses regarding a prospective tenant are
assumed on a triple net basis, whereby all reimbursable operating
expenses are the responsibility of the tenant, except non-reimbursable
expenses, reserves and replacements, alterations, leasing commissions,
and management fees, set at our estimated stabilized expense amount.
(6) Alteration costs for initial build-out are estimated at $45.00 per square
foot (inclusive of HVAC retrofit from single-tenancy to multi-tenancy),
$15.00 for second generation space, $7.50 per square foot for a renewal
tenant, and $10.13 for prospective lease renewals. Alteration costs are
paid in the first year of the lease.
(7) Leasing commissions for the subject property are estimated at 12.00
percent of the first year's rent and 4.5.0 percent of the remaining
year's rent for the lease term. Leasing commissions for prospective lease
renewals are assumed at 7.13 percent of the first year's rent and 4.50
percent of the remaining year's rent for the lease term. All leasing
commissions are assumed to be paid in the first year of the lease.
(8) Capital improvement costs associated with the transformation of the
subject property from single-tenancy to multi-tenancy, including
$1,000,000 for additional landscaping and re-surfacing of the existing
parking lot; $450,000 for additional parking spaces, and $750,000 for
asbestos removal.
(9) Conversion of the pre-tax cash flows into a present value by discounting
at an acceptable range of yield rates currently expected for similar
types of properties. In our analysis, we have discounted the cash flows
from 12.75 to 13.25 percent at 25 basis point intervals.
(10) Collection loss is calculated at 3.0 percent of the potential gross
income during the holding period.
(11) A derivation of the most probable net operating income and pre-tax cash
flows to be generated by the property by subtracting all property
expenses from the effective gross income.
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<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
CASH FLOW
131
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
(12) Estimation of a reversionary sales price based upon capitalizing the net
operating income in calendar year 2009.
(13) Determination of a yield rate which would attract a prudent investor to
invest their money in a similar situation with comparable degrees of
risk, non-liquidity, and management burdens.
(14) The reversionary sales price of the subject property is estimated by
dividing a range of terminal capitalization rates from 9.50 to 10.0
percent into the 11th year's NOI before debt service; subtracting costs
of sale, assumed to be 1.50 percent; and adding the net proceeds to the
10th year's income before discounting.
(15) Our selection of the investment parameters utilized to estimate the
market value of the subject property, were based on investment parameters
currently anticipated in the marketplace, investment parameters derived
from the Sales Comparison Approach, conversations with Cushman &
Wakefield's Financial Services Group, Cushman & Wakefield's National
Investor Survey, national surveys provided by CB Commercial and Korpacz,
and conversations with participants currently active in the acquisition
and disposition of properties similar to the subject.
A detailed cash flow pro forma for 132 months, beginning October 1, 1998,
based on the previous assumptions, is presented on the facing page.
In regard to the subject property, it is our opinion that an investor would
require a discount rate in the range of 13.25 to 13.75 percent. Accordingly, we
have discounted the projected future pre-tax cash flows to be received by an
equity investor in the subject property to a present value from 13.25 percent to
13.75 percent, at 25 basis point intervals. Discounting these cash flows over
the range of yields and terminal rates now being required by participants in the
market for this type of real estate places additional perspective upon our
analysis. A valuation matrix for the subject property as of October 1, 1998, is
presented as follows:
<TABLE>
<CAPTION>
=========================================================================================================
VALUATION MATRIX
ZENITH
HEADQUARTERS OFFICE BUILDING
=========================================================================================================
TERMINAL CAPITALIZATION RATE
------------------------- ------------------------- -------------------------
IRR 9.50% 9.75% 10.0%
- --------------------------- ------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
13.25% $22,676,279 $22,141,673 $21,633,796
13.50% $22,052,611 $21,529,664 $21,032,864
=========================================================================================================
</TABLE>
132
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
- --------------------------- ------------------------- ------------------------- -------------------------
13.75% $21,443,116 $20,931,549 $20,445,560
=========================== ========================= ========================= =========================
</TABLE>
The value of the subject property varies with the discount rate and
terminal capitalization rate from approximately $22,676,000 to $20,445,000, as
rounded. Giving consideration to all of the characteristics of the subject
property previously discussed, we feel that a prudent investor would require a
yield which falls near the mid-aspect of the market range outlined above for
this property.
In view of the analysis presented, it is our opinion that the discounted
cash flow analysis indicates a market value of $21,500,000, as rounded, for the
subject property. The indices of investment generated through this indication of
value are presented as follows:
<TABLE>
<CAPTION>
===============================================================
ZENITH
HEADQUARTERS OFFICE BUILDING
GLENVIEW, ILLINOIS
===============================================================
<S> <C>
Terminal Capitalization Rate 9.75%
Equity Yield (Rd) 13.50%
Price/SF of NRA (401,000 SF) $53.62/SF
===============================================================
</TABLE>
We would note that the computed equity yield is not necessarily the true
rate of return on equity capital. This analysis has been performed on a pre-tax
basis. The tax benefits created by real estate investment will serve to attract
investors to a pre-tax yield, which is not the full measure of the return on
capital.
CONCLUSION
In the Income Approach to value, we utilized the discounted cash flow
method in estimating the market value of the subject property. We believe that
the discounted cash flow method is most appropriate. The discounted cash flow
method indicates an overall value conclusion of $21,500,000. Therefore, in the
final analysis, we have estimated the market value of the subject property, by
the Income Approach, as of October 1, 1998, at $21,500,000.
133
<PAGE>
RECONCILIATION AND FINAL VALUE ESTIMATE
- --------------------------------------------------------------------------------
The three approaches we used indicate the following values:
Cost Approach N/A
Sales Comparison Approach $21,850,000
Income Approach $21,500,000
The merits of each approach have been considered, and they individually
lend support to our overall conclusion of value.
The Cost Approach is a method whereby accrued depreciation is deducted from
the cost new of the improvements, and this is added to the land value. However,
given the advanced age and is unique nature of the subject property, coupled
with the difficulty in estimating accrued depreciation for the subject property,
we have not utilized the Cost Approach in this analysis.
The Sales Comparison Approach is a reflection of what investors have been
paying for similar office properties. Sufficient data exists to develop a
conclusion of value by this approach. However, the primary emphasis of this
approach is to focus on investment parameters. The derivation of overall
capitalization rates recognizes the relationship between a property's income and
selling price, which was recognized in this approach. It is our opinion that the
indices reflected by the sales were supportive of the parameters utilized in the
Sales Comparison Approach and Income Approach.
In the final analysis, the Income Approach is considered to be the most
reliable and meaningful indicator of value. The value indicated by this approach
is a reflection of investment parameters that were derived from the Sales
Comparison Approach, Cushman & Wakefield's National Survey of Real Estate
Investors, Spring 1998 Real Estate Investor Survey conducted by Peter F. Korpacz
& Associates, CB Commercial's Second Quarter 1998 Investor Survey, members of
Cushman & Wakefield's Financial Services Group, and participants currently
active in the acquisition and disposition of properties similar to the
subject's. The income was derived from actual recently negotiated leases of
similar Class B office buildings, within the subject's primary office submarket.
The expenses were based upon similar office properties, including information
provided by BOMA.
The subject's development is highly suited to analysis by the discounted
cash flow method. The focus on property value in relation to anticipated income
is well founded since the basis for investment is profit in the form of return
or yield on investment capital.
134
<PAGE>
RECONCILIATION AND FINAL VALUE ESTIMATE
- --------------------------------------------------------------------------------
The subject's development, as an investment vehicle, is sensitive to all
changes in the economic climate and the economic expectations of investors. The
discounted cash flow analysis most accurately reflects changes in the economic
climate of investor expectations by adjusting the variables used to qualify the
model. Most weight was given the discounted cash flow analysis in estimating the
market value of the subject property.
As a result of our analysis, we have formed an opinion that the market
value of the fee simple interest in the above referenced real property, subject
to the assumptions, limiting conditions, certifications, and definitions, as of
October 1, 1998, was:
TWENTY ONE MILLION FIVE HUNDRED THOUSAND DOLLARS
$21,500,000
Further, it is our opinion that the market value of the fee simple interest
in the surplus land area which is associated with the subject property, subject
to the assumptions, limiting conditions, certifications, and definitions, as of
October 1, 1998, was:
THREE MILLION DOLLARS
$3,000,000
As such, it is our opinion that the aggregate market value of the combined
fee simple interests in the subject property, subject to the assumptions,
limiting conditions, certifications, and definitions, as of October 1, 1998,
was:
TWENTY FOUR MILLION FIVE HUNDRED THOUSAND DOLLARS
$24,500,000
MARKETING TIME
Marketing time is an estimate of the time that might be required to sell a
real property interest at the appraised value. Marketing time is presumed to
start on the effective date of the appraisal. Marketing time is subsequent to
the effective date of the appraisal, and exposure time is presumed to precede
the effective date of the appraisal.
The estimate of marketing time uses some of the same data analyzed in the
process of estimating the reasonable exposure time and is not intended to be a
prediction of a date of sale. Our estimate of an appropriate marketing time for
the subject relates to a sale of the subject property. Based on our
investigations, we conclude that a marketing period of approximately 12 months,
or less would be required in order to sell the subject property.
135
<PAGE>
RECONCILIATION AND FINAL VALUE ESTIMATE
- --------------------------------------------------------------------------------
This is based upon our conversations with Cushman & Wakefield's Financial
Services Group, whom are familiar with the subject's position within the
marketplace. The value is based on the current market conditions. It should not
be interpreted that this value estimate represents the final price at which the
property might sell throughout the entire marketing period due to uncertain
market conditions.
Given the subject's location and market position, it is our opinion that
the property would attract investor interest. According to the Third Quarter
1998 Real Estate Investor Survey, published by Peter Korpacz & Associates, Inc.,
"competition for properties is reducing the length of time they remain on the
market." This is evident in the shorter average marketing time in most surveyed
markets compared with Third Quarter 1997. According to Korpacz, the average
marketing time for national suburban office buildings is 8.25 months as of Third
Quarter 1998, a decrease from the Third Quarter 1997 average marketing time of
9.00 months. Furthermore, the average marketing time of office buildings located
within the Chicago metropolitan area is 7.50 months, which is a decrease from
the Third Quarter 1997 average marketing time of 10.43 months. Individual
marketing time estimates for all property groups ranges from a low of 4.65
months (National Apartment Market) to a high of 9.55 months (National Regional
Mall). The average for all surveyed commercial markets is 7.37 months, a
decrease from last year's average of 8.68 months.
According to CB Commercial, Second Quarter 1998, typical marketing time
regarding suburban office buildings ranges from a low of 4 months to a high of 9
months, with an overall average of 5.93 months.
Given the factors stated above, it is our opinion that a marketing time of
approximately 12 months, or less is appropriate for the subject property, given
the property's location, and investment parameters utilized in our Income
Approach, and with additional support provided by the Spring 1998 Real Estate
Investor Survey, and CB Commercial.
136
<PAGE>
QUICK SALE VALUE ESTIMATE
- --------------------------------------------------------------------------------
We have provided in our valuation a quick sale or orderly liquidation
value estimate of the subject property. A quick sale is estimated as a sale
within a six-month period.
In considering the question of value under a quick sale concept, there is
a great degree of subjectivity and judgement involved in this estimate.
No scientific method or "rule of thumb" exists in applying this discount.
Therefore, we have attempted to subjectively consider the potential buyer for
this property and determine a reasonable discount given the relative
marketability of the property and other factors.
Office brokers were contacted in the subject's marker area and, although
no specific examples were discussed, they believe a discount ranging from 10 to
20 percent of the market value would be most likely under a quick sale scenario.
We believe an approximate 15 percent discount to be a reasonable allowance
to account for a quick sale of the subject property. It is noted that the
discount rate is applied to the estimated value of the subject property
inclusive of the surplus developable rights (FAR).
Therefore, after considering all factors pertinent under a quick sale or
orderly liquidation sale concept, it is our opinion that the value of the
subject property, as of October 1, 1998, was:
TWENTY-MILLION EIGHT HUNDRED THOUSAND DOLLARS
$20,800,000
137
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
"Appraisal" means the appraisal report and opinion of value stated therein; or
the letter opinion of value, to which these Assumptions and Limiting Conditions
are annexed.
"Property" means the subject of the Appraisal.
"C&W" means Cushman & Wakefield, Inc. or its subsidiary which issued the
Appraisal.
This appraisal has been made subject to the following assumptions and limiting
conditions:
1. No responsibility is assumed for the legal description or for any matters
which are legal in nature. Title to the Property is assumed to be good and
marketable and the Property is assumed to be free and clear of all liens
unless otherwise stated. No survey of the Property was undertaken.
2. The information contained in the Appraisal or upon which the Appraisal is
based has been gathered from sources the Appraiser assumes to be reliable
and accurate. Some of such information may have been provided by the owner
of the Property. Neither the Appraisers nor C&W shall be responsible for
the accuracy or completeness of such information, including the correctness
of estimates, opinions, dimensions, sketches, exhibits and other factual
matters. The Appraisal and the opinion of value stated therein is as of the
date stated in the Appraisal. Changes since that date in external and
market factors can significantly affect property value.
3. The appraisal is to be used in whole and not in part. No part of the
Appraisal shall be used in conjunction with any other appraisal. Possession
of the Appraisal, or a copy thereof, does not carry with it the right of
publication. Publication of the Appraisal or any portion thereof without
the prior written consent of C&W is prohibited. Except as may be otherwise
expressly stated in the letter of engagement to prepare the Appraisal, C&W
does not permit use of the Appraisal by any person other than the party to
whom it is addressed or for purposes other than those for which it was
prepared. If written permission is given by C&W to use the Appraisal, the
Appraisal must be used in its entirety and only with proper written
qualification as approved by C&W. No part of the Appraisal or the identity
of the Appraiser shall be conveyed to the public through advertising,
public relations, news media or used in any material (other than in
judicial or non-judicial proceedings involving Zenith) without C&W's prior
written consent. Reference to the Appraisal Institute or to the MAI
designation is prohibited.
138
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
4. The Appraisal assumes (a) responsible ownership and competent management of
the Property; (b) there are no hidden or unapparent conditions of the
Property, subsoil or structures that render the Property more or less
valuable (no responsibility is assumed for such conditions or for arranging
for engineering studies that may be required to discover them); (c) full
compliance with all applicable federal, state and local zoning and
environmental regulations and laws, unless noncompliance is stated, defined
and considered in the Appraisal; and (d) all required licenses,
certificates of occupancy and other governmental consents have been or can
be obtained and renewed for any use on which the value estimate contained
in the Appraisal is based.
5. The physical condition of the improvements considered by the Appraisal is
based on visual inspection by the Appraiser or other person identified in
the Appraisal. C&W assumes no responsibility for the soundness of
structural members nor for the condition of mechanical equipment, plumbing
or electrical components.
6. The projected potential gross income referred to in the Appraisal may be
based on lease summaries provided by the owner or third parties. The
Appraiser has not reviewed lease documents and assumes no responsibility
for the authenticity or completeness of lease information provided by
others or the bona fides of actual lease. C&W suggests that legal advice be
obtained regarding the interpretation of lease provisions and the
contractual rights of parties.
7. The projections of income and expenses are not predictions of the future.
Rather, they are the Appraiser's best estimates of current market thinking
on future income and expenses. The Appraiser and C&W make no warranty or
representation that these projections will materialize. The real estate
market is constantly fluctuating and changing. It is not the Appraisers'
task to predict or in any way warrant the conditions of a future real
estate market; the Appraiser can only reflect what the investment
community, as of the date of the Appraisal, envisions for the future in
terms of rental rates, expenses, supply, and demand.
8. Unless otherwise stated in the Appraisal, the existence of potentially
hazardous or toxic materials which may have been used in the construction
or maintenance or operation of the improvements or may be located at or
about the Property was not considered in arriving at the opinion of value
stated in the Appraisal. These materials (such as formaldehyde foam
insulation, asbestos insulation, various soil contaminants, and other
potentially hazardous materials) may affect the value of the Property. The
Appraisers are not qualified to detect such substances and C&W urges that
an expert in this field be employed to determine the economic impact of
these matters on the opinion of value stated in the Appraisal.
9. If the Appraisal is submitted to a lender or investor with the prior
approval of C&W, such party should consider the Appraisal as one factor,
together with its independent investment considerations and underwriting
criteria, in its overall investment decision.
139
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
10. Unless otherwise stated in the Appraisal, compliance with the requirements
of the Americans with Disabilities Act of 1990 (ADA) has not been
considered in arriving at the opinion of value stated in the Appraisal.
Failure to comply with the requirements of the ADA may negatively affect
the value of the property. C&W recommends that an expert in this field be
employed.
11. Please note that prior to the use of the Appraisal report, our value
conclusion, or our firm name as part of, or to be referenced in, any
offering or other material intended for the review of others to be
submitted to others (other than in connection with judicial or non-judicial
proceedings involving Zenith), except as otherwise provided in our letter
of engagement, our permission is granted on the condition that we be
provided with an indemnification agreement in a form and content
satisfactory to us, by parties satisfactory to us. Notwithstanding the
foregoing, prospective institutional lenders may rely on and use the
appraisal reports in their entirety for purposes of a first mortgage loan
transaction with Zenith.
140
<PAGE>
CERTIFICATION OF APPRAISAL
- --------------------------------------------------------------------------------
We certify that, to the best of our knowledge and belief:
1. Jeffrey A. Piehl and Michael J. Schaeffer inspected the property. Jeffrey
A. Piehl and Michael J. Schaeffer prepared the report. Stanley R. Dennis,
Jr., MAI, has reviewed and approved the report.
2. The statements of fact contained in this report are true and correct.
3. The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are our personal,
unbiased professional analyses, opinions, and conclusions.
4. We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
5. Our compensation is not contingent on an action or event (such as the
approval of a loan) resulting from the analyses, opinions, or conclusions
in, or the use of, this report. The appraisal assignment was not based on
a requested minimum valuation, a specific valuation, or the approval of a
loan.
6. Our analyses, opinions, and conclusions were developed, and this report
has been prepared, in conformity with the Uniform Standards of
Professional Appraisal Practice of the Appraisal Foundation and the Code
of Ethics and Standards of Professional Practice of the Appraisal
Institute.
7. No one provided significant professional assistance to the persons
signing this report.
8. The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
9. As of the date of this report, Stanley R. Dennis, Jr., MAI, has completed
the requirements of the continuing education program of the Appraisal
Institute.
Jeffrey A. Piehl Michael J. Schaeffer Stanley R. Dennis, Jr., MAI
Associate Appraiser Director Managing Director
Illinois Certification No. Illinois Certification No.
No. 153-000885 No. 153-000686
141
<PAGE>
ADDENDA
- --------------------------------------------------------------------------------
ENGAGEMENT LETTER
STATE APPRAISAL CERTIFICATION
LEGAL DESCRIPTION
TITLE REPORT
ANNEXATION AGREEMENT
PRO-JECT ASSUMPTIONS REPORT
PRO-JECT LEASE ABSTRACT REPORT
CUSHMAN & WAKEFIELD'S INVESTOR SURVEY
QUALIFICATIONS OF APPRAISERS
142
<PAGE>
================================================================================
ZENITH CORPORATE HEADQUARTERS BUILDING
PURCHASE/SALE YIELD ANALYSIS
ALL CASH SALE-PURCHASED OCTOBER 1, 1998, SOLD SEPTEMBER 3, 2009
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
PRESENT VALUE ESTIMATE
-------------------------------------------------------------------------
<S> <C>
Discount Rate 13.50%
Present Value of Cash Flow $ 1,657,676
Present Value of Reversion $ 19,871,988
VALUE OF SUBJECT PROPERTY $ 21,529,664
ROUNDED $ 21,500,000
Going-In Cap Rate -3.28%
-------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
REVERSION ASSUMPTIONS
-------------------------------------------------------------------------
<S> <C>
11th Year NOI $ 6,978,600
Terminal Cap Rate 9.75%
----
Resale Price $ 71,575,385
Costs of Sale @ 1.5% $ 1,073,631
------------
Net Reversion Proceeds $ 70,501,754
-------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
RATE SENSITIVITY ANALYSIS
------------------------------------------------------------------------------------
Terminal Cap Rate
IRR 9.50% 9.75% 10.00%
--- ----- ----- ------
<S> <C> <C> <C>
12.75% $23,967,593 $23,408,800 $22,877,947
13.00% $23,314,482 $22,767,930 $22,248,705
13.25% $22,676,279 $22,141,673 $21,633,796
-----------
13.50% $22,052,611 $21,529,664 $21,032,864
-----------
13.75% $21,443,116 $20,931,549 $20,445,560
14.00% $20,847,441 $20,346,983 $19,871,548
14.25% $20,265,245 $19,775,631 $19,310,497
------------------------------------------------------------------------------------
</TABLE>
================================================================================
<PAGE>
================================================================================
ZENITH CORPORATE HEADQUARTERS BUILDING
10-YEAR CASH-FLOW PROJECTIONS AND REVERSIONARY DATA
Beginning October 1, 1998
Ending September 30, 2008
<TABLE>
<CAPTION>
Fiscal Year
-------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 2004
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RENTAL INCOME
ALL TENANTS $ 597,147 $ 3,784,933 $5,633,121 $5,802,113 $5,976,178 $ 6,155,460
----------- ----------- ---------- ---------- ---------- -----------
TOTAL RENTAL INCOME $ 597,147 $ 3,784,933 $5,633,121 $5,802,113 $5,976,178 $ 6,155,460
RECOVERIES
GENERAL OPERATING $ 191,940 $ 1,231,570 $1,983,767 $2,053,197 $2,125,060 $ 2,199,439
INSURANCE $ 6,914 $ 44,363 $ 71,457 $ 73,960 $ 76,545 $ 79,226
REAL ESTATE TAXES $ 125,514 $ 805,351 $1,297,228 $1,342,632 $1,389,622 $ 1,438,260
MANAGEMENT FEES $ 7,518 $ 160,331 $ 345,482 $ 374,292 $ 386,219 $ 398,532
----------- ----------- ---------- ---------- ---------- -----------
TOTAL RECOVERIES $ 331,886 $ 2,241,615 $3,697,934 $3,844,081 $3,977,446 $ 4,115,457
GROSS RENTAL INCOME $ 929,033 $ 6,026,548 $9,331,055 $9,646,194 $9,953,624 $10,270,917
VACANCY ALLOWANCE ($27,871) ($180,796) ($279,931) ($289,386) ($298,609) ($308,127)
------------ ----------- ---------- ---------- ---------- -----------
EFFECTIVE GROSS INCOME $ 901,162 $ 5,845,752 $9,051,124 $9,356,808 $9,655,015 $ 9,962,790
OPERATING EXPENSES
GENERAL OPERATING $ 292,127 $ 1,235,325 $1,879,827 $2,053,199 $2,125,061 $ 2,199,438
INSURANCE $ 66,706 $ 69,041 $ 71,457 $ 73,958 $ 76,547 $ 79,226
REAL ESTATE TAXES $ 1,210,975 $ 1,253,359 $1,297,227 $1,342,630 $1,389,622 $ 1,438,259
MANAGEMENT FEES $ 36,046 $ 233,830 $ 362,045 $ 374,272 $ 386,201 $ 398,512
----------- ----------- ---------- ---------- ---------- -----------
TOTAL OPERATING EXPENSES $ 1,605,854 $ 2,791,555 $3,610,556 $3,844,059 $3,977,431 $ 4,115,435
-------------------------------------------------------------------------------------------
NET OPERATING INCOME ($704,692) $ 3,054,197 $5,440,568 $5,512,749 $5,677,584 $ 5,847,355
-------------------------------------------------------------------------------------------
CAPITAL EXPENSES
TENANT ALTERATIONS $ 5,193,346 $11,120,779 $ 913,182 $ 0 $ 0 $ 0
LEASING COMMISSIONS $ 689,759 $ 1,477,018 $ 181,928 $ 0 $ 0 $ 0
CAPITAL RESERVES $ 50,000 $ 51,750 $ 53,561 $ 55,436 $ 57,376 $ 59,384
PARKING/LANDSCAPING $ 1,000,000
PARKING EXPANSION $ 450,000
ASBESTOS REMOVAL $ 750,000
OPERATING EXPENSE LOSS $ 585,000 $ 200,000
-----------
TOTAL CAPITAL EXPENSES $ 8,718,105 $12,849,547 $1,148,671 $ 55,436 $ 57,376 $ 59,384
----------- ----------- ---------- ---------- ---------- -----------
-------------------------------------------------------------------------------------------
CASH FLOW ($9,422,797) ($9,795,350) $4,291,897 $5,457,313 $5,620,208 $ 5,787,971
-------------------------------------------------------------------------------------------
<CAPTION>
-------------------------------------------------------------------------------------------
2005 2006 2007 2008 REVERSION
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RENTAL INCOME
ALL TENANTS $ 6,340,126 $ 6,213,046 $ 6,142,824 $ 7,043,942 $ 7,345,623
----------- ----------- ----------- ----------- ----------
TOTAL RENTAL INCOME $ 6,340,126 $ 6,213,046 $ 6,142,824 $ 7,043,942 $ 7,345,623
RECOVERIES
GENERAL OPERATING $ 2,276,419 $ 2,245,971 $ 2,202,745 $ 2,465,817 $ 2,612,242
INSURANCE $ 81,998 $ 80,900 $ 79,346 $ 88,820 $ 94,097
REAL ESTATE TAXES $ 1,488,600 $ 1,468,687 $ 1,440,422 $ 1,612,446 $ 1,708,198
MANAGEMENT FEES $ 411,238 $ 382,346 $ 363,650 $ 439,367 $ 474,740
----------- ----------- ----------- ----------- -----------
TOTAL RECOVERIES $ 4,258,255 $ 4,177,904 $ 4,086,163 $ 4,606,450 $ 4,889,277
GROSS RENTAL INCOME $10,598,381 $10,390,950 $10,228,987 $11,650,392 $12,234,900
VACANCY ALLOWANCE ($317,951) ($311,729) ($306,869) ($349,512) ($367,047)
----------- ----------- ----------- ----------- -----------
EFFECTIVE GROSS INCOME $10,280,430 $10,079,221 $ 9,922,118 $11,300,880 $11,867,853
OPERATING EXPENSES
GENERAL OPERATING $ 2,276,419 $ 2,230,419 $ 2,219,321 $ 2,464,791 $ 2,612,243
INSURANCE $ 81,999 $ 84,869 $ 87,839 $ 90,914 $ 94,096
REAL ESTATE TAXES $ 1,488,598 $ 1,540,699 $ 1,594,623 $ 1,650,435 $ 1,708,200
MANAGEMENT FEES $ 411,217 $ 403,169 $ 396,885 $ 452,035 $ 474,714
----------- ----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES $ 4,258,233 $ 4,259,156 $ 4,298,668 $ 4,658,175 $ 4,889,253
-------------------------------------------------------------------------------------------
NET OPERATING INCOME $ 6,022,197 $ 5,820,065 $ 5,623,450 $ 6,642,705 $ 6,978,600
-------------------------------------------------------------------------------------------
CAPITAL EXPENSES
TENANT ALTERATIONS $ 0 $ 1,486,661 $ 3,183,465 $ 387,274
LEASING COMMISSIONS $ 0 $ 767,983 $ 1,644,522 $ 202,560
CAPITAL RESERVES $ 61,463 $ 63,614 $ 65,840 $ 68,145
PARKING/LANDSCAPING
PARKING EXPANSION
ASBESTOS REMOVAL
OPERATING EXPENSE LOSS
TOTAL CAPITAL EXPENSES $ 61,463 $ 2,318,258 $ 4,893,827 $ 657,979
----------- ----------- ----------- -----------
-------------------------------------------------------------------------------------------
CASH FLOW $ 5,960,734 $ 3,501,807 $ 729,623 $ 5,984,726
-------------------------------------------------------------------------------------------
</TABLE>
================================================================================
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
10 ZENITH HEADQUARTERS (10/98 VALUE) PRO FORMA ANA 981,001 20F
20 ALL TENANTS 597,147 3,784,933 5,633,121 5,802,113 5,976,178 6,155,460 6,340,126
30 GENERAL OPERATING 191,940 1,231,570 1,983,767 2,053,197 2,125,060 2,199,439 2,276,419
30 INSURANCE 6,914 44,363 71,457 73,960 76,545 79,226 81,998
30 REAL ESTATE TAXES 125,514 805,351 1,297,228 1,342,632 1,389,622 1,438,260 1,488,600
30 MANAGEMENT FEES 7,518 160,331 345,482 374,292 386,219 398,532 411,238
70 VACANCY ALLOWANCE 27,871 180,796 279,931 289,386 298,609 308,127 317,951
80 GENERAL OPERATING 292,127 1,235,325 1,879,827 2,053,199 2,125,061 2,199,438 2,276,419
80 INSURANCE 66,706 69,041 71,457 73,958 76,547 79,226 81,999
80 REAL ESTATE TAXES 1,210,975 1,253,359 1,297,227 1,342,630 1,389,622 1,438,259 1,488,598
80 MANAGEMENT FEE 36,046 233,830 362,045 374,272 386,201 398,512 411,217
90 COMMISSIONS 689,759 1,477,018 181,928 0 0 0 0
91 CAPITAL IMPRVMNTS 2,835,000 251,750 53,561 55,436 57,376 59,384 61,463
95 ALTERATIONS 5,193,346 11,120,779 913,182 0 0 0 0
20 ALL TENANTS 9,945,433
30 GENERAL OPERATING 3,560,218
30 INSURANCE 128,243
30 REAL ESTATE TAXES 2,328,103
30 MANAGEMENT FEES 629,311
70 VACANCY ALLOWANCE 497,739
80 GENERAL OPERATING 3,560,219
80 INSURANCE 128,243
80 REAL ESTATE TAXES 2,328,101
80 MANAGEMENT FEE 643,742
90 COMMISSIONS 0
91 CAPITAL IMPRVMNTS 96,125
95 ALTERATIONS 0
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10 ZENITH HEADQUARTERS
(10/98 VALUE )
20 ALL TENANTS 6,213,046 6,142,824 7,043,942 7,345,623 7,565,992 7,792,973 8,026,762 7,963,053
30 GENERAL OPERATING 2,245,971 2,202,745 2,465,817 2,612,242 2,703,672 2,798,300 2,896,242 2,894,044
30 INSURANCE 80,900 79,346 88,820 94,097 97,391 100,798 104,327 104 245
30 REAL ESTATE TAXES 1,468,687 1,440,422 1,612,446 1,708,198 1,767,989 1,829,870 1,893,910 1,892,478
30 MANAGEMENT FEES 382,346 363,650 439,367 474,740 489,871 505,493 521,611 495,552
70 VACANCY ALLOWANCE 311,729 306,869 349,512 367,047 378,747 390,823 403,286 400,481
80 GENERAL OPERATING 2,230,419 2,219,321 2,464,791 2,612,243 2,703,671 2,798,300 2,896,240 2,865,123
80 INSURANCE 84,869 87,839 90,914 94,096 97,389 100,798 104,326 107,977
80 REAL ESTATE TAXES 1,540,699 1,594,623 1,650,435 1,708,200 1,767,987 1,829,867 1,893,912 1,960,199
80 MANAGEMENT FEE 403,169 396,885 452,035 474,714 489,847 505,464 521,583 517,956
90 COMMISSIONS 767,983 1,644,522 202,560 0 0 0 0 467,396
91 CAPITAL IMPRVMNTS 63,614 65,840 68,145 70,530 72,998 75,553 78,198 80,935
95 ALTERATIONS 1,486,661 3,183,465 387,274 0 0 0 0 904,784
20 ALL TENANTS
30 GENERAL OPERATING
30 INSURANCE
30 REAL ESTATE TAXES
30 MANAGEMENT FEES
70 VACANCY ALLOWANCE
80 GENERAL OPERATING
80 INSURANCE
80 REAL ESTATE TAXES
80 MANAGEMENT FEE
90 COMMISSIONS
91 CAPITAL IMPRVMNTS
95 ALTERATIONS
<CAPTION>
<S> <C> <C> <C> <C>
10 ZENITH HEADQUARTERS (10/98 VALUE)
20 ALL TENANTS 7,781,001 8,864,085 9,374,524 9,655,759
30 GENERAL OPERATING 2,802,504 3,098,091 3,323,502 3,439,826
30 INSURANCE 100,949 111,597 119,716 123,906
30 REAL ESTATE TAXES 1,832,618 2,025,905 2,173,305 2,249,373
30 MANAGEMENT FEES 461,532 548,133 603,858 624,452
70 VACANCY ALLOWANCE 389,358 439,434 467,847 482,800
80 GENERAL OPERATING 2,832,082 3,107,000 3,313,940 3,439,825
80 INSURANCE 111,756 115,668 119,716 123,906
80 REAL ESTATE TAXES 2,028,806 2,099,814 2,173,307 2,249,373
80 MANAGEMENT FEE 503,570 568,335 605,083 624,420
90 COMMISSIONS 2,092,293 794,266 0 0
91 CAPITAL IMPRVMNTS 83,767 86,699 89,734 92,874
95 ALTERATIONS 4,050,258 1,531,164 0 0
20 ALL TENANTS
30 GENERAL OPERATING
30 INSURANCE
30 REAL ESTATE TAXES
30 MANAGEMENT FEES
70 VACANCY ALLOWANCE
80 GENERAL OPERATING
80 INSURANCE
80 REAL ESTATE TAXES
80 MANAGEMENT FEE
90 COMMISSIONS
91 CAPITAL IMPRVMNTS
95 ALTERATIONS
</TABLE>
<PAGE>
Exhibit 99.Q
------------------------------------------------------------
COMPLETE APPRAISAL
OF REAL PROPERTY
ZENITH ELECTRONICS CORPORATION
RAULAND PICTURE TUBE DIVISION
PLANT #45
2155 Rose Street (25th Avenue)
Unincorporated Leyden Township, Cook County, Illinois
------------------------------------------------------------
IN A SELF-CONTAINED FORMAT
As of MAY 21, 1998
Prepared For:
PPM FINANCE, INC.
225 West Wacker Drive, Suite 1200
Chicago, Illinois 60606
And
ZENITH ELECTRONICS CORPORATION
1000 Milwaukee Avenue
Glenview, Illinois 60625
Prepared By:
CUSHMAN & WAKEFIELD OF ILLINOIS, INC.
Valuation Advisory Services
455 North Cityfront Plaza Drive, Suite 2800
<PAGE>
Chicago, Illinois 60611-5555
<PAGE>
April 7, 1999
Ms. Barbra Buck
PPM FINANCE, INC.
225 West Wacker Drive, Suite 1200
Chicago, Illinois 60606
and
Ms. Beverly Wyckoff, Esq.
ZENITH ELECTRONICS CORPORATION
1000 Milwaukee Avenue
Glenview, Illinois 60625
RE: COMPLETE APPRAISAL OF REAL PROPERTY
ZENITH ELECTRONICS CORPORATION
RAULAND PICTURE TUBE DIVISION
PLANT #45
2155 Rose Street (25/th/ Avenue)
Unincorporated Leyden Township, Cook County, Illinois
Dear Ms. Buck and Ms. Wyckoff:
In fulfillment of our agreement as outlined in the Letter of Engagement,
Cushman & Wakefield of Illinois, Inc. is pleased to transmit our appraisal
report estimating the market value and the quick sale or liquidation value of
the fee simple estate in the referenced real estate.
This report has been prepared for PPM Finance, Inc. and Zenith Electronics
Corporation and is intended only for the specified use of said Clients. It may
not be distributed to or relied upon by other persons or entities without
written permission of Cushman & Wakefield of Illinois, Inc.
The property was inspected by and the report was prepared by David O. Conroy.
Stanley R. Dennis, Jr., MAI, has reviewed the report, and is in concurrence with
the findings herein, but did not inspect the property.
<PAGE>
April 7, 1999 Page 2
As a result of our analysis, we have formed an opinion that the market value
of the fee simple estate in the subject property, subject to the assumptions,
limiting conditions, certifications and definitions, as of May 21, 1998, was:
FOUR MILLION TWO HUNDRED THOUSAND DOLLARS
$4,200,000
The marketing period for the subject property is estimated to be
approximately 12 months, which we believe (through conversations with area
brokers and survey data) to be representative for light industrial buildings of
this type.
As a result of our analysis, we have formed an opinion that the quick sale or
liquidation value of the fee simple estate in the referenced property, subject
to the assumptions, limiting conditions, certifications, and definitions, as of
May 21, 1998 was:
THREE MILLION SEVEN HUNDRED EIGHTY THOUSAND DOLLARS
$3,780,000
In our analysis of the subject property under liquidation or quick sale value
scenario, the marketing time associated with this scenario is estimated to be 6
months or less.
This letter is invalid as an opinion of value if detached from the report,
which contains the text, exhibits, and an Addenda.
Respectively submitted,
CUSHMAN & WAKEFIELD OF ILLINOIS, INC.
David O. Conroy
Senior Appraiser
Illinois Certification NO. 153-001128
Stanley R. Dennis, Jr., MAI
Managing Director
Illinois Certification No. 153-000686
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
- --------------------------------------------------------------------------------
NAME: Zenith Electronics Corporation
Rauland Picture Tube Division
Warehouse Facility - Plant #45
LOCATION: 2155 Rose Street (25th Avenue)
Unincorporated Leyden Township,
Cook County, Illinois
AUDITOR'S PARCEL NUMBERS: 12-34-100-023 and -024
INTEREST APPRAISED: Fee simple estate
DATE OF VALUE: May 21, 1998
OWNERSHIP: Zenith Electronics Corporation
LAND AREA: The land area of the site under analysis is
approximately 420,354 square feet, or 9.65
acres.
ZONING: The subject site is located within a zoning
district designated as an I-1, Restricted
Industrial, District by Cook County.
HIGHEST AND BEST USE
If Vacant: Industrial development
As Improved: Industrial development, as improved
IMPROVEMENTS
Type: Industrial warehouse building
Year Built: 1961, with an addition in the late 1960's
Gross Building Area: 220,904 square feet
Construction: Masonry and insulated metal over a steel frame.
Condition: Good
MARKET VALUE INDICATIONS:
COST APPROACH: $4,250,000
SALES COMPARISON APPROACH: $4,200,000
<PAGE>
INCOME APPROACH: $4,200,000
VALUE CONCLUSION: $4,200,000
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
- --------------------------------------------------------------------------------
RESULTING INDICATORS
Price Per Square Foot: $19.01 per square foot of building area.
ESTIMATED MARKETING TIME: 12 months
QUICK SALE OR LIQUIDATION VALUE:
Value Conclusion: $3,780,000
Price Per Square Foot: $17.11 per square foot of building area.
ESTIMATED MARKETING TIME: 6 months
SPECIAL ASSUMPTIONS: 1. This appraisal report was prepared in
conformity with the requirements of the Code
of Ethics and Standards of Professional
Practice of the Appraisal Institute.
2. Information regarding the subject
property was provided to us by Zenith
Electronics Corporation and is assumed to be
accurate.
3. No environmental audits were provided to
the appraisers. We have assumed the subject
property to be free of environmental hazards.
The appraisers are not qualified to detect
such substances and Cushman & Wakefield urges
that an expert in this field be employed to
determine the presence, if any, of any such
toxic materials.
4. Please refer to the list of additional
assumptions and limiting conditions included
at the end of this report.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
================================================================================
PAGE
<S> <C>
PHOTOGRAPHS OF SUBJECT PROPERTY...................................... 1
INTRODUCTION......................................................... 7
REGIONAL ANALYSIS.................................................... 12
NEIGHBORHOOD ANALYSIS................................................ 24
INDUSTRIAL MARKET ANALYSIS........................................... 25
PROPERTY DESCRIPTION................................................. 33
REAL PROPERTY TAXES AND ASSESSMENTS.................................. 38
ZONING............................................................... 39
HIGHEST AND BEST USE................................................. 40
VALUATION PROCESS.................................................... 43
COST APPROACH........................................................ 44
SALES COMPARISON APPROACH............................................ 59
INCOME APPROACH...................................................... 67
RECONCILIATION AND FINAL VALUE ESTIMATE.............................. 78
QUICK SALE VALUE ESTIMATE............................................ 82
ASSUMPTIONS AND LIMITING CONDITIONS.................................. 83
CERTIFICATION OF APPROVAL............................................ 86
ADDENDA.............................................................. 87
Legal Description
Land Sale Data Sheets
Improved Sale Data Sheets
Cushman & Wakefield Investor Survey
Qualification Of Appraisers
</TABLE>
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
================================================================================
-----------------------------------------------------------------------
-----------------------------------------------------------------------
VIEW LOOKING SOUTH ALONG ROSE STREET (25TH AVENUE), SUBJECT IS TO LEFT
-----------------------------------------------------------------------
-----------------------------------------------------------------------
VIEW LOOKING NORTH ALONG ROSE STREET (25TH AVENUE), SUBJECT IS TO RIGHT
1
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
================================================================================
-----------------------------------------------------------------------
-----------------------------------------------------------------------
VIEW LOOKING SOUTHEAST AT SUBJECT WAREHOUSE FACILITY
-----------------------------------------------------------------------
-----------------------------------------------------------------------
VIEW LOOKING EAST AT ENTRANCE TO WAREHOUSE FACILITY FROM ROSE STREET
2
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
================================================================================
-----------------------------------------------------------------------
-----------------------------------------------------------------------
VIEW OF WAREHOUSE AREA
-----------------------------------------------------------------------
-----------------------------------------------------------------------
VIEW OF INTERIOR DOCK AREA
3
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
================================================================================
-----------------------------------------------------------------------
-----------------------------------------------------------------------
VIEW OF WAREHOUSE FACILITY
-----------------------------------------------------------------------
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VIEW OF DOCK-HIGH LOADING DOORS
4
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
================================================================================
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VIEW OF REAR OF SUBJECT WAREHOUSE ALONG RAIL LOADING DOORS.
RAIL CARS ARE LAND-LOCKED - RAIL CONNECTION NEEDS TO BE RECONNECTED
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INTERIOR VIEW OF WAREHOUSE
5
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
================================================================================
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INTERIOR VIEW OF WAREHOUSE
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INTERIOR VIEW OF OFFICE AND LOCKER ROOM AREAS
6
<PAGE>
INTRODUCTION
================================================================================
PROPERTY DESCRIPTION
The subject property consists of a warehouse facility containing a gross
building area of approximately 220,904 square feet. The building was
constructed in 1961, with an addition in the late 1960's. The site area
contains 9.65 acres. The property address is 2155 Rose Street, Leyden Township,
Cook County, Illinois. The Cook County Assessor's PIN numbers are 12-34-100 023
and 024.
PROPERTY OWNERSHIP AND RECENT HISTORY
According to information supplied by the property's owner, Zenith Electronics
Corporation, Zenith traded a warehouse facility in Chicago to Helene Curtis for
this facility in 1992. This facility is used as the warehouse for the Rauland
Picture Tube Plant in nearby Melrose Park.
COMPETENCY PROVISION
We are aware of the competency provision by the USPAP and the authors of this
report meet the standards. David O. Conroy inspected the subject property,
researched, and analyzed the pertinent market information, and wrote the report,
under the supervision of Stanley R. Dennis, Jr., MAI. It is our opinion that we
are fully competent to perform this appraisal, due to the fact that:
1. The appraisers have full knowledge and experience in the nature of this
assignment.
2. All necessary and appropriate steps have been taken in order to complete the
assignment competently.
3. There is no lack of knowledge, or experience that would prohibit this
assignment to be completed in a professional competent manner or where a
biased or misleading opinion of value would be rendered.
PURPOSE AND FUNCTION OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value and the quick
sale or liquidation value of the fee simple estate in the subject property as of
May 21, 1998, the date of inspection. The function of this appraisal is to
assist our clients, PPM Finance, Inc., and Zenith Electronics Corporation, in an
evaluation of the real estate asset for possible sale.
7
<PAGE>
INTRODUCTION
================================================================================
SCOPE OF THE APPRAISAL
In the process of preparing this appraisal, I met with Mr. Uday P. Nadkarni,
Director - Industrial Engineering and Facilities, Mr. Charles Svitak, Manager -
Facilities Engineering and Energy, and Mr. Edward Reszke, Manager - Distribution
and Warehousing. I inspected the exterior and interior of the subject property,
reviewed interior plans, conducted market research into the sale price of
comparable land sales and developed a complete cost approach analysis. We also
ascertained sales prices of comparable improved properties, developed a value
estimate by the direct sales comparison approach and gathered information on
comparable leases of similar warehouse properties and developed an income
approach through direct capitalization to estimate the fee simple estate under
each of the valuation perspectives.
DATE OF VALUE AND PROPERTY INSPECTION
The date of value is May 21, 1998, which is the date of the property
inspection.
PROPERTY RIGHTS APPRAISED
Fee simple estate.
DEFINITIONS OF VALUE, INTEREST APPRAISED AND OTHER PERTINENT TERMS
The definition of market value in accordance with the Uniform Standards of
Professional Appraisal Practice (USPAP), 1996 Edition, published by The
Appraisal Foundation, is as follows:
The most probable price which a property should bring in a competitive and
open market under all conditions requisite to a fair sale, the buyer and
seller, each acting prudently and knowledgeably, and assuming the price is
not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title from
seller to buyer under conditions whereby:
1. Buyer and seller are typically motivated;
2. Both parties are well informed or well advised, and acting in what they
consider their own best interests;
3. A reasonable time is allowed for exposure in the open market;
4. Payment is made in terms of cash in U.S. dollars or in terms of financial
arrangements comparable thereto; and
8
<PAGE>
INTRODUCTION
================================================================================
5. The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions granted by
anyone associated with the sale.
Definitions of pertinent terms taken from the Dictionary of Real Estate
Appraisal, Third Edition (1993), published by the Appraisal Institute, are as
follows:
FEE SIMPLE ESTATE
Absolute ownership unencumbered by any other interest or estate; subject
only to the limitations imposed by the governmental powers of taxation,
eminent domain, police power and escheat.
QUICK SALE
Quick sale or liquidation value reflects a sale within a six-month period.
CASH EQUIVALENT
A price expressed in terms of cash, as distinguished from a price expressed
totally or partly in terms of the face amounts of notes or other securities
that cannot be sold at their face amounts.
Definitions of other terms taken from various are as follows:
MARKET VALUE AS IS ON APPRAISAL DATE
The market value of a property in the condition observed upon inspection and
as it physically and legally exists without hypothetical conditions,
assumptions, or qualifications as of the date the appraisal is prepared.
MARKETING TIME
Marketing time is an estimate of the time that might be required to sell a
real property interest at the appraised value. Marketing time is presumed to
start on the effective date of the appraisal. Marketing time is subsequent
to the effective date of the appraisal, whereas exposure time, as defined
below is presumed to precede the effective date of the appraisal. The
estimate of marketing time uses some of their same data analyzed in the
process of estimating the reasonable exposure time and is not intended to be
a predication of a date of sale.
9
<PAGE>
INTRODUCTION
================================================================================
We have concluded that a marketing period of approximately 12 months would be
required in order to sell the subject property under the market value
premise. The market value conclusion expressed in this report is based on
current market conditions. Our market value estimate should not be
interpreted as being representative of the final price at which the property
might sell throughout the entire marketing period, due to uncertain market
conditions.
EXPOSURE TIME
Under Paragraph 3 of the Definition of Market Value, the value estimate
presumes that "A reasonable time is allowed for exposure in the open market".
Exposure time is defined as the estimated length of time the property
interest being appraised would have been offered on the market prior to the
hypothetical consummation of a sale at the market value on the effective date
of the appraisal. Exposure time is presumed to precede the effective date of
the appraisal.
We have estimated the appropriate exposure time for the subject property to
be approximately 12 months under the market value premise.
LEGAL DESCRIPTION
The legal description of the subject property is included in the Addenda
section of this report. The legal description was taken from materials provided
by the client. It should be noted that the legal description of the site has not
been verified with legal counsel. We suggest that such verification be obtained
prior to utilizing said legal description in any legal document or conveyance.
Cushman & Wakefield assumes no responsibility for the accuracy or legality of
said legal description.
10
<PAGE>
INTRODUCTION
================================================================================
REGIONAL AREA MAP
11
<PAGE>
REGIONAL ANALYSIS
================================================================================
CHICAGO METROPOLITAN AREA
This section evaluates general demographic and economic trends in the
property's regional location to determine the outlook for the overall market
based upon comparison of projected population, employment and other trends with
actual historical data. The Chicago Consolidated Metropolitan Statistical Area
(CMSA), located at the southwestern tip of Lake Michigan, is the Midwest's
financial, commercial, transportation, and industrial center. As defined by the
United States Census Bureau, the Chicago CMSA includes a total of eleven
counties: eight in Illinois, two in Indiana, and one in Wisconsin. As a whole,
the Chicago CMSA covers a territory of 5,660 square miles.
POPULATION
The population of the Chicago Metropolitan Area is the third largest in the
nation, behind New York and greater Los Angeles. The historical and projected
population growth trends for the six primary counties in the Chicago
Metropolitan area are summarized in TABLE A below.
<TABLE>
<CAPTION>
================================================================================
TABLE A
CHICAGO METROPOLITAN AREA
POPULATION STATISTICS - 1980 THRU 2006
- --------------------------------------------------------------------------------
ANNUAL ANNUAL
% CHANGE % CHANGE
COUNTY 1980 1996 1980-1996 2006 1996-2006
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cook 5,254,000 5,136,800 -0.14% 5,086,800 -0.08%
Chicago 3,005,000 2,762,000 -0.53% N/A N/A
Suburban 2,249,000 2,374,800 0.34% N/A N/A
DuPage 659,000 857,800 1.66% 925,800 0.90%
Kane 278,000 353,300 1.51% 374,800 0.37%
Lake 440,000 570,600 1.64% 624,000 0.88%
McHenry 148,000 225,700 2.67% 273,600 1.27%
Will 324,000 415,800 1.57% 499,600 1.21%
Total 7,103,000 7,560,000 0.39% 7,784,600 0.25%
- --------------------------------------------------------------------------------
SOURCE: WOODS & POOLE ECONOMICS, INC.
================================================================================
</TABLE>
As summarized in TABLE A, the City of Chicago had an estimated population of
2.762 million in 1996, a decrease of 243,000 residents since 1980, when the
population was estimated at approximately 3.005 million people. However, the
decline in urban population since 1980 was more than offset by a significant
growth in the suburban population.
12
<PAGE>
REGIONAL ANALYSIS
================================================================================
The population shift from the city to the suburbs becomes evident when one
looks at the county population as a percentage of the total population. These
figures, as well as projections for the year 2006, are presented below in TABLE
B as follows:
<TABLE>
<CAPTION>
===========================================================
TABLE B
POPULATION AS A PERCENTAGE OF THE TOTAL
-----------------------------------------------------------
County 1980 1996 2006(1)
-----------------------------------------------------------
<S> <C> <C> <C>
Cook: 74.0% 68.0% 65.8%
Chicago 42.3% 36.5% -
Suburbs 31.6% 31.4% -
DuPage 9.3% 11.4% 12.1%
Kane 3.9% 4.7% 4.7%
Lake 6.2% 7.6% 8.0%
McHenry 2.1% 3.0% 3.3%
Will 4.6% 5.5% 6.1%
-----------------------------------------------------------
/1/ Projected
===========================================================
</TABLE>
The preceding table shows a steady migration from the city toward the suburbs.
The collar counties of DuPage, Kane, Lake, McHenry, and Will increased their
share of the regional population from 26.1 percent in 1980 to 32.2 percent in
1996. Their share of the population is expected to further increase to 34.2
percent by the year 2006. The population shift from the city to suburban areas
is common among most major cities throughout the Great Lakes and Northeastern
regions, and is expected to continue for the foreseeable future.
TRANSPORTATION
AIR TRANSPORTATION
Chicago is one of the primary transportation hubs in the United States.
O'Hare International Airport is the busiest in the world, handling approximately
67.25 million passengers in 1995. The substantial increase in air traffic is
attributed to several factors, which include the deregulation of the airline
industry, the establishment of regional "hubs" by major airlines, and the
economic expansion into global markets. United Airlines rebuilt their terminal
in 1987 at a cost of $500 million; American Airlines also expanded and upgraded
their facility in 1990, the $329 million project was intended to provide more
space for airline operations and to provide greater convenience and comfort for
their passengers. Finally, the new 1.1 million square foot International
Terminal at O'Hare was completed in 1992. The new terminal increased
international passenger travel from 6.76 million in 1993 to 9.89 million in
1995, or 15.0 percent.
13
<PAGE>
REGIONAL ANALYSIS
================================================================================
Midway Airport, located in the southwest portion of the city, serves as a
secondary airport which has become an increasingly popular alternative to
O'Hare. From 1980 to 1990, passenger volumes increased significantly, rising
from 600,000 passengers to nearly 9.0 million passengers. Passenger volumes
fell to 7.3 million in 1991 and to 4.6 million in 1992 as Midway Airlines, the
primary carrier at the time, filed for bankruptcy. In 1991, Midway Airport was
serviced by four only carriers, Comair, Northwest, Southwest and USAir; however,
during 1992 and 1993, twelve new airline carriers were added, including America
West, Midway Airlines, MarkAir, TWA, and Continental. According to information
compiled by the Chicago Department of Aviation, 6.76 million passengers traveled
through Midway Airport in 1993, 9.54 million in 1994 and 9.89 in 1995. The
newest CTA rail line, which links Midway Airport to the Chicago Loop was
completed in 1993. The $500.0 million project provides daily transportation for
approximately 50,000 southwest side residents. Benefiting from a new Midway
Airlines, a surging Southwest Airlines and the local operations of 15 other
carriers, Midway Airport is expected to see passenger volume continue to
increase.
According to an article in Crain's Chicago Business, city officials are
considering options to expand Midway Airport's terminal operations. Their
choices include replacing Midway Airport's 47-year old terminal with a larger
one or expanding the current structure. Reportedly, the city anticipated
construction to commence in 1996, with new terminal operations in four years,
however, at present, no construction has been started. The city has also
purchased three land parcels situated east of Cicero Avenue to accommodate
expanded parking. According to the city officials, the cost of the project
would be borne by the airport's carriers and federal sources, not by city
taxpayers. While the expansion would ease air traffic into Chicago; the
proximity of residential development around Midway Airport limits the size and
flight schedule of aircraft utilizing the airport. Therefore, in the end, the
terminal expansion would serve to safeguard Midway's position as a thriving
second-tier airport, rather than significantly expand its customer base.
GROUND TRANSPORTATION
Several major expressways and interstate highways pass through the Chicago
area. Interstate 88 and 290 are the main routes to cities along the East-West
corridor. Interstate 55 provides access to the southwestern cities. Cities to
the north and northwest are accessed via Interstates 90 and 94; and finally,
north-south travel between the western suburbs is facilitated by Interstate 294
and 355. In total, the Chicago area has over 630
14
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REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
miles of expressways. Within the metropolitan area, commuter transportation is
facilitated by rail lines, rapid transit systems, bus lines and expressway
systems.
Suburban Chicago is served by eleven radial Metra rail lines originating
from the Central Business District. The 507-mile Metra system serves 227
stations in six counties in Illinois: Cook, Lake, DuPage, Will, McHenry and Kane
and Kenosha County in Wisconsin. Ridership on Metra totaled 73.2 million in
1995, a slight decrease from the 74.7 million riders in 1994. The exhibit on the
facing page details the areas serviced by Metra's transportation network in the
Chicago Metropolitan Area. The urban areas of Chicago are served by sixteen
elevated rail lines and a number of bus routes. Just over 135.3 million people
used the "El" and 306 million used the bus routes as a mode of transportation in
1995. According to the RTA, 442.7 million people utilized some form of public
transportation in 1995; a 5.9 percent decrease from 1994.
EMPLOYMENT
The Chicago economy, like most major metropolitan areas, began as a
manufacturing center. However, today the Chicago economic growth is no longer
primarily based on the manufacturing sector, but is distributed among wholesale
and retail trade, health care, education, and financial services. TABLE C,
below, summarizes the diversity of employment for the eleven county Consolidated
Metropolitan Statistical Area.
<TABLE>
<CAPTION>
==================================================================================================
TABLE C
CHICAGO METROPOLITAN AREA EMPLOYMENT STATISTICS: 1996 - 2006
==================================================================================================
COMPOUND
1996 PERCENT 2006 PERCENT GROWTH
INDUSTRY GROUP EMPLOYMENT OF TOTAL EMPLOYMENT OF TOTAL 1996-2006
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mining/Agriculture 40,160 0.8% 47,710 0.9% 1.74%
Manufacturing 728,980 14.5% 701,260 13.1% -0.39%
Construction 236,610 4.7% 244,450 4.6% 0.33%
TCU/(1)/ 285,860 5.7% 307,410 5.7% 0.73%
Trade 1,106,870 22.0% 1,162,370 21.7% 0.49%
FIRE 468,730 9.3% 532,870 10.0% 1.29%
Services 1,592,010 31.7% 1,803,700 33.7% 1.26%
Government 558,340 11.1% 545,920 10.1% -0.22%
- --------------------------------------------------------------------------------------------------
TOTAL 5,030,540 100.00% 5,357,150 100.0% 0.63%
- --------------------------------------------------------------------------------------------------
SOURCE: WOODS & POOLE ECONOMICS, INC.
/(1)/ TRANSPORTATION, COMMUNICATIONS & UTILITIES
==================================================================================================
</TABLE>
15
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
The local employment picture is expected to follow historical trends as the
Chicago MSA enters the next decade. The service sector will continue to lead
employment, the manufacturing sector will shrink and overall job growth will
remain steady. Employment increases in the communications sector are considered
a sure bet; however, expected utility deregulation will dampen long-term growth
prospects for this industry. According to Woods & Poole, the services and FIRE
industries should continue to lead employment growth during the next ten years.
These projections are supported by the steady increase in the number of area
small businesses, the contribution of local universities and MSA's ability to
capitalize on increased international trade.
In 1996, the number of jobs in Cook County accounted for 62.8 percent of total
employment for the eleven county area. Similar to the population trends
previously discussed, the collar counties are also projected to increase their
share of total employment. This distribution is summarized in TABLE D below.
<TABLE>
<CAPTION>
==========================================================================================
TABLE D
CHICAGO METROPOLITAN AREA
EMPLOYMENT STATISTICS: 1996 - 2006
==========================================================================================
1996 2006
INDUSTRY GROUP EMPLOYMENT EMPLOYMENT
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Cook County 62.8% 59.8%
DuPage County 12.3% 13.5%
Kane County 3.7% 3.8%
Lake County 6.3% 7.3%
McHenry County 2.0% 2.2%
Will County 3.0% 3.2%
Other Counties 9.9% 10.1%
- ------------------------------------------------------------------------------------------
TOTAL/(1)/ 100% 100%
- -------------------------------------------------------------------------------------------
SOURCE: WOODS & POOLE
/(1)/ FOR THE 11-COUNTY CSMA
===========================================================================================
</TABLE>
Chicago is a leading corporate headquarters location. A number of Fortune 500
firms are headquartered in the Chicago area. Many other firms also have
regional headquarters in the Chicago area. Among the largest firms
headquartered in Chicago are: Sears, Roebuck & Company, Amoco, Sara Lee, United
Airlines, and Motorola. The
16
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
presence of a large number of corporate headquarters in the area is indicative
of the strength of the local support network and general business climate.
Chicago's top five public company employers in 1995 were the Sears, Roebuck &
Company, McDonald's Corporation, Sara Lee Corporation, Motorola, Inc., and UAL
Corporation. A list of the largest public and private companies, by 1995
revenues, is presented in EXHIBIT A on the following facing page.
Chicago is also a world leader in the trading of commodities, stock options,
currency and interest rate futures. The City has four major financial exchanges
including the Chicago Board of Trade, the Chicago Board Options Exchange, the
Chicago Mercantile Exchange and the Midwest Stock Exchange. Eighty percent of
the world's commodities are traded through three of Chicago's exchanges.
UNEMPLOYMENT
The average annual unemployment rates for the six-county metropolitan area are
summarized below in TABLE E. From 1988 to 1993, Cook, Kane, and Will County had
unemployment rates higher than the national average, while DuPage and Lake
County were consistently lower. Only McHenry County had unemployment rates
similar to the national average during that time period. Since year-end 1994,
unemployment rates in the six-county metropolitan area have generally been below
the average for the nation.
<TABLE>
<CAPTION>
====================================================================================
TABLE E
AVERAGE ANNUAL UNEMPLOYMENT RATE
SIX-COUNTY CHICAGO METROPOLITAN AREA
====================================================================================
COOK DUPAGE KANE LAKE MCHENRY WILL U.S.
YEAR COUNTY COUNTY COUNTY COUNTY COUNTY COUNTY ILLINOIS AVG.
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1988 6.7% 3.8% 5.4% 4.3% 4.8% 7.3% 6.8% 5.5%
1988 5.9% 3.3% 5.5% 3.9% 4.5% 6.3% 6.0% 5.3%
1990 6.3% 3.6% 5.9% 3.9% 5.3% 6.4% 6.2% 5.5%
1991 7.2% 4.8% 7.5% 4.6% 7.1% 7.4% 7.1% 6.7%
1992 7.8% 5.1% 8.0% 4.8% 6.6% 7.8% 7.5% 7.4%
1993 7.8% 5.1% 7.6% 4.9% 6.4% 7.4% 7.4% 6.4%
1994 4.2% 2.8% 4.6% 3.8% 3.9% 4.8% 4.2% 5.1%
1995 5.5% 3.4% 5.0% 4.0% 4.1% 5.3% 5.2% 5.6%
1996 5.5% 3.4% 4.9% 4.0% 4.0% 5.2% 5.3% 5.4%
Jul-97 4.8% 2.8% 3.8% 3.3% 2.9% 4.2% 4.6% 5.0%
</TABLE>
17
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SOURCE: ILLINOIS DEPARTMENT OF EMPLOYMENT SECURITY
================================================================================
18
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================
EXHIBIT A
METROPOLITAN CHICAGO'S LARGEST PUBLIC COMPANIES
RANKED BY 1995 REVENUES
- ---------------------------------------------------------------------------------------------------
NET
REVENUES NUMBER OF EMPLOYEES
NAME CITY 1995 (000'S) 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sears Roebuck & Co. Hoffman Estates $34,925.0 359,700
- ---------------------------------------------------------------------------------------------------
Amoco Corp. Chicago $27,066.0 42,689
- ---------------------------------------------------------------------------------------------------
Motorola Inc. Schaumburg $27,037.0 142,000
- ---------------------------------------------------------------------------------------------------
Allstate Corp. Northbrook $22,793.3 44,3000
- ---------------------------------------------------------------------------------------------------
Sara Lee Corp. Chicago $17,719.0 149,100
- ---------------------------------------------------------------------------------------------------
Caterpillar, Inc. Peoria $16,072.0 54,352
- ---------------------------------------------------------------------------------------------------
UAL Corp. Elk Grove Township $14,943.0 77,900
- ---------------------------------------------------------------------------------------------------
CNA Financial Corp. Chicago $14,699.7 15,600
- ---------------------------------------------------------------------------------------------------
Ameritech Corp. Chicago $13,427.8 65,345
- ---------------------------------------------------------------------------------------------------
Archer Daniels Midland Co. Decatur $12,671.8 14,833
- ---------------------------------------------------------------------------------------------------
Walgreen Co. Deerfield $10,395.0 68,800
- ---------------------------------------------------------------------------------------------------
Deere & Co. Moline $10,291.0 33,375
- ---------------------------------------------------------------------------------------------------
WMX Technologies, Inc. Oakbrook $10,247.6 74,400
- ---------------------------------------------------------------------------------------------------
Abbott Laboratories Abbott Park $10,012.1 50,241
- ---------------------------------------------------------------------------------------------------
McDonald's Corp. Oakbrook $ 9,794.5 183,000
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
============================================================================================
METROPOLITAN CHICAGO'S LARGEST PRIVATE COMPANIES
RANKED BY 1995 REVENUES
--------------------------------------------------------------------------------------------
NAME NET REVENUES 1995 NUMBER OF EMPLOYEES 1995
(000's)
--------------------------------------------------------------------------------------------
<S> <C> <C>
Montgomery Ward Holding Co. $7,085.0 54,800
--------------------------------------------------------------------------------------------
Marmon Group $6,000.0 28,000
--------------------------------------------------------------------------------------------
Alliant Foodservice, Inc. $4,225.7 9,000
--------------------------------------------------------------------------------------------
Topco Associates, Inc. $3,700.0 402
--------------------------------------------------------------------------------------------
Kemper National Insurance Cos. $3,400.0 8,837
--------------------------------------------------------------------------------------------
Hyatt Hotels Corp. $2,700.0 40,000
--------------------------------------------------------------------------------------------
Ace Hardware Corp. $2,440.0 3,929
--------------------------------------------------------------------------------------------
Cotter & Company $2,437.0 4,195
--------------------------------------------------------------------------------------------
Budget Rent a Car Corp. $2,430.0 24,000
--------------------------------------------------------------------------------------------
OSI Industries, Inc. $2,000.0 575
============================================================================================
</TABLE>
19
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
After three years of relatively high unemployment rates throughout the Chicago
Metropolitan Area, the labor market improved significantly during 1994.
According to Crain's Chicago Business, economic recovery in the Chicago area is
expected to be stronger than other areas of the country, largely due to the
strong export of capital goods.
TOURISM
Chicago has long been a destination for tourists. The potential for additions
to the number of visitors coming to the Chicago area on an annual basis has been
enhanced of late, as the possibility of riverboat gambling to the City of
Chicago area continues to be explored. Navy Pier and North Pier, located in the
southern portion of the North Michigan Avenue Corridor, offer a variety of
cultural and maritime events during the summer months. The $190.0 million
redevelopment of Navy Pier incorporates many additional uses in a variety of new
facilities to serve the city and tourist populations. These include the Family
Pavilion anchored by the 50,000 square foot Chicago Children's Museum; Navy Pier
Gardens; Festival Hall, an enclosed parking facility for 1,200 automobiles; new
restaurants; an 18,000 square foot beer garden and a 25,000 square foot
ballroom. Additional tourist attractions include at Navy Pier include the
Skyline Stage, a 1,500 seat theater; a large screen theater with a five-story
high by eighty feet wide screen; and a 150 foot Ferris wheel. While attendance
at Navy Pier has exceeded initial expectations; according to a December 17, 1996
article in Crain's Chicago Business, North Pier has never performed to
expectations. While the 280,000 square feet of office space is well occupied;
the 160,000 square feet of retail space has suffered. The Baja Beach Club, a
nightclub and restaurant which serves as an anchor tenant, is currently
operating under Chapter 11 bankruptcy; and the Children's' Museum, considered a
traffic generator, moved to Navy Pier. North Pier is currently on the block and
is expected to transact between $25.0 to $35.0 million; considerably less than
the original $70.0 million redevelopment cost. Additional tourist attractions
in the Chicago Metropolitan Area include the Six Flags Great America Amusement
Park, Sears Tower, the John Hancock Building, which is currently renovating
their skydeck, Shedd Aquarium, Museum of Science and Industry, the Adler
Planetarium, the Art Institute, Michigan Avenue and the lakefront.
Chicago Bears owner, Michael McCaskey, is seeking a new stadium for his
football team after the 1999 season. According to Crain's Chicago Business,
after nine months of relentlessly selling a do-or-die deadline of early 1996 for
a new stadium plan, McCaskey extended the team's deadline for another year. The
extension came as plans for the
21
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
Northwest Indiana football stadium complex died and political support for the
proposed $415.0 million, 72,000 seat domed facility near McCormick Place in
Chicago is questionable. A decision will have to be made by the end of this
season because the design and construction of a new stadium will take at least
three years.
State Street, the historic shopping street where no automobiles have been
allowed for years, was recently renovated. State Street is home to the flagship
Marshall Fields store, as well as many other large and small retailers. The
Chicago Transportation Department spent $30.0 million to renovate the street and
open it to auto traffic. In an effort to preserve sidewalk space and encourage
pedestrian traffic, the street width was maintained at 16 feet. Automobile
traffic will be limited, with turn lanes at various intersections to enable
drivers to turn onto cross streets.
SUMMARY
In summary, Chicago's status as a world class city is due to a variety of
inherent strengths, including: its excellent transportation system, central
geographic location, well educated work force, commodities and futures
exchanges, and its numerous cultural, educational and recreational amenities.
In addition, the municipality of the City of Chicago is generally healthy
financially, and the administration under Mayor Richard M. Daley, Jr. is
considered helpful toward business and development. Because of these factors,
the area ranked 11th among all metropolitan areas in terms of business climate,
according to a recent survey of chief executives across the nation. This same
survey, conducted by Cushman & Wakefield, Inc., also found that the Chicago area
"is still tops on access to markets and raw materials, and has improved its rank
position on the cost and availability of industrial labor, quality of life for
employees, government climate, and the cost and availability of both office
space and industrial sites with existing uses."
Although the Chicago area will continue to be subject to national economic
trends and conditions, the diversity of the local economy will insulate the area
from volatile economic swings. Overall, the Chicago area is expected to
continue its trend of economic growth. The continuation of Chicago's healthy
business climate, as well as its economic stability, should ensure a favorable
environment for real estate development and investment over the long-term.
22
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
insert neighborhood map
23
<PAGE>
NEIGHBORHOOD ANALYSIS
- --------------------------------------------------------------------------------
The subject property is located in the near western suburban area of
unincorporated Leyden Township, Cook County. Adjacent communities are Melrose
Park and Franklin Park. The subject is located approximately three miles west of
the western edge of the city of Chicago and approximately 15 miles west of the
Central Business District of Chicago. Leyden Township is bordered on the north
and east by Franklin Park, on the west by Northlake, and on the south by
Northlake and Melrose Park. Major north/south collectors in the area include
Mannheim Road, Rose Street (25th Avenue) and 1st Avenue. Major east/west
collectors are Grand, Fullerton, and North Avenues and Lake Street. Railroads
that serve the area include Union Pacific Railroad and the Indiana Harbor Belt
Railroad. Access to the Eisenhower expressway is via Mannheim Road, 25th
Avenue, and Broadway Avenue. Access to Interstate 294 is via North Avenue.
The subject property is situated on the east side of Rose Street (25th
Avenue). This is a mixed industrial-residential section, at this location, Rose
Street is predominantly developed with industrial and residential users.
Bordering the subject property is Indiana Harbor Belt Railroad to the east, Rose
Street (25th Avenue) to the west, an industrial building to the north and to the
south. Rose Street, at the subject's location, is a four-lane thoroughfare.
Rose Street (25th Avenue) rises as it goes south over the Indiana Harbor Belt
Railroad and crosses North Avenue in Melrose Park approximately three blocks
south of the Zenith warehouse. The subject neighborhood is considered a mature
community and is fully developed. Generally, industrial development is along the
east side of Rose Street and residential development along the west side of Rose
Street.
In summary, the subject is located in an area well suited for industrial-
commercial development. Real estate values are anticipated to increase at a
moderate, but steady, pace. Overall, the economy of the immediate area is
anticipated to continue to be stable.
24
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
METROPOLITAN CHICAGO MARKET OVERVIEW
According to Cushman & Wakefield's Research Services Department, the total
inventory of industrial space in the Chicago area is about 900 million square
feet. Given the degree of user ownership, vacancy statistics for Chicago area
industrial properties are difficult to estimate. However, according to Cushman
& Wakefield's First Quarter, 1998 Industrial Market Report, approximately 62.1
million square feet of industrial space is currently available throughout the
metropolitan area, implying an overall vacancy rate of 7.2 percent. Note,
however, that some of this vacant space includes older, obsolete industrial
facilities. The breakdown of available industrial space, by submarket within
the Chicago MSA, is summarized in the following table.
<TABLE>
<CAPTION>
=========================================================================================
CHICAGO MSA INDUSTRIAL MARKET SUMMARY
1ST QUARTER 1998
=========================================================================================
TOTAL AVAILABLE
TOTAL INDUSTRIAL INDUSTRIAL SPACE VACANCY
SUBMARKET SPACE (SF) (SF) RATE %
=========================================================================================
<S> <C> <C> <C>
Chicago North 109,090,599 5,820,831 5.3%
Chicago South 132,580,230 9,577,568 7.2%
Western Cook Cty 95,222,329 7,039,406 7.4%
South Suburbs 77,732,814 5,397,041 6.9%
Northern Cook Cty 39,516,385 1,938,880 4.9%
NORTHWEST COOK CTY 90,956,768 6,437,457 7.1%
Northern Fox Valley 15,400,127 610,395 4.0%
Northeast DuPage Cty 70,593,799 6,324,399 9.0%
Southern DuPage Cty 14,332,527 830,565 5.8%
Central DuPage Cty 27,195,443 2,159,424 7.9%
Southern Fox Valley 57,707,418 5,535,667 9.6%
Lake County 70,407,701 6,395,539 9.1%
McHenry County 23,465,165 700,915 3.0%
Western Kane Cty 9,305,572 354,307 3.8%
Will County 39,532,0924 3,033,875 7.7%
- -----------------------------------------------------------------------------------------
Year-End 1995 828,858,907 59,745,952 7.2%
Year-End 1996 838,354,939 62,199,229 7.4%
Year End 1997 872,773,890 62,148,026 7.1%
1ST QUARTER 1998 873,038,969 62,156,269 7.1%
- -----------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
insert page for metro market ovw
26
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
Over the past few years, continued improvement within the regional and
national economies have spurred a significant amount of industrial growth in the
Chicago metropolitan area. This is a marked change from the uncertainty which
arose from the weak economy prevalent in the late-1980's and early-1990's.
Discussions with knowledgeable market participants, and review of relevant
market surveys, indicate that a greater level of absorption of existing
industrial inventory and reduced development of new space resulted in the
overall stabilization of industrial property values and rental rates in 1993 and
1994. This trend continued through 1996, although market-wide vacancy levels
were somewhat offset by substantial inventories of new construction which began
to come on-line in late 1996. Graphically presented on the facing page is a
summary of the Chicago Metropolitan Industrial Inventory Vacancy, Historical
Sales and Leasing Activity as reported by Cushman & Wakefield. This chart
illustrates 1997 industrial leasing and sales activity and construction
completion through the First Quarter of 1998.
The beneficiaries of market stabilization and recovery within the industrial
sector have been mixed and depend upon the particular submarket and industrial
property type. Demand for some manufacturing facilities, and particularly those
located in the city center, has remained flat or continued to deteriorate in
terms of market position. The largest inventory of available space is located
in the city and within western portions of Cook County. The lowest levels of
available industrial inventory in Cook or DuPage Counties are reported in the
northern Cook County area, availability is especially limited among good-quality
properties in close proximity to the Chicago O'Hare International Airport, with
the strongest demand generally in warehouse and distribution facilities.
Statistics prepared through the First Quarter of 1998 by Cushman & Wakefield
suggest a similar circumstance. Generally, all of the Chicago metropolitan area
industrial submarkets tracked by Cushman & Wakefield have demonstrated improved
sales and leasing activity with a slowing of construction completions.
27
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
CHICAGO METROPOLITAN AREA
DEVELOPMENT ACTIVITY
Institutional investors continue to have a strong appetite for newer, fully-
leased, warehouse/distribution space within the Chicago metropolitan area. This
institutional demand is especially pronounced in select areas such as Carol
Stream, Hanover Park and Bolingbrook. The result has been a continued boom in
speculative construction within the strongest industrial submarkets in the
Chicago area. The bulk of this new construction was started in 1995 when
industrial market conditions (i.e., rental and vacancy rates) were optimal to
support new speculative development, especially given the high levels of demand
at that time coupled with the fairly limited alternatives for users seeking new
or expanded operations areas.
Discussions with local area brokers indicates that the Melrose Park and
Northwest Cook County area remains one of the most highly sought after
distribution locales within the Chicago MSA. This area continues to attract new
companies from alternate locations within the metropolitan area.
INVESTOR EXPECTATIONS
The investment community continues to place a premium on quality, industrial
projects. The increase in available capital for investment has resulted in
downward pressure on yield rates. Institutional investors continue to favor
high-cube distribution facilities. Investor demand for fully-leased, well-
located, institutional-quality industrial facilities has placed downward
pressure on going-in capitalization rates, which have dropped to 9.0 percent or
less, in some cases, but typically range between 9.0 to 9.5 percent. Investors
indicate that this product class is most frequently situated in growth markets,
most notably, DuPage, Lake and Will Counties. Market participants report that
the recent influx of buyers attracted to the Chicago area industrial market are
expected to continue to drive investment activity.
NORTHWEST COOK COUNTY SUBMARKET
The subject property consists of heavy industrial building located in
unincorporated Leyden Township between Melrose Park and Franklin Park within the
Northwest Cook County industrial submarket (as delineated by Cushman &
Wakefield).
This submarket is bounded to the east by I-294, west by Barrington Road,
south by DuPage County, north by Lake County. The market is comprised of a high
concentration of
28
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
industrial buildings in established industrial areas with rail service and
trucking routes. Also, this market's close proximity to O'Hare Airport continues
to attract tenants. The Northwest Cook County submarket includes one of the
largest industrial parks in the country, Centex Industrial Park, located in the
densely industrialized community of Elk Grove.
<TABLE>
<CAPTION>
==========================================================================================
NORTHWEST COOK COUNTY INDUSTRIAL SUBMARKET
Available Industrial Space (SF)
- ------------------------------------------------------------------------------------------
WAREHOUSE/ % % OFFICE/ %
SURVEY DATE DISTRIBUTION CHANGE MANUFACTURING CHANGE SERVICE CHANGE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
4th Qtr. 1989 3,634,629 - - - 1,666,087 - - - 803,716 - - -
4th Qtr. 1990 4,792,137 31.8% 2,415,394 45.0% 1,879,163 133.8%
4th Qtr. 1991 6,676,565 39.3% 2,697,301 11.7% 1,860,463 -1.0%
4th Qtr. 1992 6,048,064 - 9.4% 3,010,287 11.6% 1,643,195 -11.7%
4th Qtr. 1993 5,344,742 -11.6% 3,239,872 7.6% 1,471,051 -10.5%
4th Qtr. 1994 4,772,461 -10.7% 3,171,676 -2.1% 1,281,392 -12.9%
4th Qtr. 1995 3,413,936 -28.5% 2,075,541 -34.6% 1,266,687 -0.11%
4th Qtr. 1996 4,377,367 28.2% 2,401,929 15.7% 1,256,989 -0.08%
4th Qtr. 1997 4,408,827 0.07% 1,871,473 -22.1% 866,899 -31.0%
1st Qrt. 1998 3,689,143 -16.3% 1,936,958 3.5% 811,356 -6.4%
- ------------------------------------------------------------------------------------------
Source: Cushman & Wakefield Market Research Services
==========================================================================================
</TABLE>
This submarket experienced a significant increase in available space from
1989 to 1991. Recent trends indicate that the amount of available
warehouse/distribution space has been declining since 1991. The supply of
manufacturing space had been increasing steadily until 1993, and has dropped
steadily through the Fourth Quarter, 1997. This submarket also experienced a
significant increase in office/service space from 1989 to 1991, but the
availability of this product type has been declining since 1991.
Industrial leasing activity within the Northwest Cook County submarket
totaled nearly 858,000 square feet through the first quarter 1998. Meanwhile,
sales activity within this submarket for first quarter 1998 reached 828,000
square feet.
The following chart contains a summary of average net industrial rental rates
generally found in the Northwest Cook County submarket for each property type.
Please note that the actual rates for specific buildings can vary considerably
and can be outside the ranges presented.
29
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
======================================================================================
NORTHWEST COOK COUNTY INDUSTRIAL SUBMARKET
Rental Survey
(First Quarter 1998)
======================================================================================
Property Type Average Net Asking
Rental Rate
======================================================================================
<S> <C>
Warehouse/Distribution $4.37
Manufacturing $4.18
Office/Service $7.98
======================================================================================
</TABLE>
The Northwest Cook County industrial submarket has suffered from the real
estate tax differential with nearby DuPage County. This is especially
significant for the communities bordering DuPage County, because of their
proximity to concentrations of more modern business and industrial parks in
neighboring communities located in DuPage. Real estate taxes for industrial
properties located in DuPage County tend to range from under $1.00 to $2.00 per
square foot. This is significant when compared to Cook County (including
Melrose Park, Franklin Park, and Leyden Township) for industrial properties,
which shoulder a real estate tax expense of $2.00 to $3.00 per square foot, or
more.
Discussions with Cushman & Wakefield industrial brokers indicate that,
despite the current disadvantage of real estate taxes versus similar properties
in DuPage County, owner-user demand could be found for the subject facilities
because of their location and setting. It is believed that demand for space
exists at a rental rate which is partially adjusted for the real estate tax
differential.
Discussions with active brokers indicate that the Cook County real estate tax
rate tends to put downward pressure on industrial rental rates in the local
area, relative to those of adjacent communities located in DuPage County. The
downward pressure on rental rates is a function of the requirement to remain
competitive in terms of overall cost of occupancy to prospective tenants.
Market participants indicate that increases in real estate taxes have offset any
improvement in gross rental rates within the subject's market.
30
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
While the western Cook County area has seen considerable market activity in
the past few years, a good portion of the market activity is related to entities
moving within the area. As stated, building improvements in the immediate area
are generally divided among warehouse and industrial buildings. The facilities
are generally single- and multi-tenant buildings, typically containing less than
100,000 square feet. Most of the single-user properties are becoming investor-
owned and converted to tenant-occupied buildings. This is also a market where
many of the older buildings, 30 to 50 years in age, are being redeveloped with
more functional industrial facilities.
SUMMARY
Overall, the metropolitan Chicago industrial market has experienced
substantial improvement in vacancies, rental rates and an increase in activity
in the last year. Industrial real estate remains a favorite among investors.
However, market participants indicate the fringe areas of Cook County will
continue to lose market share to adjacent communities associated with a lower
real estate tax burden. Over the long-term, we feel, as supported by local
market participants, that the good market fundamentals of the immediate market
will remain stable, as long as property pricing is competitive. We feel older -
1960-1980 vintage - leased properties will continue to be converted to investor-
owned industrial properties as the owner/occupied market adjusts and moves to
the more modern facilities in DuPage, Lake, and Will Counties.
31
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
insert assessor's tax map
32
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
SITE DESCRIPTION
Location: 2155 Rose Street (25/th/ Avenue)
Unincorporated Leyden Township, Cook County, Illinois
Assessor's Parcel
Number: 12-34-100-023 and 024
Shape: Rectangular (see Assessor's Tax Map on facing page.)
Area: 420,354 square feet, or 9.65 acres.
Frontage: Approximately 700 feet along the east side of Rose
Street.
Topography: The site is level and at street grade.
Street Improvements: Rose Street is a four-lane, asphalt paved street,
having concrete curbs and gutters.
Soil Conditions: We were not provided with a soil survey. Therefore, we
assume that the soil's load-bearing capacity is
sufficient to support the existing structure. We
observed no evidence to the contrary during our
physical inspection of the property.
Utilities: All typical utilities are available at the subject
property.
Water: Leyden Township
Sewer: Leyden Township
Electricity: Commonwealth Edison
Gas: Northern Illinois Gas Company
Telephone: Ameritech
Access: Direct access to the subject property is provided via
Rose Street (25/th/ Avenue). Rose Street accesses North
Avenue and Interstate 290 and provides good access to
the area's highway system.
Land Use Restrictions: We were not given a title report to review. As far as
we know, no easements, encroachments, or restrictions
adversely affect the sites' use.
33
<PAGE>
Insert floor plan
34
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Flood Hazard: According to the Community Panel No. 17031C0386F,
National Flood Insurance Rate Map, effective September
19, 1997, the subject properties are in Flood Hazard
Zone X, which is considered an area of minimal flooding
and outside the five hundred year flood plain.
Hazardous Substances: No evidence of hazardous substances or toxic waste was
noted during our inspection of the site. The existence
of potentially hazardous or toxic material which may be
located at or about the subject property was not
considered in arriving at the opinion of value. The
appraisers are not qualified to detect such substances
and Cushman & Wakefield urges that an expert in this
field be employed to determine the presence, if any, of
any such toxic materials.
Comments: Overall, the subject site is functionally adequate and
well-suited for the existing land use.
IMPROVEMENTS DESCRIPTION
The subject improvements consist of an industrial warehouse building. This
facility was originally constructed in 1961, with an addition constructed in the
late 1960's. The one-story warehouse building contains 220,904 square feet.
The land-to-building ratio is 1.90:1. Zenith occupies the entire building (the
building's Floor Plan is provided on the facing page).
CONSTRUCTION DETAIL
Foundations: Concrete spread footings and continuous perimeter
footings.
Framing: Steel framework of columns, beams and open-web bar
joists.
Bay Spacing: 27' x 35'
Clearance: Clear interior height in the industrial is 18 and 20
feet. Office area is finished to 8-foot ceiling heights
with acoustical panels.
Floors: The flooring has reinforced concrete on compacted stone
or fill, sealed with coat of cure/sealer.
Walls: Exterior wall finish includes concrete block walls,
finished with common brick, and insulated metal panels.
35
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Roof Structure: All steel construction of truss girders, steel joist
and gauge metal decking with a membrane roof covering.
Windows: Single pane glass in industrial metal frames in the
warehouse section.
Pedestrian Doors: Metal hollow core doors in metal frames.
Loading Doors: All truck dock doors are on the building's west
elevation and consist of 26 exterior dock-high doors,
and four interior dock-high spaces. There are four rail
doors along the east side of the building.
Rail: Yes, but not active. Rail cars are located on the
tracks adjacent to the warehouse building.
MECHANICAL DETAIL
Heating and Cooling: A hot water gas fired boiler provides heat to the
warehouse and office components. A ceiling-mounted air
conditioning unit provides cooling to the office area.
Electrical Service: Adequate
Fire Protection: The facility is sprinklered for fire protection.
INTERIOR DETAIL
Floor Covering: Office area typically of vinyl tile.
Walls: Office area typically of painted gypsum boards.
Ceilings: Office area typically of lay-in acoustical tile
ceiling.
Lighting: Fluorescent light fixtures for the office floor areas.
Fluorescent and light fixtures in industrial areas.
Doors: Interior: Hollow core, wood doors in metal frames.
Exterior: Hollow core, metal doors in metal frames.
SITE IMPROVEMENTS
On-Site Parking: The parking areas are asphalt paved and include regular
and handicapped parking of approximately 40 spaces.
Trailer parking is available for 25 trailers along the
fence line and 30 trailer parking spaces at the dock
doors.
36
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Landscaping: None.
Comments: The subject property is in good overall condition. The
quality of the subject improvements is rated average to
good; the layout and functional plan are also rated good.
The ceiling heights of 18 and 20 feet are considered below
current standards but are considered adequate. The subject
property is expected to have an economic life expectancy of
approximately 40 years.
37
<PAGE>
REAL PROPERTY TAXES AND ASSESSMENTS
- --------------------------------------------------------------------------------
Real estate taxes and assessments for the subject are issued by Cook County.
Cook County assesses commercial property at 38.0 percent of the assessor's
opinion of market value. Real estate taxes are paid one year in arrears;
therefore, the 1996 taxes are payable in 1997.
In determining the real estate taxes payable for the subject, the County
applies a state equalization factor to the assessed valuation in order to
establish an equalized valuation. State equalization factors are designed to
compensate for differences in the assessment practices in each county in
Illinois. The tax rate is then applied to the state equalization factor to
determine the gross taxes payable. The chart below shows the assessed
valuation, tax rate and total real estate taxes for the property.
<TABLE>
<CAPTION>
===============================================================================
1996 REAL ESTATE AND ASSESSMENTS PAYABLE IN 1997
-------------------------------------------------------------------------------
ASSESSED EQUALIZED TAX REAL ESTATE TAXES
VALUATION VALUE RATE TAXES PER
PARCEL NUMBER SF
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12-34-100-023 $ 532,428 $1,145,625 7.8981 $ 84,134.70
-------------------------------------------------------------------------------
12-34-100-024 $ 654,327 $1,407,915 7.8981 $117,546.82
-------------------------------------------------------------------------------
Total $1,186,755 $2,553,540 7.8981 $201,681.52 $0.91
===============================================================================
</TABLE>
The estimated market value of the subject property is greater than the
equalized assessed valuation and, therefore, the property is not considered
over-assessed.
38
<PAGE>
ZONING
- --------------------------------------------------------------------------------
The subject property lies within the I-1 Industrial District, of Cook County.
The I-1 Industrial District is intended to control the development of lands to
be used by industrial firms that have high standards of performance and that can
locate in close proximity to residential and business uses without creating
nuisances. The I-1 Industrial District permits most manufacturing wholesaling
and warehousing activities.
Based upon our review of the subject properties, as improved, they appear to
represent legal and conforming uses under the applicable zoning guidelines.
We know of no deed restrictions, private or public, that further limit the
subject property's use. We cannot guarantee that no such restrictions exist.
Deed restrictions are a legal matter and only a title examination by an attorney
or title company can usually uncover such restrictive covenants. Thus, we
recommend a title search to be conducted determine if any such restrictions do
exist.
39
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
According to the Dictionary of Real Estate Appraisal, Third Edition (1993),
published by the Appraisal Institute, the highest and best use is defined as:
The reasonably probable and legal use of vacant land or an improved property,
which is physically possible, appropriately supported, financially feasible,
and that results in the highest value. The four criteria the highest and
best use must meet are legal permissibility, physical possibility, financial
feasibility, and maximum profitability.
We evaluated the site's highest and best use, both as developed and as if
vacant. The highest and best use must meet four criteria. The use must be (1)
physically possible, (2) legally permissible, (3) financially feasible, and (4)
maximally productive.
AS VACANT
Regardless of how favorable the physical attributes of a property are, or how
feasible and productive a use might be for a given site, the permissibility of
uses has to be given the initial consideration. As discussed in the Zoning
section of this report, the site is currently zoned for warehouse, assembly and
manufacturing under the I-1 Zoning District of Cook County. Furthermore, there
do not appear to be any private restrictions that would hinder the development
of the property.
The second test is what is physically possible. As evident from the Property
Description section of this report, the site's size, topography, soil, and other
general physical attributes accommodate most land uses. Moreover, the critical
utilities (i.e., water and sanitary sewer) are available to the site and, thus,
should not impede the timing of the site's development. Although a variety of
uses could be physically be placed on the subject property, its location within
an industrial area of Leyden Township suggests some type of industrial use would
be most appropriate for the site.
The third and fourth constraints concern what is financially feasible on the
one hand and maximally productive of the other. The adjacent land uses and
access to major ground transportation routes have a direct bearing on the use
potential for the subject site. The subject's location within an industrial area
of Leyden Township, and the size of the parcel, provide a natural proclivity
toward warehouse/distribution or manufacturing buildings.
40
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
The metropolitan Chicago area and the Northwest Cook County submarket have
been very stable over for the past several years, as presented in the Industrial
Market Analysis section of this report and shows warehouse use and industrial
use in demand. Due to this demand, the most maximally productive use of the
site is to develop the subject site into an industrial building.
In conclusion, an industrial facility would be physically possible, would
conform to all zoning requirements, and would provide a maximum return to the
investor. Thus, the highest and best use of the subject site, assuming it to be
vacant and available for development would be for the development of a one-story
warehouse or manufacturing building.
AS IMPROVED
Unlike the previous analysis of the subject site, as vacant, this analysis
considers the subject property as currently improved, with an evaluation as to
the legal, physical, and financial appropriateness of the existing land use.
This analysis also considered whether the value of the site, as developed,
exceeds the value of the site, as vacant.
The first test is what is legally permissible. The subject site is zoned I-
1, Industrial District by Cook County, which provides for the legally conforming
use of the current improvements. Therefore, the subject property meets the test
of legal permissibility.
The second test is what is physically possible. Relative to the physical
considerations, the subject site is improved with a warehouse/distribution
building constructed in the 1960's with a gross building area of 220,904 square
feet. Based upon our observations, there are no apparent physical factors, such
as drainage, or other site characteristics, that would adversely affect the
utility and/or development of the existing improvements. Adequate accessibility
is provided, but the parking for both trailers and automobiles is considered
marginally adequate. The subject site's size is considered marginally adequate
to accommodate the current improvements.
The land-to-building ratio is 1.90:1, which is within the lower range of
market parameters.
Utilities are also available via Leyden Township and street improvements are
adequate. Therefore, based on the above, the subject property's development
meets the test of physically possible.
41
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
Demand is the most important criteria regarding financial feasibility. Our
research, detailed in the Industrial Market Analysis section of this report,
indicates that there is a demand for industrial development within the subject's
market. The subject property is occupied by Zenith Electronic Corporation.
Based on this analysis, the subject building, as presently developed, meets the
test of financial feasibility.
The fourth test is what is maximally productive. The most important
criterion for this analysis is whether the subject property, as vacant, exceeds
the value of the property, as developed. The cost approach, sale comparison and
the income approaches to value estimated for the subject property clearly
demonstrate that the value of the existing improvements exceeds the value of the
site, as vacant. Our final conclusion of value, considering these approaches to
value, substantially exceeds the value of the subject site, as vacant. No
alternative use of the subject property exceeds the four tests of highest and
best use for the subject property, as developed. Based on the above, the
subject property, as currently developed, meets the test of maximum
productivity.
In conclusion, based on the four tests of highest and best use, it is our
opinion that the subject property improvements represent the highest and best
use of the subject site, as improved.
42
<PAGE>
VALUATION PROCESS
- --------------------------------------------------------------------------------
Appraisers typically use three approaches in valuing real property: the Cost
Approach, the Sales Comparison Approach, and the Income Approach. The type and
age of the property and the quantity and quality of data affect the
applicability of each approach in a specific appraisal situation.
COST APPROACH
The Cost Approach is a method whereby accrued depreciation is deducted from
the cost new of the improvements, the resultant depreciated cost estimate is
added to the land value. The final figure indicates the value of the whole
property. Generally, the land value is obtained through the separate application
of the Sales Comparison Approach. Replacement cost new of the improvements is
estimated on the basis of current prices for the component parts of the building
less depreciation, computed after analyzing the disadvantages or deficiencies of
the existing building as compared to a new building. Because sufficient
information is available to reasonably estimate the replacement cost new of the
improvements, as well as land value, we have employed this approach.
SALES COMPARISON APPROACH
In the Sales Comparison Approach, the appraiser gathers data on sales of
comparable properties and analyzes the nature and condition of each sale, making
logical adjustments for dissimilar characteristics. Typically, a common
denominator is found such as price per square foot or an income multiplier. The
Sales Comparison Approach gives a good indication of value when sales of similar
properties area available. In this instance, there is sufficient data available
to utilize this approach.
INCOME APPROACH
The Income Approach is predicated upon the assumption that there is a
definite relationship between the amount of income the property will earn and
its value. This approach is based upon the principal that value is created by
the expectation of benefits derived from the future. Net income is converted
into value by the capitalization process. Because properties like the subject
are generally income producing, the Income Approach is particularly pertinent to
this appraisal.
The appraisal process is concluded by a review and re-examination of each of
the approaches to value that have been employed. Consideration is given to the
type and reliability of the data used, and the applicability of each approach.
Finally, the approaches are reconciled and a final value is concluded.
43
<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
This approach consists of an analysis of the property's physical value. The
principle of substitution, the underlying rationale of this approach, holds that
no prudent person will pay more for a property than the price of a site and the
cost of constructing, without undue delay, an equally desirable and useful
property.
In the Cost Approach, we employed the following steps to reach an estimate of
value:
1. estimate land value as if vacant;
2. estimate the improvements' replacement cost new, including indirect costs;
3. estimate the necessary developer's overhead and profit for the type of
property being appraised, including profit on the land;
4. add land value, replacement cost new, and profit to calculate the total
cost new of the property;
5. estimate accrued depreciation, if any, from physical, functional, and/or
external causes; and
6. deduct accrued depreciation from the total cost new of the property to
estimate its current value by the Cost Approach.
LAND VALUATION
We used the Sales Comparison Approach to estimate land value. In this method,
we analyzed prices buyers have recently paid for similar sites in the subject's
competing area. Our value estimate was derived from prices of recently sold
comparable industrial sites, which offer similar locational attributes. In
making comparisons, we adjusted the sales prices for differences between the
subject and the comparable properties. Presented on the following facing page is
a summary of pertinent details of sold sites that we compared with the subject
site. A map identifying the locations of each of the respective land sales
utilized in this analysis is presented on the subsequent facing page. The
following is a detailed discussion of each of the land sales utilized in
estimating the market value of the subject site, as if vacant, and available for
development. The detail of each comparable land sale is included in the Addenda
section of this report.
COMPARABLE LAND SALE L-1 is located 1600 North 25th Avenue, Melrose Park,
Illinois. This is the sale of an old industrial facility that is being
purchased by Opus North, a developer. The existing building is being
demolished and the site will be developed with a new 501,600 warehouse
distribution building. The former building
44
<PAGE>
was a 420,435 square foot manufacturing plant. The property is to close in
August 1998 for approximately $4,265,000. The site contains 24.48 acres or
1,066,349
45
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================================
SUMMARY OF COMPARABLE INDUSTRIAL LAND SALES
- ------------------------------------------------------------------------------------------------------------------------
COMP Size/AC
NO. LOCATION SALE DATE SALE PRICE SIZE/SF ZONING PRICE/SF
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
L-1 1600 North 25th Avenue Under $4,265,000(1) 24.48 AC Industrial $4.00
Melrose Park, Illinois contract --------
1,066,349 SF
- ------------------------------------------------------------------------------------------------------------------------
L-2 1060 East Irving Park Road 5/96 $ 750,000 3.55 AC Manufacturing $4.85
Bensenville, Illinois -------
154,638 SF
- ------------------------------------------------------------------------------------------------------------------------
L-3 NWC of Williams and Belmont 1/96 $2,100,000 8.89 AC Industrial $5.42
Franklin Park, Illinois -------
387,248 SF
- ------------------------------------------------------------------------------------------------------------------------
L-4 50 South Mannhein Road 1/96 $1,315,000 6.0 AC Industrial $5.03
Hillside, Illinois ------
261,360 SF
- ------------------------------------------------------------------------------------------------------------------------
SUBJECT 2155 Rose Street -- -- 9.65 AC Industrial --
Unincorporated Leyden Township, Cook -------
County, Illinois 420,354 SF
========================================================================================================================
</TABLE>
(1) This was the sale of a 420,000 square foot industrial building on a
1,066,349 square foot site. The buyer will demolish the building. The value
of the scrap will pay for demolition according to the selling broker. The
selling price of the property is reported to be $4,265,000. The sale is
expected to close in August 1998.
<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
square feet. The land is zoned industrial. The sale price equates to $4.00
per square foot of land area.
COMPARABLE LAND SALE L-2 is located at 1060 East Irving Park Road,
Bensenville, Illinois. The site contains 3.55 acres or 154,638 square feet.
The property is zoned industrial. The site is rectangular in shape, level and
at street grade. The property was sold for $750,000, which equates to $4.85
per square foot of land area. This sale was part of an assemblage of 60 acres
for the construction of a 1,000,000 square foot warehouse facility.
COMPARABLE LAND SALE L-3 is located at the Northeast corner of Williams and
Belmont Avenues, Franklin Park, Illinois. The site is rectangular in shape,
level and at street grade. The site is zoned industrial. The purchaser will
construct a 200,000 square foot warehouse building that is to be leased to
Life Fitness. The site contains 8.89 acres or 387,242 square feet. The
purchase price was $2,108,000. The sale took place on January 26, 1996. The
indicated sale price per square foot of land area was $5.42.
COMPARABLE LAND SALE L-4 is located at 50 South Mannheim Road, Hillside,
Illinois. This site contains 6.0 acres or 261,360 square feet. The site is
rectangular in shape, level and at street grade. The property is zoned
industrial. A 155,000 square foot industrial building was demolished by the
seller to re-develop the site. The property sold on January 2, 1996 for
$1,315,000 or $5.03 per square foot of land area.
The appraisers searched the subject's market area for recent land
transactions. Several land sales were identified and considered for comparison
of the subject site within the Western Cook County Area. The enclosed land sales
represent, to our knowledge, the most recent and comparable land sales within
the subject's market area, with which to draw reference to the subject site.
Land prices of our comparable sales range from $4.00 to $5.42 per square
foot, with an average unit sales price per square foot of land area of $4.83.
The comparable sales range in size from 154,638 square feet (3.55 acres) to
1,066,349 square feet (24.48 acres), with an average size of 467,399 square
feet, or approximately 10.73 acres.
The values of land parcels are influenced by various factors. The fundamental
factors believed to be of particular significance in this instance are: passage
of time, size, location, zoning, utility, highest and best use, and
accessibility. These items must be carefully
48
<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
weighed in a comparative market analysis so reasonable value adjustments may be
applied.
49
<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
Insert comparable land sales map
50
<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
Typically, larger tracts of land tend to sell at lower unit sales prices than
their smaller counterparts, all other factors being equal. The analysis of
utility considers such physical characteristics as shape, depth, frontage,
corner influences, topography, zoning, and the availability of utility services.
The analysis of location considers such factors as exposure or visibility,
accessibility, and the quality of the surrounding area. The analysis of passage
of time considers such factors as appreciation in land values over time.
The comparables presented in this analysis are considered the most pertinent
information available, and are believed to provide a reasonable basis with which
to form an opinion of land value for the subject site, as if vacant, and
available for development. We attempted to quantify the various adjustments;
however, due to the varying factors associated with the sales, quantified
adjustments are difficult at best. The most market-oriented unit of comparison
for properties such as the subject is the sales price per square foot of land
area. All comparable sales were analyzed on this basis.
It should be noted, that the qualitative analysis which follows is primarily
for informational purposes; the intent being to assist the reader in the thought
process used to compare the dissimilarities of the sales to the subject, with
the ultimate result being a plausible market value conclusion. However, because
the trading of real estate occurs in a very imperfect market, coupled with the
fact that no two land sales are exactly alike, the use of paired sales to derive
quantifiable adjustments, though preferable in theory, is not generally
practical in the marketplace. The reasons being that even in the most ideal
circumstances, the quality and uniformity of data is insufficient to produce
accurate results, not to mention the intangible factor of motivation. As such,
the data could conceivably be manipulated to producing varying results.
Therefore, the reader should be cautioned that the adjustments set forth herein
are not to be construed as absolute, but are provided as a visual aid in
demonstrating the logic and reasonableness of the conclusion.
TERMS OF SALE
All of the land sales cited within this section were arms-length
transactions, therefore, no adjustment for terms of sale were considered to be
warranted.
MARKET CONDITIONS
This adjustment, which is also referred to as the "time adjustment" reflects
the change in market conditions from the sale date of a comparable to the
valuation date of the subject.
51
<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
Industrial real estate market conditions in Chicago Metropolitan Area have
continued to improve, resulting in continued improvement in market conditions
and land values since comparable land sales L-2, L-3 and L-4 were negotiated.
LOCATION
Comparable sales L-1, L-3 and L-4 have superior locations and downward
adjustments are made. Comparable sale L-2 is in a similar location and no
adjustment is made.
UTILITY (PHYSICAL CHARACTERISTICS)
The analysis of utility considers such factors as shape, depth, frontage,
plottage, topography, zoning, and the availability of utility services. All of
the land sales considered having similar utility aspects in relation to the
subject site and, therefore, no adjustments for physical characteristics were
required.
SIZE
The site area of the subject is 420,354 square feet or 9.65 acres. Comparable
sale L-1 is significantly larger than the subject and an upward adjustment is
made. Comparable sale L-2 is smaller than the subject and a downward adjustment
is made. Comparable sales L-3 and L-4 are similar in size to the subject and no
adjustment is made.
<TABLE>
<CAPTION>
===================================================================================================================================
QUALITATIVE ADJUSTMENT CHART
COMPARABLE LAND SALES
===================================================================================================================================
Comp SALE TERMS OF MARKET CUMULATIVE LOCATION SIZE UTILITY CUMULATIVE
No. PRICE SALE CONDITIONS ADJUSTMENT ADJUSTMENT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
L-1 $4.00 Arms-length Similar $4.00 Superior Inferior Similar Inferior
0% 0% 0% -10% +20% 0% +10%
$4.40
- -----------------------------------------------------------------------------------------------------------------------------------
L-2 $4.85 Arms-length Inferior $5.14 Similar Superior Similar Superior
0% +6% 6% 0% -10% 0% -10%
$4.63
- -----------------------------------------------------------------------------------------------------------------------------------
L-3 $5.42 Arms-length Inferior $5.85 Superior Similar Similar Superior
0% +8% +8% Inferior -20% 0% 0% -20%
$4.68
- -----------------------------------------------------------------------------------------------------------------------------------
L-4 $5.03 Arms-length Inferior $5.43 Superior Similar Similar Superior
0% +8% +8% Inferior -20% 0% 0% -20%
$4.35
===================================================================================================================================
</TABLE>
52
<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
53
<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
The adjusted comparable sales range from $4.35 to $4.68 per square foot, with
an average adjusted sales price of $4.52. We feel the value would fall near the
upper end of the value range, therefore, applying an estimated $4.25 to $4.75
per square foot value range results in the following overall value estimates for
the subject property.
====================================================================
LAND VALUATION
====================================================================
UNIT SALES
LAND AREA X PRICE/SF = ESTIMATED VALUE
--------------------------------------------------------------------
420,354 SF x $4.25 = $1,786,505
420,354 SF x $4.75 = $1,996,682
====================================================================
We believe the value of the subject site would lie near the mid-aspect of the
above indicated market range, or at $4.50 per square foot, or $1,900,000, as
rounded.
COST OF IMPROVEMENTS
As developed, the subject's existing improvements are considered to be an
distribution warehouse facility of low cost to average quality, Class C, as
defined in Section 14, Page 23 of the Marshall Valuation Service.
BASE COSTS
The published costs include all direct costs for the base structure and
tenant improvements, and the following indirect costs:
(1) plans, specifications, and building permits, including engineer's and
architect's fees;
(2) normal fees and interests on construction funds during the construction
period, leasing commissions;
(3) sales taxes on materials; and
(4) contractor's overhead and profit, including worker's compensation, fire
and liability insurance, unemployment insurance, etc.
According to cost estimates published by the Marshall Valuation Service, as
presented in Section 14, Page 23, the replacement cost new regarding a low cost
to average, Class C,
54
<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
distribution warehouse building is approximately $25.00 per square foot, as of
September, 1997. We have also included a $1.00 per square foot upward adjustment
for a sprinkler system. The preceding base costs were adjusted regarding current
cost and local cost multipliers of 1.02 and 1.17, respectively. Furthermore, we
have estimated the replacement cost new for site improvements at $200,000. These
refinements result in a total replacement cost new for the subject property,
summarized as follows:
=====================================================================
REPLACEMENT COST NEW
=====================================================================
Base Cost @ $25.00/SF/(1)/: $5,522,600
Plus: Sprinkler System @ $1.00/SF: $ 220,904
---------------------------------------------------------------------
TOTAL BASE COST: $5,743,504
---------------------------------------------------------------------
Current Cost Multiplier @ 1.02 $5,858,374
Local Cost Multiplier @ 1.17 $6,854,298
---------------------------------------------------------------------
ADJUSTED COST ESTIMATE: $6,854,298
---------------------------------------------------------------------
Site Improvements: $ 200,000
---------------------------------------------------------------------
TOTAL REPLACEMENT COST NEW ESTIMATE: $7,054,298
AS ROUNDED: $7,050,000
---------------------------------------------------------------------
/(1)/ Based on the total building area of 220,904 square feet.
=====================================================================
OTHER COSTS
These include indirect and site improvement costs (sidewalks, exterior
lighting, landscaping, etc.) as well as architectural and engineering fees,
legal fees and loan fees. Indirect and site improvement costs were included in
our previous cost analysis and reference is made thereto.
DEVELOPER'S PROFIT
Developer's profit typically ranges from 10 to 20 percent of total project
costs (including land). Given that the subject is an owner-occupied property, we
have estimated a developer's profit toward the lower end of the commonly cited
range of approximately 10 percent in our analysis.
ESTIMATE OF ACCRUED DEPRECIATION
55
<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
Accrued depreciation is the difference between the cost new of the
improvements and the current value of those improvements measured on the
appraisal date. Depreciation includes loss in value from three basic categories:
(1) physical deterioration; (2) functional obsolescence; and (3) external
obsolescence.
Physical deterioration is the result of aging and normal wear and tear on a
structure, which reduces its value. Impairments may be curable or incurable.
Functional obsolescence is the adverse affect on value resulting from design
defects that impair the structure's usefulness. It can be caused by changes over
the years that have made some aspect of the structure, material, or design
obsolete by current standards. External obsolescence refers to the diminished
utility of a structure due to negative influences emanating from outside the
building.
PHYSICAL DETERIORATION
To estimate accrued physical depreciation, the appraiser must estimate a
property's effective age and its typical life expectancy. The appraiser
estimates a structure's effective age by observing its condition and utility,
including any relevant external factors. The structure's effective age may be
more or less than its actual chronological age. Typical life expectancy is the
length of time that new improvements typically contribute to a property's value
The subject property was constructed in approximately 1961 with an addition
in the late 1960's and is in overall good condition and has an average physical
age of approximately 30 years. Based upon our inspection of the improvements
they were found to be in average condition.
Our inspection of the subject property found the interior and exterior of the
improvements to be in good condition. The site improvements were also found to
be in good condition. Based upon our inspection we have estimated the effective
age of the subject improvements at 25 years. Information published by the
Marshall Valuation Service indicates that the typical economic life expectancy
of improvements similar to the subject is 40 years.
Given a 25-year effective age and a 40-year economic life expectancy, accrued
physical depreciation developed by the age-life method amounts to 63 percent,
which is calculated below.
=============================
ACCRUED PHYSICAL DEPRECIATION
56
<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
---------------------------------------------------------
AGE-LIFE METHOD
---------------------------------------------------------
25-Year (Effective Age)
---------------------- 63%
40 Years (Normal Economic Life)
=========================================================
All costs, excluding land value, are multiplied by this percentage to
calculate total physical depreciation for the subject property.
FUNCTIONAL OBSOLESCENCE
Functional obsolescence is a loss in value resulting from defects in design.
It can also be caused by changes that, over time, have made some aspect of a
structure, such as its materials or design, obsolete by current standards. In
the instance of the subject property the functional items are the low ceiling
clearance and a marginally adequate land-to-building ratio for trailer and
automobile parking.
External Obsolescence
External obsolescence results from negative influences originating from
outside the subject property, such as a neighborhood decline, poor local and/or
regional market conditions, the existence of nearby environmental hazards, etc.
We believe no external obsolescence applied to the subject property.
CONCLUSION
Based on the above, the estimated value of the subject's existing
improvements, by the Cost Approach, is summarized as follows:
================================================================================
COST APPROACH SUMMARY
================================================================================
Land Value $1,900,000
Total Replacement Cost New $7,050,000
----------
Total Cost Before Profit $8,950,000
Developer's Profit @ 10.0% $ 895,000
----------
Total Cost New $9,845,000
Less: Accrued Physical Depreciation @ 63%(1) $5,005,530
----------
Sub Total $4,839,650
Less: Functional Obsolescence @ 20% $ 587,930
----------
$4,251,720
----------
57
<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
Total Indicated Value
===========================================================================
INDICATED VALUE BY THE COST APPROACH, AS ROUNDED $ 4,250,000
---------------------------------------------------------------------------
(1) Depreciation on total cost new less land value.
===========================================================================
Therefore, based on the above, indicated the value of the subject property,
by the Cost Approach, equates to $4,250,000, as rounded.
58
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
METHODOLOGY
In the Sales Comparison Approach, we estimated the value of the subject by
comparing it with similar, recently sold properties in the surrounding or
competing area. Inherent in this approach is the principle of substitution,
which holds that when a property is replaceable in the market, its value tends
to be set at the cost of acquiring an equally desirable substitute property,
assuming that no costly delay is encountered in making the substitution
By analyzing sales that qualify as arms-length transactions between willing
and knowledgeable buyers and sellers, we can identify value and price trends.
The sold properties must be comparable to the subject in physical, locational,
and economic characteristics. The basic steps of this approach are:
1. research recent, relevant property sales and current offerings throughout
the competitive area;
2. select and analyze properties that are similar to the subject, considering
changes in economic conditions that may have occurred between the sale date
and the date of value, and other physical, functional, or locational
factors;
3. identify sales that include favorable financing and calculate the cash
equivalent price;
4. reduce the sale prices to a common unit of comparison such as price per
square foot of gross building area;
5. make appropriate adjustments to the prices of the comparable properties;
6. interpret the adjusted sales data and draw a logical value conclusion.
Since this approach relies primarily on physical units of comparison, it
requires an adequate sample of recently sold properties that posses physical,
economic and financial comparability to the subject property. Implicit in this
definition of comparability is the concept of utility, in that the motivation
and needs of a particular segment of market demand are comparably met, or
served.
59
<PAGE>
<TABLE>
<CAPTION>
============================================================================================
SUMMARY OF IMPROVED WAREHOUSE SALES
- --------------------------------------------------------------------------------------------
Sale
Comp Address Date Sale Price Bldg. Area
No
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
L-1 3333 Charles Street 10/97 $2,377,500 173,749 SF
Franklin Park, Illinois
- --------------------------------------------------------------------------------------------
I-2 2635 South Western Avenue 7/97 $5,710,000 249,600 SF
Chicago, Illinois
- --------------------------------------------------------------------------------------------
I-3 11936 South Central Avenue 5/97 $8,050,000 320,171 SF
Alsip, Illinois
- --------------------------------------------------------------------------------------------
I-4 1400 West 35th Street 3/97 $4,650,000 537,000 SF
Chicago, Illinois
============================================================================================
Subject 2155 Rose Street -- -- 220,904 SF
Leyden Township, Cook County,
Illinois
============================================================================================
<CAPTION>
===================================================================================================================
SUMMARY OF IMPROVED WAREHOUSE SALES
- -------------------------------------------------------------------------------------------------------------------
Comp Age Clearance Truck Doors
--- --------- -----------
No Address LBT Ratio % Office Construction Price/SF
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
L-1 3333 Charles Street 1985 17-20 Feet 10 DHD $12.68
Franklin Park, Illinois ------ ---------- 4 DID
1.72:1 12% -----
Masonry & Metal
- -------------------------------------------------------------------------------------------------------------------
I-2 2635 South Western Avenue 1968 28 Feet 36 DHD $22.88
Chicago, Illinois ------ -------- 9 DID
1.73:1 1% -----
Masonry
- -------------------------------------------------------------------------------------------------------------------
I-3 11936 South Central Avenue 1972 22 Feet 36 DHD $25.14
Alsip, Illinois ------ -------- 9 DID
1.71:1 2% -----
Tilt-Up Concrete
- -------------------------------------------------------------------------------------------------------------------
I-4 1400 West 35th Street 1971 22 Feet 74 DHD $8.66
Chicago, Illinois ------ ------- 4 DID
1.34:1 3% -----
Masonry
===================================================================================================================
Subject 2155 Rose Street 1961 & late 18-20 Feet 30 DHD --
Leyden Township, Cook County, 1960's ---------- ------
Illinois ----- .05% Masonry & Metal
1.90:1
==================================================================================================================
</TABLE>
DHD= Dock High Door
DID= Drive In Door
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
ANALYSIS OF SALES
In our research and analysis of the market for improved properties with
characteristics similar to those of the subject, we have attempted to gather
what we consider to be the most relevant data so that reasonable comparisons can
be made. There were several industrial buildings which exhibited similarities
to subject property.
The most widely-used and market-oriented unit of comparison is the sale price
per square foot of gross building area. All comparable sales have been analyzed
on this basis. Presented on the facing page is a summary of the sold improved
properties that we compared with the subject property. A map showing the
location of the sales in relation to the subject property is provided on the
following facing page. The sales are further detailed in the Addenda section of
this report.
COMPARABLE PROPERTY SALE I-1 is located at 3333 Charles Street, Franklin
Park, Illinois. Olympus Properties, Inc. sold this property to Michael
Goldstein on October 20, 1997 for $2,377,750. The building contains 173,749
square feet and is located on a 297,878 square foot site, giving it a land-
to-building ratio of 1.72:1. The building has 17 and 20 foot clear ceiling
heights and has 12 percent office finish. The masonry building has 10 dock-
high doors and four drive-in doors. The building was vacant at time of
sale. The indicated sales price equates to $12.68 per square foot of
building area.
COMPARABLE PROPERTY SALE I-2 is located at 2635 South Western Avenue,
Chicago, Illinois. Towne Realty, Inc. sold to Gold Eagle Company on July 3,
1997 for $5,710,000. The building, constructed in 1968, contains 249,600
square feet and is located on a 431,070 square foot site. The land-to-
building ratio is 1.73:1. The building has 28-foot clear ceiling height and
has 1 percent office finish. The masonry building has 36 dock-high doors
and nine drive-in doors. The building was vacant at time of sale. The
indicated sale price per square foot of building area is $22.88.
COMPARABLE PROPERTY SALE I-3 is located at 11936 South Central Avenue,
Alsip, Illinois. Summis PCA Partners sold to First Industrial L.P. on May
30, 1997 for $8,050,000. The building contains 320,171 square feet and is
located on a 548,856-square foot site. The land-to-ratio is 1.71:1. This
tilt-up concrete building was constructed in 1972. The clear ceiling height
is 22 feet and the building has 2 percent office finish. There are 36 dock-
high doors and nine drive-in doors. The tenant lease expires in February
1999, at which time the tenant will leave the building. The building
indicated sale price per square foot of building area equates to $25.14.
61
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
Insert map
62
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
COMPARABLE PROPERTY SALE I-4 is located at 1400 W. 35th Street, Chicago,
Illinois. Sears, Roebuck & Co. sold to Miracle LLC, a developer, on March 11,
1997 for $4,650,000. This building contains 537,000 square feet and is
situated on a 717,019 square foot site. The land-to-building ratio equates
to 1.34:1. The building, constructed in 1971, is of masonry construction.
Clear ceiling height is 22 feet. There is 3.0 percent office finish. There
are 74 dock-high doors and four drive-in doors. The building is currently
being extensively remodeled at a cost of $5,000,000. The indicated sales
price is $8.66 per square foot of building area.
The five enclosed sales indicate prices ranging from $8.66 per square foot to
$25.14 per square foot, with an average of $17.34 per square foot.
Since this approach relies on physical units of comparison, it requires an
adequate sample of recently sold properties that possess physical, economic, and
financial comparability to the subject. Implicit in this definition of
comparability is the concept of utility, in that the motivation and needs of a
particular segment of market demand are comparably met and served.
It should be noted that comparability does not imply an identical or exact
duplicate, but rather the possession of a similar utility affected by similar
supply and demand forces. In this instance, we were able to secure a number of
older and larger industrial building sales similar to the subject property.
However, differences do exist between the subject property and the comparables
that must be considered in order to estimate the value for the subject property.
These differences include: the passage of time, location, accessibility, size,
functionality, ceiling heights, proportion of office, age, and quality and
condition of improvements. Further, with regard to sale of income-producing
properties, consideration must be give to the quality and magnitude of the
rental income.
All of the sale comparables considered are situated in similar locations for
industrial facilities. The unit prices of the larger facilities and those with
inferior clearance heights warrant upward adjustments, while smaller facilities
and those with superior locational or access characteristics warrant a downward
adjustment.
The specific qualitative adjustments made to each sale comparable are
detailed below and summarized in the adjustment grid which follows within this
section.
63
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
TERMS OF SALE
All of improved sales cited within this section were arms-length
transactions, therefore, no adjustments for terms of sale were considered to be
warranted.
MARKET CONDITIONS
This adjustment, which is also referred to as the time adjustment, reflects
the change in market conditions from the sale date comparable to the valuation
date of the subject. Market conditions in the competing area have continued to
improve over the past 6 to 12 months, during that time it appears that said
improvement would be significant enough to qualify for a modest adjustment to
the comparable sales.
BUILDING AREA
Given the typical relationship between building area and unit selling price,
comparable sale I-1 is smaller than the subject and warrants a downward
adjustment. Comparable sale I-2 is considered similar to the subject property in
terms of gross building area; therefore, no adjustment is considered applicable.
Comparable sales I-3 and I-4 are significantly larger than the subject and
upward adjustments are made.
ACCESS
Comparable sale I-1 has very poor access that requires going through a
residential neighborhood, and an upward adjustment is made. All other
comparable sales are considered to have basically similar access as that enjoyed
by subject and no adjustment is made.
LOCATION
All comparable sales are considered to have similar locations to the subject
and no adjustment is made.
QUALITY AND AGE
All the comparable sales reflect newer improvements than the subject and
downward adjustments are made.
CLEAR CEILING HEIGHTS
64
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
Comparable sales I-2, I-3 and I-4 have warehouse clearance heights superior
to that enjoyed by the subject property, requiring a downward adjustment.
Meanwhile, sale I-1 is considered similar
PROPORTION OF OFFICE
Comparable sale I-1 has been adjusted downward to reflect above average
amount of finished office space versus the subject. The remaining improved
sales were all considered similar to the subject property in terms of office
finish.
<TABLE>
<CAPTION>
====================================================================================================================================
QUALITATIVE ADJUSTMENT CHART
IMPROVED PROPERTY SALES
====================================================================================================================================
COMP SALE TERMS MARKET BUILDING QUALITY CEILING HEIGHTS PROPORTION OF OVERALL
NO. PRICE OF CONDITIONS AREA ACCESS LOCATION /AGE OFFICE
SALE ----------
ADJUSTED
SALE PRICE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
I-1 $12.68 0% 5% -5% +30% 0% -5% 0% -5% +15%
------ -------
$13.31 $15.31
-----------------------------------------------------------------------------------------------------------------------------------
I-2 $22.88 0% 6% 0% 0% 0% -10% -15% 0% -25%
------ -------
$24.25 $18.19
- ------------------------------------------------------------------------------------------------------------------------------------
I-3 $25.14 0% 6% +15% 0% 0% -25% -10% 0% -20%
------ -------
$26.65 $21.32
- ------------------------------------------------------------------------------------------------------------------------------------
I-4 $ 8.66 0% 7% +20% 0% 0% +70% -10% 0% +80%
------ -------
$ 9.27 $16.69
====================================================================================================================================
</TABLE>
The comparable sales range in adjusted price from $15.31 to $21.32 per square
foot, with an average adjusted price of $17.88 per square foot. Given the net
effect of the adjustments discussed above, we believe an adjusted unit sales for
the subject ranges from $18.00 to $20.00 per square foot of net rentable
building area. Based on this range of unit prices, the following range of
market value is indicated for the subject property.
================================================================================
SALES COMPARISON APPROACH
INDICATED VALUE RANGE
================================================================================
Subject's x Unit Price = Estimated
NRA Per SF Value
================================================================================
220,904 SF x $18.00 = $3,976,272
220,904 SF x $20.00 = $4,418,080
================================================================================
65
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
Selecting a value slightly above the mid-point of the indicated market range,
the market value of the subject property, is estimated at $4,200,000, which
equates to a unit price per square foot indication of $19.01.
66
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
METHODOLOGY
The Income Approach is a method of converting the anticipated economic
benefits of owning property into a value estimate through capitalization. The
principle of "anticipation" underlies this approach in that investors recognize
the relationship between an asset's income and its value. In order to value the
anticipated economic benefits of a particular property, potential income and
expenses must be estimated, and the most appropriate capitalization method must
be selected.
The two most common methods of converting net income into value are direct
capitalization and discounted cash flow analysis. In direct capitalization,
stabilized net operating income is divided by an overall rate to indicate a
value. In the discounted cash flow method, anticipated future net income streams
and a reversionary value are discounted to an estimate of net present value at a
chosen yield rate (internal rate of return).
In valuing the subject, it is our opinion that the direct capitalization
method is the most appropriate, as the subject is a single-tenant building with
a long term lease. As a result, this method was developed in this analysis.
POTENTIAL GROSS INCOME
Potential gross income, that is, income before operating and fixed expenses
is determined by economic rent obtainable for the subject property. Their
future benefits are estimated by forecasting the earning potential of the
property under prevailing and foreseeable market conditions. Appropriate
allowances for vacancy and operating expenses, based on market conditions, are
then deducted from the potential gross income or gross earnings. This process
will result in an estimate of net operating income for the property.
MARKET RENT
In order to estimate market rent for the subject property, we have surveyed
the market for recent leases of comparable warehouse buildings. We reviewed the
terms of a number of reported lease transactions which were recently negotiated
at comparable properties. In estimating market rent for the subject, its
location, quality, design and functionality, age, amenities, and other pertinent
factors were considered. The comparable rents have been reduced to a common
unit of comparison: net annual rent per square foot of building area. The trend
in the local market, regarding the structure of industrial leases, is to
negotiate them on a
67
<PAGE>
- --------------------------------------------------------------------------------
net basis, whereby all real estate taxes, insurance, and common area maintenance
costs are the responsibility of the tenant. Provided on the following facing
page is a summary of recent
68
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
SUMMARY OF COMPARABLE LEASES OF WAREHOUSE PROPERTIES
===================================================================================================================================
COMP TENANT(S) START Bldg. SF % Clearance DOCK Net Rate/SF
LOCATION DATE ------- OFFICE --------- DOORS ----------- COMMENTS
NO LEASED SF AGE TERM
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
R-1 AVAILABLE Available 1,063,294 SF 17% 25 Feet 44 DHD $2.50 Chicago
--------- ------------ ------- 10 DID ----- Enterprise
13535 South Torrance Avenue 238,865 SF 1960-65 5 Years Center
Chicago, Illinois
- -----------------------------------------------------------------------------------------------------------------------------------
R-2 AVAILABLE Available 254,068 SF 3.6% 18-26 Feet 4 DHD $2.75 Calumet
--------- ---------- ---------- ----- Business
1401-1581 East 98th Street 103,680 SF 1967 5 Years Center
Chicago, Illinois
- -----------------------------------------------------------------------------------------------------------------------------------
R-3 COOPER TIRE 12/97 173,749 SF 15% 15-18 Feet 10 DHD $2.75 Rate of step
----------- ---------- ---------- 4 DID ----- increases not
3333 Charles Street 154,496 SF 1985 8 Years known
Franklin Park, Illinois
- -----------------------------------------------------------------------------------------------------------------------------------
R-4 VANGARD DISTR. 2/97 115,850 SF 3.0% 24 Feet 8 DHD $2.69 Amount of step
-------------- ---------- ------- 2 DID ----- increases not
7131 West 61 Street 115,850 SF 1970 7 Years known
Chicago, Illinois
- -----------------------------------------------------------------------------------------------------------------------------------
R-5 TRUE VALUE 8/97 208,713 SF 1.5% 24 Feet 10 DHD $2.55 Multi-Tenant
---------- ---------- ------- 2 DID 2 Years building
6960-80 West 51st Street 114,277 SF 1970 -----
Bedford Park, Illinois
- -----------------------------------------------------------------------------------------------------------------------------------
Subject: 2155 Rose Street -- 220,904 SF .05% 18-20 Feet 30 DHD -- Masonry
Leyden Township, ---------- ---------- Distribution
Cook County, Illinois 220,904 SF 1961-late Warehouse
60's
===================================================================================================================================
</TABLE>
DHD = Dock-high Door
DID = Drive-in Door
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
comparable warehouse and distribution center leases located in the Chicago
metropolitan area. A map indicating the location of each is provided on the
subsequent facing page.
Our summary of recently negotiated leases indicate that net leases are the
most recent leases of similar large warehouse properties in similar Chicago
markets. None of the comparable leases required free rent.
Ceiling height, loading facilities, finished office area, bay depths and
parking areas of the comparables are compared to the subject property and
adjustments made as required for these items.
COMPARABLE RENTAL R-1 is an offering at the Chicago Enterprise Center, 13535
South Torrence Avenue, Chicago, Illinois. This is a 238,865-square foot
space in a 1,063,294 square foot facility. The space has 25-foot clear
ceilings and 17 percent office finish. There are 44 dock-high doors and 10-
drive-in doors. The asking rental rate is $2.50 per square foot on a net
basis. They expect to negotiate a five-year lease.
COMPARABLE RENTAL R-2 is an offering at 1401-1581 East 98th Street, Chicago,
Illinois. This is space in the Calumet Business Center. The lease space is
103,680 square feet in a 254,068-square foot building. The space has clear
ceiling heights of 18 and 26 feet. There are four dock-high doors. The
office finish amounts to 3.6 percent. The asking rental rate is $2.75 on a
net basis. They expect to negotiate a five-year lease.
COMPARABLE RENTAL R-3 is located at 3333 Charles Street, Franklin Park,
Illinois. This is a 154,496-square foot space in a 173,749-square foot
building. This building has clear ceiling heights of 15 and 18 feet. There
are 10 dock-high doors and four drive-in doors. The rental rate is $2.75 per
square foot on a net basis. The rent rises at unknown step increase rates.
The lease term is 8 years.
COMPARABLE RENTAL R-4 is located at 7131 West 61st Street, Chicago, Illinois.
This is a 115,850-square foot, single-tenant building. The building has 24-
foot clear ceiling height. The office space equates to 1.5 percent of the
building. There are eight dock-high doors and two drive-in doors. The lease
to Vanguard Distributors was for 7 years. The rental rate was $2.69 per
square foot. The amount of step increases is not known.
COMPARABLE RENTAL R-5 is located at 6960-80 West 51st Street, Bedford Park,
Illinois. This is a 114,277-square foot space in a 208,713-square foot
building. The clear ceiling height is 24 feet. The space has 1.5 percent
office finish. There are 10 dock-
70
<PAGE>
INCOME APPROACH
- -------------------------------------------------------------------------------
high doors and two drive-in doors. The tenant is True Value. The rental rate
is $2.55 per square foot net. The lease is for two years.
71
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
Insert comparables map
72
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
Presented in the following table is a summary of the results of our survey
of office/warehouse building leases.
----------------------------------------------------------------
RESULTS OF DISTRIBUTION/WAREHOUSE SURVEY
----------------------------------------------------------------
Sample Size of Survey: Warehouse Properties
Total Leased Space: 727,168 SF
Surveyed: 5 properties
Range of Rental Rates: $2.50/SF to $2.75/SF, Net
Average Rental Rate: $2.65/SF, Net
Average Size: 145,434 SF
Range of Lease Terms: 2 to 8 Years
Expense Provisions: All lease rates are net
================================================================
The comparable rents have been reduced to a common unit of comparison, the
annual net rent per square foot of building area. The enclosed negotiated rent
comparables reflect a rental range of $2.55 to $2.75 per square foot, on a net
basis. The leased areas range in size from 114,277 square feet to 154,496
square feet, and the comparables are located in buildings constructed between
1960 and 1985. The rental offerings R-1 and R-2 have asking rates of $2.50 and
$2.75 per square foot.
MARKET RENT CONCLUSION
The subject has 220,904 total square feet, with .05 percent office finish
and 18-20-foot ceiling clearance. Comparable rentals R-2, R-3, R-4 and R-5 are
smaller than the subject and downward adjustments are made. The comparable
rentals R-1, R-2, R-4, and R-5 have superior ceiling heights and downward
adjustments are made. Comparable rentals R-1 and R-2 are offerings and a 10
percent reduction to $2.25 and $2.48 is expected through negotiation.
Considering the subject's age, condition, and ceiling clearance, we feel a
rental rate of $2.25 per square foot, net, is market.
REIMBURSABLE EXPENSES
The typical lease terms for warehouse buildings similar to the subject
property are triple net leases. The meaning of a triple-net lease typically
varies from market to market;
73
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
however, in this instance, triple-net leases often require the tenant to pay a
pro-rata share of all operating expenses, excluding property management fees and
reserves for replacement.
VACANCY AND COLLECTION LOSS
A deduction must be made from the total gross revenues due to an investor
in the subject property to account for the possibility of vacancy and/or non-
collection of rent. We have deducted 5.0 percent from gross revenues produced by
the subject property as an allowance for vacancy and the occasional non-payment
of rent or expenses by the lessee.
OPERATING EXPENSES
The subject property is assumed to be subject to a triple-net lease, where
the tenant pays for all operating expenses with the exception of management and
reserves for replacement. These expenses are discussed as follows.
MANAGEMENT FEE
Per discussions with knowledgeable asset managers and investment and
leasing brokers, 1.0 to 3.0 percent management fees are typically quoted for
industrial buildings like the subject. A management fee of 2.0 percent of
effective gross income is considered reasonable in the case of the subject.
RESERVES FOR REPLACEMENT
It is customary and prudent to deduct an annual sum from the cash flow to
establish a reserve for replacing long-lived items throughout the building. We
have estimated reserves for replacement at $0.10 per square foot of rentable
area, or $22,090, which is considered adequate in order to cover the costs of
replacing long-lived capital items such as the roof components and mechanical
systems considering the good condition of the subject building.
CAPITALIZATION
We converted net operating income into a value indication by means of the
direct capitalization method. After deducting all expenses, the net property
cash flow generated by the subject property is converted to a capital sum by an
overall rate, which is the direct relationship between the net income generated
by the real estate and its value in the marketplace.
74
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
As a point of reference in our selection of a capitalization rate, let us
first consider the general investor for institutional-quality industrial
buildings. Cushman & Wakefield Valuation Advisory Services has surveyed national
real estate investors to determine their investment objectives. THE CUSHMAN &
WAKEFIELD NATIONAL INVESTOR SURVEY, SPRING 1998 details the investment
requirements of active investors in the marketplace. Regarding typical, high-
quality warehouse/distribution buildings, capitalization rates typically range
from 7.8 to 10.5 percent, with the average-low and average-high of 8.6 and 9.3
percent, respectively. Terminal capitalization rates reflect an average-low and
average-high of 9.0 and 9.6 percent, respectively. Growth rates for income and
expenses generally range from 3.0 to 4.0 percent. This is illustrated in the
following chart.
================================================================================
CUSHMAN & WAKEFIELD INVESTOR SURVEY
SPRING 1998
WAREHOUSE/DISTRIBUTION, CLASS-A -- LEASED ASSET
================================================================================
GOING-IN TERMINAL INCOME EXPENSE
CAP RATE CAP RATE IRR GROWTH GROWTH
================================================================================
Overall Range 7.8-10.5% 8.0-11.5% 8.5-13.0% 1.0-4.0% 2.0-4.0%
Average Low/
Average High 8.6/9.3% 9.0/9.6% 10.8/11.5% 2.9/3.5% 2.9/3.3%
================================================================================
According to a recent Korpacz Real Estate Investor-Survey First Quarter
1998, the average Cap rate for industrial properties is now 12 basis points
lower than one year ago. Location is becoming increasingly important in
warehousing and distribution as more companies consolidate their operations in
major distribution centers. The results of the survey are summarized below.
<TABLE>
<CAPTION>
===========================================================================================================
KORPACZ REAL ESTATE INVESTOR SURVEY
NATIONAL INDUSTRIAL MARKET
===========================================================================================================
<S> <C> <C> <C> <C> <C>
Date of Income Expense
Survey Going-In OAR Terminal OAR IRR Growth Growth
- -----------------------------------------------------------------------------------------------------------
First Quarter 1997
</TABLE>
75
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Range 7.75 to 10.00% 8.00 to 10.50% 8.50 to 12.50% 0.00 to 6.00% 3.00 to 4.50%
------------- ------------- ------------- ------------ ------------
Average 8.96% 9.37% 11.14% 3.38% 3.75%
- ------------------------------------------------------------------------------------------------------------
First Quarter 1998
- ------------------------------------------------------------------------------------------------------------
Range 8.00 to 10.50% 8.00 to 11.00% 10.00 to 12.50% 2.00 to 6.00% 3.00 to 4.00%
------------- ------------- -------------- ------------ ------------
Average 9.08% 9.50% 11.25% 3.65% 3.63%
============================================================================================================
</TABLE>
76
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
It has been our experience that going-in capitalization rates are typically
the lowest for newer, single-tenant buildings which would be subject to only
minimal physical and functional depreciation, and which would incur relatively
modest re-leasing exposure.
DIRECT CAPITALIZATION METHOD
In estimating the market value of the subject property, we utilized the
direct capitalization method. In direct capitalization, net operating income is
divided by an overall rate to indicate a value. A summary of the direct
capitalization is presented in the following chart.
----------------------------------------------------------------
DIRECT CAPITALIZATION SUMMARY
----------------------------------------------------------------
TOTAL
----------------------------------------------------------------
REVENUES
Potential Gross Income $497,034
Less Vacancy and Collection Loss (5.0 %) ($ 24,852)
----------
Effective Gross Income $472,182
EXPENSES
Management Fee (2.0%) ($ 9,444)
Reserves for Replacement at $0.10 SF ($ 22,090)
----------
Total Expenses ($ 31,534)
Net Operating Income $440,648
----------------------------------------------------------------
Applying a market range of capitalization rates of 10.25 to 10.75 percent
to the subject's estimated net income of $440,648, indicates a range of market
value for the subject property of $4,099,051 to $4,299,005.
INCOME APPROACH CONCLUSION
Therefore, based on the above, it is our opinion that the market value of
the fee simple estate of the subject property, by the direct capitalization
method, would lie at the mid-aspect of the indicated market range, or at
$4,200,000, as rounded.
77
<PAGE>
RECONCILIATION AND FINAL VALUE ESTIMATE
- --------------------------------------------------------------------------------
Value indications for the subject property by the various approaches to
value employed are indicated as follows:
Cost Approach $4,250,000
Sales Comparison Approach $4,200,000
Income Approach $4,200,000
In the reconciliation of the three approaches employed, each approach to
value is considered in order to determine the reliability of the data and
conclusions of each and to weigh which approach best represents the actions of
typical buyers for properties similar to the subject's.
COST APPROACH
The Cost Approach has been given consideration because of the merits of the
principles of substitution. We have sufficient data to estimate land value, and
this information has been presented within our land valuation analysis.
Nevertheless, estimates of construction costs, developer's profit, depreciation
and other factors are somewhat subjective and comparatively less reliably-based.
Therefore, less weight was given this approach in determining our final estimate
of value.
SALES COMPARISON APPROACH
The Sales Comparison Approach is a reflection of what market participants
have been paying for similar warehouse buildings in the recent past. Sufficient
data exists to develop a reliably-based conclusion of value by this approach.
This approach was given significant consideration in determining our final
estimate of value.
INCOME APPROACH
Generally, the Income Approach is considered to be the most reliable and
meaningful indicator of value in our analysis of the subject property. The
subject property is highly suited to analysis by the Income Approach, as this is
the analysis most often applied in institutional investment circles. The focus
on property value in relation to anticipated income is well founded since the
basis for investment is profit in the form of return or yield on invested
capital. The appraisers relied most heavily upon the results of the income
analysis given the applicability of this method in accounting for the particular
characteristics
78
<PAGE>
of the property cash flow, as well as being the primary analytical and decision-
making tool of institutional investors.
79
<PAGE>
RECONCILIATION AND FINAL VALUE ESTIMATE
- --------------------------------------------------------------------------------
Giving more weight to the indication of value via the Income Approach and
Sales Comparison Approach, it is our opinion that the market value of the fee
simple estate in the subject property, considering the assumptions, limiting
conditions, certification and definitions, as of May 21, 1998, was:
FOUR MILLION TWO HUNDRED THOUSAND DOLLARS
$4,200,000
MARKETING TIME
Marketing time is an estimate of the time that might be required to sell a
real property interest at the appraised value. Marketing time is presumed to
start on the effective date of the appraisal. Marketing time is subsequent to
the effective date of the appraisal, whereas exposure time, as defined below, is
presumed to precede the effective date of the appraisal. The estimate of
marketing time uses some of the same data analyzed in the process of estimating
the reasonable exposure time and is not intended to be a prediction of a date of
sale.
Based on our discussions with local real estate professionals, we have
concluded that a marketing period of approximately 12 months would be required
in order to sell the subject property. This estimate is based on our
conversations with brokers familiar with the local industrial market, as well as
actual marketing time of similar industrial buildings located in the subject's
market area. The value conclusion expressed in this report are based on current
market conditions. This value estimate should not be interpreted as being
representative of the final price at which the property might sell throughout
the entire marketing period, due to uncertain market conditions.
EXPOSURE TIME
Under Paragraph 2 of the Definition of Market Value, the value estimate
presumes that "A reasonable time is allowed for exposure in the open market."
Exposure time is defined as the estimated length of time the property interest
being appraised would have been offered on the market prior to the hypothetical
consummation of a sale at the market value on the effective date of the
appraisal. Exposure time is presumed to precede the effective date of the
appraisal.
80
<PAGE>
RECONCILIATION AND FINAL VALUE ESTIMATE
- --------------------------------------------------------------------------------
We have estimated the appropriate exposure time for the subject property to
be approximately 12 months.
81
<PAGE>
QUICK SALE VALUE ESTIMATE
- --------------------------------------------------------------------------------
We have provided in our valuation a quick sale or orderly liquidation value
estimate of the subject property. A quick sale is estimated as a sale within a
six-month period.
In considering the question of value under a quick sale concept, there is a
great degree of subjectivity and judgement involved in this estimate.
No scientific method or "rule of thumb" exists in applying this discount.
Therefore, we have attempted to subjectively consider the potential buyer for
this property and determine a reasonable discount given the relative
marketability of the property and other factors.
Industrial brokers were contacted in the subject's market area and,
although no specific examples were discussed, they believe a discount ranging of
5 to 20 percent from the market value would be most likely under a quick sale
scenario.
We believe an approximate 10 percent discount from the market value to be a
reasonable allowance to account for a quick sale of the subject property.
Therefore, after considering all factors pertinent under a quick sale or
orderly liquidation sale concept, it is our opinion that the quick sale value of
the subject property, as of May 21, 1998, was:
THREE MILLION SEVEN HUNDRED EIGHTY THOUSAND DOLLARS
$3,780,000
82
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
"Appraisal" means the appraisal report and opinion of value stated therein; or
the letter opinion of value, to which these Assumptions and Limiting Conditions
are annexed.
"Property" means the subject of the Appraisal.
"C&W" means Cushman & Wakefield, Inc. or its subsidiary which issued the
Appraisal.
This appraisal has been made subject to the following assumptions and limiting
conditions:
1. No responsibility is assumed for the legal description or for any matters
which are legal in nature. Title to the Property is assumed to be good and
marketable and the Property is assumed to be free and clear of all liens
unless otherwise stated. No survey of the Property was undertaken.
2. The information contained in the Appraisal or upon which the Appraisal is
based has been gathered from sources the Appraiser assumes to be reliable
and accurate. Some of such information may have been provided by the owner
of the Property. Neither the Appraisers nor C&W shall be responsible for the
accuracy or completeness of such information, including the correctness of
estimates, opinions, dimensions, sketches, exhibits and other factual
matters. The Appraisal and the opinion of value stated therein is as of the
date stated in the Appraisal. Changes since that date in external and market
factors can significantly affect property value.
3. The appraisal is to be used in whole and not in part. No part of the
Appraisal shall be used in conjunction with any other appraisal. Possession
of the Appraisal, or a copy thereof, does not carry with it the right of
publication. Publication of the Appraisal or any portion thereof without the
prior written consent of C&W is prohibited. Except as may be otherwise
expressly stated in the letter of engagement to prepare the Appraisal, C&W
does not permit use of the Appraisal by any person other than the party to
whom it is addressed or for purposes other than those for which it was
prepared. If written permission is given by C&W to use the Appraisal, the
Appraisal must be used in its entirety and only with proper written
qualification as approved by C&W. No part of the Appraisal or the identity
of the Appraiser shall be conveyed to the public through advertising, public
relations, news media or used in any material (other than in judicial or
83
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
non-judicial proceedings involving Zenith) without C&W's prior written
consent. Reference to the Appraisal Institute or to the MAI designation is
prohibited.
4. The Appraisal assumes (a) responsible ownership and competent management of
the Property; (b) there are no hidden or unapparent conditions of the
Property, subsoil or structures that render the Property more or less
valuable (no responsibility is assumed for such conditions or for arranging
for engineering studies that may be required to discover them); (c) full
compliance with all applicable federal, state and local zoning and
environmental regulations and laws, unless noncompliance is stated, defined
and considered in the Appraisal; and (d) all required licenses, certificates
of occupancy and other governmental consents have been or can be obtained
and renewed for any use on which the value estimate contained in the
Appraisal is based.
5. The physical condition of the improvements considered by the Appraisal is
based on visual inspection by the Appraiser or other person identified in
the Appraisal. C&W assumes no responsibility for the soundness of structural
members nor for the condition of mechanical equipment, plumbing or
electrical components.
6. The projected potential gross income referred to in the Appraisal may be
based on lease summaries provided by the owner or third parties. The
Appraiser has not reviewed lease documents and assumes no responsibility for
the authenticity or completeness of lease information provided by others or
the bona fides of actual lease. C&W suggests that legal advice be obtained
regarding the interpretation of lease provisions and the contractual rights
of parties.
7. The projections of income and expenses are not predictions of the future.
Rather, they are the Appraiser's best estimates of current market thinking
on future income and expenses. The Appraiser and C&W make no warranty or
representation that these projections will materialize. The real estate
market is constantly fluctuating and changing. It is not the Appraisers'
task to predict or in any way warrant the conditions of a future real estate
market; the Appraiser can only reflect what the investment community, as of
the date of the Appraisal, envisions for the future in terms of rental
rates, expenses, supply, and demand.
84
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
8. Unless otherwise stated in the Appraisal, the existence of potentially
hazardous or toxic materials which may have been used in the construction or
maintenance or operation of the improvements or may be located at or about
the Property was not considered in arriving at the opinion of value stated
in the Appraisal. These materials (such as formaldehyde foam insulation,
asbestos insulation, various soil contaminants, and other potentially
hazardous materials) may affect the value of the Property. The Appraisers
are not qualified to detect such substances and C&W urges that an expert in
this field be employed to determine the economic impact of these matters on
the opinion of value stated in the Appraisal.
9. If the Appraisal is submitted to a lender or investor with the prior
approval of C&W, such party should consider the Appraisal as one factor,
together with its independent investment considerations and underwriting
criteria, in its overall investment decision.
10. Unless otherwise stated in the Appraisal, compliance with the requirements
of the Americans with Disabilities Act of 1990 (ADA) has not been considered
in arriving at the opinion of value stated in the Appraisal. Failure to
comply with the requirements of the ADA may negatively affect the value of
the property. C&W recommends that an expert in this field be employed.
11. Please note that prior to the use of the Appraisal report, our value
conclusion, or our firm name as part of, or to be referenced in, any
offering or other material intended for the review of others to be submitted
to others (other than in connection with judicial or non-judicial
proceedings involving Zenith), except as otherwise provided in our letter of
engagement, our permission is granted on the condition that we be provided
with an indemnification agreement in a form and content satisfactory to us,
by parties satisfactory to us. Notwithstanding the foregoing, prospective
institutional lenders may rely on and use the appraisal reports in their
entirety for purposes of a first mortgage loan transaction with Zenith.
85
<PAGE>
CERTIFICATION OF APPROVAL
- --------------------------------------------------------------------------------
We certify that, to the best of our knowledge and belief:
1. David O. Conroy, inspected the property and prepared the report and Stanley
R. Dennis, Jr., MAI, has reviewed and approved the report, but did not
inspect the property.
2. The statements of fact contained in this report are true and correct.
3. The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are our personal, unbiased
professional analyses, opinions, and conclusions.
4. We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
5. Our compensation is not contingent on an action or event (such as the
approval of a loan) resulting from the analyses, opinions, or conclusions
in, or the use of, this report. The appraisal assignment was not based on a
requested minimum valuation, a specific valuation, or the approval of a
loan.
6. Our analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the Uniform Standards of Professional
Appraisal Practice of the Appraisal Foundation and the Code of Ethics and
Standards of Professional Practice of the Appraisal Institute.
7. No one provided significant professional assistance to the persons signing
this report.
8. The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
9. As of the date of this report, Stanley R. Dennis, Jr., MAI has completed the
requirements of the continuing education program of the Appraisal Institute.
David O. Conroy Stanley R. Dennis, Jr., MAI
Senior Appraiser Managing Director
Illinois Certification No. 153-001128 Illinois Certification No. 153-000686
86
<PAGE>
ADDENDA
- --------------------------------------------------------------------------------
LEGAL DESCRIPTION
COMPARABLE LAND SALES
COMPARABLE IMPROVED SALES
CUSHMAN & WAKEFIELD INVESTOR SURVEY
APPRAISER QUALIFICATIONS
87
<PAGE>
IMPROVED PROPERTY SALES
- --------------------------------------------------------------------------------
IMPROVED SALE I-1
- -----------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
PROPERTY IDENTIFICATION
Location: 333 Charles Street
Franklin Park, Cook County, Illinois
PROPERTY & SALE INFORMATION
Grantor: Olympus Properties, Inc.
(Tim Burton-Werner Industries)
Grantee: Gold Realty Group
(Michael Goldstein)
Date of Sale: October 20, 1997
<PAGE>
IMPROVED PROPERTY SALES
- --------------------------------------------------------------------------------
I-1 (CONTINUED)
- ---------------
Physical Description
Land Area: 297,878 square feet, or 6.84 acres
Gross Building Area: 173,749 square feet
Finished Office Area: 20,850 square feet, or 12.0 percent
Clear Ceiling Height: 17 & 20 feet
Construction: Concrete block with brick finish
Year Built: 1985
Land/Bldg. Ratio: 1:72:1
Rail: No
Condition: Average
Terms of Sale: Cash to seller
Sale Price: $ 2,377,500
Sale Price/SF: $ 12.68/SF
Comments: This property had been vacant since April 1995.
The property was then leased to Cooper Automotive
by the new buyer. The property has ten dock-high
doors and four drive-in doors.
<PAGE>
IMPROVED PROPERTY SALES
- --------------------------------------------------------------------------------
IMPROVED SALE I-2
- -----------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
PROPERTY IDENTIFICATION
Location: 2635 S. Western Avenue
Chicago, Cook County, Illinois
PROPERTY & SALE INFORMATION
Grantor: Towne Realty, Inc.
Grantee: Gold Eagle Company
Date of Sale: July 3, 1997
Physical Description
Land Area: 431,070 square feet, or 9.90 acres
Gross Building Area: 249,600 square feet
<PAGE>
IMPROVED PROPERTY SALES
- --------------------------------------------------------------------------------
Finished Office Area: 2,490 square feet, or 1.0 percent
I-2 (CONTINUED)
- ---------------
Clear Ceiling Height: 28 feet
Sprinklered Yes
Year Built: 1968
Land-to-Building Ratio: 1.73:1
Condition: Good
Terms of Sale: Cash to seller
Sale Price: $5,710,000
Sales Price/SF: $22.88/SF
Comments: This building was purchased by an owner-user.
The buyer will occupy 150,000 square feet and
lease the remaining space.
The building has 36 dock-high doors and 9
drive-in doors.
<PAGE>
IMPROVED PROPERTY SALES
- --------------------------------------------------------------------------------
IMPROVED SALE I-3
- -----------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
PROPERTY IDENTIFICATION
Location: 11936 South Central Avenue
Alsip, Cook County, Illinois
PROPERTY & SALE INFORMATION
Grantor: Sammis PCA Partners
Grantee: First Industrial L.P.
Date of Sale: May 30, 1997
Physical Description
Land Area: 548,856 square feet, or 12.60 acres
<PAGE>
IMPROVED PROPERTY SALES
- --------------------------------------------------------------------------------
Gross Building Area: 320,171 square feet
I-3 (CONTINUED)
- ---------------
Finished Office Area: 6,400 square feet, or 2.0 percent
Clear Ceiling Height: 22 feet
Construction: Tilt-up concrete panel
Year Built: 1972
Land-to-Building Ratio: 1.71:1
Rail: No
Condition: Good
Terms of Sale: Cash to seller
Sale Price: $8,050,000
Sales Price/SF: $25.14 per square foot
Comments: The current tenant will leave the property at
the end of the lease term in 1999. There are
36 dock-high doors and 9 drive-in doors.
<PAGE>
IMPROVED PROPERTY SALES
- --------------------------------------------------------------------------------
IMPROVED SALE I-4
- -----------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
PROPERTY IDENTIFICATION
Location: 1400 W. 35th Street
Chicago, Cook County, Illinois
PROPERTY & SALE INFORMATION
Grantor: Sears, Roebuck & Co.
Grantee: Miracle LLC
Date of Sale: March 11, 1997
Physical Description
Land Area: 717,019 square feet, or 16.46 acres
<PAGE>
IMPROVED PROPERTY SALES
- --------------------------------------------------------------------------------
Gross Building Area: 537,000 square feet
I-4 (CONTINUED)
- ---------------
Finished Office Area: 16,000 square feet, or 3.0 percent
Clear Ceiling Height: 14-22 feet
Construction: Concrete block w/brick finish
Year Built: 1971
Land-to-Building Ratio: 1.34:1
Rail: No
Condition: Fair
Terms of Sale: Cash to seller
Sale Price: $4,650,000
Sales Price/SF: $8.66/SF
Comments: This building was sold vacant to an investor.
The building has 74 dock-high doors and 9
drive-in doors. The purchaser is extensively
remodeling the property and will lease the
property as a warehouse distribution facility.
<PAGE>
IMPROVED PROPERTY SALES
- --------------------------------------------------------------------------------
IMPROVED SALE I-5
- -----------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
PROPERTY IDENTIFICATION
Location: 1300 Howard Street
Elk Grove, Illinois
PROPERTY & SALE INFORMATION
Grantor: Equitable Life Assurance Society, as Trustee
Date of Sale: September 1996
<PAGE>
IMPROVED PROPERTY SALES
- --------------------------------------------------------------------------------
I-5 (CONTINUED)
- ---------------
Physical Description
Land Area: 23,700 square feet, or 0.54 acres
Gross Building Area: 10,000 square feet
Finished Office Area: 2,400 square feet, or 24%
Clear Ceiling Height: 14 feet
Construction: Concrete block with brick finish
Sprinklered: No
Year Built: 1977
Land-to-Building Ratio: 2.37:1
Rail: No
Condition: Average
Terms of Sale: Cash to seller
Sale Price: $450,000
Sales Price/SF: $45.00 per square foot
Comments: This property was sold to its tenant. The
building has one dock-high door and two
drive-in doors. The brick face of the
building was replaced by the seller before
the sale because of a structural problem.
<PAGE>
IMPROVED PROPERTY SALES
- --------------------------------------------------------------------------------
IMPROVED SALE I-6
- -----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROPERTY IDENTIFICATION
Location: 91 North Liverly Boulevard
Elk Grove, Cook County, Illinois
PROPERTY & SALE INFORMATION
Grantor: Schmidt Cartage, Inc.
Grantee: Mark and Cynthia Deutsch
Date of Sale: April 22, 1996
<PAGE>
IMPROVED PROPERTY SALES
- --------------------------------------------------------------------------------
I-6 (CONTINUED)
- ---------------
Physical Description
Land Area: 22,194 square feet, or 0.51 acres
Gross Building Area: 9,983 square feet
Finished Office Area: 900 square feet, or 9.0%
Clear Ceiling Height: 14 feet
Construction: Concrete block w/brick finish
Year Built: 1974
Land-to-Building Ratio: 2.22:1
Rail: No
Condition: Good
Terms of Sale: Cash to seller
Sale Price: $460,000
Sales Price/SF: $46.08 per square foot
Comments: The building was leased at time of sale. The
building has two drive-in doors and two dock-
high doors.
<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>
Exhibit 99s
================================================================
COMPLETE APPRAISAL
OF REAL PROPERTY
Electro Partes de Matamoros, S.A. de C.V.
An Industrial Manufacturing/Warehouse Facility
General Lauro Villar KM4, Number 700H; and
A Warehouse Facility
79 Tamaulipas Avenue
Matamoros, Tamaulipas, Mexico
C & W Appraisal File No. 99-9021
================================================================
IN A COMPLETE FORMAT
As of January 25, 1999
Prepared For:
Zenith Electronics Corporation
Attention: Ms. Beverly Wyckoff
1000 Milwaukee Avenue
Glenview, Illinois 60025
Prepared By:
Cushman & Wakefield of Arizona, Inc.
Valuation & Consulting Services
Suite 300
1850 North Central Avenue
Phoenix, Arizona 85004-4590
<PAGE>
February 4, 1999
Zenith Electronics Corporation
Attention: Ms. Beverly Wyckoff
1000 Milwaukee Avenue
Glenview, Illinois 60025
Re: Complete Appraisal of Real Property
Electro Partes de Matamoros, S.A. de C.V.
An Industrial Manufacturing Facility
General Lauro Villar KM4, Number 700H; and
79 Tamaulipas Avenue
Matamoros, Tamaulipas, Mexico
Dear Ms. Wyckoff:
In fulfillment of our agreement as outlined in the Letter of Engagement,
Cushman & Wakefield of Arizona, Inc., is pleased to transmit our report
estimating the market value of the fee simple interest in the subject property
as is.
As specified in the Letter of Engagement, the value opinion reported is
qualified by certain assumptions, limiting conditions, certifications and
definitions, which are set forth in the report. This is a complete appraisal
prepared in accordance with the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
This report was prepared for the client, and it is intended only for the
specified use of the client. It may not be distributed to, or relied upon by,
other persons or entities without written permission of Cushman & Wakefield of
Arizona, Inc.
The subject consists of two non-contiguous industrial facilities occupied
by a single tenant. The manufacturing building encompasses 196,442 square feet
and situated on two building parcels assembled to form one building site
totaling approximately 8.51 acres. A subsidiary of Zenith for the manufacturing
and warehousing of television parts utilize the facility. The improvements were
constructed between approximately 1971 and 1973 and are in average condition,
with no major deferred maintenance noted. The second facility is a 55,000 square
foot warehouse facility partially used for storage. The building is in a
dilapidated condition and has extensive physical deterioration, numerous items
of functional obsolescence and deferred maintenance. Further, the underlying
municipal site restrictions have been modified to permit retail/residential land
uses and restricts future industrial development. This facility is not
considered to provide any value enhancement to the underlying land value.
<PAGE>
Ms. Wyckoff
February 4, 1999
Page 2
Adrian Slater inspected the subject property and assisted in the
preparation of the report. Michael L. Miller, MAI inspected only the
manufacturing building and prepared the report. As a result of our analysis, we
have formed an opinion that the market value of the fee simple estate in the
manufacturing facility, subject to the assumptions, limiting conditions,
certifications and definitions, as of January 25, 1999, is:
THREE MILLION FOUR HUNDRED FIFTY THOUSAND DOLLARS
$3,450,000
Further, as a result of our analysis, we have formed an opinion that the
market value of the fee simple estate in the warehouse facility, subject to the
assumptions, limiting conditions, certifications and definitions, as of January
25, 1999, is:
FIVE HUNDRED TWENTY THOUSAND DOLLARS
$520,000
Since the land on which the warehouse is situated and the manufacturing
building can be sold in conjunction and/or separately, there is no need for
discounting or deductions when considering the market value combined. Thus, the
market value of the fee simple estate in both properties, as of January 25,
1999, is:
THREE MILLION NINE HUNDRED SEVENTY THOUSAND DOLLARS
$3,970,000
This letter is invalid as an opinion of value if detached from the report,
which contains the text, exhibits, and an Addendum.
Respectfully submitted,
CUSHMAN & WAKEFIELD OF ARIZONA, INC.
Michael L. Miller, MAI Adrian Slater
Director Associate Director
Valuation Advisory Services Cushman & Wakefield/GCI
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
- --------------------------------------------------------------------------------
Property Name: Electro Partes de Matamoros, S.A. de C.V.
Location: Matamoros, Tamaulipas, Mexico
Manufacturing Facility: General Lauro Villar KM4, Number 700H,
Warehouse Facility: 79 Tamaulipas Avenue
Interest Appraised: Fee simple estate
Date of Value: January 25, 1999
Date of Inspection: January 25, 1999
Ownership: Zenith
Land Area:
Manufacturing Facility: 8.51 acres, or 370,543 square feet
Warehouse Facility: 3.99 acres, or 370,543 square feet
Zoning: Industrial (assembly non-contaminants)
Highest and Best Use
Manufacturing Facility
If Vacant: Industrial development
As Improved: Continued single-tenant industrial use
Warehouse Facility
If Vacant: Commercial development
As Improved: Demolish the existing structure to accommodate
new commercial and residential demand
Manufacturing Improvements
Type: Single-tenant industrial manufacturing/
warehouse building and related site improvements
Year Built: 1971 to 1973
Type of Construction: Masonry block with prefabricated roof system
Gross Building Area: 196,442 square feet
Condition: Average
Warehouse Improvements
Type: Single-tenant warehouse building in poor
condition
Year Built: 1971
Type of Construction: Masonry block with prefabricated roof system
Gross Building Area: 55,000 square feet
Condition: Poor
<PAGE>
Summary of Salient Facts and Conclusions
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Value Indicators
Manufacturing Facility
Cost Approach: $4,080,000
Land Value: $ 430,000
Sales Comparison Approach: $3,340,000
Income Approach: $3,590,000
Value Conclusion $3,450,000
Warehouse Facility
Cost Approach: $ 520,000
Land Value: $ 520,000
Sales Comparison Approach: N/A
Income Approach: N/A
Value Conclusion $ 520,000
Aggregate Value (both facilities): $3,970,000
</TABLE>
Estimated Marketing Time: 12 months
Special Limiting Conditions:
1) The appraiser conducted an appraisal on the subject in May of 1998. At
that time, a market value estimate of $4,130,000 and a liquidation value of
$3,540,000. The market value considered a 12 to 18 month marketing period, while
liquidation value considered only a six-month marketing period. However, since
that appraisal was conducted, a number of factors support a decline in the
market value:
A) A 25.0 percent decline in the value of the peso has occurred since the
previous date of appraisal. This directly affects the value of real
estate in Mexico.
B) The world capital markets contracted substantially in October and
November 1998. Although the capital markets are recovering, the
contraction has still limited the number of potential purchasers
(particularly REITs), increased the cost of loans (even though the
prime interest rate has decreased) and made secondary markets, like
Matamoros, less desirable for real estate financing. Bob Burnand with
Cushman & Wakefield's Financial Services Group indicated that real
estate prices still remain 10 to 15 percent below those levels
immediately prior to October 1998.
2) The appraiser did not consider the warehouse facility in the previous
analysis.
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
<S><C> <C>
Page
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
INTRODUCTION............................................................ 1
Identification of Property........................................... 1
Property Ownership and Recent History................................ 1
Purpose and Function of the Appraisal................................ 1
Scope of the Appraisal............................................... 1
Date of Value and Property Inspection................................ 2
Property Rights Appraised............................................ 2
Definitions of Value, Interest Appraised, and Other Pertinent Terms.. 2
Legal Description.................................................... 3
Personal Property.................................................... 4
Reporting Guidelines................................................. 4
Marketing Time....................................................... 4
REGIONAL ANALYSIS....................................................... 5
MAQUILADORA ANALYSIS.................................................... 12
MAQUILADORA INDUSTRY.................................................... 20
INDUSTRIAL MARKET ANALYSIS.............................................. 22
NEIGHBORHOOD ANALYSIS................................................... 29
PROPERTY DESCRIPTION.................................................... 31
Site Description.................................................. 31
Improvements Description.......................................... 33
ZONING.................................................................. 37
REAL ESTATE ASSESSMENTS AND TAXES....................................... 38
HIGHEST AND BEST USE.................................................... 38
VALUATION METHODOLOGY................................................... 45
COST APPROACH........................................................... 46
SALES COMPARISON APPROACH............................................... 57
INCOME APPROACH......................................................... 65
RECONCILIATION AND FINAL VALUE ESTIMATE................................. 70
ASSUMPTIONS AND LIMITING CONDITIONS..................................... 72
CERTIFICATION OF APPRAISAL.............................................. 74
ADDENDA................................................................. 75
Subject Photographs
Legal Description
Location Map
Qualifications of Appraiser
</TABLE>
<PAGE>
INTRODUCTION
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Identification of Property
The subject property is known as the Electro Partes de Matamoros, S.A. de
C.V., a subsidiary of Zenith, which manufactures and warehouses computer parts.
There are two facilities under consideration.
1) An industrial manufacturing/warehouse building totaling 196,442 square
feet of gross building area. The site consists of two parcels of land
assembled to form one building site that encompasses 8.51 acres of land.
The physical address is General Lauro Villar KM4, Number 700H, in the
city of Matamoros, state of Tamaulipas, Mexico.
2) An industrial warehouse building totaling 55,000 square feet of gross
building area. The site consists of one commercial building site that
encompasses 3.99 acres of land. The physical address is 79 Tamaulipas
Avenue, in the city of Matamoros, state of Tamaulipas, Mexico.
Both, noncontiguous subject facilities are situated on major arterials
adjacent east to the central business district of the city of Matamoros.
Property Ownership and Recent History
Both subject sites were acquired by the current owners in approximately
1971 and subsequently constructed the building improvements between 1971 and
1973. The manufacturing facility has undergone minor interior remodeling as
demands on manufacturing have changed. It is well maintained and functional for
manufacturing uses. However, the warehouse facility is in a dilapidated
condition and has extensive physical deterioration, numerous items of functional
obsolescence and deferred maintenance. Further, the underlying municipal site
restrictions have been modified to permit retail/residential land uses and
restricts future industrial development.
In May 1998, the two subject properties were marketed for sale by
Insignia/Binswanger. The manufacturing facility was marketed at a price similar
to the appraised value. The warehouse facility was marketed at $700,000. The
only reported offer for the subject facilities was one for approximately
$3,500,000, with the buyer desiring ownership in both properties at that price.
No prior sales, listings, or offers are known to have occurred in the last three
years.
Purpose and Function of the Appraisal
The purpose of the appraisal is to provide an estimate of the market value
of the fee simple interest in the subject property as is. At the request of the
client, we have estimated the liquidation value of the subject property. This
assumes a six month sale period, which is less than the estimated marketing
period if sold at the market value previously noted. It is our understanding the
appraisal will be utilized to assist in making management decisions relative to
financing.
Scope of the Appraisal
In the process of preparing this appraisal, we:
. Inspected the building and site improvements with the production manager.
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<PAGE>
Introduction
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. Drove every major street in the community and inspected all large commercial,
industrial and office facilities and all industrial parks within the
community.
. Conducted market research and analysis regarding the socio-economic makeup of
the country and the specific community where the subject is located.
. Prepared specific interviews and reviewed business and industrial overviews
prepared by Cushman & Wakefield of Mexico, Northern Mexico's regional
economic centers, real estate brokers, and developers in order to prepare a
comprehensive overview of the maquiladora market.
. Conducted market research and analysis of occupancies, asking rents,
concessions, and operating expenses at competing properties. This included
phone conversation with industrial park managers, the individual maquiladora
production managers, area real estate brokers in the U.S. and throughout
Mexico. Further, we reviewed publications put out by the State, the local
economic development council and the U.S. sister city.
. Conducted market inquiries into recent sales of similar properties to
ascertain sales prices per square foot and capitalization rates. This
included reviewing all potential commercial and industrial transactions in
the community, a regional search in the City, State and a national search of
potential leases and sales.
. Reviewed specific construction costs of projects recently completed, under
construction and proposed in order to substantiate a replacement cost
estimate. A land value estimate through a comparison of recent land sales was
conducted and after depreciation, used to derive a value via the Cost
Approach for the manufacturing facility. In the case of the warehouse
facility, only the value of the underlying site was considered.
. The improved sales were used to derive a value estimate for the manufacturing
facility via the Sales Comparison Approach.
. A number of contracted leases and available buildings for leased were
research. The best comparables were used to estimate a market rent. This rent
was reduced by applicable expenses to derive a net income estimate. We then
capitalized this net income into a value estimate for the manufacturing
facility via the Income Approach.
. The three approaches to value are then reconciled into a single value
estimate.
Date of Value and Property Inspection
The date of value is January 25, 1999, the same as the date of inspection.
Property Rights Appraised
Fee simple estate and liquidation value based on a six month marketing
period.
Definition of Market Value
The definition of market value taken from the Uniform Standards of
Professional Appraisal Practice, 1994 Edition, published by The Appraisal
Foundation, is as follows:
The most probable price which a property should bring in a competitive and
open market under all conditions requisite to a fair sale, the buyer and
seller each acting prudently and knowledgeably, and assuming the price is not
affected by undue stimulus. Implicit in this definition is the consummation
of a sale as of a specified date and the passing of title from seller to
buyer under conditions whereby:
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<PAGE>
Introduction
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(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what they
consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of financial
arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions granted
by anyone associated with the sale.
Exposure Time
Under paragraph 3 of the Definition of Market Value, the value estimate
presumes that a reasonable time is allowed for exposure in the open market.
Exposure time is defined as the estimated length of time the property
interest being appraised would have been offered on the market prior to the
hypothetical consummation of a sale at the market value on the effective
date of the appraisal. Exposure time is presumed to precede the effective
date of the appraisal.
The following definitions of pertinent terms taken from the Dictionary of
Real Estate Appraisal, Third Edition (1993), published by The American Institute
of Real Estate Appraisers (now known as The Appraisal Institute), are as
follows:
Fee Simple Estate
Absolute ownership unencumbered by other interest or estate, subject only
to the limitations imposed by the governmental powers of taxation, eminent
domain, police power and escheat.
Market Rent
The rental income that a property would most probably command in the open
market; indicated by the current rents paid and asked for comparable space
as of the date of the appraisal.
Cash Equivalent
A price expressed in terms of cash, as distinguished from a price expressed
totally or partly in terms of the face amounts of notes or other securities
that cannot be sold at their face amounts.
Market Value As Is on Appraisal Date
The value of specific ownership rights to an identified parcel of real
estate as of the effective date of the appraisal; related to what
physically exists and is legally permissible and excludes all assumptions
concerning hypothetical market conditions or possible rezoning.
Legal Description
A legal description is found the Addenda.
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<PAGE>
Introduction
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Personal Property
There is no noted personal property associated with the operations of the
subject property that would require value consideration in the analysis of the
real estate.
Reporting Guidelines
Throughout this report, all figures will be reported in United States (US)
dollars, unless specifically specified as pesos. All sizes will also be reported
in square footage or in acres.
Marketing Time
Marketing time is an estimate of the time that might be required to sell a
real property interest at the appraised value. Marketing time is presumed to
start on the effective date of the appraisal. (Marketing time is subsequent to
the effective date of the appraisal, while the previously note exposure time is
presumed to precede the effective date of the appraisal.)
The estimate of marketing time uses some of the same data analyzed in the
process of estimating the reasonable exposure time, and it is not intended to be
a prediction of a date of sale.
Our estimate of an appropriate marketing time for the subject relates to a
sale of the property in its as-is condition. Based on our assessment of the
local real estate market and economic forces in general coupled with discussions
with local and regional brokers and buyers/sellers of industrial projects
similar to the subject, we have concluded that the probable marketing period for
the subject property in today's environment would 12 months.
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<PAGE>
REGIONAL ANALYSIS
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Since real estate is an immobile asset, economic trends affecting its
locational quality in relation to other competing properties within its market
area will also have a direct effect on its value as an investment. To accurately
reflect such influences, it is necessary to examine the past and probable future
trends that may affect the economic structure of the market area and evaluate
the impact on the market potential of the subject.
Regional and Local Influences
Mexico is a country struggling to modernize its infrastructure and reform
its political system. Although changes have been made, the process has been
slow. The joining of GATT known today as the World Trade Organization (WTO) in
1987 began the process of Mexico joining the free world. The signing of the
North American Free Agreement (NAFTA) in 1994 set in motion the reduction of
tariffs between Mexico and the United States. Since then Mexico has signed
several free trade agreements in Central and South America. The involvement of
other political parties besides the Partido Revolucionario Institucional (PRI)
in the governing of Mexico has created greater participation by the people.
However, problems persist in the southern states, such as Chiapas, where the
indigenous people continue to demand a voice in the political process.
Since the devaluation of the peso in 1994, Mexico has been attempting to
create stability in the financial markets. Over the last 20 years Mexico has
devalued its currency every six years. The massive $52 billion financial aid
package the United States and the International Monetary Fund loaned Mexico in
1995 created greater restrictions on the country's federal reserve bank. Since
then the pesos has floated freely. In order for Mexico to succeed, the
corruption must be uprooted and the judicial system reformed. Nevertheless,
Mexico's close proximity to the United States, its young, inexpensive labor
force and natural resources creates a great opportunity in tourism and
manufacturing that still have not been met.
Economy
Latin American countries, especially those considered mature emerging
markets, held a profitable position during 1997. The Wall Street Journal
classified Latin America as the zone which generates the world's highest
profits, with Mexico categorized as a mature emergent market. By the close of
1997, almost $12 billion in international investments occurred in all of Mexico,
establishing the country as the third most popular country for foreign
investment. The GNP grew by 7.3 percent versus the government's 5.2 percent
projection. The inflation rate was 15.72 percent.
Mexico is the largest Spanish speaking country in the world. With respect
to land area, it is the third largest country in Latin America and the
thirteenth largest in the world. The United States is Mexico's largest trade
partner, and Mexico is the third largest trade partner of the United States
after Canada and Japan. The approval of NAFTA in 1994 between Mexico, the United
States and Canada created the largest and most lucrative trade zone in the
world, with a market of more than 400 million consumers. As other Latin American
countries continue to grow economically and are incorporated in free trade
agreements with Mexico, the Mexican economy will incur the most benefits due to
its central location and recent stabilized economy.
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<PAGE>
Regional Analysis
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The economy in 1996 and 1997 was presented with a slow but constant
recuperation. At the beginning of 1995, a 30 percent devaluation of the
peso/dollar exchange rate was projected. But due to strong economic indicators
in the second part of the year, the peso stabilized and created a stimulating
force for accelerated recuperation, surpassing many previous predictions
surrounding the country's capacity for recovery. Further, in 1997, Mexico
reduced its short term external debt.
Mexico City remains as the most expensive city in the country. Conversely,
the city possessed the largest number of industrial and commercial
establishments, as well as representing approximately 30 percent of the average
GNP. Moreover, according to the American Chamber of Commerce, most companies
reported domestic sales volume increased during 1997, with almost one-third
indicating net operating profits had increased by more than 30 percent.
However, the real consumer buying capability has grown more slowly.
Santander, a Spanish banking group, predicted a consumer growth of around 2.5
percent for the year's end, and a jump in sales of approximately 10 percent, in
comparison to the previous year.
After World War II, Mexico based its economic growth on a system of import-
substituting industrialization. Barriers to imports protected domestic products
from foreign competition. Although the economy grew at average annual rates of 6
percent in the 1950s and 1960s, the limits to the import substitution model were
all too apparent by the 1982 crisis. With booming oil prices and foreign
borrowing or deficit spending foreclosed, the De la Madrid government began to
open one of the world's most closed economies to competition and to cut back the
role of the state in economic activity.
The next president, Carlos Salinas de Gotari (1988-94), stepped up the pace
of this policy, privatizing many government industries and the banks, which had
been nationalized in 1982 by De La Madrid's predecessor, Jose Lopez Portillo.
On January 1, 1994, Mexico entered the North American Free Trade Agreement
(NAFTA) with the U.S. and Canada, further reducing barriers to trade with Mexico
for U.S. and Canadian companies and removing many restrictions of foreign
investment.
The transformation of the economy begun by the De la Madrid administration
and accelerated during the Salinas six-year presidential term brought inflation
down from 159.2 percent in 1987 to 7 percent in 1994 and produced an average
annual growth rate of 3 percent between 1985 and 1994. Mexico, the darling of
the international financial community, seemed poised to take full advantage of
its recently granted membership in the Organization for Economic Cooperation and
Development (OECD).
In 1994, a presidential election year, several social and political
problems in Mexico shook investor confidence. Organized uprisings among
indigenous groups in Chiapas, the assassination of the Institutional
Revolutionary Party (Partido Revolucionario Institucional, PRI) presidential
candidate Luis Donaldo Colosio and the murder of PRI Secretary General Jose
Francisco Ruiz Massieu, all sent tremors through Mexican financial markets.
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<PAGE>
Regional Analysis
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A massive exodus of capital precipitated a balance of payments crisis.
Without capital inflows, Mexico could no longer sustain a current account
deficit the size of 1994's; about 8 percent of GDP. The country's reserve
position left the government with no other option than to let the peso float.
Fondo Bancario de Proteccion al Ahorro (FOBAPROA), the Mexican equivalent of the
U. S. FDIC, has since taken $43 billion in real estate properties as the result
of the previous pesos devaluation and is now responsible for management and
disposition.
The harsh, painful adjustment sparked by the devaluation (on December 19,
1994 a dollar cost 3.4 pesos; at the end of 1995 it cost 7.7 pesos) and the
economic policies required to forestall falling back into the vicious
devaluation/inflation spirals of the past provoked the sharpest economic
contraction since the Great Depression.
The economy began to recover by late 1995, accelerated rapidly in 1996 with
growth of over 5 percent for the year and declined to 4.5 percent for 1997. It
is expected that this growth will end 1998 at 4.0 percent annual growth. In
addition, exchange rate volatility has since eased and inflation has fallen from
an annual rate of over 51.9 percent in the aftermath of the devaluation to 27.7
percent at the end of 1996. By May 1997 inflation fell below 1 percent per month
for the first time since December 1994. Inflation ended 1997 at 16.0 percent and
is estimated at 11.5 percent in 1998.
The recovery was, however, unevenly distributed. On the external side
improvement was immense. Besides overcoming the liquidity crunch, Mexico
succeeded in shifting a large trade deficit of $6.4 billion in 1994 to a surplus
of more than $6.4 billion in 1996. Mexico's access to international markets was
restored in mid-1995 when the Mexican authorities took advantage of the
opportunity to issue market debt in order to prepay the rescue package. By
January 1997, the portion of the rescue package owed to the United States was
repaid in full and $5 billion of the $12.4 billion owed to the IMF was pre-paid.
Mexico was also able to build up foreign exchange reserves to pre-crisis levels,
from $4 billion in January 1995 to $22 billion on July 18, 1997. The current
account deficit also shrunk from over 7 percent of GDP in 1994 ($30 billion) to
0.4 percent in 1996 ($1.4 billion).
As the United States' third largest trading partner, Mexico represents a
thriving market for U.S. products. Not only does Mexico offer a large market for
intermediate and capital goods produced in the U.S. and Canada, but it also
offers a growing market for consumer goods.
Intermediate goods, such as parts, supplies and raw materials used in
manufacturing, account for 78.8 percent of imports, and capital goods, such as
manufacturing equipment, account for 78.8 percent of imports, and capital goods,
such as manufacturing equipment, account for another 13.4 percent. The fact that
these two groups compose over 92 percent of Mexico's imports reflects the
country's developing industrial base. Among the main importers of these goods
are Mexico's manufacturing and maquiladora industries and the Mexican
government.
Although Mexico was hit by a severe economic crisis in 1995/96, its huge
consumer market is beginning to show signs of strong recovery. Due to the
introduction of free market
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<PAGE>
Regional Analysis
- --------------------------------------------------------------------------------
policies and the recent expansion of many well-known retail chains in Mexico,
consumers are enjoying access to a wide variety of foreign goods and services.
Government Privatization
From 1997 until 2000, most of Mexico's remaining public transportation will
be privatized, including fifty-eight airports, nine ports, five rail concessions
and a dozen municipal transit systems. The long-distance telecommunications
market has already been opened to competition. In 1997, the government announced
a $100 billion toll road modernization program, $15-20 billion of which will be
invested before the year 2000 to modernize Mexico's transportation
infrastructure. Mexico's government sustained IVA (Impuesto al Valor Agregado)
at 15 percent and adjusted its budget for 1998 due to fluctuations of oil
prices, because oil is Mexico's main export product.
Mexico privatized billions of dollars in state-owned industries in the
1990's, and began a steady process of opening trade that culminated with the
approval of NAFTA. However, continued progress on privatizations has been slow
and cumbersome. A Mexican-US rail consortium, Transportacion Ferroviaria
Mexicana (TFM), only recently took control of Mexico's most important railway
line in a $1.4 billion deal that completed the country's most difficult sell-
off. The long-awaited petrochemical privatization was watered down last year.
The state-owned airports are next on the list to be sold.
A $100 million investment was recently announced by the government for a
railroad modernization program, with an estimated $15 to $20 billion to be
invested before 2000 to modernize Mexico's transportation infrastructure.
Trends
The government's new National Program of Financing for Development 1997-
2000 (Programa Nacional de Financiamiento de Desarrollo, Pronafide) is the first
multiyear plan and has broadened the range of policy goals to include targets
for national savings, social welfare expenditures and educational attainment. It
is designed to ensure GDP growth of 5.6 percent by the year 2000. To achieve
this goal, the plan calls for raising the country's total savings rate (internal
savings, external savings and depreciation rate) by more than four percentage
points to 25.5 percent of GDP in 2000 from 20.9 percent in 1996.
According to government and industry statistics, private consumption is in
fact on the rebound, albeit at a meager rate--2 percent in the first quarter of
the year. Overall consumption rose 4.5 percent in 1997.
In preparation for increased demand, companies in 1999 will continue to
expect to invest more. In 1997 alone, companies poured 44 percent more into
physical plant improvements and expansion, acquisition of new businesses, real
estate, research and development, and personnel training than they did in 1996.
In 1997, respondents increased investment in these areas by an additional 32
percent.
Employment Projections
Reflecting the trends in sectoral performance, manufacturing companies will
experienced investment level increases at a slower pace in 1997 (44.5 percent)
and 1998 (26.7 percent)
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<PAGE>
Regional Analysis
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than in 1996 (57.4 percent). 1996 was one of the first years when the sector's
strongest members first looked beyond the frail domestic market and focused
their eyes on the lucrative export market. The bulk of investment in this sector
will be seen in the expansion and construction of new physical plant and the
acquisition of equipment.
The services and retail sectors on the other hand saw 1997 as the "get-
ready" year. Service-oriented companies geared up for greater business by
investing an average of 56.1 percent more than in 1996. As could be expected,
the vast majority of the sector's investment (72.4 percent) was in the training
of its workforce to provide better-quality service.
The retail sector, one of the most affected by the travails of the economic
recession, is betting on slow but sure increased consumption levels between now
and the end of the six-year presidential term, or sexenio, by investing more in
new facilities and employee training. Survey respondents to the American Chamber
of Commerce study indicated investment in the sector grew by an average of 31.3
percent in 1997 and an additional 24.9 percent in 1998. Fully half of
respondents belonging to the sector indicated they are channel funds toward the
construction of new facilities. Confirming this data, the country's retail trade
association, the ANTAD, said its members invested a total of $2.95 billion in
new and expanded stores over the last two years. An even greater number of
respondents (69.2 percent), however, said they invested more to train their
human resources--a sign that greater competition has forced retailers to provide
not only better choices and prices, but also better service.
Companies in all three sectors also supported their growth with new
employees as well. Manufacturers and service companies increased their
workforces by an average of 43 percent in 1997, and by 51 percent in 1998.
Retailers hired 9.1 percent more workers in 1998 and 9.5 percent more in 1998.
The government estimates that close to one million new jobs were created in 1998
alone. Overall, the employment outlook is extremely bright and should continue
to grow above U.S. levels.
Infrastructure
We have provided an overview of the transportation and utility
infrastructure of the community in order to provide further insight into the
economic viability of the country.
Airports
Mexico boasts the most highly developed airport infrastructure in Latin
America with 83 public airports, of which 53 are international. Mexico has 32
international agreements that permit reciprocal service to 12 countries
throughout the Americas, 13 in Europe and seven in Asia. Deregulation in recent
years warranted an increase in the number of carriers, route expansion, more
competitive pricing and a growing number of passengers. Privatization of
Mexico's 58 existing airports, in groups of two or three, began in the second
quarter of 1997.
Ports
Mexico has a total of 76 seaports and nine river ports. Of those, 22 ports
are located in the country's major production and consumption centers, and
handle the bulk of national and international activity. The remaining ports are
dedicated to fishing and tourism. Port activity is highly concentrated in six
ports: Salina Cruz, Lazaro Cardenas, Manzanillo on the Pacific Coast and
Coatzacoalcos, Veracruz and Tampico/Altamira on the Gulf of Mexico. Total cargo
traffic
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<PAGE>
Regional Analysis
- --------------------------------------------------------------------------------
through the port network increased 25.8 percent from 1996 to 1997, with
significant increases in both imports and exports.
Highways
Mexican highways are divided into toll roads and toll-free roads. About one
third of the overall highway system is paved. Most of the paved roads are part
of the federal highway system, which between 1989 and the end of this decade
will have increased by over 70 percent. Toll highways are generally four lanes,
modern and quite costly. In contrast, toll-free roads are usually two lanes and
in poor condition. The government maintains the country's web of toll-free roads
whereas the network of toll highways is operated by the Office of Federal
Bridges and Roads (Caminos y Puentes Federales, Capufe) or by private
concessionaires. Rural roads still represent an important element of regional
and local transit.
Telephones
Telmex, once a government-owned monopoly, was privatized in 1991 and is now
the fastest-growing telephone company in the world. The concession granted to
Telmex in 1990, defined the company's operating areas and set clear service
targets. The concession permitted the new owner a near monopoly for six years,
but competition for long distance services began in August 1996 and the bidding
on local frequencies began in October 1997. The long distance telephone networks
in Mexico are mostly fiber optic and totally digital. Local switching is also
digital and is more widespread than in many developed countries.
Water
The National Drinking Water and Sewage Program (Programa Nacional de Agua
Potable y Alcantarillado), launched in 1990 by the National Water Commission
Comision Nacional del Agua, CNA), achieved nearly 100-percent availability of
potable water in medium-sized cities by 1992. It also increased the sewage
treatment coverage by one third, reaching 90 percent in major cities and 80
percent in medium-sized cities. Nonetheless 16.4 percent of the Mexican
population does not have access to potable water and 33.0 percent do not have
adequate sewage.
Water experts estimate that approximately $7 billion will be needed to
complete and expand current water projects and to construct new wastewater
collection and treatment systems. Since federal and local government budget
allocations for water projects are insufficient, much of the funding will need
to come from private sources of financing.
Demographics
Presently, nearly 42 million of the 95 million Mexican citizens live in
poverty, with the national minimum wage at $26.45 pesos per day (approximately
$3.23 U.S.). Less than 20 percent of the population earns more than $5,125 pesos
per month ($625 U.S. per month). Furthermore, the World Bank estimated that 42
percent of Mexico's economic population is employed in the informal sector.
Approximately 56.8 percent of the Mexican population is under the age of 25
years, and six of every 10 citizens reside in cities. However, this trend is
changing, as the growth rate of the four main Mexican cities decreased to 1.8
percent from the 2.0 percent national average. One of the biggest problems
facing communities is adequately housing residents.
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<PAGE>
Regional Analysis
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Consorcio ARA, residential developers, reported Mexico's housing deficit
was calculated at around six to eight million residences. In order to meet the
basic demands of the rapidly growing population, the housing inventory will have
to grow by roughly 777,000 units per year. During the past year, the
metropolitan areas averaged 4.52 residents per unit, slightly below the national
average of 4.65 residents per unit. Meanwhile, 86 percent of metropolitan
housing stock has access to water, and 84 percent has access to sanitary
services and drainage. However, nearly one million homes do not have electricity
and/or potable water, although the percentage of homes with electricity rose
from 58.9 percent to 93.2 percent between 1970 and 1995.
Schools/Education
There are many private institutions that offer quality education from
kindergarten to university. Many of them are bilingual, with the best
institutions concentrated in the economic centers of Mexico City, Guadalajara
and Monterrey.
Summary
The common border of Mexico with the United States represents a unique
locational perspective that in the long term will benefit both countries. Mexico
is replacing many far east countries as a preferred manufacturing location, and
for good reason. Labor costs are similar and transportation costs are reduced to
North and South American countries. Additionally, the labor market is becoming
well schooled, with recent developments consisting of state of the art
facilities where skilled labor savings can also be found.
Mexico is taking the appropriate steps to become a free market society that
can effectively operate in a global economy. Society and government has reacted
positively to these changes, thus Mexico should remain one of the fastest
growing economies, with some of the highest profit potentials, of any country in
the world.
Near term forecasts project continued government and economic growth, at
reasonable levels. Population forecasts slightly above 2.0 percent are expected,
while growth in housing should substantially exceed this level due to current
inadequate supply. Municipal services will continue to expand and the monetary
system is expected to remain stable, with future inflation increases anticipated
at five to eight percent annually. Further, foreign investment will remain at
some of the highest levels of any country in the world.
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<PAGE>
MAQUILADORA ANALYSIS
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In this analysis, we will analyze the business of manufacturing within
Mexico, then detail an overview of the industrial market within the community
and the maquiladora market in specific. A maquiladora is defined as an in-bond
light manufacturing facility located in Mexico. It is typically associated with
a company's raw materials being transported to the maquiladora where the product
is manufactured, then the finished product is shipped to the retailer or
consumer.
Manufacturing In Mexico
Mexican manufacturers generally range from small to medium-size companies. Of
the country's almost 120,000 manufacturing companies, approximately 98 percent
are micro, small or medium-size businesses, all with fewer than 250 employees.
However, almost all materials used to manufacture chemical products, electrical
and electronic components, textiles and footwear are imported from the U.S. Less
than 2 percent of these materials are produced in Mexico.
U.S. companies in Mexico purchase more raw materials from the U.S. than from
Mexico, which means U.S. companies tend to have the inside track for supplying
materials to their Mexican subsidiaries and other U.S. companies in Mexico.
Buying criteria, such as terms of payment, quality standards and delivery time,
are similar to U.S. standards. The top 10 states in terms of the number of
medium and large manufacturing operations are:
1. The State of Mexico
2. The Federal District
3. Nuevo Leon
4. Baja California Norte
5. Chihuahua
6. Jalisco
7. Guanajuato
8. Coahuila
9. Puebla
10. Tamaulipas
The Maquiladora Industry
Maquiladora plants are twin plants that utilize imported basic American
products and convert them into the finished export merchandise ready for U.S.
and international retailers. This allows American firms to compete with other
foreign companies. The majority of the 300 maquiladora companies that in recent
years have been establishing themselves in northern cities like Mexicali and
Ciudad Juarez are export companies. In the Baja region of central Mexico, larger
manufacturers rely on large developers like Hines and Group Accion to set up
infrastructure and construction so exporting can go straight from Mexico to the
desired country. In northeast Mexico, large developers like Finsa and a
subsidiary of Security Capital (a real estate investment trust) form the bulk of
new construction activity. They have just recently provided management of the
business operations in addition to facility construction. Regardless of the
location, these frontier communities did not previously have an established
public information sector or private brokerage firm to provide companies with
the various locational
- --------------------------------------------------------------------------------
-12-
<PAGE>
Maquiladora Analysis
- --------------------------------------------------------------------------------
and business opportunities available to them. Thus, companies had to rely on
specific economic districts and the industrial park land owners for information.
Mexico's maquiladora industry continues its dynamic growth rate. This 32-year
old program is now Mexico's second largest source of foreign exchange revenue,
in excess of $6 billion. Maquiladora exports represent 45 percent of the total
Mexican manufactured exports. Maquiladoras started 1997 with a growth rate
exceeding 1996's by 16.7 percent, and it is projected that this growth rate will
remain constant throughout 1998. In comparison, the non-maquiladora
manufacturing sector is growing at a rate of 7.3 percent. From January to June
1997, the Mexican government approved permits for 283 new maquiladoras resulting
in 23,902 direct jobs. In total, there are currently 3,650 maquiladoras in
Mexico, accounting for more than 920,412 direct jobs. The new maquiladoras
represent the entire gambit of manufacturing procedures, including textiles,
furniture, automotive components, toys, sporting goods and chemicals.
Summary of The Maquiladora Industry
<TABLE>
<CAPTION>
March 31, 1996 June 31, 1997
-------------- -------------
<S> <C> <C>
Number of plants 2,288 3,650
Number of jobs 710,268 920,412
</TABLE>
It is obvious this industrial market is expanding at a rapid pace; in fact,
it is exceeding the expansion of some of the fastest growing U.S. communities.
The industrial growth for maquiladoras versus the growth of the Mexican economy
is summarized below.
<TABLE>
<CAPTION>
Industry Growth
Maquiladoras National Average
--------------- ----------------
<S> <C> <C>
First Quarter 1997 14.2% 5.7%
Breakdown by Location
Border Region 76.6%
Interior 23.4%
</TABLE>
Recent trends indicate that of the new additions to the market, greater
numbers of maquiladora plants have moved from the border areas to the interior
of Mexico. This trend is generally due to the improvement of transportation
infrastructure, facilitating the export of maquiladora-manufactured goods and
enhancing access to the border region and the U.S. market. Also, many
maquiladora employers are finding lower turnover rates in the interior cities of
Mexico, such as Durango, Puebla, Queretaro and Yucatan. We have tracked the
building permits for new maquiladoras in the states of Baja California,
Coahuila, Chihuahua, Federal District, Guanajuato, Mexico, Nuevo Leon, Puebla,
Sonora, and Tamaulipas (shown in order from bottom to top). As can be seen, Baja
California and Chihuahua rank number one and two in total building permits.
Also, construction activity in Baja California, Coahuila, Federal District,
Guanajuato, Nuevo Leon, and Tamaulipas increased in 1997 over 1996 levels. More
non-North American investment is anticipated. With the passage of NAFTA and the
strict rules of origin, goods manufactured in North America have preferential
treatment as tariff and non-tariff barriers are eliminated for the signatory
countries. These rules have encouraged Asian and European firms that want to be
competitive in the North American market to invest in one of the signatory
countries. For example, Daimler Benz from Germany has invested in both the U.S.
and Mexico and Daewoo from Korea in Mexico.
- --------------------------------------------------------------------------------
-13-
<PAGE>
Maquiladora Analysis
- --------------------------------------------------------------------------------
[GRAPH HERE]
Investments are finally targeting the Mexican market. The maquiladora program
was originally designed to allow the duty-free entry into Mexico of parts and
components which would then undergo some portion of the manufacturing process
and finally be re-exported with duties assessed only on the value added. Until
1994, sales in Mexico from maquiladoras were strictly controlled and essentially
not permitted. However, since 1995, under the revised Federal Decree for the
Promotion and Operation of Maquiladora Export Industry (Decreto para el Fomento
y Operacion de la Industria Maquiladora de Exportacion), a maquiladora can sell
up to 65 percent of its total production in the Mexican market. This percentage
will increase over the next five years until 2001 when maquiladora sales in the
domestic market will have no limits. This option adds a new dimension to the
long-term strategies for existing maquiladoras and potential new investment.
While turnover is still extremely high, efforts to reverse this trend are
slowly showing results. Companies are trying a variety of incentives to retain
employees, from cash bonuses based on production to more creative incentives,
such as giving away popular consumer products. Companies that invest in employee
incentives, meal programs, medical benefits and social programs are having
turnovers as low as many U.S. companies.
According to March 1997 figures, the average daily salary of maquiladora
personnel was $105.21 pesos (approximately US$13), approximately four times the
national average daily wage. Obviously, this rate is competitive with many Asian
countries and well below U.S. and Canadian levels. As such, this provides
companies with high labor costs significant cost savings when relocating
manufacturing to Mexico. However, as will be discussed in more detail within the
Cost Approach section of this report, building costs are similar to or higher
than U.S. costs due to the lack of speculative buildings added to the market.
This provides no measurable savings in the warehousing of goods compared to the
U.S.
-14-
<PAGE>
Maquiladora Analysis
- --------------------------------------------------------------------------------
The economic recession of 1995 in Mexico, during which the peso lost over 50
percent of its value, brought domestic growth and investment to a drastic halt.
But it also had the impact of lowering the costs of operation for those foreign
firms which have revenue in foreign currency. While the rest of the Mexican
economy experienced negative growth rates, the export sectors, primarily the
maquiladora industry, experienced positive growth rates. In the Maquiladora
market, rents have the option to be paid in pesos and/or dollars. Typically,
rent is paid in dollars and management fees in pesos. Additionally, most foreign
companies form a joint venture with a Mexican national, or a Mexican company, to
provide a slightly more favorable tax treatment. Salaries are typically also
paid in pesos, except for the production managers and executives, who are paid
in dollars. Historically, salaries were paid in cash, but companies are now
installing ATM in their facilities and employees have the ability to collect all
or a portion of their paycheck and bank the rest. This is an interesting
transition, as it is extremely important to the long-term economic viability of
the people that personal savings increase.
In the wake of the previous crisis, the prospects for investment have a long-
term positive prospectus. Efforts need to be dedicated to ensuring that
infrastructure limitations at the border do not impede the flow of goods and
people both north and southbound. As trilateral trade among the signatory
members of NAFTA exceeds $400 billion, 70 percent of which crosses from one
country to the other through the land-based ports of entry (truck and/or rail),
there needs to be a trilateral approach to developing and enhancing north/south
trade corridors. This currently is a difficult and time consuming process.
IMPORT AND EXPORT COMPARISONS
<TABLE>
<CAPTION>
Jan.-June
1995 % 1996 % 1997 %
---- --- ---- --- --------- ---
U.S. Exports
- -------------
<S> <C> <C> <C> <C> <C> <C>
Mexico 46,292 7.92 56,792 9.09 32,715 9.63
Canada 127,226 21.76 134,210 21.47 75,195 22.13
Non-NAFTA Countries 411,224 70.32 434,076 69.44 231,866 68.24
------- ----- ------- ----- ------- -----
Total 584,742 100 625,075 100 339,776 100
U.S. Imports
- -------------------
Mexico 62,101 8.35 74,297 9.34 40,923 8.3
Canada 144,370 19.42 155,893 19.60 83,952 20.05
Non-NAFTA Countries 537,072 72.23 565,099 71.06 291,732 71.65
------- ----- ------- ----- ------- -----
Total 743,543 100 795,289 100 416,607 100
===============================================================================================================
Mexican Exports
- -------------------
U.S. 66,273 88.32 80,540 83.9 44,538 84.97
Canada 1,987 2.5 2,171 2.26 1,087 2.07
Non-NAFTA Countries 11,282 14.18 13,289 13.84 6,795 12.96
------- ----- ------- ----- ------- -----
Total 79,542 100 96,000 100 52,420 100
Mexican Imports
- -------------------
U.S. 53,902 74.4 67,555 75.51 37,504 74.52
Canada 1,34 1.90 1,744 1.95 932 1.85
Non-NAFTA Countries 17,1777 23.70 20,170 22.54 11,893 23.63
------- ----- ------- ----- ------- -----
Total 72,453 100 89,469 100 50,329 100
===============================================================================================================
</TABLE>
Source: Banco de Mexico and U.S. Department of Commerce
-15-
<PAGE>
Maquiladora Analysis
- --------------------------------------------------------------------------------
Regardless of NAFTA, Mexico is negotiating for other trade agreements.
Similar types of agreements with five other countries have been consummated and
are just beginning with the European Union and Mercosur (consists of Brazil,
Argentina, Paraguay and Uruguay and is seen as one of the fastest growing trade
accords in the world). When these negotiations are concluded in 1998, the
European Union could easily replace the U.S. as Mexico's largest trading
partner.
The National Foreign Investment Commission (Comision Nacional de Inversiones
Extranjeras, CNIE) within the Secretariat of Commerce and Industrial Development
(Secretaria de Comercio y Fomento Industrial, Secofi) regulates foreign
investment and can authorize majority foreign investment in areas in which
foreign capital cannot automatically exceed 49 percent.
Changes to the Foreign Investment Law
Recent amendments to Mexico's Foreign Investment Law further liberalize the
regulation of foreign investment in Mexico to conform with recent privatization
initiatives and consolidate relevant provisions previously found in other laws
and regulations. Certain reporting and procedural requirements are clarified
and, in some instances, relaxed. Additionally, in many cases in which prior
government approval is still required, it is deemed to have been granted if not
denied within a specified time frame. The most significant changes to foreign
investments are as follows:
* For the first time, foreign entities may directly acquire land, provided
it is outside Mexico's restricted zones (coastal and border areas).
* The calculation of foreign investment in a restricted enterprise will no
longer take into account minority foreign participation in the entity or
entities which own or would own such enterprise, provided such entities
are controlled by Mexican nationals.
* Limits on foreign investment in financial group holding companies, banks,
stock brokerage houses and stock market specialists are raised from 30
percent to 49 percent, although Mexican laws regulating financial
institutions permit U.S. and Canadian financial institutions to own up to
100 percent of qualified Mexican affiliates and acquire up to 100 percent
of all but Mexico's three largest financial institutions. The foreign
investment limit applicable to companies formed to manage Mexico's newly-
created retirement funds (Afores) is set at 49 percent.
* The types of basic telecommunications services subject to the 49 percent
limit on foreign investment have been clarified by tying the limitation of
services which require the award of a government operating concession,
with the exception of cellular telephone services, which can exceed such
percentage with prior approval from the CNIE.
- --------------------------------------------------------------------------------
-16-
<PAGE>
Maquiladora Analysis
- --------------------------------------------------------------------------------
* With prior governmental approval, entities with majority foreign
investment may now participate in the bidding for the privatization of the
operation of Mexico's airports, telecommunications, satellites and
railroads.
A summary of foreign investment characteristics indicate the U.S. generates
the highest investment, followed by Canada and The Netherlands. To date, this
investment totals $5.646 billion.
DISTRIBUTION OF DIRECT FOREIGN INVESTMENT
BY COUNTRY OF ORIGIN (1996)
<TABLE>
<CAPTION>
-------------------------------------------------
Country
-------------------------------------------------
<S> <C>
United States 66.0%
Canada 8.7%
The Netherlands 5.8%
India 5.1%
Germany 2.9%
Japan 1.7%
France 1.2%
Switzerland 1.2%
-------------------------------------------------
</TABLE>
Source: Secofi, General Office of Foreign Investment
Acquisition of Mexican Companies
There are no restrictions on the purchase of up to 40 percent, or a lower
percentage allowed for restricted activities, of the capital of companies
controlled by Mexicans at the time of the acquisition. However, the prior
approval of the CNIE is required when the total value of assets of the relevant
Mexican company exceeds an amount periodically established by the CNIE and
which, at the time of publication, was fixed at $85 million pesos ($10.625
million at an exchange rate of 8 pesos to $1).
Commercial Loans
Despite incipient recovery, credit is still scarce and expensive in Mexico.
The current interest rate is between 20 and 30 percent, with limited access to
commercial bank financing by many prospective borrowers. It is important to note
that, particularly in the last six months, investment funds, both domestic and
international, have increased their interest in the Mexican market. There are at
least 10 different funds that are actively seeking opportunities to finance a
project or to inject capital in Mexican-based companies.
Tax Matters
Mexican tax law treats foreigners doing business "with" Mexico differently
than it treats those doing business "in" Mexico. Doing business with Mexico
suggests engaging in international trade directly from a foreign home office,
whereas doing business in Mexico suggests the additional step of establishing a
physical presence in Mexico and regularly engaging in commercial activities in
the country.
- --------------------------------------------------------------------------------
-17-
<PAGE>
Maquiladora Analysis
- --------------------------------------------------------------------------------
Doing Business "With" Mexico
A foreign company can do business with Mexico from abroad in order to
minimize the tax and regulatory consequences arising from the establishment of a
presence in the country. When structuring operations in this way, however,
foreigners must be extremely careful to ensure that they do not create a
"permanent establishment" or a "fixed base" in Mexico as the income derived from
such entities is considered taxable.
Doing Business "In" Mexico
Foreigners may opt to do business in Mexico by employing a subordinate agent,
establishing a Mexican company, or acquiring stock in an existing Mexican
company. The use of any of these methods will create a permanent establishment
and has the following tax and regulatory consequences:
Corporate Tax -- A corporate tax of 34 percent must be paid annually on the
company's taxable profits. Such profits are calculated by deducting certain
allowed expenses from the total accruable income. Most of the company's
income is considered accruable for income tax purposes at the time invoices
are issued, or when goods or services are delivered to the buyer if no
invoice is issued. Basically, the allowed deductions are all discounts and/or
expenses deemed "strictly indispensable" for the carrying out of the
company's business.
Tax on Assets -- There is a federal tax on corporate assets applied at a rate
of 1.8 percent. This tax is applied on the fixed, financial and current
assets of Mexican companies. This tax must be paid on an annual basis through
monthly provisional payments. The payment of the tax on assets is not
required during the pre-operational period of a company, the year in which
operations commence, the following two years of operation, or the year in
which it is liquidated.
Value Added Tax -- When the Mexican company transfers or leases goods, or
renders services in Mexico, it will be obligated to pay Value Added Tax
(Impuesto al Valor Agregado, IVA). This tax is 15 percent of the price of the
goods or services and can be transferred to the clients by including the tax
on its billing invoices. This rate is 10 percent within 20 kilometers of the
border of Mexico and in all of Baja California and Quintana Roo. However, if
such goods and services are to be exported from Mexico, the IVA is zero
percent.
Reductions in both the Value Added Tax and the Tax on Assets are up for
debate in 1998's fiscal reform.
Payroll Taxes -- The company is subject to a local and state payroll tax at a
rate that depends on the location of the working facilities. The federal
government also taxes corporations with social security fees that amount to a
minimum of 8.95 percent of the payroll, to be paid by the employer for old
age, death, child care, retirement and disability.
- --------------------------------------------------------------------------------
-18-
<PAGE>
Maquiladora Analysis
- --------------------------------------------------------------------------------
Warehousing
Warehousing in Mexico has experienced important changes in 1997. Control of
most of the warehousing sector is being passed from the government to private
hands, leading to improvements in both infrastructure and services. Still, fewer
and smaller facilities are available in Mexico than in the U.S.
Warehousing costs are usually paid monthly and are charged in terms of
space/area occupied. Also, any merchandise placed in a warehouse should be
insured. Basic insurance policies can be obtained directly through the warehouse
or by contracting a private insurance company for a more comprehensive policy.
- --------------------------------------------------------------------------------
-19-
<PAGE>
MAQUILADORA INDUSTRY
- --------------------------------------------------------------------------------
The maquiladora industry in the state of Tamaulipas continues with its
tendency for growth. However, at the national level, the number of
establishments grew 12.8 percent, while the number in the state grew 8.3 percent
in 1997. Corresponding to employed personnel, it appears that growth at the
national level was 19.4 percent while the state of Tamaulipas had approximately
eight percent growth at of the end of 1997. The last aggregate value increase at
the national level was 40.0 percent and at the state level was approximately 30
percent. Thus, it can be concluded that the number of establishments and the
relative employment increases are similar, while proportionately more is being
spent on those facilities. Again, these increases are above those being
experienced in the fastest growing U.S. metropolitan communites.
Currently, the interior states of the country are growing at much greater
rates than those on the frontier (the border between the U.S. and Mexico). The
interior communities have aggressively sought foreign investments and have
become the most attractive of all communities which use intensive manual labor.
The difference is that the maquiladora that currently settles in the northern
frontier utilizes more U.S. technology and warrants the most skilled labor in
the manufacturing process. Thus, businesses that utilize intensive and cheap
manual labor are opting for the states in the center of the republic, such as
Durango, Aguascalientes, Guanajuato, Zacatecas and Yucatan.
The empoyers in the frontier communties provide the greatest increase in
salaries and grants/loans that has skewed the growth in national average
employment wages upward. This implies an above average increase in salaries paid
by the maquiladora. Another consideration is that 1997 reflects three
consecutive years of considerable growth, at some of the highest levels in the
30 years the maquiladora has been Mexico.
We have documented a breakdown of the maquiladora industry adjacent to the
U.S. border for discussion.
PARTICIPATION OF THE MAQUILADORA INDUSTRY
EXPORTATION FOR THE FRONTIER ENTITIES
October 1997
<TABLE>
<CAPTION>
===============================================================================================
Frontier Entities Establishments Employed Personnel Aggregate Value
===============================================================================================
Millions Of
Number % People % Dollars %
===============================================================================================
<S> <C> <C> <C> <C> <C> <C>
Chihuahua 413 14.6 249,535 26.3 212 26.8
Nuevo Leon 112 4.0 41,171 4.3 43 5.4
Sonora 232 8.2 83,748 8.8 55 6.9
Coahuila 253 9.0 81,576 8.6 56 7.1
Baja California 937 33.2 210,240 22.2 193 24.4
Tamaulipas 326 11.5 142,258 15.0 118 14.9
Other Entities 550 19.5 140,130 14.8 115 14.5
----- ----- ------- ----- --- -----
National Total 2,823 100.0 948,658 100.0 792 100.0
===============================================================================================
</TABLE>
Source: INEGI, Direccion General de Estadistica, Direccion de Estadisticas
Economicas
(General Site of Statistics, Site of Economic Statistics).
Note: The information presented corresponds to the month of October, 1997.
- --------------------------------------------------------------------------------
-20-
<PAGE>
Maquiladora Industry
- --------------------------------------------------------------------------------
COMMERCIAL BALANCE
FRONTIER STATES
January-August 1997 (Millions Of Dollars)
<TABLE>
<CAPTION>
=========================================================================================================
AGGREGATE VALUE
EXPORTS IMPORTS MAQUILADORADOR COMMERCIAL
STATE (+) (-) INDUSTRY BALANCE
=========================================================================================================
<S> <C> <C> <C> <C>
Chihuahua 213.0 681.2 1,592.9 1,124.7
B.C.N. 292.0 841.4 1,266.0 716.6
Tamaulipas 138.1 548.0 878.8 468.9
Sonora 367.2 445.0 387.9 310.1
Coahuila 216.0 593.5 370.4 -7.1
Nuevo Leon 470.0 2,284.0 301.0 -1,513.0
=========================================================================================================
</TABLE>
SOURCE: Secretary of Commerce and Industrial Promotion, Delegation Chihuahua,
INEGI, Statistics from the Maquiladora Export Industry.
The participation in the frontier entities in national exports is only a
small allocation. They make up only 2.4 percent of the total exports of the
country, while these states import 8.0 percent of all national imports with
respect to aggregate value. However, they have a significant bearing on their
local economies and the maquiladora industry as a whole; as these frontier
states command 85.5 percent of the $4,797 million dollars generated by the
maquiladorador industry at the national level. The state of Chihuahua has the
greatest commercial balance of any state, while Nuevo Leon and Coahuila present
deficit amounts. Within this state, Juarez is one of the largest communities and
is a young vibrant city poised to take advantage of the North American Free
Agreement (NAFTA) with its proximity to the United States. The young, educated
labor force, coupled with the low wages, provides the competitive edge for the
maquiladora industry in this market.
Summary
While the maquiladora market provides only a small part of the economic make-
up of the country, it provides significant manufacturing employment and
construction dollars to those communities adjacent to the U.S. border.
Maquiladora production managers indicated that fully 60 to 80 percent of all
their manufacturing employees are women, providing employment opportunities to a
segment of the market that previously was not provided jobs. Additionally, the
expanding maquiladora market has provided workers and managers with employment
opportunities at increased wages. As such, we anticipate management and skilled
labor costs to increase significantly in the next one to three years as the
market continues to expand. From an unskilled labor perspective, additional
opportunities will allow employees to relocate to firms with enhanced benefits
and should reduce unemployment levels.
The market expansion should also provide a sense of stability to those firms
that are considering relocating to Mexico but have not made the move. Labor
costs are at some of the lowest levels in the world and, with U.S. influences,
the population is rapidly gaining housing, savings and educational opportunities
previously not available. Coupled with the relatively young population basis,
Mexico, and particularly the frontier states, should continue to effectively
compete on an international basis for new manufacturing opportunities.
- --------------------------------------------------------------------------------
-21-
<PAGE>
INDUSTRIAL MARKET ANALYSIS
- --------------------------------------------------------------------------------
This section will review the current status of the industrial market in
Mexico and Matamoros in order to analyze those factors that will influence the
future of the subject property. There were no available municipal publications
on the Matamoros industrial market. Information was obtained from Cushman &
Wakefield of Mexico/GCI, INEGI and interviews with Finsa, Best Real Estate,
Grupo Puebla and Dynatech.
Real Estate Overview
Currently, small firms, which create the lion's share of new jobs in most
economies, do not have access to either the bank loan or international markets.
Therefore, most companies are wholly owned and have limited capital for research
and development, the purchase of new technology and for expansion. Further, they
have the inability to leverage their real estate over the long term; therefore,
a large percentage of the operating funds go for real estate.
Larger companies have a competitive advantage in financing their facilities.
They have the option to lease, buy someone else's previously occupied facility
(rarely available), or work with a developer on a build-to-suit. The latter
provides a facility that is specifically catered to the needs of the
manufacturer.
Development/Investment
John Deere, Rhone Poulenc, Bimbo, Calsonic and 3M made strong investments in
the industrial sector during 1997 in Mexico but, although export companies like
these grew (maquiladora business grew approximately 70 percent between 1990 and
1996), most of Mexico's domestic industries remained unchanged.
The largest communities in the country, like Mexico City, have a diverse
industry base, with a predominance of auto parts, electronics, pharmaceutical,
textiles and consumer products. In Mexico City, type A industrial space is
normally build-to-suit; therefore, the supply of new speculative industrial
buildings remains very low. As a result of this shortage of space, the few
modern facilities within the city are rapidly acquired when they become
available.
This is also true of every frontier community we inspected and surveyed --
Hermosillo, Juarez, Chihuahua, Matamoros, and Reynosa. Although their economies
are not as diverse as Mexico City, continued market expansion has caused
similarities in industry base and also the same company with multiple locations.
This provides maquiladoras to be strategically located across the southern
border of the U.S. to provide lower transportation costs. It also allows
convenient access to shipping opportunities in both the Atlantic and Pacific
oceans.
Outlook
Of the 3,650 maquiladora programs in mid-1997, 68 percent were at the
northern frontier of Mexico, and 32 percent in the country's interior. In the
automotive sector alone, between 1996 and 2000, production in Mexico is expected
to grow from 1.2 million to 1.85 million vehicles. This industry investment will
average $3 billion a year and provide significant incentive to communities
catering to these companies.
- --------------------------------------------------------------------------------
-22-
<PAGE>
Industrial Market Analysis
- -------------------------------------------------------------------------------
In contrast to the industrial growth of the northern and interior states,
heavy industry will definitely continue leaving Mexico City to outlying
communities. However, because the Mexico City metropolitan area still comprises
the largest consumer market, most companies will focus on locating suitable
spaces for distribution or service centers -- mainly in the northern submarkets
of the city or in cities close to the metropolitan area.
Matamoros Market
The strength of the Matamoros economy has created a sizable need for
industrial space. An advantage that Matamoros offers over many other frontier
communities is its established industrial base. It was one of the first
maquiladora markets and continues to attract new businesses, in addition to
expansions of existing facilities. Market expansion since 1994 is documented for
both Reynosa and Matamoros, the two largest cities in the state, adjacent to the
U.S. border.
INDUSTRIAL MARKET EXPANSIONS
Reynosa and Matamoros
<TABLE>
<CAPTION>
=============================================================================================================
Reynosa Matamoros
Year New Buildings Expansions New Buildings Expansions
=============================================================================================================
<S> <C> <C> <C> <C> <C>
1994 14 8 14 3
1995 17 5 13 3
1996 26 N/A 14 N/A
1997 19 N/A 12 N/A
=============================================================================================================
</TABLE>
As indicated, Matamoros has experienced stable building activity over the
last four years. Because speculative builders have just recently entered the
market, the supply of new buildings is expected to increase. Almost all new
buildings that were constructed between 1994 and 1997 were build-to-suit
projects. However, it is our anticipation that new additions to the market will
stabilize in 1998 and 1999, as Reynosa continues to attract more new facilities.
This is due to the considerable amount of money being spent by McAllen to
attract industry to that region.
Reynosa and Matamoros industry has traditionally been oriented towards
light manufacturing (the maquiladora), yet during 1995 and 1996 distribution
centers and high-tech space began to appear. During 1996, suppliers for the big
maquiladora plants in Reynosa and Matamoros provided increased demand of
industrial space in the 30,000 to 50,000 square feet range that was previously
not available. This market trend of building industrial space less than 50,000
square feet is a new trend precipitated by businesses entering the market at an
initially small scale and then expanding into larger spaces or constructing
additions. This trend is occurring throughout the frontier cities that cater to
the maquiladora market.
The maquiladora program in Matamoros is highly successful because it offers
foreign entrepreneurs the benefits of low labor and production costs to process
and assemble raw materials or components imported duty free or in bond on a
temporary basis. These products are then exported back to their country of
origin or to a third country.
- --------------------------------------------------------------------------------
-23-
<PAGE>
Industrial Market Analysis
- -------------------------------------------------------------------------------
Under this program foreign investors are allowed to own a 100 percent
equity stake in a maquiladora export company. These firms have parent companies
abroad, mostly in the U.S., but have direct control of patents, technology and
day-to-day operations. Whole ownership, of course, requires the largest fixed
investment, but it is also the option that has yielded the highest returns for
many maquiladoras. After permitting process is complete, a building can be
rented, leased or bought, and utilities contracted. Individual and collective
working contracts are established with the employees and workers.
Presently, 30 percent of the Matamoros's maquiladora activity is in
electronics, 24 percent in automobiles, 14 percent in textiles and 32 percent in
a variety of other products. Value added per employee in Matamoros'
manufacturing sector is 10 percent higher than the comparable U.S. figure. The
average fully-burdened manufacturing wage is lower than that in the U.S.
Matamoros is a right-to-work city, and with nearly 30 years of experience in the
maquiladora industry, it is one of the largest maquiladora centers in Mexico.
There are 48,000 workers in 120 maquiladora plants, and a constant influx of
workers from surrounding agricultural areas provides an abundant labor force.
Over 20 new companies have established operations in the city during the past 18
months.
New companies' average full burden labor rate is $0.77 to $0.95 per hour
during the training period and $0.90 to $1.20 per hour once full-time employment
begins. The following list worker labor costs.
MATAMOROS HOURLY LABOR COSTS
(U.S. Dollars)
<TABLE>
<CAPTION>
==========================================================================================================
Employee Skills Minimum Wage Maximum Wage
==========================================================================================================
<S> <C> <C>
Semi-skilled $ 0.77 $ 0.95
- ----------------------------------------------------------------------------------------------------------
Highly-skilled $ 0.90 $ 1.50
- ----------------------------------------------------------------------------------------------------------
Bilingual secretary $ 1.50 $ 2.50
- ----------------------------------------------------------------------------------------------------------
Supervisor $ 1.95 $ 2.54
- ----------------------------------------------------------------------------------------------------------
Head of repair/maintenance $ 3.80 $ 4.50
- ----------------------------------------------------------------------------------------------------------
Accountant $ 4.50 $ 5.50
- ----------------------------------------------------------------------------------------------------------
Engineer $ 5.35 $ 6.80
- ----------------------------------------------------------------------------------------------------------
Senior quality service engineer $10.00 $13.20
- ----------------------------------------------------------------------------------------------------------
Senior project engineer $13.20 $18.30
==========================================================================================================
</TABLE>
All maquiladoras are unionized under the Confederation of Mexican Workers
union (CTM). Within CTM, companies choose among three local unions. The unions
help keep turnover in Matamoros comparatively low. New companies work a 48-hour
week. Unions encourage training on the job, and Matamoros workers have a very
low absentee rate. As a result, the maquiladora employment has risen steadily
from 37,500 employees in 1988, 42,000 employees in 1994, 44,000 employees in
1995, 45,000 employees in 1996 to 50,000 employees as of September 1997.
The following chart illustrates the number of maquiladoras in Matamoros
from 1986 through September 1997.
- --------------------------------------------------------------------------------
-24-
<PAGE>
Industrial Market Analysis
- -----------------------------------------------------------------------------
NUMBER OF MAQUILADORAS IN MATAMOROS
1986 THROUGH SEPTEMBER 1997
<TABLE>
<CAPTION>
=================================
Year Maquiladoras
=================================
<S> <C>
1986 43
---------------------------------
1987 59
---------------------------------
1988 62
---------------------------------
1989 84
---------------------------------
1990 84
---------------------------------
1991 92
---------------------------------
1992 96
---------------------------------
1993 95
---------------------------------
1994 102
---------------------------------
1995 97
---------------------------------
1996 100
---------------------------------
1997 120
=================================
</TABLE>
The lack of available space with 22' clear heights or greater is another
building trend that has produced demand for new development. The supply has been
initiated by one U.S. developer who joined forces with local landowners in order
to build industrial facilities meeting U.S. standard specs. While these trends
are slowly being met by developers, it is the owners of the industrial parks who
control the supply for build-to-suit product, and product being built outside
these parks is becoming more limited due to government restrictions and social
concerns.
The Reynosa and Matamoros markets consist mainly of freestanding industrial
facilities that were constructed specifically for the tenant. Many tenants and
building owners have remained in this market since their initial building
occupancy and have expanded as demand increases. It is rare to have maquiladoras
vacant and typically occurs when businesses require larger buildings for their
operations and relocate. A thorough view of the market indicated an occupancy of
98 percent, with a majority of the inventory constructed in the 1980s. The new
speculative buildings being added to the market rarely remain vacant for three
months following completion of construction.
The lack of available space with 22' clear heights or greater is another
building trend that has produced demand for new development. The supply has been
initiated by one U.S. developer who joined forces with local landowners in order
to build industrial facilities meeting U.S. standard specs. While these trends
are slowly being met by developers, it is the owners of the industrial parks who
control the supply for build-to-suit product, and product being built outside
these parks is becoming more limited due to government restrictions and social
concerns.
- --------------------------------------------------------------------------------
-25-
<PAGE>
Industrial Market Analysis
- --------------------------------------------------------------------------------
Subdivision map
- --------------------------------------------------------------------------------
-26-
<PAGE>
Industrial Market Analysis
- --------------------------------------------------------------------------------
The Reynosa and Matamoros markets consist mainly of freestanding industrial
facilities that were constructed specifically for the tenant. Many tenants and
building owners have remained in this market since their initial building
occupancy and have expanded as demand increases. It is rare to have maquiladoras
vacant and typically occurs when businesses require larger buildings for their
operations and relocate. A thorough view of the market indicated an occupancy of
97 percent, with a majority of the inventory constructed in the 1970s and 1980s.
The new speculative buildings being added to the market rarely remain vacant for
three months following completion of construction.
Real estate financing is beginning to recognize the U.S. standards. New
U.S. lenders have begun to finance in Matamoros, while the U.S. border banks and
Mexican banks are very interested to lend money to the industrial market. Title
insurance companies are currently working in Matamoros providing the same title
insurance as in the United States. Every day more companies require
environmental studies for properties to be purchased or financed.
Most build-to-suit lease agreements are for five to 10 years, and the
developer will pay off the construction of the facility in approximately seven
years. This reflects an initial yield requirement (rental income as a percent of
total construction cost, including land) of at least 14 percent. Even leases
with the best credit tenants (Fortune 500 companies) warrant lease rates
exceeding 12.75 percent and range to a high of 16.0 percent. Almost all require
corporate business or personal guarantees. Buildings are rarely financed by the
owners and typically constructed under an all cash scenario. However, only the
largest developers in the community can obtain financing, with rates typically
14.0 to 18.0 percent with preleasing and corporate guarantees. However, on
speculative projects, financing rates climb to 18.0 or 22.0 percent.
Matamoros remains one of the most attractive maquiladora markets to invest
in. Blue chip tenants and high-quality construction from reliable companies are
among the reasons why important money lenders, such as GE Capital, Texas
Commerce Bank and Heller Financial, have committed to financing new projects. It
is also why Security Capital has targeted this market for substantial
speculative building development. Thus, the long-term outlook is for stability
among existing tenants, with market expansion creating additional occupancy
alternatives previously not available. Further, if these lenders can provide
financing at levels below existing capitalization rates, building costs and
lease rates could decline. Current market leasing activity suggests that rental
rates have since stabilized, but could decline as speculative builders bring new
product to the market, reduce construction costs due to economies of scale and
better leverage their financial structure.
The estimated 1996 vacancy rate was approximately three percent for the
community and at the end of 1997, increased to approximately four percent.
However, established industrial subdivisions are 100 percent occupied.
Matamoros remains one of the most attractive maquiladora markets to invest
in. Blue chip tenants and high-quality construction from reliable companies are
among the reasons why important money lenders, such as GE Capital, Texas
Commerce Bank and Heller Financial, have committed to financing new projects. It
is also why Security Capital has targeted this market for substantial
speculative building development. Thus, the long-term outlook is for stability
among existing tenants, with market expansion creating additional occupancy
alternatives previously
- --------------------------------------------------------------------------------
-27-
<PAGE>
Industrial Market Analysis
- --------------------------------------------------------------------------------
not available. Further, if these lenders can provide financing at levels below
existing capitalization rates, building costs and lease rates could decline.
Current market leasing activity suggests that rental rates have since
stabilized, but could decline as speculative builders bring new product to the
market, reduce construction costs due to economies of scale and better leverage
their financial structure.
It should be noted that not all industrial facilities in the community are
occupied by maquiladora operators. Matamoros is an established industrial market
for many Mexican originated manufacturers. Southwest of the community is
Monterey, the largest city in the state and the cultural and political center of
northeast Mexico. Many goods are being manufactured in Matamoros for retailers
within this large community.
Building costs in Matamoros and Reynosa are higher than other maquiladora
markets closer to the center of the state, due to the hot climate with high
humidity requiring air conditioning (AC) throughout the entire building. In
cities like Chihuahua, Hermosillo and Juarez, warehouse and manufacturing space
can be cooled with evaporative coolers, decreasing building costs $1.00 to $3.00
per square foot.
In summary, these industrial market characteristics support a strong
industrial market, with statistics equaling some of the best levels experienced
in the highest growth communities in the U.S. It is reported that 15 percent of
the Fortune 500 companies are represented in the Matamoros market. Given the
current economic climate, the Matamoros industrial market should outperform most
U.S. metropolitan areas in terms of industrial construction, leasing activity
and net absorption. However, increased market efficiencies should cause rental
rates to stabilize or slightly decline.
Industrial Parks
Matamoros offers competitive industrial land prices and quality
infrastructure along the U.S./Mexico border. There are three industrial parks in
the community, Finsa Industrial Park, CIMA Industrial Park and CYLSA Industrial
Park. Land is available in FINSA and CYLSA industrial parks. FINSA offers
natural gas, rail service and water treatment and CIMA Industrial Park offers
propane gas. Land prices range from $1.25 to $2.00 per square foot, and rents
for new buildings range from $4.80 to $6.00 per square foot, while older
buildings are achieving rental rates of $3.36 to $4.80 per square foot, per
year.
Submarket Summary
The subject is situated in a built-out mixed use neighborhood with no
available land for expansion. Although initially part of an industrial park,
community growth has caused residential and commercial development to be
interspersed throughout. As a result, it is currently a less desirable location
for industrial development due to traffic and residential congestion.
- --------------------------------------------------------------------------------
-28-
<PAGE>
Neighborhood Analysis
- --------------------------------------------------------------------------------
Matamoros, Tamaulipas, is on the southern bank of the Rio Grande, directly
across from Brownsville, Texas. The river is a natural boundary between the
states of Tamaulipas and Texas. The Falcon and Marte R. Gomez dams are on the
Rio Bravo and the San Juan River, one of its tributaries. The cities are 21
miles west of the Gulf of Mexico.
The two cities are related economically, historically and culturally.
Economic cooperation dates back to the American Civil War when the two cities
served as an import area for vital Civil War supplies and as an export area for
the South's cotton. The cooperation continued through the years, as each city
served the other's needs. After 310 years, in 1996, they officially became
Sister Cities with a colorful parade and festivities.
This vital economic link took even stronger hold through the emergence of
maquiladoras in the 1960s. Matamoros was home to Mexico's first maquiladora.
Today, over 100 foreign corporations have manufacturing operations in the city,
most with manufacturing, warehousing and transportation support operations on
the American side.
Tourism is an important part of the regional economy. Matamoros each year
hosts thousands of visitors from within the country and abroad, who come knowing
they always find a happy smile and friendly hand welcoming them. The semi-warm,
sub-humid weather is widely recognized as one of the most agreeable. The annual
average temperature is 74/o/, and the annual precipitation is 26 inches.
Likewise, Brownsville ranks fifth in Texas for long- and short-term stays.
Vacationers are attracted by the subtropical climate and Brownsville's direct
access to South Padre Island.
Mexico's 15th largest city, Matamoros, has a population of over 450,000.
The city has a long and rich cultural tradition. The refurbished Teatro de la
Reforma, for example, plays host to an annual cultural festival in October that
is regarded as one of Mexico's finest.
A good transportation network also links the region. The Port of
Brownsville, widely regarded as Mexico's northernmost port, provides competitive
transportation to the markets of Europe, Africa, Asia and South America. This is
a deep water seaport with a 42-foot channel. It is the southernmost terminus of
the U.S. inland waterway system, allowing barge transport to eastern U.S. and
the Great Lakes area. The port has liquid, grain and container handling systems.
Two international bridges and a rail crossing unite the border cities. The
Gateway Bridge is two lanes in each direction, and a $20 million expansion to
the northbound import lot was completed in 1993. The B&M Bridge has two lanes
each way for passenger vehicles and two lanes for commercial traffic. An
expansion was completed in 1997. The Los Tomates Bridge, the city's third, is
now being built with completion slated for 1998. Expressway 77 will be expanded
to the border, connecting traffic to a loop around Matamoros. The Los Indios
Bridge opened in 1995 and is a link to Harlingen, Texas. The International rail
bridge is the only rail crossing for 200 miles. It is served by the Union
Pacific Railroad and Transportacion Ferroviaria Mexicana.
- --------------------------------------------------------------------------------
-29-
<PAGE>
Neighborhood Analysis
- --------------------------------------------------------------------------------
There are three international airports within a 25-mile radius which
connect to the hubs of Houston, Dallas and Mexico City. Brownsville has the
largest air cargo facility in southern Texas. There are also 25 long-haul
carriers serving the area.
Highway access is provided by U.S. 77 and 83. Access to Mexico City is via
Highway 101 and Highway 4. Monterrey is 210 miles south of Matamoros along
Highway 40.
The subject property consist of two parcels of land within a mixed use
neighborhood. Streets within the area are asphalt paved and most are improved
with gutters. It is situated within the city limits of Matamoros, Tamaulipas,
Mexico. This is at the east-central part of the city, and approximately three
miles from the Mexico-U.S. border. The street frontages are General Lauro
Villar, a major commuter route and commercial corridor, and an interior
neighborhood street.
Because of the subject's locational characteristics, the neighborhood
boundaries are generally those of the city limits. The area is residential
based, with light manufacturing and warehousing interspersed throughout, and
commercial along General Lauro Villar. The airport is situated at the southern
edge of town, approximately four miles to the southwest.
The Zenith facility, known as Electro Partes de Matamoros, S.A. de C.V., is
one of the oldest industrial facilities in Matamoros. Adjacent are similar aged
industrial buildings. All reflect substantial site build-out.
All industrial sites within the subject and adjacent industrial parks have
all municipal utilities, including water, sewer, electric and telephone. Water
for sprinkler systems are handled by onsite water storage tanks, which is
supplied on the subject site.
Public transportation is available and is a typical municipal route.
However, newly developed industrial facilities are situated in industrial parks.
Overall, the subject is inferior to newly constructed buildings in the community
in terms of location and design characteristics.
- --------------------------------------------------------------------------------
-30-
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Site Description
Location: Two parcels of land make up the subject manufacturing
site are situated on the south side of General Lauro
Villar, while the warehouse site consists of a single
parcel of land at 79 Tamaulipas Avenue. Both parcels are
within east-central Matamoros.
Shape: The sites are irregular
Area:
Manufacturing Site: 8.51 acres or 370,543 square feet
Warehouse Site: 3.99 acres or 173,804 square feet
Frontage:
Manufacturing Site: The west side of H Street, an interior neighborhood
street and the south side of General Lauro Villar.
Warehouse Site: The south side of Tamaulipas Avenue.
Topography/Terrain: The sites are generally level and at grade with their
roadway frontages. Water retention basins have been
improved on the building sites.
Street Improvements:
Manufacturing Site: Streets are improved with asphalt paving and concrete
curbs. H Street is a two lane, bi-directional interior
neighborhood street, while General Lauro Villar is a
four lane, bi-directional arterial with center raised
median. A turn lane is installed at the subject's side
street.
Warehouse Site: The frontage street is improved with asphalt paving and
concrete curbs. Tamaulipas Avenue is a four lane, bi-
directional arterial with center raised median, asphalt
paving and concrete curbs. A turn lane is installed at
the subject's site.
Soil Conditions: We did not receive nor review a soil report. However, we
assume the soils' load-bearing capacities are sufficient
to support the existing structures. We did not observe
any evidence to the contrary during our physical
inspection of the property. The tract's drainage appears
to be adequate.
Utilities: All standard utilities are available to the site
including water, sewer, electricity, and telephone
service.
Access:
Manufacturing Site: The building site is accessed via curb cuts along
General Lauro Villar and H Street. Street parking is
provided on the adjacent side street.
- --------------------------------------------------------------------------------
-31-
<PAGE>
Property Description
- -------------------------------------------------------------------------------
Warehouse Site: The building site is accessed via curb cuts along
Tamaulipas Avenue.
Land Use Restrictions: We were not given a title report to review. We do not
know of any easements, encroachments, or restrictions
that would adversely affect the sites' use. However, we
recommend a title search to determine whether any adverse
conditions exist.
Flood Hazard: Based on our inspection of the sites, there is minimal
probability of flooding. Additionally, the parking areas
are raised slightly above street level to provide water
runoff.
Hazardous Substances: We noted no evidence of toxic waste during our inspection
of the site, although it was confirmed that chemical
tanks and storage (oxygen, argon and propane in
particular) is being conducted on the manufacturing site.
However, it is important to note that we are not experts
in this field and therefore recommend the inspection of
the subject by an expert in the field of toxic waste. An
environmental assessment on the sites was not made
available during the preparation of this report. This
appraisal is predicated on the assumption that hazardous
substances do not exist, however if concerns exist, we
recommend site assessments be conducted.
Comments:
Manufacturing Site: Overall, the subject site is suited in the current market
for its intended use, light industrial development.
Considering current land use patterns in the
neighborhood, the site is typical of older industrial
facilities in the community. It has fair to average
locational characteristics as an industrial site. We were
provided two documents that were a result of direct
ownership recordings. These also documented the parcel
sizes, of 152,830 and 217,713 square feet.
Warehouse Site: Overall, the subject site is less suited in the current
market for its intended use, light industrial
development. Considering its frontage and current land
use patterns in the neighborhood, the site is typical of
retail developed parcels, rather than industrial uses. It
has above average locational characteristics and caters
to a retail use. This is one reason why the underlying
zoning was recently modified from industrial to retail.
The site size of 3.99 acres was provided by Zenith.
Improvements Description - Manufacturing Facility
The subject property consists of one, one and two-story industrial facility
having a building area of 196,442 square feet. The project was completed between
1971 and 1973 on an 8.51 acre site. Periodic interior renovation, including the
additions of new walls, have since been made as production demands have changed.
- --------------------------------------------------------------------------------
-32-
<PAGE>
Property Description
- -------------------------------------------------------------------------------
Based on a building area of 196,442 square feet and a building site of 8.51
acres, or 370,543 square feet, an improvement ratio of 53 percent is indicated.
The south half of the building has a second floor mezzanine area used for
manufacturing. The improvements are considered to be in average overall
condition at the time of inspection. The facility provides adequate open paved
surface parking. Representatives of Zenith provided the building area
calculations, building sizes and land area dimensions. However, we were unable
to review building plans. The project is currently 100 percent occupied by the
owner/occupant. The physical inspection, coupled with comments by the facilities
manager, provided the basis for the following improvement description.
General Data
Year Built: 1971 to 1973
Building Description
Size: 196,442 square feet
Construction Detail
Foundation: Reinforced concrete slab
Walls: Masonry block construction, with painted finish.
Minimal building fenestration.
Floors: Sealed concrete slab in warehouses, and
manufacturing, commercial grade carpet, and
composition tile in the office areas.
Roof Structure/Cover: Prefab metal trusses with high rib metal deck and
built up roof or corrugated metal covers.
Windows: Aluminum fixed-pane windows of various sizes
Pedestrian Doors: Hollow metal exterior doors in the warehouses and
manufacturing areas; metal framed plate glass in
main entrances and hollow core wood doors in the
offices.
Loading Doors: There are overhead doors in the manufacturing area.
Ceiling Height: 9 feet in the office area and 15 to 22 feet in the
warehouse and manufacturing areas.
Mechanical Detail
Heating and Cooling: The buildings have roof-mounted, electrical force
cool air-conditioning units.
Plumbing Service: The buildings have separate restroom facilities for
the warehouse/manufacturing areas and smaller,
private
- --------------------------------------------------------------------------------
-33-
<PAGE>
Property Description
- -------------------------------------------------------------------------------
bathrooms in the offices. Electric water heaters supply
hot water to the buildings. A reverse osmosis water
system is provided for the drinking water.
Electrical Service: Electric service is assumed to meet all local
municipality code.
Fire Protection: Fully sprinkler system with a self contained holding
tank installed on-site.
Security Protection: Fenced lot with guard gates and security alarms
installed throughout the building. Full time security
personal are on-site.
Interior Detail
Floor Covering: Offices feature composition tile and carpet coverings;
warehouse and manufacturing has exposed concrete slab
Interior Walls: Painted and textured gypsum board in the offices
Ceiling: Nine-foot ceilings with 2' x 4' or 2' x 2' suspended
tile in the offices; no finish in warehouses except for
insulation
Lighting: Suspended fluorescent lights in warehouse and
manufacturing; recessed fluorescent fixtures in office
suites
Hazardous Substances: We are not aware of any other potentially hazardous
materials (such as formaldehyde foam insulation,
asbestos insulation, radon gas emitting materials, or
other potentially hazardous materials) which may be
used in the construction of the improvements. The
improvements are built of modern materials. However, we
are not qualified to detect such materials and urge the
client to employ an expert in the field to determine if
such hazardous materials are present.
Americans with Disabilities
Act Compliance: The subject property is in Mexico and is not subject to
the American with Disabilities Act (ADA). We have
assumed the improvements are not under the jurisdiction
of compliance and therefore, no modifications are
required.
Site Improvements
On-site Parking: The site improvements consist of concrete curbs and
sidewalks, chemical and water storage tanks, chain link
perimeter fencing, metal gate, security lighting
attached to
- --------------------------------------------------------------------------------
-34-
<PAGE>
Property Description
- -------------------------------------------------------------------------------
the building and on pole mounts. The site is asphalt
paved and some gravel areas are evident due to the lack
of paving upkeep. However, the cost to resurface is not
considered an economic return.
Landscaping: The property has small trees, shrubs and grass along
General Lauro Villar.
Comments: The subject building improvements were completed in two
phases between 1971 and 1973. The improvements are
considered to be in average condition. The roof cover
on the building was partially replaced in the last
three years (one-third) and the remainder in the last
five years. The normal life expectancy of a building of
this type is considered to be 45 years. Because of the
average condition and average maintenance of the
facility, the effective age is less than the actual
average age of 26 years. We have estimated the
effective age at 20 years, and remaining economic life
at 25 years. The quality of the subject improvements,
including the layout and functional utility, are rated
average.
The improvements offer functional utility for only
those users not requiring substantial clear heights,
large rooms and can operate in a two story
manufacturing environment. Further, shipping and
receiving (distribution) features are limited within
the building and the subject's location in a dense
urban area further compounds large scale distribution.
Personal Property No personal property within the building was
Included: included in the analysis.
Improvements Description - Warehouse Facility
The subject property consists of a one-story, two building warehouse
facility having a building area of 55,000 square feet (one building reported at
22,000 square feet, 33,000 square feet for the other). The project was completed
between 1971 and 1973 on a 3.99 acre site. The improvements have not undergone
renovation, and are considered to be dilapidated due to the building structure
to be in poor physical condition. All structural components are considered to
warrant renovation and the basic interior finish needs to be completely
replaced. Further, it is reported that much of the building's mechanical and
electrical systems need updating.
Based on a building area of 55,000 square feet and a building site of 3.99
acres, or 173,804 square feet, an improvement ratio of 32 percent is indicated.
This is low for industrial properties of this type. Representatives of Zenith
provided the building and land sizes. We were unable to review building plans.
The project is only partially occupied by the owner/occupant due to the physical
condition of the property. The physical inspection, coupled with comments
- --------------------------------------------------------------------------------
-35-
<PAGE>
Property Description
- -------------------------------------------------------------------------------
by the facilities manager, and area industrial building owners indicated the
building improvements to be inadequate for standard warehouse operations. As
will be discussed within the Highest and Best Use analysis, we gave no value
consideration to these building improvements.
-36-
<PAGE>
ZONING
- --------------------------------------------------------------------------------
Manufacturing Building
The subject site is zoned Light Manufacturing, by the city of Matamoros. The
"Licencia de Uso de Suelo" which is the zoning permit to construct the subject
improvements was issued by the government on upon completion of construction and
reissued annually. The subject improvements appeared to comply with all the
requirements establish by the state of Tamaulipas law for urban development
under article 5to. Fracion II y 125 de la Ley 101 de Desarollo Urbano para el
Esatado de Tamaulipas. In Mexico, a property could be zoned a certain
classification but if it does not have the license for the certain use or the
"Licencia de Uso de Suelo", it would be in violation and the user could be
forced to cease operations. Municipal officers in Tamaulipas indicated that the
property is in compliance. The subject property is zoned light manufacturing use
and is also reportedly in compliance with all zoning requirements. Additionally,
local building contractors indicated that zoning requirements permit a maximum
improvement ratio of 70 percent of the land area.
Warehouse Building
The subject site was previously zoned Light Manufacturing, by the city of
Matamoros. The "Licencia de Uso de Suelo" which is the zoning permit to
construct the subject improvements was issued by the government on upon
completion of construction and reissued annually. The last reissuance provided
for a change in the land use from industrial to retail/residential. This was
reportedly done due to the subject's location being non-industrial oriented
brought about by abutting land uses. Adjacent developments are retail oriented
and the subject's frontage provides for high volume traffic.
Although the subject improvements do not reportedly comply with current
zoning requirements, the existing warehouse use is considered a grandfathered,
permitted use. However, if the improvements were demolished, it would be
unlikely that they could be replaced. Further, an analysis of the site's
municipal land use controls currently restricts industrial uses. Thus, the
subject building improvements are considered to be a legal, nonconforming use.
- --------------------------------------------------------------------------------
-37-
<PAGE>
REAL ESTATE ASSESSMENTS AND TAXES
- --------------------------------------------------------------------------------
Real Estate Taxes and Assessments
The subject properties were constructed between 1971 and 1973 and
periodically assessed for tax purposes. However, the subject are two single
tenant buildings and taxes are the responsibility of the tenant. The tenant, in
this case the owner, has paid all previous real estate taxes. Because of the
lack of comparative buildings in the city of Matamoros and the state of
Tamaulipas, and that under this analysis all real estate taxes would be the
responsibility of the tenant (does not affect the income to the owner), we have
not attempted to estimate the reasonableness of the subject's real estate tax.
Further, the local taxing and assessment office could not provide us with an
estimate of the subject's real estate taxes.
Real Estate taxes in Mexico are very low compared to the United States. It is
unlikely that the subject would be assessed and taxed based on the estimation of
market value concluded within this report.
- --------------------------------------------------------------------------------
-38-
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
Highest and Best Use of Site
According to the Dictionary of Real Estate Appraisal, Third Edition (1993), a
publication of the Appraisal Institute, The highest and best use of the site as
though vacant is defined as:
Among all reasonable, alternative uses, the use that yields the highest
present land value, after payments are made for labor, capital, and
coordination. The use of a property based on the assumption that the parcel
of land is vacant or can be made vacant by demolishing any improvements.
We evaluated both sites' highest and best use as if vacant and as currently
improved. The highest and best use must meet four criteria. The use must be:
(1) Legally permissible;
(2) Physically possible;
(3) Financially feasible; and
(4) Maximally productive.
AS IF VACANT -- MANUFACTURING FACILITY
Legally Permissible
The first test concerns permitted uses. In the case of the subject, we are
analyzing two parcels of land assembled to form one building site, encompassing
8.51 acres. According to our understanding of the zoning ordinance noted
earlier, the site may be improved with structures that accommodate a variety of
light manufacturing, office and accessory uses. As previously reported, the
subject site appears to be a legal and conforming use.
We would note there are no intended changes in land use regulations for the
site or the immediate area of the neighborhood. Therefore, if vacant, the
subject site could be improved with a similar use as currently exists on the
subject building site. Therefore, we view zoning as imposing no measurable
valuation constraints and buildings as large as 70 percent of the site area
could be improved. Additionally, there are no known deed restrictions that would
prohibit development.
Physically Possible
The second test is what is physically possible. As discussed in the Property
Description, the site's size, soil, topography, etc., does not physically limit
each site use. Its size is large enough to accommodate most permitted uses under
current zoning. The site is fully improved, provided with all utilities, has
level topography and fair accessibility for an industrial facility. Thus, there
are no physical barriers that would restrict development, however the urban
location makes large scale distribution and heavy manufacturing uses an unlikely
development alternative.
Financially Feasible
Based on our analysis, the Matamoros real estate market has shown stable
vacancy levels, rental rates and sustained growth in new supply. Because of
steady growth of the local
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<PAGE>
Highest And Best Use
- --------------------------------------------------------------------------------
economy after the economic crisis of 1994, an increased demand for space
occurred in most maquiladora markets. However, growth in Matamoros has remained
relatively stable. Because of the limited number of developers in the community,
construction costs have remained stable. Increased market competition should
cause costs and rental rates to decline slightly, although land prices are
expected to remain stable.
The subject site is situated in an intense urban area, with considerable
traffic congestion, although its close proximity to the U.S.-Mexico border
provides for minimal transportation costs. Within the neighborhood, the subject
site has fair accessibility, above average street visibility, but only fair
locational characteristics for industrial users.
The feasibility of a new project depends on the desire of a company to locate
in the city. The industrial market has been driven by built-to-suit projects.
Based on year-end 1997 vacancy and 1997 absorption levels, less than a one-
year's supply is available within Matamoros and within the subject's submarket.
The submarket rental rates on new product ranges from $4.75 to $5.70 and when
considering typical owner expenses and turnkey build-to-suit costs of $30 to $36
per square foot, including land, the first year rate of return ranges from 14.7
to 14.8 percent, supporting feasibility. However, the financial feasibility of
any project will depend on the continued desire of a firm to move to Matamoros,
and indications are that future demand will remain similar to historical levels.
Matamoros has a feasibility based on its established reputation as being one
of the first maquiladora markets. However, some new maquiladora operators are
opting for locations at the interior of the country and increased demand has
been experienced in Reynosa, Matamoros's closest competing maquiladora
community. This is due to the above average employee turnover experienced by
area manufacturers, particular compared to some of the communities at the
interior of the country and the intense marketing of Reynosa by its sister city,
McAllen. Regardless, new companies entering this market are finding out that a
relocation from the U.S. to Matamoros, increases productivity at some of the
lowest labor costs in the world. The result of operations in facilities that
could be constructed on the subject site, could provide labor cost savings to
cover the cost of a building in one to three years.
Maximally Productive
In our opinion, the improvement of the subject site with light industrial
uses would be physically possible and legally permissible, and financially
feasible, even under a speculative construction basis. However, yield rates
would be increased if an owner occupant was predetermined. Many potential
manufacturers cannot meet building demands from existing inventory in Matamoros,
or other northern Mexico communities oriented toward large industrial
occupancies and have been unwilling to wait for a lengthy build-to-suit
transaction. Thus, the maximally productive use of the site would be for the
development of light industrial space oriented towards single tenant occupancy.
Conclusion - As If Vacant
The highest and best use of the subject site, as if vacant, is believed to be
for light industrial development. The site benefits from a location within an
intense urban area with close proximity to the U.S.-Mexican border. The
metropolitan area has shown continued stability in attracting maquiladora
companies to the city. In addition, a build-to-suit development
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<PAGE>
Highest And Best Use
- --------------------------------------------------------------------------------
is always feasible, as the cost and profit requirements of the developer are
being met by market rent levels and construction costs.
AS IF VACANT - WAREHOUSE FACILITY
Legally Permissible
The first test concerns permitted uses. In the case of the subject, we are
analyzing one parcel of land forming one building site, encompassing 3.99 acres.
According to our understanding of the zoning ordinance noted earlier, the site
may be improved with structures that accommodate a variety of retail,
residential and accessory uses. These restrictions would affect all future
developments on the subject site.
We would note that the recent changes in land use regulations for the site
conform to its frontage location on a high traffic arterial and adjacent to
retail developments. The site size of most likely to large for a single retail
user, but, would also lend itself for residential development. Therefore, if
vacant, the subject site could not be improved with a similar use as currently
exists on the subject building site. Therefore, we view zoning to impose
measurable constraints on the valuation process in the following, as improved,
analysis.
Physically Possible
The second test is what is physically possible. As discussed in the Property
Description, the site's size, soil, topography, etc., does not physically limit
the sites use. Its size is large enough to accommodate most permitted uses under
current zoning. The site is fully improved, provided with all utilities, has
level topography and above average accessibility for a potential retail use.
Thus, there are no physical barriers that would restrict development.
Financially Feasible
Based on our analysis, the Matamoros real estate market has shown stable
vacancy levels, rental rates and sustained growth in new supply. Because of
steady growth of the local economy after the economic crisis of 1994, an
increase in industrial demand for space occurred in most maquiladora markets.
However, growth in the retail and office markets have been more limited within
the subject and competing communities. The growth of Matamoros has stabilized
based on industrial development. Further, the earning power of employees has
remained constrained due to the maquiladora industry and retail expansion has
lagged substantially. An observation of the market indicates that primarily
redevelopment of existing facilities in the community is the predominance and
the lack of vacant sites for expansion will warrant future renovation
opportunities.
The subject site is situated in an intense urban area, with considerable
traffic congestion, and it has close proximity to the U.S.-Mexico border. Within
the neighborhood, the subject site has above average accessibility, street
visibility, and locational characteristics for retail users. However, industrial
users are currently opting for established industrial parks at the peripherial
of the community. These industrial parks have conforming uses and provided for
similar architectural and land use controls typifying industrial uses. These
uses are generally not being developed within the immediate vicinity of the
subject site.
The feasibility of a new retail project depends on the potential revenue that
a specific retailer can experience. Most retail users would desire a major
arterial location, with the most
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-41-
<PAGE>
Highest And Best Use
- --------------------------------------------------------------------------------
desirable locations at major intersections. Although the subject has an interior
block location, it does provide a retail orientation and a conforming use could
be developed based on demand. Because most retail establishments are owner
occupants, it is likely that this type of development would best fit the
prospective development of the subject site. Thus, the price that could be paid
for the site by a buyer would be purely the economic incentive that a specific
retailer could obtain given their profitability and notable competition in the
area.
Residential expansion is occurring in the market and an adjacent parcel was
purchased in 1998 for residential development. The developer indicated that
demand is above expectations and has resulted in a feasibly alternative use that
would be appropriate for the subject site. Thus, the subject could be oriented
toward mixed use, retail and residential development.
Maximally Productive
In our opinion, the improvement of the subject site with retail uses would be
physically possible and legally permissible, and financially feasible, even
under a speculative construction basis. Retailers have limited available
building supply in Matamoros, and the market has not been expansionary. This is
due to many resident's disposable income being spent on the U.S. side of the
border, rather than expanding the Matamoros market. However, as the Brownsville
and Matamoros communities become more co-dependent, retail expansion should
occur in the near term in the Matamoros market. It has been noted that
residential expansion is now occurring. Thus, the subject site represents an
infill site that would be desirable for future retail expansion, particularly by
an owner user and dense residential development. Thus, the maximally productive
use of the site would be for the development of retail space oriented towards
single tenant occupancy, with the residual portion of the site oriented toward
residential housing development.
Conclusion - As If Vacant
The highest and best use of the subject site, as if vacant, is believed to be
for owner occupied retail development, with the residual portion of the site
oriented toward residential housing development.. The site benefits from a
location within an intense urban area with close proximity to the U.S.-Mexican
border. The metropolitan area has shown industrial expansion and the country is
allowing free market competition that is attracting typical U.S. and
international retailers. In addition, a build-to-suit development is always
feasible, as the cost and profit requirements of the developer would be met by
market rent levels and construction costs.
AS IMPROVED - MANUFACTURING FACILITY
Legally Permissible
As previously stated the subject's zoning permits light industrial uses. It
appears the improved components of the subject site are a legal and conforming
use, thereby satisfying the legal permissibility criterion.
Physically Possible
As previously stated in the Property Description section of this report, the
overall design and condition of the noted improvements restricts most
occupancies, with significant interior and structural renovation. Further, the
design is for large scale warehousing, which is not a typical use within Mexican
maquiladora communities. A warehouse use would limit the number
- --------------------------------------------------------------------------------
-42-
<PAGE>
Highest And Best Use
- --------------------------------------------------------------------------------
of potential maquiladora operators that could utilize the subject facility.
However, in view of the subject's zoning and physical characteristics, the
existing development is considered to warrant substantial renovation, if not
complete razing of the structure.
Financially Feasible
Since the subject was constructed as an owner occupied facility, it has
incurred no vacancy since its construction. General real estate operating
expenses are reported to be typical of larger industrial facilities in the
region. In addition, the space is sufficiently functional to allow only one
occupant to generate sufficient income to exceed expenses. Therefore, the
continued use of the subject as an industrial use, with occupancy by one tenant.
Maximally Productive
The subject improvements have been concluded as being physically supportable,
legally permissible and financially feasible. Demolition and/or significant
renovation are not considered to be financially feasible alternatives.
Therefore, as no other utilization of the improvements would result in a higher
value, it has been determined the maximally productive use is as improved.
Conclusion
Based on our analysis, we believe the current use of the site, as improved,
represents a proper use of the site within the definition of highest and best
use. However, the improvements due have some functional deficiencies that
precludes occupancy by some maquiladora operators and these functional
deficiencies cannot be cured given existing building design. Thus, the subject
is considered to warrant below average appeal in the maquiladora market.
AS IMPROVED - WAREHOUSE FACILITY
Legally Permissible
As previously stated the subject's zoning permits only retail and residential
uses. The current light industrial facility improved on the site was built in
conformance with historical municipal restrictions, which have recently changed.
Thus, the existing improvements are considered a grandfathered use. It appears
the improved components of the subject site are a legal, but nonconforming use.
It is unlikely that they could be replaced if a major portion was demolished.
Physically Possible
As previously stated in the Property Description section of this report, the
overall design for warehousing is typical of older facilities. However, the
buildings physical condition is poor. It is need of structural, mechanical and
interior finish renovation. The property owner utilizes the facility for only
limited warehousing. In view of the subject's zoning and physical
characteristics, the existing development does not satisfy the physically
possible criterion of highest and best use as improved.
Financially Feasible
Since the subject was constructed as an owner occupied facility, it has
incurred no vacancy since its construction. However, maquiladora communities are
typically not competitive warehousing markets. Rather, increased building costs
and low labor costs versus their sister, U.S. city provide for only a
manufacturing competitive advantage. In all cases were a
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-43-
<PAGE>
Highest And Best Use
- --------------------------------------------------------------------------------
maquiladora market is situated in close proximity to a U.S. city, the
maquiladora market benefits from the manufacturing operations and the U.S. city
benefits from the warehousing. The subject owner has a warehouse facility in
McAllen, Texas.
For the last six months, the subject has been offered on the market for
$750,000. This equates to $13.64 per square foot when applied to the building
area, and $4.32 per square foot when applied to the land area. However, limited
interest was expressed in the facility and the current offer for $3,500,000,
includes the manufacturing facility. As indicated, we have estimated the market
value of this manufacturing facility at $3,450,000. Thus, the $50,000 Difference
between the market value and the purchase price results in the allocated price
of the subject warehouse facility. However, this equates to only $0.91 per
square foot when applied to the building area, and $0.29 per square foot when
applied to the land area. It is obvious at this allocated price that no
contributory value is being allocated the building improvements. However, given
the commercial potential of the site, as if vacant, a land value above the
allocated price is reasonable. A general concensus of the market is that
commercial land of this type would exceed $1.00 per square foot and recent
residential land sales have occurred around $12.00 per square foot.
Maximally Productive
The subject improvements have been concluded as warranting considerable
renovation. Further, they are not legally permissible under current land use
restriction, or financially feasible given their physical and locational
characteristics. Demolition and/or significant renovation is considered to be a
financially feasible alternative. Therefore, as other utilizations of the
improvements would result in a higher value, it has been determined the
maximally productive use is for demolition, with eventual retail development
when owner or tenant demand is exhibited.
Conclusion
Based on our analysis, we believe retail development of the site represents a
proper use of the site within the definition of highest and best use. As
improved, the improvements have physical and economic deficiencies that
precludes most industrial warehouse users. The lack of contributory value of the
building improvements is attested by the current offer for the property.
Further, retail use is confirmed by the highest and best use test, as if vacant.
As a result, we will analyze only the market value of the land. The costs
associated with demolishion will likely be offset by any contributory value of
the building components and no deduction from land value has been considered.
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<PAGE>
VALUATION METHODOLOGY
- --------------------------------------------------------------------------------
Appraisers have three approaches available to them in valuing improved
property: the Cost Approach, the Sales Comparison Approach and the Income
Approach. In most instances, the real property interest being appraised (e.g.,
fee simple, leased fee or leasehold) will dictate the validity of a particular
approach.
The subject property is located in the city of Matamoros, state of
Tamaulipas, Mexico. The subject manufacturing facility was constructed for the
owner/tenant between 1971 and 1973. Furthermore, the subject property is owned
by a U.S. corporation that also has facilities in the U.S., as are most major
maquiladora facilities in Matamoros. Previously, most projects were built by the
specific company, with the use of a local building contractor, and occupied by
the owner. However, in the last few years, the demand in the rental market has
increased and lending institutions are just now starting to provide financial
leverage to real estate investors. Based on these facts, all three approaches to
estimate value, Cost Approach, Sales Comparison Approach and Income Approach
will be used in our analysis.
Regarding the manufacturing facility, a detailed Cost Approach was performed,
although the older building age makes estimating depreciation somewhat
subjective. Improved sales of similar facilities to perform a Sales Comparison
Approach were also found in Matamoros and additional research uncovered sales
throughout the Frontier communities of northern Mexico that could also be used
for comparisons. The recently negotiated lease activity and properties available
for lease were limited within the community of Matamoros and was supplemented by
additional lease information in Reynosa. These were relied on in estimating
market rent and deriving a value via the Income Approach.
Because no contributory value was given the warehousing improvements, we have
considered only a land value estimate. This was conducted through the use of the
Sales Comparison Approach.
The appraisal process is concluded by a review and re-examinations of each of
the approaches to value that have been employed. Consideration is given to the
type and reliability of data used, and the applicability of each approach.
Finally, the approaches are reconciled and a final value conclusion is
estimated.
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<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
Methodology
This approach to value consists of an analysis of the physical value of the
property. The principle of substitution, which forms the underlying rationale of
this approach, holds that no prudent person will pay more for a property than
the amount with which he can obtain, by purchase of a site and construction of a
building, without undue delay, a property of equal desirability and utility.
In the Cost Approach, the following ten steps are typically employed to reach
an estimate of value:
(1) Estimate the value of the land as though vacant and available to be
developed to its highest and best use;
(2) Estimate the replacement cost of the primary structure(s) as of the
effective appraisal date. The estimate includes both direct (hard) costs
and indirect (soft) costs;
(3) Estimate other costs (indirect costs) incurred after construction to
bring the new, vacant primary structure(s) up to market conditions and
occupancy levels;
(4) Estimate an appropriate entrepreneurial profit from an analysis of the
market;
(5) Add estimated replacement or reproduction cost, indirect costs, and the
entrepreneurial profit, often expressed as a percentage of total direct
and indirect costs, to arrive at the total replacement or reproduction
cost of the primary structure(s);
(6) Estimate the amount of accrued depreciation in the structure, which is
divided into three major categories; physical deterioration, functional
obsolescence, and external obsolescence;
(7) Deduct the estimated accrued depreciation from the total reproduction or
replacement cost of the primary structure(s) to derive an estimate of
the depreciated replacement cost;
(8) Estimate replacement costs and depreciation for any accessory buildings
and site improvements, and then deduct the estimated depreciation from
the replacement costs of these improvements. Site improvements and minor
buildings are often appraised at their net value, i.e., directly on a
depreciated cost basis;
(9) Add the depreciated replacement costs of the primary structure(s), the
accessory improvements, and the site improvements to obtain the
estimated total depreciated replacement cost of all the improvements;
and
(10) Add the site value to the total depreciated replacement cost of all the
improvements to arrive at the indicated value of the fee simple interest
in the property.
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<PAGE>
Cost Approach
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Land Valuation - Manufacturing Facility
Depending on the specific appraisal assignment and/or the value being sought,
any of the following methods may be used to value land that is vacant or
considered to be unimproved or vacant.
The first method is the Sales Comparison Approach, which is the process of
analyzing sales of reasonably similar, recently sold sites in order to derive an
indication of the most reasonable and probable market value of the land being
appraised.
The second method is the Land Residual Approach, which is a valuation
technique based upon the premise that income can be divided between land and
improvements, and that the residual income to the land can then be capitalized
into a value.
A third procedure, the Subdivision Development Method, may sometimes be used
to estimate the value of vacant, usually undivided land, through a process of
analyzing the cost to development (including profit) and interest carry relative
to the anticipated gross income from the retail sales of individual lots or
tracts.
The fourth and fifth methods, the Allocation and Extraction methods, which
are two techniques that permit the distribution of the total value or sales
price of a property between land and building.
The last procedure is the Ground Rent Capitalization method, where ground
rents can be capitalized at an appropriate rate to indicate the market value of
a site.
Under the right circumstances, any of the preceding methods may be useful in
forming the basis of a valid estimate of land value. However, given the
availability of sales data, the Sales Comparison Approach is considered to be
the best approach toward valuing the subject site. The most widely used and most
market-oriented unit of comparison for properties such as the subject is the
sales price per square foot. All of the comparable sales were compared on this
basis and adjustments were made to the various comparables. On the following
page is a summary of the sales we found most comparable to the subject. These
are a culmination of reviewing all known industrial subdivision activity in the
community in the last three years. Only sales within Matamoros were considered
reliable for comparison.
As noted earlier, the subject site is zoned for industrial development under
the jurisdiction of Matamoros. The subject site is similar in location, access,
visibility, development potential, but differ in size. This analysis will
consider the aggregate area of the subject site.
According to our highest and best use analysis, we have concluded single-
tenant industrial uses would be the most likely development for the subject
site. Accordingly, a search was conducted for comparable land sales deemed to be
conducive to similar development.
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<PAGE>
Cost Approach
- --------------------------------------------------------------------------------
COMPARABLE LAND SALES
From end of report
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-48-
<PAGE>
Cost Approach
- --------------------------------------------------------------------------------
Land sales map
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-49-
<PAGE>
Cost Approach
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The comparables analyzed include five land sales zoned for industrial
development that have occurred in Matamoros in the last 36 months. The preceding
table depicts a summary of the land comparables.
Note that certain adjustments to the sales will be made for comparison
purposes, but a degree of subjectivity is involved. We were unable to support
the magnitude of the adjustments by paired sales analysis, but the adjustments
do reflect our thought processes in comparing one transaction with another.
Property Rights Conveyed
All of the comparable sales involved vacant parcels of land unencumbered by
any leases. Therefore, all of the sales set forth herein represent the transfer
of the fee simple estate. Consequently, no adjustments are warranted for
differences in property rights conveyed.
Seller Financing/Cash Equivalency
The sales were purchased on an all cash, or cash equivalent basis. Since we
are valuing the subject site based on a cash equivalent sale, no adjustment is
necessary.
Conditions of Sale
Sometimes sales involve certain elements, which motivate the buyer or seller
to pay or accept more or less than the market value of the property. When such
influences differ from typical market conditions, adjustments are required. All
of the comparables were subject to normal (or typical) conditions of sale and
required no adjustment.
Market Conditions
An adjustment for market conditions, often referred to as a time adjustment,
reflects a change in the market from the sale date of the comparable to the
valuation date of the subject property. An analysis of real estate trends
indicates that the market for Matamoros has remained stable since the December
1994 devaluation of the Mexican peso.
Since the mid-1995 oldest sale comparable, rental rates on improved product
have also remained relatively stable, as had net absorption. The high level of
market activity has caused vacancies to increase in light of initial speculative
building projects being constructed. But construction costs are just starting to
decline due to the competitiveness of the market. It is difficult to measure
these factors relative to changes in land value over the last 36 months.
A review of land sales that have occurred since 1995, indicated a stability
in industrial land prices. Another consideration is for changes in economic
characteristics of the community, particularly as they relate to the value of
the peso. In 1995, the average exchange rate was 6.4, increasing to 7.6 in 1996,
7.9 in 1997 and increasing substantially to 9.1 in 1998. At the date of
inspection, the peso was trading at 10.7 for each U.S. dollar. This change
directly affects the economics of Mexican real estate and the economy. Because
of the economic characteristics of the community, coupled with increased land
supply at lower costs situated at the peripheral of the community, a downward
adjustment for changes in market conditions was supported.
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-50-
<PAGE>
Cost Approach
- --------------------------------------------------------------------------------
Location
An analysis of location involves factors such as proximity to a labor force,
major thoroughfares, surrounding influences, and area amenities. The proximity
to a labor force is critical in a country like Mexico that does not have a good
public transportation system and few industrial employees have automobiles.
Sale L-1 is situated in the Ciudad Industrial Park, and of the three parks in
the community, it is considered the least desirable. This is due to its somewhat
peripheral location. An upward adjustment is necessary to reflect the market
value of the subject.
Sales L-2, L-3 and L-5 are industrial sales within the Finsa Industrial Park,
the most desirable industrial location in the city. These sales warrant downward
adjustments to reflect the subject's inferior locational characteristics. Sale
L-4 is situated immediately outside the Finsa's park boundaries and considered
to have similar locational attributes as the subject.
Access/Visibility
For most industrial properties, easy access, visibility and exposure to a
major arterial are helpful but are not paramount for developmental success.
However, properties may differ in terms of frontage, access to a heavily
traveled arterial or highway access. Values for vacant industrial land are
influenced by access to highways. It is our opinion that no adjustments to the
comparables are warranted.
Zoning
Adjustments for zoning can be related to several issues, including density,
site coverage (floor area ratio), other restrictions, such as open space
requirements, etc. The main focus of adjustment under the zoning category would
be for use restrictions. As all of the comparable sales are industrially zoned
and would allow a similar industrial development as what exists on the subject
site, no adjustment is warranted.
Utility
The analysis of site utility considers such physical characteristics as
shape, depth, frontage, plottage, corner influence, topography, zoning, the
availability of utility services, and encumbrances, i.e. the overall usability
of the land. The shape of a property has the potential to restrict the overall
utility. The lack or presence of easements and/or restrictions must also be
considered in the comparison process.
As described previously, the subject site consists of one building site of
irregular configuration, but has level topography that does not affect the costs
of development. All the sales have level topography, which does not increase the
costs of development relative to the subject. None of the comparables have any
adverse physical factors, such as flood plain, easements, encroachments, or
obvious environmental problems, etc., that influenced their respective purchase
prices. Like the subject, each of the comparables offer adequate shape, depth
and the availability of utility services.
Density/Size
The subject encompasses 8.51 acres of land; whereas, the comparables range in
size from 1.00 to 9.00 acres. Generally, the rule of quantity discount dictates
that the larger the size,
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<PAGE>
Cost Approach
- --------------------------------------------------------------------------------
the smaller the price per unit, all other factors being equal. However, to a
certain degree, a larger site will allow greater site flexibility in terms of
design and layout and may result in lower development costs because of the
economies of scale. The land comparables did support the need for an adjustment
to Sale L-2 due to variations in size. The following table illustrates the
adjustments made to the land comparables.
<TABLE>
<CAPTION>
===========================================================================================
Land Comparables 1 2 3 4 5
===========================================================================================
<S> <C> <C> <C> <C> <C>
Unadjusted Sale Price $260,000 $87,120 $326,700 $427,000 $490,000
Property Rights Conveyed 0% 0% 0% 0% 0%
Financing Terms 0% 0% 0% 0% 0%
Condition of Sales 0% 0% 0% 0% 0%
Market Conditions -10% -20% -20% -30% -30%
---- ---- ---- ---- ----
Total Adjustments -10% -20% -20% -30% -30%
---- ---- ---- ---- ----
Adjusted Sale Price $234,000 $69,696 $261,360 $298,900 $343,000
Adjusted Price/Sq. Ft. $1.07 $1.60 $1.20 $0.98 $0.87
Locational & Physical Adjustments
Location +10% -5% -5% 0% -5%
Access/Visibility 0% 0% 0% 0% 0%
Zoning 0% 0% 0% 0% 0%
Utility 0% 0% 0% 0% 0%
Density/size 0% -25% 0% 0% 0%
-- ---- -- -- --
Total Adjustments +10% -30% -5% 0% -5%
---- ---- --- -- ---
Final Adjusted Price Sq. Ft. $1.18 $1.12 $1.14 $0.98 $0.83
- -------------------------------------------------------------------------------------------
Average Price Per Sq. Ft. $1.05
===========================================================================================
</TABLE>
The comparable properties range from cash equivalent prices of $1.19 to $2.00
per square foot before the adjustment process. The indicated value of the
subject property after making the necessary adjustments, results in a value
ranging from $0.83 to $1.14 per foot, with an average of $1.05 per square foot.
Sales L-2, L-3 and L-4 produced an adjusted sales price range from $1.12 to
$1.18 per square foot, an appropriate range to reflect the market value of the
subject.
We have estimated the subject's market value of $1.15 per square foot for the
subject site. This is only slightly above the average adjusted square foot price
and considers most weight were given to the adjusted sale prices of Sales L-2,
L-3 and L-4. Based upon the subject's highest and best use, it is our opinion
the aggregate value of the subject site is calculated as follows:
370,543 Square Feet x $1.15/Square Feet = $426,124
Rounded $430,000
Land Valuation - Manufacturing Facility
Because of the lack of recent market expansion in the retail sector, we could
not confirm any recent commercial land sales. In addition to contacting the
State transfer office, local brokers and developers, we also contacted a
building managers at newly constructed retail factilities. In all cases, we were
informed that the site had been under the same ownership for at least three
years.
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-52-
<PAGE>
Cost Approach
- --------------------------------------------------------------------------------
Because the market is just starting its retail expansionary mode, we
contacted developers and retailers that may be interested in purchasing the
subject facility and their comments are noted. This reflects a price prior to
demolishion of the existing improvements, site preparation and any
environmental/site studies.
Automotive Retailer $1.25 to $1.75 per square foot
Retail Developer $1.50 per square foot
Retail Broker $1.75 to $2.50 per square foot
Residential Developer $7.50 per square foot
Residential Broker $6.50 to $8.00 per square foot
While a survey of this type is somewhat subjective, in our highest and best
use analysis, we have concluded single-tenant retail use would be the most
likely development for the subject site. However, it appears that residential
pricing is exceeding this. The adjacent approximate six acre site sold in 1998
for $12.08 per square foot, after demo of the previous building, site prep and
any land use studies. However, that developer indicated that the residential
demand for the subject is less, approximately $7.50 per square foot of land are
prior to demolition. Further, his development would have to sell out first and
spillover demand could then be had at the subject. This would likely be another
three to five years, warranting a discount to reflect a present value. Utilizing
a typical 25 percent land holding cost, the present value for a four year hold
would be around $3.00 per square foot. Since limited sales data is available and
we can extract some indication of an allocated price based on the current
pending offer, this is considered reasonable to estimate market value.
We have estimated the subject's market value of $3.00 per square foot for the
warehouse site. This is above the square foot price allocated for the
manufacturing site, but it is industrial zoned, thus has inferior economic
characteristics. Based upon the subject's highest and best use, it is our
opinion the aggregate value of the subject site is calculated as follows:
173,804 Square Feet x $1.75/Square Feet = $521,412
Rounded $520,000
- --------------------------------------------------------------------------------
-53-
<PAGE>
Cost Approach
- --------------------------------------------------------------------------------
Cost of Improvements
The subject improvements were evaluated in terms of type of construction,
design, and building materials to arrive at an estimate of replacement cost.
The cost estimate is inclusive of indirect costs such as architectural and
engineering fees, legal fees, inspection fees and closing costs, administrative
overhead, the contractor's overhead and profit, as well as the developer's
entrepreneurial profit. All direct costs for the base structure and tenant
improvements, and the following indirect costs:
1. Plans, specifications, site improvements, and building permits,
including working engineers' and architects' fees;
2. Normal fees and interest on funds during the construction period;
3. Sales taxes on materials; and
4. Contractor's overhead and profit includes workmen's compensation, fire
and liability insurance, unemployment insurance, etc.
Our estimate of replacement cost new for the subject improvements is based on
information provided by local developers, general contractors and internal
information obtained by Cushman & Wakefield/GCI on recently constructed
industrial projects. The interviews with developers and general contractors
included an itemized discussion of the applicable costs associated with
developing the respective project. Additional consideration for soft costs
considered in these costs included administrative and legal.
Because of the high cost of funds associated with lending institutions in
Mexico, that few developers, have access to construction financing, that U.S.
financing in Mexico is well below their internal lending institutional levels
and that many developers build with cash, construction interest costs were not
considered in the analysis.
Because of similarities in tenants, builders and construction material costs
throughout the Frontier communities, recently constructed facilities from the
city of Reynosa, Chihuahua, Juarez and Hermosillo were considered. A summary of
these recent construction projects are summarized:
<TABLE>
<CAPTION>
=================================================================================================================
Building Building Size/ Cost/
Location Tenant/Builder Description Cost Sq. Ft. Sq. Ft.
=================================================================================================================
<S> <C> <C> <C> <C> <C>
Salvarcar Corridor Nationwide 10% office, 30' clear, $1,250,000 50,000 $25.00
Juarez, Chihuahua Processing AC/Evap
- -----------------------------------------------------------------------------------------------------------------
Bermudas Ind. Park N/A 10% office, 30' clear, $2,300,000 100,000 $23.00
Juarez, Chihuahua AC/Evap
- -----------------------------------------------------------------------------------------------------------------
Sin Tierra Intermex 10% office, 30' clear, $1,150,000 50,000 $23.00
Chihuahua, Chihuahua AC/Evap
- -----------------------------------------------------------------------------------------------------------------
C.U.M. McCulloch 15% office, 22' clear, $6,396,936 254,960 $25.09
Hermosillo, Sonora AC/Evap, Mezzanine
- -----------------------------------------------------------------------------------------------------------------
Parque Industrial Finsa 10% office, 26' clear, $4,240,000 136,690 $31.00
Reynosa, Tamaulipas AC
- -----------------------------------------------------------------------------------------------------------------
Finsa Industrial Finsa 10% office, 26' clear, $1,550,000 50,000 $31.00
Reynosa, Tamaulipas AC
=================================================================================================================
</TABLE>
-54-
<PAGE>
Cost Approach
- --------------------------------------------------------------------------------
The cost comparables suggest a direct building cost range of $23.00 to
$25.09 per square foot for an industrial buildings in Chihuahua, Juarez, and
Hermosillo with 10 to 15 percent office finish, 22 to 30 foot clear height, and
AC/Evap throughout the building. However, building costs in Reynosa average
$31.00 per square foot for a typical 50,000 to 136,690 square foot facility.
Discussions with officers at Finsa indicated the subject would warrant a cost
similar to the facilities in Reynosa, at $31.00 per square foot.
Given the subject's physical characteristics, a cost of $31.00 per square
foot cost for typical industrial buildings with 10 to 15 percent office finish,
22 to 30 foot clear height, and AC is appropriate for the subject. We have
allocated a replacement cost of $31.00 per square foot, or $6,090,000 rounded,
when applied to the 196,442 square foot gross building area.
Developer's Profit
Developer's profit is difficult to measure in the Frontier communities of
Mexico, due to many developer's owning the industrial park (land), build-to-
suits have an additional profit percentage on either sales or leases, and
developer's are typically the intended tenant of the facility. Only until the
last two years were speculative buildings being constructed where developer's
profit could be accurately measured, however, few developer's have access to the
necessary capital to conduct this on a large scale. Currently, Security Capital
is one of the only developer's conducting build-to-suits throughout the country.
Based on recently constructed projects, developer's profit is ranging from 12
to 20 percent of total project costs. In cases where profit falls around 12
percent, the developer also has equity in the land that increases their return.
However, the market has recently become more competitive, requiring slight
reductions in developer's profits to the range of 12 to 16 percent. Only those
developers with construction financing below 12 percent or provide build-to-suit
buildings that are subsequently leased at rates above $5.25 per square foot, can
their yields increase above 18 percent.
The project developer should anticipate a 14.0 percent profit on the total
building cost, excluding land. This is at the middle of the range given the
subject's size and the economics of the market. The inclusion of a 14.0 percent
developer's profit reflects the entrepreneurial profit/incentive to construct
the project and is inherent in supporting the development feasibility for income
producing properties.
Estimate of Accrued Depreciation
Accrued depreciation is the difference between the cost new of improvements
and the current value of those improvements. Depreciation includes value losses
in three basic categories: (1) physical deterioration, (2) functional
obsolescence, and (3) external obsolescence.
The subject improvements are estimated to have an overall economic life
expectancy of approximately 45 years. Based on our observations, the effective
age of the improvements is 20 years. Therefore, the remaining economic life of
the improvements is 25 years. The use of the economic age-life method of
estimating deterioration projects a deduction of 44.4 percent (20 years/45
years).
- --------------------------------------------------------------------------------
-55-
<PAGE>
Cost Approach
- --------------------------------------------------------------------------------
Functional building deficiencies were noted due to the layout of the building
improvements and that their design is uncharacteristic of modern buildings. The
comparatively low ceiling height, two-story mezzanine manufacturing area and
heavily partition interior reduces the subject's marketability. We have applied
a $3.00 per square foot deduction, or $589,326, to reflect these building
deficiencies. A deduction for external depreciation was not considered
necessary.
SUMMARY OF THE COST APPROACH
<TABLE>
<S> <C>
Total Cost Improvement $6,090,000
Plus: Developer's Profit +852,600
Less: Accrued Depreciation (Cost only) -3,293,286
----------
Depreciated Value of the Improvements $3,649,314
Add: Land Value 430,000
----------
Total Property Value $4,079,314
Rounded to: $4,080,000
</TABLE>
This value estimate equates to a square foot value of $20.77.
- --------------------------------------------------------------------------------
-56-
<PAGE>
Sales Comparison Approach
- --------------------------------------------------------------------------------
Methodology
In the Sales Comparison Approach, we estimated value by comparing this
property with similar, recently sold properties in the Frontier communities of
northern Mexico. Inherent in this approach is the principle of substitution,
which holds that when a property is replaceable in the market, its value tends
to be set at the cost of acquiring an equally desirable substitute property,
assuming that no costly delay is encountered in making the substitution.
By analyzing sales that qualify as arm's-length transactions between
willing and knowledgeable buyers and sellers, we can identify value and price
trends. The basic steps involved in the application of this approach are as
follows:
(1) Researching recent, relevant property sales and current offerings
throughout the competitive area;
(2) Selecting and analyzing those properties considered most similar to
the subject, considering changes in economic conditions that may have
occurred between the sale date and the date of value, and other
physical, functional or locational factors;
(3) Identifying the sales that include favorable financing and calculate
the cash equivalent price;
(4) Reducing the sale prices to common units of comparison, such as price
per square foot of building area (in this case gross leasable area);
(5) Making appropriate adjustments between the comparable properties and
the property appraised; and
(6) Interpreting the adjusted sales data and draw a logical value
conclusion.
The most widely used and market-oriented unit of comparison for properties
such as the subject is the sales price per square foot. All comparable sales
were analyzed on this basis. We present on the following page a summary of the
improved properties we compared with the subject property.
Analysis of Sales
Our market investigations began with an investigation of improved sales
that had occurred in the Matamoros area over the last several years. However,
due to low vacancy resulting from minimal tenant turnover, that most build to
suit projects have the original tenant still occupying the property and that all
speculative buildings being constructed are for lease, few sales have occurred
within the immediate community of Matamoros. The building sales investigation
was expanded to include a search of industrial sales in northern Mexico
communities that also offer similar typed industrial projects, primarily
Chihuahua, Juarez, and Reynosa. The criterion we used was improved sales of
modern manufacturing facilities that are appropriate for maquiladora operations.
- --------------------------------------------------------------------------------
-57-
<PAGE>
Sales Comparison Approach
- --------------------------------------------------------------------------------
Insert improved sales summary at the end of this report
- --------------------------------------------------------------------------------
-58-
<PAGE>
Sales Comparison Approach
- --------------------------------------------------------------------------------
Our search included interviews with the following brokerage firms; Enrique
Portillo with Cushman & Wakefield/GCI, CB Commercial and Binswanger. We also
interviewed the managers of the major industrial parks within the respective
communities, the maquiladora managers of most of the property sales and
industrial developers with Security Capital and Finsa.
This sales search uncovered 12 sales and two listings within the respective
communities that could be used for comparison. The sales are of typical
maquiladora industrial facilities which ranged in size from 25,390 to 229,327
square feet and in effective age from new to 17 years. All, but Sale 10 and 12,
are designed for single tenant occupancy. Sale 12 is a six building portfolio
which was purchased by a single investor.
One of the comparables was still under construction at the time of
inspection and represent build-to-suit transactions, as do three other
comparables. Because of the lack of improved inventory available for sale or
lease, maquiladora and typical industrial users typically employ a developer to
construct a facility, which they will buy upon completion. This provides the
developer with a sure sale and provides the buyer with a building designed for
their specific manufacturing use. Many buyers have had to default to this
process due to the absence of available buildings, the lack of market knowledge,
real estate surveys and individuals knowledgeable of all segments of the market.
With respect to the overall analysis, it appears the variance in sale
prices is primarily associated with the quality of the building, if the
build-to-suit design created added building costs and if the building is vacant.
A vacant building within these markets reflects a somewaht distressed sale that
the markets discounts substantially. However, it is important to address each
property in terms of the conventional sequence of adjustments relative to the
subject. The following analysis primarily concentrates on differences meriting
adjustment.
Property Rights Conveyed
All but Sale 10 are single tenant facilities that were vacant at the time
of sale or purchased as an owner occupant and sold in fee simple. The fee simple
interest of the subject is also under consideration. Sale 10 was a two tenant
facility with contract lease rates at market levels. Sale 12 was six buildings
purchased under a sale-leaseback agreement. A market rent equivalency adjustment
is not appropriate for these two sales and no adjustment is warranted for
property rights conveyed.
Seller Financing/Cash Equivalency
According to our conversations with parties familiar with the transactions,
the financing for the sales were cash to the seller. No adjustment is warranted
for financing.
Conditions of Sale
We identified no special motivational conditions concerning the comparable
sales. Therefore, in our opinion, no adjustments are warranted for special
motivational conditions.
Time (Market Conditions)
Changes in market conditions may be caused by fluctuations in supply and
demand, inflation, deflation or other factors. Market conditions generally
change over time and,
- --------------------------------------------------------------------------------
-59-
<PAGE>
Sales Comparison Approach
- --------------------------------------------------------------------------------
therefore, changes in market conditions from specific past sales should be
considered when making a comparative analysis of the property at the valuation
date.
Another consideration is for changes in economic characteristics of the
community, particularly as they relate to the value of the peso. In 1995, the
average exchange rate was 6.4, increasing to 7.6 in 1996, 7.9 in 1997 and
increasing substantially to 9.1 in 1998. At the date of inspection, the peso was
trading at 10.7 for each U.S. dollar. This change directly affects the economics
of Mexican real estate and the economy. Because of the economic characteristics
of the community, coupled with increased land supply at lower costs situated at
the peripheral of the community, a downward adjustment for changes in market
conditions was supported.
This is further compounded by the consolidation of the REIT industry. REIT
stock prices have declined substantially in the last four months and were
previously a major investor in the market, with Security Capital being one of
the largest. They were constructing speculative buildings in the market which
reportedly they may not be able to finish or remain in an ownership position due
to their high yield requirements (around 18 percent). If they vacate the market,
they could provide some vacant buildings at reduced pricing. Because of the
economic characteristics of the community, coupled with increased land supply at
lower costs situated at the peripheral of the community, a downward adjustment
for changes in market conditions was supported.
Other
This analysis will analyze only the subject manufacturing facility, since
the building components of the subject warehouse facility are not considered to
have any contributory value to the under lying land value.
The additional adjustments needed for the comparables are described for
each property, with most involving location, condition, age/quality issues or
economic characteristics. All sales will be analyzed after the adjustment for
excess land, if appropriate. The chart at the end of this analysis will then
summarize the comparisons.
Sales 1, 2 and 3 are situated in the community of Chihuahua, within the
state of Chihuahua. Although considered a Frontier community, it is closer to
the interior of the country than any communities where sales were included. The
result is a lower labor cost and lower employee turnover. Building costs are
lower due to the use of evaporative coolers in the warehouse/manufacturing area
and lower construction labor costs. Two of the Sales, 1 and 3, produced the
lowest square foot prices of the comparables. However, Sale 2, a build-to-suit
produced the highest square foot price of the comparables. But this is due to
the enhanced physical characteristics of the facility, rather than a superior
location. As a result of the previous discussion, these sales were adjusted
upward to reflect their location in a community with lower industrial costs.
Sales 4 and 5 are situated in Matamoros. These sales are similar to the
subject in locational characteristics.
Sales 6, 7, 8 and 9 are situated in Juarez, the largest industrial market
where sales could be derived. Although land costs are slightly higher than those
in Matamoros, building costs are
- --------------------------------------------------------------------------------
-6O-
<PAGE>
Sales Comparison Approach
- --------------------------------------------------------------------------------
lower. Also, industrial rental rates are similar. As such, no adjustment was
made to these comparables.
Sales 10 and 11 are situated in Reynosa, a maquiladora community
immediately south of McAllen, Texas and also within the state of Tamaulipas.
This is Matamoros's directly competing maquiladora market and has similar
building owners, developers, costs of construction and rental rates. As such,
building sale prices are similar to those reflected in Matamoros. These sales
are considered reliable comparisons to the subject.
Sale 1 reflects an older transaction within Chihuahua that was vacant at the
time of sale. It is also one of the largest buildings in the community and
reflected a building with considerable physical deterioration. The buyer
subsequently remodeled the interior at considerable cost. The $17.44 per square
foot price reflects the sale of a vacant building in need of remodeling. Because
the subject is actually older in effective age, but lacks deferred maintenance,
this comparable is only slightly inferior to the subject in physical
characteristics. This sale is appropriate for comparison to the subject, as it
represents an older, vacant industrial factility. However, it is an older sale
and warrants a large downward adjustment due to changes in market conditions.
This adjustment would more than offset the inferior physical condition of this
facility. As a result, we conclude that the subject would warrant a market value
slightly below $17.44 per square foot.
Sale 2 consists of the John Deere Cos. recently completed 107,000 square
foot light assembly/distribution/office facility. This project opened in April
1997 and took about 9 months to complete. The construction cost was $5,600,000
or $52.34 per square foot, however the project had 30,000 square feet of office
(28%) build-out and some specialized tenant improvements. This facility is
located in the Parque De Complejo De Industrial and according to our source is
located on arguably the best site within the park. The facility is situated on
77 acres, which was purchased for $3,700,000 or $1.10 per square foot. A
considerable portion of the land area is excess land and could be resold. An
adjustment was made to the price, however at $54.63 per square foot reflects a
newer facility with no physical deterioration, has a higher office finish and
generally represents a superior facility. Thus, the subject warrants a market
value well below $54.63 per square foot.
Sale 3 consists of a building totaling 92,000 square feet and is situated
on 250,000 square feet of land. The initial asking price was $2,300,000,while
the contracted sale price was $1,750,000, or $19.02 per square foot of building
area. The building was marketed for approximately 12 months and sold in the fall
of 1997. This vacant building has approximately 10 percent office build-out,
fully sprinklered, had ground mounted air washers (100 percent), a cafeteria and
a functional open production area. There is some added land for expansion, but
its proximity to the building would make a sale difficult, therefore no excess
was considered. Although this reflects a recent transaction, a downward
adjustment for market conditions is warranted. At $19.02 per square foot, this
comparable warrants a downward adjustment to reflect the market value of the
subject.
Sales 4 and 5 reflect industrial building purchases of similar facilities
in Matamoros. They range in price from $32.31 to $34.75 per square foot. These
sales reflect substantially newer
- --------------------------------------------------------------------------------
-61-
<PAGE>
Sales Comparison Approach
- --------------------------------------------------------------------------------
construction, with much less physical deterioration. In summary, the subject
warrants a market value well below $32.31 per square foot, as indicated by these
sales.
Sales 6, 7, 8 and 9 are situated in Juarez, with Sales 6 and 8 located
within the Bermudas Industrial Park and Sale 7 within the Salvacar Corridor.
Sale 6 is the listing of a 25,390 square foot industrial facility that is 17
years old and has noted functional deficiencies, including low ceiling heights
and partitioned interior. All are considerably smaller buildings. At a lower
price range of $25.60 per square foot, this price warrants a further downward
adjustment to reflect the subject's market value. Sale 7 is a new facility and
Sale 8 is under construction, both build-to-suit projects where the buyer is
purchasing the property upon completion of construction. Sale 9 is a 1998 sale
of an owner occupied building considered superior in physical attributes to the
subject. At $44.23, $31.00 and $46.54, they represent the upper range of pricing
in the Juarez industrial market and warrant large downward adjustments to
reflect the market value of the subject.
Sales 10 and 11 are industrial facilities situated in Reynosa. Sale 10 is
an 8 year old facility, 83,000 square foot in size and the only multitenant
facility considered for comparison. It has a higher office allocation and
superior interior finish as the subject. At $50.60 per square foot, this
represents the extreme upper market value of maquiladoras in the Frontier
communities. Sale 11 is a build-to-suit facility that was recently constructed
and was purchased by the tenant at completion. At $34.00 per square foot, a
downward adjustment is made to reflect the market value of the subject due to
its new construction.
Sale 12 is the sale-leaseback of six industrial buildings within Juarez.
The buyer's motivation was a 14.47 percent capitalization rate, which reflected
a value of $36.77 per square foot. While the improvements encompass 485,126
square feet, this sale reflects a superior comparison to the subject due to the
superior building characteristics, their leased status and their investment
characteristics.
Summary
Overall, Sale 1 $17.44 per square foot represents the most similar
comparison, but a slight downward adjustment is required due to current market
conditions. Sales 3 and 6, at $19.02 and $25.60 per square foot reflect slightly
superior comparisons. The remaining sales reflect substantially superior
comparisons, suggesting the subject warrants a market value below $31.00 per
square foot. Discussions with industrial brokers from the respective firms
previously noted indicated that a market value of $17.00 to $20.00 per square
foot is a reliable indication of market value for the subject.
- --------------------------------------------------------------------------------
-62-
<PAGE>
Sales Comparison Approach
- --------------------------------------------------------------------------------
IMPROVED SALES COMPARISON
<TABLE>
<CAPTION>
============================================================================
Sales Overall Rating
Comp Price Relative to
No. Property Per SF* The Subject *
============================================================================
<C> <S> <C> <C>
1 Av. Miguel de Cervante No. 140 $17.44 Slightly Superior
Chihuahua, Mexico
============================================================================
2 Parque de Complejo de Industrial $54.63 Superior
Chihuahua, Mexico
- ----------------------------------------------------------------------------
3 Los Americas (Neilson Building) $19.02 Superior
Chihuahua, Mexico
- ----------------------------------------------------------------------------
4 NEC Av. Ohio and Av. Del Obreno $32.31 Superior
Matamoros, Mexico
- ----------------------------------------------------------------------------
5 Av. Poniente $34.75 Superior
Matamoros, Mexico
- ----------------------------------------------------------------------------
6 Boulevard Gomez Morin $25.60 Superior
Juarez, Mexico
- ----------------------------------------------------------------------------
7 Avenue de las Torres $44.23 Superior
Juarez, Mexico
- ----------------------------------------------------------------------------
8 Bermudas Industrial Park $31.00 Superior
Juarez, Mexico
- ----------------------------------------------------------------------------
9 Johnson Controls $46.54 Superior
Juarez, Mexico
- ----------------------------------------------------------------------------
10 Parque Industrial Park $50.60 Superior
Reynosa, Mexico
- ----------------------------------------------------------------------------
11 Finsa Industrial Park $34.00 Superior
Reynosa, Mexico
- ----------------------------------------------------------------------------
12 6 industrial buildings $36.77 Superior
Juarez, Mexico
============================================================================
</TABLE>
The appraiser conducted an appraisal on the subject in May of 1998. At that
time, a market value estimate of $4,130,000 and a liquidation value of
$3,540,000. The market value considered a 12 to 18 month marketing period, while
liquidation value considered only a six month marketing period. However, since
that appraisal was conducted, a number of factors support a decline in the
market value:
1) A 25.0 percent decline in the value of the peso has occurred since the
previous date of appraisal. This directly affects the value of real estate in
Mexico.
2) The world capital markets contracted substantially in October and November
1998. Although the capital markets are recovering, the contraction has still
limited the number of potential purchasers (particularly REITs), increased the
cost of loans (even though the prime interest rate has decreased) and made
secondary markets, like Matamoros, less desirable for real estate financing. Bob
Burnand with Cushman & Wakefield's Financial Services Group indicated that real
estate prices still remain 10 to 15 percent below those levels immediately prior
to October 1998.
- --------------------------------------------------------------------------------
-63-
<PAGE>
Sales Comparison Approach
- --------------------------------------------------------------------------------
3) Since the initial appraisal, the subject building has been marketed
for sale. A number of investors and potential users have looked into purchasing
the property. Most of the investment purchasers expressed preliminary interest
below $3,000,000. However, only one potential user has made an offer for both
subject buildings, allocating $3,500,000 for the real estate. They have
indicated that they will partially utilitize the warehouse facility and
eventually redevelop or sell it in the near term.
Based on the preceding analysis, an estimated value of $17.00 per square
foot is considered reasonable for the subject building improvements. Therefore,
the subject's total value via the sales price per square foot of building area
methodology is:
196,442 Square Feet x $17.00/Square Feet = $3,339,174
Rounded $3,340,000
- --------------------------------------------------------------------------------
-64-
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
The subject manufacturing facility contains approximately 196,442 square
feet. The quality of construction is considered to be fair to average for this
facility considering its age and architectural style. The subject was designed
for single-tenant occupancy, specific to the current tenant's needs. Although
the market has historically consisted of owner occupied buildings, speculative
facilities only available for lease and build-to-suit facilities that are
preleased, rather than sold to the user are now prevalent in the market.
Therefore, using the Income Approach can provide a reasonable estimate of market
value for the subject. Below, we have discussed the process used to estimate
market value.
Properties such as the subject have been leased on a triple net basis, with
the tenant paying all operating expenses. If available, the subject would lease
on a triple net basis and reflect a market rental rate toward the extreme lower
range as compared to other leased and available industrial projects in the
Matamoros industrial market. We have elected to look at lease rates with triple
net terms. In an effort to estimate market rent for the subject, a search was
conducted of only industrial facilities that were leased or available for lease
in Reynosa and Matamoros that could provide a general indication of market rent.
Our search uncovered five lease comparables that have occurred since the
beginning of 1995 and May 1998. We concentrated on leased facilities within
similar investment characteristics for comparison. This information is shown in
the Industrial Rent Comparable Summary below.
INDUSTRIAL RENT COMPARABLE SUMMARY
<TABLE>
<CAPTION>
===================================================================================================
Tenant/ Building Term Lease Annual Lease
Comp Location Size (SF) (Years) Date Rate (NNN)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
1 Cleo Building 83,000 7 June $5.85
Parque Industrial Park, Reynosa 1998
- ---------------------------------------------------------------------------------------------------
2 Data Comp 100,000 7 1997 $6.24
Parque Industrial Park, Reynosa
- ---------------------------------------------------------------------------------------------------
3 MagnaTech 136,690 10 May $5.52
Parque Industrial Park, Reynosa 1998
- ---------------------------------------------------------------------------------------------------
4 AYUSA 46,960 7 1995 $5.28
Avenue Poniente, Matamoros
- ---------------------------------------------------------------------------------------------------
5 Confidential 50,000 5 February $5.40
Finsa Industrial Park, Reynosa 1998
- ---------------------------------------------------------------------------------------------------
Subj. General Lauro Villar KM4, Number 700H, 196,442 --- --- ---
Matamoros, Mexico
===================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
-65-
<PAGE>
Income Approach
- --------------------------------------------------------------------------------
Trying to compare the rent comparables on a point-by-point basis to the
individual subject improvements is difficult, since some are build-to-suit
arrangements were the tenant provided some of the capital associated with
construction. However, to the best of our knowledge, the lease rates reflect the
leasing activity of improved industrial properties. Because of the recent peso
devaluation and the consolidation in the REIT market (Security Capital has a
large presence in this market and was constructing speculative buildings before
pulling out of the market), downward pressures have recently occurred on rents.
Thus, these comparable's rates need to be adjusted downward 10 to 30 percent to
reflect current market conditions.
The comparables are all smaller in size than the subject. Additionally, these
properties have physical amenities that are superior to the subject. Age, clear
height and percent office build-out also vary, but the market data does not
present a clear rental rate variation for these differences. Regardless, the
subject would command a market rental rate below these comparables given its
physical characteristics. This would be in addition to the warranted market
rental rate adjustment.
Rent Comparables 1, 2, 3 and 5 are situated in Reynosa, within the Parque and
Finsa industrial parks. All have interior subdivision access, availability of
utilities and municipal services. They produced a range in rental rates from
$5.40 to $6.40 per square foot. Rent Comparable 5 is one of three leases that
was negotiated within the Finsa Industrial Park in the last year at rates of
$5.40 to $5.52 per square foot. Rent Comparable 4 is situated in Matamoros and
reflected the older lease of a 46,960 square foot facility for $5.28 per square
foot. It was given most consideration, but still requires a large downward
adjustment in the estimation of the subject's market value.
Older leased buildings were difficult to confirm since most have the original
tenant still occupying the facility since its construction. Discussions with
Finsa, the largest industrial developer and manager in the community, indicated
rents for new buildings range from $4.50 to $5.60 per square foot, while older
buildings are achieving rental rates of $3.00 to $4.50 per square foot, per
year. The general consensus is that the subject would warrant a market rent from
$3.75 to $4.25 per square foot. We have concluded that the subject's reasonable
market rent is $3.80 per square foot, due to its physical characteristics.
Vacancy
Vacancy rates in the Matamoros industrial market were discussed in the Market
Analysis section. Vacancy rates have increased slightly in the city and
subject's submarket in the last two years, currently standing at around four
percent. However, with the recent consolidation in the REIT industry and the
number of speculative buildings that were being constructed that may not meet
their desired yield expectations, we anticipate an increase in the market
vacancy in the near term. Therefore, we have projected stabilized vacancy to be
8.0 percent.
Expenses
We have estimated market rent on a triple net basis. Therefore, the landlord
is responsible for a limited amount of expenses. These expenses are listed and
discussed below.
- --------------------------------------------------------------------------------
-66-
<PAGE>
Income Approach
- --------------------------------------------------------------------------------
Management - Professional management fees were obtained from Cushman &
Wakefield/GCI and Finsa. Reportedly, management fees range between 0.5
percent and 2.0 percent of effective gross income for multitenant
industrial facilities and a flat fee of $75,000 to $150,000 for the
management of industrial parks with 20 to 40 facilities. We assume
professional management will be required in the operation of this property
on a limited basis. Therefore, we estimate management expense at 1.0
percent.
Reserves for Replacement - This item is for replacement of major building
components, such as air conditioners, roofing, plumbing, etc. This expense
item usually ranges between $0.02 and $0.08 per square foot of building
area. We have allocated an above average expense of $0.10 per square foot
of total building area per year, or $19,644 annually, due to the subject's
older age of construction.
Miscellaneous - This expense category includes legal and accounting
services, real estate taxes and insurance costs during periods of vacancy,
telephone and other expense items not included in other classifications.
This expense item is estimated to be 2.0 percent of effective gross income.
Following is an Income and Expense Summary using the above discussed income
and expense items.
INCOME AND EXPENSE SUMMARY
<TABLE>
<CAPTION>
<S> <C> <C>
Potential Gross Income
196,442 S.F. @ $3.80/S.F./Year $746,480
Less Vacancy (8%) -59,718
--------
Effective Gross Income $686,761
Less Operating Expenses:
Management (1%) $ 6,868
Reserves ($0.10/S.F.) 19,644
Miscellaneous (2%) 13,735
--------
Total Operating Expenses -40,246
--------
Net Operating Income $646,515
</TABLE>
Direct Capitalization
Direct capitalization is used whereby we have assumed all the improvements
are leased at a market rental rate, with the appropriate deductions for vacancy
and owners expenses under net lease terms. Because some of the sales used in our
analysis were owner/user properties, capitalization rates were not always
available. However, those sales were capitalization rates could be obtained are
summarized:
- --------------------------------------------------------------------------------
-67-
<PAGE>
Income Approach
- --------------------------------------------------------------------------------
Summary of Overall Capitalization Rates
<TABLE>
<CAPTION>
======================================
Sale Capitalization Rate
======================================
<S> <C>
I-4 15.7%
--------------------------------------
I-5 14.3%
--------------------------------------
I-10 11.6%
--------------------------------------
I-12 14.5%
======================================
</TABLE>
Sale I-4 reflects the purchase of a vacant building that was subsequently
leased. At 15.7 percent, this reflects the appropriate overall rate for a newer,
functional, vacant building in the Frontier communities oriented toward
maquiladora occupancy. Sale I-5 produced an overall rate of 14.3 percent, based
on the asking lease rate at the time of purchase. The potential tenant actually
decided to purchase the facility and conducted some remodeling at their cost.
The seller would have had to provide this additional cost if the buyer would
have leased the facility, which would have pushed the rental rate upward. Thus,
a 14.3 percent overall rate reflects the low end of the range. The buyer and
seller of Sale I-10 indicated that the purchase price was above market levels.
This was due to some internal motivations, which could not be confirmed, and
pushed the overall rate downward. An overall rate of 11.6 percent is
unrealistically low to use in capitalizing net income into value within the
Mexico industrial market. Sale I-12 was the purchase of six buildings occupied
by five tenants. This purchase has considerably more income stability than the
subject.
Another way of deriving overall rates is through the analysis of build-to-
suit facilities, where the facility upon completion is subsequently leased to
the tenant. Examples of industrial facilities currently under construction and
available for lease are summarized:
BUILD-TO-SUIT ANALYSIS
Construction Costs, Income Analysis and Resulting Overall Rate
<TABLE>
<CAPTION>
====================================================================================================================
Building Size Project Approximate Net Overall
Comp Project (SF) Cost Income* Rate
- --------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
1 Morelea, Juarez 60,000 $2,400,000 $313,140 13.0%
- --------------------------------------------------------------------------------------------------------------------
2 Salvacar Industrial Park, Juarez 63,504 $2,032,128 $340,400 16.8%
- --------------------------------------------------------------------------------------------------------------------
3 Juan Gabriel, Juarez 84,000 $2,772,000 $470,000 17.0%
- --------------------------------------------------------------------------------------------------------------------
4 Magnatec, Reynosa 136,690 $5,640,000 $710,420 12.6%
====================================================================================================================
</TABLE>
*Net income is based on asking or contract rent, market vacancy and expenses.
Developers are obtaining overall rates of 12.6 percent to 17.0 percent on
their build-to-suit projects. However, many own the industrial park and enhance
their yields considerably due to a lower cost basis in the land. The average
rate for the four comparables noted is 14.9 percent, versus 14.0 percent for the
four sales previously noted. It can be concluded that developers are making an
additional yield around 1.0 percent. It can be concluded that capitalization
rates for industrial product ranges from 11.6 percent to 17.0 percent for
institutional-grade properties. Given the subject's large size, its location in
a smaller maquiladora market, and its non-institutional grade physical
characteristics, we have selected an overall rate of 18.0 percent as applied
below.
- --------------------------------------------------------------------------------
-68-
<PAGE>
Income Approach
- --------------------------------------------------------------------------------
Direct Capitalization
<TABLE>
==============================================================
<S> <C>
Net Operating Income $646,515
--------------------------------------------------------------
Divided by Overall Capitalization Rate 18.0%
--------------------------------------------------------------
Indicated Value $3,591,750
--------------------------------------------------------------
Rounded to: $3,590,000
==============================================================
</TABLE>
Thus, the value indication, via Income Approach, of the subject manufacturing
building is estimated to be $3,590,000 on a cash equivalent basis.
- --------------------------------------------------------------------------------
-69-
<PAGE>
RECONCILIATION AND FINAL VALUE CONCLUSION
- --------------------------------------------------------------------------------
Value indications for the subject property by the approaches to value are
indicated as follows:
<TABLE>
<CAPTION>
Manufacturing Warehouse
------------- ---------
<S> <C> <C>
Cost Approach $4,080,000 $350,000
Sales Comparison Approach $3,340,000 N/A
Income Approach $3,590,000 N/A
</TABLE>
In the reconciliation, each approach to value is reviewed in order to
determine the reliability of the data in each and to weigh that approach best
represents the actions of typical users and investors in the market.
The Cost Approach is generally a very reliable estimate of value in a stable
economy and when the subject is new construction with little or no depreciation
to be estimated. However, the subject manufacturing facility has suffered from
some physical deterioration due to its physical and effective age. Regardless,
the availability of cost information was reliable and land comparables provided
a reliable land value estimate. Because a particular purchaser of the subject
would rely less on this approach, we have given it least consideration.
The value attributable to the warehouse facility was determined to be limited
to the land. The older, dilapidated condition of the warehouse warrants no value
consideration to the building improvements. This was confirmed by brokers with
Insignia and Cushman & Wakefield, and developers, including Finsa. Thus, the
value concluded for this facility was estimated under a Sales Comparison
Approach to estimate land value.
The Sales Comparison Approach is based on the principle of substitution,
which implies that a prudent person will not pay more to buy a property than it
would cost to buy a comparable substitute property. The subject manufacturing
facility, as improved, was compared with other industrial building sales. The
lack of uniformity in the market made it somewhat difficult to objectively
adjust the comparables. However, there was adequate sales transactions to rely
on, and their square foot prices bracketed an appropriate value indication for
the subject. Based on the availability and reliability of the data, coupled with
the fact that the subject would likely be purchased by an owner user, the sales
comparison approach was given most emphasis in the estimation of market value.
Given its age and investment characteristics, the subject is less suited to
an analysis by direct capitalization. However, a substantial amount of market
data was available that could be relied upon. If the subject were bought and
sold in the investment market, this approach is very reliable. However, given
its single tenant orientation, coupled with its older age, the subject is less
desirable to the investment market. Thus, we have given it minimal
consideration.
- --------------------------------------------------------------------------------
-70-
<PAGE>
Reconciliation And Final Value Conclusion
- --------------------------------------------------------------------------------
As a result of our analysis, we have formed an opinion that the market value of
the fee simple estate in the manufacturing facility, subject to the assumptions,
limiting conditions, certifications and definitions, as of January 25, 1999, is:
THREE MILLION FOUR HUNDRED FIFTY THOUSAND DOLLARS
$3,450,000
Further, as a result of our analysis, we have formed an opinion that the
market value of the fee simple estate in the land on which the warehouse
building is situated, subject to the assumptions, limiting conditions,
certifications and definitions, as of January 25, 1999, is:
FIVE HUNDRED TWENTY THOUSAND DOLLARS
$520,000
Since the land on which the warehouse is situated and the manufacturing
building can be sold in conjunction and/or separately, there is no need for
discounting or deductions when considering the market value combined. Thus, the
market value of the fee simple estate in both properties, as of January 25,
1999, is:
THREE MILLION NINE HUNDRED SEVENTY THOUSAND DOLLARS
$3,970,000
Marketing Time
Marketing time is an estimate of the time that might be required to sell a
real property interest at the appraised value. Marketing time is presumed to
start on the effective date of the appraisal. Marketing time is subsequent to
the effective date of the appraisal, whereas exposure time, as defined below, is
presumed to precede the effective date of the appraisal. The estimate of
marketing time uses some of the same data analyzed in the process of estimating
the reasonable exposure time and is not intended to be a prediction of a date of
sale.
We have concluded that a marketing period of less than 12 months would be
required in order to sell the subject property. This reflects the marketing time
exhibited by the sale which have been included. The value conclusion expressed
in this report is based on the current market conditions.
Exposure Time
Under paragraph 3 of the Definition of Market Value, the value estimate
presumes that "...a reasonable time is allowed for exposure in the open market."
Exposure time is defined as the estimated length of time the property interest
being appraised would have been offered on the market prior to the hypothetical
consummation of a sale at the market value on the effective date of the
appraisal. Exposure time is presumed to precede the effective date of the
appraisal. We have estimated the appropriate exposure time for the subject
property to be approximately 12 months.
- --------------------------------------------------------------------------------
-71-
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
Appraisal means the appraisal report and opinion of value stated therein; or
the letter opinion of value, to which these Assumptions and Limiting Conditions
are annexed.
Property means the subject of the Appraisal.
C&W means Cushman & Wakefield, Inc., or its subsidiary that issued the
Appraisal.
Appraiser(s) means the employees of C&W who prepared and signed the
Appraisal.
The Appraisal has been made subject to the following assumptions and limiting
conditions:
(1) No responsibility is assumed for the legal description or for any matters
that are legal in nature. Title to the Property is assumed to be good and
marketable and the Property is assumed to be free and clear of all liens
unless otherwise stated. No survey of the Property was undertaken.
(2) The information contained in the Appraisal or upon which the Appraisal is
based, has been gathered from sources the Appraiser assumes to be reliable
and accurate. The owner of the Property may have provided some of such
information. Neither the Appraiser nor C&W shall be responsible for the
accuracy or completeness of such information, including the correctness of
estimates, opinions, dimensions, sketches, exhibits and other factual
matters. The Appraisal and the opinion of value stated therein is as of the
date stated in the Appraisal. Changes since that date in external and market
factors can significantly affect property value.
(3) The Appraisal is to be used in whole and not in part. No part of the
Appraisal shall be used in conjunction with any other appraisal. Possession
of the appraisal, or a copy thereof, does not carry with it the right of
publication. Publication of the Appraisal or any portion thereof without the
prior written consent of C&W is prohibited. Except as may be otherwise
expressly stated in the letter of engagement to prepare the Appraisal, C&W
does not permit use of the Appraisal by any person other than the party to
whom it is addressed or for purposes other than that for which it was
prepared. If written permission is given by C&W to use the Appraisal, the
Appraisal must be used in its entirety and only with proper written
qualification as approved by C&W. No part of the appraisal or the identity
of the Appraiser shall be conveyed to the public through advertising, public
relations, news, sales or other media or used in any material without C&W's
prior written consent. Reference to the Appraisal Institute or to the MAI
designation is prohibited.
(4) The Appraiser shall not be required to give testimony in any court or
administrative proceeding relating to the Property or the Appraisal.
(5) The Appraisal assumes (a) responsible ownership and competent management of
the Property; (b) there are no hidden or unapparent conditions of the
Property, subsoil or structures that render the Property more or less
valuable (no responsibility is assumed for such conditions or for arranging
for engineering studies that may be required to
- --------------------------------------------------------------------------------
-72-
<PAGE>
Assumptions And Limiting Conditions
- --------------------------------------------------------------------------------
discover them); (c) full compliance with all applicable federal, state and
local zoning and environmental regulations and laws, unless noncompliance
is stated, defined and considered in the Appraisal; and (d) all required
licenses, certificates of occupancy and other governmental consents have
been or can be obtained and renewed for any use on which the value estimate
contained in the Appraisal is based.
(6) The Appraiser or other person identified in the Appraisal bases the
physical condition of the improvements considered by the Appraisal on
visual inspection. C&W assumes no responsibility for the soundness of
structural members nor for the condition of mechanical equipment, plumbing
or electrical components.
(7) The projected potential gross income referred to in the Appraisal may be
based on lease summaries provided by the owner or third parties. The
Appraiser has not reviewed lease documents and assumes no responsibility
for the authenticity or completeness of lease information provided by
others or the bona fides of actual leases. C&W suggests that legal advice
be obtained regarding the interpretation of lease provisions and the
contractual rights of parties.
(8) The projections of income and expenses are not predictions of the future.
Rather, they are the Appraiser's best estimates of current market thinking
on future income and expenses. The Appraiser and C&W make no warranty or
representation that these projections will materialize. The real estate
market is constantly fluctuating and changing. It is not the Appraiser's
task to predict or in any way warrant the conditions of a future real
estate market; the Appraiser can only reflect what the investment
community, as of the date of the Appraisal, envisions for the future in
terms of rental rates, expenses, and supply and demand.
(9) Unless otherwise stated in the Appraisal, the existence of potentially
hazardous or toxic materials which may have been used in the construction
or maintenance or operation of the improvements or may be located at or
about the Property was not considered in arriving at the opinion of value
stated in the Appraisal. These materials (such as formaldehyde foam
insulation, asbestos insulation, various soil contaminants, and other
potentially hazardous materials) may affect the value of the Property. The
Appraisers are not qualified to detect such substances and C&W urges that
an expert in this field be employed to determine the economic impact of
these matters on the opinion of value stated in the Appraisal.
(10) If the Appraisal is submitted to a lender or investor with the prior
approval of C&W, such party should consider the Appraisal as one factor,
together with its independent investment considerations and underwriting
criteria, in its overall investment decision.
(11) Unless otherwise stated in the appraisal, compliance with the requirements
of the Americans With Disabilities Act of 1990 (ADA) has not been considered
in arriving at the opinion of value stated in the appraisal. Failure to
comply with the requirements of the ADA may negatively affect the value of
the property. C&W recommends that an expert in this field be employed.
- --------------------------------------------------------------------------------
-73-
<PAGE>
CERTIFICATION OF APPRAISAL
- --------------------------------------------------------------------------------
We certify that, to the best of our knowledge and belief:
(1) Michael L. Miller, MAI, Director has inspected the manufacturing facility
and prepared the report. Adrian Slater, Associate Director, has inspected
both the manufacturing and the warehouse facilities and assisted in
preparation of the report.
(2) The statements of fact contained in this report are true and correct.
(3) The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are our personal,
unbiased professional analyses, opinions, and conclusions.
(4) We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
(5) Our compensation is not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the amount
of the value estimate, the attainment of a stipulated result, or the
occurrence of a subsequent event. The appraisal assignment was not based on
a requested minimum valuation, a specific valuation or the approval of a
loan.
(6) No one provided significant professional assistance to the persons signing
this report.
(7) Our analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the Uniform Standards of Professional
Appraisal Practice of the Appraisal Foundation and the Code of Professional
Ethics and the Standards of Professional Appraisal Practice of the
Appraisal Institute.
(8) The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
(9) As of the date of this report, Michael L. Miller, MA, has completed
requirements of the continuing education program of the Appraisal
Institute.
(10) We have sufficient knowledge and expertise to appraise the subject
property.
Michael L. Miller, MAI Adrian Slater
Director Associate Director
Valuation Advisory Services Cushman & Wakefield/GCI
- --------------------------------------------------------------------------------
-74-
<PAGE>
ADDENDA
- --------------------------------------------------------------------------------
Subject Photographs
Legal Description
Location Map
Qualifications of Appraiser
- --------------------------------------------------------------------------------
-75-
<PAGE>
- --------------------------------------------------------------------------------
BLANK PAGE
- --------------------------------------------------------------------------------
-76-
<PAGE>
- --------------------------------------------------------------------------------
ELECTRO PARTES DE MATAMOROS, S.A. DE C.V. (ZENITH)
General Lauro Villar KM4, Number 700H
COMPARABLE LAND SALES
<TABLE>
<CAPTION>
===================================================================================================================================
Street Location,
Land Industrial Location Sale Price Per Land Land
Sale Buyer, City, State Date Sale Price Square Foot Acres Square Feet Comments
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
1 Ciudad Industrial Park 1997 $260,000 $1.19 5.00 217,800 Bought to construct maquiladora
N/A, Matamoros, Tamaulipas facility within the CIMA park.
- ------------------------------------------------------------------------------------------------------------------------------------
2 Avenue Unions, Finsa 1996 $ 87,120 $2.00 1.00 43,560 Bought to construct a switching
AT&T, Matamoros, Tamaulipas station. Within Phase III of
the park.
- ------------------------------------------------------------------------------------------------------------------------------------
3 Avenue Uniones, Finsa 1996 $326,700 $1.50 5.00 217,800 Bought to construct 93,000 SF
ATAPCO, Matamoros, Tamaulipas maquiladora employing 800.
- ------------------------------------------------------------------------------------------------------------------------------------
4 SEC Avenue Uniones and 1995 $427,000 $1.40 7.00 304,920 Purchased for speculation.
Prolongacion Uniones,
Parque del Norte N/A,
Matamoros, Tamaulipas
- ------------------------------------------------------------------------------------------------------------------------------------
5 Avenue Uniones, Finsa 1995 $490,000 $1.25 9.00 392,040 Bought to construct 102,000 SF
Marmon, Matamoros, Tamaulipas maquiladora employing 200.
- ------------------------------------------------------------------------------------------------------------------------------------
Subj. General Lauro Villar KM4, N/A -- -- 8.51 370,543 Two parcels of land assembled
Number 700H, to form one building site.
Zenith, Matamoros,
Tamaulipas, Mexico
===================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
-77-
<PAGE>
ELECTRO PARTES DE MATAMOROS, S.A. DE C.V. (ZENITH)
General Lauro Villar KM4, Number 700H
COMPARABLE BUILDING SALES
<TABLE>
<CAPTION>
=====================================================================================================================
Sale Bldg. Size Price Percent
No. Location/Tenant Date (Sq. Ft.) Sale Price Sq. Ft. Finish
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 Av. Miguel de Cervante No. 140 March 229,327 $ 4,000,000 $17.44 15%
Chihuahua, Mexico Vacant 1996
- ---------------------------------------------------------------------------------------------------------------------
2 Parque de Complejo de Industrial April 107,000 $ 9,300,000 $86.92 28%
Chihuahua, Mexico John Deere 1997 $ 5,845,868* $54.63*
- ---------------------------------------------------------------------------------------------------------------------
3 Los Americas (Neilson Building) Late-1997 92,000 $ 1,750,000 $19.02 10%
Parque Industrial Los Americas
Chihuahua, Mexico D&B to Am. Industries
- ---------------------------------------------------------------------------------------------------------------------
4 NEC Av. Ohio and Av. Del Obreno July 35,596 $ 1,650,000 $46.35 10%
Parque Industrial del Norte 1995 $ 1,150,000* $32.31* 80% AC
Matamoros, Mexico Daniel Industries
- ---------------------------------------------------------------------------------------------------------------------
5 Av. Poniente January 46,960 $ 1,597,000 $34.75 100% AC
Ciudad Industrial, 1995
Matamoros, Mexico United Technologies
- ---------------------------------------------------------------------------------------------------------------------
6 Boulevard Gomez Morin Available 25,390 $ 650,000 $25.60 10%
Juarez, Mexico Vacant
- ---------------------------------------------------------------------------------------------------------------------
7 Avenue de las Torres February 52,000 $ 2,300,000 $44.23 10%
Salvarcar Corridor 1998
Juarez, Mexico National Processing
Company
- ---------------------------------------------------------------------------------------------------------------------
8 Bermudas Industrial Park June 100,000 $ 3,100,000 $31.00 10%
Juarez, Mexico Build-to-Suit 1998
- ---------------------------------------------------------------------------------------------------------------------
9 Southeast Submarket February 52,645 $ 2,450,000 $46.54 20%
Juarez, Mexico Johnson Controls 1998
- ---------------------------------------------------------------------------------------------------------------------
10 Parque Industrial Park Mid- 83,000 $ 4,200,000 $50.60 15%
Reynosa, Mexico Data Comp 1996
- ---------------------------------------------------------------------------------------------------------------------
11 Finsa Industrial Park June 50,000 $ 1,700,000 $34.00 10%
Reynosa, Mexico AMMEX 1998
- ---------------------------------------------------------------------------------------------------------------------
12 6 Industrial Buildings November 485,126 $17,840,000 $36.77 15%
Juarez, Mexico A.O. Smith, 1998
Mannesmann, American Yazaky, Johnson
Matthey, Thomson
- ---------------------------------------------------------------------------------------------------------------------
Subj. General Lauro Villar KM4, Number 700H, N/A 196,442 --- --- Appr.
Matamoros, Mexico Zenith 15%
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
=====================================================================================================================
Effect.
No. Location/Tenant Age Occupancy Comments
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 Av. Miguel de Cervante No. 140 11 yrs. Vacant Distressed sale of vacant
Chihuahua, Mexico Vacant building
- ---------------------------------------------------------------------------------------------------------------------
2 Parque de Complejo de Industrial New Owner- 77 acre site purchased for
Chihuahua, Mexico John Deere occupant $3.7M, Build-to-suit for
owner/tenant
- ----------------------------------------------------------------------------------------------------------------------
3 Los Americas (Neilson Building) 10 yrs. Owner- Asking price was $2,100,000,
Parque Industrial Los Americas occupant 12 month marketing period,
Chihuahua, Mexico D&B to Am. Industries 250,000 SF site, sprinklered,
cafeteria
- ----------------------------------------------------------------------------------------------------------------------
4 NEC Av. Ohio and Av. Del Obreno 7 yrs. Investor 9.14 acres of excess land,
Parque Industrial del Norte masonry bldg., good condition
Matamoros, Mexico Daniel Industries
- ----------------------------------------------------------------------------------------------------------------------
5 Av. Poniente 3 yrs. Owner- Buyer offered $0.44/SF/Mo.
Ciudad Industrial, occupant Lease prior to purchase
Matamoros, Mexico United Technologies masonry/metal constr.
- ----------------------------------------------------------------------------------------------------------------------
6 Boulevard Gomez Morin 17 yrs. Vacant Brick and concrete building
Juarez, Mexico Vacant with 10' clear. Functional
deficiencies noted.
- ----------------------------------------------------------------------------------------------------------------------
7 Avenue de las Torres New Owner- Evap. Warehouse, Restra
Salvarcar Corridor occupant walls, tin roof, 2 docks, Build-
Juarez, Mexico National Processing to-suit for owner/tenant
Company
- ----------------------------------------------------------------------------------------------------------------------
8 Bermudas Industrial Park Under Owner- Build-to-suit for owner/tenant;
Juarez, Mexico Build-to-Suit Constr. occupant not completed at inspection
- ----------------------------------------------------------------------------------------------------------------------
9 Southeast Submarket 7 yrs. Owner- Tilt and masonry, B-U roof,
Juarez, Mexico Johnson Controls occupant manufacturing bldg.
- ----------------------------------------------------------------------------------------------------------------------
10 Parque Industrial Park 8 yrs. 100% 2-tenant bldg., 26,900 SF
Reynosa, Mexico Data Comp 68%** recently vacated; $0.52 avg.
lease rate; 11.6% OAR
- ----------------------------------------------------------------------------------------------------------------------
11 Finsa Industrial Park New Owner- Build-to-suit for owner/tenant;
Reynosa, Mexico AMMEX occupant not completed at inspection
- ----------------------------------------------------------------------------------------------------------------------
12 6 Industrial Buildings 5-10 Owner- Sale-leaseback of a 6 building
Juarez, Mexico A.O. Smith, yrs. occupants portfolio to a single buyer
Mannesmann, American Yazaky, Johnson
Matthey, Thomson
- ----------------------------------------------------------------------------------------------------------------------
Subj. General Lauro Villar KM4, Number 700H, 20 yrs. Owner- Build-to-suit for owner/tenant,
Matamoros, Mexico Zenith occupant some functional deficiencies.
======================================================================================================================
</TABLE>
* Adjusted to reflect exclusion of excess land **Current occupancy
-78-
<PAGE>
[BAR CHART APPEARS HERE]
-79-
<PAGE>
Exhibit 99u
[BINSWANGER LETTERHEAD]
13 November 1998
VIA FACSIMILE 847-391-8003
FEDERAL EXPRESS OVERNIGHT
Beverly A. Wyckoff, Esquire
Legal Department
Zenith Electronics Corporation
1000 Milwaukee Avenue
Glenview, IL 60025
Re: Exclusive Agency Agreement - Mexico
Dear Ladies and Gentlemen:
In response to your request, please consider this letter to be permission to use
the contents of the "Property Summary and Value Estimates" evaluation, performed
by Bermudez Binswanger, concerning Zenith's assets located in Mexico, for public
disclosure as part of Zenith's disclosure to the Securities and Exchange
Commission.
This permission is conditioned upon the notification within such disclosure that
the referenced document is not an appraisal and the value estimates were not
conducted in accordance with MAI Standards. In addition, such summary and value
estimates were prepared prior to Binswanger's engagement by Zenith and were not
prepared in accordance with any contractual obligation to Zenith.
If you have any questions regarding the scope of the permitted use of these
materials, or this transmittal, you may contact me directly.
Very truly yours,
/s/ Susan M. Sygenda
- --------------------
Susan M. Sygenda
cc: David R. Binswanger
SMS:css
[BOTTOM LETTERHEAD]
<PAGE>
Exhibit 99v
Date:
--------------------
Zenith Electronics Corporation
Ladies and Gentlemen:
Permission is hereby given for the public disclosure, as part of Zenith's
disclosures to the Securities and Exchange Commission, of the contents of the
appraisal performed by Greenwich Industrial Services, LLC concerning Zenith's
assets located in Reynosa, Mexico, which appraisal is dated May 14, 1998.
GREENWICH INDUSTRIAL SERVICES, LLC
By: /s/ Michael J. DiProspero
-----------------------------
Name: Michael DiProspero
Its: Vice President
<PAGE>
Exhibit 99w
[FORRESTER LOGO]
April 16, 1999
Beverly A. Wykoff
Legal Department
Zenith Electronics Corporation
1000 Milwaukee Avenue
Glenview, IL 60025
To Whom It May Concern:
Pursuant to our contract, Forrester Research, Inc. ("Forrester") consents to the
inclusion of our name and to the description of Forrester in the Form S-4
currently being revised and filed by the Zenith Electronics Corporation
("Zenith").
Forrester does not consent to be an expert in the Form S-4 or as having prepared
or certified any part of the Form S-4.
Very truly yours,
/s/ Timothy J. Moynihan, Esq.
- -----------------------------
Timothy J. Moynihan, Esq.
Corporate Counsel
Forrester Research, Inc.
1033 Massachusetts Avenue
Cambridge, MA 02138
Tel: 617/497-7090
Fax: 617/868-0577
www.forrester.com
<PAGE>
Exhibit 99x
[GARTNER GROUP LOGO]
251 River Oaks Parkway
San Jose, CA 95134-1913
USA
+1-408-468-8000 [PHONE LOGO]
+1-408-468-8526 [FAX LOGO]
www.gartner.com
November 17, 1998
Ms. Beverly A. Wyckoff
Legal Department
Zenith Electronics Corporation
1000 Milwaukee Avenue
Glenview, IL 60025
Telephone: +1.847.391.8001 Fax: +1.847.391.8003
Engagement #18024680
Re: Release of International VSB Market Forecast for SEC filing
Dear Ms. Wyckoff:
As per our agreement in the above-specified engagement, Gartner Group, Inc.
hereby gives permission for Zenith Electronics Corporation to use the
information in the reports for Securities and Exchange Commission filings. The
reports are to be attached as exhibits to the S-4, to be read in their entirety.
The reports may be filed electronically under the SEC's EDGAR system.
This permission also extends to inputs made to valuations provided by Peter J.
Solomon Company in conjunction with Zenith.
If you have any questions about the usage of this permission, please contact me
directly at 408.468.8557.
Sincerely,
/s/ Paul-Jon McNealy /s/ Massimo Moggi
- -------------------- -----------------
Paul-Jon McNealy Massimo Moggi
Consultant Managing Vice President
GartnerConsulting GartnerConsulting
November 17, 1998 November 17, 1998
<PAGE>
Exhibit 99y
UNITED STATES BANKRUPTCY COURT
FOR THE [___________] DISTRICT OF [_____________]
In re: ) Chapter 11
)
ZENITH ELECTRONICS CORPORATION ) Case No. 99-___(___)
)
Debtor. )
BALLOT FOR ACCEPTING OR REJECTING THE PREPACKAGED
PLAN OF REORGANIZATION DATED _________________________, 1999 OF
ZENITH ELECTRONICS CORPORATION
Class 4 - Bank Lender Claims
PLEASE READ AND FOLLOW THE ENCLOSED
VOTING INSTRUCTIONS CAREFULLY BEFORE COMPLETING THE BALLOT.
PLEASE CHECK THE APPROPRIATE BOX BELOW TO INDICATE
YOUR ACCEPTANCE OR REJECTION OF THE PREPACKAGED PLAN.
________________________________________________________________________________
THIS BALLOT IS ACCOMPANIED BY A RETURN ENVELOPE THAT IS ADDRESSED TO
GEORGESON & COMPANY, INC. (THE "SOLICITATION AGENT").
THIS BALLOT MUST BE RECEIVED BY THE SOLICITATION AGENT BY 5:00 P.M.,
NEW YORK CITY TIME, ___, 1999 (THE "EXPIRATION DATE")
UNLESS THE COMPANY, IN ITS SOLE DISCRETION, EXTENDS OR WAIVES THE PERIOD
DURING WHICH 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.
________________________________________________________________________________
This Ballot may not be used for any purpose other than for casting votes to
accept or reject the Prepackaged Plan (as defined herein). All capitalized
terms used in the Ballot or Voting Instructions but not otherwise defined
therein shall have the meaning ascribed to them in the Prepackaged Plan of
Reorganization dated ______________, 1999 of Zenith Electronics Corporation (the
"Prepackaged Plan").
Item 1. Amount and Type of Claim.
The undersigned is the beneficial holder of a Class 4 Claim in the aggregate
outstanding amount of $__________.
Item 2. Certifications.
By signing this Ballot, the undersigned certifies:
(i) 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 some person or
entity which is a beneficial interest holder of the Claims or securities being
voted;
(ii) 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 the Disclosure Statement and Solicitation Materials and will
acknowledge that the Solicitation is being made pursuant to the terms and
conditions set forth therein;
<PAGE>
(iii) to the Bankruptcy Court and the Company that either (a) such person
or entity has not submitted any other Ballots for such Class of Claims 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) to 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;
(v) that no other Ballots with respect to the amount of the Claims
identified in Item 1 have been cast or, if any other Ballots have been cast with
respect to such Claims, such earlier Ballots are hereby revoked; and
(vi) 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 Claims
for purposes of voting on the Prepackaged Plan.
Item 3. Class 4 Vote.
The holder of the Class 4 Claim set forth in Item 1 votes (please check one):
[_] To Accept the Prepackaged Plan [_] To Reject the Prepackaged Plan
THE BOARD OF DIRECTORS OF ZENITH ELECTRONICS CORPORATION
RECOMMENDS THAT YOU ACCEPT THE PREPACKAGED PLAN
BY CHECKING THE "TO ACCEPT THE PREPACKAGED PLAN" BOX IN ITEM 3
Dated:_______________
Name of Voter:________________________________________
(Print or Type)
Social Security or Tax I.D. No._______________________
Signature_____________________________________________
By____________________________________________________
(If Appropriate)
Title:________________________________________________
(If Appropriate)
Street Address________________________________________
City, State and Zip Code______________________________
-2-
<PAGE>
PLEASE COMPLETE, SIGN AND DATE
THE BALLOT AND RETURN IT PROMPTLY
YOUR BALLOT MUST BE RECEIVED BY:
BALLOT TABULATION CENTER-ZENITH ELECTRONICS CORPORATION:
________________
________________
________________
Attn:________
BY 5:00 P.M., NEW YORK CITY TIME ON OR
BEFORE ________________, 1999, OR YOUR VOTE WILL NOT BE COUNTED
-3-
<PAGE>
VOTING INSTRUCTIONS
1. All capitalized terms used in the Ballot or Voting Instructions but not
otherwise defined therein shall have the meaning ascribed to them in the
Prepackaged Plan of Reorganization dated ___________, 1999 of Zenith Electronics
Corporation (the "Prepackaged Plan").
2. The Prepackaged Plan can be confirmed by the Bankruptcy Court, and therefore
made binding on you, if it is accepted by the holders of two-thirds in amount
and more than one-half in number of debt claims in each impaired debt class
voting on the Prepackaged Plan. Please review the Disclosure Statement for more
information.
3. To ensure that your vote is counted, you must (i) complete the Ballot, (ii)
indicate your decision either to accept or reject the Prepackaged Plan in the
boxes provided in Item 3 of the Ballot, and (iii) sign and return the Ballot to
the address set forth on the enclosed prepaid envelope. Your Ballot must be
received by Georgeson & Company, Inc. -________________________________ (the
"Solicitation Agent") by 5:00 p.m., New York City Time on or before
_______________, 1999 (the "Expiration Date"). If a Ballot is received after
the Expiration Date, it will not be counted. The method of delivery of Ballots
to be sent to the Solicitation Agent is at the election and risk of each holder
of a 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 Ballot should be sent to the Company, any
indenture trustee, or the Company's financial or legal advisors.
4. If multiple Ballots are received from an individual holder of Claims with
respect to the same Claims prior to the Expiration Date, the last Ballot timely
received will supersede and revoke any earlier received Ballot.
5. The Ballot is not a letter of transmittal and may not be used for any
purpose other than to vote to accept or reject the Prepackaged Plan and to
determine the alleged amount of a beneficial holder's claim. Accordingly, at
this time, creditors should not surrender certificates or instruments
representing or evidencing their Claims, and neither the Company nor the
Solicitation Agent will accept delivery of such certificates or instruments
surrendered together with a Ballot. The remittance of your notes or other
evidence of your claims for exchange pursuant to the Prepackaged Plan may only
be made by you and will not be accepted if certificates or instruments
representing your Claims (in proper form for transfer) are delivered together
with a letter of transmittal that will be furnished to you as provided under the
Prepackaged Plan or as notified following confirmation of the Prepackaged Plan
by the Bankruptcy Court.
6. This Ballot does not constitute, and shall not deemed to be, a proof of
claim or equity interest or an assertion or admission of a claim or equity
interest.
7. Please be sure to sign and date your Ballot. If you are completing the
Ballot on behalf of an entity, indicate your relationship with such entity and
the capacity in which you are signing. In addition, please provide your name
and mailing address if different from that set forth on the attached mailing
label or if no such mailing label is attached to the Ballot.
8. If you hold Claims in more than one class under the Prepackaged Plan, you
may receive more than one Ballot coded for each different Class. Each Ballot
votes only your claims indicated on that Ballot. Please complete and return each
Ballot you received.
9. The Ballot must be returned in sufficient time to allow it to be RECEIVED by
the Solicitation Agent by no later than 5:00 p.m., New York City Time, on or
before the Expiration Date. If you believe you have received the wrong Ballot,
please contact the Solicitation Agent or your broker or bank immediately.
-4-
<PAGE>
PLEASE MAIL YOUR BALLOT PROMPTLY!
--------------------------------
IF YOU HAVE ANY QUESTIONS REGARDING THIS BALLOT
OR THE VOTING PROCEDURES,
PLEASE CALL THE SOLICITATION AGENT AT _______________.
-5-
<PAGE>
Exhibit 99z
UNITED STATES BANKRUPTCY COURT
FOR THE [___________] DISTRICT OF [_____________]
In re: ) Chapter 11
)
ZENITH ELECTRONICS CORPORATION ) Case No. 99-___(___)
)
Debtor. )
BALLOT FOR ACCEPTING OR REJECTING THE PREPACKAGED
PLAN OF REORGANIZATION DATED _________________________, 1999 OF
ZENITH ELECTRONICS CORPORATION
Class 6 - Old Subordinated Debenture Claims
(Holders of 6-1/4% Convertible Subordinated Notes due 2011)
PLEASE READ AND FOLLOW THE ENCLOSED
VOTING INSTRUCTIONS CAREFULLY BEFORE COMPLETING THE BALLOT.
PLEASE CHECK THE APPROPRIATE BOX BELOW TO INDICATE
YOUR ACCEPTANCE OR REJECTION OF THE PREPACKAGED PLAN.
________________________________________________________________________________
THIS BALLOT IS ACCOMPANIED BY A RETURN ENVELOPE THAT IS ADDRESSED TO
GEORGESON & COMPANY, INC. (THE "SOLICITATION AGENT").
THIS BALLOT MUST BE RECEIVED BY THE SOLICITATION AGENT BY 5:00 P.M.,
NEW YORK CITY TIME, ___, 1999 (THE "EXPIRATION DATE"),
UNLESS THE COMPANY, IN ITS SOLE DISCRETION, EXTENDS OR WAIVES THE PERIOD
DURING WHICH 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.
________________________________________________________________________________
This Ballot may not be used for any purpose other than for casting votes to
accept or reject the Prepackaged Plan (as defined herein). All capitalized
terms used in the Ballot or Voting Instructions but not otherwise defined
therein shall have the meaning ascribed to them in the Prepackaged Plan of
Reorganization dated ______________, 1999 of Zenith Electronics Corporation (the
"Prepackaged Plan").
Item 1. Amount and Type of Claim.
The undersigned is the beneficial holder of a Class 6 Claim in the aggregate
outstanding amount of $__________.
Item 2. Description of Class 6 Claims.
Please provide the information required by this Item 2 in the following table
(use additional sheets of paper if necessary):
- --------------------------------------------------------------------------------
Names of Holder* Account Number** Face Amount of Debentures Held
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total Amount of Claims $__________________________
(must be same as Item 1)
<PAGE>
* Insert your name if the Class 6 Claims are held by you in record name, or,
if held by a broker or bank (as agent thereof), insert the name of the
broker or bank (or agent thereof) through which you own the Class 6 Claims.
** Please indicate the account number of the broker or bank where the account
is held.
Item 3. Certifications.
By signing this Ballot, the undersigned certifies:
(i) 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 some person or
entity which is a beneficial interest holder of the Claims or securities being
voted;
(ii) 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 the Disclosure Statement and Solicitation Materials and will
acknowledge that the Solicitation is being made pursuant to the terms and
conditions set forth therein;
(iii) to the Bankruptcy Court and the Company that either (a) such person
or entity has not submitted any other Ballots for such Class of Claims 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) to 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;
(v) that no other Ballots with respect to the amount of the Claims
identified in Item 1 have been cast or, if any other Ballots have been cast with
respect to such Claims, such earlier Ballots are hereby revoked; and
(vi) 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 Claims
for purposes of voting on the Prepackaged Plan.
Item 4. Class 6 Vote.
The holder of the Class 6 Claim set forth in Item 1 votes (please check one):
[_] To Accept the Prepackaged Plan [_] To Reject the Prepackaged Plan
THE BOARD OF DIRECTORS OF ZENITH ELECTRONICS CORPORATION
RECOMMENDS THAT YOU ACCEPT THE PREPACKAGED PLAN
BY CHECKING THE "TO ACCEPT THE PREPACKAGED PLAN" BOX IN ITEM 4
Item 5.
The holder of Class 6 Claims set forth in Item 1 elects:
[_] Check this box if you wish to preserve your rights, if any, against
the Investor Releasees, the D&O Releasees and the Prepetition
Committee and do not consent to the permanent injunction precluding
claims by you against the Investor Releasees, the D&O Releasees and
the Prepetition Committee as described on pages [_____] of the
Disclosure Statement and in Clause C of Article X of the Prepackaged
Plan.
IT IS A CONDITION TO CONSUMMATION OF THE PREPACKAGED PLAN THAT NOT
MORE THAN 5% OF THE HOLDERS OF CLASS 6 CLAIMS CHECK THE BOX IN ITEM 5
OF THE BALLOT. IF MORE THAN 5% OF THE HOLDERS OF CLASS 6 CLAIMS CHECK
THE BOX IN ITEM 5, YOU MAY NOT RECEIVE THE DISTRIBUTIONS PROVIDED IN
THE PREPACKAGED PLAN.
If you sign and return this Ballot, but do not make the above election by
marking the box in this Item 5, on and as of the Effective Date, you will be
deemed to have consented to the permanent injunction as to those Persons
described in Clause C of Article X of the Prepackaged Plan. Your decision with
respect to Item 5 is independent of whether you vote on the Prepackaged Plan
and, if you vote on the Prepackaged Plan, of whether you vote to accept or
reject the Plan.
-2-
<PAGE>
Dated:_______________
Name of Voter:______________________________________
(Print or Type)
Social Security or Tax I.D. No._____________________
Signature___________________________________________
By__________________________________________________
(If Appropriate)
Title:______________________________________________
(If Appropriate)
Street Address______________________________________
City, State and Zip Code____________________________
PLEASE COMPLETE, SIGN AND DATE
THE BALLOT AND RETURN IT PROMPTLY
YOUR BALLOT MUST BE RECEIVED BY:
BALLOT TABULATION CENTER -ZENITH ELECTRONICS CORPORATION:
_________________
_________________
_________________
Attn:_________
BY 5:00 P.M., NEW YORK CITY TIME
ON OR BEFORE _______________, 1999, OR YOUR VOTE WILL NOT BE COUNTED
-3-
<PAGE>
VOTING INSTRUCTIONS
1. All capitalized terms used in the Ballot or Voting Instructions but not
otherwise defined therein shall have the meaning ascribed to them in the
Prepackaged Plan of Reorganization dated ___________, 1999 of Zenith Electronics
Corporation (the "Prepackaged Plan").
2. The Prepackaged Plan can be confirmed by the Bankruptcy Court, and therefore
made binding on you, if it is accepted by the holders of two-thirds in amount
and more than one-half in number of debt claims in each impaired debt class
voting on the Prepackaged Plan. Please review the Disclosure Statement for more
information.
3. To ensure that your vote is counted, you must (i) complete the Ballot, (ii)
indicate your decision either to accept or reject the Prepackaged Plan in the
boxes provided in Item 4 of the Ballot, (iii) indicate your decision as to
whether you do not consent to the permanent injunction described in Clause C of
Article X of the Prepackaged Plan and (iv) sign and return the Ballot to the
address set forth on the enclosed prepaid envelope. Your Ballot must be
received by Georgeson & Company, Inc. -________________________________ (the
"Solicitation Agent") by 5:00 p.m., New York City Time on or before
_______________, 1999 (the "Expiration Date"). If a Ballot is received after
the Expiration Date, it will not be counted. The method of delivery of Ballots
to be sent to the Solicitation Agent is at the election and risk of each holder
of a 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 Ballot should be sent to the Company, any
indenture trustee, or the Company's financial or legal advisors.
4. If multiple Ballots are received from an individual holder of Claims with
respect to the same Claims prior to the Expiration Date, the last Ballot timely
received will supersede and revoke any earlier received Ballot.
5. The Ballot is not a letter of transmittal and may not be used for any
purpose other than to vote to accept or reject the Prepackaged Plan and to
determine the alleged amount of a beneficial holder's claim. Accordingly, at
this time, creditors should not surrender certificates or instruments
representing or evidencing their Claims, and neither the Company nor the
Solicitation Agent will accept delivery of such certificates or instruments
surrendered together with a Ballot. The remittance of your notes or other
evidence of your claims for exchange pursuant to the Prepackaged Plan may only
be made by you and will not be accepted if certificates or instruments
representing your Claims (in proper form for transfer) are delivered together
with a letter of transmittal that will be furnished to you as provided under the
Prepackaged Plan or as notified following confirmation of the Prepackaged Plan
by the Bankruptcy Court.
6. This Ballot does not constitute, and shall not deemed to be, a proof of
claim or equity interest or an assertion or admission of a claim or equity
interest.
7. Please be sure to sign and date your Ballot. If you are completing the
Ballot on behalf of an entity, indicate your relationship with such entity and
the capacity in which you are signing. In addition, please provide your name
and mailing address if different from that set forth on the attached mailing
label or if no such mailing label is attached to the Ballot.
8. If you hold Claims in more than one class under the Prepackaged Plan, you
may receive more than one Ballot coded for each different Class. Each Ballot
votes only your claims indicated on that Ballot. Please complete and return each
Ballot you received.
9. The Ballot must be returned in sufficient time to allow it to be RECEIVED by
the Solicitation Agent by no later than 5:00 p.m., New York City Time, on or
before the Expiration Date. If you believe you have received the wrong Ballot,
please contact the Solicitation Agent or your broker or bank immediately.
-4-
<PAGE>
PLEASE MAIL YOUR BALLOT PROMPTLY!
--------------------------------
IF YOU HAVE ANY QUESTIONS REGARDING THIS BALLOT
OR THE VOTING PROCEDURES,
PLEASE CALL THE SOLICITATION AGENT AT
-5-
<PAGE>
Exhibit 99aa
UNITED STATES BANKRUPTCY COURT
FOR THE [___________] DISTRICT OF [_____________]
In re: ) Chapter 11
)
ZENITH ELECTRONICS CORPORATION ) Case No. 99-___(___)
)
Debtor. )
BALLOT FOR ACCEPTING OR REJECTING THE PREPACKAGED
PLAN OF REORGANIZATION DATED _________________________, 1999 OF
ZENITH ELECTRONICS CORPORATION
Class 7 - LGE Claims
PLEASE READ AND FOLLOW THE ENCLOSED
VOTING INSTRUCTIONS CAREFULLY BEFORE COMPLETING THE BALLOT.
PLEASE CHECK THE APPROPRIATE BOX BELOW TO INDICATE
YOUR ACCEPTANCE OR REJECTION OF THE PREPACKAGED PLAN.
________________________________________________________________________________
THIS BALLOT IS ACCOMPANIED BY A RETURN ENVELOPE THAT IS ADDRESSED
TO GEORGESON & COMPANY, INC. (THE "SOLICITATION AGENT").
THIS BALLOT MUST BE RECEIVED BY THE SOLICITATION AGENT BY 5:00 P.M.,
NEW YORK CITY TIME, ___, 1999 (THE "EXPIRATION DATE"),
UNLESS THE COMPANY, IN ITS SOLE DISCRETION, EXTENDS OR WAIVES THE PERIOD
DURING WHICH 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.
________________________________________________________________________________
This Ballot may not be used for any purpose other than for casting votes to
accept or reject the Prepackaged Plan (as defined herein). All capitalized
terms used in the Ballot or Voting Instructions but not otherwise defined
therein shall have the meaning ascribed to them in the Prepackaged Plan of
Reorganization dated ______________, 1999 of Zenith Electronics Corporation (the
"Prepackaged Plan").
Item 1. Amount and Type of Claim.
The undersigned is the beneficial holder of a Class 7 Claim in the aggregate
outstanding amount of $__________.
Item 2. Certifications.
By signing this Ballot, the undersigned certifies:
(i) 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 some person or
entity which is a beneficial interest holder of the Claims or securities being
voted;
(ii) 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 the Disclosure Statement and Solicitation Materials and will
acknowledge that the Solicitation is being made pursuant to the terms and
conditions set forth therein;
<PAGE>
(iii) to the Bankruptcy Court and the Company that either (a) such person
or entity has not submitted any other Ballots for such Class of Claims 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) to 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;
(v) that no other Ballots with respect to the amount of the Claims
identified in Item 1 have been cast or, if any other Ballots have been cast with
respect to such Claims, such earlier Ballots are hereby revoked; and
(vi) 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 Claims
for purposes of voting on the Prepackaged Plan.
Item 3. Class 7 Vote.
The holder of the Class 7 Claim set forth in Item 1 votes (please check one):
[_] To Accept the Prepackaged Plan [_] To Reject the Prepackaged Plan
THE BOARD OF DIRECTORS OF ZENITH ELECTRONICS CORPORATION
RECOMMENDS THAT YOU ACCEPT THE PREPACKAGED PLAN
BY CHECKING THE "TO ACCEPT THE PREPACKAGED PLAN" BOX IN ITEM 3
Dated:_______________
Name of Voter:_________________________________
(Print or Type)
Social Security or Tax I.D. No.________________
Signature______________________________________
By_____________________________________________
(If Appropriate)
Title:_________________________________________
(If Appropriate)
Street Address_________________________________
City, State and Zip Code_______________________
-2-
<PAGE>
PLEASE COMPLETE, SIGN AND DATE
THE BALLOT AND RETURN IT PROMPTLY
YOUR BALLOT MUST BE RECEIVED BY:
BALLOT TABULATION CENTER -ZENITH ELECTRONICS CORPORATION:
_________________
_________________
_________________
Attn:________
BY 5:00 P.M., NEW YORK CITY TIME ON OR
BEFORE ________________, 1999, OR YOUR VOTE WILL NOT BE COUNTED
-3-
<PAGE>
VOTING INSTRUCTIONS
1. All capitalized terms used in the Ballot or Voting Instructions but not
otherwise defined therein shall have the meaning ascribed to them in the
Prepackaged Plan of Reorganization dated ___________, 1999 of Zenith Electronics
Corporation (the "Prepackaged Plan").
2. The Prepackaged Plan can be confirmed by the Bankruptcy Court, and therefore
made binding on you, if it is accepted by the holders of two-thirds in amount
and more than one-half in number of debt claims in each impaired debt class
voting on the Prepackaged Plan. Please review the Disclosure Statement for more
information.
3. To ensure that your vote is counted, you must (i) complete the Ballot, (ii)
indicate your decision either to accept or reject the Prepackaged Plan in the
boxes provided in Item 3 of the Ballot, and (iii) sign and return the Ballot to
the address set forth on the enclosed prepaid envelope. Your Ballot must be
received by Georgeson & Company, Inc. -________________________________ (the
"Solicitation Agent") by 5:00 p.m., New York City Time on or before
_______________, 1999 (the "Expiration Date"). If a Ballot is received after
the Expiration Date, it will not be counted. The method of delivery of Ballots
to be sent to the Solicitation Agent is at the election and risk of each holder
of a 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 Ballot should be sent to the Company, any
indenture trustee, or the Company's financial or legal advisors.
4. If multiple Ballots are received from an individual holder of Claims with
respect to the same Claims prior to the Expiration Date, the last Ballot timely
received will supersede and revoke any earlier received Ballot.
5. The Ballot is not a letter of transmittal and may not be used for any
purpose other than to vote to accept or reject the Prepackaged Plan and to
determine the alleged amount of a beneficial holder's claim. Accordingly, at
this time, creditors should not surrender certificates or instruments
representing or evidencing their Claims, and neither the Company nor the
Solicitation Agent will accept delivery of such certificates or instruments
surrendered together with a Ballot. The remittance of your notes or other
evidence of your claims for exchange pursuant to the Prepackaged Plan may only
be made by you and will not be accepted if certificates or instruments
representing your Claims (in proper form for transfer) are delivered together
with a letter of transmittal that will be furnished to you as provided under the
Prepackaged Plan or as notified following confirmation of the Prepackaged Plan
by the Bankruptcy Court.
6. This Ballot does not constitute, and shall not deemed to be, a proof of
claim or equity interest or an assertion or admission of a claim or equity
interest.
7. Please be sure to sign and date your Ballot. If you are completing the
Ballot on behalf of an entity, indicate your relationship with such entity and
the capacity in which you are signing. In addition, please provide your name
and mailing address if different from that set forth on the attached mailing
label or if no such mailing label is attached to the Ballot.
8. If you hold Claims in more than one class under the Prepackaged Plan, you
may receive more than one Ballot coded for each different Class. Each Ballot
votes only your claims indicated on that Ballot. Please complete and return each
Ballot you received.
9. The Ballot must be returned in sufficient time to allow it to be RECEIVED by
the Solicitation Agent by no later than 5:00 p.m., New York City Time, on or
before the Expiration Date. If you believe you have received the wrong Ballot,
please contact the Solicitation Agent or your broker or bank immediately.
-4-
<PAGE>
PLEASE MAIL YOUR BALLOT PROMPTLY!
--------------------------------
IF YOU HAVE ANY QUESTIONS REGARDING THIS BALLOT
OR THE VOTING PROCEDURES,
PLEASE CALL THE SOLICITATION AGENT AT __________.
-5-
<PAGE>
Exhibit 99ab
UNITED STATES BANKRUPTCY COURT
FOR THE [___________] DISTRICT OF [_____________]
In re: ) Chapter 11
)
ZENITH ELECTRONICS CORPORATION ) Case No. 99-___(___)
)
Debtor. )
MASTER BALLOT FOR ACCEPTING OR REJECTING THE
PREPACKAGED PLAN OF REORGANIZATION DATED
_________________________, 1999 OF ZENITH ELECTRONICS CORPORATION
Class 6 - Old Subordinated Debenture Claims
(Holders of 6-1/4% Convertible Subordinated Notes due 2011)
This Master Ballot may not be used for any purpose other than for casting votes
to accept or reject the Prepackaged Plan (as defined herein). All capitalized
terms used in the Master Ballot or Voting Instructions but not otherwise defined
therein shall have the meaning ascribed to them in the Prepackaged Plan of
Reorganization dated ______________, 1999 of Zenith Electronics Corporation (the
"Prepackaged Plan").
This Master Ballot is being sent to brokers, proxy intermediaries, and other
nominees of Beneficial Holders (as defined herein) and is to be used by brokers,
proxy intermediaries or other nominees for casting votes to accept or reject the
Prepackaged Plan on behalf of and in accordance with the Ballots cast by the
Beneficial Holders holding Class 6 Claims through such brokers, proxy
intermediaries, or other nominees.
The Prepackaged Plan referred to in this Master Ballot can be confirmed by the
Bankruptcy Court and thereby made binding on all holders of Claims if it is
accepted by the holders of two-thirds in amount and more than one-half in number
of Claims in each impaired debt class voting on the Prepackaged Plan. To have
the votes of your Beneficial Holders count, you must complete and return this
Master Ballot.
PLEASE READ AND FOLLOW THE ENCLOSED
VOTING INSTRUCTIONS CAREFULLY BEFORE COMPLETING THE BALLOT.
________________________________________________________________________________
THIS BALLOT IS ACCOMPANIED BY A RETURN ENVELOPE THAT IS ADDRESSED TO
GEORGESON & COMPANY, INC. (THE "SOLICITATION AGENT").
THIS BALLOT MUST BE RECEIVED BY THE SOLICITATION AGENT BY 5:00 P.M.,
NEW YORK CITY TIME, , 1999 (THE "EXPIRATION DATE"),
UNLESS THE COMPANY, IN ITS SOLE DISCRETION, EXTENDS OR WAIVES THE PERIOD
DURING WHICH 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.
________________________________________________________________________________
Item 1. Amount and Type of Claim.
The undersigned is the record holder of _________ Class 6 Claims in the
aggregate outstanding amount of $__________, for which voting instructions have
been received from holders of the beneficial interests of such Claims (the
"Beneficial Holders") as listed in Item 3 below.
<PAGE>
Item 2. Class 6 Vote.
As instructed by the Beneficial Holders of the aggregate number of Class 6
Claims as set forth in Item 1 above, the undersigned transmits the following
votes of such Beneficial Holders in respect of their Class 6 Claims.
To Accept (vote FOR) the Prepackaged Plan:
- ---------------------------------- ---------------------------------------
Aggregate number of Class 6 Claims Aggregate Amount of Old
Subordinated Debentures Claims
To Reject (vote AGAINST) the Prepackaged Plan:
- ---------------------------------- ---------------------------------------
Aggregate number of Class 6 Claims Aggregate Amount of Old
Subordinated Debentures Claims
Item 3. Class 6 Vote - Number of Holders of Class 6 Claims
The following Beneficial Holders of Class 6 Claims, as identified by their
respective customer account numbers or the respective sequence numbers set forth
below, have delivered to the undersigned Ballots casting votes (indicate the
aggregate amount for each respective account under the appropriate column,
please use additional sheets of paper if necessary):
- -------------------------------------------------------------------------------
Insert Amount of Claims Voted
- -------------------------------------------------------------------------------
Customer Account No. Accept the Prepackaged Plan Reject the Prepackaged Plan
and/or Customer Name (VOTE FOR) (VOTE AGAINST)
- -------------------------------------------------------------------------------
1.
- -------------------------------------------------------------------------------
2.
- -------------------------------------------------------------------------------
3.
- -------------------------------------------------------------------------------
4.
- -------------------------------------------------------------------------------
5.
- -------------------------------------------------------------------------------
6.
- -------------------------------------------------------------------------------
7.
- -------------------------------------------------------------------------------
Item 4. Certification
By signing this Ballot, the undersigned certifies:
(i) that (a) it has received a copy of the Disclosure Statement, Ballot
and other Solicitation Materials and has delivered the same to the Beneficial
Holders listed thereon, (b) it has received a completed and signed Ballot from
each such Beneficial Holder, (c) it is the registered holder of the securities
being voted, (d) it has been authorized by each such Beneficial Holder to vote
on the Prepackaged Plan, and (e) the Beneficial Holder has certified to such
nominee that such Beneficial Holder has not submitted any other Ballots for such
Class of Claims held in other accounts or other registered names, or, if it has
submitted another Ballot held in other accounts or registered names, that the
Beneficial Holder has certified to such nominee that such Beneficial 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) that it be treated as the Beneficial Holder of the Claims for purposes
of voting on the Prepackaged Plan, unless otherwise authorized by the Bankruptcy
Court;
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<PAGE>
(iii) that it has properly disclosed (a) the number of such Beneficial
Holders, (b) the respective amounts and issues of the Old Subordinated
Debentures owned, as the case may be, by each such Beneficial Holder, (c) each
Beneficial Holder's respective vote concerning the Prepackaged Plan, (d) the
customer account or other identification number for each such Beneficial Holder;
and
(iv) that it will maintain Ballots returned by Beneficial Holders (whether
properly completed or defective) for disclosure to the Bankruptcy Court or
Company if so ordered.
Item 5. Preservation of Rights
The following beneficial holders of Class 6 Claims have elected, by checking the
box in Item 5 of their Ballot, to preserve their rights against the Investor
Releasees the D&O Releasees and the Prepetition Committee and to not consent to
the permanent injunction precluding claims by them against the Investor
Releasees, the D&O Releasees and the Prepetition Committee as described in
Clause C of Article X of the Prepackaged Plan.
- -------------------------------------------------------------------------------
Insert Amount of Claims Voted
- -------------------------------------------------------------------------------
Customer Account No. (Elected to Preserve Rights)
and/or Customer Name
- -------------------------------------------------------------------------------
1.
- -------------------------------------------------------------------------------
2.
- -------------------------------------------------------------------------------
3.
- -------------------------------------------------------------------------------
4.
- -------------------------------------------------------------------------------
5.
- -------------------------------------------------------------------------------
6.
- -------------------------------------------------------------------------------
7.
- -------------------------------------------------------------------------------
IT IS A CONDITION TO CONSUMMATION OF THE PREPACKAGED PLAN THAT NOT MORE THAN 5%
OF THE HOLDERS OF CLASS 6 CLAIMS CHECK THE BOX IN ITEM 5 OF THE BALLOT. IF MORE
THAN 5% OF THE HOLDERS OF CLASS 6 CLAIMS CHECK THE BOX IN ITEM 5, YOU MAY NOT
RECEIVE THE DISTRIBUTIONS PROVIDED IN THE PREPACKAGED PLAN.
Dated:_______________
Name of Voter:____________________________________
(Print or Type)
Social Security or Tax I.D. No.___________________
Signature_________________________________________
By________________________________________________
(If Appropriate)
Title:____________________________________________
(If Appropriate)
Street Address____________________________________
City, State and Zip Code__________________________
THIS MASTER BALLOT MUST BE RECEIVED BY:
BALLOT TABULATION CENTER-ZENITH ELECTRONICS CORPORATION GROUP
c/o _______________
_______________
_______________
Attn:_______________
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<PAGE>
BY 5:00 P.M. NEW YORK CITY TIME
ON OR BEFORE ______________, 1999, OR THESE VOTES WILL NOT BE COUNTED
-4-
<PAGE>
VOTING INSTRUCTIONS
The Company is soliciting the votes of holders of Class 6 Claims with
respect to the Prepackaged Plan of Reorganization dated _____________, 1999 of
Zenith Electronics Corporation (the "Prepackaged Plan") referred to in the
Disclosure Statement (a copy of which is attached hereto). All capitalized terms
used in the Master Ballot or in these instructions but not otherwise defined
herein shall have the meaning ascribed to such terms in the Prepackaged Plan.
The Prepackaged Plan can be confirmed by the Bankruptcy Court, and
therefore made binding on all holders, if it is accepted by the holders of two-
thirds in amount and more than one-half in number of debt claims in each
impaired debt class voting on the Prepackaged Plan. To have the Ballots of your
Beneficial Holders count, you must complete and return this Master Ballot.
You should deliver the Ballot and other documents relating to the
Prepackaged Plan, including the Disclosure Statement (collectively, the
"Solicitation Materials"), to each Beneficial Holder of Class 6 Claims and take
any action required to enable each such Beneficial Holder to vote the Class 6
Claims held by such Beneficial Holder. With regard to any Ballots returned to
you, to have the vote of your Beneficial Holder count, you must not later than
5:00 p.m. New York City Time on _____________, 1999, subject to extension in the
sole discretion of the Company (the "Expiration Date"), (a) retain such Ballots
in your files and transfer the requested information from each such Ballot onto
the attached Master Ballot, (b) execute the Master Ballot and (c) deliver such
Master Ballot to Georgeson & Company, Inc. __________________________ (the
"Solicitation Agent") Attention: ____________. Please keep any records of the
Ballots received from Beneficial Holders until ___________, 2000 (or such other
date as is set by subsequent Bankruptcy Court order). You may be ordered to
produce the Ballots to the Company or Bankruptcy Court.
The Master Ballot is not a letter of transmittal and may not be used for
any purpose other than to vote to accept or reject the Prepackaged Plan, and to
determine the alleged amount of a Beneficial Holder's Claim. Accordingly,
Holders of Class 6 Claims should not surrender instruments or certificates
representing or evidencing their Class 6 Claims, and neither the Company nor the
Solicitation Agent will accept delivery of such instruments or certificates
surrendered together with a Ballot. The remittance of your instruments or other
evidence of your claims for exchange pursuant to the Prepackaged Plan may only
be made by you, and will only be accepted if instruments or certificates
representing your Class 6 Claims (in proper form for transfer) are delivered
together with a letter of transmittal that will be furnished to you as provided
under the Prepackaged Plan or as notified following confirmation of the
Prepackaged Plan by the Bankruptcy Court.
To properly complete the Master Ballot take the following steps:
(a) Provide appropriate information for each of the items on the
Master Ballot (Please note that Item 3 requests information for each
individual Beneficial Holder for whom you hold Class 6 Claims in your
name. To identify such Beneficial Holders, please use the customer
name and account number assigned by you to each such Beneficial
Holder).
(b) Identify (i) the vote to accept or reject the Prepackaged
Plan and (ii) vote not to consent to Clause C of Article X of the
Prepackaged Plan, in Items 2 and 5 respectively for the Class 6 Claims
held by you as the registered holder on behalf of the Beneficial
Holders.
(c) Sign and date your Master Ballot.
(d) If you are completing this Master Ballot on behalf of another
entity, state your title with such entity.
(e) Provide your name and mailing address if different from the
preprinted address on the Master Ballot or if no preprinted address
appears on the Master Ballot.
(f) Deliver the Master Ballot to the Solicitation Agent.
-5-
<PAGE>
If you are both the registered holder and Beneficial Holder of any of
the Class 6 Claims and you wish to vote such Class 6 Claims, you may
return either a Ballot or a Master Ballot.
The method of delivery of a Master Ballot to the Solicitation Agent is at
the election and risk of each entity. Except as otherwise provided herein, such
delivery will be deemed made only when the original executed Master Ballot is
actually received by the Solicitation Agent. Instead of effecting delivery by
mail, it is recommended, through not required, that such entities use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. Delivery of a Master Ballot by facsimile, e-
mail or any other electronic means will not be accepted. No Master Ballot should
be sent to the Company, any indenture trustee, or the Company's financial or
legal advisors.
No fees or commissions or other remuneration will be payable to any broker,
dealer or other person for soliciting Ballots accepting the Prepackaged Plan.
IF YOU HAVE ANY QUESTIONS REGARDING THIS BALLOT
OR THE VOTING PROCEDURES,
PLEASE CALL THE SOLICITATION AGENT AT _____________.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL RENDER YOU OR ANY
OTHER PERSON THE AGENT OF THE COMPANY OR THE SOLICITATION AGENT, OR AUTHORIZE
YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF
ANY OF THEM WITH RESPECT TO THE PREPACKAGED PLAN, EXCEPT FOR THE STATEMENTS
CONTAINED IN THE DOCUMENTS ENCLOSED HEREWITH.
-6-
