<PAGE>
As filed with the Securities and Exchange Commission on June 21, 1999.
Registration No. 333-61057
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 5 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. [_]
----------------
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 JUNE 21, 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% Senior 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 is implementing
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 completion 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 212.
-----------
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 and restated, 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
$135.1 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 April 3,
1999, approximately $7.7 million of interest had accrued on the LGE Leveraged
Lease Claims and approximately $5.1 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 55.3% of the Old Common Stock including vested but
unexercised options) held by LGE, 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) 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 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 THE COMPANY WHO ARE NOT OFFICERS OR DIRECTORS OF LGE OR
CURRENT OFFICERS OF THE COMPANY.
iii
<PAGE>
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 for the periods
prior to May 1998 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 complete 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........................................................... 49
Events Leading to the Restructuring..................................... 49
Debenture Committee..................................................... 60
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............................................... 64
Recommendation of the Board............................................. 65
LGE's Position Regarding the Financial Restructuring.................... 68
Liquidation and Going Concern Analyses.................................. 69
The Restructuring Agreement............................................. 78
Amendments to Certificate of Incorporation and By-Laws.................. 83
Interests of Certain Persons in the Financial Restructuring; Conflicts
of Interest............................................................ 83
Liquidity Pending Consummation of the Restructuring..................... 87
Dissenters' Rights...................................................... 87
THE PREPACKAGED PLAN...................................................... 88
General................................................................. 88
Classification of Claims and Equity Interests under the Prepackaged
Plan................................................................... 89
Summary of Treatment Under the Prepackaged Plan......................... 91
Summary of Other Provisions of the Prepackaged Plan..................... 94
Conditions to Confirmation/Consummation................................. 101
Effect of Consummation of the Prepackaged Plan.......................... 101
</TABLE>
vii
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Modification of the Prepackaged Plan.................................... 102
Intended Actions During the Prepackaged Chapter 11 Case................. 102
Confirmation Standards.................................................. 104
Confirmation of the Prepackaged Plan Without Acceptance by All Classes
of Impaired Claims..................................................... 105
Certain Consequences of Non-Acceptance of the Prepackaged Plan.......... 106
OPERATIONAL RESTRUCTURING................................................. 107
MARKET PRICES OF THE OLD COMMON STOCK..................................... 110
MARKET PRICES OF THE OLD SUBORDINATED DEBENTURES.......................... 111
HISTORICAL AND PRO FORMA CAPITALIZATION................................... 112
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA........................... 113
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.............................. 114
BUSINESS PLAN PROJECTIONS................................................. 120
Assumptions Underlying the Business Plan Projections.................... 129
History of the Business Plan Projections................................ 134
ACCOUNTING TREATMENT...................................................... 139
LIQUIDATION ANALYSIS...................................................... 139
DESCRIPTION OF DEBT AND CREDIT ARRANGEMENTS............................... 144
Short-Term Debt......................................................... 144
Long-Term Debt.......................................................... 146
The DIP Facility and the Citicorp Exit Facility......................... 147
DESCRIPTION OF NEW DEBENTURES............................................. 150
SUMMARY OF LGE NEW RESTRUCTURED SENIOR NOTE............................... 153
SUMMARY OF LGE NEW CREDIT FACILITY........................................ 154
SOLICITATION; VOTING PROCEDURES........................................... 156
General................................................................. 156
Voting Record Date...................................................... 156
Expiration Date; Extensions; Amendments................................. 156
Voting Procedures and Other Requirements................................ 157
Agreements Upon Furnishing Ballots...................................... 161
Method of Delivery of Ballots........................................... 161
Withdrawal of Ballots; Revocation....................................... 161
Solicitation Agent...................................................... 161
Notice Agent............................................................ 162
Waivers of Defects, Irregularities, Etc................................. 162
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS............................................................ 163
Results of Operations: First Quarter of 1999 Compared to First Quarter
1998................................................................... 163
Results of Operations: 1996 to 1998..................................... 164
Cash Flows.............................................................. 169
Financial Condition..................................................... 171
Readiness for the Year 2000............................................. 174
BUSINESS.................................................................. 176
General................................................................. 176
Raw Materials........................................................... 176
</TABLE>
viii
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<TABLE>
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Patents................................................................ 176
Seasonal Variations in Business........................................ 177
Major Customers........................................................ 177
Competitive Conditions................................................. 177
Research and Development............................................... 177
Environmental Matters.................................................. 177
Employees.............................................................. 177
Financial Information about Foreign and Domestic Operations and Export
Sales................................................................. 178
Properties of the Company.............................................. 178
Subsidiaries........................................................... 179
Legal Proceedings...................................................... 179
MANAGEMENT............................................................... 183
Current Directors of the Company....................................... 183
Board and Committee Meetings and Directors' Compensation............... 185
Current Executive Officers of the Company.............................. 187
Executive Compensation and Other Information........................... 191
Options/SAR Grants in 1997............................................. 192
Aggregated Option/SAR Exercises in 1997 and Year-End Option/SAR
Values................................................................ 192
SECURITY OWNERSHIP....................................................... 193
Security Ownership of Certain Beneficial Owners........................ 193
DESCRIPTION OF CAPITAL STOCK............................................. 194
Old Common Stock and Old Preferred Stock............................... 194
New Common Stock....................................................... 194
Delaware Anti-Takeover Law............................................. 194
CERTAIN TRANSACTIONS..................................................... 195
APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS TO RESALES OF NEW
SECURITIES.............................................................. 200
Transfers of New Debentures............................................ 200
Certain Transactions by Stockbrokers................................... 201
Issuance of New Common Stock........................................... 201
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS........................... 201
Consequences to Holders of the Old Subordinated Debentures............. 201
Consequences to Holders of Other Claims................................ 204
Consequences to Holders of Equity Interests in the Company............. 205
Consequences to LGE.................................................... 205
Consequences to the Company............................................ 205
Limitations to the Tax Opinion......................................... 207
ESTIMATED FEES AND EXPENSES.............................................. 210
Advisors............................................................... 210
LEGAL MATTERS............................................................ 211
EXPERTS.................................................................. 211
INDEX OF CERTAIN DEFINED TERMS........................................... 212
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
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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 May 25, 1999, the
Company sold assets to unrelated third parties following arms'-length
negotiations for cash and purchase credits totaling $71 million pursuant to the
Operational Restructuring. Such assets had appraised values with a range from
$60.3 million to $73.5 million. The Company believes that the prices obtained
were fair. Based on appraisals received by the Company and the results of its
sale efforts to date, the Company estimates that it will receive approximately
$36 million to $42 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 $102.0 million The first $50 million will be LGE
obligations under Tranche B Claims with all excess
unsecured demand note over $50 million classified as LGE
financing transactions Tranche A Claims.
with Bank of America,
First National Bank of
Chicago--NBD, Societe
Generale, Seoul Branch and
Credit Agricole Indosuez,
Seoul Branch (the
"Unsecured Bank Loans").
LGE has made payments
under demands against
guarantees on all $102
million of the Unsecured
Bank Loans. 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 2%.
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 through
April 30, 1999 ($1.4
million) less the amount
projected to be received
by LGE from the sale of
other Leveraged Lease
assets prior to July 31,
1999 ($12.3 million).
Interest accrues on these
claims at a rate per annum
equal to LIBOR +6.5%. 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 April 3,
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 These Claims consist of the Claims for costs and
(The Company is not expenses of administration under section 503(b),
currently able to 507(b) or 1114(e)(2) of the Bankruptcy Code,
estimate the number of including: (a) the actual and necessary costs and
holders or amount of expenses incurred after the Petition Date of
claims in this Class) 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>
<TABLE>
<CAPTION>
Class/Type of
Claim/Estimated
Amount
as of July 31,
1999 Description and Treatment of Claims
- --------------- -----------------------------------
<S> <C>
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
(Impaired, entitled to relating to the Company's $125 million senior
vote) secured credit facility (the "Amended Citibank
(This Class has 9 holders Credit Facility"). On or prior to the Effective
and $73.2 million of Date, each holder of a Citibank Secured Claim must
Claims) file and serve a written election designating
whether or not such holder will be a lender under
the Citicorp Exit Facility. If such holder elects
to be a lender under the Citicorp Exit Facility,
the Claim of such holder shall be treated as
provided in the Commitment. If such holder elects
not to be a lender under the Citicorp Exit
Facility, on the Effective Date, unless such holder
and the Company agree to a different treatment, the
Claim of such holder (i) will be paid in full in
cash by New Zenith or (ii) will otherwise be
treated in any manner so that such Claim shall
otherwise be unimpaired within the meaning of
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.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Class/Type of
Claim/Estimated
Amount
as of July 31,
1999 Description and Treatment of Claims
- --------------- -----------------------------------
<C> <S>
Class 4--General This Class of Claims consists of all unsecured
Unsecured Claims Claims against the Company that are not Old
(Unimpaired, not entitled Subordinated Debenture Claims or LGE Tranche A
to vote) Claims or LGE Tranche B Claims (the "General
(The Company estimates Unsecured Claims"). This Class includes, but is not
this Class has limited to, the interest payable to LGE on the LGE
approximately 900 trade Reimbursement Claims and the LGE Leveraged Lease
creditors, 60 carrier Claims. Unless the holder of such Claim and the
claimants, 70,000 service Company agree to a different treatment, each holder
contract creditors, 200 of an allowed General Unsecured Claim shall receive
holders of unknown claims one of the following alternative treatments, at the
and an undetermined election of the Company: (a) to the extent then due
number of warranty and and owing on the Effective Date, such Claim will be
other claimants, paid in full in cash by New Zenith; (b) to the
aggregating approximately extent not due and owing on the Effective Date,
$161 million of Claims) 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.
Class 5--Old Subordinated This Class of Claims consists of all Claims arising
Debenture Claims from or relating to the Old Subordinated Debentures
(Impaired, entitled to (the "Old Subordinated Debenture Claims"). Members
vote) 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,
representing $483.09 in principal amount of New
Debentures for each $1,000 in principal amount of
Old Subordinated Debentues it holds. 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 shall be made on the Effective Date
or as soon thereafter as is practical. 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.
The LGE Tranche A Claims consist of the following
Class 6--LGE Claims Claims held by LGE (i) the LGE Leveraged Lease
(Impaired, entitled to Claims, (ii) the LGE Technical Services Claims and
vote) (iii) that portion of the LGE Reimbursement
LGE Tranche A Claims:
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Class/Type of
Claim/Estimated
Amount
as of July 31,
1999 Description and Treatment of Claims
- --------------- -----------------------------------
<C> <S>
(This Class has 1 Claims and the LGE Demand Loan Claims not
holder and classified as LGE Tranche B Claims. On the
approximately $175.5 Effective Date, LGE will receive the LGE New
million of Claims) Restructured Senior Note and the Reynosa Assets in
full satisfaction of the 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
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.
This Class consists of holders of Equity Interests.
Class 7--Equity Interests Holders of Equity Interests in the Company shall
receive no distribution and retain no property
(Impaired, deemed to under the Prepackaged Plan. All Old Common Stock
reject, not entitled to will be cancelled.
vote)
(The Company estimates
this Class has 11,500
holders of record of
67,525,447 shares of Old
Common Stock)
</TABLE>
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."
7
<PAGE>
Comparison of Treatments
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 and illustrates how the going concern value of the Company would
be allocated among holders of Claims and Equity Interests on a hypothetical
absolute priority basis. Under the going concern analysis presented by PJSC,
the Company's total going concern value was estimated at $308.8 million, and
was comprised of $155.0 million in enterprise value and tuner patent value and
$153.8 million in VSB technology value. See "SPECIAL FACTORS--Liquidation and
Going Concern Analyses." This illustration does not give effect to the
contractual subordination provisions in the Old Subordinated Debenture
Indenture, and the unsecured LGE Claims, the General Unsecured Claims, and the
Old Subordinated Debenture Claims are treated as if they were pari passu. 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>
Hypothetical
Allocation of
Claim or Going Concern
Interest Treatment if Company Value on an
(estimated Treatment Under Liquidated in Hypothetical Absolute
claim) Prepackaged Plan Chapter 7 Bankruptcy Priority Basis
---------- ---------------- -------------------------- --------------
<S> <C> <C> <C>
Citibank Claims Holders would, at their Holders would be paid in $77.2 million
($77.2 million) election, either (a) full in cash.
participate in the Citicorp
Exit Facility or (b) be paid
in full or be otherwise
treated in a manner so as to
be unimpaired.
LGE Claims LGE would receive the LGE LGE would receive $50.1 $193.4 million
($166.0 New Restructured Senior million on account of its
million-- Note, the Reynosa Assets and secured claims, representing
secured; all of the New Common Stock. a recovery of 32.7% of its
$209.5 million-- estimated secured Claims.
unsecured) LGE would receive no
distribution and retain no
property on account of its
unsecured claims.
Other Secured Holders would be treated in Holders would retain the --*
Claims a manner so as to be collateral securing their
($0.0 million) rendered unimpaired. claims but would receive no
distribution and retain no
other property on account of
their Claims.
Other Priority Holders would be paid in Holders would receive no --*
Claims full in cash or be otherwise distribution and retain no
($0.0 million) treated in a manner so as to property on account of their
be rendered unimpaired. Claims.
General Holders would be paid in Holders would receive no $24.0 million
Unsecured Claims full in cash or be otherwise distribution and retain no
($230.4 million) treated in a manner so as to property on account of their
be rendered unimpaired. Claims.
Old Subordinated Holders would receive a pro Holders would receive no $14.2 million
Debenture Claims rata distribution of $50 distribution and retain no
($108.9 million) million of the New property on account of their
Debentures. Claims.
Equity Interests Holders would receive no Holders would receive no $0.0 million
(67,525,447 distribution and retain no distribution and retain no
shares) property on account of their property on account of their
Equity Interests. Equity Interests.
Total $308.8 million
</TABLE>
*To the extent that such claims existed going concern value would be
allocated to them prior to any allocation to a junior class of claims.
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;
provided, however, that the injunction does not preclude police or regulatory
agencies from fulfilling their statutory duties.
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 Co., Ltd. ("LG Semicon"), an affiliate of
LGE, 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 or 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
9
<PAGE>
hypothetical restructuring occurring without the Investor Releasees 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.
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 did not
investigate whether any specific avoidance actions or other potential causes of
action against the Debenture Releasees exist.
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."
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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 complete 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 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 added to the principal amount of the LGE New Restructured Senior Notes
at a rate of LIBOR plus 6.5% per annum 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. Interest will be
paid in cash only to the extent such ratio test is met. 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: 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 complete 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)
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
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<PAGE>
Restructuring, the Company expects that it will continue to purchase some
finished products, components and other technical services from LGE.
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 $150 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 complete 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 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.
These analyses concluded that the value to be received by holders of Impaired
Claims (other than LGE) under the Prepackaged Plan is equal to or greater than
the amount projected to be received by such holders in a liquidation or a
hypothetical distribution of the Company's assets on an absolute priority
basis. These analyses also concluded that under either the Financial
Restructuring, the liquidation analysis or a hypothetical distribution of the
Company's going concern value on an absolute priority basis, there would be no
value available to holders of Equity Interests. See "SUMMARY--The Prepackaged
Plan--Comparison of Treatments." These analyses also concluded that under
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<PAGE>
the treatment offered in the Prepackaged Plan, LGE would receive less with
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 $1.4 million and Mr. McNulty up to $1.2 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
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<PAGE>
interest involving LGE and its affiliates. The Special Committee did not
resolve or address any other conflicts of 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 August 31, 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 $1.1 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 1998
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. In June 1999, the Board approved an
additional short-term incentive program based on performance goals for the 1999
fiscal year. The Company may be obligated to make payments to the two tiers of
executives aggregating up to approximately $2.1 million, including up to
$287,667 and $285,192 for Mr. Vitkus and Mr. McNulty, respectively. The Company
may be obligated to make payments to the two tiers of key executives and senior
managers aggregating up to $5.8 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. The following chart summarizes the
retention bonuses and incentives the Company has paid and may be obligated to
pay.
<TABLE>
<CAPTION>
Actual 1999
1998 Maximum Maximum
Short-Term Short-term Long-Term
Retention Incentive Incentive Incentive
Executive Group Bonus Payment Payment Payment Total
- --------------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Tier One Executives and
Senior Managers........ $ 780,286 $1,014,544 $1,835,944 $5,007,072 $ 8,637,846
Tier Two Executives and
Senior Managers........ 349,492 330,560 252,640 819,792 1,752,484
---------- ---------- ---------- ---------- -----------
Total................. $1,129,778 $1,345,104 $2,088,584 $5,826,864 $10,390,330
========== ========== ========== ========== ===========
</TABLE>
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<PAGE>
The executives currently in tier one are: Richard F. Vitkus, Edward J.
McNulty, William G. Luehrs, Richard Lewis, Kathryn Wolfe, William J. Sims,
Michael Thomas and John I. Taylor. The executives currently in tier two are:
Hector Escobedo, Gerald Reid, Wendy Weil and Tom Sorensen. 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. The Company has also approved a 1999 short-term incentive program
under which it may be obligated to pay up to approximately $12.8 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.
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<PAGE>
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 U.S. trustee or Company concerning the 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. 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."
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<PAGE>
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, 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 2 which consists of
the Citibank Secured Claims; (2) Class 5 which consists of the Old Subordinated
Debenture Claims; (3) Class 6 which consists of the LGE Claims; and (4) Class 7
which consists of Equity Interests.
The Prepackaged Plan provides that, on or prior to the Effective Date, each
holder of a Citibank Secured Claim must file and serve a written election
designating whether or not such holder will be a lender under the Citicorp Exit
Facility. If such holder elects to be a lender under the Citicorp Exit
Facility, the Claim of such holder shall be treated as provided in the
Commitment. If such holder elects not to be a lender under the Citicorp Exit
Facility, on the Effective Date, unless such holder and the Company agree to a
different treatment, the Claim of such holder (i) will be paid in full in cash
by New Zenith or (ii) will otherwise be treated in any manner so that such
Claim shall otherwise be unimpaired within the meaning of section 1124 of the
Bankruptcy Code.
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 June
16, 1999 the last trading price for the Old Common Stock was $0.40625 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.
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<PAGE>
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.
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) April 3, 1999 on an historical basis and
on a pro forma basis giving effect to the Financial Restructuring as if it had
occurred on April 3, 1999 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 "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 Projected As of
April 3, 1999 July 31, 1999
---------------- ---------------------------
Without With
Pro Financial Financial
Actual Forma Restructuring Restructuring
------- ------- ------------- -------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Cash.......................... $ 5.2 $ 20.2 (1) $ -- $ --
======= ======= ======= =======
LGE Extended Payables Claims.. $ 130.1 $ -- $ 140.0 $ --
======= ======= ======= =======
Debt:
Borrowings under Unsecured
Bank Loans(2).............. $ 30.0 $ 30.0 $ -- $ --
Amended Citibank Credit
Facility................... -- -- 73.2 --
Post-Restructuring bank
credit facility............ -- 1.6 -- 74.8
LGE Leveraged Lease Claims.. 89.3 -- 76.4 --
LGE Reimbursement Claims.... 72.0 -- 102.0 --
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....................... -- 106.9 -- 135.1
------- ------- ------- -------
Total debt................ $ 324.8 $ 188.5 $ 400.1 $ 259.9
======= ======= ======= =======
Stockholders' equity:
Old Common Stock, $1.00 par
value, 150,000,000 shares
authorized, 67,630,628
shares issued and
outstanding(3)............. $ 67.6 $ -- $ 67.6 $ --
New Common Stock, $0.01 par
value, 1,000 shares
authorized, 1,000 shares
issued and outstanding(4).. -- -- -- --
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).................. (962.3) (909.0) (994.5) (938.5)
Treasury stock, 105,181 Old
Common Shares, at cost..... (1.7) -- (1.7) --
------- ------- ------- -------
Total stockholders'
equity................... $(389.6) $(136.3) $(421.8) $(165.8)
======= ======= ======= =======
</TABLE>
- --------
(1) Includes $15.0 million the Company would borrow under the LGE Demand Loan
immediately prior to the Financial Restructuring.
(2) Represents the Company's credit obligations to Credit Agricole Indosuez,
which were paid in full by LGE on April 20, 1999 following a demand by
Credit Agricole Indosuez on LGE under its guarantee, resulting in an
increase in LGE Reimbursement Claims.
(3) Excludes 3,020,000 shares of Old Common Stock issuable upon exercise of
outstanding stock options as of April 3, 1999, of which 1,746,000 shares
are issuable to LGE and 1,274,000 shares are issuable to employees. There
will be no such options outstanding on a pro forma basis.
(4) 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.
On April 20, 1999 LGE paid $30.0 million to Credit Agricole Indosuez
following a demand under LGE's guarantee of the Company's $30.0 million credit
obligations to Credit Agricole Indosuez. As a result of LGE's payment, the
amount of LGE's Reimbursement Claims increased by $30.0 million. The Company
believes that this will have the effect of increasing its projected interest
expense. The Business Plan Projections do not give effect to the Credit
Agricole Indosuez payment, however, because it occurred after they were
prepared. The Company does not believe the increase in projected interest
expense would have a material impact on the Business Plan Projections.
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......... 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
Unsecured Bank Loans, 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 2--Citibank Secured
Claims; (ii) Class 5--Old Subordinated Debenture Claims; and (iii) Class 6--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."
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 holders of Citibank Secured Claims and
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
26
<PAGE>
"cram down" as part of the Confirmation of the Prepackaged Plan. In addition,
if the holders of the Old Subordinated Debenture Claims do not accept the
Prepackaged Plan, the Company intends to initiate a "cram down" procedure with
respect to the Class composed of the holders of the Old Subordinated
Debentures. If such a "cram down" is approved by the Bankruptcy Court, holders
of the Old Subordinated Debenture Claims would receive no distribution and
retain no property.
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 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 June 1999 is
4.85%).
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 had a net loss of $25.1 million
(including $3.3 million of restructuring charges) for the three months ended
April 3, 1999. 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 April 3, 1999 the Company had $572.7 million in total current
liabilities and a deficit in stockholders' equity of $389.6 million. As of
April 3, 1999, the Company's current liabilities included a $130.1 million
vendor credit line payable to LGE, $30 million in demand loans guaranteed by
LGE, $89.3 million of LGE Leveraged Lease Claims (which equals the obligations
of the Company to LGE resulting from LGE's payment of $90.1 million to settle
the Company's obligations under the Leveraged Leases less proceeds from sales
of Leveraged Lease assets) and $72 million of LGE Reimbursement Claims
resulting from LGE's 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 $259.9 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.
In April 1999, the Company negotiated an extension of the Amended Citibank
Credit Facility to the earlier of a bankruptcy filing by the Company and
August 31, 1999. Further extensions may be necessary, but there can be no
assurance that such extensions 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 took 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 and April 1999 to extend the
term of the facility until the earlier of a bankruptcy filing by the Company
and August 31, 1999. 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 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
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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, Australia and Singapore 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, Australia and Singapore, 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 currently operates three manufacturing facilities: Reynosa,
which will be transferred to LGE under the Prepackaged Plan; Chihuahua, which
produces set-top boxes for NWS; and a small component parts operation in
Chicago. 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. As part of the Operational
Restructuring, the Company is seeking to sell or shut down manufacturing
facilities in Chihuahua 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 May 25, 1999 the Company sold assets to unrelated third parties
following arms'-length negotiation for cash and purchase credits totaling $71
million pursuant to the Operational Restructuring. Such assets had appraised
values with a range from $60.3 million to $73.5 million. The Company believes
that the prices obtained were fair. Based on appraisals received by the
Company and the results of its sale efforts to date, the Company estimates
that it will receive approximately $36 million to $42 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 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
terms of the sale included a lease agreement under which the Company is
permitted to be a tenant in the building through December 1999. In May 1999,
the Company extended its lease at the Glenview headquarters through December
2000. The Company has reduced the amount of space it occupies in the building,
as provided in the lease amendment. The base rent payable by the Company is
$5.00 per rentable square foot to January, 2000, and the Company is required
to pay its pro-rata share of the operating expenses and real estate taxes
associated with the building during that period. From January 1, 2000, the
rent payable by the Company will be $21.50 per square foot for three office
floors and $8.00 per square foot for basement space. Such rates are inclusive
of operating costs. 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). In
April 1999, the Company sold substantially all of the assets located at its
Cd. Juarez facility to subsidiaries of Kimball International, Inc. for
approximately $23.8 million. The Company is now in the process of selling the
remaining assets located at the facility. 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
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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 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 complete 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, 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 completion 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
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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.
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
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model years after 1999. Failure of the Company to provide its planned product
line at the designated price points could adversely impact the ability of the
Company to place products in targeted retail outlets or maintain targeted
market share and could have a material adverse effect on the Company's
business, financial condition, results of operations, ability to implement the
Restructuring and ability to meet its financial obligations, including those
under the New 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
complete 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. Following the
recommendation of the Special Committee and the approval of the Board, in June
1999 the Company and LGE entered into an Amended and Restated Restructuring
Agreement to extend the date by which the Prepackaged Plan must be consummated
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to September 15, 1999, modify various provisions of the Restructuring Agreement
to reflect the terms of the Citibank Exit Facility and Lock-Up Agreement and
defer until May 31, 1999 the Company's obligation to pay interest to LGE on
certain amounts owed by the Company to LGE.
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 $1.2 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% 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 complete 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 complete 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 complete 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 complete 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;
. transactions with affiliates . mergers, acquisitions and
and stockholders; consolidations; and
. incurrence of liens; . issuance of capital stock.
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 August 31, 1999. 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 presently beneficially owns 55.3% of the Old Common Stock (including
vested but unexercised options) and controls 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. LGE Claims have been separately classified because
the holder of these Claims has voluntarily agreed to convert their debt to
equity and because LGE is an insider. LGE has consented to the separate
classification of its Claims as provided in the Prepackaged Plan. Finally,
because the Old Subordinated Debenture Indenture contains subordination
provisions, the Old Subordinated Debentures are not held by insiders, and the
Old Subordinated Debenture Claims are not guaranteed by LGE, the Company
believes that the Old Subordinated Debenture Claims are significantly
different from the other unsecured debt and therefore must be classified
separately.
To the extent that the Bankruptcy Court finds that a different
classification is required for the Prepackaged Plan to be confirmed, the
Company presently anticipates that it would seek (i) to modify the Prepackaged
Plan to provide for whatever reasonable classification might be required for
Confirmation and (ii) to use the acceptances received from any creditor
pursuant to this solicitation for the purpose of obtaining the approval of the
Class or Classes of which such creditor ultimately is deemed to be a member.
Any such reclassification of creditors, although subject to the notice and
hearing requirements of the Bankruptcy Code, could adversely affect the Class
in which such creditor was initially a member, or any other Class under the
Prepackaged Plan, by changing the composition of such Class and the vote
required for approval of the Prepackaged Plan. There can be no assurance that
the Bankruptcy Court, after finding that a classification was inappropriate
and requiring a reclassification, would approve the Prepackaged Plan based
upon such reclassification. Except to the extent that modification of
classification in the Prepackaged Plan requires resolicitation, the Company
will, in accordance with the Bankruptcy Code and the Bankruptcy Rules, seek a
determination by the Bankruptcy Court that acceptance of the Prepackaged Plan
by any holder of Claims pursuant to this solicitation will constitute a
consent to the Prepackaged Plan's treatment of such holder regardless of the
Class as to which such holder is ultimately
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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 Prepackaged Plan 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) 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 for any act or omission that is determined to have
constituted willful misconduct or gross negligence, by a court of competent
jurisdiction. It is a condition to the obligation of the Debenture Committee
under the Lock-Up Agreement that the Prepackaged Plan exculpate the Debenture
Releasees as provided therein. 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
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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 Debentures 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 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 year 2000 issue is the result of computer programs being written using
two digits rather than four to indicate the year. Computer programs and
certain products that have date-sensitive software may recognize the year "00"
as 1900 rather than the year 2000. Zenith uses and relies on computer
technology in many facets of its operations. It believes that its customers
and suppliers also rely on computer technology.
The Company has established a year 2000 task force, and has been undertaking
year 2000 readiness initiatives. There can be no assurance that the Company
will successfully complete its year 2000 goals, however. The Company has not
yet developed contingency plans. If Zenith, its customers or its suppliers are
not successful in making necessary modifications and conversions on a timely
basis, the year 2000 issue could have a material adverse effect on the
Company's business, financial condition and results of operations.
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.
The Company estimates that it has spent approximately $4.5 million prior to
1999 in connection with year 2000 readiness, and that it will spend an
additional $4.6 million in 1999 for year 2000 readiness measures.
Year 2000 transition efforts may involve costs in addition to those
currently budgeted or anticipated to be budgeted. The Company has not yet
determined the full costs of the modifications that may be necessary to
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address all Year 2000 issues. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Readiness for the Year 2000."
Dependence on Patents and Proprietary Technology
In connection with the Operational Restructuring, the Company intends to
become a sales, distribution and technology development company. As a result,
the Company will continue to be dependent on its ability to protect and
utilize its proprietary technologies. The Company currently holds many patents
relating to VSB technologies, HDTV and digital television related inventions.
The Company's ability to commercialize many of the products it has under
development will depend, in part, on its ability, both in the United States
and in other countries, to obtain and maintain patents, enforce those patents,
preserve trade secrets, operate without infringing on the proprietary rights
of third parties and obtain licenses to use patents held by third parties when
necessary.
There can be no assurance that the patents currently owned or licensed by
the Company, or any future patents owned or licensed by the Company, will
prevent other companies from developing similar or technologically equivalent
products, or that other companies will not be issued patents that may prevent
the sale of the Company's products or require licensing and the payment of
significant fees or royalties by the Company. There can be no assurance that
pending or future patent applications licensed to or owned by the Company will
result in issued patents, patent protection will be secured for any particular
technology, any patent rights that have been or may be issued to the Company
or its licensors will be valid or enforceable, any patent rights that have
been or may be issued to the Company or its licensors will not infringe upon
the patents of third parties or that the Company's patents will provide
meaningful protection to the Company. The Company may be unable to avoid
infringement of third-party patents and may have to obtain licenses, defend
infringement actions or challenge the validity of those patents in court.
There can be no assurance that a license will be available to the Company on
terms and conditions acceptable to the Company, if at all, or that the Company
will prevail in any patent dispute. Patent litigation is costly and time
consuming, and there can be no assurance the Company will have, or will
devote, resources sufficient to pursue such litigation. If the Company does
not obtain a license under such patents, is found liable for infringement, or
is not able to have such patents declared invalid, the Company may be liable
for significant monetary damages, may encounter significant delays in bringing
products to market, or may be precluded from participating in the manufacture,
use or sale of products or technologies protected by such patents.
The Company relies on trade secrets and other unpatented proprietary
information in connection with its product development activities. To the
extent that the Company relies on confidential information to maintain its
competitive position, there can be no assurance that other parties may not
independently develop the same or similar information. The Company seeks to
protect trade secrets and proprietary knowledge, in part, through
confidentiality agreements with its employees, consultants, advisors and
collaborators. These agreements may not effectively prevent disclosure of the
Company's confidential information and may not provide the Company with an
adequate remedy in the event of unauthorized disclosure of such information.
If the Company's employees, scientific consultants or collaborators develop
inventions or technologies independently that may be applicable to the
Company's products under development, disputes may arise about ownership of
proprietary rights to those inventions and technologies. Such inventions and
technologies will not necessarily become the Company's property, but may
remain the property of those persons or their employers. Protracted and costly
litigation could be necessary to enforce and determine the scope of the
Company's proprietary rights. There can be no assurance that the Company will
have, or will devote, sufficient resources to pursue such litigation. The
Company's failure to obtain or maintain patent and trade secret protection,
for any reason, could have a material adverse effect on the Company's
business, financial position and results of operations.
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SPECIAL FACTORS
Events Leading to the Restructuring
The Company has for many years experienced and continues to experience,
severe financial difficulties, resulting in the immediate need to restructure
both its business operations and its capital structure. The Company has
incurred losses in all but one of the years since 1985. These results
generally reflect, among other things: significant and persistent declines in
the Company's gross margins, largely resulting from reductions in color
television prices driven by competitive factors, and high operating costs and
performance difficulties associated with product development programs and new
automated production processes.
In light of the Company's net losses, the competitive environment and
inflationary cost pressures over the past several years, and in an effort to
increase gross margins and lower costs, the Company has undertaken various
cost reduction programs, profit improvement initiatives, design,
manufacturing, logistics and distribution improvements and various business
consolidations. While the Company has been able to achieve some operating
improvements through these measures, it has been unable to generate sufficient
revenues to support its continued business operations in the absence of a
significant 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
$366.2 million of payments including 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.
In April 1999, LG Semicon transferred the Old Common Stock it owned to LGE for
an aggregate amount of 10 Korean Won (approximately US $0.01). Pursuant to the
Prepackaged Plan, the Old Common Stock owned by LGE 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 had to invest substantial
additional funding. Such funding was not available under the Business Plan
Projections. Additionally, reconfiguring the production line would have taken
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. On March 31, 1999, this facility was
amended to provide that demand for repayment may not occur prior to August 31,
1999, when repayment is due in full. 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. In April
1999, LGE paid an additional $30 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
and in accordance with the terms of LGE's guarantees of Zenith's obligations
under the Leveraged Leases, LGE was subrogated to the rights and interests of
the lessor and its lenders, including the interest of the lessor in the two
owner trusts that own the equipment. Consequently, LGE became the beneficiary
of these owner trusts and now controls these owner trusts. The Company had 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 is reduced by the amount of the sale proceeds. Through
April 30, 1999, approximately $1.4 million had been paid to the owner trust of
the Leveraged Lease (Mexico) from the sale of assets under the Leveraged Lease
(Mexico).
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.
In April 1999, the term of the Amended Citibank Credit Facility was extended
to the earlier of a bankruptcy filing by the Company or August 31, 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 August 31, 1999.
Following the recommendation of the Special Committee and the approval of
the Board, the Company and LGE entered into an Amended and Restated
Restructuring Agreement in June 1999 to extend the date by which the
Prepackaged Plan must be Consummated to September 15, 1999, modify various
provisions of the Restructuring Agreement to reflect the terms of the Citibank
Exit Facility and Lock-Up Agreement and defer until May 31, 1999 the Company's
obligation to pay interest to LGE on certain amounts owed by the Company to
LGE.
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.
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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 $2.9 million, $50.7 million, $93.3 million and
$128.8 million for the three months ended April 3, 1999, and the years ended
December 31, 1998, 1997 and 1996, respectively. Sales of products purchased
from LGE and LG Semicon contributed $7.4 million, $59.8 million, $112.3
million and $141.4 million to sales for the three months ended April 3, 1999,
and the years ended December 31, 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. During the three months ended
April 3, 1999, and the year ended December 31, 1998, the Company accrued
approximately $0.6 million and $1.5 million, respectively, in royalties for
the use of the Company's brand names pursuant to this direct shipment program.
A similar arrangement was entered into in April 1997 in Canada where LGE's
Canadian affiliate sells Zenith branded VCRs under a license from the Company.
Pursuant to that arrangement, the Company accrued approximately $0.2 million
and $0.3 million during the three months ended April 3, 1999, and the year
ended December 31, 1998, respectively, 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. During the
three months ended April 3, 1999, the Company purchased no equipment from LGE.
Product and other sales: The Company sells televisions, picture tubes, yokes
and other manufactured subassemblies to LGE and its subsidiaries at prices
that are comparable to prices charged by the Company to its major customers.
Such sales totalled approximately $5.2 million, $53.6 million, $55.1 million
and $29.4 million during the three months ended April 3, 1999, and the years
ended December 31, 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 $0.8 million and $4.4 million, respectively, in the
three months ended April 3, 1999, $27.3 million and $19.6 million,
respectively, in 1998 and $25.5 million and $16.8 million, respectively 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
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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 April 3, 1999. Under a
separate agreement, the Company has licensed its tuner patents to LGE. LGE's
payments to the Company under tuner licenses were approximately $0.1 million,
$0.4 million, $0.6 million and $1.0 million for the three months ended April
3, 1999, and the years ended December 31, 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 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 April 3, 1999, 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 $61,000, $1.5 million, $4.8 million and $0.3 million for the
three months ended April 3, 1999, and the years ended December 31, 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.
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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 $0.3 million, $1.1
million and $0.1 million for the three months ended April 3, 1999, and the
years ended December 31, 1998 and 1997, respectively.
Other Items: The Company currently leases space from an LGE subsidiary in
Huntsville, Alabama, for its Parts and Service group, and Ontario, California,
for a warehouse. The Company leased space from an LGE subsidiary in San Jose,
California, for NWS in 1998 and 1997. Lease payments to LGE were approximately
$0.2 million, $0.6 million, $0.3 million and $2,000 for the three months ended
April 3, 1999, and the years ended December 31, 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 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
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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.
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
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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
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 a prepackaged plan of reorganization, 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 New Common Stock of New Zenith, the Reynosa Assets
and 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 Old 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.
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The Special Committee, in person or by conference telephone, met seven times
in April and May 1998 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
financial 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 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
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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-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 original 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 original Restructuring Agreement. The Special Committee
reported its recommendation to the Board that the original Restructuring
Agreement be approved. Management of the Company also recommended that the
Board accept
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the original Restructuring Agreement as negotiated. The Board unanimously
voted to approve the terms of the original Restructuring Agreement, subject
only to management's completion of documentation. The Company and LGE entered
into the original 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, as amended.
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.
On June 14, 1999, the Special Committee determined to recommend the Amended
and Restated Restructuring Agreement to the Board for its approval. At a
meeting of the Board on June 14, 1999, the Special Committee reported its
recommendation to the Board that the Amended and Restated Restructuring
Agreement be approved. Management also recommended that the Board accept the
Amended and Restated Restructuring Agreement. All members of the Board (other
than Mr. Lee, who was not present at the Board meeting) voted to approve the
terms of the Amended and Restated Restructuring Agreement.
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
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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 April 30,
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 April 30, 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 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. The
Lock-Up Agreement requires that the Debenture Releasees receive the same
releases and exculpation provided to the D&O Releasees and the Investor
Releasees. The Debenture Releasees provided no independent consideration in
exchange for the Company's agreement to seek such releases and exculpation.
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.
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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. In April 1999, one of the
Equity Interest holders, the California Public Employees Retirement System,
informed the Company that it had retained Rothschild, Inc. as its investment
banker. In May 1999, the Company, the Special Committee and their advisors met
with the California Public Employees Retirement System and its advisors and
reviewed with such parties the Company's past and current efforts to sell the
Company or identify an investor, as well as matters relating to the Special
Committee's and the Board's review of potential restructuring alternatives.
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 complete 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 added to the
principal amount of the 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. Interest will be payable in cash only to the extent such
ratio test is met. 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 $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 $135.1 million plus the New Common
Stock in exchange for $375.5 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,
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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), 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 New Common Stock of New Zenith and
will, therefore, have 100% (increased from approximately 55.3%) 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. On April 29, 1999, LGE informed the Company that
it had acquired 26,095,200 shares of Old Common Stock of the Company and the
associated Old Common Stock purchase rights from its affiliate, LG Semicon.
The Company was informed that the aggregate purchase price for such shares was
10 Korean Won (approximately US$0.01). As a result of this transfer, LGE owns
approximately 55.3% of the Old Common Stock including vested but unexercised
options.
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.
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
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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
Bankruptcy Code. The Company's ability to complete 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 the holders of the Old Common
Stock (including LGE) will receive no distributions and retain no property in
respect of their holdings of the Old
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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 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 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."
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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.
(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.
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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
Prepackaged 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 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.
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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 retained Lazard on February 1, 1998 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, and has not had any other material relationship with, LGE or its
affiliates (including the Company) in the last two years and no such
relationship is currently contemplated.
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
of the Old Subordinated 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
Old 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 Old 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.
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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.
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.
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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
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.
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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 April 30, 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 April 30, 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 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 April 30, 1999. Through April 30,
1999, Greenwich has also received approximately $52,000 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
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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.
The Company selected Insignia/ESG, Inc. ("Insignia/ESG") as its real estate
advisor and broker for the disposition of its U.S. properties after soliciting
recommendations from other companies and after interviewing a number of real
estate brokers and advisors who specialize or have experience with office,
manufacturing, and warehousing facilities. Insignia/ESG is a nationally
recognized real estate firm with market experience in the U.S. real estate
market in general and Illinois and Texas real estate in particular.
Insignia/ESG was not specifically compensated for its summary and value
estimate concerning the Company's U.S. real estate, but has earned and may
earn additional commissions on the sale of the Company's U.S. properties in
accordance with the terms of its brokerage agreement with the Company.
Insignia/ESG has been engaged as the Company's broker for purposes of leasing
a new headquarters site. The Company has also engaged Insignia/ESG as an
advisor on real estate matters relating to this disposal of certain
manufacturing Subsidiaries of the Company, for which it receives a fee. As
compensation for its brokerage services through April 30, 1999, Insignia/ESG
received $466,000. Additionally, Insignia/ESG received $40,000 through April
30, 1999 for advisory services associated with the Company's disposition of
real estate assets and Subsidiaries.
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 and Insignia/ESG, Inc. have, 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 Peer Group. With respect to the Terminal Value, the going concern
analysis applies a range of discount rates
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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 (which the
Company believes are reasonable) and are subject to significant business,
economic, and competitive
73
<PAGE>
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.
On April 20, 1999 LGE paid $30.0 million to Credit Agricole Indosuez
following a demand under LGE's guarantee of the Company's $30.0 million credit
obligations to Credit Agricole Indosuez. As a result of LGE's payment, the
amount of LGE's Reimbursement Claims increased by $30.0 million. The Company
believes that this will have the effect of increasing its projected interest
expense. The Business Plan Projections, and, therefore, the going concern
analysis do not give effect to the Credit Agricole Indosuez payment, however,
because it occurred after they were prepared. Inclusion of the Credit Agricole
Indosuez payoff would result in a lower going concern valuation due to the
increased interest expense. The Company does not believe the decrease in going
concern value would have a material impact on the going concern valuation.
The following table summarizes the going concern value and the liquidation
value presented by PJSC to the Special Committee. For a full description of
the different analyses, see "Annex B--Report of Peter J. Solomon Company
Limited."
Summary of Going Concern Value and Liquidation Value Comparison
Under PJSC's Presentation to the
Special Committee Dated April 13, 1999
(in Millions)
<TABLE>
<CAPTION>
Going Concern Value
under Prepackaged Plan
- -----------------------------------------
Component of Value Value
- ------------------------ ---------------
<S> <C>
Enterprise Value (except
tuner
patents)............... $108.6 to $89.9
Tuner Patents........... $ 63.5 to $59.1
VSB Technology.......... $153.8
---------------
Total Going Concern
Value.................. $308.8
===============
</TABLE>
<TABLE>
<CAPTION>
Liquidation Value
under Hypothetical Chapter 7 Liquidation
- ---------------------------------------------------------------------------
Component of Value Value
- -------------------------------------------------------------------- ------
<S> <C>
Other Liquidation Proceeds (all assets
except tuner patents and VSB)*..................................... $ 45.6
Tuner Patents....................................................... $ 35.0
VSB Technology...................................................... $ 42.6
------
Total Liquidation Value............................................. $123.2
======
</TABLE>
- --------
* These values are net of administrative costs associated with a liquidation
of the Company's assets over the liquidation period.
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.
74
<PAGE>
The principal differences between the April 1999 analyses and the November
1998 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 1998 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 1998 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 1998
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
. 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 1998 analyses and the November
1998 analyses are as follows:
. the November 1998 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 1998 analyses were prepared;
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<PAGE>
. the July 1998 analyses were generated using the business plan
projections dated June 26, 1998, while the November 1998 analyses
incorporated the business plan projections dated November 12, 1998;
. the November 1998 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 1998 analyses.
. the November 1998 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 1998 analyses, as compared to $2.50
per unit in the July 1998 analyses);
.with respect to the going concern analyses, the November 1998 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 1998 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 1998 analysis;
.with respect to the liquidation analyses:
.the November 1998 analysis allocates projected warranty expenses of
$33.7 million against both finished goods and trademark and
distribution values, while the July 1998 analysis allocated such
expenses of $23.3 million solely to finished goods value; and
.the November 1998 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 1998 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 1998 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 1998
analyses incorporated projections from the business plan projections
dated June 26, 1998;
.with respect to VSB, the July 1998 analyses utilized reduced royalty
revenue projections to reflect projected royalty-free cross-licenses,
which were included in the July 1998 analyses to reflect the Company's
market experience;
76
<PAGE>
.the July 1998 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 1998 analysis utilized a 20%
estimated recovery rate, resulting in a $2.1 million increase in
projected available liquidation proceeds;
.the July 1998 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 1998 analysis was derived from a Sales
Multiples Approach; and
. in the July 1998 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 1998 analysis because such assets are projected to
have already been liquidated as of the effective date of the analysis.
PJSC's preliminary going concern analysis was based on business plan
projections that projected that the Company would have a positive EBIT in the
terminal year. PJSC then used this positive EBIT to calculate the Terminal
Value of the Company. When the Company updated its business plan projections
in June 1998, it asked PJSC to update its going concern analysis to reflect
the value of the Company based on the revised business plan projections. Based
on the revised business plan projections, the Company projected a negative
EBIT in the terminal year. PJSC advised the Company that it believed the use
of an EBIT multiple to determine the Terminal Value of the Company under those
circumstances would have understated the enterprise value of the Company (in
fact, with a negative EBIT, such a methodology would have resulted in a
Terminal Value of zero). Accordingly, PJSC used a Sales Multiples Approach.
PJSC continued to use a Sales Multiples Approach when it updated its analyses
to give effect to the April 1999 Projections.
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
$(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 1998 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 $103.3 million to $86.6 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.
77
<PAGE>
In the November 1998 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 1998 analysis, the
November 1998 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 1998 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 1998 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 original 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. Following the
recommendation of the Special Committee and the approval of the Board, in June
1999 the Company and LGE entered into an Amended and Restated Restructuring
Agreement pursuant to which, in exchange for the mutual covenants described
therein, the parties agreed to extend the date by which the Prepackaged Plan
must be consummated to September 15, 1999, to modify various provisions of the
Restructuring Agreement to reflect the terms of the Citibank Exit Facility and
Lock-Up Agreement and to defer until May 31, 1999 the Company's obligation to
pay interest to LGE on certain amounts owed by the Company to LGE. The Company
did not make any cash payment to LGE as consideration for the Amended and
Restated Restructuring Agreement.
The description of the Restructuring Agreement contained in this Disclosure
Statement describes the material terms of the Restructuring Agreement but does
not purport to be complete and is qualified in its entirety by reference to
the Restructuring Agreement, a copy of which is included as an exhibit to the
Registration Statement of which this Disclosure Statement forms a part and is
incorporated herein by reference.
The Transactions
In addition to the transactions contemplated by the Financial Restructuring,
the Restructuring Agreement provides that, upon the terms and subject to the
conditions set forth in the Restructuring Agreement, LGE may,
78
<PAGE>
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 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; (iii) 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; (iv) 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 (v) beginning on May 31, 1999 to
pay LGE each month in arrears all interest accruing on amounts owed but unpaid
by the Company to LGE under the Reimbursement Agreement and under the
Financial Support Agreement. The Company has agreed to conduct business in the
ordinary course and to use commercially reasonable efforts to retain key
employees and business relationships. The Company has agreed not to, and to
cause its Subsidiaries not to, without the consent of LGE, (i) acquire or
agree to acquire any business or any assets (other than inventory) that would
be material to the Company; (ii) sell, lease, license or otherwise dispose of
any of the assets or properties of the Company or its Subsidiaries other than
in the ordinary course of business or pursuant to the Business Plan
Projections; (iii) amend its Certificate of Incorporation or By-laws; (iv)
redeem or otherwise acquire any shares of its capital stock or issue any
capital stock or any option, warrant or right relating thereto; (v) incur any
liabilities, obligations or indebtedness for borrowed money or guarantee any
such liabilities, obligations or indebtedness; (vi) permit or allow any of the
assets or properties of the Company or any Subsidiary to be subject to any
lien, subject to certain customary exceptions; (vii) cancel any material
indebtedness or waive any claims or rights of material value; (viii) make any
change in any method of accounting or accounting practice or policy; (ix)
modify, amend, terminate or permit the lapse of any material lease of real
property; (x) enter into any material contract or arrangement; (xi) enter into
any agreement or take any action in violation of the terms of the
Restructuring Agreement or the Restructuring; (xii) settle any material tax
audit or make or change any material tax election, (xiii) hire any new
executive officers of the Company or any of its Subsidiaries; (xiv) subject to
certain exceptions, grant any employee of the Company or any of its
Subsidiaries an increase in compensation, severance or termination pay, enter
into any employment, severance or termination agreement with any such employee
or adopt any new benefit plan or arrangement or amend any such plan; (xv)
enter any new line of business; or (xvi) agree, whether in writing or
otherwise, to do any of the foregoing. The Company has also agreed to, and to
cause its Subsidiaries to, (i) use commercially reasonable efforts to take all
actions to fulfill its obligations in respect of the Restructuring Agreement;
(ii) make all filings required under any applicable law or regulation and use
all reasonable efforts to obtain all permits necessary to be obtained by the
Company or any of its Subsidiaries, (iii) cooperate with LGE in exchanging
information and supplying assistance in connection with filings contemplated
by the Restructuring Agreement; (iv) not issue any press release or make any
other public statement regarding the Restructuring without the prior consent
of LGE; and (v) perform all obligations under and comply with all terms and
provisions of the Leveraged Leases other than obligations to pay "Basic Rent"
under the Leveraged Leases. The Company has agreed to promptly notify LGE in
writing of any fact, condition, event or occurrence that could reasonably be
expected to result in the failure of any conditions contained in the
Restructuring Agreement to be satisfied.
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<PAGE>
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) if required, 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 $150 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 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; (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 reasonable satisfaction with, and the Company's
filing with the Commission of, the Disclosure Statement; (ix) LGE's
satisfaction 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; (x) 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; (xi) 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 amended and
restated 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
80
<PAGE>
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; (xii) 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; (xiii) 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 (xiv) 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 (other than certain
defaults arising out of the Company's failure to make payments on the Old
Subordinated Debentures due on April 1, 1999).
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 September 15,
1999; or (ii) any statute shall make consummating the transactions under the
Restructuring Agreement illegal, or any court or other regulatory authority
shall have issued a judgment, order, decree or ruling enjoining the
Consummation of the transactions contemplated by the Restructuring Agreement
and such judgment, order, decree or ruling shall have become final and non-
appealable.
Termination by LGE
The Restructuring Agreement may also be terminated by LGE if (i) the Company
fails to perform in any material respect any obligation or breaches any
representation or warranty, and the Company fails to perform such obligation
or cure any such breach capable of being cured within 30 days' notice by LGE;
(ii) the Board or the Special Committee withdraws or modifies, in a manner
adverse to LGE (as determined by LGE in its reasonable judgment), its approval
or recommendation of the Restructuring Agreement or the Restructuring; or
(iii) any condition to LGE's obligations under the Restructuring Agreement
becomes impossible to fulfill (other than as a result of any breach by LGE).
Termination by the Company
The Restructuring Agreement may be terminated by the Company if (i) LGE
fails to perform in any material respect any obligation or breaches any
representation or warranty, and LGE fails to perform such obligation or cure
any such breach capable of being cured within 30 days' notice by the Company;
(ii) any condition to the Company's obligations under the Restructuring
Agreement becomes impossible to fulfill (other than as a result of any breach
by the Company); or (iii) there is an Alternative Proposal which the Board in
good faith determines represents a superior transaction for the Company as
compared to the Financial Restructuring, and the Board determines, after
consultation with counsel, that failure to terminate the Restructuring
Agreement would be inconsistent with the compliance by the Board with its
fiduciary duties imposed by law; provided, however, that the Company may not
terminate the Restructuring Agreement (i) if the Alternative Proposal is
subject to a financing condition, unless the Board is of the opinion, after
consultation with PJSC or another nationally recognized investment banking
firm, that the Alternative Proposal is financeable, (ii) if, prior to or
concurrently with any purported termination, (x) the Company or the person or
entity that made the Alternative Proposal (the "New Investor") shall not have
paid the Transaction Expenses (as defined below) contemplated by the
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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 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.
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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 DGCL (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 beneficially owns
approximately 55.3% 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.
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;
provided, however, that the injunction does not preclude police or regulatory
agencies from fulfilling their statutory duties. 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.
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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 Company is
not generally aware of any specific potential cause or causes of action
against any non-LGE related D&O Releasees that would be extinguished by the
releases provided in the Prepackaged Plan. The Company did not investigate
whether any specific avoidance actions or other potential causes of action
against the Debenture Releasees exist. However, to the extent any such claims
exist, such claims will be released by the terms of the Prepackaged Plan.
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. At the hearing on Confirmation, the Company would likely introduce
the materials set forth in the Disclosure Statement as evidence in support of
the Confirmation of the Prepackaged Plan, including the release, waiver,
exculpation and injunctive provisions contained therein. 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.
The Company believes that, among other factors, the continued service of the
D&O Releasees provides a legal and factual basis for including such parties
under the release and exculpation provisions of the Prepackaged Plan,
notwithstanding the ordinary compensation, incentive programs and retentions
benefits offered by the Company to such parties. The Company has not
quantified the value to the Company of such continued service because the
Company does not believe the value of such services are quantifiable.
The D&O Releasees and the Investor Releasees have asserted certain
noncontingent claims for indemnification against the Company arising from the
Vengrove litigation. See "RISK FACTORS--Legal
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Proceedings." The Company may be jointly liable with the D&O Releasees or the
Investor Releasees as to certain claims for reimbursement or contribution, and
such claims for reimbursement or contribution may be contingent as of the time
for allowance or disallowance of such claims and consequently may be subject
to disallowance pursuant to 11 U.S.C. (S) 502(e)(1)(B). The Company
acknowledges that arguments exist that certain case law could result in the
subordination in whole or in part, of certain indemnification claims arising
out of securities litigation pursuant to 11 U.S.C. (S) 510(b).
As of April 3, 1999, the Company employed approximately 5,300 people. Such
employees are D&O Releasees and are covered by the releases and exculpation
provisions of the Prepackaged Plan. The compensation paid by the Company to
the Executive Officers of the Company is described in "MANAGEMENT--Current
Executive Officers of the Company--Executive Compensation and Other
Information." The long and short term incentive programs and retention
benefits offered by the Company to the Executive Officers are described in "--
Executive Retention and Incentive Programs" and "--Employment Agreements." The
1998 base salary paid by the Company to the seven tier 1 level executives that
are not Executive Officers ranged from $132,000 to $275,000 on an annual
basis. The 1998 base salary paid by the Company to the four tier 2 level
executives ranged from $125,000 to $150,000 on an annual basis. The long and
short term incentive programs and retention benefits offered by the Company to
tier 1 and tier 2 level executives are described in "--Executive Retention and
Incentive Programs." The 1998 base salary paid by the Company to the 23 tier 3
level executives ranged from $100,008 to $150,000 on an annual basis. The 1998
base salary paid by the Company to the 38 tier 4 level executives ranged from
$70,008 to $126,700 on an annual basis. The 1998 base salary paid by the
Company to the 572 exempt salaried employees not described above ranged from
$5,000 to $108,000 on an annual basis. The 1998 wages paid by the Company to
the 101 non-exempt employees ranged from $14,568 to $59,547 on an annual
basis. The 1998 wages paid by the Company to the 84 hourly employees ranged
from $10,400 to $63,750 on an annual basis. Additionally, 72 sales staff
received base salaries that ranged from $35,000 to $70,000 annually, and
commissions based on profit contribution of products sold which could range
from $24,000 to $35,000 annually. Base salaries and wages in 1999 do not
differ materially from 1998 amounts.
The Company offers a retention bonus and stay bonus program to approximately
175 tier 3, tier 4 and exempt salaried employees, which is described in "--
Executive Retention and Incentive Programs." The Company offered a short-term
incentive program for 1998 and has instituted a similar program for 1999 to
the majority of its non-hourly employees, which is described in "--Executive
Retention and Incentive Programs." The Company also offers certain additional
incentive programs unique to particular divisions of the Company.
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 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, 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, 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.
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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 Releasees 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.
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
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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 its 1998 short-
term and long-term incentive programs for two tiers of 15 key executives and
senior managers, not including the Chief Executive Officer. A similar short-
term incentive program was implemented in June 1999 covering 12 key executives
and senior executives. 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 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 August 31, 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. LGE Claims have been separately classified because
LGE has voluntarily agreed to convert its debt to equity and because LGE is an
insider. LGE has consented to the separate classification of its Claims as
provided in the Prepackaged Plan. Finally, because the Old Subordinated
Debenture Indenture contains subordination provisions, the Old Subordinated
Debentures are not held by insiders, and the Old Subordinated Debenture Claims
are not guaranteed by LGE, the Company contends that the Old Subordinated
Debenture Claims are significantly different from the other unsecured debt and
therefore must be classified separately.
To the extent that the Bankruptcy Court finds that a different
classification is required for the Prepackaged Plan to be confirmed, the
Company would seek (i) to modify the Prepackaged Plan to provide for whatever
reasonable classification might be required for Confirmation and (ii) to use
the acceptances received from any holder of Claims pursuant to this
solicitation for the purpose of obtaining the approval of the Class or Classes
of
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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 Impaired --entitled to vote
Class 3--Other Secured Claims Unimpaired --not entitled to vote
Class 4--General Unsecured Claims Unimpaired --not entitled to vote
Class 5--Old Subordinated Debenture Impaired --entitled to vote
Claims
Class 6--LGE Claims: Impaired --entitled to vote
LGE Tranche A Claims
LGE Tranche B Claims
Class 7--Equity Interests Impaired --not entitled to vote;
deemed to reject
</TABLE>
The Prepackaged Plan divides Claims against the Company into seven 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: On or prior to the Effective Date, each holder of a Citibank
Secured Claim must file and serve a written election designating whether or
not such holder will be a lender under the Citicorp Exit Facility. If such
holder elects to be a lender under the Citicorp Exit Facility, the Claim of
such holder shall be treated as provided in the Commitment. If such holder
elects not to be a lender under the Citicorp Exit Facility, on the Effective
Date, unless such holder and the Company agree to a different treatment, the
Claim of such holder (i) will be paid in full in cash by New Zenith or (ii)
will otherwise be treated in any manner so that such Claim shall otherwise be
unimpaired within the meaning of section 1124 of the Bankruptcy Code. The
failure of a holder of a Citibank Secured Claim to file and serve a written
election as provided herein will not modify or otherwise affect any existing
contractual obligation or commitment of such holder to be a lender under the
Citicorp Exit Facility.
Voting: Citibank Secured Claims are impaired and the holders of Citibank
Secured Claims are 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;
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(b) the Company shall surrender all collateral securing such Claim to the
holder thereof, without representation or warranty by or recourse against
the Company or New Zenith; or
(c) such Claim will be otherwise treated in any other manner so that such
Claims shall otherwise be rendered unimpaired pursuant to section 1124 of
the Bankruptcy Code.
Any default with respect to any Secured Claim that existed immediately prior
to the filing of the Prepackaged Chapter 11 Case shall be deemed cured upon
the Effective Date.
Voting: Other Secured Claims are not impaired and the holders of Secured
Claims are conclusively deemed to have accepted the Prepackaged Plan pursuant
to section 1126(f) of the Bankruptcy Code. Therefore, the holders of Other
Secured Claims are not entitled to vote to accept or reject the Prepackaged
Plan.
Class 4--General Unsecured Claims
Classification: General Unsecured Claims consist of the unsecured Claims
that are not Old Subordinated Debenture Claims, 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 5--Old Subordinated Debenture Claims
Classification: Old Subordinated Debenture Claims consist of the Claims of
holders of the Old Subordinated Debentures.
Treatment: If Class 5 accepts the Prepackaged Plan, on or as soon as
practicable after the Effective Date, each holder of an Allowed Old
Subordinated Debenture Claim shall receive, in full and final satisfaction of
such Claim, a pro rata distribution of the New Debentures. If Class 5 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.
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Class 6--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 7--Equity Interests
Classification: Class 7 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; provided, however, that the injunction does not
preclude police or regulatory agencies from fulfilling their statutory duties.
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 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.
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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 Releasees 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.
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,
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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. Pursuant to the Prepackaged Plan, the Company will have assumed,
pursuant to the Bankruptcy Code, the Lock-Up Agreement on the Effective Date,
including the Company's indemnification obligations to each of the Debenture
Releasees contained therein, and the Company's agreements with Hebb & Gitlin
and Crossroads to pay professional fees incurred by the holders of Old
Subordinated Debentures who are Debenture Releasees.
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 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 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. The Company shall make
distributions of the New Debentures pursuant to such indenture.
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. As promptly as
practicable after the Effective Date, the Company will provide holders of Old
Subordinated Debentures with instructions with respect to the delivery of the
Old Subordinated Debentures and the distributions of the New 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 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.
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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 5 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 5 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, 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
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of Claims and Equity Interests of any nature whatsoever, including any
interest accrued on such Claims from and after the date the Company files the
Prepackaged Chapter 11 Case with the Bankruptcy Court ("Petition Date"),
against the Company, or any of its assets or properties, (2) on the Effective
Date, all such Claims against, and Equity Interests in the Company shall be
satisfied, discharged and released in full and (3) all persons and entities
shall be precluded from asserting against New Zenith, its successors or its
assets or properties any other or further Claims or 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 2--Citibank Secured
Claims; (ii) Class 5--the Old Subordinated Debenture Claims; (iii) Class 6--
the LGE Claims; and (iv) Class 7--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 7--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.
106
<PAGE>
THE OPERATIONAL RESTRUCTURING
Under the Operational Restructuring, the Company intends to transform itself
from an integrated manufacturer and distributor of consumer electronics
products into a sales, distribution and technology company. The Operational
Restructuring requires that the Company close and dispose of all, or
substantially all, of its manufacturing facilities and outsource all, or
substantially all, product lines beginning with the 1999 model year.
Closing Manufacturing Operations and Disposition of Assets
The Company ceased production at its Melrose Park manufacturing facility in
March 1999 and is currently in the process of decommissioning the facility.
The Company has entered into two agreements with Philips for the sale of
certain manufacturing equipment located at the Company's Melrose Park
facility, including some of the equipment previously leased by the Company
under the Leveraged Lease (Melrose Park), and the purchase of color picture
tubes from Philips. Under the agreements, Philips will provide sales credits
against picture tube purchases by the Company over a three-year period in
exchange for certain picture tube manufacturing equipment located in the
Company's Melrose Park facility. The expected credits range from $17.2 million
to $23.9 million, depending upon the amount of picture tubes purchased. The
amount of picture tubes to be purchased from Philips depends on the Company's
requirements for picture tubes, which depends on customer demand and sales
volumes. The Company has no right to use the credits after the expiration or
termination of the manufacturing agreement, and may not receive any credits in
exchange for the equipment if it breaches or terminates the manufacturing
agreement.
A substantial portion of the equipment purchased by Philips was owned by the
owner trust under the Leveraged Lease (Melrose Park), which is controlled by
LGE as a result of LGE's payments under its guarantee of the Company's
obligations under the Leveraged Leases. The Company purchased such equipment
from the owner trust immediately prior to the sale to Philips in exchange for
approximately $11.5 million of the credits to be received by the Company from
Philips. The Company may purchase the credits for cash from the owner trust.
The Company expects to purchase such credits from the owner trust as necessary
to acquire picture tubes from Philips.
The Company's Glenview, Illinois headquarters building was sold to
BRI/Glenview I Inc. in October 1998 for $23.3 million. The terms of the sale
included a lease agreement under which the Company may continue to be a tenant
in the building through December 1999. In May 1999, the Company extended the
term of the lease through December 2000. The Company has reduced the amount of
space it occupies in the building, as provided in the lease amendment. 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.
In April 1999, the Company sold substantially all of the assets located at
its Cd. Juarez facility to subsidiaries of Kimball International, Inc. for
approximately $23.8 million less escrowed amounts. The Company is now in the
process of selling the remaining assets located at the facility. In March,
1999, a portion of the equipment located in Cd. Juarez was sold at auction,
resulting in $1.1 million of proceeds. Approximately $0.7 million of the
assets sold were assets under the Leveraged Lease (Mexico). Accordingly, $0.7
million was paid to the owner trust of the Leveraged Lease (Mexico) in
reduction of the Leveraged Lease Claims.
The Company is currently marketing other portions of its operations,
properties, equipment and inventories for sale as going concerns or as
individual asset sales.
107
<PAGE>
Outsourcing Contracts
Between October and December 1998, the Company entered into definitive
supply agreements or model year purchase orders 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
has discontinued 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.
108
<PAGE>
Matamoros, Tamaulipas, Mexico. The Company sold its electron gun
operations located in Matamoros, Mexico to a third party in February 1999
for approximately $4.4 million, less escrowed amounts. The sale also
included certain projection television tube manufacturing equipment under
the Leveraged Lease (Mexico), for which the sale proceeds of $0.7 million
were paid to the owner trust of the Leveraged Lease (Mexico), which is
controlled by LGE as a result of its settlement of the Company's
obligations under the Leveraged Leases. The amount owed by the Company to
LGE on account of its settlement of the Leveraged Leases is reduced by the
$0.7 million proceeds from the sale of the equipment. The Company expects
that the remaining equipment at this facility will be liquidated or
scrapped.
Reynosa, Tamaulipas, Mexico. The Company's Reynosa facility currently
manufactures direct view television sets and chassis for console
televisions. The Company expects to transfer substantially all of the
Reynosa facility to LGE pursuant to the Prepackaged Plan. The Company
continues to market several properties at its Reynosa facilities that are
not scheduled to be transferred to LGE.
Cd. Juarez, Chihuahua, Mexico. The Company assembled console televisions
and projections televisions at its Cd. Juarez facility, and previously
manufactured projection television picture tubes at this facility. The
Company ceased operations at the plant in February 1999 and has begun to
decommission portions of the plant. The Company is providing some of the
equipment used to produce console televisions to the Company's outsource
supplier of such products to facilitate manufacture of those products to
the Company's specifications. In March 1999, a portion of the equipment
located in Juarez was sold at auction, resulting in $1.1 million of
proceeds. Of that amount, $0.7 million is allocated to the sale of
Leveraged Lease (Mexico) assets and has been paid over to the owner trustee
under the Leveraged Lease (Mexico). In April 1999, the Company sold
substantially all of the assets located at its Cd. Juarez facility to
subsidiaries of Kimball International, Inc. for approximately $23.8
million. The Company is now in the process of selling the remaining assets
located at the facility and liquidating the subsidiary in accordance with
Mexican laws.
109
<PAGE>
MARKET PRICES OF THE OLD 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 June 16, 1999)................. .50000 .31000
</TABLE>
110
<PAGE>
MARKET PRICES OF THE OLD SUBORDINATED DEBENTURES
The Old Subordinated Debentures were historically listed and traded on the
NYSE. On May 21, 1998, the Company announced the terms of the Financial
Restructuring. On May 22, 1998, the NYSE suspended trading of the Old
Subordinated Debentures. The following table sets forth, for the periods
indicated, the high and low trading price for the Old Subordinated Debentures
on the NYSE Composite Tape.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
1997
First Quarter............................................. 79 3/4 72 1/2
Second Quarter............................................ 84 1/4 81 1/2
Third Quarter............................................. 85 76 1/4
Fourth Quarter............................................ 74 1/2 49
1998
First Quarter............................................. 75 57
Second Quarter (through May 21, 1998)..................... 71 1/4 20
</TABLE>
On May 21, 1998, the last trading day prior to the suspension of trading of
the Old Subordinated Debentures, the closing sales price of the Old
Subordinated Debentures on the New York Stock Exchange was 25 3/8. Although
the Company believes that there has been trading in the Old Subordinated
Debentures from time to time, the Company has not been able to obtain regular
market prices for the Old Subordinated Debentures since May 21, 1998.
111
<PAGE>
HISTORICAL AND PRO FORMA CAPITALIZATION
The following table sets forth the consolidated capitalization and cash and
cash equivalents of the Company at (i) April 3, 1999 on an historical basis
and on a pro forma basis giving effect to the Financial Restructuring as if it
had occurred on April 3, 1999 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 "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 April Projected As of July 31,
3, 1999 1999
------------------ ---------------------------
Without With
Financial Financial
Actual Pro Forma Restructuring Restructuring
------- --------- ------------- -------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Cash.......................... $ 5.2 $ 20.2(1) $ -- $ --
======= ======= ======= =======
LGE Extended Payables Claims.. $ 130.1 $ -- $ 140.0 $ --
======= ======= ======= =======
Debt:
Borrowings under Unsecured
Bank Loans(2).............. $ 30.0 $ 30.0 $ -- $ --
Amended Citibank Credit
Facility................... -- -- 73.2 --
Post-Restructuring bank
credit facility............ -- 1.6 -- 74.8
LGE Leveraged Lease Claims.. 89.3 -- 76.4 --
LGE Reimbursement Claims.... 72.0 -- 102.0 --
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....................... -- 106.9 -- 135.1
------- ------- ------- -------
Total debt................ $ 324.8 $ 188.5 $ 400.1 $ 259.9
======= ======= ======= =======
Stockholders' equity:
Old Common Stock, $1.00 par
value, 150,000,000 shares
authorized, 67,630,628
shares issued and
outstanding(3)............. $ 67.6 $ -- $ 67.6 $ --
New Common Stock, $0.01 par
value, 1,000 shares
authorized, 1,000 shares
issued and outstanding(4).. -- -- -- --
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).................. (962.3) (909.0) (994.5) (938.5)
Treasury stock, 105,181 Old
Common Shares, at cost..... (1.7) -- (1.7) --
------- ------- ------- -------
Total stockholders'
equity................... $(389.6) $(136.3) $(421.8) $(165.8)
======= ======= ======= =======
</TABLE>
- --------
(1) Includes $15.0 million the Company would borrow under the LGE Demand Loan
immediately prior to the Financial Restructuring.
(2) Represents the Company's credit obligations with Credit Agricole Indosuez,
which were paid in full by LGE on April 20, 1999 following a demand by
Credit Agricole Indosuez on LGE under its guarantee, resulting in an
increase in LGE Reimbursement Claims.
(3) Excludes 3,020,000 shares of Old Common Stock issuable upon exercise of
outstanding stock options as of April 3, 1999, of which 1,746,000 shares
are issuable to LGE and 1,274,000 shares are issuable to employees. There
will be no such options outstanding on a pro forma basis.
(4) New Common Stock does not show a value due to rounding in millions.
112
<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 and the
three-month periods ended April 3, 1999 and March 28, 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 selected
unaudited historical financial information for the three-month periods ended
April 3, 1999 and March 28, 1998 has been derived from unaudited consolidated
financial statements prepared by the Company, which reflect all adjustments,
consisting only of normal recurring adjustments, that, in the opinion of the
Company, are necessary for a fair presentation. The following financial
information should be read in conjunction with "PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and the Company's Consolidated Financial
Statements and related notes thereto appearing elsewhere in this Disclosure
Statement. See "INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA."
<TABLE>
<CAPTION>
Three Months Ended Years Ended December 31,
------------------- -----------------------------------------------
(Unaudited)
April 3, March 28,
1999 1998 1998 1997 1996 1995 1994
-------- --------- ------- -------- -------- -------- --------
(Dollars in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Results of operations:
Net sales............. $ 150.6 $ 220.7 $ 984.8 $1,173.1 $1,287.9 $1,273.9 $1,469.0
Pre-tax (loss)........ (25.1) (37.8) (272.5) (300.2) (177.8) (98.5) (14.8)
Net (loss)............ (25.1) (37.8) (275.5) (299.4) (178.0) (90.8) (14.5)
Financial Position:
Total assets.......... $ 290.5 $ 499.7 $ 350.0 $ 527.7 $ 765.3 $ 700.7 $ 662.4
Long term debt........ 92.0 127.0 97.8 132.8 152.7 168.8 182.0
Stockholders' equity
(deficit)............ (389.6) (126.8) (364.5) (89.0) 162.0 317.5 237.1
Per share of basic and
diluted common stock:
Net income (loss)..... $ (0.37) $ (0.55) $ (4.08) $ (4.49) $ (2.73) $ (1.85) $ (0.35)
Book value (deficit).. (5.77) (1.89) (5.40) (1.33) 2.44 5.00 5.19
Other Financial Data:
Ratio of losses to
fixed charges (1).... -- -- -- -- -- -- --
</TABLE>
- --------
(1) The Company's deficiency of earnings to cover fixed charges for the three
months ended April 3, 1999 and for the years ended December 31, 1998,
1997, 1996, 1995 and 1994 was $25.1 million, $272.5 million, $300.2
million, $177.8 million, $98.5 million and $14.8 million, respectively.
113
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma condensed consolidated balance sheet as of April 3,
1999 set forth below has been prepared as if the Financial Restructuring had
been completed as of April 3, 1999. The unaudited pro forma statements of
consolidated operations for the year ended December 31, 1998 and the three
months ended April 3, 1999 set forth below have 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 the final three quarters of 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 complete 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) will
receive no distributions and retain no property in respect of their holdings
of Old Common Stock under the Prepackaged Plan.
114
<PAGE>
ZENITH ELECTRONICS CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in millions)
<TABLE>
<CAPTION>
April 3, 1999
---------------------------------------------------
Historical Pro Forma Adjustments Pro Forma
---------- --------------------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash..................... $ 5.2 $ 15.0 (a) $ 20.2
Receivables, net......... 85.4 -- 85.4
Inventories.............. 73.9 -- 73.9
Other.................... 26.7 (1.1)(b) 25.6
------- ------- -------
Total current assets... 191.2 13.9 205.1
Property, plant and
equipment, net.......... 48.1 (26.6)(c)(d) 21.5
Receivable from related
party................... 13.8 (13.8)(d)(g) --
Property held for
disposal................ 27.0 -- 27.0
Other.................... 10.4 (0.7)(b) 9.7
------- ------- -------
Total assets........... $ 290.5 $ (27.2) $ 263.3
======= ======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.......... $ 30.0 $ 1.6 (l) $ 31.6
Short-term debt with
related party........... 191.3 (191.3)(a)(e)(f)(g) --
Current portion of long-
term debt............... 11.5 (11.5)(h) --
Accounts payable......... 51.9 -- 51.9
Accounts payable to
related party........... 130.8 (130.1)(i) 0.7
Income taxes payable..... 4.2 -- 4.2
Other accrued expenses... 153.0 (3.2)(h) 149.8
------- ------- -------
Total current
liabilities........... 572.7 (334.5) 238.2
Long-term debt............. 92.0 (42.0)(h) 50.0
Long-term debt with related
party..................... -- 106.9 (c)(e)(f)(g)(j) 106.9
Other long term
liabilities............... 15.4 (10.9)(j) 4.5
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)............... (962.3) 53.3 (b)(h)(l) (909.0)
Old treasury stock....... (1.7) 1.7 (k) --
------- ------- -------
Total stockholders'
equity.................. (389.6) 253.3 (136.3)
------- ------- -------
Total liabilities and
stockholders' equity.. $ 290.5 $ (27.2) $ 263.3
======= ======= =======
</TABLE>
115
<PAGE>
Notes to the Pro Forma Balance Sheet
(a) The Company receives $15.0 million of additional borrowings under the LGE
Demand Note. 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 0.0 1.0
----- ---- ----
$ 1.1 $0.7 $1.8
===== ==== ====
</TABLE>
<TABLE>
<C> <S> <C> <C>
Dr. Restructuring expense....................................... $ 1.8
Cr. Other current assets...................................... $ 1.1
Cr. Other non-current assets.................................. 0.7
</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 $5.8 million.
<TABLE>
<C> <S> <C> <C>
Dr. Property, plant and equipment................................. $5.8
Cr. Receivable from related party............................... $5.8
</TABLE>
(e) The LGE Demand Loan Claims, which will total $45.0 million, will be
settled partially through the issuance of New Common Stock ($18.3 million)
and partially by the LGE New Restructured Senior Note ($26.7 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............................ 18.3
Cr. Long-term debt with related party......................... 26.7
</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>
116
<PAGE>
(g) The Leveraged Lease Claims ($89.3 million) will be settled partially by
the LGE New Restructured Senior Note ($81.3 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........................ $ 89.3
Cr. Long-term debt with related party....................... $ 81.3
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 ($11.5 million) and long-term debt ($92.0
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 $56.7 million.
Dr. Current portion of long-term debt......................... $ 11.5
Dr. Long-term debt............................................ 92.0
Dr. Accrued interest on Old Subordinated Debentures........... 3.2
Cr. Long-term debt.......................................... $ 50.0
Cr. Extraordinary gain...................................... 56.7
(i) The LGE Extended Payable Claims ($130.1 million) will be settled through
the issuance of New Common Stock.
Dr. Accounts payable to related party......................... $130.1
Cr. New Common Stock........................................ $ --
Cr. New additional paid-in capital.......................... 130.1
(j) The LGE Technical Services Claims ($9.3 million) and the LGE Guarantee Fee
Claims ($1.6 million) will be settled partially through the issuance of
New Common Stock ($1.6 million) and partially by the LGE New Restructured
Senior Note ($9.3 million).
Dr. Other long-term liabilities............................... $ 10.9
Cr. New Common Stock........................................ $ --
Cr. New additional paid-in capital.......................... 1.6
Cr. Long-term debt with related party....................... 9.3
(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
(l) The Company will pay certain fees to financial advisors upon filing of the
Prepackaged Chapter 11 Case.
Dr. Restructuring expense..................................... $1.6
Cr. Short-term debt......................................... $1.6
</TABLE>
117
<PAGE>
ZENITH ELECTRONICS CORPORATION
PRO FORMA STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited)
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended April
3, 1999 Year Ended December 31 , 1998
-------------------------------- ----------------------------------
Pro Forma Pro Pro Forma Pro
Historical Adjustments Forma Historical Adjustments Forma
---------- ----------- ------ ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $150.6 $ -- $150.6 $ 984.8 $ -- $ 984.8
------ ----- ------ ------- ----- -------
Cost, expenses and
other:
Cost of products
sold................. 134.7 -- 134.7 905.5 (5.9)(a) 899.6
Selling, general and
administrative....... 25.9 -- 25.9 126.6 -- 126.6
Engineering and
research............. 8.0 -- 8.0 39.1 -- 39.1
Other operating
income, net.......... (7.7) -- (7.7) (43.0) -- (43.0)
Restructuring
charges.............. 3.3 (b) -- 3.3 202.3 (c) -- 202.3
------ ----- ------ ------- ----- -------
Operating loss.......... (13.6) -- (13.6) (245.7) (5.9) (239.8)
Gain (loss) on asset
sales, net............. (0.3) -- (0.3) 16.6 -- 16.6
Interest expense........ (2.2) 1.2 (d) (1.0) (14.6) 4.1 (d) (10.5)
Interest expense-related
party.................. (9.2) 5.8 (d) (3.4) (29.7) 16.1 (d) (13.6)
Interest income......... 0.2 -- 0.2 0.9 -- 0.9
------ ----- ------ ------- ----- -------
Loss before income
taxes.................. (25.1) 7.0 (18.1) (272.5) 26.1 (246.4)
Income tax.............. -- -- -- 3.0 -- 3.0
------ ----- ------ ------- ----- -------
Net loss................ $(25.1) $ 7.0 $(18.1) $(275.5) $26.1 $(249.4)
====== ===== ====== ======= ===== =======
Net loss per basic and
diluted common share... $(0.37) $0.10 $(0.27) $ (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 $3.3 million of cost associated with work performed by outside
consulting and law firms to support the development of the Restructuring
and the Prepackaged Plan. Excluding these restructuring charges, pro forma
net loss for the three months ended April 3, 1999 would have been $14.8
million.
(c) 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 restructuring charges, pro forma net loss for the
year ended December 31, 1998 would have been $47.1 million.
118
<PAGE>
(d) Net reduction of interest expense as a result of the Financial
Restructuring has been estimated as follows:
<TABLE>
<CAPTION>
Three Months Year Ended
Ended 4/3/99 12/31/98
------------ ----------
<S> <C> <C>
Interest expense on the new debt:
LGE New Restructured Senior Note, at LIBOR
(adjusted quarterly) + 6.5%, (estimated herein
as 12%) (principal--$113.5 million)............. $ 3.4 $ 13.6
New Debentures (principal--$50.0 million at face
value).......................................... 1.0 4.1
Reversal of actual interest expense:
Old Subordinated Debentures...................... (1.7) (6.5)
A portion ($30.0 million) of the Unsecured Bank
Loans........................................... (0.5) (1.7)
LGE Extended Payables............................ (3.1) (15.1)
Amortization of LGE Guarantee Fee Claims related
to various financing activities................. (0.4) (5.1)
LGE Leveraged Lease payable...................... (2.4) (4.0)
LGE Reimbursement Claims......................... (2.0) (3.3)
LGE Demand Loan Claims........................... (1.3) (2.2)
----- ------
Net reduction in interest.......................... $(7.0) $(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).
(1.0) LGE Extended Payables Claims deferred charges written off. See footnote (b).
56.7 Extraordinary gain on retirement of the Old Subordinated Debentures. See footnote (h).
(1.6) Fees paid upon filing under Chapter 11. See footnote (l).
------
$53.3
======
</TABLE>
119
<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 complete 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 complete 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
120
<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.
On April 20, 1999 LGE paid $30.0 million to Credit Agricole Indosuez
following a demand under LGE's guarantee of the Company's $30.0 million credit
obligations to Credit Agricole Indosuez. As a result of LGE's payment, the
amount of LGE's Reimbursement Claims increased by $30.0 million. The Company
believes that this will have the effect of increasing its projected interest
expense. The Business Plan Projections do not give effect to the Credit
Agricole Indosuez payment, however, because it occurred after they were
prepared. The Company does not believe the increase in projected interest
expense would have a material impact on the Business Plan Projections.
121
<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......... 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>
122
<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........ 48.6 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................. 135.6 140.0 (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>
123
<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 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>
124
<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>
125
<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,
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<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
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<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 million represents borrowing
the Company will make after emerging from Chapter 11.
(r) Represents the 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>
128
<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.
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<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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<PAGE>
the Company will be able to obtain annual cost improvements from sourced
products from materials and manufacturing savings that reflect historical cost
improvements in the industry. The Company has assumed that, with the exception
of its Melrose Park operations, its historical costs and cost improvements
have been representative of overall industry trends. The Company believes that
improvements in the business can be obtained through annual material cost
savings and design-to-cost savings. As a result of applying the cost of goods
assumptions listed above, the Company projects the following gross margins:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003
---- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Gross Margin............................ 8.1% 11.1% 9.3% 11.0% 10.8% 11.3%
</TABLE>
Other Cost Assumptions and General and Administrative Costs
In general, costs relating to overhead, general and administrative expenses
and other costs not directly related to the costs of goods have been developed
in the Business Plan Projections based on the detailed 1999 operating budget
prepared by the Company. This budget is based on operational plans and
programs for advertising, product management, digital business initiatives,
engineering and technology initiatives and general overhead support. The
Company has developed a structure which it believes reflects what an industry
leader in consumer electronics would require in terms of head count,
facilities, capital expenditures and tooling, assuming a distribution and
technology operation without manufacturing. The Business Plan Projections
reflect overhead, general and administrative and other costs in accordance
with the model developed.
Tax Assumptions
It is assumed that New Zenith will be able to utilize NOLs thus shielding
income from federal taxation for the projection period. As a result no federal
income tax liability is presented. In addition, no state or foreign income tax
liability is presented. The Company may or may not have enough state and
foreign tax NOLs available to shelter state and foreign income taxes.
Assumptions Concerning VSB
The assumptions relating to domestic (i.e., United States) VSB market
absorption, royalty income levels and royalty rate suggestions incorporated
into the Business Plan Projections were developed by the Company with the
assistance of PJSC and Forrester, technology professionals retained by the
Company. The Business Plan Projections reflect domestic cash flows expected
from the incorporation of VSB technologies into televisions, VCRs, DVDs,
converter boxes, personal computers, satellite boxes, cable boxes and add-in
cards for personal computers.
Aggregate potential non-domestic (i.e., non-United States) revenues from
licensing activity and royalties relating to VSB technologies are not included
in the Business Plan Projections. These revenues were excluded because the
Company and Gartner/Dataquest, technology professionals retained by the
Company, believe such revenues to be highly speculative. The unreliability of
potential non-domestic VSB revenues is due to the substantial difficulty in
assessing and quantifying the risks and variables identified by
Gartner/Dataquest in analyzing potential non-domestic VSB revenues, which
risks and variables are far more extensive and material than the risks and
variables presented by the Company's domestic VSB revenue projections. These
risks and variables include:
. international economic conditions, both market-by-market and global;
. standards adoption processes and the interaction between de facto and
government decreed standards (for countries that have yet to adopt a
standard);
. influence of infrastructural elements;
. lack of historical information for the potential market;
. market drivers and consumer adoption;
. political and economic influences as among potential market countries;
131
<PAGE>
. sources of transmission content;
. lack of patent protection in some countries;
. technical considerations;
. broadcaster plans; and
. consumer electronics equipment manufacturer plans.
Accordingly, the Company believes that non-domestic market assumptions and
revenue projections with respect to VSB technology are unreliable for business
planning purposes.
The Business Plan Projections also include certain assumptions relating to
royalty-free cross licenses and other similar agreements with regard to the
Company's intellectual property, particularly its patents.
For additional information regarding the qualifications, selection of, and
procedures used by Forrester and Gartner/Dataquest, see "SPECIAL FACTORS--
Liquidation and Going Concern Analyses."
The Company's assumptions regarding the absorption of digital products by
consumer markets are based in part on information provided by Forrester and
Gartner/Dataquest. The relevant markets are moving rapidly and Forrester and
Gartner/Dataquest may periodically update their views and predictions
accordingly. Since the Business Plan Projections were prepared, Forrester has
revised its views regarding the timing of HDTV rollout and the likelihood that
the cable television industry will adopt VSB technology. These revisions would
result in slightly lower estimates for VSB cash flows, although the Company
does not believe that the differences are material in the context of the
Prepackaged Plan. There can be no assurance, however, that Forrester or
Gartner/Dataquest will not revise its predictions in a way that could
materially affect the Business Plan Projections.
Assumptions Concerning Asset Disposition
As part of its preparation for the Restructuring, the Company retained
certain nationally recognized professionals who inspected the Company's
plants, land, equipment and inventories and provided appraisals concerning the
value of these assets under circumstances approximating those contemplated in
the Operational Restructuring.
The Company and a potential lender engaged the Valuation and Advisory
Service of Cushman & Wakefield of Illinois, Inc. and Cushman & Wakefield of
Arizona, Inc. to prepare appraisals concerning the Company's real estate
assets in the United States and Mexico. These Cushman & Wakefield Companies
are part of a network of Cushman & Wakefield affiliates which are nationally
recognized real estate advisors and providers of appraisal services and have
recognized expertise in evaluating the current market for office,
manufacturing and warehouse space. The appraisals prepared for the Company
were performed in accordance with the Uniform Standards of Professional
Appraisal Practices of the Appraisal Foundation and in accordance with
instructions from the Company's potential lenders. In preparing its
appraisals, the appraisers considered regional and neighborhood analysis for
each property location, the current market for similar types of property, real
estate taxes and assessments and zoning. The appraisers provided appraised
values of each property or facility including both fair market value and
"quick sale estimates." Such appraisals should be read in their entirety and
state an opinion of value as of the date of the report and are subject to
assumptions and limiting conditions stated in each report. As compensation for
its services, the Cushman & Wakefield Companies received approximately $80,000
for their initial appraisals of the Company's real estate assets, and
approximately $15,000 relating to additional work performed subsequent to the
delivery of their initial appraisals through April 30, 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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<PAGE>
Company's capital assets records and conducted offsite review, research and
analysis of the assets, including review of comparable sales of similar pieces
of equipment. In arriving at its conclusions as to the value of the Company's
machinery and equipment, Greenwich Industrial Services considered workflow of
the products produced, capability constraints, safety issues, quality
controls, maintenance of the equipment, industry trends, location of the
facilities, current technology and overall working conditions and environment.
Greenwich Industrial Services provided a range of appraised values: fair
market value in-place, fair market value, and forced liquidation value. As
compensation for its services, Greenwich Industrial Services received fees
totaling approximately $102,800 through April 30, 1999. Through April 30,
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.
The Company selected Insignia/ESG as its real estate advisor and broker for
the disposition of its U.S. properties after soliciting recommendations from
other companies and after interviewing a number of real estate brokers and
advisors who specialize or have experience with office, manufacturing, and
warehousing facilities. Insignia/ESG is a nationally recognized real estate
firm with market experience in the U.S. real estate market in general and
Illinois and Texas real estate in particular. Insignia/ESG was not
specifically compensated for its summary and value estimate concerning the
Company's U.S. real estate, but has earned and may earn additional commissions
on the sale of the Company's U.S. properties in accordance with the terms of
its brokerage agreement with the Company. Insignia/ESG has been engaged as the
Company's broker for purposes of leasing a new headquarters site. The Company
has also engaged Insignia/ESG as an advisor on real estate matters relating to
this disposal of certain manufacturing Subsidiaries of the Company, for which
it receives a fee. As compensation for its brokerage services through April
30, 1999, Insignia/ESG received $466,000. Additionally, Insignia/ESG received
$40,000 through April 30, 1999 for advisory services associated with the
Company's disposition of real estate assets and Subsidiaries.
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.
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<PAGE>
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
In connection with the planning and development of the Prepackaged Plan, the
Company prepared projections to present the anticipated impact of its
restructuring. The first set of projections was prepared in April 1998. The
projections were updated in June 1998, November 1998 and April 1999. The
following table summarizes the aggregate projected gross margin, operating
expenses (excluding restructuring), other operating income, interest expense,
and gain on asset sales during the projection period from the Company's four
sets of projections. The April 1998 Projections covered the period from 1998
through 2002, while the other projections covered the period from 1998 through
2003.
<TABLE>
<CAPTION>
Aggregate Over Projection Period
-----------------------------------
April June November April
1998 1998 1998 1999
------- ------- -------- -------
(in millions)
<S> <C> <C> <C> <C>
Projected gross margin................... $ 394.7 $ 488.4 $ 547.5 $ 594.5
Projected operating expenses (excluding
restructuring).......................... (564.6) (691.6) (743.3) (784.6)
Projected other operating income......... 166.8 291.6 256.4 265.9
------- ------- ------- -------
Projected operating (loss) income...... (3.1) 88.4 60.6 75.8
Projected interest expense............... (203.1) (160.2) (170.6) (209.4)
Projected gain on asset sales............ 119.1 54.7 22.5 27.6
------- ------- ------- -------
Projected (loss) income before
restructuring items................... (87.1) (17.1) (87.5) (106.0)
Restructuring items...................... (243.6) (201.4) (185.1) (168.5)
Income taxes............................. -- -- -- (3.0)
------- ------- ------- -------
Net (loss) earnings...................... $(330.7) $(218.5) $(272.6) $(277.5)
======= ======= ======= =======
</TABLE>
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 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
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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
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. The
June Projections also included the addition of projections for the year 2003,
which were prepared in order to show five years post-restructuring. The
significant changes from the April 1998 Projections to the June 1998
Projections are summarized below.
The June 1998 Projections showed $93.7 million more aggregate projected
gross margins than shown in the April 1998 Projections. The increase was
primarily due to the inclusion of projections for 2003, which contributed
$108.4 million of projected gross margin, and a $39.8 million reduction in
projected costs of merchandising programs for commercial and international
sales. The increases in projected margin were partially offset by a $40.3
million increase in projected production costs to reflect updated information,
a $14.9 million increase in projected freight on international sales as a
result of refined estimates, and a $4.5 million increase in projected costs
related to a delay in the projected shutdown of the Cd. Juarez facility.
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<PAGE>
The June 1998 Projections showed $127.0 million more in aggregate projected
operating expenses (excluding restructuring), than shown in the April 1998
Projections. The increase was primarily due to the inclusion of projections
for 2003, which contributed $110.9 million of projected operating expenses, a
$13.2 million increase in projected sales commissions, an $18.7 million
increase in projected expenses relating to the inclusion of short- and long-
term incentive compensation programs as part of the proposed restructuring
plan, a $4.1 million reduction in projected savings from staff reductions, and
a $8.4 million increase in projected field and administrative sales expenses.
These increases in projected expenses were partially offset by a $27.4 million
decrease in projected advertising expenses.
The June 1998 Projections showed $124.8 million more in aggregate projected
other operating income than shown in the April 1998 Projections. The increase
was primarily due to the inclusion of projections for 2003, which contributed
$78.8 million of projected other operating income, a $31.2 million increase in
projected VSB royalties derived from inclusion of projected VSB royalties for
personal computers, a $14.0 million decrease from the reduction of projected
amortization of financing fee charges, and an increase of $4.8 million in
projected other royalties and licenses, offset by a $4.0 million decrease in
projected tuner royalties.
The June 1998 Projections showed $42.9 million less in aggregate projected
interest expense than shown in the April 1998 Projections. The decrease was
primarily due to projected debt retirement or conversion into equity in
connection with the financial restructuring, which was not included in the
April 1998 Projections. The inclusion of a financial restructuring also
resulted in a $63.6 million projected gain on debt forgiveness, offset by a
$34.0 million projected acceleration of guarantee and finance fee amortization
and the inclusion of projections for 2003, which contributed $19.7 million of
projected interest expenses.
The June 1998 Projections showed $64.4 million less in aggregate projected
gains on sale of assets than shown in the April 1998 Projections. The decrease
was primarily due to changes in estimated sale proceeds resulting from updated
market value information.
The June 1998 Projections showed $55.0 million more in aggregate projected
cash flows than shown in the April 1998 Projections. The increase was
primarily due to a $119.9 million decrease in projected cash interest and
restructuring expenses due to the inclusion of a financial restructuring, the
inclusion of projections for 2003, which contributed $48.0 million of
projected cash flow, partially offset by a $12.4 million increase in projected
working capital requirements and a $97.2 million decrease in projected
proceeds from asset sales.
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 1998.
The significant changes from the June 1998 Projections to the November 1998
Projections are summarized below.
The November 1998 Projections showed $59.0 million more aggregate projected
gross margins than shown in the June 1998 Projections. The increase was
primarily due to a $15.3 million increase in projected revenues from the
accessories business, a $6.0 million projected savings on freight in
connection with a new distribution
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<PAGE>
center, and a $16.8 million decrease in projected product costs based on
contracts entered into for outsourced products and $20.9 million increase
based on the difference between the actual results for nine months of 1998 as
compared to the projections included in the June Projections.
The November 1998 Projections showed $51.7 million more in aggregate
projected operating expenses (excluding restructuring), than shown in the June
1998 Projections. The increase was primarily due to a projected delay in
certain staff reductions, together with increases in projected overhead
expenses to support development of digital products, product and program
management, inventory planning and the difference between the actual results
for nine months of 1998 as compared to the projections included in the June
Projections.
The November 1998 Projections showed $35.2 million less in aggregate
projected other operating income than shown in the June 1998 Projections. The
decrease was primarily due to a $91.4 million decrease in projected VSB
royalties derived from Forrester's revised estimates of VSB usage in personal
computers, partially offset by a $21.6 million increase in projected other
royalties and licensing fees, the inclusion of $7.3 million of projected
incentive payments received under a contract with Americast, and a $27.5
million decrease in projected amortization of financing fees.
The November 1998 Projections showed $10.4 million more in aggregate
projected interest expense than shown in the June 1998 Projections. The
increase was due to an increase in projected debt levels related to decreased
projected asset sale proceeds and decreased projected VSB royalties.
The November 1998 Projections showed $32.2 million less in aggregate
projected gains on sale of assets than shown in the June 1998 Projections. The
decrease was primarily due to decreases in projected sale proceeds resulting
from updated market value information and the Company's experience in
attempting to market certain assets.
The November 1998 Projections showed $96.1 million less in aggregate
projected cash flows than shown in the June 1998 Projections. The decrease was
primarily due to a $34.1 million decrease in projected EBITDA due to decreases
in projected royalty income and increases in projected operating expenses. The
decrease in projected cash flows was also due to a $21.0 million increase in
projected working capital requirements, a $16.6 million increase in projected
debt service, a $11.4 million increase in cash interest expense and a $9.2
million increase in cash restructuring payments.
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.
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.
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
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<PAGE>
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.
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 significant changes from the November1998 Projections to the April 1999
Projections are summarized below.
The April 1999 Projections showed $47.0 million more aggregate projected
gross margins than shown in the November 1998 Projections. $33.2 million of
the increase was primarily attributable to an extension of the projected
completion of the Operational Restructuring, which results in the Company
retaining certain manufacturing assets longer than projected in November 1998
and the resulting exclusion of overhead from gross margin, as compared to an
outsourcing cost structure. The April 1999 Projections also included a $6.7
million increase due to projected rebates and purchase credits in connection
with projected purchases by the Company in excess of the minimum provided in
the Philips contract and $7.1 million from the difference between the actual
results for all of 1998 as compared to the projections included in the
November Projections.
The April 1999 Projections showed $41.3 million more in aggregate projected
operating expenses (excluding restructuring), than shown in the November 1998
Projections. The increase was primarily due to a $28.7 million increase in
projected expenses attributable to an extension of the projected completion of
the Operational Restructuring, together with a $22.2 million increase in
support expenses for digital products, program and product management,
licensing fees and year 2000 compliance expenses, partially offset by $9.6
million from the difference between the actual results for all of 1998 as
compared to the projections included in the November Projections.
The April 1999 Projections showed $9.5 million more in aggregate projected
other operating income than shown in the November 1998 Projections. The
increase was primarily due to the difference between the actual results for
all of 1998 as compared to the projections included in the November
Projections.
The April 1999 Projections showed $38.8 million more in aggregate projected
interest expense than shown in the November 1998 Projections. The increase was
primarily due to an extension of the projected completion of the
Restructuring.
The April 1999 Projections showed $4.6 million less in aggregate projected
gain on debt forgiveness than shown in the November 1998 Projections to
reflect the terms of the Lock-Up Agreement. The April 1999 Projections also
showed $21.2 million less in restructuring/reorganization expenses than shown
in the November 1998 Projections due to decreases in projected asset
impairment, environmental obligations, and severance costs, offset by
increased professional fees due to an extension of the projected completion of
the Restructuring.
The April 1999 Projections showed $33.9 million less in aggregate projected
cash flows than shown in the November 1998 Projections. The decrease was
primarily due to a $50.7 million increase in projected cash interest in
connection with the extension of the projected completion of the
Restructuring. The extension of the projected completion of the Restructuring
also resulted in a $23.4 million increase in projected working capital, a $9.7
million increase in projected restructuring expenses, a $10.6 million increase
in projected capital expenditures and extended the projected date of
conversion of debt into equity. These decreases in projected cash flows were
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<PAGE>
partially offset by a $63.5 million decrease in debt service, primarily on the
LGE New Restructured Senior Note.
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 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
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<PAGE>
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.
The liquidation proceeds realized by the Company are heavily dependent upon
liquidation of inventories and sale of real properties, plants and equipment
in a timely and efficient manner. Consequently, the liquidation analysis
assumes that appropriate professionals would be employed to oversee the
process of disposition of the Company's assets. During the liquidation, the
Company believes there would be significant costs of the liquidation and
employee turnover. See notes accompanying the liquidation analysis.
The Company believes, based on the assumptions set forth herein, that the
value of the distributions offered to the members of each Class of Impaired
Claims under the Prepackaged Plan will be greater than the distribution such
creditors would receive in a liquidation under chapter 7.
Section 1129(a)(7)(A)(ii) of the Bankruptcy Code states that the Bankruptcy
Court shall confirm a plan of reorganization only if certain requirements are
met, including a requirement that each holder of an Impaired Claim or Equity
Interest who does not consent to the plan receive or retain property that has
a value at least equal to the distribution such holder would receive if the
company were liquidated under chapter 7 of the Bankruptcy Code.
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<PAGE>
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..... (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).......................... 222.5 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 Binswanger/
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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 each of the entire second and 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...................................... $ 6.0 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......... $ 70.4 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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<PAGE>
DESCRIPTION OF DEBT AND CREDIT ARRANGEMENTS
Short-Term Debt
Citibank Credit Facility and Amended Citibank Credit Facility
In April 1997, the Company obtained a three-year, $110 million revolving
credit facility, composed of a $45 million term tranche and a $65 million
revolving tranche, with a bank group syndicated by Citibank. This Citibank
Credit Facility replaced the Company's previous credit agreement with a
lending group which was syndicated by General Electric Capital Corporation
("GECC Credit Facility"). Under the revolving credit line, the maximum
commitment of funds available for borrowing was limited by a defined borrowing
base formula related to eligible inventory. Initially, the facility was
secured by the Company's inventory, domestic fixed assets, stock of the
Company's Subsidiaries and tuner patent royalties, along with the related
patents, licenses and other general intangibles. Interest on borrowings is
based on market rates.
The Citibank Credit Facility contained certain covenants that had to be met
in order to remain in compliance with the facility, including financial
covenants that had to be maintained as of the end of each fiscal quarter.
During 1997, the Company amended the Citibank Credit Facility to relax certain
financial covenants and to provide additional collateral. As amended, the
financial covenants include a minimum EBITDA amount, a current ratio test, a
funded debt/total capitalization ratio test, a tuning patent royalties test
and an LGE payable test. As a result of waivers obtained from the bank group
in December 1997 and March 1998, only the tuning patent royalties test and the
LGE payable test were in effect as of December 31, 1997 and March 31, 1998,
and the Company was in compliance with both of those covenants. In addition,
there were restrictions regarding investments, acquisitions, guarantees,
transactions with affiliates, sales of assets, mergers and additional
borrowings, along with limitations on liens, along with dividend payments on
the Company's common stock.
On June 29, 1998 the Citibank Credit Facility was amended and restated and
the Citibank Receivables Facility was terminated. The Amended Citibank Credit
Facility provides for up to $125.0 million of revolving loans, subject to
borrowing base restrictions, including up to $25.0 million in letters of
credit and up to $11.0 million in swing line loans. The revolving loans must
be repaid on or before the earlier of the Company's filing for bankruptcy and
August 31, 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 a floating rate of interest
measured by reference to one or more of (i) the Base Rate plus 2.0% per annum
or (ii) the relevant Eurodollar Rate plus 3.25%.
The term "Base Rate" is defined in the Amended Citibank Credit Agreement as
the higher of:
(a) the highest rate of interest announced publicly by Citibank, N.A. in
New York, New York from time to time as its base rate; or
(b) the sum of:
. 0.50% per annum, plus
. the per annum rate obtained by dividing (x) a three week average of
secondary market morning offering rates in the United States for
three-month certificates of deposit of major United States money
market banks by (y) 100% less the average of daily percentages
specified by the Federal Reserve Board for determining the maximum
reserve requirement for Citibank, N.A. in respect of liabilities
which include three-month nonpersonal U.S. Dollar time deposits,
plus
. the average of the daily net annual assessment rates established by
Citibank, N.A. for determining the assessment payable by Citibank,
N.A. to the Federal Deposit Insurance Corporation for insuring
deposits of Citibank, N.A. in the United States, or
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<PAGE>
(c) for any day 0.5% per annum above the weighted average of the rates on
overnight federal funds transactions with members of the Federal
Reserve Systems arranged by Federal funds brokers, but in no event
higher than the maximum rate permitted by applicable law.
The term "Eurodollar Rate" is defined in the Amended Citibank Credit
Agreement for any applicable period as the average of the interest rates per
annum at which deposits in United States dollars for such period are offered
by the principal office of Citibank, N.A. in London, England to prime banks in
the London interbank market two business days before the first day of such
period in an amount approximately equal to the principal amount of, and for a
length of time approximately equal to the amount and period sought by Zenith
as the borrower.
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.
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 was one
year from the date of the first borrowing, subject to LGE's right to demand
repayment at anytime after June 30, 1998. In April 1999, in conjunction with
the extension of the Amended Citibank Credit Facility to August 31, 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 August 31, 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 April 3, 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. All such amounts have been paid by LGE pursuant to its
guarantee as of April 30, 1999. 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
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<PAGE>
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>
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
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<PAGE>
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.
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
described under "--Short-Term Debt; Citibank Credit Facility and Amended
Citibank Credit Facility"), plus 1.75% or (b) the relevant Eurodollar Rate (as
described under "--Short-Term Debt; Citibank Credit Facility and Amended
Citibank Credit Facility"), plus 2.75%. Following an event of default, 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.
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<PAGE>
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 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 described under "--Short-Term Debt; Citibank Credit Facility and
Amended Citibank Credit Facility") plus 2.0% or (b) the relevant Eurodollar
Rate (as described under "--Short-Term Debt; Citibank Credit Facility and
Amended Citibank Credit Facility"), plus 3.0%, subject to a grid based on
performance levels to be determined. Following an event of default, 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.
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<PAGE>
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.
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<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 their date of issuance, at the rate shown by their
title, payable on May 1 and November 1 in each year, commencing November 1,
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.
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<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 will not be secured.
Unsecured Bank Loans, 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. 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 added to the principal amount of the LGE New
Restructured Senior Notes.
Collateral and Guarantees
Except as otherwise agreed to by LGE and the Company, the LGE New
Restructured Senior Note will be secured by a 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
Third anniversary of the Consummation of the Prepackaged Plan.
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 November 1, 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 2--Citibank Secured Claims
Class 5--Old Subordinated Debenture Claims
Class 6--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 2, Class 5 and Class 6. The Master Ballots are being
distributed to holders of Claims in Class 5.
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
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Subordinated Debentures and that such holder has cast the same vote on any
multiple ballots for holdings in a single Class of Claims. THE NAMES OF ALL
BROKER-DEALERS OR OTHER INTERMEDIARIES OR PERSONS THAT HOLD THE OLD
SUBORDINATED DEBENTURES FOR A BENEFICIAL INTEREST HOLDER SHOULD BE INDICATED
ON THE BALLOTS. AUTHORIZED SIGNATORIES (OTHER THAN BROKERAGE FIRMS AND OTHER
PARTICIPANTS) SHOULD SUBMIT SEPARATE BALLOTS FOR EACH BENEFICIAL INTEREST
HOLDER FOR WHOM THEY ARE VOTING.
Other
If a Ballot is signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations, or others acting in a fiduciary
or representative capacity, such persons should indicate such capacity when
signing in accordance with the procedures set forth under "Certifications"
below and, unless otherwise determined by the Company, must submit proper
evidence satisfactory to the Company of authority to so act on behalf of a
beneficial interest holder.
The Company, in its sole discretion, may waive any defect in any Ballot or
Master Ballot at any time, either before or after the close of voting, and
without notice. Except as provided below, unless the Ballot or Master Ballot
being furnished is timely submitted to the Solicitation Agent on or prior to
the Expiration Date together with any other documents required by such Ballot
or Master Ballot, as the case may be, the Company may, in its sole discretion,
reject such Ballot or Master Ballot as invalid and, therefore, decline to
utilize it in connection with seeking Confirmation of the Prepackaged Plan by
the Bankruptcy Court.
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
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received a completed and signed Ballot from each such beneficial interest
holder, (c) such nominee is the registered holder of the securities being
voted, (d) such nominee has been authorized by each such beneficial interest
holder to vote on the Prepackaged Plan, and (e) the beneficial interest holder
has certified to such nominee that such beneficial interest holder has not
submitted any other Ballots for such Class of Claims held in other accounts or
other registered names, or, if held in other accounts or registered names,
that the beneficial interest holder has certified to such nominee that such
beneficial interest holder has cast the same vote for such Class of Claims,
and such nominee will disclose such other accounts or registered holders and
such other ballots; (ii) will request that such nominee be treated as the
beneficial interest holder of the securities for purposes of voting on the
Prepackaged Plan, unless otherwise authorized by the Bankruptcy Court; (iii)
will disclose (a) the number of such beneficial interest holders, (b) the
respective principal amounts and issues of the Old Subordinated Debentures
owned, as the case may be, by each such beneficial interest holder, (c) each
beneficial interest holder's respective vote concerning the Prepackaged Plan,
(d) the customer account or other identification number for each such
beneficial interest holder; and (iv) will agree to maintain Ballots returned
by beneficial interest holders (whether properly completed or defective) for
disclosure to the Bankruptcy Court if so ordered.
Ballots
A separate form of Ballot and, when applicable, Master Ballot, is to be used
for each Class of Impaired Claims. Holders of Claims should take care to use
the correct Ballot(s) in voting on the Prepackaged Plan. See "--Incomplete
Ballots." If any Ballots are damaged or lost, or if a holder has any questions
concerning this Solicitation, it may contact the Solicitation Agent at the
address or phone number listed on the back cover of this Disclosure Statement.
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,
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unless cured or waived. Abstentions as a result of failing to submit a
properly executed Ballot or Master Ballot (when appropriate) or failing to
indicate a vote either for acceptance or rejection of the Prepackaged Plan
will not be counted as votes for or against the Prepackaged Plan. The Company,
in its sole discretion, may waive any defect in any Ballot or Master Ballot at
any time, either before or after the close of voting, and without notice. No
assurance can be given, however, that the Bankruptcy Court will recognize any
such waiver.
Agreements Upon Furnishing Ballots
The delivery of a Ballot or Master Ballot indicating a vote to accept the
Prepackaged Plan by a holder of an Impaired Claim pursuant to the procedures
set forth above will constitute an agreement between such holder and the
Company to accept (i) all the terms of, and conditions to, this Solicitation
and (ii) all the terms of the Prepackaged Plan.
Method of Delivery of Ballots
The method of delivery of Ballots and Master Ballots to be delivered to the
Solicitation Agent is at the election and risk of each holder of an Impaired
Claim. Except as otherwise provided herein, such delivery will be deemed made
only when 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
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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.
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 first three months of 1999 compared with the
first three months of 1998, set forth below, have largely been excerpted from
the Company's Quarterly Report on Form 10-Q for the quarter ended April 3,
1999. 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: First Quarter of 1999 Compared to First Quarter of 1998
The Company's first quarter net loss, excluding restructuring charges, was
$21.8 million in 1999 compared to $35.2 million in 1998. Including a $3.3
million restructuring charge, the Company reported a 1999 first quarter net
loss of $25.1 million or $0.37 per basic and diluted common share. In the 1998
first quarter, including a $2.6 million restructuring charge, the Company
reported a net loss of $37.8 million or $0.55 per basic and diluted common
share.
The first quarter of 1999 and 1998 restructuring charges related to costs
associated with work performed by outside consulting and law firms to support
the development of the Operational Restructuring, the Financial Restructuring
and the Prepackaged Plan.
The Company's core business--the development, manufacture and distribution
of a broad range of products for the delivery of video entertainment--is
composed of two major product areas--Consumer Electronics (which includes
color picture tube operations) and 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).
Total first quarter sales were $150.6 million in 1999, down 32% from $220.7
million in 1998. Consumer Electronics sales declined $83.6 million (or 41%) in
the 1999 quarter compared with the same period in 1998, driven largely by
planned sales reductions in lower-margin color television products and a
change in distribution strategy whereby certain VCRs were sold directly from
LGE rather than through the Company's direct sales organization. The Company
received a royalty ($0.6 million in 1999) for these sales. The 1999 sales
decrease also resulted from (i) a shortage of certain products including
projection televisions; (ii) a large 1997 year-end finished goods inventory
which necessitated aggressive promotions in the first quarter of 1998 and
(iii) LGE's Canadian affiliate purchasing $4.5 million less in 1999.
Sales of NWS products increased $13.5 million (or 75%) in the first quarter
of 1999 compared with a year ago. The increase reflects continued strong
demand for digital set-top boxes from both domestic customers and emerging
international markets which began in late 1998.
The Company's 1999 first quarter gross margin was $15.9 million compared to
$7.2 million in the prior year. This was primarily the result of: (i) lower
depreciation expense and other fixed manufacturing costs eliminated in the
1999 first quarter (due to restructuring activities which were primarily in
the fourth quarter of 1998), (ii) a favorable change in product mix to more
NWS products, (iii) favorable spending and material costs at the Reynosa
plant, and (iv) a planned reduction in the sale of lower margin business.
Selling, general and administrative expenses were $25.9 million in the first
quarter of 1999, compared with $30.7 million in the previous year. Expenses
for 1999 benefited from lower advertising costs and the Company's continuing
efforts to downsize staffing.
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Other operating expense (income) was $(7.7) million for the first quarter of
1999 and $(7.2) million for the same period in 1998. Other operating income in
the first quarter of 1999 includes $6.2 million of accrued royalty income from
manufacturers of television sets and VCRs who have taken licenses under some
of the Company's U.S.tuner system patents. This income was $6.3 million in the
first quarter of 1998.
Interest expense was $11.4 million in the first quarter of 1999, compared
with $8.2 million in the comparable period of the previous year. The change
resulted from higher funding requirements in 1999 (at generally higher
interest rates) for Company operations and the Company's need to accrue
interest on the amount the Company owes LGE for LGE's guarantee of the
Company's obligation under the sale-leaseback agreement.
During the three months ended April 3, 1999, $18.4 million of cash was
provided by operating activities principally as a result of $39.4 million of
cash provided by the change in current accounts, which was principally
composed of a $51.1 million decrease in receivables and a $10.3 million
decrease in inventories, partially offset by an $18.9 million reduction in
accounts payable and accrued expenses. The decrease in receivables was the
result of lower revenue in the first quarter of 1999 and the Company's
continued effort to reduce its aged receivables. The decrease in inventories
and accounts payable and accrued expenses resulted primarily from the Company
decreasing manufacturing activities as part of its operational restructuring
plan and its continuing effort to improve its rate of finished goods turnover.
Cash was used to fund $20.5 million of net losses from operations as adjusted
for depreciation.
During the three months ended April 3, 1999, $5.4 million of cash was
provided by investing activities. This was composed of $5.8 million of cash
received from the sale of certain property, partially offset by $0.4 million
of cash used for capital additions.
During the three months ended April 3, 1999, $18.6 million of cash was used
by financing activities. This was composed of a $17.8 million repayment of
revolving credit borrowings under the Amended Citibank Credit Facility and
$0.8 million repaid to LGE from proceeds from the sale of equipment previously
included in the sale-leaseback transaction.
Results of Operations: 1996 to 1998
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
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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.
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.
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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) 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 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, 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.
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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 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
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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.
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
Restructuring.
Reorganization and additional restructuring charges of approximately $27
million are expected to be incurred in 1999 as the Company continues to
implement its Restructuring. 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.
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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.
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.
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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 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.
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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.
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 April 3, 1999, the Company had $454.9 million of interest-bearing
obligations which consisted of: (i) $130.1 million of extended-term payables
with LGE, (ii) $103.5 million of Old Subordinated Debentures (the current
portion of which was $11.5 million), (iii) $30.0 million currently payable
under the remaining Unsecured Bank Loans, (iv) $72.0 million owed to LGE as a
result of LGE's payments under demands against guarantees on the Unsecured Bank
Loans, (v) $89.3 million owed to LGE as a result of LGE's payment under the
guarantees of the Leveraged Leases and (vi) $30.0 million outstanding under a
secured credit facility with LGE. As of April 3, 1999, there was no balance
outstanding under the Amended Citibank Credit Facility.
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 such LGE credit support, 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. As of April 3, 1999, the Company owed LGE $1.6 million in guarantee fees.
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 during the second quarter of 1999 LGE made a
payment under a demand against its guarantee of the remaining $30 million. 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
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loans, subject to borrowing base restrictions. In April 1999, 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) August 31,
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. This additional
credit support is not included in LGE's previous commitment to provide $160
million of credit support to the Company.
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 August 31, 1999. Repayment is due
in full at the end of the term. The first such borrowing occurred in May 1998,
and as of April 3, 1999, $30 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.
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 shares of Old Common Stock 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
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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.
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.
On April 16, 1999, LGE informed the Company that it had received a demand
for repayment under LGE's guarantee of the Company's $30 million demand loan
payable to Credit Agricole Indosuez, Seoul Branch. LGE further informed the
Company that on April 20, 1999, it made payment in full against its guarantee
under such demand. Such payment by LGE constitutes a LGE Reimbursement Claim
for LGE against the Company under the Reimbursement Agreement.
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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
January 1, 2000. While the Company is working to achieve Year 2000 readiness,
there can be no assurance that it will successfully achieve all of its goals.
At this time, and based on the Company's current implementation plan, the
Company does not believe that its Year 2000 related issues will have a
material adverse effect on the Company's business. Although no contingency
plan has been deemed to be necessary at this time, the Company is in the
process of evaluating the need for various contingency plans as a
precautionary measure.
Included within the Company's Year 2000 readiness initiatives are plans to
ensure the Company's 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 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.
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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
April 28, 1999, LGE owned 38,315,000 shares, including vested but unexercised
options, of Old Common Stock of the Company, which represents 55.3% of the
outstanding Old Common Stock.
Sources of Supply
Many materials, such as copper, plastic, steel, wood, glass, aluminum and
zinc, are essential to the manufacture of the Company's products. Adequate
sources of supply exist for these materials. The direct importance of the
items to the business has decreased as the Company has implemented the
Operational Restructuring. Pursuant to the Operational Restructuring, the
Company has been discontinuing its manufacturing operations and outsourcing
products. See "THE OPERATIONAL RESTRUCTURING--Outsourcing Contracts."
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
complete 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 April 3, 1999, the Company employed approximately 5,300 people, of
whom approximately 2,900 were hourly workers covered by collective bargaining
agreements.
As of April 3, 1999, approximately 750 of the Company's employees were
located in the Chicago, Illinois, area, of whom approximately 100 were
represented by unions. Approximately 4,250 of the Company's employees are
located in Mexico, of whom approximately 2,800 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 April 30, 1999, the Company utilized a total of approximately 4.8
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 Four administration, 1.6
(including suburban locations) production and
warehousing facilities
(approximately
0.7 million square feet
is leased by
the Company)
Fort Worth, El Paso and Dallas, Seven locations-- 1.0
Texas; Huntsville, Alabama; warehouses/offices
Ontario and San Jose, (all of which are leased
California and Greenville, by the Company)
Tennessee
Foreign:
Mexico Three locations with ten 2.2
manufacturing
and warehouse buildings
Taiwan One purchasing office --
---
Total 4.8
===
</TABLE>
The Company's facilities are suitable and adequate to meet current and
anticipated requirements. Mortgages exist on domestic real property as
collateral for certain of the Company's financing agreements.
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<PAGE>
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 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
179
<PAGE>
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 County, Colorado, the Liquid Dynamics Superfund Site in Chicago,
Illinois, the Midwest Solvent Recovery Superfund
180
<PAGE>
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.
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.
181
<PAGE>
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.
182
<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>
183
<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 from 1989 to
1999, 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>
184
<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. LGE beneficially owns
approximately 55.3% 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 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.
185
<PAGE>
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.
186
<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..... 59 Senior Vice President and Chief Financial Officer
since June 1998. Previously Chief Financial Officer
of General Binding Corporation from 1984 to 1997.
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 $1.1 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 four 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 $1.1 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 1998 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. Under the Company's 1999 short-term incentive program, payments
could range from 30% to 50% of base salary for tier 1 executives and 20% to
25% of base salary for tier 2 executives.
187
<PAGE>
Payments under tier 1 and tier 2 1998 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
$5.0 million and $0.8 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 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 June 1999,
the Board approved an additional short-term incentive program based on
performance goals for the 1999 fiscal year. The Company may be obligated to
make payments to the two tiers of executives aggregating up to approximately
$2.1 million, including up to $287,667 and $285,192 for Mr. Vitkus and Mr.
McNulty, respectively. The Company could be required to make payments to key
executives and senior managers aggregating up to $5.8 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 1999
1998 Maximum Maximum
Short-Term Short-term Long-Term
Retention Incentive Incentive Incentive
Executive Group Bonus Payment Payment Payment Total
- --------------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Tier One Executives and
Senior Managers........ $ 780,286 $1,014,544 $1,835,944 $5,007,072 $ 8,637,846
Tier Two Executives and
Senior Managers........ 349,492 330,560 252,640 819,792 1,752,484
---------- ---------- ---------- ---------- -----------
Total................... $1,129,778 $1,345,104 $2,088,584 $5,826,864 $10,390,330
========== ========== ========== ========== ===========
</TABLE>
The executives currently in tier one are: Richard F. Vitkus, Edward J.
McNulty, William G. Luehrs, Richard Lewis, Kathryn Wolfe, William J. Sims,
Michael Thomas and John I. Taylor. The executives currently in tier two are:
Hector Escobedo, Gerald Reid, Wendy Weil and Tom Sorensen. 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 and Research. Kevin Lynch resigned from his position as the
Company's Senior Vice-President Outsourcing effective April 30, 1999.
Additionally, Gregg Gronowski resigned from his position as the Company's
Director--Champion Products effective May 7, 1999. Messrs. Lynch and Gronowski
will not be eligible for the remainder of their retention bonus, and will not
participate in the long-term incentive program. Mr. Thomas was moved from tier
two to tier one effective May 1, 1999 when he was promoted to Senior Vice-
President Sourcing and Inventory Control. 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
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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 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
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<PAGE>
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 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.
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<PAGE>
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.
(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."
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<PAGE>
(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).
192
<PAGE>
SECURITY OWNERSHIP
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information regarding the beneficial
ownership of the Old and New Common Stock as of April 30, 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........... 38,315,000(3) 55.3% 1,000 100%
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 514,443 shares of Old Common Stock as of April 30, 1999.
(2) Percentage includes outstanding exercisable stock options.
(3) As of April 28, 1999, LGE beneficially owned 38,315,000 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.
(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.
193
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Old Common Stock and Old Preferred Stock
The Company is presently authorized to issue 150,000,000 shares of Old
Common Stock, par value $1.00 per share, and 8,000,000 shares of preferred
stock, par value $1.00 per share (the "Old Preferred Stock"). As of September
26, 1998, there were issued and outstanding 67,525,447 shares of Old Common
Stock and no shares of Old Preferred Stock. Except as may be otherwise
required by applicable law, the holders of the Old Common Stock vote together
as a Class and are entitled to one vote per share on any matter submitted to a
vote of the Company's stockholders. The issuance, designations, preferences
and voting rights of the Old Preferred Stock are as determined from time to
time by the Board. The shares of Old Common Stock have no preemptive or other
subscription rights and there are no conversion, redemption or sinking fund
provisions with respect to such shares.
New Common Stock
Giving effect to the transactions contemplated by the Prepackaged Plan, the
Old Common Stock will be cancelled and, pursuant to the Amended Certificate of
Incorporation, the Company will be authorized to issue 1,000 shares of New
Common Stock, par value $0.01 per share. Immediately after the Restructuring,
there will be issued and outstanding 1,000 shares of New Common Stock, all of
which will be owned by LGE. Holders of the New Common Stock will be entitled
to one vote per share on any matter submitted to a vote of the Company's
stockholders. The shares of New Common will have no preemptive or other
subscription rights and there will be no conversion, redemption or sinking
fund provisions with respect to such shares.
Delaware Anti-Takeover Law
The Company presently is (and, upon Consummation of the Restructuring, will
be) subject to the provisions of section 203 (the "Delaware Anti-Takeover
Law") of the Delaware General Corporation Law (the "DGCL"). Under the Delaware
Anti-Takeover Law, certain "business combinations" between a Delaware
corporation, whose stock generally is publicly traded or held of record by
more than 2,000 stockholders, and an "interested stockholder" are prohibited
for a three-year period following the date that such stockholder became an
interested stockholder, unless, among other conditions, (i) the corporation
has elected in its certificate of incorporation not to be governed by the
Delaware Anti-Takeover Law, (ii) the business combination was approved by the
board of directors of the corporation before the other party to the business
combination became an interested stockholder, (iii) upon consummation of the
transaction that made it an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
commencement of the transaction (excluding voting stock owned by directors who
are also officers or held in employee benefit plans in which the employees do
not have a confidential right to tender or vote stock held by the plan) or
(iv) the business combination was approved by the board of directors of the
corporation and ratified by 66 2/3% of the voting stock which the interested
stockholder did not own. The three-year prohibition also does not apply to
certain business combinations proposed by an interested stockholder following
the announcement or notification of certain extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the corporation's directors.
The term "business combination" is defined generally to include mergers or
consolidations between a Delaware corporation and an "interested stockholder,"
transactions with an "interested stockholder" involving the assets or stock of
the corporation or its majority-owned subsidiaries and transactions which
increase an interested stockholder's percentage ownership of stock. The term
"interested stockholder" is defined generally as any person who becomes the
beneficial owner of 15% or more of a Delaware corporation's voting stock. The
Delaware Anti-Takeover Law could prohibit or delay the accomplishment of
mergers or other takeover or change in control attempts with respect to the
Company and, accordingly, may discourage attempts to acquire the Company.
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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 Old Common Stock from the
Company. As of April 28, 1999, LGE beneficially owned 38,315,000 shares of Old
Common Stock of the Company which represents 55.3% of the outstanding Old
Common Stock. Because LGE owns and/or has the ability to vote a majority of
the issued and outstanding Old 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 the first
quarter of 1999 and 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 $2.9 million, $50.7 million, $93.3 million and $128.8
million of these items for the three months ended April 3, 1999, and the years
ended December 31, 1998, 1997 and 1996, respectively. Sales of products
purchased from LGE and LG Semicon contributed $7.4 million, $59.8 million,
$112.3 million and $141.4 million to sales for the three months ended April 3,
1999, and the years ended December 31, 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 the three
months ended April 3, 1999, and the year ended December 31, 1998, the Company
accrued approximately $0.6 million and $1.5 million, respectively, in
royalties for the use of the Company's brand names pursuant to this direct
shipment program. A similar arrangement was entered into in April 1997 in
Canada where LGE's Canadian affiliate sells Zenith branded VCRs under a
license from the Company. Pursuant to that arrangement, the Company accrued
approximately $0.2 million and $0.3 million during the three months ended
April 3, 1999, and the year ended December 31, 1998, respectively, 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. During the three months
ended April 3, 1999, the Company did not purchase any equipment from LGE. 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
195
<PAGE>
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 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 the
three months ending April 3, 1999, and the years ended December 31, 1998, 1997
and 1996 by the Company to LGE and to subsidiaries of LGE were $5.2 million,
$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. During
the three months ended April 3, 1999, the Company's sales to the LGE's
Canadian and Mexican subsidiaries were $0.8 million and $4.4 million,
respectively. 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. 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 April 3, 1999, 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
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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 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
$0.1 million, $0.4 million, $0.1 million and $1.0 million for the three months
ended April 3, 1999, and the years ended December 31, 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 April 3, 1999, 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 April 3, 1999, 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 April
3, 1999. 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
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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.
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 $61,000, $1.5 million,
$4.8 million and $0.3 million for the three months ended April 3, 1999, and
the years ended December 31, 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 $0.3 million, $1.1 million and $0.1
million for the three months ended April 3, 1999, and the years ended December
31, 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 April 3,
1999, $7.7 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 April 1999, in conjunction with the extension of the
Amended Citibank Credit Facility to the earlier of a bankruptcy filing by the
Company and August 31, 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 August 31, 1999. Repayment is
due in full at the end of the term. The Company has borrowed $30 million under
such facility through April 3, 1999, and has accrued $0.3 million and has paid
$3.2 million of interest through April 3, 1999. 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
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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 April 20,
1999, LGE had made payments pursuant to demands on its guarantees in
connection with all of the Unsecured Bank Loans. April 3, 1999, $5.1 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.
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 $130.1 million,
$135.6 million, $144.3 million and $106.8 million as of April 3, 1999,
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 1999, 1998, 1997, and 1996
were 13.5%, 13.4%, 7.9% and 6.4%, respectively. During the quarter ended April
3, 1999, and the years ended December 31, 1998 and 1997, the Company has
accrued approximately $3.1 million, $15.1 million and $9.6 million of
interest, respectively, under this credit arrangement.
As of April 3, 1999, December 31, 1998, 1997 and 1996, accounts payable
included $130.8 million, $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 $7.9 million as of April 3, 1999, $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 shares 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, was
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
Huntsville, Alabama, for its Parts and Service group and Ontario, California,
for a warehouse. The Company leased space from an LGE subsidiary in San Jose,
California, for NWS in 1998 and 1997. Zenith's rental payments at market rates
in respect of the Huntsville, Ontario and San Jose properties totaled
approximately $45,000, $109,000 and $0.0, respectively, in the first three
months of 1999, 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.
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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 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.
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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.
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
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"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 constitute "securities" for federal income tax purposes. Whether an
instrument constitutes a "security" is determined based on all the facts and
circumstances. In particular, 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, and hence both debentures have
terms of ten years or more, they will be treated as securities for federal
income tax purposes.
Since they will be 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 therefore 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 therefore (provided such Old
Subordinated Debenture was held as a capital asset at the time of the
exchange).
Except for the amount of gain attributable to accrued market discount on an
Old Subordinated Debenture that was purchased with market discount (as
described in "--Accrued Market Discount" below), any gain recognized on the
exchange will be capital gain if the Old Subordinated Debenture is a capital
asset in the hands of the holder. Such gain 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
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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.
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 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
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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
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
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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 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
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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 June 1999 is 4.85%).
If a corporation that undergoes an ownership change has a "net unrealized
built-in loss," subject to certain limitations, any "recognized built-in loss"
during the five-year period beginning with the date of the ownership change 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.
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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.
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.
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.
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
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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 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.
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THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PREPACKAGED PLAN ARE
COMPLEX. THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF U.S. FEDERAL
INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF CERTAIN CLAIMS
AND EQUITY INTERESTS IN LIGHT OF SUCH HOLDER'S PARTICULAR CIRCUMSTANCES AND
INCOME TAX SITUATION. ALL HOLDERS SHOULD CONSULT WITH THEIR TAX ADVISORS AS TO
THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE TRANSACTIONS CONTEMPLATED BY
THE PREPACKAGED PLAN, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE,
LOCAL OR FOREIGN TAX LAWS, AND OF ANY CHANGE IN APPLICABLE TAX LAWS.
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ESTIMATED FEES AND EXPENSES
The estimated fees and expenses expected to be incurred by the Company and
that LGE has advised the Company that it expects to incur in connection with
the Restructuring are approximately $36.1 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
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$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.
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.
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INDEX OF CERTAIN DEFINED TERMS
<TABLE>
<S> <C>
60-Day Period............................................................... 203
Administrative Claims....................................................... 4
AFR......................................................................... 204
AHYDOs...................................................................... 207
Allowed..................................................................... 90
Alternative Proposal........................................................ 79
Amended Certificate of Incorporation........................................ 83
Amended Citibank Credit Facility............................................ 5
Appraisers.................................................................. 70
April 1998 Projections...................................................... 134
April 1999 Projections...................................................... 137
ATSC........................................................................ 32
Audit Committee............................................................. 50
Ballots..................................................................... 25
Bankruptcy Code............................................................. i
Bankruptcy Court............................................................ 10
Bankruptcy Rules............................................................ 27
Base Rate................................................................... 144
Board....................................................................... iii
Business Plan Projections................................................... 20
CDT......................................................................... 49
CERCLA...................................................................... 180
Change in Control Period.................................................... 190
Citibank.................................................................... 14
Citibank Credit Facility.................................................... 50
Citibank Receivables Facility............................................... 50
Citibank Secured Claims..................................................... 5
Citicorp.................................................................... 11
Citicorp Exit Facility...................................................... 11
Claims...................................................................... i
Class....................................................................... 9
COD......................................................................... 205
Commission.................................................................. v
Commitment.................................................................. 11
Company..................................................................... i
Company Peer Group.......................................................... 70
Confirmation................................................................ i
Confirmation Date........................................................... 89
Consumer Electronics........................................................ 164
Consummation................................................................ iii
Contingent Compensation Plan................................................ 186
Crossroads.................................................................. 60
D&O Releasees............................................................... 9
Delaware Anti-Takeover Law.................................................. 194
Debenture Committee......................................................... ii
Debenture Releasees......................................................... 9
DGCL........................................................................ 194
DIP Facility................................................................ 11
Directors' Retirement Plan.................................................. 186
Disclosure Statement........................................................ i
Disqualified OID............................................................ 207
Distribution Record Date.................................................... 99
EBIT........................................................................ 77
EBITDA...................................................................... 11
Effective Date.............................................................. i
Employment Agreements....................................................... 189
Equity Interests............................................................ iii
ERISA....................................................................... 145
Eurodollar Rate............................................................. 145
Exchange Act................................................................ v
</TABLE>
<TABLE>
<S> <C>
Expiration Date............................................................. 27
Final Order................................................................. 18
Financial Restructuring..................................................... i
Forrester................................................................... 70
FS&D Applications........................................................... 47
Gartner/Dataquest........................................................... 70
GECC Credit Facility........................................................ 144
General Unsecured Claims.................................................... 6
Greenwich................................................................... 71
Impaired Claims............................................................. 4
Implementation Program...................................................... 80
Indenture Event of Default.................................................. 150
Insignia/ESG................................................................ 72
Investor Releasees.......................................................... 9
IRS......................................................................... 201
Issue Price................................................................. 202
JA&A........................................................................ 13
June 1998 Projections....................................................... 135
Key Executives.............................................................. 189
Lazard...................................................................... 56
Leveraged Lease (Melrose Park).............................................. 3
Leveraged Lease (Mexico).................................................... 3
Leveraged Leases............................................................ 3
LG Semicon.................................................................. 9
LGAI........................................................................ 53
LGAI Maquila Agreement...................................................... 53
LGE......................................................................... ii
LGE Claims.................................................................. ii
LGE Demand Loan Claims...................................................... 2
LGE Demand Loan Facility.................................................... 51
LGE Extended Payables Claims................................................ 3
LGE Guarantee Fee Claims.................................................... 3
LGE Leveraged Lease Claims.................................................. 3
LGE New Credit Facility..................................................... 154
LGE New Credit Facility Event of Default.................................... 155
LGE New Credit Support...................................................... 11
LGE New Restructured Senior Note............................................ ii
LGE Reimbursement Claims.................................................... 2
LGE Restructured Notes Default.............................................. 154
LGE Stock Purchase Agreement................................................ 49
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.................................................... 191
New Common Stock............................................................ ii
New Indenture............................................................... 150
New Investor................................................................ 81
New Debentures.............................................................. i
New Zenith.................................................................. ii
NOLs........................................................................ 12
Nominee..................................................................... 28
Notice Agent................................................................ 28
November 1998 Projections................................................... 136
NWS......................................................................... 31
NYSE........................................................................ v
OID......................................................................... 202
Old Common Stock............................................................ iii
</TABLE>
212
<PAGE>
<TABLE>
<S> <C>
Old Preferred Stock......................................................... 194
Old Subordinated Debenture Claims........................................... 6
Old Subordinated Debenture Indenture........................................ i
Old Subordinated Debentures................................................. i
Operational Restructuring................................................... i
Other Priority Claims....................................................... 5
Other Secured Claims........................................................ 5
Petition Date............................................................... 102
Phillips.................................................................... 34
PIK......................................................................... 11
PJSC........................................................................ 12
Prepackaged Chapter 11 Case................................................. 9
Prepackaged Plan............................................................ i
Priority Tax Claims......................................................... 4
Professionals............................................................... 15
PRPs........................................................................ 180
Qualifying Debt............................................................. 206
Registration Statement...................................................... v
Reimbursement Agreement..................................................... 51
Reorganization Period....................................................... 20
Restructuring............................................................... i
Restructuring Agreement..................................................... ii
Reynosa Assets.............................................................. ii
</TABLE>
<TABLE>
<S> <C>
Sales Multiples Approach.................................................... 73
Section 382 Limitation...................................................... 29
Securities Act.............................................................. v
Solicitation................................................................ iii
Solicitation Agent.......................................................... 28
Solicitation Materials...................................................... 27
Special Committee........................................................... iii
Subsidiaries................................................................ 1
Tax Code.................................................................... 28
Tax Opinion................................................................. 201
Terminal Value.............................................................. 72
TIN......................................................................... 204
Transaction Expenses........................................................ 82
Transaction Fee............................................................. 82
Treasury Regulations........................................................ 201
Trustee..................................................................... 151
Unimpaired Claims........................................................... 98
Unsecured Bank Loans........................................................ 2
US EPA...................................................................... 181
Voting Record Date.......................................................... i
VSB......................................................................... 32
Zenith...................................................................... i
</TABLE>
213
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Statements of Operations (Unaudited) for the Three
Months Ended April 3, 1999 and March 28, 1998........................... F-2
Condensed Consolidated Balance Sheets (Unaudited) at April 3, 1999,
December 31, 1998 and March 28, 1998.................................... F-3
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three
Months Ended April 3, 1999 and March 28, 1998........................... F-4
Notes to Condensed Consolidated Financial Statements (Unaudited)......... F-5
Statements of Consolidated Operations and Retained Earnings (Deficit) for
the Years Ended December 31, 1998, 1997 and 1996........................ F-11
Consolidated Balance Sheets at December 31, 1998 and 1997................ F-12
Statements of Consolidated Cash Flows for the Years Ended December 31,
1998, 1997 and 1996..................................................... F-13
Notes to Consolidated Financial Statements............................... F-14
Report of Independent Public Accountants................................. F-34
</TABLE>
F-1
<PAGE>
ZENITH ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
In Millions, Except Per Share Amounts
<TABLE>
<CAPTION>
Three Months Ended
------------------
April 3, March 28,
1999 1998
-------- ---------
<S> <C> <C>
Net sales.................................................. $150.6 $220.7
------ ------
Costs, expenses and other:
Cost of products sold.................................... 134.7 213.5
Selling, general and administrative...................... 25.9 30.7
Engineering and research................................. 8.0 10.8
Other operating expense (income), net (Note 4)........... (7.7) (7.2)
Restructuring charges (Note 3)........................... 3.3 2.6
------ ------
Operating loss............................................. (13.6) (29.7)
Loss on asset sales, net................................... (0.3) (0.2)
Interest expense........................................... (2.2) (3.8)
Interest expense--related party............................ (9.2) (4.4)
Interest income............................................ 0.2 0.3
------ ------
Loss before income taxes................................... (25.1) (37.8)
Income taxes............................................... -- --
------ ------
Net loss................................................... $(25.1) $(37.8)
====== ======
Net loss per share of basic and diluted common stock (Note
5)........................................................ $(0.37) $(0.55)
====== ======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-2
<PAGE>
ZENITH ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
In Millions
<TABLE>
<CAPTION>
April December 31, March 28,
ASSETS 3, 1999 1998 1998
- ------ ------- ------------ ---------
<S> <C> <C> <C>
Current assets:
Cash......................................... $ 5.2 $ -- $ 23.2
Receivables, net of allowance for doubtful
accounts of $18.9, $42.0 and $--,
respectively................................ 77.5 127.0 9.6
Receivable from related party................ 7.9 8.5 6.4
Inventories (Note 7)......................... 73.9 84.2 127.1
Transferor certificates (Note 6)............. -- -- 103.4
Other........................................ 26.7 10.8 23.4
------- ------- -------
Total current assets....................... 191.2 230.5 293.1
Property, plant and equipment, net............. 48.1 50.2 164.4
Property held for disposal..................... 27.0 43.0 5.7
Receivable from related party.................. 13.8 21.3 --
Other noncurrent assets........................ 10.4 5.0 36.5
------- ------- -------
Total assets............................... $ 290.5 $ 350.0 $ 499.7
======= ======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C> <C>
Current liabilities:
Short-term debt (Note 8)..................... $ 30.0 $ 47.8 $ 102.0
Short-term debt with related party (Note 8).. 191.3 192.1 --
Current portion of long-term debt (Note 8)... 11.5 5.8 14.8
Accounts payable............................. 51.9 48.1 86.6
Accounts payable with related party (Note
9).......................................... 130.8 136.1 134.0
Income taxes payable......................... 4.2 4.2 0.7
Accrued expenses............................. 153.0 167.8 144.6
------- ------- -------
Total current liabilities.................. 572.7 601.9 482.7
Long-term liabilities.......................... 4.5 3.6 8.6
Long-term liabilities with related party....... 10.9 11.2 8.2
Long-term debt (Note 8)........................ 92.0 97.8 127.0
Stockholders' equity:
Preferred stock.............................. -- -- --
Common stock................................. 67.6 67.6 67.1
Additional paid-in capital................... 506.8 506.8 507.3
Retained earnings (deficit).................. (962.3) (937.2) (699.5)
Treasury stock............................... (1.7) (1.7) (1.7)
------- ------- -------
Total stockholders' equity................. (389.6) (364.5) (126.8)
------- ------- -------
Total liabilities and stockholders'
equity.................................... $ 290.5 $ 350.0 $ 499.7
======= ======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-3
<PAGE>
ZENITH ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
In Millions
<TABLE>
<CAPTION>
Increase (Decrease) in Cash
Three Months Ended
------------------------------
April 3, 1999 March 28, 1998
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................... $ (25.1) $ (37.8)
Adjustments to reconcile net loss to net cash
provided (used) by operations:
Depreciation................................ 4.6 9.9
Other....................................... (0.4) --
Loss on asset sales, net.................... 0.3 0.2
Changes in assets and liabilities:
Current accounts.......................... 39.4 32.8
Other assets.............................. (1.0) 1.2
Other liabilities......................... 0.6 (0.2)
------------- -------------
Net cash provided by operating activities..... 18.4 6.1
------------- -------------
Cash flows from investing activities:
Capital additions........................... (0.4) (2.7)
Proceeds from asset sales................... 5.8 10.0
Transferor certificates increase............ -- (13.9)
------------- -------------
Net cash provided (used) by investing
activities................................... 5.4 (6.6)
------------- -------------
Cash flows from financing activities
Short-term borrowings, net.................. (18.6) 30.0
Principal payments on long-term debt........ -- (6.3)
------------- -------------
Net cash provided (used) by financing
activities................................... (18.6) 23.7
------------- -------------
Increase in cash.............................. 5.2 23.2
Cash at beginning of period................... -- --
------------- -------------
Cash at end of period......................... $ 5.2 $ 23.2
============= =============
Increase (decrease) in cash attributable to
changes in current accounts:
Receivables, net............................ $ 51.1 $ 5.7
Inventories................................. 10.3 38.4
Other assets................................ (3.1) 2.9
Accounts payable and accrued expenses....... (18.9) (14.2)
------------- -------------
Net change in current accounts................ $ 39.4 $ 32.8
============= =============
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest.................................... $ 4.5 $ 6.7
Income taxes................................ -- --
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-4
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note One--Basis of presentation
The accompanying unaudited condensed consolidated financial statements
("financial statements") have been prepared in accordance with generally
accepted accounting principles and pursuant to the rules and regulations of
the Securities and Exchange Commission. The accuracy of the amounts in the
financial statements is in some respects dependent upon facts that will exist,
and procedures that will be performed by the company, later in the year. In
the opinion of management, all adjustments necessary for a fair presentation
of the financial statements have been included and are of a normal, recurring
nature. For further information, refer to the consolidated financial
statements and notes thereto included in the company's Form 10-K for the year
ended December 31, 1998.
Certain reclassifications have been made to prior year selling, general and
administrative expenses and restructuring charges to conform to the current
year presentation and had no effect on net income reported.
Note Two--Subsequent events
On April 16, 1999, LG Electronics Inc. ("LGE") informed the company that it
had received a demand for repayment under LGE's guarantee of the company's
$30.0 million demand loan note payable to Credit Agricole. LGE further
informed the company that on April 20, 1999, it had made payment in full
against its guarantee under such demand. Such payment by LGE gives rise to a
claim by LGE against the company under the Reimbursement Agreement dated as of
November 3, 1997 between LGE and the company.
Effective as of April 19, 1999, the company entered into a Second Amendment
and Waiver to the Amended and Restated Credit Agreement dated as of June 29,
1998, among the company, the lenders, Citibank, N. A. as issuing bank and
Citicorp North America, Inc. as agent. The terms of such amendment extend the
maturity date of the facility to the earlier of the bankruptcy filing by the
company or August 31, 1999. Also, effective as of April 19, 1999, the company
and LGE amended the LGE Demand Loan Facility to provide that no demand for
repayment could be made under the facility, absent a default, prior to August
31, 1999.
On April 29, 1999, the company was informed by LGE that on April 28, 1999, LGE
had acquired 26,095,200 shares of common stock of the company along with the
associated common stock purchase rights from its affiliate, LG Semicon Co.,
Ltd. The company was informed that the aggregate purchase price for such
shares was 10 Korean Won (approximately US$0.01). As a result of this
transfer, LGE owns approximately 54.2 percent of the outstanding common stock
of the company, excluding vested but unexercised options.
In April 1999, the company sold substantially all of the assets located at its
Cd. Juarez, Mexico facility to subsidiaries of Kimball International, Inc. for
approximately $23.8 million less escrowed amounts.
Note Three--Restructuring charges
During the first quarter of 1999, the company recorded $3.3 million of
restructuring charges related to costs associated with work performed by
outside consulting and law firms to support the development of the operational
and financial restructuring plans and the prepackaged plan of reorganization.
A restructuring charge of $2.6 million was recorded in the first quarter of
1998 for fees paid to outside professionals for work to support the
development of the company's operational and financial restructuring plans.
F-5
<PAGE>
A summary of the restructuring reserve recorded in 1998 and 1999 is as
follows:
<TABLE>
<CAPTION>
Restructuring 1999 1999 Restructuring
Reserve at Restructuring Cash Reserve at
Dec. 31, 1998 Charges Payments April 3, 1999
------------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Severance and other
employee costs............ $15.4 $-- $ (6.8) $ 8.6
Plant closure and business
exit costs................ 15.0 -- (2.4) 12.6
Professional fees.......... 0.6 3.3 (3.6) 0.3
Other...................... 0.3 -- (0.1) 0.2
----- ---- ------ -----
Total restructuring
reserve............... $31.3 $3.3 $(12.9) $21.7
===== ==== ====== =====
</TABLE>
Note Four--Other operating expense (income)
Other operating expense (income) consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended
------------------
April 3, March 28,
1999 1998
-------- ---------
In millions
<S> <C> <C>
Royalty income--tuner system patents................... $(6.2) $(6.3)
Royalty income--VCR direct ship........................ (0.6) (0.2)
Royalty income--other.................................. (1.3) (0.3)
Bank fees.............................................. 0.3 0.4
Other.................................................. 0.1 (0.8)
----- -----
Total other operating income, net.................. $(7.7) $(7.2)
===== =====
</TABLE>
Note Five--Loss per share
In accordance with Statement of Financial Accounting Standards No. 128
"Earnings Per Share", the company computed basic loss per share by dividing
net loss by the weighted average number of shares of common stock outstanding
during the periods. Diluted loss per share, assuming conversion of the 6 1/4
percent convertible subordinated debentures due 2011 and outstanding stock
options, is not presented because the effect of the assumed conversion is
antidilutive. The weighted average number of shares was 67.5 million and 67.0
million for the three months ended April 3, 1999 and the three months ended
March 28, 1998, respectively.
Note Six--Receivables
During the third quarter of 1998, the company's trade receivables
securitization was terminated. As a result, the company's financial statements
for the first quarter of 1999 reflect that receivables, net of allowance for
doubtful accounts, are no longer sold and transferor certificates (which
represented the company's retained interest in the pool of receivables that
were sold) do not exist. A non-cash restructuring charge of $3.9 million was
made to write-off deferred charges (bank, attorney and guarantee fees) related
to the receivable securitization in the third quarter of 1998.
Note Seven--Inventories
Inventories consisted of the following (in millions):
<TABLE>
<CAPTION>
April 3, December 31, March 28,
1999 1998 1998
-------- ------------ ---------
<S> <C> <C> <C>
Raw materials and work-in-process........ $32.6 $47.1 $ 94.0
Finished goods........................... 41.3 37.1 33.1
----- ----- ------
Total inventories.................... $73.9 $84.2 $127.1
===== ===== ======
</TABLE>
Note Eight--Short-term debt and credit arrangements; Long-term debt
Between November 1997 and February 1998, the company entered into a series of
new financing transactions designed to enhance the company's liquidity and
financial flexibility. The company obtained a total
F-6
<PAGE>
of $110.0 million in unsecured and uncommitted credit facilities through four
lines of credit with Bank of America ($30.0 million), First Chicago NBD ($30.0
million), Societe Generale ($20.0 million) and Credit Agricole ($30.0
million). The credit lines were guaranteed by LGE for which LGE is entitled to
receive a fee in an amount up to 2 percent of the outstanding amount of the
loans. As of April 3, 1999, only the Credit Agricole loan remained outstanding
in the amount of $30.0 million. During the second and third quarter of 1998,
LGE made payments under demands against guarantees on $72.0 million of the
facilities and the company is obligated to LGE for these payments plus
interest. The company's obligations to LGE are secured by a second lien on
certain assets of the company. See Note Two for subsequent event.
In March 1998, the company entered into a secured credit facility with LGE
which provides for borrowings of up to $45.0 million. As of April 3, 1999,
$30.0 million was outstanding under the facility. See Note Nine for further
discussion and Note Two for subsequent event.
In April 1997, the company entered into a sale-leaseback transaction whereby
the company sold and leased back manufacturing equipment in its Melrose Park,
Illinois, plant and in its Reynosa and Juarez, Mexico, facilities. The
company's payment obligations, along with certain other items under the lease
agreement, were fully guaranteed by LGE. In July 1998, LGE made payment under
the guarantees of the leases in the amount of $90.1 million under a negotiated
settlement with the lessor. As equipment previously included in the sale-
leaseback transaction is sold, the proceeds of such sales will reduce the
company's debt to LGE for this payment. As a result of initial asset sales and
payments to LGE, the company's first quarter financial statements reflect a
reduced $89.3 million current liability to LGE (included in "Short-term debt
with related party" on the balance sheet).
The company's Citibank credit facility provides for up to $125.0 million of
revolving loans, subject to borrowing base restrictions. The revolving loans
must be repaid on or before the earlier of (a) the company filing for a
prepackaged plan of reorganization or (b) April 30, 1999. In addition, the
company is required to make repayments: (i) to the extent of the excess of
borrowings over the borrowing base and (ii) with the proceeds of most sales of
capital stock or assets. The obligations of the company under the amended
Citibank credit facility are secured by certain of the company's assets. The
amended Citibank credit facility requires the company, among other things, to
meet certain financial tests regarding the amount of tuner patent royalties
and the average outstanding payable to LGE for products purchased in the
ordinary course of business. The facility also contains covenants which, among
other things, restrict the ability of the company and its subsidiaries to
incur indebtedness, issue guarantees, incur liens, declare dividends or pay
management or consulting fees to affiliates, make loans and investments,
engage in transactions with affiliates, liquidate, sell assets or engage in
mergers. Interest on borrowings is based on market rates. As of April 3, 1999,
no borrowings were outstanding under this credit facility. See Note Two for
subsequent event.
On March 31, 1999, the company entered into a Commitment Letter (the
"Commitment") with Citicorp North America, Inc. pursuant to which Citicorp
North America, Inc. agreed to provide up to $150.0 million of debtor-in-
possession financing during the pendency of the company's bankruptcy
proceeding and agreed to provide a new three-year $150.0 million credit
facility following completion of the company's bankruptcy proceeding, subject
in each case to borrowing base restrictions. The new facilities will be
secured by certain of the company's assets, including inventory, receivables,
fixed assets and intellectual property, and will be subject to other terms and
conditions. The Commitment is subject to the completion of definitive
documentation and other conditions and provides for interest on borrowings
based on specified margins above LIBOR or the prime rate.
The new credit facilities will be in addition to the $60 million post-
restructuring credit support to be provided by LGE to the company pursuant to
the terms of the restructuring agreement between the parties.
On March 29, 1999, the company was advised by LGE that LGE had received Korean
regulatory approval to permit LGE to consummate the transactions set forth in
the restructuring agreement between the company and LGE, including
authorization for LGE to provide the company with $60 million of post-
restructuring credit support, on the terms and conditions of the restructuring
agreement.
F-7
<PAGE>
The company did not make the April 1, 1999 sinking fund ($5.8 million) and
interest ($3.2 million) payments on its subordinated debentures due 2011. The
company's failure to make such payments on April 1, subject to grace periods
(if any) provided in the indenture, constitutes a default under the indenture
relating to the subordinated debentures.
The lenders under the Citicorp credit facility waived the cross default under
the credit facility related to the company's failure to make the payments on
the subordinated debentures. In addition, LGE waived the cross default under
the Note Agreement between LGE and the company and certain related security
documents related to the company's failure to make the payments on the
subordinated debentures.
On March 31, 1999, the company, LGE and an ad hoc committee of holders of the
company's 6 1/4% Convertible Subordinated Debentures due 2011 reached an
agreement with respect to the terms of the company's proposed prepackaged plan
of reorganization. The ad hoc committee is comprised of Loomis Sayles &
Company, Mariner Investment Group and Caspian Capital Partners, L.L.P. (the
"Debenture Committee"). The members of the Debenture Committee have
represented to the company that they collectively hold or control over 50% of
the outstanding principal amount of the subordinated debentures.
The company, LGE and the Debenture Committee have agreed to the terms of the
proposed restructuring of the subordinated debentures. The parties have
agreed, among other things, that under the prepackaged plan, if approved,
holders of the subordinated debentures will receive a pro rata distribution of
$50 million of new 8.19 percent subordinated debentures of the company due
2009. The Debenture Committee has agreed to support confirmation of the
company's prepackaged plan, and has agreed to forbear from enforcement of any
defaults that might occur with respect to the subordinated debentures until
the prepackaged plan is confirmed. However, the obligations of the members of
the Debenture Committee terminate if, among other circumstances, the
prepackaged plan has not been filed with the Bankruptcy Court on or before
September 15, 1999, or the prepackaged plan has not been confirmed by the
Bankruptcy Court on or before December 31, 1999. The agreement also contains
other customary provisions.
Note Nine--Related party
In November 1995, a change in control of the company occurred, in which LGE
and an affiliate purchased shares of the company pursuant to a combined tender
offer and purchase of newly issued shares of common stock from the company. As
of April 3, 1999, LGE and its affiliate owned 36,569,000 shares, excluding
vested but unexercised options, of common stock of the company which
represents 54.2 percent of the outstanding common stock. Because LGE owns a
majority of the issued and outstanding common stock, it effectively controls
the outcome of any matter requiring action by a majority of the company's
stockholders, including the election of a majority of the company's directors
and any future change in control of the company. See Note Two for subsequent
event.
On August 7, 1998, the company entered into a restructuring agreement with LGE
which sets forth the terms and conditions pursuant to which LGE has agreed to
participate in and assist the company with its proposed financial and
operational restructuring plans.
LGE is a leading international brand-name manufacturer of five main groups of
products: televisions; audio and video equipment; home appliances; computers
and office automation equipment; and other products, including video displays,
telecommunication products and components, and magnetic media. The following
represent the most significant transactions between the company and LGE during
the three-month periods ended April 3, 1999 and March 28, 1998.
Product purchases: In the ordinary course of business, the company purchases
VCRs, television-VCR combinations and components from LGE and its affiliates.
The company purchased $2.9 million and $7.8 million of these items during the
three-month periods ended April 3, 1999 and March 28, 1998, respectively.
Sales of products purchased from LGE and its affiliates contributed $7.4
million and $20.1 million to sales during the
F-8
<PAGE>
three-month periods ended April 3, 1999 and March 28, 1998, respectively. The
purchase prices were the result of negotiations between the parties and were
consistent with third party bids.
In 1998, the company and LGE entered into a direct shipment arrangement
pursuant to which LGE sells and ships VCRs directly to the company's two
largest customers and pays the company a license fee for the use of the
company's brand names on such products and the inclusion of the company's
patented tuner technology in such products. The license fee payable by LGE is
comparable to licensing rates charged by the company to unrelated parties.
During the three-month periods ended April 3, 1999 and March 28, 1998, the
company accrued approximately $0.6 million and $0.2 million, respectively, in
royalties for the use of the company's brand names pursuant to this direct
shipment program. A similar arrangement was entered into in April 1997, in
Canada where LGE's Canadian affiliate sells Zenith branded VCRs under a
license from the company. Pursuant to that arrangement, the company accrued
approximately $0.2 million in the three months ended April 3, 1999. No amount
was accrued in the three months ended March 28, 1998.
Product and other sales: The company sells televisions, picture tubes, yokes
and other manufactured subassemblies to LGE and its affiliates at prices
consistent with amounts charged by the company to its major customers. Sales
by the company to LGE and its affiliates were $5.2 million and $11.0 million
during the three months ended April 3, 1999 and March 28, 1999, respectively.
In December 1996, the company closed its wholly-owned Canadian distributor and
sold the remaining inventory to LGE at book value. The company entered into a
distributor agreement with an LGE subsidiary whereby such subsidiary became
the Canadian distributor for the company. During 1997, the company entered
into a similar agreement with an LGE subsidiary in Mexico to sell the
company's products in Mexico. During the three months ended April 3, 1999 and
March 28, 1998, the company's sales to the LGE Canadian and Mexican
subsidiaries were $5.2 million and $9.6 million, respectively. These amounts
are included in the sales by the company to LGE and its affiliates discussed
above.
Other Items: In March 1998, the company entered into a secured credit facility
with LGE which provides for borrowings of up to $45.0 million. The interest
rate is LIBOR plus 6.5 percent per annum. The term of the facility (as
amended) is one year from the date of the first borrowing, subject to LGE's
right to demand repayment at anytime after April 30, 1999. Repayment is due in
full at the end of the term. The first such borrowing occurred in May 1998,
and as of April 3, 1999, $30.0 million was outstanding under the facility. The
facility is secured by a second lien on certain of the company's assets,
including its VSB technology and is subject to certain terms and conditions.
See Note Two for subsequent event.
Accounts payable with related party included $130.8 million and $134.0 million
to LGE and its affiliates as of April 3, 1999 and March 28, 1998,
respectively. In April 1997, the company and LGE entered into an arrangement
whereby LGE provided a vendor credit line to the company to finance the
company's purchases of certain goods from LGE in the ordinary course of
business. Prior to April 1997, the company's accounts payable arising in the
ordinary course of business to LGE were extended for certain periods of time,
but no formal arrangement was in place. The amount of extended payables was
$130.1 million and $133.7 million as of April 3, 1999 and March 28, 1998,
respectively. The company is charged interest on the extended period at rates
reflecting then-current market conditions in Korea.
The company believes that the transactions between the company and LGE have
been conducted on terms no less favorable to the company than could have been
obtained with unrelated third parties.
Note Ten--Segment and geographic data
The company adopted Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" as of
December 31, 1998. This statement established new disclosure requirements
related to operating and geographic segments.
F-9
<PAGE>
Financial information, summarized by segment, is as follows:
<TABLE>
<CAPTION>
Consumer Network Corporate
Electronics Systems and Other Consolidated
----------- ------- --------- ------------
In millions
<S> <C> <C> <C> <C>
Three Months Ended April 3,
1999
Net sales.................. $119.1 $31.5 $ -- $150.6
Income (loss) before income
taxes..................... (8.9) 3.1 (19.3) (25.1)
Three months Ended March 28,
1998
Net sales.................. $202.7 $18.0 $ -- $220.7
Loss before income taxes... (20.0) (3.3) (14.5) (37.8)
</TABLE>
It should be noted that in the information presented, certain costs such as
interest and administrative costs are not allocated to the Consumer Electronics
or Network Systems segments. These unallocated costs are reported above in the
Corporate and Other column.
F-10
<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-11
<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-12
<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-13
<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-14
<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-15
<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. The 1998
expense included $13.4 million accrued for potential environmental
liabilities. 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 an estimate of $3.5 million for 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 December 31, 1997 Balance Sheet includes $5.7 million for
Property held for disposal. This amount represents Land at the Woodridge, IL
site, and as such, had no direct operating results in the period.
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-16
<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-17
<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-18
<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-19
<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-20
<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 (a)...................... 24.8 -- (9.4) 15.4
Plant closure and business exit
costs (b)...................... 18.8 -- (3.8) 15.0
Professional fees (c)........... 11.5 -- (10.9) 0.6
Inventory writedowns............ 3.2 (3.2) -- --
Other (d)....................... 0.5 -- (0.2) 0.3
------ ------- ------ -----
Total restructuring
charges.................... $202.3 $(144.6) $(26.4) $31.3
====== ======= ====== =====
</TABLE>
The basis for recording these charges in 1998 results is as follows:
(a) $8.0 expensed as incurred in 1998, $16.8 accrued under EITF 94-3;
(b) $3.8 expensed as incurred in 1998, $15.0 accrued under EITF 94-3;
(c) $11.5 all expensed as incurred in 1998;
(d) $.5 all expensed as incurred in 1998.
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
F-21
<PAGE>
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
expected sales proceeds and third-party appraisals and valuations, including
management and third party estimates of $16.9 million 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 operating results, for the year ended December 31, 1998, of the assets
held for disposal are, generally, not identifiable. Only the Network Systems
and its Chihuahua, Mexico, facility is a stand-alone segment with identifiable
results of operations, which results are disclosed in Note Nine. None of the
remaining assets held for disposal, consisting of the Melrose Park, Illinois,
and the Juarez, and Matamoros, Mexico, manufacturing facilities, represent
stand-alone operations of the company for which results of operations are
identifiable. Rather, they were cost centers that produced assemblies and
finished goods for the Consumer Electronics segment.
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.
F-22
<PAGE>
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>
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>
F-23
<PAGE>
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)
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.
F-24
<PAGE>
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.
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>
F-25
<PAGE>
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.
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>
F-26
<PAGE>
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
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.
F-27
<PAGE>
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>
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.
F-28
<PAGE>
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>
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
F-29
<PAGE>
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>
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.
F-30
<PAGE>
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.
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
F-31
<PAGE>
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.
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.
F-32
<PAGE>
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-33
<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-34
<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,
Case No. 99- ( )
Debtor.
- ----------------------------------
- --------------------------------------------------------------------------------
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>
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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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- -------------------------------------------------------------------------------
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. "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.
9. "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.
10. "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.
11. "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.
12. "Beneficial Holder" means the Person or Entity holding the beneficial
interest in a Claim or Equity Interest.
13. "Business Day" means any day, other than a Saturday, Sunday or "legal
holiday" (as defined in Bankruptcy Rule 9006(a)).
14. "By-Laws" mean the By-Laws of the Reorganized Debtor, the form of
which shall be Filed on or before the Confirmation Date.
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15. "Cash" means cash and cash equivalents.
16. "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.
17. "Citibank Secured Claims" means all Claims arising from or relating
to the Amended Citibank Credit Agreement.
18. "Citicorp Exit Facility" means that certain $150 million three-year
credit facility to be provided to the Reorganized Debtor pursuant to the
terms and conditions of the Citicorp Exit Facility Commitment.
19. "Citicorp Exit Facility Commitment" means that certain commitment
letter by and between the Debtor and Citicorp North America, Inc., a copy
of which is set forth as an exhibit to the Disclosure Statement.
20. "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.
21. "Claim Holder" or "Claimant" means the Holder of a Claim.
22. "Class" means a category of Holders of Claims or Equity Interests as
set forth in Article III of the Plan.
23. "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.
24. "Common Stock" means the authorized common stock of the Corporation.
25. "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.
26. "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.
27. "Confirmation Order" means the order of the Bankruptcy Court
confirming the Plan pursuant to section 1129 of the Bankruptcy Code.
28. "Consummation" means the occurrence of the Effective Date.
29. "Corporation" means Zenith Electronics Corporation, a Delaware
corporation.
30. "Creditor" means any Holder of a Claim.
31. "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.
32. "Debtor" means the Corporation, as debtor in the Prepackaged Chapter
11 Case.
33. "Debtor in Possession" means the Corporation, as debtor in possession
in the Prepackaged Chapter 11 Case.
34. "Delaware General Corporation Law" means title 8 of the Delaware
Code, as now in effect or hereafter amended.
35. "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.
36. "Debenture Releasees" 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.
37. "Debenture Releasees Lock-Up Agreement" means that certain
Forbearance, Lock-Up and Voting Agreement dated March 31, 1999 by and among
the Debtor, LGE and the members of the Debenture Releasees, a copy of which
is set forth as an exhibit to the Disclosure Statement.
38. "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.
39. "Distribution Record Date" means the close of business on the
Business Day immediately preceding the Effective Date.
40. "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.
41. "Entity" means an entity as defined in section 101(15) of the
Bankruptcy Code.
42. "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.
43. "Estate" means the estate of the Debtor created by section 541 of the
Bankruptcy Code upon the commencement of the Prepackaged Chapter 11 Case.
44. "File" or "Filed" means file or filed with the Bankruptcy Court in
the Prepackaged Chapter 11 Case.
45. "Final Decree" means the decree contemplated under Bankruptcy Rule
3022.
46. "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.
47. "General Unsecured Claim" means any Unsecured Claim that is not an
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.
48. "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.
49. "Impaired Claim" means a Claim classified in an Impaired Class.
50. "Impaired Class" means each of Classes 2, 5, 6 and 7 as set forth in
Article III of the Plan.
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<PAGE>
51. "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.
52. "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 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.
53. "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.
54. "Leveraged Leases" means the Leveraged Lease (Melrose Park) and the
Leveraged Lease (Mexico).
55. "LGE" means LG Electronics Inc., a corporation organized under the
laws of the Republic of Korea.
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.
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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.
62. "LGE Reimbursement Claims" means any and all claims of LGE against
the Debtor arising from or relating to the Reimbursement Agreement, 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 6, 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 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.
69. "New Debentures" means those certain $50,000,000 of new 8.19% Senior
Debentures due November 1, 2009 issued by the Reorganized Debtor, offered
to the Holders of Allowed Claims in Class 5, the form of which shall be
Filed on or before the Confirmation Date.
70. "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.
71. "Old Subordinated Debenture Claims" means all Claims arising from or
related to the Old Subordinated Debentures or the Old Subordinated
Debenture Indenture.
72. "Old Subordinated Debentures" mean the 6 1/4% Convertible
Subordinated Debentures due 2011, issued by the Corporation under the Old
Senior Subordinated Debenture Indenture.
73. "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.
74. "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.
75. "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 6.
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76. "Person" means a person as defined in section 101(41) of the
Bankruptcy Code.
77. "Petition Date" means the date on which the Debtor filed its petition
for relief commencing the Prepackaged Chapter 11 Case.
78. "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.
79. "Prepackaged Chapter 11 Case" means the case under chapter 11 of the
Bankruptcy Code, commenced by the Debtor in the Bankruptcy Court.
80. "Priority Tax Claim" means a Claim of a governmental unit of the kind
specified in section 507(a)(8) of the Bankruptcy Code.
81. "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.
82. "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.
83. "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 LGE's guarantees of certain financial
accommodations provided to the Debtor.
84. "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.
85. "Restructuring Agreement" means that certain Amended and Restated
Restructuring Agreement dated as of June 14, 1999 by and between the Debtor
and LGE (as amended and supplemented from time to time), a copy of which is
set forth as an exhibit to the Disclosure Statement.
86. "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.
87. "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.
88. "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.
89. "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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90. "Securities Act" means the Securities Act of 1933, 15 U.S.C. sections
77a-77aa, as now in effect or hereafter amended.
91. "Unimpaired Claim" means an unimpaired Claim within the meaning of
section 1124 of the Bankruptcy Code.
92. "Unimpaired Class" means an unimpaired Class within the meaning of
section 1124 of the Bankruptcy Code.
93. "Unsecured Claim" means any Claim against the Debtor that is not a
Secured Claim, Administrative Claim, Priority Tax Claim or Other Priority
Claim.
94. "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.
95. "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 Impaired --entitled to vote
Class 3--Other Secured Claims Unimpaired --not entitled to vote
Class 4--General Unsecured Claims Unimpaired --not entitled to vote
Class 5--Old Subordinated Debenture Claims Impaired --entitled to vote
Class 6--LGE Claims: Impaired --entitled to vote
LGE Tranche A Claims
LGE Tranche B Claims
Class 7--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: On or prior to the Effective Date, each Holder of a
Citibank Secured Claim must File and serve upon the Debtor a written
election designating whether or not such Holder will be a lender under the
Citicorp Exit Facility. If such Holder elects to be a lender under the
Citicorp Exit Facility, the Allowed Class 2 Claim of such Holder shall be
treated as provided in the Citicorp Exit Facility Commitment. If such
Holder elects not to be a lender under the Citicorp Exit Facility, on the
Effective Date, unless such Holder and the Debtor agree to a different
treatment, the Allowed Class 2 Claim of such Holder (i) will be paid in
full in cash by the Reorganized Debtor or (ii) will otherwise be treated in
any manner so that such Allowed Class 2 Claim shall otherwise be unimpaired
within the meaning of section 1124 of the Bankruptcy Code. The failure of a
Holder of a Citibank Secured Claim to File and serve a written election as
provided herein
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<PAGE>
shall not modify or otherwise affect any existing contractual agreement or
commitment of such Holder to be a lender under the Citicorp Exit Facility.
(c) Voting: Class 2 is impaired and the Holders of Class 2 Claims are
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.
5. Class 4--General Unsecured Claims
(a) Classification: Class 4 consists of the Claims of Holders of General
Unsecured Claims.
(b) Treatment: The legal, equitable and contractual rights of the Holders
of Class 4 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 4 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 4 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 4 is not impaired and the Holders of Class 4 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 4 are not
entitled to vote to accept or reject the Plan.
6. Class 5--Old Subordinated Debenture Claims
(a) Classification: Class 5 consists of the Claims of Holders of Old
Subordinated Debentures.
(b) Treatment: If Class 5 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 5 rejects the Plan, the Holders of Old Subordinated Debentures will
not receive or retain any property on account of their Old Subordinated
Debentures.
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<PAGE>
(c) Voting: Class 5 is impaired and the Holders of Allowed Class 5 Claims
are entitled to vote to accept or reject the Plan.
7. Class 6--LGE Claims
(a) Classification: Class 6 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 6 is impaired and the Holder of the Allowed Class 6
Claims is entitled to vote to accept or reject the Plan.
8. Class 7--Equity Interests
(a) Classification: Class 7 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 7 is impaired, but because no distributions will be
made to Holders of Class 7 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 7 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.
ARTICLE IV.
ACCEPTANCE OR REJECTION OF THE PLAN
A. Voting Classes
Each Holder of an Allowed Claim in Classes 2, 5, and 6 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.
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<PAGE>
C. Presumed Acceptance of Plan
Classes 1, 3, and 4 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 7 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 7. 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 5 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.
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 and Other Secured 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 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.
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<PAGE>
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 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 Citicorp Exit Facility and 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.
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<PAGE>
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,
but excluding any accrued but unpaid interest related thereto, 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.
Notwithstanding anything to the contrary contained herein, on the Effective
Date, the Debtor shall be deemed to have assumed, pursuant to sections 365 and
1123 of the Bankruptcy Code, the Prepetition Committee Lock-Up Agreement,
including the Debtor's indemnification obligations to each of the Debenture
Releasees contained therein, and the Debtor's agreements with Hebb & Gitlin
and Crossroads Capital Partners to pay professional fees incurred by the
Holders of Old Subordinated Debentures who are Debenture Releasees.
B. Claims Based on Rejection of Executory Contracts or Unexpired Leases
All proofs of claim with respect to Claims (other than LGE Leveraged Lease
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 (other than LGE Leveraged Lease 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.
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
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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 Debentures, and the New Common Stock to be
issued under the Plan shall be deemed issued as of the Effective Date
regardless of the date on which they are actually dated, authenticated or
distributed; provided, however, that the Reorganized Debtor shall withhold any
actual payment until such distribution is made and no interest shall accrue or
otherwise be payable on any such withheld amounts.
B. Distributions by the Reorganized Debtor; Distributions with Respect to Debt
Securities
The Reorganized Debtor shall make all distributions required under the Plan.
Notwithstanding the provisions of Article V.B above regarding the cancellation
of the Old Subordinated Debenture Indenture, the Old Subordinated Debenture
Indenture shall continue in effect to the extent necessary to allow the
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, and Old
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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 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.
A-19
<PAGE>
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 5 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 5 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
Debentures or New Common Stock to be distributed pursuant to the Plan on
account of any such Claim shall, pending such surrender, be treated as an
undeliverable distribution pursuant to Article VII.C above.
1. Notes and Debentures
Each Holder of an Old Subordinated Debenture Claim shall tender its Old
Subordinated Debenture relating to such Claim to the Reorganized Debtor in
accordance with written instructions to be provided to such Holders by the
Reorganized Debtor as promptly as practicable following the Effective Date.
Such instructions shall specify that delivery of such Old Subordinated
Debenture will be effected, and risk of loss and title thereto will pass, only
upon the proper delivery of such Old Subordinated Debentures with a letter of
transmittal in accordance with such instructions. All surrendered Old
Subordinated Debentures shall be marked as canceled.
2. Failure to Surrender Canceled Instruments
Any Holder of Old Subordinated Debentures that fails to surrender or is
deemed to have failed to surrender the applicable Old Subordinated Debentures
required to be tendered hereunder within five years after the Effective Date
shall have its Claim for a distribution pursuant to the Plan on account of
such Old Subordinated Debenture discharged and shall be forever barred from
asserting any such Claim against the 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
A-20
<PAGE>
or indemnity as may be required by the Reorganized Debtor to hold the
Reorganized Debtor harmless from any damages, liabilities or costs incurred in
treating such individual as a Holder of an Allowed Claim. Upon compliance with
this Article VII.I by a Holder of a Claim evidenced by an Old Subordinated
Debenture, such Holder shall, for all purposes under the Plan, be deemed to
have surrendered such note or debenture.
ARTICLE VIII.
PROCEDURES FOR RESOLVING DISPUTED CLAIMS
A. Prosecution of Objections to Claims
After the Confirmation Date, the Debtor and the Reorganized Debtor shall
have the exclusive authority to File objections, settle, compromise, withdraw
or litigate to judgment objections to Claims. From and after the Confirmation
Date, the Debtor and the Reorganized Debtor may settle or compromise any
Disputed Claim without approval of the Bankruptcy Court.
B. Estimation of Claims
The Debtor or the Reorganized Debtor may, at any time, request that the
Bankruptcy Court estimate any contingent or unliquidated Claim pursuant to
section 502(c) of the Bankruptcy Code regardless of whether the Debtor or the
Reorganized Debtor has previously objected to such Claim or whether the
Bankruptcy Court has ruled on any such objection, and the Bankruptcy Court
will retain jurisdiction to estimate any Claim at any time during litigation
concerning any objection to any Claim, including during the pendency of any
appeal relating to any such objection. In the event that the Bankruptcy Court
estimates any contingent or unliquidated Claim, that estimated amount will
constitute either the allowed amount of such Claim or a maximum limitation on
such Claim, as determined by the Bankruptcy Court. If the estimated amount
constitutes a maximum limitation on such Claim, the Debtor or Reorganized
Debtor may elect to pursue any supplemental proceedings to object to any
ultimate payment on such Claim. All of the aforementioned Claims objection,
estimation and resolution procedures are cumulative and not necessarily
exclusive of one another. Claims may be estimated and subsequently
compromised, settled, withdrawn or resolved by any mechanism approved by the
Bankruptcy Court.
C. Payments and Distributions on Disputed Claims
Notwithstanding any provision in the Plan to the contrary, except as
otherwise agreed by the Reorganized Debtor in its sole discretion, no partial
payments and no partial distributions will be made with respect to a Disputed
Claim until the resolution of such disputes by settlement or Final Order.
Subject to the provisions of this Article VIII.C, as soon as practicable after
a Disputed Claim becomes an Allowed Claim, the Holder of such Allowed Claim
will receive all payments and distributions to which such Holder is then
entitled under the Plan. Notwithstanding the foregoing, any Person or Entity
who holds both an Allowed Claim(s) and a Disputed Claim(s) will receive the
appropriate payment or distribution on the Allowed Claim(s), although, except
as otherwise agreed by the Reorganized Debtor in its sole discretion, no
payment or distribution will be made on the Disputed Claim(s) until such
dispute is resolved by settlement or Final Order.
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.
A-21
<PAGE>
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 5 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.
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
A-22
<PAGE>
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 Debenture Releasees are released by the Debtor and the
Reorganized Debtor and its subsidiaries from any and all claims (as defined in
section 101(5) of the Bankruptcy Code), obligations, rights, suits, damages,
causes of action, remedies and liabilities whatsoever, whether known or
unknown, foreseen or unforeseen, existing or hereafter arising, in law, equity
or otherwise, that the Debtor or its subsidiaries would have been legally
entitled to assert in their own right (whether individually or collectively)
or on behalf of the Holder of any Claim or Equity Interest or other Person or
Entity, based in whole or in part upon any act or omission, transaction,
agreement, event or other occurrence taking place on or before the Effective
Date, except in the case of the D&O Releasees, for claims or liabilities (i)
in respect of any loan, advance or similar payment by the Debtor or its
subsidiaries to any such Person, or (ii) in respect of any contractual
obligation owed by such Person to the Debtor or its subsidiaries.
C. Limited Releases by Holder of Claims
On and after the Effective Date, each Holder of a Claim (i) who has accepted
the Plan, (ii) whose Claim is in a Class that has accepted or is deemed to
have accepted the Plan pursuant to section 1126 of the Bankruptcy Code, or
(iii) who is entitled to receive a distribution of property under the Plan,
other than the Holder of a Claim in Class 5 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 Debenture Releasees
from any and all claims (as defined in section 101(5) of the Bankruptcy Code),
obligations, rights, suits, damages, causes of action, remedies and
liabilities whatsoever, whether known or unknown, foreseen or unforeseen,
existing or hereafter arising, in law, equity or otherwise, that such Person
or Entity would have been legally entitled to assert (whether individually or
collectively), based in whole or in part upon any act or omission,
transaction, agreement, event or other occurrence taking place on or before
the Effective Date in any way relating or pertaining to (x) the Debtor or the
Reorganized Debtor, (y) the Debtor's Prepackaged Chapter 11 Case, or (z) the
negotiation, formulation and preparation of the Plan, the Restructuring
Agreement or any related agreements, instruments or other documents.
D. Preservation of Rights of Action
Except as otherwise provided in the Plan or in any contract, instrument,
release, indenture or other agreement entered into in connection with the
Plan, in accordance with section 1123(b) of the Bankruptcy Code, the
Reorganized Debtor shall retain and may exclusively enforce any claims, rights
and Causes of Action that the Debtor or Estate may hold against any Person or
Entity. The Reorganized Debtor may pursue such retained claims, rights or
causes of action, as appropriate, in accordance with the best interests of the
Reorganized Debtor. On the Effective Date, the Reorganized Debtor shall be
deemed to waive and release any claims, rights or Causes of Action arising
under sections 544, 547, 548, 549 and 550 of the Bankruptcy Code held by the
Reorganized Debtor against any Person or Entity.
E. Exculpation
The Debtor, the Reorganized Debtor, the Investor Releasees, the D&O
Releasees, and the Debenture Releasees 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.
A-23
<PAGE>
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; provided, however, that this injunction shall not preclude
police or regulatory agencies from fulfilling their statutory duties.
ARTICLE XI.
RETENTION OF JURISDICTION
Notwithstanding the entry of the Confirmation Order and the occurrence of the
Effective Date, the Bankruptcy Court shall retain such jurisdiction over the
Prepackaged Chapter 11 Case after the Effective Date as legally permissible,
including jurisdiction to:
A. Allow, disallow, determine, liquidate, classify, estimate or establish
the priority or secured or unsecured status of any Claim, including the
resolution of any request for payment of any Administrative Claim and the
resolution of any and all objections to the allowance or priority of
Claims;
B. Grant or deny any applications for allowance of compensation or
reimbursement of expenses authorized pursuant to the Bankruptcy Code or the
Plan, for periods ending on or before the Effective Date;
C. Resolve any matters related to the assumption, assumption and
assignment or rejection of any executory contract or unexpired lease to
which the Debtor is a party or with respect to which the Debtor may be
liable and to hear, determine and, if necessary, liquidate, any Claims
arising therefrom, including those matters related to the amendment after
the Effective Date pursuant to Article VI above to add any executory
contracts or unexpired leases to the list of executory contracts and
unexpired leases to be rejected;
D. Ensure that distributions to Holders of Allowed Claims are
accomplished pursuant to the provisions of the Plan, including ruling on
any motion Filed pursuant to Article VII;
E. Decide or resolve any motions, adversary proceedings, contested or
litigated matters and any other matters and grant or deny any applications
involving the Debtor that may be pending on the Effective Date;
F. Enter such orders as may be necessary or appropriate to implement or
consummate the provisions of the Plan and all contracts, instruments,
releases, indentures and other agreements or documents created in
connection with the Plan or the Disclosure Statement;
G. Resolve any cases, controversies, suits or disputes that may arise in
connection with the Consummation, interpretation or enforcement of the Plan
or any Person's or Entity's obligations incurred in connection with the
Plan;
H. Issue injunctions, enter and implement other orders or take such other
actions as may be necessary or appropriate to restrain interference by any
Person or Entity with Consummation or enforcement of the Plan, except as
otherwise provided herein;
I. Resolve any cases, controversies, suits or disputes with respect to
the releases, injunction and other provisions contained in Article X and
enter such orders as may be necessary or appropriate to implement such
releases, injunction and other provisions;
J. Enter and implement such orders as are necessary or appropriate if the
Confirmation Order is for any reason modified, stayed, reversed, revoked or
vacated;
K. Determine any other matters that may arise in connection with or
relate to the Plan, the Disclosure Statement, the Confirmation Order or any
contract, instrument, release, indenture or other agreement or document
created in connection with the Plan or the Disclosure Statement; and
L. Enter an order and/or final decree concluding the Prepackaged Chapter
11 Case.
A-24
<PAGE>
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 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.
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.
A-25
<PAGE>
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> Total
<CAPTION> Present
Value
of Net Present Value of
VSB Domestic VSB Technology @
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 a Citibank Secured Claim, Old Subordinated Debentures 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
(5a) Opinion of Kirkland & Ellis
(8a) 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)
*(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)
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
*(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)
(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)
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
(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) Amended and Restated Restructuring Agreement, dated as of June
14, 1999, 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
+(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.
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
+(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
+(27c) Financial Data Schedule for the Three Months Ended April 3, 1999
+(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.
+(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.
</TABLE>
II-6
<PAGE>
<TABLE>
<C> <S>
+(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) Consent of Insignia/ESG
+(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 2
(99z) Form of Ballot for Class 5
(99aa) Form of Ballot for Class 6
(99ab) Form of Master Ballot
+(99ac) Machinery and Equipment Appraisal, Zenith Electronics
Corporation, Melrose Park--Plant #25, dated April 1, 1998,
prepared by Greenwich Industrial Services, LLC.
+(99ad) Machinery and Equipment Appraisal, Zenith Electronics
Corporation, Matamoros Mexico, dated April 1, 1998, prepared by
Greenwich Industrial Services, LLC.
+(99ae) Machinery and Equipment Appraisal, Zenith Electronics
Corporation, Chihuahua, Mexico, dated April 1, 1998, prepared by
Greenwich Industrial Services, LLC.
+(99af) Machinery and Equipment Appraisal, Zenith Electronics
Corporation, Microcircuits Plant #6, dated April 1, 1998,
prepared by Greenwich Industrial Services, LLC.
+(99ag) Machinery and Equipment Appraisal, Zenith Electronics
Corporation, Franklin Park, Plant #5, dated April 1, 1998,
prepared by Greenwich Industrial Services, LLC.
+(99ah) Machinery and Equipment Appraisal, Zenith Electronics
Corporation, Ciudad Juarez, Mexico, dated April 1, 1998,
prepared by Greenwich Industrial Services, LLC.
+(99ai) Machinery and Equipment Appraisal, Zenith Electronics
Corporation, Glenview, IL Plant #31, dated April 1, 1998,
prepared by Greenwich Industrial Services, LLC.
(99aj) Zenith Capital Structure Analysis prepared for LG Electronics by
Lazard Freres & Co. LLC
(99ak) U.S. Owned Facilities, Property Summary and Value Estimates,
dated February 1998, prepared by Insignia/ESG
(99al) Zenith Mexican Portfolio Disposition Investigation and Proposal,
prepared by Insignia/ESG
(99am) Zenith Headquarters Facility Plant #31 Evaluation, dated
February 1998, prepared by Insignia/ESG
(99an) Zenith, 6601 South 33rd Street, McAllen, Texas, Plant #15
evaluation, prepared by Insignia/ESG
(99ao) Zenith, 2155 Rose Street, Franklin Park, Illinois Evaluation,
prepared by Insignia/ESG
</TABLE>
- --------
* Represents a management contract, compensation plan or arrangement.
+Previously filed.
II-7
<PAGE>
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;
(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. 5 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 18th day of June, 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. 5 to the Registration Statement has been signed below by the
following persons in the capacities indicated on the 18th day of June, 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
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,
Case No. 99- ( )
Debtor.
- ----------------------------------
- --------------------------------------------------------------------------------
PREPACKAGED PLAN OF REORGANIZATION
OF ZENITH ELECTRONICS CORPORATION
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
- --------------------------------------------------------------------------------
James H.M. Sprayregen
Matthew N. Kleiman
Anup Sathy
KIRKLAND & ELLIS
200 E. Randolph Drive
Chicago, Illinois 60601
(312) 861-2000
Counsel to
ZENITH ELECTRONICS CORPORATION,
debtor and debtor-in-possession
Dated: [ ]
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I.
DEFINED TERMS, RULES OF INTERPRETATION, COMPUTATION OF TIME AND
GOVERNING LAW....................................................... 4
A. Rules of Interpretation, Computation of Time and Governing Law... 4
B. Defined Terms.................................................... 4
ARTICLE II.
ADMINISTRATIVE AND PRIORITY TAX CLAIMS............................... 9
A. Administrative Claims............................................ 9
B. Priority Tax Claims.............................................. 9
ARTICLE III.
CLASSIFICATION AND TREATMENT OF CLASSIFIED CLAIMS AND EQUITY
INTERESTS........................................................... 9
A. Summary.......................................................... 9
B. Classification and Treatment..................................... 12
C. Special Provision Governing Unimpaired Claims.................... 14
ARTICLE IV.
ACCEPTANCE OR REJECTION OF THE PLAN.................................. 15
A. Voting Classes................................................... 15
B. Acceptance by Impaired Classes................................... 15
C. Presumed Acceptance of Plan...................................... 15
D. Presumed Rejection of Plan....................................... 15
E. Non-Consensual Confirmation...................................... 15
ARTICLE V.
MEANS FOR IMPLEMENTATION OF THE PLAN................................. 15
Continued Corporate Existence and Vesting of Assets in the
A. Reorganized Debtor............................................... 15
Cancellation of Notes, Instruments, Debentures, Common Stock and
B. Stock Options.................................................... 16
C. Issuance of New Securities; Execution of Related Documents....... 16
Corporate Governance, Directors and Officers, and Corporate
D. Action........................................................... 16
E. LGE New Credit Support........................................... 17
F. Sources of Cash for Plan Distribution............................ 17
ARTICLE VI.
TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES................ 17
A. Assumption of Executory Contracts and Unexpired Leases........... 17
Claims Based on Rejection of Executory Contracts or Unexpired
B. Leases........................................................... 17
Cure of Defaults for Executory Contracts and Unexpired Leases
C. Assumed.......................................................... 18
D. Indemnification of Directors, Officers and Employees............. 18
E. Compensation and Benefit Programs................................ 18
ARTICLE VII.
PROVISIONS GOVERNING DISTRIBUTIONS................................... 18
A. Distributions for Claims Allowed as of the Effective Date........ 18
Distributions by the Reorganized Debtor; Distributions with
B. Respect to Debt Securities....................................... 18
Delivery and Distributions and Undeliverable or Unclaimed
C. Distributions.................................................... 18
D. Distribution Record Date......................................... 18
E. Timing and Calculation of Amounts to be Distributed.............. 20
F. Minimum Distribution............................................. 20
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
G. Setoffs............................................................ 20
H. Surrender of Canceled Instruments or Securities.................... 20
I. Lost, Stolen, Mutilated or Destroyed Debt Securities............... 20
ARTICLE VIII.
PROCEDURES FOR RESOLVING DISPUTED CLAIMS............................... 21
A. Prosecution of Objections to Claims................................ 21
B. Estimation of Claims............................................... 21
C. Payments and Distributions on Disputed Claims...................... 22
ARTICLE IX.
CONDITIONS PRECEDENT TO CONFIRMATION AND CONSUMMATION OF THE PLAN...... 22
A. Condition Precedent to Confirmation................................ 22
B. Conditions Precedent to Consummation............................... 22
C. Waiver of Conditions............................................... 22
D. Effect of Non-occurrence of Conditions to Consummation............. 22
ARTICLE X.
RELEASE, INJUNCTIVE AND RELATED PROVISIONS............................. 23
A. Subordination...................................................... 23
B. Limited Releases by the Debtor..................................... 23
C. Limited Releases by Holder of Claims............................... 23
D. Preservation of Rights of Action................................... 23
E. Exculpation........................................................ 24
F. Injunction......................................................... 24
ARTICLE XI.
RETENTION OF JURISDICTION.............................................. 24
ARTICLE XII.
MISCELLANEOUS PROVISIONS............................................... 25
A. Dissolution of Committee(s)........................................ 25
B. Payment of Statutory Fees.......................................... 25
C. Discharge of Debtor................................................ 25
D. Modification of Plan............................................... 25
E. Revocation of Plan................................................. 25
F. Successors and Assigns............................................. 26
G. Reservation of Rights.............................................. 26
H. Section 1146 Exemption............................................. 26
I. Further Assurances................................................. 26
J. Service of Documents............................................... 26
K. Filing of Additional Documents..................................... 26
</TABLE>
A-3
<PAGE>
- -------------------------------------------------------------------------------
PREPACKAGED PLAN OF REORGANIZATION
OF ZENITH ELECTRONICS CORPORATION
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
- -------------------------------------------------------------------------------
Pursuant to title 11 of the United States Code, 11 U.S.C. (S)(S) 101 et
seq., Zenith Electronics Corporation, debtor and debtor-in-possession in the
above-captioned and numbered case, hereby respectfully proposes the following
Prepackaged Plan of Reorganization under Chapter 11 of the Bankruptcy Code:
ARTICLE I.
DEFINED TERMS, RULES OF INTERPRETATION,
COMPUTATION OF TIME AND GOVERNING LAW
A. Rules of Interpretation, Computation of Time and Governing Law
1. For purposes of the Plan: (a) whenever from the context it is
appropriate, each term, whether stated in the singular or the plural, shall
include both the singular and the plural, and pronouns stated in the
masculine, feminine or neuter gender shall include the masculine, feminine and
the neuter gender; (b) any reference in the Plan to a contract, instrument,
release, indenture or other agreement or document being in a particular form
or on particular terms and conditions means that such document shall be
substantially in such form or substantially on such terms and conditions; (c)
any reference in the Plan to an existing document or exhibit Filed, or to be
Filed, shall mean such document or exhibit, as it may have been or may be
amended, modified or supplemented; (d) unless otherwise specified, all
references in the Plan to Sections, Articles and Exhibits are references to
Sections, Articles and Exhibits of or to the Plan; (e) the words "herein" and
"hereto" refer to the Plan in its entirety rather than to a particular portion
of the Plan; (f) captions and headings to Articles and Sections are inserted
for convenience of reference only and are not intended to be a part of or to
affect the interpretation of the Plan; (g) the rules of construction set forth
in section 102 of the Bankruptcy Code shall apply; and (h) any term used in
capitalized form in the Plan that is not defined herein but that is used in
the Bankruptcy Code or the Bankruptcy Rules shall have the meaning assigned to
such term in the Bankruptcy Code or the Bankruptcy Rules, as the case may be.
2. In computing any period of time prescribed or allowed by the Plan, the
provisions of Bankruptcy Rule 9006(a) shall apply.
3. Except to the extent that the Bankruptcy Code or Bankruptcy Rules are
applicable, and subject to the provisions of any contract, instrument,
release, indenture or other agreement or document entered into in connection
with the Plan, the rights and obligations arising under the Plan shall be
governed by, and construed and enforced in accordance with, the laws of the
State of in which the Bankruptcy Court resides, without giving effect to the
principles of conflict of laws thereof.
B. Defined Terms
Unless the context otherwise requires, the following terms shall have the
following meanings when used in capitalized form in the Plan:
1. "Administrative Claim" means a Claim for costs and expenses of
administration under section 503(b), 507(b) or 1114(e)(2) of the Bankruptcy
Code, including: (a) the actual and necessary costs and expenses incurred
after the Petition Date of preserving the Estate and operating the business
of the Debtor (such as wages, salaries or commissions for services and
payments for goods and other services and leased premises); (b)
compensation for legal, financial advisory, accounting and other services
and reimbursement of expenses awarded or allowed under section 330(a) or
331 of the Bankruptcy Code; and (c) all fees and
A-4
<PAGE>
charges assessed against the Estate under chapter 123 of title 28 United
States Code, 28 U.S.C. (S)(S) 1911-1930.
2. "Allowed" means, with respect to any Claim, except as otherwise
provided herein: (a) a Claim that has been scheduled by the Debtor in its
schedule of liabilities as other than disputed, contingent or unliquidated
and as to which the Debtor or other party in interest has not Filed an
objection by the Effective Date; (b) a Claim that either is not a Disputed
Claim or has been allowed by a Final Order; (c) a Claim that is allowed:
(i) in any stipulation of amount and nature of Claim executed prior to the
Confirmation Date and approved by the Bankruptcy Court; (ii) in any
stipulation with the Debtor of amount and nature of Claim executed on or
after the Confirmation Date; or (iii) in any contract, instrument,
indenture or other agreement entered into or assumed in connection with the
Plan; (d) a Claim relating to a rejected executory contract or unexpired
lease that either (i) is not a Disputed Claim or (ii) has been allowed by a
Final Order, in either case only if a proof of Claim has been Filed by the
Bar Date or has otherwise been deemed timely Filed under applicable law; or
(e) a Claim that is allowed pursuant to the terms of this Plan.
3. "Allowed . . . Claim" means an Allowed Claim in the particular Class
described.
4. "Amended Certificate of Incorporation" means the Certificate of
Incorporation of the Reorganized Debtor, as restated as described in
Article V.D.1 of the Plan, the form of which shall be Filed on or before
the Confirmation Date.
5. "Amended Citibank Credit Agreement" means that certain Amended and
Restated Credit Agreement dated June 29, 1998 among the Corporation, the
Lenders designated therein, Citibank, N.A., as Issuing Bank, and Citicorp
North America, Inc., as Agent for the Issuing Bank and the Lenders,
together with all related notes, certificates, security agreements,
mortgages, pledges, indemnities, collateral assignments, undertakings,
guaranties, and other instruments and documents, as each may have been
amended or modified from time to time.
6. "Ballot Date" means the date stated in the Voting Instructions by
which all Ballots must be received.
7. "Ballots" mean the ballots accompanying the Disclosure Statement upon
which Holders of Impaired Claims shall indicate their acceptance or
rejection of the Plan in accordance with the Plan and the Voting
Instructions.
8. "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.
9. "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.
10. "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.
11. "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.
12. "Beneficial Holder" means the Person or Entity holding the beneficial
interest in a Claim or Equity Interest.
13. "Business Day" means any day, other than a Saturday, Sunday or "legal
holiday" (as defined in Bankruptcy Rule 9006(a)).
14. "By-Laws" mean the By-Laws of the Reorganized Debtor, the form of
which shall be Filed on or before the Confirmation Date.
A-5
<PAGE>
15. "Cash" means cash and cash equivalents.
16. "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.
17. "Citibank Secured Claims" means all Claims arising from or relating
to the Amended Citibank Credit Agreement.
18. "Citicorp Exit Facility" means that certain $150 million three-year
credit facility to be provided to the Reorganized Debtor pursuant to the
terms and conditions of the Citicorp Exit Facility Commitment.
19. "Citicorp Exit Facility Commitment" means that certain commitment
letter by and between the Debtor and Citicorp North America, Inc., a copy
of which is set forth as an exhibit to the Disclosure Statement.
20. "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.
21. "Claim Holder" or "Claimant" means the Holder of a Claim.
22. "Class" means a category of Holders of Claims or Equity Interests as
set forth in Article III of the Plan.
23. "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.
24. "Common Stock" means the authorized common stock of the Corporation.
25. "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.
26. "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.
27. "Confirmation Order" means the order of the Bankruptcy Court
confirming the Plan pursuant to section 1129 of the Bankruptcy Code.
28. "Consummation" means the occurrence of the Effective Date.
29. "Corporation" means Zenith Electronics Corporation, a Delaware
corporation.
30. "Creditor" means any Holder of a Claim.
31. "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.
32. "Debtor" means the Corporation, as debtor in the Prepackaged Chapter
11 Case.
33. "Debtor in Possession" means the Corporation, as debtor in possession
in the Prepackaged Chapter 11 Case.
34. "Delaware General Corporation Law" means title 8 of the Delaware
Code, as now in effect or hereafter amended.
35. "Disclosure Statement" means the Disclosure Statement and Proxy
Statement-Prospectus for the Solicitation of Votes for the Prepackaged Plan
of the Corporation dated [ ], as amended, supplemented, or
modified from time to time, describing the Plan, that is prepared and
distributed in
A-6
<PAGE>
accordance with sections 1125, 1126(b) and/or 1145 of the Bankruptcy Code
and Bankruptcy Rule 3018 and/or other applicable law.
36. "Debenture Releasees" 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.
37. "Debenture Releasees Lock-Up Agreement" means that certain
Forbearance, Lock-Up and Voting Agreement dated March 31, 1999 by and among
the Debtor, LGE and the members of the Debenture Releasees, a copy of which
is set forth as an exhibit to the Disclosure Statement.
38. "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.
39. "Distribution Record Date" means the close of business on the
Business Day immediately preceding the Effective Date.
40. "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.
41. "Entity" means an entity as defined in section 101(15) of the
Bankruptcy Code.
42. "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.
43. "Estate" means the estate of the Debtor created by section 541 of the
Bankruptcy Code upon the commencement of the Prepackaged Chapter 11 Case.
44. "File" or "Filed" means file or filed with the Bankruptcy Court in
the Prepackaged Chapter 11 Case.
45. "Final Decree" means the decree contemplated under Bankruptcy Rule
3022.
46. "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.
47. "General Unsecured Claim" means any Unsecured Claim that is not an
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.
48. "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.
49. "Impaired Claim" means a Claim classified in an Impaired Class.
50. "Impaired Class" means each of Classes 2, 5, 6 and 7 as set forth in
Article III of the Plan.
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51. "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.
52. "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 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.
53. "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.
54. "Leveraged Leases" means the Leveraged Lease (Melrose Park) and the
Leveraged Lease (Mexico).
55. "LGE" means LG Electronics Inc., a corporation organized under the
laws of the Republic of Korea.
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.
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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.
62. "LGE Reimbursement Claims" means any and all claims of LGE against
the Debtor arising from or relating to the Reimbursement Agreement, 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 6, 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 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.
69. "New Debentures" means those certain $50,000,000 of new 8.19% Senior
Debentures due November 1, 2009 issued by the Reorganized Debtor, offered
to the Holders of Allowed Claims in Class 5, the form of which shall be
Filed on or before the Confirmation Date.
70. "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.
71. "Old Subordinated Debenture Claims" means all Claims arising from or
related to the Old Subordinated Debentures or the Old Subordinated
Debenture Indenture.
72. "Old Subordinated Debentures" mean the 6 1/4% Convertible
Subordinated Debentures due 2011, issued by the Corporation under the Old
Senior Subordinated Debenture Indenture.
73. "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.
74. "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.
75. "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 6.
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76. "Person" means a person as defined in section 101(41) of the
Bankruptcy Code.
77. "Petition Date" means the date on which the Debtor filed its petition
for relief commencing the Prepackaged Chapter 11 Case.
78. "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.
79. "Prepackaged Chapter 11 Case" means the case under chapter 11 of the
Bankruptcy Code, commenced by the Debtor in the Bankruptcy Court.
80. "Priority Tax Claim" means a Claim of a governmental unit of the kind
specified in section 507(a)(8) of the Bankruptcy Code.
81. "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.
82. "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.
83. "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 LGE's guarantees of certain financial
accommodations provided to the Debtor.
84. "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.
85. "Restructuring Agreement" means that certain Amended and Restated
Restructuring Agreement dated as of June 14, 1999 by and between the Debtor
and LGE (as amended and supplemented from time to time), a copy of which is
set forth as an exhibit to the Disclosure Statement.
86. "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.
87. "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.
88. "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.
89. "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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90. "Securities Act" means the Securities Act of 1933, 15 U.S.C. sections
77a-77aa, as now in effect or hereafter amended.
91. "Unimpaired Claim" means an unimpaired Claim within the meaning of
section 1124 of the Bankruptcy Code.
92. "Unimpaired Class" means an unimpaired Class within the meaning of
section 1124 of the Bankruptcy Code.
93. "Unsecured Claim" means any Claim against the Debtor that is not a
Secured Claim, Administrative Claim, Priority Tax Claim or Other Priority
Claim.
94. "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.
95. "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 Impaired --entitled to vote
Class 3--Other Secured Claims Unimpaired --not entitled to vote
Class 4--General Unsecured Claims Unimpaired --not entitled to vote
Class 5--Old Subordinated Debenture Claims Impaired --entitled to vote
Class 6--LGE Claims: Impaired --entitled to vote
LGE Tranche A Claims
LGE Tranche B Claims
Class 7--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: On or prior to the Effective Date, each Holder of a
Citibank Secured Claim must File and serve upon the Debtor a written
election designating whether or not such Holder will be a lender under the
Citicorp Exit Facility. If such Holder elects to be a lender under the
Citicorp Exit Facility, the Allowed Class 2 Claim of such Holder shall be
treated as provided in the Citicorp Exit Facility Commitment. If such
Holder elects not to be a lender under the Citicorp Exit Facility, on the
Effective Date, unless such Holder and the Debtor agree to a different
treatment, the Allowed Class 2 Claim of such Holder (i) will be paid in
full in cash by the Reorganized Debtor or (ii) will otherwise be treated in
any manner so that such Allowed Class 2 Claim shall otherwise be unimpaired
within the meaning of section 1124 of the Bankruptcy Code. The failure of a
Holder of a Citibank Secured Claim to File and serve a written election as
provided herein
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shall not modify or otherwise affect any existing contractual agreement or
commitment of such Holder to be a lender under the Citicorp Exit Facility.
(c) Voting: Class 2 is impaired and the Holders of Class 2 Claims are
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.
5. Class 4--General Unsecured Claims
(a) Classification: Class 4 consists of the Claims of Holders of General
Unsecured Claims.
(b) Treatment: The legal, equitable and contractual rights of the Holders
of Class 4 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 4 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 4 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 4 is not impaired and the Holders of Class 4 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 4 are not
entitled to vote to accept or reject the Plan.
6. Class 5--Old Subordinated Debenture Claims
(a) Classification: Class 5 consists of the Claims of Holders of Old
Subordinated Debentures.
(b) Treatment: If Class 5 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 5 rejects the Plan, the Holders of Old Subordinated Debentures will
not receive or retain any property on account of their Old Subordinated
Debentures.
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(c) Voting: Class 5 is impaired and the Holders of Allowed Class 5 Claims
are entitled to vote to accept or reject the Plan.
7. Class 6--LGE Claims
(a) Classification: Class 6 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 6 is impaired and the Holder of the Allowed Class 6
Claims is entitled to vote to accept or reject the Plan.
8. Class 7--Equity Interests
(a) Classification: Class 7 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 7 is impaired, but because no distributions will be
made to Holders of Class 7 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 7 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.
ARTICLE IV.
ACCEPTANCE OR REJECTION OF THE PLAN
A. Voting Classes
Each Holder of an Allowed Claim in Classes 2, 5, and 6 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.
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C. Presumed Acceptance of Plan
Classes 1, 3, and 4 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 7 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 7. 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 5 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.
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 and Other Secured 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 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.
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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 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 Citicorp Exit Facility and 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.
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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,
but excluding any accrued but unpaid interest related thereto, 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.
Notwithstanding anything to the contrary contained herein, on the Effective
Date, the Debtor shall be deemed to have assumed, pursuant to sections 365 and
1123 of the Bankruptcy Code, the Prepetition Committee Lock-Up Agreement,
including the Debtor's indemnification obligations to each of the Debenture
Releasees contained therein, and the Debtor's agreements with Hebb & Gitlin
and Crossroads Capital Partners to pay professional fees incurred by the
Holders of Old Subordinated Debentures who are Debenture Releasees.
B. Claims Based on Rejection of Executory Contracts or Unexpired Leases
All proofs of claim with respect to Claims (other than LGE Leveraged Lease
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 (other than LGE Leveraged Lease 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.
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
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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 Debentures, and the New Common Stock to be
issued under the Plan shall be deemed issued as of the Effective Date
regardless of the date on which they are actually dated, authenticated or
distributed; provided, however, that the Reorganized Debtor shall withhold any
actual payment until such distribution is made and no interest shall accrue or
otherwise be payable on any such withheld amounts.
B. Distributions by the Reorganized Debtor; Distributions with Respect to Debt
Securities
The Reorganized Debtor shall make all distributions required under the Plan.
Notwithstanding the provisions of Article V.B above regarding the cancellation
of the Old Subordinated Debenture Indenture, the Old Subordinated Debenture
Indenture shall continue in effect to the extent necessary to allow the
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, and Old
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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 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.
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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 5 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 5 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
Debentures or New Common Stock to be distributed pursuant to the Plan on
account of any such Claim shall, pending such surrender, be treated as an
undeliverable distribution pursuant to Article VII.C above.
1. Notes and Debentures
Each Holder of an Old Subordinated Debenture Claim shall tender its Old
Subordinated Debenture relating to such Claim to the Reorganized Debtor in
accordance with written instructions to be provided to such Holders by the
Reorganized Debtor as promptly as practicable following the Effective Date.
Such instructions shall specify that delivery of such Old Subordinated
Debenture will be effected, and risk of loss and title thereto will pass, only
upon the proper delivery of such Old Subordinated Debentures with a letter of
transmittal in accordance with such instructions. All surrendered Old
Subordinated Debentures shall be marked as canceled.
2. Failure to Surrender Canceled Instruments
Any Holder of Old Subordinated Debentures that fails to surrender or is
deemed to have failed to surrender the applicable Old Subordinated Debentures
required to be tendered hereunder within five years after the Effective Date
shall have its Claim for a distribution pursuant to the Plan on account of
such Old Subordinated Debenture discharged and shall be forever barred from
asserting any such Claim against the 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
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or indemnity as may be required by the Reorganized Debtor to hold the
Reorganized Debtor harmless from any damages, liabilities or costs incurred in
treating such individual as a Holder of an Allowed Claim. Upon compliance with
this Article VII.I by a Holder of a Claim evidenced by an Old Subordinated
Debenture, such Holder shall, for all purposes under the Plan, be deemed to
have surrendered such note or debenture.
ARTICLE VIII.
PROCEDURES FOR RESOLVING DISPUTED CLAIMS
A. Prosecution of Objections to Claims
After the Confirmation Date, the Debtor and the Reorganized Debtor shall
have the exclusive authority to File objections, settle, compromise, withdraw
or litigate to judgment objections to Claims. From and after the Confirmation
Date, the Debtor and the Reorganized Debtor may settle or compromise any
Disputed Claim without approval of the Bankruptcy Court.
B. Estimation of Claims
The Debtor or the Reorganized Debtor may, at any time, request that the
Bankruptcy Court estimate any contingent or unliquidated Claim pursuant to
section 502(c) of the Bankruptcy Code regardless of whether the Debtor or the
Reorganized Debtor has previously objected to such Claim or whether the
Bankruptcy Court has ruled on any such objection, and the Bankruptcy Court
will retain jurisdiction to estimate any Claim at any time during litigation
concerning any objection to any Claim, including during the pendency of any
appeal relating to any such objection. In the event that the Bankruptcy Court
estimates any contingent or unliquidated Claim, that estimated amount will
constitute either the allowed amount of such Claim or a maximum limitation on
such Claim, as determined by the Bankruptcy Court. If the estimated amount
constitutes a maximum limitation on such Claim, the Debtor or Reorganized
Debtor may elect to pursue any supplemental proceedings to object to any
ultimate payment on such Claim. All of the aforementioned Claims objection,
estimation and resolution procedures are cumulative and not necessarily
exclusive of one another. Claims may be estimated and subsequently
compromised, settled, withdrawn or resolved by any mechanism approved by the
Bankruptcy Court.
C. Payments and Distributions on Disputed Claims
Notwithstanding any provision in the Plan to the contrary, except as
otherwise agreed by the Reorganized Debtor in its sole discretion, no partial
payments and no partial distributions will be made with respect to a Disputed
Claim until the resolution of such disputes by settlement or Final Order.
Subject to the provisions of this Article VIII.C, as soon as practicable after
a Disputed Claim becomes an Allowed Claim, the Holder of such Allowed Claim
will receive all payments and distributions to which such Holder is then
entitled under the Plan. Notwithstanding the foregoing, any Person or Entity
who holds both an Allowed Claim(s) and a Disputed Claim(s) will receive the
appropriate payment or distribution on the Allowed Claim(s), although, except
as otherwise agreed by the Reorganized Debtor in its sole discretion, no
payment or distribution will be made on the Disputed Claim(s) until such
dispute is resolved by settlement or Final Order.
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.
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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 5 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.
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
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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 Debenture Releasees are released by the Debtor and the
Reorganized Debtor and its subsidiaries from any and all claims (as defined in
section 101(5) of the Bankruptcy Code), obligations, rights, suits, damages,
causes of action, remedies and liabilities whatsoever, whether known or
unknown, foreseen or unforeseen, existing or hereafter arising, in law, equity
or otherwise, that the Debtor or its subsidiaries would have been legally
entitled to assert in their own right (whether individually or collectively)
or on behalf of the Holder of any Claim or Equity Interest or other Person or
Entity, based in whole or in part upon any act or omission, transaction,
agreement, event or other occurrence taking place on or before the Effective
Date, except in the case of the D&O Releasees, for claims or liabilities (i)
in respect of any loan, advance or similar payment by the Debtor or its
subsidiaries to any such Person, or (ii) in respect of any contractual
obligation owed by such Person to the Debtor or its subsidiaries.
C. Limited Releases by Holder of Claims
On and after the Effective Date, each Holder of a Claim (i) who has accepted
the Plan, (ii) whose Claim is in a Class that has accepted or is deemed to
have accepted the Plan pursuant to section 1126 of the Bankruptcy Code, or
(iii) who is entitled to receive a distribution of property under the Plan,
other than the Holder of a Claim in Class 5 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 Debenture Releasees
from any and all claims (as defined in section 101(5) of the Bankruptcy Code),
obligations, rights, suits, damages, causes of action, remedies and
liabilities whatsoever, whether known or unknown, foreseen or unforeseen,
existing or hereafter arising, in law, equity or otherwise, that such Person
or Entity would have been legally entitled to assert (whether individually or
collectively), based in whole or in part upon any act or omission,
transaction, agreement, event or other occurrence taking place on or before
the Effective Date in any way relating or pertaining to (x) the Debtor or the
Reorganized Debtor, (y) the Debtor's Prepackaged Chapter 11 Case, or (z) the
negotiation, formulation and preparation of the Plan, the Restructuring
Agreement or any related agreements, instruments or other documents.
D. Preservation of Rights of Action
Except as otherwise provided in the Plan or in any contract, instrument,
release, indenture or other agreement entered into in connection with the
Plan, in accordance with section 1123(b) of the Bankruptcy Code, the
Reorganized Debtor shall retain and may exclusively enforce any claims, rights
and Causes of Action that the Debtor or Estate may hold against any Person or
Entity. The Reorganized Debtor may pursue such retained claims, rights or
causes of action, as appropriate, in accordance with the best interests of the
Reorganized Debtor. On the Effective Date, the Reorganized Debtor shall be
deemed to waive and release any claims, rights or Causes of Action arising
under sections 544, 547, 548, 549 and 550 of the Bankruptcy Code held by the
Reorganized Debtor against any Person or Entity.
E. Exculpation
The Debtor, the Reorganized Debtor, the Investor Releasees, the D&O
Releasees, and the Debenture Releasees 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.
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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; provided, however, that this injunction shall not preclude
police or regulatory agencies from fulfilling their statutory duties.
ARTICLE XI.
RETENTION OF JURISDICTION
Notwithstanding the entry of the Confirmation Order and the occurrence of the
Effective Date, the Bankruptcy Court shall retain such jurisdiction over the
Prepackaged Chapter 11 Case after the Effective Date as legally permissible,
including jurisdiction to:
A. Allow, disallow, determine, liquidate, classify, estimate or establish
the priority or secured or unsecured status of any Claim, including the
resolution of any request for payment of any Administrative Claim and the
resolution of any and all objections to the allowance or priority of
Claims;
B. Grant or deny any applications for allowance of compensation or
reimbursement of expenses authorized pursuant to the Bankruptcy Code or the
Plan, for periods ending on or before the Effective Date;
C. Resolve any matters related to the assumption, assumption and
assignment or rejection of any executory contract or unexpired lease to
which the Debtor is a party or with respect to which the Debtor may be
liable and to hear, determine and, if necessary, liquidate, any Claims
arising therefrom, including those matters related to the amendment after
the Effective Date pursuant to Article VI above to add any executory
contracts or unexpired leases to the list of executory contracts and
unexpired leases to be rejected;
D. Ensure that distributions to Holders of Allowed Claims are
accomplished pursuant to the provisions of the Plan, including ruling on
any motion Filed pursuant to Article VII;
E. Decide or resolve any motions, adversary proceedings, contested or
litigated matters and any other matters and grant or deny any applications
involving the Debtor that may be pending on the Effective Date;
F. Enter such orders as may be necessary or appropriate to implement or
consummate the provisions of the Plan and all contracts, instruments,
releases, indentures and other agreements or documents created in
connection with the Plan or the Disclosure Statement;
G. Resolve any cases, controversies, suits or disputes that may arise in
connection with the Consummation, interpretation or enforcement of the Plan
or any Person's or Entity's obligations incurred in connection with the
Plan;
H. Issue injunctions, enter and implement other orders or take such other
actions as may be necessary or appropriate to restrain interference by any
Person or Entity with Consummation or enforcement of the Plan, except as
otherwise provided herein;
I. Resolve any cases, controversies, suits or disputes with respect to
the releases, injunction and other provisions contained in Article X and
enter such orders as may be necessary or appropriate to implement such
releases, injunction and other provisions;
J. Enter and implement such orders as are necessary or appropriate if the
Confirmation Order is for any reason modified, stayed, reversed, revoked or
vacated;
K. Determine any other matters that may arise in connection with or
relate to the Plan, the Disclosure Statement, the Confirmation Order or any
contract, instrument, release, indenture or other agreement or document
created in connection with the Plan or the Disclosure Statement; and
L. Enter an order and/or final decree concluding the Prepackaged Chapter
11 Case.
A-24
<PAGE>
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 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.
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.
A-25
<PAGE>
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>
================================================================================
ZENITH ELECTRONICS CORPORATION
AND
Trustee
-------------------------
INDENTURE
Dated as of _______, 1999
-------------------------
8.19% Debentures Due 2009
================================================================================
<PAGE>
TABLE OF CONTENTS*
-----------------
<TABLE>
<CAPTION>
<C> <S> <C>
ARTICLE ONE
DEFINITIONS............................................................... 5
Section 1.01. Definitions................................................ 5
ARTICLE TWO
ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND
EXCHANGE OF DEBENTURES.................................................... 7
Section 2.01. Designation, Amount and Issue of Debentures................ 7
Section 2.02. Form of Debentures......................................... 7
Section 2.03. Date and Denomination of Debentures........................ 8
Section 2.04. Execution of Debentures.................................... 8
Section 2.05. Exchange and Registration of Transfer of Debentures........ 9
Section 2.06. Mutilated, Destroyed, Lost or Stolen Debentures............ 10
Section 2.07. Temporary Debentures....................................... 10
Section 2.08. Cancellation of Debentures Paid, etc....................... 11
ARTICLE THREE
REDEMPTION OF DEBENTURES.................................................. 11
Section 3.01. Redemption Prices.......................................... 11
Section 3.02. Notice of Redemption; Selection of Debentures.............. 11
Section 3.03. Payment of Debentures Called for Redemption................ 12
ARTICLE FOUR
PARTICULAR COVENANTS OF THE COMPANY....................................... 13
Section 4.01. Payment of Principal, Premium and Interest................. 13
Section 4.02. Offices for Notices and Payments, etc...................... 13
Section 4.03. Appointments to Fill Vacancies in Trustee's Office......... 13
Section 4.04. Provision as to Paying Agent............................... 13
Section 4.05. Most Favored Lender Provision.............................. 14
</TABLE>
- -----------------
* This table of contents shall not, for any purpose, be deemed to be a part
of the Indenture.
-i-
<PAGE>
<TABLE>
<S> <C>
ARTICLE FIVE
DEBENTUREHOLDERS LISTS AND REPORTS
BY THE COMPANY AND THE TRUSTEE.......................................... 15
Section 5.01. Debentureholders Lists.................................... 15
Section 5.02. Preservation and Disclosure of Lists...................... 16
Section 5.03. Reports by the Company.................................... 17
Section 5.04. Reports by the Trustee.................................... 17
ARTICLE SIX
REMEDIES OF THE TRUSTEE AND
DEBENTUREHOLDERS ON EVENT OF DEFAULT.................................... 19
Section 6.01. Events of Default......................................... 19
Section 6.02. Payment of Debentures on Default; Suit Therefor........... 21
Section 6.03. Application of Monies Collected by Trustee................ 22
Section 6.04. Proceedings by Debentureholders........................... 23
Section 6.05. Proceedings by Trustee.................................... 23
Section 6.06. Remedies Cumulative and Continuing........................ 23
Section 6.07. Direction of Proceedings and Waiver of Defaults by
Majority of Debentureholders.............................. 24
Section 6.08. Notice of Defaults........................................ 24
Section 6.09. Undertaking to Pay Costs.................................. 24
ARTICLE SEVEN
CONCERNING THE TRUSTEE.................................................. 25
Section 7.01. Duties and Responsibilities of Trustee.................... 25
Section 7.02. Reliance on Documents, Opinions, etc...................... 26
Section 7.03. No Responsibility for Recitals, etc....................... 27
Section 7.04. Trustee, Paying Agents or Registrar May Own Debentures.... 27
Section 7.05. Monies to be Held in Trust................................ 27
Section 7.06. Compensation and Expenses of Trustee...................... 27
Section 7.07. Officers' Certificate as Evidence......................... 28
Section 7.08. Conflicting Interest of Trustee........................... 28
Section 7.09. Eligibility of Trustee.................................... 33
Section 7.10. Resignation or Removal of Trustee......................... 33
Section 7.11. Acceptance by Successor Trustee........................... 34
Section 7.12. Succession by Merger, etc................................. 35
Section 7.13. Limitation on Rights of Trustee as a Creditor............. 35
ARTICLE EIGHT
CONCERNING THE DEBENTUREHOLDERS......................................... 39
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
Section 8.01. Action by Debentureholders..................................... 39
Section 8.02. Proof of Execution by Debentureholders......................... 39
Section 8.03. Who Are Deemed Absolute Owners ................................ 39
Section 8.04. Company-Owned Debentures Disregarded .......................... 39
Section 8.05. Revocation of Consents; Future Holders Bound................... 40
ARTICLE NINE
DEBENTUREHOLDERS' MEETINGS
Section 9.01. Purposes of Meetings........................................... 40
Section 9.02. Call of Meetings by Trustee.................................... 41
Section 9.03. Call of Meetings by Company or Debentureholders................ 41
Section 9.04. Qualifications for Voting...................................... 41
Section 9.05. Regulations.................................................... 41
Section 9.06. Voting......................................................... 42
Section 9.07. No Delay of Rights by Meeting.................................. 42
ARTICLE TEN
SUPPLEMENTAL INDENTURES
Section 10.01. Supplemental Indentures without Consent of Debentureholders.... 43
Section 10.02. Supplemental Indentures with Consent of Debentureholders....... 44
Section 10.03. Compliance with Trust Indenture Act; Effect of
Supplemental Indentures........................................ 44
Section 10.04. Notation on Debentures......................................... 44
Section 10.05. Evidence of Compliance of Supplemental Indenture to be
Furnished Trustee.............................................. 45
ARTICLE ELEVEN
CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE............................. 45
Section 11.01. Company May Consolidate, etc., on Certain Terms................ 45
Section 11.02. Successor Corporation to be Substituted........................ 45
Section 11.03. Opinion of Counsel to be Given Trustee......................... 46
ARTICLE TWELVE
SATISFACTION AND DISCHARGE OF INDENTURE....................................... 46
Section 12.01. Discharge of Indenture......................................... 46
Section 12.02. Deposited Monies to be Held in Trust by Trustee................ 47
Section 12.03. Paying Agent to Repay Monies Held.............................. 47
Section 12.04. Return of Unclaimed Monies..................................... 47
ARTICLE THIRTEEN
</TABLE>
-iii-
<PAGE>
<TABLE>
<S> <C>
IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND
DIRECTORS.................................................................. 47
Section 13.01. Indenture and Debentures Solely Corporate Obligations....... 47
ARTICLE FOURTEEN
MISCELLANEOUS PROVISIONS................................................... 48
Section 14.01. Provisions Binding on Company's Successors.................. 48
Section 14.02. Official Acts by Successor Corporation...................... 48
Section 14.03. Addresses for Notices, etc.................................. 48
Section 14.04. Governing Law............................................... 48
Section 14.05. Evidence of Compliance with Conditions Precedent............ 48
Section 14.06. Legal Holidays.............................................. 49
Section 14.07. Trust Indenture Act to Control.............................. 49
Section 14.08. No Security Interest Created................................ 49
Section 14.09. Benefits of Indenture....................................... 49
Section 14.10. Table of Contents, Headings, etc............................ 49
Section 14.11. Execution in Counterparts................................... 49
Signatures...................................................................... 50
Acknowledgments................................................................. 51
</TABLE>
-iv-
<PAGE>
TIE-SHEET
---------
of provisions of Trust Indenture Act of 1939 with Indenture dated as of _______,
1999, between Zenith Electronics Corporation and
_________________________________, Trustee:
<TABLE>
<CAPTION>
Section of Act Section of Indenture
-------------- --------------------
<S> <C>
310(a)(1) and (2)....................................... 7.09
310(a)(3) and (4)....................................... Not applicable
310(b).................................................. 7.08 and 7.10(b)
310(c).................................................. Not applicable
311(a) and (b).......................................... 7.13
311(c).................................................. Not applicable
312(a).................................................. 5.01 and 5.02(a)
312(b) and (c).......................................... 5.02(b) and (c)
313(a).................................................. 5.04(a)
313(b)(1)............................................... Not applicable
313(b)(2)............................................... 5.04(b)
313(c).................................................. 5.04(c)
313(d).................................................. 5.04(d)
314(a).................................................. 5.03
314(b).................................................. Not applicable
314(c)(1) and (2)....................................... 14.05
314(c)(3)............................................... Not applicable
314(d).................................................. Not applicable
314(e).................................................. 14.05
314(f).................................................. Not applicable
315(a), (c) and (d)..................................... 7.01
315(b).................................................. 6.08
315(e).................................................. 6.09
316(a)(1)............................................... 6.01 and 6.07
316(a)(2)............................................... Omitted
316(a) last sentence.................................... 8.04
316(b).................................................. 6.04
317(a).................................................. 6.02
317(b).................................................. 4.04(a)
318(a).................................................. 14.07
</TABLE>
- -------------
This tie-sheet is not part of the Indenture as executed.
-v-
<PAGE>
THIS INDENTURE, dated as of _______, 1999 between ZENITH ELECTRONICS
CORPORATION, a Delaware corporation (hereinafter sometimes called the
"Company"), and _________________________________, a national banking
association organized and existing under the laws of the United States
(hereinafter sometimes called the "Trustee"),
W I T N E S S E T H:
WHEREAS, for its lawful corporate purposes, the Company has duly authorized
the issue of its 8.19% Senior Debentures Due 2009 (hereinafter sometimes called
the "Debentures"), in an aggregate principal amount not to exceed $50,000,000
and, to provide the terms and conditions upon which the Debentures are to be
authenticated, issued and delivered, the Company has duly authorized the
execution of this Indenture; and
WHEREAS, the Debentures, the certificate of authentication to be borne by
the Debentures is to be substantially in the following forms:
[FORM OF FACE OF DEBENTURE]
No. $
ZENITH ELECTRONICS CORPORATION
8.19% DEBENTURE DUE 2009
ZENITH ELECTRONICS CORPORATION, a corporation duly organized and existing
under the laws of the State of Delaware (herein called the "Company"), for value
received, hereby promises to pay to ________________________, or registered
assigns, the principal sum of _______________________________________________
Dollars on November 1, 2009, at the office or agency of the Company maintained
for that purpose in the City of ______ or the Borough of Manhattan, The City of
New York, in such coin or currency of the United States of America as at the
time of payment shall be legal tender for the payment of public and private
debts, and to pay interest, semi-annually on May 1 and November 1 of each year,
commencing _______________, on said principal sum at said office or agency, in
like coin or currency, at the rate per annum specified in the title of this
Debenture, from the May 1 or the November 1, as the case may be, next preceding
the date of this Debenture to which interest has been paid or duly provided for,
unless the date hereof is a date to which interest has been paid or duly
provided for, in which case from the date of this Debenture, or unless no
interest has been paid or duly provided for on the Debentures, in which case
from ________, 1999 until payment of said principal sum has been made or duly
provided for. Notwithstanding the foregoing, if the date hereof is after any
April 15 or October 15, as the case may be, and before the following May 1 or
November 1, this Debenture shall bear interest from such May 1 or November 1;
provided, however, that if the Company shall default in the payment of interest
due on such May 1 or November 1, then this Debenture shall bear interest from
the next preceding May 1 or November 1 to which interest has been paid or duly
provided for or, if no interest has been paid or duly provided for on the
Debentures, from ________, 1999. The interest so payable on any May 1 or
November 1 will, subject to certain exceptions provided in the Indenture
referred to on the reverse hereof, be paid to the person in whose name this
Debenture is registered at the close
<PAGE>
of business on the April 15 or October 15 next preceding such May 1 or November
1 and may, at the option of the Company, be paid by check mailed to the
registered address of such person.
Reference is made to the further provisions of this Debenture set forth on
the reverse hereof. Such further provisions shall for all purposes have the same
effect as though fully set forth at this place.
This Debenture shall be deemed to be a contract made under the laws of the
State of New York, and for all purposes shall be construed in accordance with
and governed by the laws of said State.
This Debenture shall not be valid or become obligatory for any purpose
until the certificate of authentication hereon shall have been signed by the
Trustee under the Indenture referred to on the reverse hereof.
IN WITNESS WHEREOF, Zenith Electronics Corporation has caused this
instrument to be duly executed under its corporate seal.
Dated: _________________, 19__
ZENITH ELECTRONICS CORPORATION
[SEAL]
By________________________________________
Attest:
____________________________________
-2-
<PAGE>
[FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION]
This is one of the Debentures described in the within-mentioned Indenture.
_________________________________________,
As Trustee
By_______________________________________
Authorized Signature
[FORM OF REVERSE OF DEBENTURE]
ZENITH ELECTRONICS CORPORATION
8.19% DEBENTURE DUE 2009
This Debenture is one of a duly authorized issue of Debentures of the
Company, designated as its 8.19% Debentures Due 2009 (herein called the
"Debentures"), limited (except as otherwise provided in the Indenture mentioned
below) to the aggregate principal amount of $50,000,000, all issued or to be
issued under and pursuant to an indenture dated as of _______, 1999 (herein
called the "Indenture"), duly executed and delivered by the Company to
__________________________, Trustee (herein called the "Trustee"), to which
Indenture and all indentures supplemental thereto reference is hereby made for a
description of the rights, limitations of rights, obligations, duties and
immunities thereunder of the Trustee, the Company and the holders of the
Debentures.
In case an Event of Default, as defined in the Indenture, shall have
occurred and be continuing, the principal hereof may be declared, and upon such
declaration shall become, due and payable, in the manner, with the effect and
subject to the conditions provided in the Indenture.
The Indenture contains provisions permitting the Company and the Trustee,
with the consent of the holders of not less than 66 2/3% in aggregate principal
amount of the Debentures at the time outstanding, evidenced as in the Indenture
provided, to execute supplemental indentures adding any provisions to or
changing in any manner or eliminating any of the provisions of the Indenture or
of any supplemental indenture or modifying in any manner the rights of the
holders of the Debentures; provided, however, that no such supplemental
indenture shall (i) extend the fixed maturity of any Debenture, or reduce the
rate or extend the time of payment of interest thereon, or reduce the principal
amount thereof or any premium thereon, or make the principal thereof or any
premium or interest thereon payable in any coin or currency other than that
hereinbefore provided, without the consent of the holder of each Debenture so
affected, or (ii) reduce the aforesaid percentage of Debentures, the holders of
which are required to consent to any such supplemental indenture, without the
consent of the holders of all Debentures then outstanding. It is also provided
in the Indenture that, prior to any declaration accelerating the maturity of the
Debentures, the holders of a majority in aggregate principal amount of the
Debentures at the time outstanding may on behalf of the holders of all of the
Debentures waive any past default or Event of Default under the Indenture and
its
-3-
<PAGE>
consequences except a default in the payment of interest or any premium on
or the principal of any of the Debentures. Any such consent or waiver by the
holder of this Debenture (unless revoked as provided in the Debenture) shall be
conclusive and binding upon such holder and upon all future holders and owners
of this Debenture and any Debentures which may be issued in exchange or
substitution herefor, irrespective of whether or not any notation thereof is
made upon this Debenture or such other Debentures.
No reference herein to the Indenture and no provision of this Debenture or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and any premium and interest
on this Debenture at the place, at the respective times, at the rate and in the
coin or currency herein prescribed.
The Debentures are issuable in registered form without coupons in
denominations of $1,000 and any integral multiple of $1,000. At the office or
agency of the Company in the City of ________ or the Borough of Manhattan, The
City of New York, and in the manner and subject to the limitations provided in
the Indenture, but without payment of any service charge, Debentures may be
exchanged for a like aggregate principal amount of Debentures of other
authorized denominations.
The Debentures may be redeemed at the option of the Company as a whole, or
from time to time in part, on any date prior to maturity, upon mailing a notice
of such redemption not less than twenty nor more than sixty days prior to the
date fixed for redemption to the holders of Debentures at their last registered
addresses, all as provided in the Indenture, at a redemption price equal to 100%
of the principal amount, together with accrued interest to the date fixed for
redemption; provided that if the date fixed for redemption is a May 1 or
November 1, then the interest payable on such date shall be paid to the holder
of record on the next preceding April 15 or October 15.
Upon due presentment for registration of transfer of this Debenture at the
office or agency of the Company in the City of ________ or the Borough of
Manhattan, The City of New York, a new Debenture or Debentures of authorized
denominations for an equal aggregate principal amount will be issued to the
transferee in exchange herefor, subject to the limitations provided in the
Indenture, without charge except for any tax or other governmental charge
imposed in connection therewith.
The Company, the Trustee, any paying agent and any Debenture registrar may
deem and treat the registered holder hereof as the absolute owner of this
Debenture (whether or not this Debenture shall be overdue and notwithstanding
any notation of ownership or other writing hereon made by anyone other than the
Company or any Debenture registrar), for the purpose of receiving payment
hereof, or on account hereof and for all other purposes, and neither the Company
nor the Trustee nor any paying agent nor any Debenture registrar shall be
affected by any notice to the contrary. All payments made to or upon the order
of such registered holder shall, to the extent of the sum or sums paid, satisfy
and discharge liability for monies payable on this Debenture.
No recourse for the payment of the principal of or any premium or interest
on this Debenture, or for any claim based hereon or otherwise in respect hereof,
and no recourse under or upon any obligation, covenant or agreement of the
Company in the Indenture or any indenture supplemental
-4-
<PAGE>
thereto or in any Debenture, or because of the creation of any indebtedness
represented thereby, shall be had against any incorporator, stockholder, officer
or director, as such, past, present or future, of the Company or of any
successor corporation, either directly or through the Company or any successor
corporation, whether by virtue of any constitution, statute or rule of law or by
the enforcement of any assessment or penalty or otherwise, all such liability
being, by the acceptance hereof and as part of the consideration for the issue
hereof, expressly waived and released.
AND WHEREAS, all acts and things necessary to make the Debentures, when
executed by the Company and authenticated and delivered by the Trustee, as in
this Indenture provided, and issued, the valid, binding and legal obligations of
the Company, and to constitute these presents a valid agreement according to its
terms, have been done and performed, and the execution of this Indenture and the
issue hereunder of the Debentures have in all respects been duly authorized;
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
That in order to declare the terms and conditions upon which the Debentures
are, and are to be, authenticated, issued and delivered, and in consideration of
the premises, of the purchase and acceptance of the Debentures by the holders
thereof and of the sum of one dollar duly paid to it by the Trustee at the
execution of these presents, the receipt whereof is hereby acknowledged, the
Company covenants and agrees with the Trustee for the equal and proportionate
benefit of the respective holders from time to time of the Debentures, as
follows:
ARTICLE ONE
DEFINITIONS
Section 1.01. Definitions. The terms defined in this Section 1.01 (except
as herein otherwise expressly provided or unless the context otherwise requires)
for all purposes of this Indenture and of any indenture supplemental hereto
shall have the respective meanings specified in this Section 1.01. All other
terms used in this Indenture which are defined in the Trust Indenture Act of
1939 or which are by reference therein defined in the Securities Act of 1933, as
amended (except as herein otherwise expressly provided or unless the context
otherwise requires) shall have the meanings assigned to such terms in said Trust
Indenture Act and in said Securities Act as in force at the date of the
execution of this Indenture.
Board of Directors: The term "Board of Directors" shall mean the Board of
Directors of the Company or the Executive Committee of such Board.
Company: The term "Company" shall mean Zenith Electronics Corporation, a
Delaware corporation and subject to the provisions of Article Eleven shall
include its successors and assigns.
Debenture or Debentures; Outstanding: The terms "Debenture" or
"Debentures" shall mean any Debenture or Debentures, as the case may be,
authenticated and delivered under this Indenture.
-5-
<PAGE>
The term "outstanding", when used with reference to Debentures, shall,
subject to the provisions of section 8.04, mean, as of any particular time, all
Debentures authenticated and delivered by the Trustee under this Indenture,
except
(a) Debentures theretofore cancelled by the Trustee or delivered to the
Trustee for cancellation;
(b) Debentures, or portions thereof, for the payment or redemption of which
monies in the necessary amount shall have been deposited in trust with the
Trustee or with any paying agent (other than the Company) or shall have been set
aside and segregated in trust by the Company (if the Company shall act as its
own paying agent), provided that if such Debentures are to be redeemed prior to
the maturity thereof, notice of such redemption shall have been given as in
Article Three provided, or provision satisfactory to the Trustee shall have been
made for giving such notice; and
(c) Debentures in lieu of or in substitution for which other Debentures
shall have been authenticated and delivered pursuant to the terms of Section
2.06, unless proof satisfactory to the Trustee is presented that any such
Debentures are held by bona fide holders in due course.
Debentureholder: The terms "Debentureholder", "holder of Debentures", or
other similar terms, shall mean any person in whose name at the time a
particular Debenture is registered on the books of the Company kept for that
purpose in accordance with the terms hereof.
Event of Default: The term "Event of Default" shall mean any event
specified in Section 6.01, continued for the period of time, if any, and after
the giving of the notice, if any, therein designated.
Indenture: The term "Indenture" shall mean this instrument as originally
executed or, if amended or supplemented as herein provided, as so amended or
supplemented.
Leveraged Lease Assets: The term "Leveraged Lease Assets" means those
assets subject to 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 Company, as Lessee, as supplemented by that certain
Lease Supplement dated April 2, 1997 by and between Fleet Bank, as Lessor, and
the Company, as Lessee, and 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, and any proceeds received in respect thereof.
LGE New Restructured Senior Note: The term "LGE New Restructured Senior
Note" shall mean that certain note issued by the Company dated ________, 1999
in favor of LG Electronics Inc.
LGE New Restructured Senior Note Documents: The term "LGE New Restructured
Senior Note Documents" shall mean all notes, documents, agreements or
instruments related to the LGE New Restructured Senior Note.
Officers' Certificate: The term "Officers' Certificate", when used with
respect to the Company, shall mean a certificate signed by the Chairman, the
President or any Vice President and by the Controller, any Assistant Controller,
the Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary
of the Company. Each such certificate shall include the statements provided for
in Section 14.05 if and to the extent required by the provisions of such
Section.
Opinion of Counsel: The term "Opinion of Counsel" shall mean an opinion in
writing signed by legal counsel, who may be an employee of or counsel to the
Company, acceptable to the Trustee. Each such opinion shall include the
statements provided for in Section 14.05 if and to the extent required by the
provisions of such Section.
Person: The term "Person" shall mean a corporation, an association, a
partnership, an organization, an individual, a government or a political
subdivision thereof or a governmental agency.
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Principal Office of the Trustee: The term "principal office of the
Trustee", or other similar term shall mean the principal office of the Trustee
at which at any particular time its corporate trust business shall be
administered which at the date hereof is located at __________________________,
_______________________________________________________.
Responsible Officer: The term "Responsible Officer", when used with
respect to the Trustee, shall mean any officer in the Corporate Trust Division
of the Trustee, or any other officer or assistant officer of the Trustee
customarily performing functions similar to those performed by the persons who
at the time shall be such officers, respectively, or to whom any corporate trust
matter is referred because of his knowledge of and familiarity with the
particular subject.
Subsidiary: The term "Subsidiary" shall mean any corporation of which at
least a majority of the outstanding stock having voting power under ordinary
circumstances to elect a majority of the board of directors of said corporation
shall at the time be owned by the Company or by the Company and one or more
Subsidiaries or by one or more Subsidiaries.
Trustee: The term "Trustee" shall mean _________________________________,
and, subject to the provisions of Article Seven hereof, shall also include its
successors and assigns as Trustee hereunder.
Trust Indenture Act of 1939: The term "Trust Indenture Act of 1939" shall
mean the Trust Indenture Act of 1939 as it was in force at the date of execution
of this Indenture, except as provided in Section 10.03.
ARTICLE TWO
ISSUE, DESCRIPTION, EXECUTION,
REGISTRATION AND EXCHANGE OF DEBENTURES
Section 2.01. Designation, Amount and Issue of Debentures. The Debentures
shall be designated as 8.19% Debentures Due 2009." Debentures not to exceed the
aggregate principal amount of $50,000,000 (except as provided in Section 2.06)
upon the execution of this Indenture, or from time to time thereafter, may be
executed by the Company and delivered to the Trustee for authentication, and the
Trustee shall thereupon authenticate and deliver said Debentures to or upon the
written order of the Company, signed by its President or any of its Vice
Presidents and its Treasurer or any of its Assistant Treasurers, without any
further action by the Company hereunder.
Section 2.02. Form of Debentures. The Debentures and the Trustee's
certificate of authentication to be borne by the Debentures shall be
substantially in the form as in this Indenture above recited. Any of the
Debentures may have imprinted thereon such legends or endorsements as the
officers executing the same may approve (execution thereof to be conclusive
evidence of such approval) and as are not inconsistent with the provisions of
this Indenture, or as may be required to comply with any law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Debentures may be listed, or to conform to usage.
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Section 2.03. Date and Denomination of Debentures. The Debentures shall be
issuable in registered form without coupons in denominations of $1,000 and any
integral multiple of $1,000. Every Debenture shall be dated the date of its
authentication and, except as provided in this Section, shall bear interest,
payable semiannually on May 1 and November 1 of each year, commencing
___________, from the May 1 or November 1, as the case may be, next preceding
the date of such Debenture to which interest has been paid or duly provided for,
unless the date of such Debenture is the date to which interest has been paid or
duly provided for, in which case from the date of such Debenture, or unless no
interest has been paid or duly provided for on the Debentures, in which case
from ________, 1999, until payment of the principal sum has been made or duly
provided for. Notwithstanding the foregoing, when there is no existing default
in the payment of interest on the Debentures, all Debentures authenticated by
the Trustee after the close of business on the record date (as hereinafter in
this Section defined) for any interest payment date (May 1 or November 1, as the
case may be) and prior to such interest payment date shall be dated the date of
authentication but shall bear interest from such interest payment date;
provided, however, that if and to the extent that the Company shall default in
the interest due on such interest payment date, then any such Debenture shall
bear interest from the May 1 or November 1, as the case may be, next preceding
the date of such Debenture to which interest has been paid or duly provided for,
unless no interest has been paid or duly provided for on the Debentures, in
which case from ________, 1999.
The person in whose name any Debenture is registered at the close of
business on any record date (as hereinafter defined) with respect to any
interest payment date shall be entitled to receive the interest payable on such
interest payment date notwithstanding the cancellation of such Debenture upon
any transfer or exchange subsequent to the record date and prior to such
interest payment date; provided, however, that if and to the extent the Company
shall default in the payment of the interest due on such interest payment date,
such defaulted interest shall be paid to the persons in whose names outstanding
Debentures are registered on a subsequent record date established by notice
given by mail by or on behalf of the Company to the holders of Debentures not
less than fifteen days preceding such subsequent record date. The term "record
date" as used in this Section with respect to any interest payment date shall
mean the April 15 or October 15, as the case may be, next preceding such
interest payment date, or if such day shall be a day on which banking
institutions in the City of ______ or in The City of New York are authorized by
law or executive order to close, the next preceding day which shall not be a day
on which such institutions are so authorized to close.
Section 2.04. Execution of Debentures. The Debentures shall be signed in
the name and on behalf of the Company by the facsimile signature of its Chairman
or President or, in lieu thereof, of any of its Vice Presidents or its Treasurer
and attested by its Secretary or any Assistant Secretary, under its corporate
seal (which may be printed, engraved or otherwise reproduced thereon, by
facsimile or otherwise). For that purpose the Company may adopt and use the
facsimile signature of any person who has been or is or shall be such officer.
Only such Debentures as shall bear thereon a certificate of authentication
substantially in the form hereinbefore recited, executed by the Trustee, shall
be entitled to the benefits of this Indenture or be valid or obligatory for any
purpose. Such certificate by the Trustee upon any Debenture executed by the
Company shall be conclusive evidence that the Debenture so authenticated has
been duly authenticated and delivered hereunder and that the holder is entitled
to the benefits of this Indenture.
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In case any officer of the Company who shall have signed any of the
Debentures shall cease to be such officer before the Debentures so signed shall
have been authenticated and delivered by the Trustee, or disposed of by the
Company, such Debentures nevertheless may be authenticated and delivered or
disposed of as though the person who signed such Debentures had not ceased to be
such officer of the Company; and any Debenture may be signed on behalf of the
Company by such persons as, at the actual date of the execution of such
Debenture, shall be the proper officers of the Company, although at the date of
the execution of this Indenture any such person was not such an officer.
Section 2.05. Exchange and Registration of Transfer of Debentures.
Debentures may be exchanged for a like aggregate principal amount of Debentures
of other authorized denominations. Debentures to be exchanged shall be
surrendered at the office or agency to be maintained by the Company in the City
of ______ or the Borough of Manhattan, The City of New York and the Company
shall execute and register and the Trustee shall authenticate and deliver in
exchange therefor the Debenture or Debentures which the Debentureholder making
the exchange shall be entitled to receive.
The Company shall keep, at said office or agency in the City of ______ and
the City of New York, a register in which, subject to such reasonable
regulations as it may prescribe, the Company shall register Debentures and shall
register the transfer of Debentures as in this Article Two provided. Such
register shall be in written form or in any other form capable of being
converted into written form within a reasonable time. At all reasonable times
such register shall be open for inspection by the Trustee. Upon due presentment
for registration of transfer of any Debenture at such office or agency
maintained by the Company in the City of _______ or the Borough of Manhattan,
The City of New York, the Company shall execute and register and the Trustee
shall authenticate and deliver in the name of the transferee or transferees a
new Debenture or Debentures for an equal aggregate principal amount.
All Debentures presented for registration of transfer or for exchange,
redemption or payment shall (if so required by the Company or the Trustee) be
duly endorsed by, or be accompanied by a written instrument or instruments of
transfer in form satisfactory to the Company and the Trustee duly executed by,
the holder or his attorney duly authorized in writing.
No service charge shall be made for any exchange or registration of
transfer of Debentures, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
therewith.
The Company shall not be required to exchange or register a transfer of (a)
any Debentures for a period of 15 days next preceding any selection of
Debentures to be redeemed or (b) any Debentures selected, called or being called
for redemption.
Section 2.06. Mutilated, Destroyed, Lost or Stolen Debentures. In case any
temporary or definitive Debenture shall become mutilated or be destroyed, lost
or stolen, the Company in its discretion may execute, and upon its request the
Trustee shall authenticate and deliver, a new
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Debenture, bearing a number not contemporaneously outstanding, in exchange and
substitution for the mutilated Debenture, or in lieu of and in substitution for
the Debenture so destroyed, lost or stolen. In every case the applicant for a
substituted Debenture shall furnish to the Company and to the Trustee such
security or indemnity as may be required by them to save each of them harmless,
and, in every case of destruction, loss or theft, the applicant shall also
furnish to the Company and to the Trustee evidence to their satisfaction of the
destruction, loss or theft of such Debenture and of the ownership thereof.
The Trustee may authenticate any such substituted Debenture and deliver the
same upon the written request or authorization of any officer of the Company.
Upon the issuance of any substituted Debenture, the Company may require the
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed in relation thereto and any other expenses connected therewith
and in addition a further sum not exceeding $2 for each Debenture so issued in
substitution. In case any Debenture which has matured or is about to mature
shall become mutilated or be destroyed, lost or stolen, the Company may, instead
of issuing a substitute Debenture, pay or authorize the payment of the same
(without surrender thereof except in the case of a mutilated Debenture) if the
applicant for such payment shall furnish to the Company and to the Trustee such
security or indemnity as may be required by them to save each of them harmless
and, in case of destruction, loss or theft, evidence satisfactory to the Company
and the Trustee of the destruction, loss or theft of such Debenture and of the
ownership thereof.
Every substituted Debenture issued pursuant to the provisions of this
Section 2.06 by virtue of the fact that any Debenture is destroyed, lost or
stolen shall constitute an additional contractual obligation of the Company,
whether or not the destroyed, lost or stolen Debenture shall be found at any
time, and shall be entitled to all the benefits of the Indenture equally and
proportionately with any and all other Debentures duly issued hereunder. All
Debentures shall be held and owned upon the express condition that the foregoing
provisions are exclusive with respect to the replacement or payment of
mutilated, destroyed, lost or stolen Debentures and shall preclude, to the
extent permitted under applicable law, any and all other rights or remedies
notwithstanding any law or statute existing or hereafter enacted to the contrary
with respect to the replacement or payment or conversion of negotiable
instruments or other securities without their surrender.
Section 2.07. Temporary Debentures. Pending the preparation of definitive
Debentures, the Company may execute and the Trustee shall authenticate and
deliver temporary Debentures (printed or lithographed). Temporary Debentures
shall be issuable in any authorized denomination, and substantially in the form
of the definitive Debentures but with such omissions, insertions and variations
as may be appropriate for temporary Debentures, all as may be determined by the
Company. Every such temporary Debenture shall be authenticated by the Trustee
upon the same conditions and in substantially the same manner, and with the same
effect, as the definitive Debentures. Without unreasonable delay the Company
will execute and deliver to the Trustee definitive Debentures and thereupon any
or all temporary Debentures may be surrendered in exchange therefor, at the
principal office of the Trustee in the City of ______ or the office or agency of
the Company in the Borough of Manhattan, The City of New York, and the Trustee
shall authenticate and deliver in exchange for such temporary Debentures an
equal aggregate principal amount of definitive Debentures. Such exchange shall
be made by the Company at its own expense
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and without any charge therefor. Until so exchanged, the temporary Debentures
shall in all respects be entitled to the same benefits under this Indenture as
definitive Debentures authenticated and delivered hereunder.
Section 2.08. Cancellation of Debentures Paid, etc. All Debentures
surrendered for the purpose of payment, redemption, exchange or registration of
transfer, or in discharge shall, if surrendered to the Company or any paying
agent or any Debenture registrar, be surrendered to the Trustee and promptly
cancelled by it, or, if surrendered to the Trustee, shall be promptly cancelled
by it, and no Debentures shall be issued in lieu thereof except as expressly
permitted by any of the provisions of this Indenture. The Trustee shall destroy
cancelled Debentures and deliver a certificate of such destruction to the
Company. If the Company shall acquire any of the Debentures, however, such
acquisition shall not operate as a redemption or satisfaction of the
indebtedness represented by such Debentures unless and until the same are
surrendered to the Trustee for cancellation.
ARTICLE THREE
REDEMPTION OF DEBENTURES
Section 3.01. Redemption Prices. The Company may, at its option, redeem all
or from time to time any part of the Debentures on any date prior to maturity,
upon notice as set forth in Section 3.02, at a redemption price equal to 100% of
the principal amount thereof, together with accrued interest to the date fixed
for redemption; provided that if the date fixed for redemption is a May 1 or
November 1, then the interest payable on such date shall be paid to the holder
of record on the next preceding April 15 or October 15.
Section 3.02. Notice of Redemption; Selection of Debentures. In case the
Company shall desire to exercise the right to redeem all, or, as the case may
be, any part of the Debentures pursuant to Section 3.01, it shall fix a date for
redemption and it, or, at its request, the Trustee in the name of and at the
expense of the Company, shall mail or cause to be mailed a notice of such
redemption at least 20 and not more than 60 days prior to the date fixed for
redemption to the holders of Debentures so to be redeemed as a whole or in part
at their last addresses as the same appear on the registry books of the Company.
Such mailing shall be by first class mail. The notice if mailed in the manner
herein provided shall be conclusively presumed to have been duly given, whether
or not the holder received such notice. In any case, failure to give such notice
by mail or any defect in the notice to the holder of any Debenture designed for
redemption as a whole or in part shall not affect the validity of the
proceedings for the redemption of any other Debenture.
Each such notice of redemption shall specify the date fixed for redemption,
the place or places of payment, that payment will be made upon presentation and
surrender of such Debentures, that interest accrued to the date fixed for
redemption will be paid as specified in said notice, and that on and after said
date interest thereon or on the portions thereof to be redeemed will cease to
accrue. If fewer than all the Debentures are to be redeemed, the notice of
redemption shall identify the Debentures to be redeemed. In case any Debenture
is to be redeemed in part only, the notice of redemption shall state the portion
of the principal amount thereof to be redeemed and shall state that on and after
the date fixed for redemption, upon surrender of such Debenture, a new Debenture
or Debentures in principal amount equal to the unredeemed portion thereof will
be issued.
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Prior to the redemption date specified in the notice of redemption given as
provided in this Section, the Company will deposit with the Trustee or with one
or more paying agents an amount of money sufficient to redeem on the redemption
date all the Debentures so called for redemption at the redemption price,
together with accrued interest to the date fixed for redemption. If fewer than
all the Debentures are to be redeemed, it will give the Trustee notice not less
than 45 days prior to the redemption date as to the aggregate principal amount
of Debentures to be redeemed.
If fewer than all the Debentures are to be redeemed or if any Debentures
are to be redeemed in part only, the Trustee shall select, in such manner as in
its sole discretion it shall deem appropriate and fair, the Debentures or
portions thereof to be redeemed. The Debentures (or portions thereof) so
selected shall be deemed duly selected for redemption for all purposes hereof.
Section 3.03. Payment of Debentures Called for Redemption. If notice of
redemption has been given as above provided, the Debentures or portions of
Debentures with respect to which such notice has been given shall become due and
payable on the date and at the place or places stated in such notice at the
redemption price, together with interest accrued to the date fixed for
redemption, and on and after said date (unless the Company shall default in the
payment of such Debentures at the redemption price, together with interest
accrued to said date) interest on the Debentures or portions of Debentures so
called for redemption shall cease to accrue. On presentation and surrender of
such Debentures at a place of payment in said notice specified, the said
Debentures or the specified portions thereof shall be paid and redeemed by the
Company at the redemption price, together with interest accrued thereon to the
date fixed for redemption.
Upon presentation of any Debenture redeemed in part only, the Company shall
execute and the Trustee shall authenticate and deliver to the holder thereof, at
the expense of the Company, a new Debenture or Debentures, of authorized
denominations, in principal amount equal to the unredeemed portion of the
Debentures so presented.
ARTICLE FOUR
PARTICULAR COVENANTS OF THE COMPANY
Section 4.01. Payment of Principal, Premium and Interest. The Company
covenants and agrees that it will duly and punctually pay or cause to be paid
the principal of and premium, if any, and interest on each of the Debentures at
the places, at the respective times and in the manner provided herein and in the
Debentures.
Section 4.02. Offices for Notices and Payments, etc. So long as any of the
Debentures remain outstanding, the Company will maintain in the City of ______
and in the Borough of Manhattan, The City of New York, an office or agency where
the Debentures may be presented for payment, and an office or agency where the
Debentures may be presented for registration of transfer and for exchange as in
this Indenture provided and an office or agency where notices and demands to or
upon the Company in respect of the Debentures or of this Indenture may be
served. The Company will give to the Trustee written notice of the location of
each such office or agency and
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of any change of location thereof. In case the Company shall fail to maintain
any such office or agency or shall fail to give such notice of the location or
of any change in the location thereof, presentations and demands may be made and
notices may be served at the principal office of the Trustee in the City of
______ and the office or agency of the Trustee in the Borough of Manhattan, The
City of New York, and the Company hereby appoints the Trustee at the principal
office of the Trustee in the City of ______ and the office or agency of the
Trustee in the Borough of Manhattan, The City of New York, its agent to receive
all such presentations and demands.
Section 4.03. Appointments to Fill Vacancies in Trustee's Office. The
Company, whenever necessary to avoid or fill a vacancy in the office of Trustee,
will appoint, in the manner provided in Section 7.10, a Trustee, so that there
shall at all times be a Trustee hereunder.
Section 4.04. Provision as to Paying Agent. (a) If the Company shall
appoint a paying agent other than the Trustee, it will cause such paying agent
to execute and deliver to the Trustee an instrument in which such agent shall
agree with the Trustee, subject to the provisions of this Section 4.04,
(1) that it will hold all sums held by it as such agent for the
payment of the principal of and premium, if any, or interest on the
Debentures (whether such sums have been paid to it by the Company or by any
other obligor on the Debentures) in trust for the benefit of the holders of
the Debentures; and
(2) that it will give the Trustee notice of any failure by the Company
(or by any other obligor on the Debentures) to make any payment of the
principal of and premium, if any, or interest on the Debentures when the
same shall be due and payable.
(b) If the Company shall act as its own paying agent, it will, on or before
each due date of the principal of and premium, if any, or interest on the
Debentures, set aside, segregate and hold in trust for the benefit of the
holders of the Debentures a sum sufficient to pay such principal and premium, if
any, or interest so becoming due and will notify the Trustee of any failure to
take such action and of any failure by the Company (or by any other obligor
under the Debentures) to make any payment of the principal of and premium, if
any, or interest on the Debentures when the same shall become due and payable.
(c) Anything in this Section 4.04 to the contrary notwithstanding, the
Company may, at any time, for the purpose of obtaining a satisfaction and
discharge of this Indenture, or for any other reason, pay or cause to be paid to
the Trustee all sums held in trust by it, or any paying agent hereunder, as
required by this Section 4.04, such sums to be held by the Trustee upon the
trusts herein contained.
(d) Anything in this Section 4.04 to the contrary notwithstanding, the
agreement to hold sums in trust as provided in this Section 4.04 is subject to
Sections 12.03 and 12.04.
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Section 4.05. Most Favored Lender Provision. (a) If the Company shall enter
into an amendment of or waiver to, or other agreement or arrangement
supplemental to, the LGE New Restructured Senior Note Documents which shall
provide for any Additional Covenants or Additional Defaults, then such
Additional Covenants or Additional Defaults shall be deemed to have been
incorporated herein as if fully set forth herein with such changes as may be
necessary to make such Additional Covenants or Additional Defaults applicable to
this Indenture without any further requirement for notice or action on the part
of the Company or any holder of Debentures. For purposes of this paragraph (a),
(1) "Additional Covenant" means an affirmative or negative covenant or
similar restriction applicable to the Company or any of its Subsidiaries
which requires the maintenance of any particular financial condition or the
achievement of any particular financial performance or which prohibits or
limits actions which the Company or any such Subsidiary could otherwise
take (or permits any such action only upon satisfaction of specified
conditions) or requires the taking of any action which the Company or any
such Subsidiary would not otherwise be required to take.
(2) "Additional Default" means any provision which would permit LGE to
accelerate the maturity of, require the Company or any Subsidiary to buy or
indemnify LGE in respect of, or otherwise terminate the LGE New
Restructured Senior Note Documents prior to the original maturity or
expiration date of the indebtedness evidenced thereby.
(b) If the Company shall enter into an amendment of or waiver to, or other
agreement or arrangement supplemental to, the LGE New Restructured Senior Note
Documents which shall provide for any earlier time of repayment or prepayment of
any indebtedness owing in respect of the LGE New Restructured Senior Note than
that required as of the date hereof (taking into account any mandatory
prepayment provisions contained in the LGE New Restructured Senior Note
Documents as of the date hereof) (regardless of whether such repayment or
prepayment obligation arises from dispositions of assets, a mandatory sinking
fund or repayment schedule or otherwise), this Indenture shall be deemed to have
been amended to provide for repayment or prepayment of a proportional principal
amount of the Debentures at the new time of repayment or prepayment of the
indebtedness owing in respect of the LGE New Restructured Senior Note.
The change to this Indenture deemed to have been effected pursuant to this
paragraph (b) shall not require any notice or action on the part of the Company
or any holder of Debentures.
(c) The Company shall not enter into an amendment to or waiver to, or other
agreement or arrangement supplemental to, the LGE New Restructured Senior Note
Documents which shall provide for a pledge or lien on any real or personal
property of the Company or any of its Subsidiaries (other than in respect of the
Leveraged Lease Assets). If, notwithstanding the foregoing, the Company shall
enter into such an amendment or waiver, it shall take such action as shall be
necessary or appropriate to grant an equal and ratable lien on such real or
personal property in favor of the Trustee for the benefit of the holders of the
Debentures, but such amendment or waiver shall nevertheless constitute a failure
on the part of the Company to observe and perform a covenant and agreement set
forth in this Indenture for purposes of Section 6.01(c).
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(d) If the Company shall prepay the LGE New Restructured Senior Note in
whole or in part at its option at any time before a mandatory prepayment is due
in respect thereof under the terms of the LGE New Restructured Senior Note
Documents as of the date hereof, it shall simultaneously prepay a proportional
principal amount of the Debentures.
(e) If the Company shall make any cash payment in respect of interest on
the LGE New Restructured Senior Note at any time (except to the extent such
payment of interest is required to be made in cash under the terms of the LGE
New Restructured Senior Note Documents as of the date hereof), it shall make a
prepayment of the Debentures in the amount that would be required pursuant to
the foregoing paragraph (d) if such cash payment had been a prepayment of
principal of the LGE New Restructured Senior Note.
ARTICLE FIVE
DEBENTUREHOLDERS LISTS AND REPORTS
BY THE COMPANY AND THE TRUSTEE
Section 5.01. Debentureholders Lists. The Company covenants and agrees that
it will furnish or cause to be furnished to the Trustee, semiannually, not more
than 15 days after each April 15 and October 15 in each year beginning with
[April 15, 2000], and at such other times as the Trustee may request in writing,
within thirty days after receipt by the Company of any such request, a list in
such form as the Trustee may reasonably require of the names and addresses of
the holders of Debentures as of a date not more than fifteen days prior to the
time such information is furnished, except that no such list need be furnished
so long as the Trustee is acting as Debenture registrar.
Section 5.02. Preservation and Disclosure of Lists. (a) The Trustee shall
preserve, in as current a form as is reasonably practicable, all information as
to the names and addresses of the holders of Debentures contained in the most
recent list furnished to it as provided in Section 5.01. The Trustee may destroy
any list furnished to it as provided in Section 5.01 upon receipt of a new list
so furnished.
(b) In case three or more holders of Debentures (hereinafter referred to as
"applicants") apply in writing to the Trustee and furnish to the Trustee
reasonable proof that each such applicant has owned a Debenture for a period of
at least six months preceding the date of such application, and such application
states that the applicants desire to communicate with other holders of
Debentures with respect to their rights under this Indenture or under the
Debentures and is accompanied by a copy of the form of proxy or other
communication which such applicants propose to transmit, then the Trustee shall,
within five business days after the receipt of such application, at its
election, either,
(1) afford such applicants access to the information preserved at the
time by the Trustee in accordance with the provisions of subsection (a) of
this Section 5.02, or
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(2) inform such applicants as to the approximate number of holders of
Debentures whose names and addresses appear in the information preserved at
the time by the Trustee in accordance with the provisions of subsection (a)
of this Section 5.02, and as to the approximate cost of mailing to such
Debentureholders the form of proxy or other communication, if any,
specified in such application.
If the Trustee shall elect not to afford such applicants access to such
information, the Trustee shall, upon the written request of such applicants,
mail to each Debentureholder whose name and address appear in the information
preserved at the time by the Trustee in accordance with the provisions of
subsection (a) of this Section 5.02 a copy of the form of proxy or other
communication which is specified in such request, with reasonable promptness
after a tender to the Trustee of the material to be mailed and of payment, or
provision for the payment, of the reasonable expenses of mailing, unless within
five days after such tender, the Trustee shall mail to such applicants and file
with the Securities and Exchange Commission, together with a copy of the
material to be mailed, a written statement to the effect that, in the opinion of
the Trustee, such mailing would be contrary to the best interests of the holders
of Debentures or would be in violation of applicable law. Such written
statement shall specify the basis of such opinion. If said Commission, after
opportunity for a hearing upon the objections specified in the written statement
so filed, shall enter an order refusing to sustain any of such objections or if,
after the entry of an order sustaining one or more of such objections, said
Commission shall find, after notice and opportunity for hearing, that all the
objections so sustained have been met and shall enter an order so declaring, the
Trustee shall mail copies of such material to all such Debentureholders with
reasonable promptness after the entry of such order and the renewal of such
tender; otherwise the Trustee shall be relieved of any obligation or duty to
such applicants respecting their application.
(c) Each and every holder of the Debentures, by receiving and holding the
same, agrees with the Company and the Trustee that neither the Company nor the
Trustee nor any paying agent nor the Debenture registrar shall be held
accountable by reason of the disclosure of any such information as to the names
and addresses of the holders of Debentures in accordance with the provisions of
subsection (b) of this Section 5.02, regardless of the source from which such
information was derived, and that the Trustee shall not be held accountable by
reason of mailing any material pursuant to a request made under said subsection
(b).
Section 5.03. Reports by the Company. (a) The Company covenants and agrees
to file with the Trustee, within fifteen days after the Company is required to
file the same with the Securities and Exchange Commission, copies of the annual
reports and of the information, documents and other reports (or copies of such
portions of any of the foregoing as said Commission may from time to time by
rules and regulations prescribe) which the Company may be required to file with
said Commission pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934; or, if the Company is not required to file information,
documents or reports pursuant to either of such sections, then to file with the
Trustee and said Commission, in accordance with rules and regulations prescribed
from time to time by said Commission, such of the supplementary and periodic
information, documents and reports which may be required pursuant to section 13
of the Securities Exchange Act of 1934 in respect of a security listed and
registered on a national securities exchange as may be prescribed from time to
time in such rules and regulations.
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(b) The Company covenants and agrees to file with the Trustee and the
Securities and Exchange Commission, in accordance with the rules and regulations
prescribed from time to time by said Commission, such additional information,
documents and reports with respect to compliance by the Company with the
conditions and covenants provided for in this Indenture as may be required from
time to time by such rules and regulations.
(c) The Company covenants and agrees to transmit by mail to all holders of
Debentures, as the names and addresses of such holders appear upon the registry
books of the Company, within thirty days after the filing thereof with the
Trustee, such summaries of any information, documents and reports required to be
filed by the Company pursuant to subsections (a) and (b) of this Section 5.03 as
may be required by rules and regulations prescribed from time to time by the
Securities and Exchange Commission.
Section 5.04. Reports by the Trustee. (a) On or before July 15, 2000, and
on or before July 15 in every year thereafter, so long as any Debentures are
outstanding hereunder, the Trustee shall transmit to the Debentureholders, as
hereinafter in this Section 5.04 provided, a brief report dated as of the
preceding May 15 with respect to:
(1) its eligibility under Section 7.09, and its qualification under
Section 7.08, or in lieu thereof, if to the best of its knowledge it has
continued to be eligible and qualified under such Sections, a written
statement to such effect;
(2) the character and amount of advances (and if the Trustee elects so
to state, the circumstances surrounding the making thereof) made by the
Trustee (as such) which remain unpaid on the date of such report, and for
the reimbursement of which it claims or may claim a lien or charge, prior
to that of the Debentures, on any property or funds held or collected by it
as Trustee, except that the Trustee shall not be required (but may elect)
to state such advances if such advances so remaining unpaid aggregate not
more than one-half of one percent of the principal amount of the Debentures
outstanding on the date of such report;
(3) the amount, interest rate, and maturity date of all other
indebtedness owing by the Company (or by any other obligor on the
Debentures) to the Trustee in its individual capacity, on the date of such
report, with a brief description of any property held as collateral
security therefor, except an indebtedness based upon a creditor
relationship arising in any manner described in paragraphs (2), (3), (4) or
(6) of subsection (b) of Section 7.13;
(4) the property and funds, if any, physically in the possession of
the Trustee, as such, on the date of such report;
(5) any additional issue of Debentures which the Trustee has not
previously reported; and
(6) any action taken by the Trustee in the performance of its duties
under this Indenture which it has not previously reported and which in its
opinion materially affects the
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Debentures, except action in respect of a default, notice of which has been
or is to be withheld by it in accordance with the provisions of Section
6.08.
(b) The Trustee shall transmit to the Debentureholders, as hereinafter
provided, a brief report with respect to the character and amount of any
advances (and if the Trustee elects so to state, the circumstances surrounding
the making thereof) made by the Trustee (as such), since the date of the last
report transmitted pursuant to the provisions of subsection (a) of this Section
5.04 (or, if no such report has yet been so transmitted, since the date of
execution of this Indenture), for the reimbursement of which it claims or may
claim a lien or charge prior to that of the Debentures on property or funds held
or collected by it as Trustee, and which it has not previously reported pursuant
to this subsection, except that the Trustee shall not be required (but may
elect) to report such advances if such advances remaining unpaid at any time
aggregate ten percent or less of the principal amount of Debentures outstanding
at such time, such report to be transmitted within ninety days after such time.
(c) Reports pursuant to this Section 5.04 shall be transmitted by mail to
all holders of Debentures as the names and addresses of such holders appear upon
the registry books of the Company.
(d) A copy of each such report shall, at the time of such transmission to
Debentureholders, be filed by the Trustee with each stock exchange upon which
the Debentures are listed and also with the Securities and Exchange Commission.
The Company will notify the Trustee when and as the Debentures become listed on
any stock exchange.
ARTICLE SIX
REMEDIES OF THE TRUSTEE AND
DEBENTUREHOLDERS ON EVENT OF DEFAULT
Section 6.01. Events of Default. In case one or more of the following
Events of Default shall have occurred and be continuing:
(a) default in the payment of any instalment of interest upon any of the
Debentures as and when the same shall become due and payable, and continuance of
such default for a period of thirty days; or
(b) default in the payment of the principal of, or premium, if any, on any
of the Debentures as and when the same shall become due and payable either at
maturity or in connection with any redemption, by declaration or otherwise; or
(c) failure on the part of the Company duly to observe or perform any
other of the covenants or agreements on the part of the Company in the
Debentures or in this Indenture continued for a period of ninety days after the
date on which written notice of such failure, requiring the Company to remedy
the same, shall have been given to the Company by the Trustee, or to the
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Company and the Trustee by the holders of at least twenty-five percent in
aggregate principal amount of the Debentures at the time outstanding; or
(d) an event of default, as defined in any mortgage, indenture or
instrument under which there may be issued, or by which there may be secured or
evidenced, any indebtedness of the Company or a Subsidiary (whether such
indebtedness now exists or shall hereafter be created or incurred) shall occur
and shall consist of default in the payment of such indebtedness at the maturity
thereof or shall result in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise become due and payable,
and such default in payment is not cured or such acceleration shall not be
rescinded or annulled within 10 days after written notice to the Company from
the Trustee or to the Company and to the Trustee from the holders of at least
10% in aggregate principal amount of the Debentures at the time outstanding;
provided that it shall not be an Event of Default if the principal amount of
indebtedness which is not paid at maturity or the maturity of which is
accelerated is less than $5,000,000; provided further that if, prior to a
declaration of acceleration of the maturity of the Debentures or the entry of
judgment in favor of the Trustee in a suit pursuant to Section 6.02, such
default shall be remedied or cured by the Company or waived by the holders of
such indebtedness, then the Event of Default hereunder by reason thereof shall
be deemed likewise to have been thereupon remedied, cured or waived without
further action upon the part of either the Trustee or any of the holders of the
Debentures, and provided further, that, subject to Sections 6.08 and 7.01, the
Trustee shall not be charged with knowledge of any such default unless written
notice of such default shall have been given to the Trustee by the Company, by a
holder or an agent of a holder of any such indebtedness, by the trustee then
acting under any indenture or other instrument under which such default shall
have occurred, or by the holders of at least five percent in aggregate principal
amount of the Debentures at the time outstanding; or
(e) if a court having jurisdiction in the premises shall enter a decree or
order for relief in respect of the Company in an involuntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or appoint a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or similar official) of the Company or of substantially all of its
property or winding-up or liquidation of its affairs, and such decree or order
shall remain unstayed and in effect for a period of ninety consecutive days; or
(f) if the Company shall commence a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect or shall
consent to the entry of an order for relief in an involuntary case under any
such law, or shall consent to the appointment of or taking possession by a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar
official) of the Company or of substantially all of its property, or shall make
any general assignment for the benefit of creditors;
then and in each and every such case, unless the principal of all of the
Debentures shall have already become due and payable, either the Trustee or the
holders of not less than twenty-five percent in aggregate principal amount of
the Debentures then outstanding hereunder, by notice in writing to the Company
(and to the Trustee if given by Debentureholders), may declare the principal of
all the Debentures to be due and payable immediately, and upon any such
declaration the same shall become and shall be immediately due and payable,
anything in this Indenture or in the Debentures
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contained to the contrary notwithstanding. This provision, however, is subject
to the condition that if, at any time after the principal of the Debentures
shall have been so declared due and payable, and before any judgment or decree
for the payment of the monies due shall have been obtained or entered as
hereinafter provided, the Company shall pay or shall deposit with the Trustee a
sum sufficient to pay all matured instalments of interest upon all of the
Debentures and the principal of and premium, if any, on any and all Debentures
which shall have become due otherwise than by acceleration (with interest on
overdue instalments of interest (to the extent that payment of such interest is
enforceable under applicable law) and on such principal and premium, if any, at
the rate borne by the Debentures, to the date of such payment or deposit) and
the expenses of the Trustee, and any and all defaults under this Indenture,
other than the nonpayment of principal of and accrued interest on Debentures
which shall have become due by acceleration, shall have been remedied -- then
and in every such case the holders of a majority in aggregate principal amount
of the Debentures then outstanding, by written notice to the Company and to the
Trustee, may waive all defaults and rescind and annul such declaration and its
consequences; but no such waiver or rescission and annulment shall extend to or
shall affect any subsequent default, or shall impair any right consequent
thereon.
In case the Trustee shall have proceeded to enforce any right under this
Indenture and such proceedings shall have been discontinued or abandoned because
of such rescission or annulment or for any other reason or shall have been
determined adversely to the Trustee, then and in every such case the Company and
the Trustee shall be restored respectively to their several positions and rights
hereunder, and all rights, remedies and powers of the Company and the Trustee
shall continue as though no such proceeding had been taken.
Section 6.02. Payment of Debentures on Default; Suit Therefor. The Company
covenants that (a) in case default shall be made in the payment of any
instalment of interest upon any of the Debentures as and when the same shall
become due and payable, and such default shall have continued for a period of
thirty days, or (b) in case default shall be made in the payment of the
principal of and premium, if any, on any of the Debentures as and when the same
shall have become due and payable whether at maturity of the Debentures or in
connection with any redemption, by declaration or otherwise--then, upon demand
of the Trustee, the Company will pay to the Trustee, for the benefit of the
holders of the Debentures, the whole amount that then shall have become due and
payable on all such Debentures for principal and premium, if any, or interest,
or both, as the case may be, with interest upon the overdue principal and
premium, if any, and (to the extent that payment of such interest is enforceable
under applicable law) upon the overdue instalments of interest at the rate borne
by the Debentures; and, in addition thereto, such further amount as shall be
sufficient to cover the costs and expenses of collection, including a reasonable
compensation to the Trustee, its agent, attorneys and counsel, and any expenses
or liabilities incurred by the Trustee hereunder other than through its
negligence or bad faith.
In case the Company shall fail forthwith to pay such amounts upon such
demand, the Trustee, in its own name and as trustee of an express trust, shall
be entitled and empowered to institute any actions or proceedings at law or in
equity for the collection of the sums so due and unpaid, and may prosecute any
such action or proceeding to judgment or final decree, and may enforce any such
judgment or final decree against the Company or any other obligor on the
Debentures and collect in
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the manner provided by law out of the property of the Company or any other
obligor on the Debentures wherever situated the monies adjudged or decreed to be
payable.
In case there shall be pending proceedings for the bankruptcy or for the
reorganization of the Company or any other obligor on the Debentures under Title
11 of the United States Code or any other applicable law, or in case a receiver
or trustee shall have been appointed for the property of the Company or such
other obligor, or in the case of any other similar judicial proceedings relative
to the Company or other obligor upon the Debentures, or to the creditors or
property of the Company or such other obligor, the Trustee, irrespective of
whether the principal of the Debentures shall then be due and payable as therein
expressed or by declaration or otherwise and irrespective of whether the Trustee
shall have made any demand pursuant to the provisions of this Section 6.02,
shall be entitled and empowered, by intervention in such proceedings or
otherwise, to file and prove a claim or claims for the whole amount of principal
and interest owing and unpaid in respect of the Debentures, and, in case of any
judicial proceedings, to file such proofs of claim and other papers or documents
as may be necessary or advisable in order to have the claims of the Trustee and
of the Debentureholders allowed in such judicial proceedings relative to the
Company or any other obligor on the Debentures, its or their creditors, or its
or their property, and to collect and receive any monies or other property
payable or deliverable on any such claims, and to distribute the same after the
deduction of its charges and expenses; and any receiver, assignee or trustee in
bankruptcy or reorganization is hereby authorized by each of the
Debentureholders to make such payments to the Trustee, and, in the event that
the Trustee shall consent to the making of such payments directly to the
Debentureholders, to pay to the Trustee any amount due it for compensation and
expenses, including counsel fees incurred by it up to the date of such
distribution. To the extent that such payment of reasonable compensation,
expenses and counsel fees out of the estate in any such proceedings shall be
denied for any reason, payment of the same shall be secured by a lien on, and
shall be paid out of, any and all distributions, dividends, monies, securities
and other property which the holders of the Debentures may be entitled to
receive in such proceedings, whether in liquidation or under any plan of
reorganization or arrangement or otherwise.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or adopt on behalf of any Debentureholder any plan of
reorganization or arrangement, affecting the Debentures or the rights of any
Debentureholder, or to authorize the Trustee to vote in respect of the claim of
any Debentureholder in any such proceeding.
All rights of action and of asserting claims under this Indenture, or under
any of the Debentures, may be enforced by the Trustee without the possession of
any of the Debentures, or the production thereof on any trial or other
proceeding relative thereto, and any such suit or proceeding instituted by the
Trustee shall be brought in its own name as trustee of an express trust, and any
recovery of judgment shall be for the ratable benefit of the holders of the
Debentures.
Section 6.03. Application of Monies Collected by Trustee. Any monies
collected by the Trustee shall be applied in the order following, at the date or
dates fixed by the Trustee for the distribution of such monies, upon
presentation of the several Debentures, and stamping thereon the payment, if
only partially paid, and upon surrender thereof if fully paid:
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FIRST: To the payment of costs and expenses of collection and
reasonable compensation to the Trustee, its agents, attorneys and counsel,
and of all other expenses and liabilities incurred, and all advances made,
by the Trustee except as a result of its negligence or bad faith;
SECOND: In case the principal of the outstanding Debentures shall not
have become due and be unpaid, to the payment of interest on the Debentures
in the order of the maturity of the instalments of such interest, with
interest (to the extent that such interest has been collected by the
Trustee) upon the overdue instalments of interest at the rate borne by the
Debentures, such payments to be made ratably to the persons entitled
thereto;
THIRD: In case the principal of the outstanding Debentures shall have
become due, by declaration or otherwise, to the payment of the whole amount
then owing and unpaid upon the Debentures for principal and premium, if
any, and interest, with interest on the overdue principal and premium, if
any, and (to the extent that such interest has been collected by the
Trustee) upon overdue instalments of interest at the rate borne by the
Debentures; and in case such monies shall be insufficient to pay in full
the whole amounts so due and unpaid upon the Debentures, then to the
payment of such principal and premium, if any, and interest without
preference or priority of principal and premium, if any, over interest, or
of interest over principal and premium, if any, or of any instalment of
interest over any other instalment of interest, or of any Debenture over
any other Debenture, ratably to the aggregate of such principal and
premium, if any, and accrued and unpaid interest.
Section 6.04. Proceedings by Debentureholders. No holder of any Debenture
shall have any right by virtue of or by availing of any provision of this
Indenture to institute any suit, action or proceeding in equity or at law upon
or under or with respect to this Indenture or for the appointment of a receiver
or trustee, or for any other remedy hereunder, unless such holder previously
shall have given to the Trustee written notice of default and of the continuance
thereof, as hereinbefore provided, and unless also the holders of not less than
twenty-five percent in aggregate principal amount of the Debentures then
outstanding shall have made written request upon the Trustee to institute such
action, suit or proceeding in its own name as Trustee hereunder and shall have
offered to the Trustee such reasonable indemnity as it may require against the
costs, expenses and liabilities to be incurred therein or thereby, and the
Trustee for sixty days after its receipt of such notice, request and offer of
indemnity, shall have neglected or refused to institute any such action, suit or
proceeding, it being understood and intended, and being expressly covenanted by
the taker and holder of every Debenture with every other taker and holder and
the Trustee, that no one or more holders of Debentures shall have any right in
any manner whatever by virtue of or by availing of any provision of this
Indenture to affect, disturb or prejudice the rights of any other holder of such
Debentures, or to obtain or seek to obtain priority over or preference to any
other such holder, or to enforce any right under this Indenture, except in the
manner herein provided and for the equal, ratable and common benefit of all
holders of Debentures.
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Notwithstanding any other provisions in this Indenture (including, without
limitation, the preceding paragraph of this Section 6.04), however, the right of
any holder of any Debenture to receive payment of the principal of and interest
on such Debenture, on or after the respective due dates expressed in such
Debenture, or to institute suit for the enforcement of any such payment on or
after such respective dates against the Company shall not be impaired or
affected without the consent of such holder.
Section 6.05. Proceedings by Trustee. In case of an Event of Default
hereunder the Trustee may in its discretion proceed to protect and enforce the
rights vested in it by this Indenture by such appropriate judicial proceedings
as the Trustee shall deem most effectual to protect and enforce any of such
rights, either by suit in equity or by action at law or by proceedings in
bankruptcy or otherwise, whether for the specific enforcement of any covenant or
agreement contained in this Indenture or in aid of the exercise of any power
granted in this Indenture, or to enforce any other legal or equitable right
vested in the Trustee by this Indenture or by law.
Section 6.06. Remedies Cumulative and Continuing. All powers and remedies
given by this Article Six to the Trustee or to the Debentureholders shall, to
the extent permitted by law, be deemed cumulative and not exclusive of any
thereof or of any other powers and remedies available to the Trustee or the
holders of the Debentures, by judicial proceedings or otherwise, to enforce the
performance or observance of the covenants and agreements contained in this
Indenture, and no delay or omission of the Trustee or of any holder of any of
the Debentures to exercise any right or power accruing upon any default
occurring and continuing as aforesaid shall impair any such right or power, or
shall be construed to be a waiver of any such default or an acquiescence
therein; and, subject to the provisions of Section 6.04, every power and remedy
given by this Article Six or by law to the Trustee or to the Debentureholders
may be exercised from time to time, and as often as shall be deemed expedient,
by the Trustee or by the Debentureholders.
Section 6.07. Direction of Proceedings and Waiver of Defaults by Majority
of Debenture holders. The holders of a majority in aggregate principal amount of
the Debentures at the time outstanding determined in accordance with Section
8.04 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; provided, however, that (subject to the
provisions of Section 7.01) the Trustee shall have the right to decline to
follow any such direction if the Trustee shall be advised by counsel that the
action or proceeding so directed may not lawfully be taken or if the Trustee in
good faith by its board of directors or trustees, executive committee, or a
trust committee of directors or trustees and/or Responsible Officers shall
determine that the action or proceedings so directed would involve the Trustee
in personal liability. Prior to any declaration accelerating the maturity of the
Debentures, the holders of a majority in aggregate principal amount of the
Debentures at the time outstanding may on behalf of the holders of all of the
Debentures waive any past default or Event of Default hereunder and its
consequences except a default in the payment of interest, or premium, if any,
on, or the principal of, the Debentures. Upon any such waiver the Company, the
Trustee and the holders of the Debentures shall be restored to their former
positions and rights hereunder, respectively; but no such waiver shall extend to
any subsequent or other default or Event of Default or impair any right
consequent thereon. Whenever any default or Event of Default hereunder shall
have been waived as permitted by this Section 6.07, said default or Event
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of Default shall for all purposes of the Debentures and this Indenture be deemed
to have been cured and to be not continuing.
Section 6.08. Notice of Defaults. The Trustee shall, within ninety days
after the occurrence of a default, mail to all Debentureholders, as the names
and addresses of such holders appear upon the registry books of the Company,
notice of all defaults known to any Responsible Officer of the Trustee, unless
such defaults shall have been cured before the giving of such notice (the term
"defaults" for the purpose of this Section 6.08 being hereby defined to be the
events specified in clauses (a), (b), (c), (d), (e) and (f) of Section 6.01, not
including periods of grace, if any, provided for therein); and provided that,
except in the case of default in the payment of the principal of or premium, if
any, or interest on any of the Debentures, the Trustee shall be protected in
withholding such notice if and so long as the board of directors, the executive
committee, or a trust committee of directors and/or Responsible Officers of the
Trustee in good faith determines that the withholding of such notice is in the
interests of the Debentureholders.
Section 6.09. Undertaking to Pay Costs. All parties to this Indenture
agree, and each holder of any Debenture by his acceptance thereof shall be
deemed to have agreed, that any court may in its discretion require, in any suit
for the enforcement of any right or remedy under this Indenture, or in any suit
against the Trustee for any action taken or omitted by it as Trustee, the filing
by any party litigant in such suit of an undertaking to pay the costs of such
suit and that such court may in its discretion assess reasonable costs,
including reasonable attorneys' fees, against any party litigant in such suit,
having due regard to the merits and good faith of the claims or defenses made by
such party litigant; provided, that the provisions of this Section 6.09 shall
not apply to any suit instituted by the Trustee, to any suit instituted by any
Debentureholder, or group of Debentureholders, holding in the aggregate more
than ten percent in principal amount of the Debentures outstanding, or to any
suit instituted by any Debentureholder for the enforcement of the payment of the
principal of or premium, if any, or interest on any Debenture on or after the
due date expressed in such Debenture.
ARTICLE SEVEN
CONCERNING THE TRUSTEE
Section 7.01. Duties and Responsibilities of Trustee. The Trustee, prior to
the occurrence of an Event of Default and after the curing of all Events of
Default which may have occurred, undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture. In case an Event of
Default has occurred (which has not been cured or waived) the Trustee shall
exercise such of the rights and powers vested in it by this Indenture, and use
the same degree of care and skill in their exercise, as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
No provision of this Indenture shall be construed to relieve the Trustee
from liability for its own negligent action, its own negligent failure to act or
its own willful misconduct, except that
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(a) prior to the occurrence of an Event of Default and after the curing or
waiving of all Events of Default which may have occurred:
(1) the duties and obligations of the Trustee shall be determined
solely by the express provisions of this Indenture, and the Trustee shall
not be liable except for the performance of such duties and obligations as
are specifically set forth in this Indenture, and no implied covenants or
obligations shall be read into this Indenture against the Trustee; and
(2) in the absence of bad faith on the part of the Trustee, the
Trustee may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon any certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture; but, in the case of any such certificates or opinions which
by any provisions hereof are specifically required to be furnished to the
Trustee, the Trustee shall be under a duty to examine the same to determine
whether or not they conform to the requirements of this Indenture;
(b) the Trustee shall not be liable for any error of judgment made in good
faith by a Responsible Officer or Officers of the Trustee, unless it shall be
proved that the Trustee was negligent in ascertaining the pertinent facts; and
(c) the Trustee shall not be liable with respect to any action taken or
omitted to be taken by it in good faith in accordance with the direction of the
holders of not less than a majority in principal amount of the Debentures at the
time outstanding determined as provided in Section 8.04 relating to the time,
method and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power upon the Trustee, under this
Indenture.
None of the provisions contained in this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur personal financial liability in
the performance of any of its duties or in the exercise of any of its rights or
powers, if there is reasonable ground for believing that the repayment of such
funds or adequate indemnity against risk or liability is not reasonably assured
to it.
Section 7.02. Reliance on Documents, Opinions, etc. Except as otherwise
provided in Section 7.01,
(a) the Trustee may rely and shall be protected in acting upon any
resolution, certificate, statement, instrument, opinion, report, notice,
request, consent, order, bond, debenture or other paper or document believed by
it to be genuine and to have been signed or presented by the proper party or
parties;
(b) any request, direction, order or demand of the Company mentioned herein
shall be sufficiently evidenced by an Officers' Certificate (unless other
evidence in respect thereof be herein specifically prescribed); and any
resolution of the Board of Directors may be evidenced to the Trustee by a copy
thereof certified by the Secretary or an Assistant Secretary of the Company;
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(c) the Trustee may consult with counsel and any advice or Opinion of
Counsel shall be full and complete authorization and protection in respect of
any action taken or omitted by it hereunder in good faith and in accordance with
such advice or Opinion of Counsel;
(d) the Trustee shall be under no obligation to exercise any of the rights
or powers vested in it by this Indenture at the request, order or direction of
any of the Debentureholders, pursuant to the provisions of this Indenture,
unless such Debentureholders shall have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby;
(e) the Trustee shall not be liable for any action taken or omitted by it
in good faith and believed by it to be authorized or within the discretion or
rights or powers conferred upon it by this Indenture;
(f) prior to the occurrence of an Event of Default hereunder and after the
curing or waiving of all Events of Default, the Trustee shall not be bound to
make any investigation into the facts or matters stated in any resolution,
certificate, statement, instrument, opinion, report, notice, request, consent,
order, approval, bond, debenture, coupon or other paper or document unless
requested in writing to do so by the holders of not less than a majority in
principal amount of the Debentures then outstanding; provided, however, that if
the payment within a reasonable time to the Trustee of the costs, expenses or
liabilities likely to be incurred by it in the making of such investigation is,
in the opinion of the Trustee, not reasonably assured to the Trustee by the
security afforded to it by the terms of this Indenture, the Trustee may require
reasonable indemnity against such expense or liability as a condition to so
proceeding; and
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed by it with due care
hereunder.
Section 7.03. No Responsibility for Recitals, etc. The recitals contained
herein and in the Debentures (except in the Trustee's certificate of
authentication) shall be taken as the statements of the Company, and the Trustee
assumes no responsibility for the correctness of the same. The Trustee makes no
representations as to the validity or sufficiency of this Indenture or of the
Debentures. The Trustee shall not be accountable for the use or application by
the Company of any Debentures or the proceeds of any Debentures authenticated
and delivered by the Trustee in conformity with the provisions of this
Indenture.
Section 7.04. Trustee, Paying Agents or Registrar May Own Debentures. The
Trustee or any paying agent or Debenture registrar, in its individual or any
other capacity, may become the owner or pledgee of Debentures with the same
rights it would have if it were not Trustee, paying agent or Debenture
registrar.
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Section 7.05. Monies to be Held in Trust. Subject to the provisions of
Section 12.04, all monies received by the Trustee shall, until used or applied
as herein provided, be held in trust for the purposes for which they were
received.
Section 7.06. Compensation and Expenses of Trustee. The Company covenants
and agrees to pay to the Trustee from time to time, and the Trustee shall be
entitled to, reasonable compensation (which shall not be limited by any
provision of law in regard to the compensation of a trustee of an express
trust), and the Company will pay or reimburse the Trustee upon its request for
all reasonable expenses, disbursements and advances incurred or made by the
Trustee in accordance with any of the provisions of this Indenture (including
the reasonable compensation and the expenses and disbursements of its counsel
and of all persons not regularly in its employ) except any such expense,
disbursement or advance as may arise from its negligence or bad faith. The
Company also covenants to indemnify the Trustee for, and to hold it harmless
against, any loss, liability or expense incurred without negligence or bad faith
on the part of the Trustee and arising out of or in connection with the
acceptance or administration of this trust, including the costs and expenses of
defending itself against any claim of liability in the premises. The obligations
of the Company under this Section 7.06 to compensate the Trustee and to pay or
reimburse the Trustee for expenses, disbursements and advances shall constitute
additional indebtedness hereunder. Such additional indebtedness shall be secured
by a lien prior to that of the Debentures upon all property and funds held or
collected by the Trustee as such, except funds held in trust for the benefit of
the holders of particular Debentures.
Section 7.07. Officers' Certificate as Evidence. Except as otherwise
provided in Section 7.01, whenever in the administration of the provisions of
this Indenture the Trustee shall deem it necessary or desirable that a matter be
proved or established prior to taking or omitting any action hereunder, such
matter (unless other evidence in respect thereof be herein specifically
prescribed) may, in the absence of negligence or bad faith on the part of the
Trustee, be deemed to be conclusively proved and established by an Officers'
Certificate delivered to the Trustee, and such Certificate, in the absence of
negligence or bad faith on the part of the Trustee, shall be full warrant to the
Trustee for any action taken or omitted by it under the provisions of this
Indenture upon the faith thereof.
Section 7.08. Conflicting Interest of Trustee. (a) If the Trustee has or
shall acquire any conflicting interest, as defined in this Section 7.08, it
shall, within ninety days after ascertaining that it has such conflicting
interest, either eliminate such conflicting interest or resign in the manner and
with the effect specified in Section 7.10.
(b) In the event that the Trustee shall fail to comply with the provisions
of subsection (a) of this Section 7.08, the Trustee shall, within ten days after
the expiration of such ninety-day period, transmit notice of such failure to all
holders of Debentures, as the names and addresses of such holders appear upon
the registry books of the Company.
(c) For the purpose of this Section 7.08, the Trustee shall be deemed to
have a conflicting interest if:
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(1) the Trustee is trustee under another indenture under which any
other securities, or certificates of interest or participation in any other
securities, of the Company, are outstanding, unless such other indenture is
a collateral trust indenture under which the only collateral consists of
Debentures issued under this Indenture; provided that there shall be
excluded from the operation of this paragraph any other indenture or
indentures under which other securities, or certificates of interest or
participation in other securities of the Company, are outstanding if (i)
this Indenture and such other indenture or indentures are wholly unsecured
and such other indenture or indentures are hereafter qualified under the
Trust Indenture Act of 1939, unless the Securities and Exchange Commission
shall have found and declared by order pursuant to subsection (b) of
Section 305 or subsection (c) of Section 307 of the Trust Indenture Act of
1939 that differences exist between the provisions of this Indenture and
the provisions of such other indenture or indentures which are so likely to
involve a material conflict of interest as to make it necessary in the
public interest or for the protection of investors to disqualify the
Trustee from acting as such under this Indenture and such other indenture
or indentures, or (ii) the Company shall have sustained the burden of
proving, on application to the Securities and Exchange Commission and after
opportunity for hearing thereon, that the trusteeship under this Indenture
and such other indenture is not so likely to involve a material conflict of
interest as to make it necessary in the public interest or for the
protection of investors to disqualify the Trustee from acting as such under
one of such indentures;
(2) the Trustee or any of its directors or executive officers is an
obligor upon the Debentures issued under this Indenture or an underwriter
for the Company;
(3) the Trustee directly or indirectly controls or is directly or
indirectly controlled by or is under direct or indirect common control with
the Company or an underwriter for the Company;
(4) the Trustee or any of its directors or executive officers is a
director, officer, partner, employee, appointee, or representative of the
Company, or of an underwriter (other than the Trustee itself) for the
Company who is currently engaged in the business of underwriting, except
that (A) one individual may be a director and/or an executive officer of
the Trustee and a director and/or an executive officer of the Company, but
may not be at the same time an executive officer of both the Trustee and
the Company; (B) if and so long as the number of directors of the Trustee
in office is more than nine, one additional individual may be a director
and/or an executive officer of the Trustee and a director of the Company;
and (C) the Trustee may be designated by the Company or by an underwriter
for the Company to act in the capacity of transfer agent, registrar,
custodian, paying agent, fiscal agent, escrow agent, or depositary, or in
any other similar capacity, or, subject to the provisions of paragraph (1)
of this subsection (c), to act as trustee whether under an indenture or
otherwise;
(5) ten percent or more of the voting securities of the Trustee is
beneficially owned by the Company or by any director, partner, or executive
officer thereof, or twenty percent or more of such voting securities is
beneficially owned, collectively, by any two or
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more of such persons; or ten percent or more of the voting securities of
the Trustee is beneficially owned either by an underwriter for the Company
or by any director, partner, or executive officer thereof, or is
beneficially owned, collectively, by any two or more such persons;
(6) the Trustee is the beneficial owner of, or holds as collateral
security for an obligation which is in default, (A) five percent or more of
the voting securities, or ten percent or more of any other class of
security, of the Company, not including the Debentures issued under this
Indenture and securities issued under any other indenture under which the
Trustee is also trustee, or (B) ten percent or more of any class of
security of an underwriter for the Company;
(7) the Trustee is the beneficial owner of, or holds as collateral
security for an obligation which is in default, five percent or more of the
voting securities of any person who, to the knowledge of the Trustee, owns
ten percent or more of the voting securities of, or controls directly or
indirectly or is under direct or indirect common control with, the Company;
(8) the Trustee is the beneficial owner of, or holds as collateral
security for an obligation which is in default, ten percent or more of any
class of security of any person who, to the knowledge of the Trustee, owns
fifty percent or more of the voting securities of the Company; or
(9) the Trustee owns on May 15 in any calendar year, in the capacity
of executor, administrator, testamentary or inter vivos trustee, guardian,
committee or conservator, or in any other similar capacity, an aggregate of
twenty-five percent or more of the voting securities, or of any class of
security, of any person, the beneficial ownership of a specified percentage
of which would have constituted a conflicting interest under paragraph (6),
(7), or (8) of this subsection (c). As to any such securities of which the
Trustee acquired ownership through becoming executor, administrator or
testamentary trustee of an estate which included them, the provisions of
the preceding sentence shall not apply, for a period of two years from the
date of such acquisition, to the extent that such securities included in
such estate do not exceed twenty-five percent of such voting securities or
twenty-five percent of any such class of security. Promptly after May 15,
in each calendar year, the Trustee shall make a check of its holdings of
such securities in any of the above-mentioned capacities as of such May 15.
If the Company fails to make payment in full of principal of or interest on
any of the Debentures when and as the same become due and payable, and such
failure continues for thirty days thereafter, the Trustee shall make a
prompt check of its holdings of such securities in any of the above-
mentioned capacities as of the date of the expiration of such thirty-day
period and, after such date, notwithstanding the foregoing provisions of
this paragraph (9), all such securities so held by the Trustee, with sole
or joint control over such securities vested in it, shall, but only so long
as such failure shall continue, be considered as though beneficially owned
by the Trustee for the purposes of paragraphs (6), (7) and (8) of this
subsection (c).
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The specifications of percentages in paragraphs (5) to (9), inclusive, of
this subsection (c) shall not be construed as indicating that the ownership of
such percentages of the securities of a person is or is not necessary or
sufficient to constitute direct or indirect control for the purposes of
paragraph (3) or (7) of this subsection (c). For the purposes of paragraphs (6),
(7), (8) and (9) of this subsection (c) only, (A) the terms "security" and
"securities" shall include only such securities as are generally known as
corporate securities, but shall not include any note or other evidence of
indebtedness issued to evidence an obligation to repay monies lent to a person
by one or more banks, trust companies or banking firms, or any certificate of
interest or participation in any such note or evidence of indebtedness; (B) an
obligation shall be deemed to be in default when a default in payment of
principal shall have continued for thirty days or more and shall not have been
cured; and (C) the Trustee shall not be deemed to be the owner or holder of (i)
any security which it holds as collateral security (as trustee or otherwise) for
an obligation which is not in default as defined in clause (B) above, or (ii)
any security which it holds as collateral security under this Indenture,
irrespective of any default hereunder, or (iii) any security which it holds as
agent for collection, or as custodian, escrow agent, or depositary, or in any
similar representative capacity.
Except as provided in the next preceding paragraph hereof, the word
"security" or "securities" as used in this Indenture shall mean any note, stock,
treasury stock, bond, debenture, evidence of indebtedness, certificate of
interest or participation in any profit-sharing agreement, collateral trust
certificate, pre-organization certificate or subscription, transferable share,
investment contract, voting-trust certificate, certificate of deposit for a
security, fractional undivided interest in oil, gas or other mineral rights, or,
in general, any interest or instrument commonly known as a "security" or any
certificate of interest or participation in, temporary or interim certificate
for, receipt for, guarantee of, or warrant or right to subscribe to or purchase,
any of the foregoing.
(d) For the purposes of this Section 7.08:
(1) The term "underwriter" when used with reference to the Company
shall mean every person who, within three years prior to the time as of
which the determination is made, has purchased from the Company with a view
to, or has offered or sold for the Company in connection with, the
distribution of any security of the Company outstanding at such time, or
has participated or has had a direct or indirect participation in any such
undertaking, or has participated or has had a participation in the direct
or indirect underwriting of any such undertaking, but such term shall not
include a person whose interest was limited to a commission from an
underwriter or dealer not in excess of the usual and customary
distributors' or sellers' commission.
(2) The term "director" shall mean any director of a corporation or
any individual performing similar functions with respect to any
organization whether incorporated or unincorporated.
(3) The term "person" shall mean an individual, a corporation, a
partnership, an association, a joint-stock company, a trust, an
unincorporated organization, or a government or political subdivision
thereof. As used in this paragraph, the term "trust" shall include only
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a trust where the interest or interests of the beneficiary or beneficiaries
are evidenced by a security.
(4) The term "voting security" shall mean any security presently
entitling the owner or holder thereof to vote in the direction or
management of the affairs of a person, or any security issued under or
pursuant to any trust, agreement or arrangement whereby a trustee or
trustees or agent or agents for the owner or holder of such security are
presently entitled to vote in the direction or management of the affairs of
a person.
(5) The term "Company" shall mean any obligor upon the Debentures.
(6) The term "executive officer" shall mean the president, every vice
president, every trust officer, the cashier, the secretary, and the
treasurer of a corporation, and any individual customarily performing
similar functions with respect to any organization whether incorporated or
unincorporated, but shall not include the chairman of the board of
directors.
The percentages of voting securities and other securities specified in this
Section 7.08 shall be calculated in accordance with the following provisions:
(A) A specified percentage of the voting securities of the Trustee,
the Company or any other person referred to in this Section 7.08 (each of
whom is referred to as a "person" in this paragraph) means such amount of
the outstanding voting securities of such person as entitles the holder or
holders thereof to cast such specified percentage of the aggregate votes
which the holders of all the outstanding voting securities of such person
are entitled to cast in the direction or management of the affairs of such
person.
(B) A specified percentage of a class of securities of a person means
such percentage of the aggregate amount of securities of the class
outstanding.
(C) The term "amount", when used in regard to securities, means the
principal amount if relating to evidences of indebtedness, the number of
shares if relating to capital shares, and the number of units if relating
to any other kind of security.
(D) The term "outstanding" means issued and not held by or for the
account of the issuer. The following securities shall not be deemed
outstanding within the meaning of this definition:
(i) Securities of an issuer held in a sinking fund relating to
securities of the issuer of the same class;
(ii) Securities of an issuer held in a sinking fund relating to
another class of securities of the issuer, if the obligation evidenced
by such other class of securities is not in default as to principal or
interest or otherwise;
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(iii) Securities pledged by the issuer thereof as security for an
obligation of the issuer not in default as to principal or interest or
otherwise;
(iv) Securities held in escrow if placed in escrow by the issuer
thereof;
provided, however, that any voting securities of an issuer shall be deemed
outstanding if any person other than the issuer is entitled to exercise the
voting rights thereof;
(E) A security shall be deemed to be of the same class as another
security if both securities confer upon the holder or holders thereof
substantially the same rights and privileges; provided, however, that, in
the case of secured evidences of indebtedness, all of which are issued
under a single indenture, differences in the interest rates or maturity
dates of various series thereof shall not be deemed sufficient to
constitute such series different classes; and provided, further, that, in
the case of unsecured evidences of indebtedness, differences in the
interest rates or maturity dates thereof shall not be deemed sufficient to
constitute them securities of different classes, whether or not they are
issued under a single indenture.
Section 7.09. Eligibility of Trustee. The Trustee hereunder shall at all
times be a corporation organized and doing business under the laws of the United
States or any State or Territory thereof or of the District of Columbia
authorized under such laws to exercise corporate trust powers, having a combined
capital and surplus of at least five million dollars, subject to supervision or
examination by Federal, State, Territorial, or District of Columbia authority
and having its principal office and place of business in the City of ______ or
in The City of New York. If such corporation publishes reports of condition at
least annually, pursuant to law or to the requirements of the aforesaid
supervising or examining authority, then for the purposes of this Section 7.09,
the combined capital and surplus of such corporation shall be deemed to be its
combined capital and surplus as set forth in its most recent report of condition
so published. In case at any time the Trustee shall cease to be eligible in
accordance with the provisions of this Section 7.09, the Trustee shall resign
immediately in the manner and with the effect specified in Section 7.10.
Section 7.10. Resignation or Removal of Trustee. (a) The Trustee may at a
time resign by giving written notice of such resignation to the Company and by
mailing notice thereof to the holders of Debentures at their addresses as they
shall appear on the registry books of the Company. Upon receiving such notice of
resignation, the Company shall promptly appoint a successor trustee by written
instrument, in duplicate, executed by order of the Board of Directors, one copy
of which instrument shall be delivered to the resigning Trustee and one copy to
the successor trustee. If no successor trustee shall have been so appointed and
have accepted appointment within sixty days after the mailing of such notice of
resignation to the Debentureholders, the resigning Trustee may petition any
court of competent jurisdiction for the appointment of a successor trustee, or
any Debentureholder who has been a bona fide holder of a Debenture or Debentures
for at least six months may, subject to the provisions of Section 6.09, on
behalf of himself and all others similarly situated, petition any such court for
the appointment of a successor trustee. Such court may thereupon, after such
notice, if any, as it may deem proper and prescribe, appoint a successor
trustee.
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(b) In case at any time any of the following shall occur--
(1) the Trustee shall fail to comply with the provisions of subsection
(a) of Section 7.08 after written request therefor by the Company or by any
Debentureholder who has been a bona fide holder of a Debenture or
Debentures for at least six months, or
(2) the Trustee shall cease to be eligible in accordance with the
provisions of Section 7.09 and shall fail to resign after written request
therefor by the Company or by any such Debentureholder, or
(3) the Trustee shall become incapable of acting, or shall be adjudged
a bankrupt or insolvent, or a receiver of the Trustee or of its property
shall be appointed or any public officer shall take charge or control of
the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
then, in any such case, the Company may remove the Trustee and appoint a
successor trustee by written instrument, in duplicate, executed by order of the
Board of Directors, one copy of which instrument shall be delivered to the
Trustee so removed and one copy to the successor trustee, or, subject to the
provisions of Section 6.09, any Debentureholder who has been a bona fide holder
of a Debenture or Debentures for at least six months may, on behalf of himself
and all others similarly situated, petition any court of competent jurisdiction
for the removal of the Trustee and the appointment of a successor trustee. Such
court may thereupon, after such notice, if any, as it may deem proper and
prescribe, remove the Trustee and appoint a successor trustee.
(c) The holders of a majority in aggregate principal amount of the
Debentures at the time outstanding may at any time remove the Trustee and
nominate a successor trustee which shall be deemed appointed as successor
trustee unless within ten days after such nomination the Company objects
thereto, in which case the Trustee so removed or any Debentureholder, upon the
terms and conditions and otherwise as in subdivision (a) of this Section 7.10
provided, may petition any court of competent jurisdiction for an appointment of
a successor trustee.
(d) Any resignation or removal of the Trustee and appointment of a
successor trustee pursuant to any of the provisions of this Section 7.10 shall
become effective upon acceptance of appointment by the successor trustee as
provided in Section 7.11.
Section 7.11. Acceptance by Successor Trustee. Any successor trustee
appointed as provided in Section 7.10 shall execute, acknowledge and deliver to
the Company and to its predecessor trustee an instrument accepting such
appointment hereunder, and thereupon the resignation or removal of the
predecessor trustee shall become effective and such successor trustee, without
any further act, deed or conveyance, shall become vested with all the rights,
powers, duties and obligations of its predecessor hereunder, with like effect as
if originally named as trustee herein; but, nevertheless, on the written request
of the Company or of the successor trustee, the trustee ceasing to act shall,
upon payment of any amounts then due it pursuant to the provisions of Section
7.06, execute and deliver an instrument transferring to such successor trustee
all the rights
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and powers of the trustee so ceasing to act. Upon request of any such successor
trustee, the Company shall execute any and all instruments in writing for more
fully and certainly vesting in and confirming to such successor trustee all such
rights and powers. Any trustee ceasing to act shall, nevertheless, retain a lien
upon all property or funds held or collected by such trustee to secure any
amounts then due it pursuant to the provisions of Section 7.06.
No successor trustee shall accept appointment as provided in this Section
7.11 unless at the time of such acceptance such successor trustee shall be
qualified under the provisions of Section 7.08 and eligible under the provisions
of Section 7.09.
Upon acceptance of appointment by a successor trustee as provided in this
Section 7.11, the Company shall mail notice of the succession of such trustee
hereunder to the holders of Debentures at their addresses as they shall appear
on the registry books of the Company. If the Company fails to mail such notice
within ten days after acceptance of appointment by the successor trustee, the
successor trustee shall cause such notice to be mailed at the expense of the
Company.
Section 7.12. Succession by Merger, etc. Any corporation into which the
Trustee may be merged or converted or with which it may be consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Trustee shall be a party, or any corporation succeeding to all or substantially
all of the trust business of the Trustee, shall be the successor to the Trustee
hereunder, provided such corporation shall be qualified under the provisions of
Section 7.08 and eligible under the provisions of Section 7.09, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto. In case at the time such successor to the Trustee shall succeed
to the trusts created by this Indenture any of the Debentures shall have been
authenticated but not delivered, any such successor to the Trustee may adopt the
certificate of authentication of any predecessor trustee, and deliver such
Debentures so authenticated; and in case at that time any of the Debentures
shall not have been authenticated, any successor to the Trustee may authenticate
such Debentures either in the name of any predecessor hereunder or in the name
of the successor trustee; and in all such cases such certificates shall have the
full force which it is anywhere in the Debentures or in this Indenture provided
that the certificate of the Trustee shall have; provided, however, that the
right to adopt the certificate of authentication of any predecessor Trustee or
authenticate Debentures in the name of any predecessor Trustee shall apply only
to its successor or successors by merger, conversion or consolidation.
Section 7.13. Limitation on Rights of Trustee as a Creditor. (a) Subject to
the provisions of subsection (b) of this Section 7.13, if the Trustee shall be
or shall become a creditor, directly or indirectly, secured or unsecured, of the
Company within four months prior to a default, as defined in subsection (c) of
this Section 7.13, or subsequent to such a default, then, unless and until such
default shall be cured, the Trustee, shall set apart and hold in a special
account for the benefit of the Trustee individually, the holders of the
Debentures and the holders of other indenture securities (as defined in
paragraph (2) of subsection (c) of this Section 7.13):
(1) an amount equal to any and all reductions in the amount due and
owing upon any claim as such creditor in respect of principal or interest,
effected after the beginning of such four-month period and valid as against
the Company and its other creditors, except any
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such reduction resulting from the receipt or disposition of any property
described in paragraph (2) of this Subsection, or from the exercise of any
right of set-off which the Trustee could have exercised if a petition in
bankruptcy had been filed by or against the Company upon the date of such
default; and
(2) all property received by the Trustee in respect of any claim as
such creditor, either as security therefor, or in satisfaction or
composition thereof, or otherwise, after the beginning of such four-month
period, or an amount equal to the proceeds of any such property, if
disposed of, subject, however, to the rights, if any, of the Company and
its other creditors in such property or such proceeds.
Nothing herein contained, however, shall affect the right of the
Trustee:
(A) to retain for its own account (i) payments made on account of any
such claim by any person (other than the Company) who is liable thereon,
and (ii) the proceeds of the bona fide sale of any such claim by the
Trustee to a third person, and (iii) distributions made in cash, securities
or other property in respect of claims filed against the Company in
bankruptcy or receivership or in proceedings for reorganization pursuant to
Title 11 of the United States Code or applicable State law;
(B) to realize, for its own account, upon any property held by it as
security for any such claim, if such property was so held prior to the
beginning of such four-month period;
(C) to realize, for its own account, but only to the extent of the
claim hereinafter mentioned, upon any property held by it as security for
any such claim, if such claim was created after the beginning of such four-
month period and such property was received as security therefor
simultaneously with the creation thereof, and if the Trustee shall sustain
the burden of proving that at the time such property was so received the
Trustee had no reasonable cause to believe that a default, as defined in
subsection (c) of this Section 7.13, would occur within four months; or
(D) to receive payment on any claim referred to in paragraph (B) or
(C), against the release of any property held as security of such claim as
provided in such paragraph (B) or (C), as the case may be, to the extent of
the fair value of such property.
For the purposes of paragraphs (B), (C) and (D), property substituted after
the beginning of such four-month period for property held as security at the
time of such substitution shall, to the extent of the fair value of the property
released, have the same status as the property released, and, to the extent that
any claim referred to in any of such paragraphs is created in renewal of or in
substitution for or for the purpose of repaying or refunding any pre-existing
claim of the Trustee as such creditor, such claim shall have the same status as
such pre-existing claim.
If the Trustee shall be required to account, the funds and property held in
such special account and the proceeds thereof shall be apportioned between the
Trustee, the Debentureholders and the holders of other indenture securities in
such manner that the Trustee, the Debentureholders
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and the holders of other indenture securities realize, as a result of payments
from such special account and payments of dividends on claims filed against the
Company in bankruptcy or receivership or in proceedings for reorganization
pursuant to Title 11 of the United States Code or applicable State law, the same
percentage of their respective claims, figured before crediting to the claim of
the Trustee anything on account of the receipt by it from the Company of the
funds and property in such special account and before crediting to the
respective claims of the Trustee, the Debentureholders, and the holders of other
indenture securities dividends on claims filed against the Company in bankruptcy
or receivership or in proceedings for reorganization pursuant to Title 11 of the
United States Code or applicable State law, but after crediting thereon receipts
on account of the indebtedness represented by their respective claims from all
sources other than from such dividends and from the funds and property so held
in such special account. As used in this paragraph, with respect to any claim,
the term "dividends" shall include any distribution with respect to such claim,
in bankruptcy or receivership or in proceedings for reorganization pursuant to
Title 11 of the United States Code or applicable State law, whether such
distribution is made in cash, securities, or other property, but shall not
include any such distribution with respect to the secured portion, if any, of
such claim. The court in which such bankruptcy, receivership, or proceeding for
reorganization is pending shall have jurisdiction (i) to apportion between the
Trustee, the Debentureholders, and the holders of other indenture securities, in
accordance with the provisions of this paragraph, the funds and property held in
such special account and the proceeds thereof, or (ii) in lieu of such
apportionment, in whole or in part, to give to the provisions of this paragraph
due consideration in determining the fairness of the distributions to be made to
the Trustee, the Debentureholders and the holders of other indenture securities
with respect to their respective claims, in which event it shall not be
necessary to liquidate or to appraise the value of any securities or other
property held in such special account or as security for any such claim, or to
make a specific allocation of such distributions as between the secured and
unsecured portions of such claims, or otherwise to apply the provisions of this
paragraph as a mathematical formula.
Any Trustee who has resigned or been removed after the beginning of such
four-month period shall be subject to the provisions of this subsection (a) as
though such resignation or removal had not occurred. If any Trustee has
resigned or been removed prior to the beginning of such four-month period, it
shall be subject to the provisions of this subsection (a) if and only if the
following conditions exist:
(1) the receipt of property or reduction of claim which would have
given rise to the obligation to account, if such Trustee had continued as
trustee, occurred after the beginning of such four month period; and
(2) such receipt of property or reduction of claim occurred within
four months after such resignation or removal.
(b) There shall be excluded from the operation of subsection (a) of this
Section 7.13 a creditor relationship arising from
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(1) the ownership or acquisition of securities issued under any
indenture, or any security or securities having a maturity of one year or
more at the time of acquisition by the Trustee;
(2) advances authorized by a receivership or bankruptcy court of
competent jurisdiction, or by this Indenture, for the purpose of preserving
any property which shall at any time be subject to the lien of this
Indenture or of discharging tax liens or other prior liens or encumbrances
thereon, if notice of such advance and of the circumstances surrounding the
making thereof is given to the Debentureholders at the time and in the
manner provided in Section 6.04 with respect to reports pursuant to
subsections (a) and (b) thereof, respectively;
(3) disbursements made in the ordinary course of business in the
capacity of trustee under an indenture, transfer agent, registrar,
custodian, payment agent, fiscal agent or depositary, or other similar
capacity;
(4) an indebtedness created as a result of services rendered or
premises rented; or an indebtedness created as a result of goods or
securities sold in a cash transaction as defined in subsection (c) of this
Section 7.13;
(5) the ownership of stock or of other securities of a corporation
organized under the provisions of Section 25(a) of the Federal Reserve Act,
as amended, which is directly or indirectly a creditor of the Company; or
(6) the acquisition, ownership, acceptance or negotiation of any
drafts, bills of exchange, acceptances or obligations which fall within the
classification of self-liquidating paper as defined in subsection (c) of
this Section 7.13.
(c) As used in this Section 7.13:
(1) The term "default" shall mean any failure to make payment in full
or the principal of or interest upon any of the Debentures or upon the
other indenture securities when and as such principal or interest becomes
due and payable;
(2) The term "other indenture securities" shall mean securities upon
which the Company is an obligor (as defined in the Trust Indenture Act of
1939) outstanding under any other indenture (A) under which the Trustee is
also trustee, (B) which contains provisions substantially similar to the
provisions of subsection (a) of this Section 7.13, and (C) under which a
default exists at the time of the apportionment of the funds and property
held in said special account;
(3) The term "cash transaction" shall mean any transaction in which
full payment for goods or securities sold is made within seven days after
delivery of the goods or securities in currency or in checks or other
orders drawn upon banks or bankers and payable upon demand;
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(4) The term "self-liquidating paper" shall mean any draft, bill of
exchange, acceptance or obligation which is made, drawn, negotiated or
incurred by the Company for the purpose of financing the purchase,
processing, manufacture, shipment, storage or sale of goods, wares or
merchandise and which is secured by documents evidencing title to,
possession of, or a lien upon, the goods, wares or merchandise or the
receivables or proceeds arising from the sale of the goods, wares or
merchandise previously constituting the security; provided that the
security is received by the Trustee simultaneously with the creation of the
creditor relationship with the Company arising from the making, drawing,
negotiating or incurring of the draft, bill of exchange, acceptance or
obligation;
(5) The term "Company" shall mean any obligor upon the Debentures.
ARTICLE EIGHT
CONCERNING THE DEBENTUREHOLDERS
Section 8.01. Action by Debentureholders. Whenever in this Indenture it is
provided that the holders of a specified percentage in aggregate principal
amount of the Debentures may take any action (including the making of any demand
or request, the giving of any notice, consent or waiver or the taking of any
other action) the fact that at the time of taking any such action the holders of
such specified percentage have joined therein may be evidenced (a) by any
instrument or any number of instruments of similar tenor executed by
Debentureholders in person or by agent or proxy appointed in writing, or (b) by
the record of the holders of Debentures voting in favor thereof at any meeting
of Debentureholders duly called and held in accordance with the provisions of
this Article Eight, or (c) by a combination of such instrument or instruments
and any such record of such a meeting of Debentureholders.
Section 8.02. Proof of Execution by Debentureholders. Subject to the
provisions of Sections 7.01, 7.02 and 9.05, proof of the execution of any
instrument by a Debentureholder or his agent or proxy shall be sufficient if
made in accordance with such reasonable rules and regulations as may be
prescribed by the Trustee or in such manner as shall be satisfactory to the
Trustee. The ownership of Debentures shall be proved by the register of such
Debentures or by a certificate of the Debenture registrar.
The record of any Debentureholders' meeting shall be proved in the manner
provided in Section 9.06.
Section 8.03. Who Are Deemed Absolute Owners. The Company, the Trustee, any
paying agent and any Debenture registrar may deem the person in whose name such
Debenture shall be registered upon the books of the Company to be, and may treat
him as, the absolute owner of such Debenture (whether or not such Debenture
shall be overdue and notwithstanding any notation of ownership or other writing
thereon) for the purpose of receiving payment of or on account of the principal
of and premium, if any, and interest on such Debenture and for all other
purposes; and neither the Company nor the Trustee nor any paying agent nor any
Debenture registrar shall be
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affected by any notice to the contrary. All such payments so made to any holder
for the time being, or upon his order shall be valid, and, to the extent of the
sum or sums so paid, effectual to satisfy and discharge the liability for monies
payable upon any such Debenture.
Section 8.04. Company-Owned Debentures Disregarded. In determining whether
the holders of the requisite aggregate principal amount of Debentures have
concurred in any direction, consent, waiver or other action under this
Indenture, Debentures which are owned by or pledged to the Company or any other
obligor on the Debentures or by any person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company or any
other obligor on the Debentures shall be disregarded and deemed not to be
outstanding for the purpose of any such determination; provided that for the
purposes of determining whether the Trustee shall be protected in relying on any
such direction, consent, waiver or other action only Debentures which the
Trustee knows are so owned shall be so disregarded. Debentures so owned which
have been pledged in good faith may be regarded as outstanding for the purposes
of this Section 8.04 if the pledgee shall establish to the satisfaction of the
Trustee the pledgee's right to vote such Debentures and that the pledgee is not
a person directly or indirectly controlling or controlled by or under direct or
indirect common control with the Company or any such other obligor. In the case
of a dispute as to such right, any decision by the Trustee taken upon the advice
of counsel shall be full protection to the Trustee.
Section 8.05. Revocation of Consents; Future Holders Bound. At any time
prior to (but not after) the evidencing to the Trustee, as provided in Section
8.01 of the taking of any action by the holders of the percentage in aggregate
principal amount of the Debentures specified in this Indenture in connection
with such action, any holder of a Debenture the serial number of which is shown
by the evidence to be included in the Debentures the holders of which have
consented to such action may, by filing written notice with the Trustee at its
principal office and upon proof of holding as provided in Section 8.02, revoke
such action so far as concerns such Debenture. Except as aforesaid any such
action taken by the holder of any Debenture shall be conclusive and binding upon
such holder and upon all future holders and owners of such Debenture,
irrespective of whether or not any notation in regard thereto is made upon such
Debenture or any Debenture issued in exchange or substitution therefor.
ARTICLE NINE
DEBENTUREHOLDERS' MEETINGS
Section 9.01. Purposes of Meetings. A meeting of Debentureholders may be
called at any time and from time to time pursuant to the provisions of this
Article Nine for any of the following purposes:
(1) to give any notice to the Company or to the Trustee, or to give
any directions to the Trustee, or to consent to the waiving of any default
hereunder and its consequences, or to take any other action authorized to
be taken by Debentureholders pursuant to any of the provisions of Article
Six;
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(2) to remove the Trustee and nominate a successor trustee pursuant to
the provisions of Article Seven;
(3) to consent to the execution of an indenture or indentures
supplemental hereto pursuant to the provisions of Section 10.02; or
(4) to take any other action authorized to be taken by or on behalf of
the holders of any specified aggregate principal amount of the Debentures
under any other provision of this Indenture or under applicable law.
Section 9.02. Call of Meetings by Trustee. The Trustee may at any time call
a meeting of Debentureholders to take any action specified in Section 10.01, to
be held at such time and at such place in the City of ______ or in the Borough
of Manhattan, The City of New York, as the Trustee shall determine. Notice of
every meeting of the Debentureholders, setting forth the time and the place of
such meeting and in general terms the action proposed to be taken at such
meeting, shall be mailed to holders of Debentures at their addresses as they
shall appear on the registry books of the Company. Such notice shall be mailed
not less than twenty nor more than ninety days prior to the date fixed for the
meeting.
Any meeting of Debentureholders shall be valid without notice if the
holders of all Debentures then outstanding are present in person or by proxy or
if notice is waived before or after the meeting by the holders of all Debentures
outstanding, and if the Company and the Trustee are either present by duly
authorized representatives or have, before or after the meeting, waived notice.
Section 9.03. Call of Meetings by Company or Debentureholders. In case at
any time the Company, pursuant to a resolution of its Board of Directors, or the
holders of at least ten percent in aggregate principal amount of the Debentures
then outstanding, shall have requested the Trustee to call a meeting of
Debentureholders, by written request setting forth in reasonable detail the
action proposed to be taken at the meeting, and the Trustee shall not have
mailed the notice of such meeting within twenty days after receipt of such
request, then the Company or such Debentureholders may determine the time and
the place in said City of ______ or Borough of Manhattan for such meeting and
may call such meeting to take any action authorized in Section 9.01, by mailing
notice thereof as provided in Section 9.02.
Section 9.04. Qualifications for Voting. To be entitled to vote at any
meeting of Debenture holders a person shall (a) be a holder of one or more
Debentures or (b) be a person appointed by an instrument in writing as proxy by
a holder of one or more Debentures. The only persons who shall be entitled to be
present or to speak at any meeting of Debentureholders shall be the persons
entitled to vote at such meeting and their counsel and any representatives of
the Trustee and its counsel and any representatives of the Company and its
counsel.
Section 9.05. Regulations. Notwithstanding any other provisions of this
Indenture, the Trustee may make such reasonable regulations as it may deem
advisable for any meeting of Debentureholders, in regard to proof of the holding
of Debentures and of the appointment of proxies,
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and in regard to the appointment and duties of inspectors of votes, the
submission and examination of proxies, certificates and other evidence of the
right to vote, and such other matters concerning the conduct of the meeting as
it shall think fit.
The Trustee shall, by an instrument in writing, appoint a temporary
chairman of the meeting, unless the meeting shall have been called by the
Company or by Debentureholders as provided in Section 9.03, in which case the
Company or the Debentureholders calling the meeting, as the case may be, shall
in like manner appoint a temporary chairman. A permanent chairman and a
permanent secretary of the meeting shall be elected by vote of the holders of a
majority in principal amount of the Debentures represented at the meeting and
entitled to vote at the meeting.
Subject to the provisions of Section 8.04, at any meeting each
Debentureholder or proxy shall be entitled to one vote for each $1,000 principal
amount of Debentures held or represented by him; provided however, that no vote
shall be cast or counted at any meeting in respect of any Debenture challenged
as not outstanding and ruled by the chairman of the meeting to be not
outstanding. The chairman of the meeting shall have no right to vote other than
by virtue of Debentures held by him or instruments in writing as aforesaid duly
designating him as the person to vote on behalf of other Debentureholders. Any
meeting of Debentureholders duly called pursuant to the provisions of Section
9.02 or 9.03 may be adjourned from time to time by a majority of those present,
whether or not constituting a quorum, and the meeting may be held as so
adjourned without further notice.
Section 9.06. Voting. The vote upon any resolution submitted to any meeting
of Debenture holders shall be by written ballots on which shall be subscribed
the signatures of the holders of Debentures or of their representatives by proxy
and the principal amount of the Debentures held or represented by them. The
permanent chairman of the meeting shall appoint two inspectors of votes who
shall count all votes cast at the meeting for or against any resolution and who
shall make and file with the secretary of the meeting their verified written
reports in duplicate of all votes cast at the meeting. A record in duplicate of
the proceedings of each meeting of Debentureholders shall be prepared by the
secretary of the meeting and there shall be attached to said record the original
reports of the inspectors of votes on any vote by ballot taken thereat and
affidavits by one or more persons having knowledge of the facts setting forth a
copy of the notice of the meeting and showing that said notice was mailed as
provided in Section 9.02. The record shall show the principal amount of the
Debentures voting in favor of or against any resolution. The record shall be
signed and verified by the affidavits of the permanent chairman and secretary of
the meeting and one of the duplicates shall be delivered to the Company and the
other to the Trustee to be preserved by the Trustee.
Any record so signed and verified shall be conclusive evidence of the
matters therein stated.
Section 9.07. No Delay of Rights by Meeting. Nothing in this Article Nine
contained shall be deemed or construed to authorize or permit, by reason of any
call of a meeting of Debentureholders or any rights expressly or impliedly
conferred hereunder to make such call, any hindrance or delay in the exercise of
any right or rights conferred upon or reserved to the Trustee or to the
Debentureholders under any of the provisions of this Indenture or of the
Debentures.
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ARTICLE TEN
SUPPLEMENTAL INDENTURES
Section 10.01. Supplemental Indentures without Consent of Debentureholders.
The Company, when authorized by the resolutions of the Board of Directors, and
the Trustee may from time to time and at any time enter into an indenture or
indentures supplemental hereto for one or more of the following purposes:
(a) to evidence the succession of another corporation to the Company, or
successive successions, and the assumption by the successor corporation of the
covenants, agreements and obligations of the Company pursuant to Article Eleven
hereof;
(b) to add to the covenants of the Company such further covenants,
restrictions or conditions as the Board of Directors and the Trustee shall
consider to be for the protection of the holders of Debentures, and to make the
occurrence, or the occurrence and continuance, of a default in any such
additional covenants, restrictions or conditions a default or an Event of
Default permitting the enforcement of all or any of the several remedies
provided in this Indenture as herein set forth; provided, however, that in
respect of any such additional covenant, restriction or condition such
supplemental indenture may provide for a particular period of grace after
default (which period may be shorter or longer than that allowed in the case of
other defaults) or may provide for an immediate enforcement upon such default or
may limit the remedies available to the Trustee upon such default;
(c) to provide for the issuance under this Indenture of Debentures in
coupon form (including Debentures registrable as to principal only) and to
provide for exchangeability of such Debentures with the Debentures issued
hereunder in fully registered form and to make all appropriate changes for such
purpose; or
(d) to cure any ambiguity or to correct or supplement any provision
contained herein or in any supplemental indenture which may be defective or
inconsistent with any other provision contained herein or in any supplemental
indenture, or to make such other provisions in regard to matters or questions
arising under this Indenture which shall not adversely affect the interests of
the holders of the Debentures.
The Trustee is hereby authorized to join with the Company in the execution
of any such supplemental indenture, to make any further appropriate agreements
and stipulations which may be therein contained and to accept the conveyance,
transfer and assignment of any property thereunder, but the Trustee shall not be
obligated to, but may in its discretion, enter into any such supplemental
indenture which affects the Trustee's own rights, duties or immunities under
this Indenture or otherwise.
Any supplemental indenture authorized by the provisions of this Section
10.01 may be executed by the Company and the Trustee without the consent of the
holders of any of the Debentures at the time outstanding, notwithstanding any of
the provisions of Section 10.02.
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Section 10.02. Supplemental Indentures with Consent of Debentureholders.
With the consent (evidenced as provided in Section 8.01) of the holders of not
less than 66 2/3% in aggregate principal amount of the Debentures at the time
outstanding, the Company, when authorized by the resolutions of the Board of
Directors, and the Trustee may from time to time and at any time enter into an
indenture or indentures supplemental hereto for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
this Indenture or of any supplemental indenture or of modifying in any manner
the rights of the holders of the Debentures; provided, however, that no such
supplemental indenture shall (i) extend the fixed maturity of any Debentures, or
reduce the rate or extend the time of payment of interest thereon, or reduce the
principal amount thereof or premium, if any, thereon, or make the principal
thereof or interest or premium, if any, thereon payable in any coin or currency
other than that provided in the Debentures without the consent of the holder of
each Debenture so affected, or (ii) reduce the aforesaid percentage of
Debentures, the holders of which are required to consent to any such
supplemental indenture, without the consent of the holders of all Debentures
then outstanding.
Upon the request of the Company, accompanied by a copy of the resolutions
of the Board of Directors certified by its Secretary or Assistant Secretary
authorizing the execution of any such supplemental indenture, and upon the
filing with the Trustee of evidence of the consent of Debentureholders as
aforesaid, the Trustee shall join with the Company in the execution of such
supplemental indenture unless such supplemental indenture affects the Trustee's
own rights, duties or immunities under this Indenture or otherwise, in which
case the Trustee may in its discretion, but shall not be obligated to, enter
into such supplemental indenture.
It shall not be necessary for the consent of the Debentureholders under
this Section 10.02 to approve the particular form of any proposed supplemental
indenture, but it shall be sufficient if such consent shall approve the
substance thereof.
Section 10.03. Compliance with Trust Indenture Act; Effect of Supplemental
Indentures. Any supplemental indenture executed pursuant to the provisions of
this Article Ten shall comply with the Trust Indenture Act of 1939, as then in
effect. Upon the execution of any supplemental indenture pursuant to the
provisions of this Article Ten, this Indenture shall be and be deemed to be
modified and amended in accordance therewith and the respective rights,
limitation of rights, obligations, duties and immunities under this Indenture of
the Trustee, the Company and the holders of Debentures shall thereafter be
determined, exercised and enforced hereunder subject in all respects to such
modifications and amendments and all the terms and conditions of any such
supplemental indenture shall be and be deemed to be part of the terms and
conditions of this Indenture for any and all purposes.
Section 10.04. Notation on Debentures. Debentures authenticated and
delivered after the execution of any supplemental indenture pursuant to the
provisions of this Article Ten may bear a notation in form approved by the
Trustee as to any matter provided for in such supplemental indenture. If the
Company or the Trustee shall so determine, new Debentures so modified as to
conform, in the opinion of the Trustee and the Board of Directors, to any
modification of this Indenture contained in any such supplemental indenture may
be prepared and executed by the
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Company, authenticated by the Trustee and delivered in exchange for the
Debentures then outstanding, upon surrender of such Debentures then outstanding.
Section 10.05. Evidence of Compliance of Supplemental Indenture to be
Furnished Trustee. The Trustee, subject to the provisions of Sections 7.01 and
7.02, may receive an Officers' Certificate and an Opinion of Counsel as
conclusive evidence that any supplemental indenture executed pursuant hereto
complies with the requirements of this Article Ten.
ARTICLE ELEVEN
CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE
Section 11.01. Company May Consolidate, etc., on Certain Terms. Subject to
the provisions of Section 11.02, nothing contained in this Indenture or in any
of the Debentures shall prevent any consolidation or merger of the Company with
or into any other corporation or corporations (whether or not affiliated with
the Company), or successive consolidations or mergers in which the Company or
its successor or successors shall be a party or parties, or shall prevent any
sale, conveyance or lease (or successive sales, conveyances or leases) of all or
substantially all of the property of the Company, to any other corporation
(whether or not affiliated with the Company) authorized to acquire and operate
the same; provided, however, and the Company hereby covenants and agrees, that
upon any such consolidation, merger, sale, conveyance or lease, other than any
such sale, conveyance or lease by the Company to a Subsidiary, the due and
punctual payment of the principal of and premium, if any, and interest on all of
the Debentures, according to their tenor, and the due and punctual performance
and observance of all of the covenants and conditions of this Indenture to be
performed by the Company, shall be expressly assumed, by supplemental indenture
satisfactory in form to the Trustee, executed and delivered to the Trustee by
the corporation (if other than the Company) formed by such consolidation, or
into which the Company shall have been merged, or by the corporation which shall
have acquired or leased such property.
Section 11.02. Successor Corporation to be Substituted. In case of any such
consolidation, merger, sale, conveyance or lease and upon the assumption by the
successor corporation, by supplemental indenture, executed and delivered to the
Trustee and satisfactory in form to the Trustee, of the due and punctual payment
of the principal of and premium, if any, and interest on all of the Debentures
and the due and punctual performance of all of the covenants and conditions of
this Indenture to be performed by the Company, such successor corporation shall
succeed to and be substituted for the Company, with the same effect as if it had
been named herein as the party of the first part. Such successor corporation
thereupon may cause to be signed, and may issue either in its own name or in the
name of Zenith Electronics Corporation any or all of the Debentures issuable
hereunder which theretofore shall not have been signed by the Company and
delivered to the Trustee; and, upon the order of such successor corporation
instead of the Company and subject to all the terms, conditions and limitations
in this Indenture prescribed, the Trustee shall authenticate and shall deliver
any Debentures which previously shall have been signed and delivered by the
officers of the Company to the Trustee for authentication, and any Debentures
which such successor corporation thereafter shall cause to be signed and
delivered to the Trustee for that purpose. All the
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Debentures so issued shall in all respects have the same legal rank and benefit
under this Indenture as the Debentures theretofore or thereafter issued in
accordance with the terms of this Indenture as though all of such Debentures had
been issued at the date of the execution hereof. In the event of any such sale,
conveyance or lease (other than any such sale, conveyance or lease by the
Company to a Subsidiary), the person named as the "Company" in the first
paragraph of this Indenture or any successor which shall thereafter have become
such in the manner prescribed in this Article Eleven may be dissolved, wound up
and liquidated at any time thereafter and such person shall be released from its
liabilities as obligor and maker of the Debentures and from its obligations
under this Indenture.
In case of any such consolidation, merger, sale, conveyance or lease such
changes in phraseology and form (but not in substance) may be made in the
Debentures thereafter to be issued as may be appropriate.
Section 11.03. Opinion of Counsel to be Given Trustee. The Trustee, subject
to Sections 7.01 and 7.02, may receive an Officers' Certificate and an Opinion
of Counsel as conclusive evidence that any such consolidation, merger, sale,
conveyance or lease and any such assumption complies with the provisions of this
Article Eleven.
ARTICLE TWELVE
SATISFACTION AND DISCHARGE OF INDENTURE
Section 12.01. Discharge of Indenture. When (a) the Company shall deliver
to the Trustee for cancellation all Debentures theretofore authenticated (other
than any Debentures which shall have been destroyed, lost or stolen and in lieu
of or in substitution for which other Debentures shall have been authenticated
and delivered) and not theretofore cancelled, or (b) all the Debentures not
theretofore cancelled or delivered to the Trustee for cancellation shall have
become due and payable, or are by their terms to become due and payable within
one year or are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption, and the
Company shall deposit with the Trustee, in trust, funds sufficient to pay at
maturity or upon redemption all of the Debentures (other than any Debentures
which shall have been mutilated, destroyed, lost or stolen and in lieu of or in
substitution for which other Debentures shall have been authenticated and
delivered) not theretofore cancelled or delivered to the Trustee for
cancellation, including principal and premium, if any, and interest due or to
become due to such date of maturity or redemption date, as the case may be, and
if in either case the Company shall also pay or cause to be paid all other sums
payable hereunder by the Company, then this Indenture shall cease to be of
further effect, and the Trustee, on demand of the Company accompanied by an
Officers' Certificate and an Opinion of Counsel as required by Section 14.05 and
at the cost and expense of the Company, shall execute proper instruments
acknowledging satisfaction of and discharging this Indenture, the Company,
however, hereby agreeing to reimburse the Trustee for any costs or expenses
thereafter reasonably and properly incurred by the Trustee in connection with
this Indenture or the Debentures.
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Section 12.02. Deposited Monies to be Held in Trust by Trustee. Subject to
Section 12.04, all monies deposited with the Trustee pursuant to Section 12.01
shall be held in trust and applied by it to the payment, either directly or
through any paying agent (including the Company if acting as its own paying
agent), to the holders of the particular Debentures for the payment or
redemption of which such monies have been deposited with the Trustee, of all
sums due and to become due thereon for principal and interest and premium, if
any.
Section 12.03. Paying Agent to Repay Monies Held. Upon the satisfaction and
discharge of this Indenture all monies then held by any paying agent of the
Debentures (other than the Trustee) shall, upon demand of the Company, be repaid
to it or paid to the Trustee, and thereupon such paying agent shall be released
from all further liability with respect to such monies.
Section 12.04. Return of Unclaimed Monies. Any monies deposited with or
paid to the Trustee for payment of the principal of, premium, if any, or
interest on Debentures and not applied but remaining unclaimed by the holders of
Debentures for six years after the date upon which the principal of, premium, if
any, or interest on such Debentures, as the case may be, shall have become due
and payable, shall be repaid to the Company by the Trustee on demand and all
liability of the Trustee shall thereupon cease; and the holder of any of the
Debentures shall thereafter look only to the Company for any payment which such
holder may be entitled to collect.
ARTICLE THIRTEEN
IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS
Section 13.01. Indenture and Debentures Solely Corporate Obligations. No
recourse for the payment of the principal of or premium, if any, or interest on
any Debenture, or for any claim based thereon or otherwise in respect thereof,
and no recourse under or upon any obligation, covenant or agreement of the
Company in this Indenture or in any supplemental indenture, or in any Debenture,
or because of the creation of any indebtedness represented thereby, shall be had
against any incorporator, stockholder, officer or director, as such, past,
present or future, of the Company or of any successor corporation, either
directly or through the Company or any successor corporation, whether by virtue
of any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise; it being expressly understood that all such
liability is hereby expressly waived and released as a condition of, and as a
consideration for, the execution of this Indenture and the issue of the
Debentures.
ARTICLE FOURTEEN
MISCELLANEOUS PROVISIONS
Section 14.01. Provisions Binding on Company's Successors. All the
covenants, stipulations, promises and agreements in this Indenture contained by
the Company shall bind its successors and assigns whether so expressed or not.
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Section 14.02. Official Acts by Successor Corporation. Any act or
proceeding by any provision of this Indenture authorized or required to be done
or performed by any board, committee or officer of the Company shall and may be
done and performed with like force and effect by the like board, committee or
officer of any corporation that shall at the time be the lawful sole successor
of the Company.
Section 14.03. Addresses for Notices, etc. Any notice or demand which by
any provision of this Indenture is required or permitted to be given or served
by the Trustee or by the holders of Debentures on the Company may be given or
served by being deposited postage prepaid by registered or certified mail in a
post office letter box addressed (until another address is filed by the Company
with the Trustee) to Zenith Electronics Corporation, Attention: Secretary, 1000
Milwaukee Avenue, Glenview, Illinois 60025. Any notice, direction, request or
demand by any Debentureholder to or upon the Trustee shall be deemed to have
been sufficiently given or made, for all purposes, if given or made in writing
at the principal corporate trust office of the Trustee, Attention:
____________________________________________________________________.
Section 14.04. Governing Law. This Indenture and each Debenture shall be
deemed to be a contract made under the laws of the State of New York, and for
all purposes shall be construed in accordance with the laws of the State of New
York.
Section 14.05. Evidence of Compliance with Conditions Precedent. Upon any
application or demand by the Company to the Trustee to take any action under any
of the provisions of this Indenture, the Company shall furnish to the Trustee an
Officers' Certificate stating that all conditions precedent, if any, provided
for in this Indenture relating to the proposed action have been complied with
and an Opinion of Counsel stating that, in the opinion of such counsel, all such
conditions precedent have been complied with.
Each certificate or opinion provided for in this Indenture and delivered to
the Trustee with respect to compliance with a condition or covenant provided for
in this Indenture shall include (1) a statement that the person making such
certificate or opinion has read such covenant or condition; (2) a brief
statement as to the nature and scope of the examination or investigation upon
which the statements or opinion contained in such certificate or opinion are
based; (3) a statement that, in the opinion of such person, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
complied with; and (4) a statement as to whether or not, in the opinion of such
person, such condition or covenant has been complied with.
Section 14.06. Legal Holidays. In any case where the date of maturity of
interest on or principal of the Debentures or the date fixed for redemption of
any Debenture will be in the City of ______ or The City of New York, New York, a
legal holiday or a day on which banking institutions are authorized by law or
executive order to close, then payment of such interest on or principal of the
Debentures need not be made on such date but may be made on the next succeeding
day not in such city a legal holiday or a day on which banking institutions are
authorized by law or executive
-47-
<PAGE>
order to close with the same force and effect as if made on the date of maturity
or the date fixed for redemption and no interest shall accrue for the period
from and after such date.
Section 14.07. Trust Indenture Act to Control. If and to the extent that
any provision of this Indenture limits, qualifies or conflicts with another
provision included in this Indenture which is required to be included in this
Indenture by any of Sections 310 to 317, inclusive, of the Trust Indenture Act
of 1939, such required provision shall control.
Section 14.08. No Security Interest Created. Nothing in this Indenture or
in the Debentures, express or implied, shall be construed to constitute a
security interest under the Uniform Commercial Code or similar legislation, as
now or hereafter enacted and in effect, in any jurisdiction where property of
the Company or its subsidiaries is located.
Section 14.09. Benefits of Indenture. Nothing in this Indenture or in the
Debentures, express or implied, shall give to any person, other than the parties
hereto, any paying agent, any Debenture registrar and their successors hereunder
and the holders of Debentures any benefit or any legal or equitable right,
remedy or claim under this Indenture.
Section 14.10. Table of Contents, Headings, etc. The table of contents and
the titles and headings of the articles and sections of this Indenture have been
inserted for convenience of reference only, are not to be considered a part
hereof, and shall in no way modify or restrict any of the terms or provisions
hereof.
Section 14.11. Execution in Counterparts. This Indenture may be executed in
any number of counterparts, each of which shall be an original, but such
counterparts shall together constitute but one and the same instrument.
_________________________________ hereby accepts the trusts in this
Indenture declared and provided, upon the terms and conditions hereinabove set
forth.
* * * *
-48-
<PAGE>
IN WITNESS WHEREOF, ZENITH ELECTRONICS CORPORATION has caused this
Indenture to be signed and acknowledged by its Chairman or its President or one
of its Vice Presidents, and its corporate seal to be affixed hereunto, and the
same to be attested by its Secretary or an Assistant Secretary, and
_________________________________ has caused this Indenture to be signed and
acknowledged by one of its Vice Presidents, and has caused its corporate seal to
be affixed hereunto and the same to be attested by one of its Trust Officers, as
of the day and year first written above.
ZENITH ELECTRONICS CORPORATION
[SEAL]
By:
----------------------------------------
Title: Chairman, President and
Chief Executive Officer
Attest:
By:
-----------------------
Title: Secretary
[TRUSTEE]
[SEAL]
By:
-----------------------
Title:
----------------
Attest:
By:
-----------------------
Title:
----------------
-49-
<PAGE>
STATE OF ILLINOIS )
) SS.:
COUNTY OF C O O K )
On the ____ day of _____, 1999, before me personally came _______________,
to me known, who, being by me duly sworn did depose and say that he resides at
___________________ that he is __________________________ of ZENITH ELECTRONICS
CORPORATION, one of the corporations described in and which executed the above
instrument; that he knows the corporate seal of said corporation; that the seal
affixed to said instrument is such corporate seal; that it was so affixed by the
authority of the Board of Directors of said corporation; and that he signed his
name thereto by like authority.
--------------------------------------------
Notary Public
[NOTARIAL SEAL]
-50-
<PAGE>
KIRKLAND & ELLIS
PARTNERSHIPS INCLUDING PROFESSIONAL CORPORATIONS
153 East 53/rd/ Street
New York, New York 10022
To Call Writer Direct: 212 446-4800 Facsimile:
212 446-4900
June 21, 1999
Zenith Electronics Corporation
1000 Milwaukee Avenue
Glenview, Illinois 60025
Re: Zenith Electronics Corporation
Registration Statement on Form S-4
Registration No. 333-61057
----------------------------------
Ladies and Gentlemen:
We are issuing this opinion in our capacity as special legal counsel to
Zenith Electronics Corporation, a Delaware corporation (the "Registrant") in
connection with the Registration Statement on Form S-4 (File No. 333-61057)
originally filed with the Securities and Exchange Commission (the "Commission")
on August 10, 1998 (such Registration Statement, as amended or supplemented, is
hereinafter referred to as the "Registration Statement") of $50,000,000 in
aggregate principal amount of the Registrant's 8.19% Senior Debentures due 2009,
(the "New Debentures"). The New Debentures are proposed to be issued as part of
the Registrant's planned financial restructuring (the "Restructuring") by means
of a prepackaged plan of reorganization under Chapter 11 of Title 11 of the
United States Code, as amended (the "Prepackaged Plan"). Pursuant to the
Restructuring, the New Debentures would be issued in exchange for all of the
Registrant's 6 1/4% Convertible Subordinated Debentures due 2011 (the "Old
Subordinated Debentures") outstanding as of immediately prior to consummation of
the Restructuring.
The New Debentures are to be issued pursuant to an Indenture (the
"Indenture"), to be entered into between the Registrant and a Trustee to be
determined, a form of which has been filed as exhibit 4(e) to the Registration
Statement. If the Restructuring is approved by the bankruptcy court, the
Indenture will be executed by the Registrant and a Trustee to be named and
qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). This opinion is being furnished in accordance with the
requirements of Item 601(b)(5) of Regulation S-K under the Securities Act of
1933, as amended (the "Act").
<PAGE>
KIRKLAND & ELLIS
Zenith Electronics Corporation
June 21, 1999
Page 2
For purposes of this letter, we have examined originals, or copies
certified or otherwise identified to our satisfaction, of such documents,
corporate records and other instruments as we have deemed necessary for the
purposes of this opinion, including (i) the Registration Statement, (ii) the
form of the Prepackaged Plan, (iii) the Articles of Incorporation and By-Laws of
the Registrant, as presently in effect, (iv) the form of the Indenture filed as
Exhibit 4(e) to the Registration Statement, and (v) certain minutes and records
of the corporate proceedings of the Registrant with respect to the issuance of
the New Debentures.
For purposes of this letter, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to the originals of all
documents submitted to us as copies and the authenticity of the originals of all
documents submitted to us as copies. We have also assumed the genuineness of the
signatures of persons signing all documents in connection with which this
opinion is rendered, the authority of such persons signing on behalf of the
parties thereto other than the Registrant and the due authorization, execution
and delivery of all documents by the parties thereto other than the Registrant.
As to any facts material to the opinions expressed herein which we have not
independently established or verified, we have relied upon statements and
representations of officers and other representatives of the Registrant and
others.
Subject to the assumptions, qualifications, exclusions and limitations
identified in this letter, we advise you that in our opinion the New Debentures,
when issued, will be binding obligations of the Registrant, enforceable against
the Registrant in accordance with their terms, when, as and if (a) the
Registration Statement shall have become effective pursuant to the provisions of
the Act, (b) appropriate corporate action shall have been taken by the
Registrant to authorize (1) the form, terms, execution and delivery of the
Indenture and (2) the form and terms of the New Debentures, (c) the New
Debentures shall have been issued in the form and containing the terms described
in the Registration Statement, the Indenture and such corporate action, (d) a
Proxy Statement-Prospectus with respect to the New Debentures shall have been
filed (or transmitted for filing) with the Commission pursuant to Rule 424(b) of
the Act, (e) any legally required consents, approvals, authorizations and other
orders of the Commission and any other courts or regulatory authorities shall
have been obtained, including without limitation such consents, approvals,
authorizations and orders with respect to the Prepackaged Plan and the
Restructuring, (f) the Indenture has been duly qualified under the Trust
Indenture Act and the Indenture has been duly executed and delivered by the
Registrant and the trustee thereunder, and (g) New Debentures shall have been
duly executed and authenticated as provided in the Indenture and
<PAGE>
KIRKLAND & ELLIS
Zenith Electronics Corporation
June 21, 1999
Page 3
duly delivered to holders of Old Subordinated Debenture Claims (as defined in
the Registration Statement) in exchange for the Old Subordinated Debentures as
provided in the Prepackaged Plan.
Our advice on every legal issue addressed in this letter is based
exclusively on the internal laws of New York and the General Corporation Law of
the State of Delaware (under which the Registrant is incorporated).
Our opinion expressed above is subject to the qualifications that we
express no opinion as to the applicability of, compliance with, or effect of (a)
any bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent
conveyance, moratorium or other similar law or judicially developed doctrine in
this area (such as substantive consolidation or equitable subordination)
affecting the enforcement of creditors' rights generally, (b) general principles
of equity (regardless of whether enforcement is considered in a proceeding in
equity or at law), (c) an implied covenant of good faith and fair dealing, (d)
public policy considerations which may limit the rights of parties to obtain
certain remedies, (e) any requirement that a claim with respect to any security
denominated in other than U.S. dollars (or a judgment denominated in other than
U.S. dollars in respect of such claim) be converted into U.S. dollars at a rate
of exchange prevailing on a date determined in accordance with applicable law,
(f) governmental authority to limit, delay or prohibit the making of payments
outside of the United States or in a foreign currency or currency unit and (g)
any laws except the laws of the State of New York and the General Corporation
Law of the State of Delaware. We advise you that issues addressed by this letter
may be governed in whole or in part by other laws, but we express no opinion as
to whether any relevant difference exists between the laws upon which our
opinions are based and any other laws which may actually govern.
For purposes of rendering our opinion expressed above, we have assumed that
(a) the Registration Statement remains effective during the offer and sale of
the New Debentures, (b) the terms of the Indenture, as executed or as thereafter
amended, and any supplemental indenture to the Indenture are consistent with the
description of the terms of such indenture set forth in the Registration
Statement and in the Proxy Statement-Prospectus included therein, (c) at the
time of the issuance, sale and delivery of the New Debentures (x) the
authorization of the New Debentures by the Registrant will not have been
modified or rescinded, and there will not have occurred any change in law
affecting the validity, legally binding character or enforceability of the New
Debentures and (y) the issuance, sale and delivery of the New Debentures, the
terms of the
<PAGE>
KIRKLAND & ELLIS
Zenith Electronics Corporation
June 21, 1999
Page 4
New Debentures, the terms of any agreement, any supplemental indenture to the
Indenture, and compliance by the Registrant with the terms of the New Debentures
and the terms of any such agreement or indenture will not violate any applicable
law, any agreement or instrument then binding upon the Registrant or any
restriction imposed by any court or governmental body having jurisdiction over
the Registrant and (d) any revisions to the form of the Indenture filed as an
exhibit to the Registration Statement prior to the execution thereof, and any
amendments or supplemental indentures to the Indenture (as executed), will not
require requalification of such indenture under the Trust Indenture Act.
We do not find it necessary for the purposes of this opinion and
accordingly we do not purport to cover herein the application of the securities
or "Blue Sky" laws of the various states to the issuance of the New Debentures.
This opinion is limited to the specific issues addressed herein, and
no opinion is implied or may be inferred beyond that expressly stated herein. We
assume no obligation to revise or supplement this opinion should the present
laws of the State of New York or the General Corporation Law of the State of
Delaware be changed by legislative action, judicial decision or otherwise.
This opinion is furnished to you in connection with the filing of the
Registration Statement and is not to be used, circulated, quoted or otherwise
relied upon for any other purposes.
We hereby consent to the filing of this opinion with the Commission as
Exhibit 5.1 to the Registration Statement. We also consent to the reference to
our firm under the heading "Legal Matters" in the Registration Statement. In
giving this consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission.
Sincerely,
/s/ KIRKLAND & ELLIS
Kirkland & Ellis
<PAGE>
To Call Writer Direct:
312 861-2000
Exhibit 8.(a)
JUNE __, 1999
Zenith Electronics Corporation
1000 Milwaukee Avenue
Glenview, Illinois 60025-2493
Re: Federal Income Tax Opinion
--------------------------
Dear Sirs/Mesdames:
In connection with the transactions described in the Proxy
Statement-Prospectus included in the Registration Statement on Form S-4
(Registration No. 333-61057) (the "Registration Statement") of Zenith
Electronics Corporation, filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, and the Securities and Exchange Act of
1934, as amended, you have requested our opinion concerning the material United
States federal income tax consequences of the Prepackaged Plan to the Company
and holders of certain Claims and Equity Interests of the Company. Capitalized
terms used herein that are not specifically defined herein have the same meaning
as in the Registration Statement.
We have examined the Proxy Statement-Prospectus, the Registration
Statement, and such other documents and such legal authorities as we have deemed
relevant for purposes of expressing the opinion contained herein. Our opinion is
based upon the applicable provisions of the Internal Revenue Code of 1986, as
amended, Treasury regulations promulgated and proposed thereunder, current
positions of the Internal Revenue Service (the "IRS") contained in published
Revenue Rulings and Revenue Procedures and existing judicial decisions. No tax
rulings have been or will be sought from the IRS with respect to any of the
matters discussed herein.
Based on the foregoing, the discussions set forth under the caption
"Certain U.S. Federal Income Tax Considerations" in the Proxy
Statement-Prospectus express our opinion as to the material U.S. federal income
tax consequences of the Prepackaged Plan, subject to the qualifications therein,
and are based upon reasonable interpretations of existing law. There can be no
assurance, however, that such views will not be successfully challenged by the
IRS or
<PAGE>
Zenith Electronics Corporation
June __, 1999
Page 2
significantly altered by new legislation, changes in IRS positions, or
judicial decisions, any of which challenges or alterations may be applied
retroactively.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the section
entitled "Legal Matters" in the Registration Statement.
This opinion is furnished to you in connection with the filing of the
Registration Statement, and is not to be used, circulated, quoted or otherwise
relied upon for any other purpose without our consent.
Very truly yours,
Kirkland & Ellis
<PAGE>
EXHIBIT 10AH
AMENDED AND RESTATED
RESTRUCTURING AGREEMENT
AMENDED AND RESTATED RESTRUCTURING AGREEMENT, dated as of June 14,
1999 (this "Agreement"), by and between ZENITH ELECTRONICS CORPORATION, a
Delaware corporation (the "Company"), and LG ELECTRONICS INC., a corporation
organized under the laws of the Republic of Korea ("LGE").
WHEREAS, LGE owns 36,569,000 shares of common stock, par value $1 per
share, of the Company (the "Old Common Stock"), representing approximately 55%
of the outstanding Old Common Stock, and LGE owns vested and unvested options to
purchase additional shares of Old Common Stock at a price of $.01 per share (the
"Options");
WHEREAS, from time to time LGE and the Company have entered into
certain contractual arrangements and LGE has provided financial support to the
Company;
WHEREAS, on April 20, 1999, June 30, 1998 and September 23, 1998, LGE
paid $30 million, $50 million and $22 million, respectively, to certain of the
Company's creditors to satisfy a portion of LGE's guarantee obligation in
respect of loans extended by such creditors to the Company;
WHEREAS, pursuant to the Reimbursement Agreement (as defined in
Section 1), the Company is required to reimburse LGE for amounts paid by LGE
under such guarantees and to pay interest at the rate specified therein to LGE
on such amounts from the date of payment by LGE to the date of reimbursement by
the Company;
WHEREAS, on July 22, 1998, LGE paid $90,086,653.08 to certain of the
Company's creditors to satisfy the obligations of the Company under the
Leveraged Lease Documents (as defined in Section 1);
WHEREAS, pursuant to the Financial Support Agreement (as defined in
Section 1), the Company is required to reimburse LGE for amounts paid by LGE to
satisfy the Company's obligations under the Leveraged Lease Documents and to pay
interest at the rate specified therein to LGE on such amounts from the date of
payment by LGE to the date of reimbursement by the Company;
WHEREAS, under the Leveraged Lease Documents, LGE (as beneficial
<PAGE>
owner of the owner trusts created thereby) is the indirect owner of the
equipment subject to the Leveraged Lease Documents and may exercise one or more
of several remedies specified in the Leveraged Lease Documents with respect to
such equipment;
WHEREAS, prior to the date hereof, LGE has directed the owner trusts
to sell certain of such equipment and has applied the net proceeds of such sales
to reduce the amount the Company is required to reimburse LGE;
WHEREAS, with respect to the remainder of such equipment LGE has
determined to (i) retain a portion of the equipment in satisfaction of a portion
-
of its claims under the Leveraged Lease Documents and (ii) transfer the balance
--
of the equipment to the Company and retain the balance of its claims under the
Leveraged Lease Documents;
WHEREAS, a special committee of the Board of Directors of the Company
composed of independent directors (the "Special Committee") considered in detail
various proposals for the reorganization of the Company and negotiated with LGE
with respect to several proposed restructuring plans;
WHEREAS, the Special Committee made certain recommendations to the
full Board of Directors of the Company;
WHEREAS, the Board of Directors of the Company determined that it is
in the best interests of the Company to restructure the business and operations
of the Company (the "Operational Restructuring") as contemplated by the Business
Plan and Projections, dated March 17, 1999 (as amended in accordance with
Section 10(e) of this Agreement, the "Operating Plan"), prepared by the
management of the Company (a copy of which is attached hereto as Annex A);
WHEREAS, the Board of Directors of the Company determined that it is
in the best interests of the Company to alter the capital structure of the
Company in accordance with the terms of the Outline for Proposed Restructuring
of Zenith Electronics Corporation dated May 21, 1998 (the "Proposal") a copy of
which is attached as Annex B, and the modifications to the Proposal as may be
further mutually agreed to by the Company and LGE, through confirmation of a
plan of reorganization (the "Plan"), under the Bankruptcy Code (as defined
below) using acceptances of the Plan to be solicited (the "Plan Solicitation")
from the requisite holders of claims against, and interests in, the Company
pursuant to Section 1125 of the Bankruptcy Code (the "Financial Restructuring,"
and together with the Operational Restructuring, the "Restructuring");
<PAGE>
WHEREAS, the Company and LGE entered into a Restructuring Agreement,
dated as of August 7, 1998 (the "Original Agreement"), pursuant to which LGE
agreed to participate in the Financial Restructuring on the terms and conditions
set forth therein;
WHEREAS, the Company and LGE have entered into a Forbearance, Lock-Up
and Voting Agreement, dated as of March 31, 1999 (the "Lock-Up Agreement"), with
certain holders of the Company's 6 1/4% Convertible Subordinated Debentures due
2011 (the "Old Subordinated Debentures") pursuant to which such holders have
agreed to vote in favor of the Plan;
WHEREAS, the Company and LGE have decided to amend and restate the
Original Agreement to reflect certain terms of the Lock-Up Agreement and other
developments relating to the Company's Restructuring;
NOW, THEREFORE, in consideration of the premises and mutual agreements
herein set forth, upon the terms and subject to the conditions set forth herein,
the parties agree as follows:
ARTICLE I
1. Definitions. As used in this Agreement, the following terms
-----------
shall have the following meanings (each such meaning to be equally applicable to
both the singular and plural forms of the respective terms so defined):
"Alternative Proposal" has the meaning set forth in Section 6.8.
"Bankruptcy Code" means Title 11 of the United States Code, as
amended, and the rules and orders thereunder.
"Bankruptcy Court" means the United States Bankruptcy Court for the
District of Delaware.
"Closing" has the meaning set forth in Section 3.
"Closing Date" has the meaning set forth in Section 3.
"Code" means the Internal Revenue Code of 1986, as amended.
<PAGE>
"Company Disclosure Letter" means the Disclosure Letter, dated August
7, 1998, from the Company to LGE as amended and modified by the Disclosure
Letter, dated as of the date hereof, from the Company to LGE.
"Company SEC Documents" has the meaning set forth in Section 4.4.
"Confirmation Order" has the meaning set forth in Section 4.3.
"Cumulative Funding Requirement" means cash flow from operations
before Restructuring and Reorganization Charges, plus interest expense and
capital expenditures, in each case as set forth in the Operating Plan. If LGE
(in its sole discretion) grants the Company an extension of the time for payment
to LGE of any interest owed to LGE or for the use of the credits under the
Philips Letter Agreement, calculation of cash flow from operations shall be
adjusted as if payment of all such amounts was made as and when due in the
absence of such extension.
"Disclosure Letters" means the Company Disclosure Letter and the LG
Disclosure Letter.
"EBITDA" means, for any period, the sum of:
(i) the net income (or net loss) of the Company (determined in
accordance with GAAP) for such period, without giving effect to any GAAP
extraordinary gains or losses and without deduction for Restructuring and
Reorganization Charges; plus (or minus)
(ii) to the extent that any of the items referred to in any of
clauses (A) though (D) below were deducted or added in calculating such net
income:
(A) interest expense of the Company for such period;
(B) federal, state or local income tax expense of the Company
with respect to operations for such period;
(C) the amount of all depreciation and amortization and other
non-cash charges for such period; and
(D) non-cash gains or losses from the sale or disposal of
<PAGE>
property (other than inventory).
"Environmental Laws" means any and all applicable federal, state,
local or municipal laws, rules, orders, regulations, statutes, ordinances,
codes, decrees or requirements of any Regulatory Authority regulating, relating
to or imposing liability or standards of conduct concerning protection of human
health or the environment, including without limitation, Hazardous Materials, as
now or may at any time during the term hereof be in effect.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means any entity that is treated as a single
employer with the Company for purposes of Section 414 of the Code.
"ERISA Plan" means an employee benefit plan within the meaning of
Section 3(3) of ERISA or any other material benefit plan maintained for
employees of the Company or any of its ERISA Affiliates.
"Exchange Act" means the Securities and Exchange Act of 1934, as
amended.
"Financial Restructuring" has the meaning set forth in the thirteenth
whereas clause.
"Financial Support Agreement" means the Financial Support Agreement,
dated March 31, 1997, as amended, between the Company and LGE.
"GAAP" means generally accepted accounting principles in the United
States as in effect from time to time.
"Hazardous Materials" means any hazardous materials, hazardous wastes,
hazardous constituents, hazardous or toxic substances, petroleum products
(including crude oil or any fraction thereof), polychlorinated biphenyls, urea-
formaldehyde insulation, asbestos containing materials defined or regulated as
such in or under any Environmental Law.
<PAGE>
"HDTV Patents" shall mean all of the Company's United States patents
and patent applications relating to its digital vestigial side band technology
or relating to and used in connection with HDTV or digital television technology
of the Company.
"Implementation Program" means the Company's implementation program
attached hereto as Annex C.
"Intellectual Property" means, with respect to any person,
collectively, such person's Patent Property and Trademark Property.
"Leveraged Lease Documents" means (i) the Participation Agreement,
-
dated as of March 26, 1997, by and among the Company, General Foods Credit
Corporation ("General Foods"), Fleet National Bank ("Fleet") as owner trustee
and the lenders party thereto, and the Lease Agreement, dated as of March 26,
1997, by and among the Company and Fleet as owner trustee, and the other
agreements and documents executed and delivered in connection therewith, and
(ii) the Participation Agreement, dated as of March 26, 1997, by and among
--
Zenith Texas, General Foods, Fleet as owner trustee and the lenders party
thereto, and the Lease Agreement, dated as of March 26, 1997, by and among
Zenith Texas and Fleet as owner trustee, and the other agreements and documents
executed and delivered in connection therewith.
"LGE Disclosure Letter" means the Disclosure Letter, dated as of
August 7, 1998, from LGE to the Company.
"Lien" has the meaning set forth in Section 4.2.
"Lock-Up Agreement" has the meaning set forth in the fifteenth whereas
clause.
"Material Adverse Effect" means a material adverse effect on the
business, properties, assets, results of operations, liabilities, condition
(financial or otherwise) or prospects of the Company and its subsidiaries taken
as a whole or on the ability of the Company or its subsidiaries to consummate
the transactions contemplated by this Agreement, including the Restructuring, or
to perform their respective obligations under the definitive transaction
agreements to be entered into in connection herewith.
"Multiemployer Plan" shall have the meaning set forth in Section
4001(a)(3) of ERISA.
<PAGE>
"New Investor" has the meaning set forth in Section 11.1(d)(iii).
"New Salaried Employee Documents" has the meaning set forth in Section
6.6.
"Note Agreement" means the Note Agreement, dated March 31, 1998,
between the Company and LGE, as amended by the First Amendment to the Note
Agreement, dated as of June 21, 1998, between the Company and LGE, and as
amended from time to time thereafter.
"Old Common Stock" has the meaning set forth in the first whereas
clause.
"Old Subordinated Debentures" has the meaning set forth in the
fifteenth clause.
"Operating Plan" has the meaning set forth in the twelfth whereas
clause.
"Operational Restructuring" has the meaning set forth in the twelfth
whereas clause.
"Options" has the meaning set forth in the first whereas clause.
"Original Agreement" has the meaning set forth in the fourteenth
whereas clause.
"Patent Property" shall mean, with respect to any person:
(i) all of such person's patents (including, with respect to the
Company, the Tuner Patents and HDTV Patents), patent applications
(including, without limitation, all patents and patent applications in
preparation for filing) and patent disclosures throughout the world,
including without limitation, with respect to the Company, each patent and
patent application referred to in Part A-1 of Section 4.14 of the Company
Disclosure Letter;
(ii) all reissues, divisions, continuations, continuations-in-part,
<PAGE>
revisions, extensions, renewals and reexaminations of any of the items
described in clause (i) of this definition; and
(iii) all patent licenses of such person (whether as licensee or
licensor), including, with respect to the Company, each patent license
referred to in Part A-2 of Section 4.14 of the Company Disclosure Letter.
"Philips Letter Agreement" has the meaning set forth in Section 2(f).
"Plan" has the meaning set forth in the thirteenth whereas clause.
"Plan Disclosure Documents" means the Disclosure Statement and Proxy
Statement-Prospectus (as amended or supplemented and including documents
incorporated by reference therein), to be used in connection with the Plan
Solicitation by the Company and the Rule 13e-3 Transaction Statement (as amended
or supplemented and including documents incorporated by reference therein) filed
jointly by the Company and LGE.
"Plan Solicitation" has the meaning set forth in the thirteenth
whereas clause.
"Property" shall mean any real property or personal property, plant,
building, facility, structure, underground storage tank or unit, equipment,
inventory or other asset owned, leased or operated by the Company or any of its
subsidiaries (including, without limitation, any surface water thereon or
adjacent thereto, and soil and groundwater thereunder).
"Regulatory Authority" means any court or government, administrative
agency or commission or other governmental or regulatory authority or agency,
federal, state, local or foreign.
"Reimbursement Agreement" means the Reimbursement Agreement, dated
November 3, 1997, between the Company and LGE, together with the other
agreements and documents executed and delivered in connection therewith (as
amended, modified or supplemented from time to time), pursuant to which the
Company agreed to repay amounts paid by LGE (as guarantor of the Company's
obligations) to certain of the Company's third party creditors.
"Reportable Event" shall have the meaning set forth in Section 4043(c)
of
<PAGE>
ERISA and the regulations thereunder.
"Representatives" has the meaning set forth in Section 6.6.
"Restructuring" has the meaning set forth in the thirteenth whereas
clause.
"Restructuring and Reorganization Charges" means charges incurred by
the Company to execute the Operating Plan and the Plan that are of the type
included in "Restructuring Charges" or "Reorganization Charges" in the Operating
Plan and determined on a basis consistent with the principles used to prepare
the Operating Plan.
"Reynosa Assets" means all of the right, title and interest of Zenith
Reynosa and Zenith Texas in and to (i) the land and buildings that comprise
-
Zenith Reynosa's production facilities # 12, #13 and #27 in Reynosa, Mexico,
(ii) all of the fixtures, equipment, personal property and other assets located
--
therein and identified in Section 1(a) of the Company Disclosure Letter (as
amended pursuant to Section 6.6) and (iii) all agreements relating to access
---
thereto.
"Reynosa Assets Claim Amount" has the meaning set forth in Section
6.6.
"Reynosa Leveraged Lease Assets" means all of its right, title and
interest of the owner trust created under the Leveraged Lease Documents in and
to the assets subject to the Leveraged Lease Documents located at Zenith
Reynosa's production facility # 27 in Reynosa, Mexico to the extent set forth on
Section 1(b) of the Company Disclosure Letter. The Reynosa Leveraged Lease
Assets have a fair market value equal to $8,000,750.00.
"Reynosa Operating Agreement" has the meaning set forth in Section
2(b).
"Reynosa Purchase Agreement" has the meaning set forth in Section
2(b).
"Securities Act" means the Securities Act of 1933, as amended.
"SEC" means the Securities and Exchange Commission.
<PAGE>
"Senior Secured PIK Notes" means the Senior Secured PIK Notes of the
Company having the terms set forth on Annex D.
"Special Committee" has the meaning set forth in the tenth whereas
clause.
"Taxes" means any net income, alternative minimum, accumulated
earnings, personal holding company, gross income, asset, gross receipts, sales,
use, goods and services, ad valorem, value added, mortgage, conveyance,
transfer, customs duties, franchise, capital stock, net worth, capital, profits,
license, withholding, payroll, employment, unemployment insurance, social
security, disability, workers' compensation, health care, excise, stamp,
property, rent, occupancy, occupational, documentary, recording, premium,
severance, environmental or windfall profit tax, duty, governmental fee or other
like assessment or charge, together with all interest or penalties thereon and
additions thereto, imposed by any taxing authority.
"Tax Return" means any return, report, declaration, form, claim for
refund or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
"Trademark" shall have the meaning ascribed to that term in the
definition of Trademark Property.
"Trademark Property" shall mean, with respect to any person:
(i) all of such person's trademarks, trade names, corporate names,
company names, business names, fictitious business names, trade styles,
service marks, certification marks, collective marks, logos, trade dress
other source of business identifiers, prints and labels on which any of the
foregoing have appeared or appear, designs and general intangibles of a
like nature (all of the foregoing items in this clause (i) being
collectively called a "Trademark"), now existing anywhere in the world or
hereafter adopted or acquired, whether currently in use or not, whether or
not registered, all registrations and recordings thereof and all
applications in connection therewith, whether pending or in preparation for
filing, including registrations, recordings and applications in the United
States Patent and Trademark Office or in any office or agency of the United
States of America or
<PAGE>
any State thereof or any foreign country, including, with respect to the
Company, those referred to in Part B-1 of Section 4.14 of the Company
Disclosure Letter;
(ii) all reissues, extensions, renewals, translations, adaptations,
derivations and combinations of any of the items described in clause (i) of
this definition;
(iii) all Trademark licenses and other agreements providing such
person with the right to use any of the types of items referred to in
clauses (i) and (ii) of this definition, including, with respect to the
Company, each Trademark license referred to in Part B-2 of Section 4.14 of
the Company Disclosure Letter;
(iv) all of the goodwill of the business connected with the use of,
and symbolized by the items described in, clauses (i) and (ii) of this
definition;
(v) the right to sue third parties for past, present and future
infringements of any Trademark property described in clauses (i) or (ii) of
this definition and, to the extent applicable in clause (iii) of this
definition; and
(vi) all proceeds of, and rights associated with, the foregoing,
including any claim by such person against third parties for past, present
or future infringement or dilution of any Trademark, Trademark registration
or (to the extent applicable and if permitted by applicable law) Trademark
license, referred to on clause (iii) of this definition, or for any injury
to the goodwill associated with the use of any such Trademark or for breach
or enforcement of any Trademark license, and all rights corresponding
thereto throughout the world.
"Transaction Expenses" has the meaning set forth in Section 11.3(a).
"Transaction Fee" has the meaning set forth in Section 11.3(b).
"Tuner Patents" shall mean, collectively, U.S. Patent No. 4,002,986,
U.S. Patent No. 4,317,227, U.S. Patent No. 4,516,170, and U.S. Patent No.
4,598,425, together with all applications, reissues, divisions, continuations,
continuations-in-part, revisions, extensions, renewals and reexaminations
relating thereto; and "Tuner Patent" shall mean any of the foregoing.
"Zenith Reynosa" means Partes de Television de Reynosa, a Mexican
<PAGE>
sociedad anonima de capital variable and a wholly-owned subsidiary of the
Company.
"Zenith Texas" means Zenith Electronics Corporation of Texas, a Texas
corporation and a wholly-owned subsidiary of the Company.
ARTICLE II
2. The Transactions. Upon the terms and subject to the conditions
----------------
set forth herein, on the Closing Date, pursuant to the Plan,
(a) LGE will purchase from the Company, and the Company will issue to
LGE, shares of newly issued common stock, par value $.01 per share, of the
Company (the "New Common Stock"), representing 100% of the New Common Stock, in
exchange for the forgiveness by LGE of $200 million of LGE claims consisting of
(i) unsecured claims for amounts outstanding as of the Closing Date up to $140
-
million arising out of the delivery of goods to the Company in the ordinary
course of business, (ii) a $50 million secured claim pursuant to the
--
Reimbursement Agreement, (iii) an unsecured claim for guarantee fees accrued and
---
unpaid through the Closing Date payable to LGE under the Reimbursement Agreement
and (iv) a portion, if any, of the secured claim pursuant to the Note Agreement
--
sufficient when aggregated with the amounts described in clauses (i), (ii) and
(iii) of this Section 2(a) to equal $200 million;
(b) LGE or one of its subsidiaries and Zenith Reynosa and Zenith
Texas will enter into an agreement (the "Reynosa Purchase Agreement") pursuant
to which Zenith Reynosa and Zenith Texas will sell to LGE or one of its
affiliates the Reynosa Assets in exchange for the release by LGE of claims equal
to the Reynosa Asset Claim Amount as reimbursement for the payment by LGE of the
Company's and Zenith Texas' obligations to certain third party creditors under
the Leveraged Lease Documents, provided, however, that if the transactions
contemplated by this Section 2(b) would have adverse Tax consequences that are
unacceptable to either the Company or LGE, then (i) the Company shall retain the
-
Reynosa Assets, (ii) the Company and LGE shall enter into an agreement with
--
respect to the operation by LGE of such Reynosa Assets and the Reynosa Leveraged
Lease Assets (the "Reynosa Operating Agreement") and (iii) the amount of LGE
---
claims that would have been exchanged for the Reynosa Assets under this
<PAGE>
Section 2(b) shall be exchanged for an equal principal amount of Senior Secured
PIK Notes;
(c) LGE will purchase from the Company, and the Company will issue to
LGE, Senior Secured PIK Notes in a principal amount equal to and in exchange for
the forgiveness by LGE of claims equal to the aggregate of (i) a secured claim
-
for principal amounts owed LGE pursuant to the Reimbursement Agreement, if any,
other than the $50 million exchanged for New Common Stock under Section 2(a),
(ii) the amount of the claim for reimbursement of the payment by LGE of the
- ---
obligations of the Company and Zenith Texas to certain third party creditors
under the Leveraged Lease Documents remaining after release of the portion of
the claim exchanged for the Reynosa Assets pursuant to Section 2(b) and the
retention of the Reynosa Leveraged Lease Assets pursuant to Section 2(f), (iii)
---
an unsecured claim for all servicing fees (the "Technical Service Fees") accrued
and unpaid through the Closing Date resulting from LGE's provision of certain
technical and other related services to the Company in connection with the
Company's research and development activities, and (iv) the amount of the
--
secured claim pursuant to the Note Agreement remaining after conversion of the
portion of the claim exchanged for New Common Stock pursuant to Section 2(a);
(d) each share of Old Common Stock owned by LGE and the Options owned
by LGE will be canceled, and LGE will have no rights or claims against the
Company in respect of such canceled Old Common Stock and Options;
(e) LGE will agree to lend or provide additional credit support to the
Company in an amount necessary to enable the Company to execute the Operating
Plan according to its terms, not to exceed $60 million, on terms mutually
acceptable to LGE and the Company;
(f) LGE will transfer to the Company all of its right, title and
interest in the equipment subject to the Leveraged Lease Documents (other than
the Reynosa Leveraged Lease Assets and any such equipment sold on or before the
Closing Date) and any credits outstanding under the Letter Agreement, dated
November 2, 1998 (the "Philips Letter Agreement"), between the Company and
Philips Electronics North America Corporation, provided, however, if the Company
and LGE do not enter into the Reynosa Purchase Agreement, then LGE will also
transfer to the Company the Reynosa Leveraged Lease Assets in exchange for
Senior Secured PIK Notes in a principal amount of $8,000,750.00; and
<PAGE>
(g) LGE's claims other than those described under Sections 2(a),
2(b), 2(c), 2(d) and 2(f), including without limitation all accrued but unpaid
interest on amounts owed by the Company to LGE under the Reimbursement
Agreement, the Financial Support Agreement and the Note Agreement, shall be
treated as unimpaired general unsecured claims under the Plan.
ARTICLE III
3.1 Closing. At the Closing, subject to the terms and conditions of
-------
this Agreement, the Company and LGE shall consummate the transactions
contemplated by Section 2 hereof. The closing (the "Closing") shall take place
at the offices of Kirkland & Ellis, 200 East Randolph Drive, Chicago, IL 60601,
at 10:00 a.m., Chicago time, as promptly as practicable following the
satisfaction or waiver of the conditions to Closing set forth in Sections 8, 9
and 10 hereof, or at such other place and time as the parties may mutually
agree. The Company shall give LGE three business days prior written notice of
the date the Closing is scheduled to occur. The "Closing Date" shall be the
date the Closing occurs.
3.2 No Survival. The sole and exclusive recourse and remedy for a
-----------
material breach of a representation or warranty shall be the non-breaching
party's right pursuant to Section 9(a) or 10(a), as the case may be, not to
consummate the transactions contemplated hereby. At Closing all representations
and warranties shall expire, and in any case, result in no future liability for
the Company or LGE or their respective subsidiaries, officers, directors and
employees.
ARTICLE IV
4. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to LGE that:
4.1 Organization; Authorization; Enforceability. It is a corporation
-------------------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware, and has all requisite power and authority to execute and
deliver this Agreement
<PAGE>
and to perform its obligations hereunder. The execution, delivery and
performance by it of this Agreement have been duly authorized by all requisite
corporate action on its part. This Agreement has been duly executed and
delivered by it and constitutes its legal, valid and binding obligation,
enforceable against it in accordance with its terms.
4.2 No Conflicts. The execution, delivery and performance of this
------------
Agreement by it will not: (x) conflict with or violate its organizational
-
documents; or (y) subject to the governmental filings and approvals referred to
-
in Section 4.3 and in the case of clauses (y)(i) and (y)(ii) as would not
reasonably be likely to result in or have a Material Adverse Effect, (i) breach
-
or violate any statute, law, rule, regulation, judgment, order or decree
applicable to it or any of its subsidiaries or by which any of their respective
properties are bound or affected, (ii) result in any breach of, or constitute a
--
default or give rise to any right of termination, revocation, cancellation,
acceleration or increased payments under (with or without the giving of notice
or the lapse of time or both), any note, mortgage, agreement, contract,
indenture, permit, lease, license, commitment, understanding or other
arrangement to which it or any of its subsidiaries is a party or by which it or
any of its subsidiaries or any of their respective properties or assets are
bound or affected, or (iii) result in the creation or imposition of any lien,
---
mortgage, security interest, restriction or other encumbrance (a "Lien") on it
or any of its subsidiaries or any of their respective assets or properties.
4.3 Consents. Except for (i) applicable requirements of the
-------- -
Securities Act, the Exchange Act, and filings under state securities or "blue
sky" laws, (ii) approval by the Bankruptcy Court of the Plan and this Agreement
--
and the entry by the Bankruptcy Court of an order confirming the Plan (the
"Confirmation Order"), (iii) filing with the Secretary of State of the State of
---
Delaware of the Certificate of Amendment of the Certificate of Incorporation of
the Company with respect to the amendments contemplated by this Agreement, and
(iv) as set forth in Section 4.3 of the Company Disclosure Letter, no consent,
--
approval or authorization of, or filing with or notification to, any Regulatory
Authority or any third party is required on its part in connection with the
execution, delivery or performance of this Agreement.
4.4 SEC Documents. Except for the Company's Annual Report on Form
-------------
10K for the fiscal year ended December 31, 1998, which was filed by the Company
on April 1, 1999, the Company has timely filed all reports, schedules, forms,
statements and other documents required to be filed by it with the SEC under the
Securities Act and the Exchange Act since December 31, 1995 (the "Company SEC
Documents"). As of its filing date, each Company SEC Document filed, as amended
or supplemented, if
<PAGE>
applicable, (i) complied in all material respects with the applicable
-
requirements of the Securities Act or the Exchange Act, as applicable, and the
rules and regulations thereunder, and (ii) did not, at the time it was filed,
--
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
4.5 Financial Statements; Absence of Undisclosed Liabilities. The
--------------------------------------------------------
financial statements of the Company included in the Company SEC Documents
complied as to form, as of their respective dates of filing with the SEC, in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, have been prepared in
accordance with generally accepted accounting principles ("GAAP") (except, in
the case of unaudited statements, as permitted by Form 10-Q of the SEC) applied
on a consistent basis during the periods involved (except as may be indicated in
the notes thereto) and fairly present in all material respects the consolidated
financial position of the Company and its consolidated subsidiaries as of the
dates thereof and the consolidated results of their operations and cash flows
for the periods then ended (subject, in the case of unaudited statements, to
normal recurring year-end audit adjustments). Except as set forth in Section
4.5 of the Company Disclosure Letter or as reflected in such financial
statements as of and for the period ending December 31, 1997 or in the notes
thereto, neither the Company nor any of its subsidiaries has any liabilities of
any nature, whether known or unknown, absolute, accrued, contingent or otherwise
and whether due or to become due, that, individually or in the aggregate, have
had or are reasonably likely to have or result in a Material Adverse Effect.
4.6 Plan Disclosure Documents. The Plan Disclosure Documents will
-------------------------
not, at the date mailed by the Company to the creditors and equity security
holders of the Company, the date the Bankruptcy Court enters the Confirmation
Order or the Closing Date, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. The Plan Disclosure Documents will comply as to
form in all material respects with the provisions of the Securities Act, the
Exchange Act and the Bankruptcy Code and all other rules, regulations, orders or
decrees thereunder.
<PAGE>
4.7 Confirmation of Plan. To the knowledge of the officers of the
--------------------
Company, the Company has not taken any action, or failed to take any action,
which might prevent, materially impede or delay or result in the revocation of
(i) the confirmation of the Plan (as provided in Section 1144 of the Bankruptcy
-
Code), (ii) a full and complete discharge (to the fullest extent possible under
--
Section 1141(d) of the Bankruptcy Code) of the debts of the Company intended to
be discharged under the Plan, and (iii) the vesting upon the entry of the
---
Confirmation Order of the property of the Company in the reorganized Company
free and clear of all claims and interests of creditors and equity security
holders except as otherwise provided in the Plan.
4.8 Compliance with Law. Except as disclosed in the Company SEC
-------------------
Documents or the Plan Disclosure Documents, neither the Company nor any of its
subsidiaries is in violation of or default under (i) any statute, law,
-
regulation, rule, judgment, order or decree of any Regulatory Authority
applicable to the Company or any of its subsidiaries or by which any of the
Company or its subsidiaries or any of their respective assets or properties are
bound or affected or (ii) any note, mortgage, indenture, contract, agreement,
--
permit, lease, license, commitment, understanding or other arrangement to which
the Company or any of its subsidiaries is a party or by which the Company or any
of its subsidiaries or any of their respective assets or properties are bound or
affected, and neither the Company nor any of its subsidiaries has received any
notice alleging noncompliance, except with reference to all the foregoing where
the failure to be in compliance would not, individually or in the aggregate,
have or result in a Material Adverse Effect.
4.9 Environmental Matters. Except as set forth in the Company SEC
---------------------
Documents and in Section 4.9 of the Company Disclosure Letter:
(a) To the best of the Company's and its subsidiaries' knowledge,
after reasonably diligent inquiry, the Property does not contain, in, on or
under, including, without limitation, the soil and groundwater thereunder, any
Hazardous Materials in violation of Environmental Laws or in amounts that could
give rise to liability under Environmental Laws.
(b) The Company and each of its subsidiaries is in material
compliance with all applicable Environmental Laws, and there is no contamination
or violation of any Environmental Law which could materially interfere with the
continued operation of any of the Properties or have or result in a Material
Adverse Effect.
<PAGE>
(c) Neither the Company nor any of the Company's subsidiaries has
received from any Regulatory Authority or other person or entity any complaint,
or notice of violation, alleged violation, investigation or advisory action or
notice of potential liability regarding matters of environmental protection or
permit compliance under applicable Environmental Laws with regard to the
Properties, nor is the Company aware that any such notice is pending or
threatened.
(d) Hazardous Materials have not been generated, treated, stored,
disposed of, at, on or under any of the Property in violation of any
Environmental Laws or in a manner that could give rise to material liability
under Environmental Laws nor have any Hazardous Materials been transported or
disposed of from any of the Properties to any other location in violation of any
Environmental Laws or in a manner that could give rise to material liability
under Environmental Laws.
(e) Neither the Company nor any of its subsidiaries is a party to any
administrative actions or judicial proceedings pending under any Environmental
Law with respect to any of the Properties, nor are there any consent decrees or
other decrees, consent orders, administrative orders or other orders, or other
administrative or judicial requirements outstanding under any Environmental Law
with respect to any of the Properties.
(f) There has been no release or threat of release of Hazardous
Materials into the environment at or from any of the Properties, or arising from
or relating to the operations of the Company or any of its subsidiaries, in
violation of Environmental Laws or in amounts that could give rise to material
liability under Environmental Laws.
(g) All information, reports, and other papers and data furnished by
the Company to LGE relating to (x) the environmental conditions on, under or
-
about the Properties currently or formerly owned, leased, operated to used by
the Company or any of its subsidiaries or any predecessor in interest thereto
and (y) any Hazardous Materials used, managed, handled, transported, treated,
-
generated, stored, discharged, emitted, or otherwise released by the Company or
any of its subsidiaries or any other person or entity on, under about or from
any Properties currently or formerly owned or leased, or otherwise in connection
with the use or operation of any of the Properties of the Company or any of its
subsidiaries, or their respective businesses and operations were, at the time
the same were so furnished, (i) to the extent prepared by third parties, to the
-
best of the Company's knowledge, and (ii) to the extent prepared by the Company,
--
complete and
<PAGE>
correct in all material respects in light of all such information, reports and
other papers and data taken as a whole at such time. No fact is currently known
to the officers of the Company which had or resulted in, or could reasonably be
expected to have or result in a Material Adverse Effect.
4.10 Title to New Common Stock. Assuming the entry of the
-------------------------
Confirmation Order, all shares of New Common Stock issued at the Closing
pursuant to this Agreement, will have been duly authorized by all necessary
corporate action on the part of the Company, and, upon such issuance, such
shares of New Common Stock will be validly issued, fully paid and nonassessable,
and the issuance of such shares will not be subject to preemptive rights of any
other stockholder of the Company.
4.11 ERISA Matters. Except as set forth in the Company SEC Documents
-------------
or Section 4.11 of the Company Disclosure Letter,
(a) The Company and each ERISA Affiliate and each of their respective
ERISA Plans are in substantial compliance with ERISA and the Code and neither
the Company nor any of its ERISA Affiliates has incurred any accumulated funding
deficiency with respect to any such ERISA Plan within the meaning of ERISA or
the Code. The Company and each of its ERISA Affiliates have complied with all
material requirements of ERISA Sections 601 through 608 and Code Section 4980B.
Neither the Company nor, to the best of the Company's knowledge, any of its
ERISA Affiliates has made any promises of retirement or other benefits to
employees, except as set forth in the ERISA Plans. Neither the Company nor any
of its ERISA Affiliates has incurred any material liability to the Pension
Benefit Guaranty Corporation in connection with any such ERISA Plan. The assets
of each such ERISA Plan which is subject to Title IV of ERISA are sufficient to
provide the benefits under such ERISA Plan, the payment of which the Pension
Benefit Guaranty Corporation would guarantee if such ERISA Plan were terminated,
and such assets are also sufficient to provide all other "benefit liabilities"
(as defined in ERISA Section 4001(a)(16)) due under the plan upon termination.
No Reportable Event has occurred and is continuing with respect to any such
ERISA Plan. No such ERISA Plan or trust created thereunder, or party in
interest (as defined in Section 3(14) of ERISA, or any fiduciary (as defined in
Section 3(21) of ERISA), has engaged in a "prohibited transaction" (as such term
is defined in Section 406 of ERISA or Section 4975 of the Code) which would
subject such ERISA Plan or any other ERISA Plan of the
<PAGE>
Company or any of its ERISA Affiliates, any trust created thereunder, or any
such party in interest or fiduciary, or any party dealing with any such ERISA
Plan or any such trust to any material penalty or tax on "prohibited
transactions" imposed by Section 502 of ERISA or Section 4975 of the Code.
Neither the Company nor any of its ERISA Affiliates is a participant in or is
obligated to make any payment to a Multiemployer Plan.
(b) Neither the approval or execution of this Agreement nor the
consummation of the transactions contemplated by this Agreement will (i) entitle
-
any individual to severance pay or (ii) accelerate the time of payment or
--
vesting of, or increase the amount of, compensation due to any individual (other
than in the form of Old Common Stock).
(c) Except as set forth in Section 4.11(c) of the Company Disclosure
Letter, there is no strike, walkout or other work stoppage or lockout pending
or, to the knowledge of the Company, threatened against or affecting the
business of the Company or any of its subsidiaries.
4.12 Taxes. Except set forth in Section 4.12 of the Company
-----
Disclosure Letter, all Tax Returns in respect of the Company and its
subsidiaries required to be filed on or before the Closing Date have (or by the
Closing Date will have) been duly and timely filed, except to the extent the
failure to file any such Tax Return would not, individually or in the aggregate,
have or result in a Material Adverse Effect. Except as set forth in Section
4.12 of the Company Disclosure Letter, all Taxes (whether or not shown on such
Tax Returns) due and payable with respect to the Company and its subsidiaries on
or before the Closing Date have (or by the Closing Date will have) been duly and
timely paid. All Taxes required to be withheld by the Company or any of its
subsidiaries on or before the Closing Date have (or by the Closing Date will
have) been duly and timely withheld and properly paid to the applicable taxing
authority.
4.13 Operating Plan. The projections contained in the Operating Plan
--------------
represent the Company's good faith estimate of the results of its operations
both before and after the Restructuring for which it believes it has a
reasonable basis. The Company believes that the assumptions which underlie the
projections continue to be reasonable in light of current circumstances.
4.14 Intellectual Property; Licenses. Except as set forth in Section
-------------------------------
4.5 of the Company Disclosure Letter, the Company possesses adequate
Intellectual Property to continue to conduct its business as heretofore
conducted by it or as projected to be
<PAGE>
conducted in the Operating Plan, and all Intellectual Property existing on the
date hereof, together with in the case of patents and Trademarks, the date of
issuance thereof, is listed in Section 4.14 of the Company Disclosure Letter.
With respect to Intellectual Property of the Company unless such Intellectual
Property has become obsolete or is no longer used or useful in the conduct of
the business of the Company:
(a) it is valid and enforceable, is subsisting, and has not been
adjudged invalid or unenforceable, in whole or in part;
(b) the Company has made all necessary filings and recordations to
protect its interest therein, including, without limitation, recordations of all
of its interest in its Patent Property and Trademark Property in the United
States Patent and Trademark Office and, to the extent necessary for the conduct
of the Company's business, in corresponding offices throughout the world;
(c) except as set forth in Section 4.5 of the Company Disclosure
Letter, the Company is the exclusive owner of the entire and unencumbered right,
title and interest in and to such Intellectual Property owned by it and no claim
has been made that the use of any of its owned Intellectual Property does or may
violate the asserted rights of any third party; and
(d) the Company has performed, and the Company will continue to
perform, all acts, and the Company has paid and will continue to pay, all
required fees and taxes, to maintain each and every item of such Intellectual
Property in full force and effect throughout the world, as applicable.
The Company owns directly or is entitled to use, by license or otherwise, all
patents, Trademarks, copyrights, mask works, licenses, technology, know-how,
processes and rights with respect to any of the foregoing used in, necessary for
or of importance to the conduct of the Company's business.
4.1 Year 2000. The replacement of business critical software or
---------
other solutions necessary to address the year 2000 issue in respect of such
software is expected to be completed by July 31, 1999. The projected cost to
the Company and its subsidiaries of such replacement or other solution is
properly reflected in the Operating Plan.
ARTICLE V
<PAGE>
5. Representations and Warranties of LGE. LGE represents and
-------------------------------------
warrants to the Company that:
5.1 Organization; Authorization; Enforceability. It is a corporation
-------------------------------------------
duly organized and validly existing under the laws of the Republic of Korea and
has all requisite power and authority to execute and deliver this Agreement and
to perform its obligations hereunder. The execution, delivery and performance
by it of this Agreement have been duly authorized by all requisite corporate
action on its part. This Agreement has been duly executed and delivered by it
and constitutes its legal, valid and binding obligation, enforceable against it
in accordance with its terms.
5.2 No Conflicts. The execution, delivery and performance of this
------------
Agreement by it will not (i) conflict with or violate its organizational
-
documents or (ii) subject to the governmental filings and approvals referred to
--
in Section 5.3, breach or violate any statute, law, rule, regulation, judgment,
order or decree applicable to it or any of its subsidiaries or by which any of
their respective properties are bound or affected.
5.3 Consents. Except for (i) applicable requirements of the
-------- -
Securities Act, the Exchange Act and filings under state securities or "blue
sky" laws, (ii) approval by the Bankruptcy Court of the Plan and this Agreement
--
and the entry by the Bankruptcy Court of the Confirmation Order, (iii) filing
---
with the Secretary of State of the State of Delaware of the Certificate of
Amendment of the Certificate of Incorporation of the Company with respect to the
amendments contemplated by this Agreement, and (iv) as set forth in Section 5.3
--
of the LGE Disclosure Letter, no consent, approval or authorization of, or
filing with or notification to, any Regulatory Authority (including, without
limitation, any Korean Regulatory Authority) or any third party is required on
its part in connection with the execution, delivery or performance of this
Agreement.
5.4 Plan Disclosure Documents. Those portions of the Plan Disclosure
-------------------------
Documents made in reliance upon and in conformity with information furnished to
the Company by LGE in writing for use in connection with the preparation thereof
will not, at the date mailed by the Company to the creditors and equity security
holders of the Company, the date the Bankruptcy Court enters the Confirmation
Order or the Closing Date, contain any untrue statement of material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light
<PAGE>
of the circumstances under which they are made, not misleading. The Company
acknowledges that the portions of the Plan Disclosure Documents set forth in
Section 5.4 of the LGE Disclosure Letter constitute the only information
furnished in writing by LGE.
ARTICLE VI
6. Agreements of the Company.
-------------------------
6.1 Reorganization Proceedings. The Company shall, and shall cause
--------------------------
its subsidiaries to, use commercially reasonable efforts to consummate the
Financial Restructuring, including, without limitation:
(a) the preparation and filing of the Plan Disclosure Documents with
the SEC as soon as practicable after the date hereof and the clearance of the
Plan Disclosure Documents by the SEC;
(b) subject to Section 6.4, the preparation and filing of supplements
or amendments to the Plan Disclosure Documents with the SEC and the clearance of
such supplements or amendments to the Disclosure Statement by the SEC if at any
time prior to the Closing Date any fact, event or development should occur or
exist that is required under the Securities Act, the Exchange Act or the
Bankruptcy Code or the rules and regulations thereunder to be set forth in a
supplement or amendment to the Plan Disclosure Documents;
(c) the solicitation and receipt of the acceptances of the requisite
holders of claims against the Company pursuant to the Plan Solicitation;
(d) the filing with, and approval of, the Bankruptcy Court of the
Plan Disclosure Documents;
(e) the confirmation of the Plan under the Bankruptcy Code using the
acceptances of the Plan received by the Company pursuant to the Plan
Solicitation; and
(f) the consummation of the transactions provided for in the Plan,
including, without limitation, the transactions described in Section 2 of this
Agreement.
6.2 Compliance with Bankruptcy Code. The Company shall, and shall
-------------------------------
cause its subsidiaries, to the extent applicable, to, comply in all material
respects with the
<PAGE>
Bankruptcy Code and all other laws, rules, regulations, decrees and orders
promulgated thereunder in connection with obtaining the Confirmation Order.
6.3 Consummation of the Plan. The Company shall, and shall cause its
------------------------
subsidiaries to, use commercially reasonable efforts to obtain, and shall
obtain, and shall refrain from taking any action that would be likely to
prevent, materially impede or delay or result in the revocation of (i) the entry
-
by the Bankruptcy Court of the Confirmation Order; (ii) the full and complete
--
discharge (to the fullest extent possible under Section 1141(d) of the
Bankruptcy Code) of the debts of the Company intended to be discharged under the
Plan; and (iii) the vesting upon the entry of the Confirmation Order of the
---
property of the Company in the reorganized Company free and clear of all claims
and interests of creditors and equity security holders except as otherwise
provided in the Plan.
6.4 Amendments to Plan and Plan Disclosure Documents. The Company
------------------------------------------------
shall not consent to any amendment or supplement to, or modification of, the
Plan or the Plan Disclosure Documents without the prior written consent of LGE,
which consent may be evidenced by the execution of the Plan or the Plan
Disclosure Documents by the LGE-designated members of the Board of Directors of
the Company.
6.5 Conduct of the Business. From the date hereof until the Closing
-----------------------
Date, except to the extent that LGE otherwise consents in writing or except as
contemplated or permitted by the Operating Plan or the Financial Restructuring,
(a) the Company shall, and shall cause its subsidiaries to, conduct business in
-
the ordinary course in substantially the same manner as presently conducted and
use commercially reasonable efforts to keep available the services of Jeffrey P.
Gannon and his "Tier 1" and "Tier 2" reports and to preserve the relationships
with key customers, suppliers and others having business dealings with the
Company or its subsidiaries, and (b) the Company shall not, and shall cause its
-
subsidiaries not to:
(i) acquire or agree to acquire by merging or consolidating with,
or by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets (other than inventory) in any such case, that would be
material to the Company;
<PAGE>
(ii) sell, lease, license, encumber or otherwise dispose of, or
agree to sell, lease, license, encumber or otherwise dispose of, any of the
assets or properties of the Company or its subsidiaries other than in the
ordinary course of business or pursuant to the Operating Plan or to
existing contractual obligations set forth in Section 6.5(ii) of the
Company Disclosure Letter for the sale or other disposition of equipment;
(iii) amend its Certificate of Incorporation, By-laws or other
organizational documents, except as set forth in the Plan;
(iv) redeem or otherwise acquire any shares of its capital stock or
issue any capital stock or any option, warrant or right relating thereto;
(v) incur any liabilities, obligations or indebtedness for borrowed
money or guarantee any such liabilities, obligations or indebtedness;
(vi) permit, allow or suffer any of the assets or properties of the
Company or any subsidiary to be subject to any Lien other than Liens (A)
-
securing debt reflected on the balance sheet of the Company as of December
31, 1997 or the notes thereto or contained in the Company SEC Documents,
(B) referred to in Section 6.5 of the Company Disclosure Letter, (C) for
- -
Taxes not yet due or payable or being contested in good faith, (D) that
-
constitute mechanics', carriers', workmens' or like Liens, Liens arising
under original purchase price conditional sales and other similar contracts
and equipment leases with third parties entered into in the ordinary
course, (E) incurred in the ordinary course of business consistent with
-
past practice in connection with workers' compensation, unemployment
insurance and social security, retirement and other legislation and in the
case of Liens described in clauses (B), (C), (D) or (E) that, individually
or in the aggregate, would not reasonably be expected to have or result in
a Material Adverse Effect;
(vii) cancel any material indebtedness (individually or in the
aggregate) or waive any claims or rights of material value;
(viii) make any change in any method of accounting or accounting
practice or policy, except as may be required by GAAP;
(ix) modify, amend, terminate or permit the lapse of any material
lease of real property (except modifications or amendments associated with
renewals of
<PAGE>
leases in the ordinary course of business consistent with past practice of
the Company);
(x) enter into any material contract or arrangement;
(xi) enter into any agreement or take any action in violation of the
terms of this Agreement or the Restructuring;
(xii) settle any material tax audit, make or change any material tax
election;
(xiii) hire any new executive officers of the Company or any of its
subsidiaries;
(xiv) except as contemplated by the New Salaried Employee Documents,
(A) grant any director, executive officer or other employee of the Company
-
or any of its subsidiaries any increase in compensation, except, in the
case of employees who are not executive officers or directors, normal
salary increases consistent with past practice or as was required under
employment agreements or arrangements in effect as of the date of the most
recent audited financial statements included in the Company SEC Documents,
(B) grant any such director, executive officer or other employee any
-
severance or termination pay, except as was required under any employment,
severance or termination agreements or arrangements or plans in effect as
of the date of the most recent audited financial statements included in the
Company SEC Documents, (C) enter into any employment, severance or
-
termination agreement with, or adopt any plan or arrangement covering, any
such director, executive officer, or employee or (D) adopt any new benefit
-
plan or arrangement (including, without limitation, an Employee Benefit
Plan, a bonus plan, a severance plan or any equity-based plan) or amend any
such plan, except as required by law;
(xv) enter any new line of business; or
(xvi) agree, whether in writing or otherwise, to do any of the
foregoing.
<PAGE>
For purposes for this Section 6.5 only, "material" means involving $5 million or
more.
6.6 Reynosa Asset Claim Amount. The Company and LGE estimated the
--------------------------
value of the Reynosa Assets to be $32,364,300.00 as of August 7, 1998. At least
five days prior to the Closing, the Company and LGE shall agree in writing on
the value of the Reynosa Assets as of the Closing Date (the "Reynosa Asset Claim
Amount"). The Reynosa Asset Claim Amount shall equal $32,364,300.00 plus (i)
-
the aggregate amount of capital expenditures made in respect of the Reynosa
Assets by the Company since August 7, 1998 and approved by LGE; minus (ii) the
--
sum of (x) the amount of depreciation (determined in accordance with GAAP) in
-
respect of the Reynosa Assets since August 7, 1998 and (y) the amount of any
-
liabilities assumed by LGE in connection with the transactions contemplated by
the Reynosa Purchase Agreement; plus or minus, as the case may be, (iii) the
---
value of any equipment, personal property or other assets added or subtracted
from the list set forth on Schedule 1(a) hereto pursuant to the mutual written
agreement of the Company and LGE.
6.7 [Intentionally omitted.]
6.8 Access and Information. So long as this Agreement remains in
----------------------
effect, the Company will (and will cause each of its subsidiaries, and each of
the accountants, counsel, consultants, officers, directors, employees, agents
and representatives (the "Representatives") of or to any of the Company and its
subsidiaries, to) give LGE and its Representatives, subject to existing
confidentiality agreements and to be used only for the purposes of this
Agreement and the transactions contemplated hereby, full access during
reasonable business hours to all of their respective properties, assets, books,
contracts, commitments, reports, records, accountants and accountant's work
papers relating to the Company and its subsidiaries, excluding such material
which is attorney-client privilege or attorney work product, and furnish to
them, subject to existing confidentiality agreements and to be used only for the
purposes of this Agreement and the transactions contemplated hereby, all such
documents, records and information with respect to the properties, assets and
business of the Company and its subsidiaries and copies of any work papers
relating thereto, excluding such material which is subject to attorney-client
privilege or attorney work product, as LGE shall from time to time reasonably
request. The Company will keep LGE generally informed as to the affairs of the
Company and its subsidiaries. In addition, the Company shall deliver to LGE,
not later than the 20th business day following the end of each fiscal month
prior to the Closing, financial statements for the Company and its consolidated
subsidiaries as of the end of such fiscal month, together with a certificate of
the chief financial officer of the Company
<PAGE>
demonstrating in reasonable detail that the Company is in compliance with the
financial covenants set forth in Section 10(f) of this Agreement. The Company
will promptly notify LGE if any information is requested from it or any
negotiations or discussions are sought to be initiated with the Company
concerning any merger, consolidation, business combination, liquidation,
reorganization, sale of substantial assets, sale of shares of capital stock,
purchase of claims or similar transactions involving the Company or any
subsidiary or any division of any thereof (an "Alternative Proposal"), and will
promptly communicate to LGE the terms of any proposal or inquiry which it may
receive in respect of any Alternative Proposal.
6.9 Further Actions. The Company shall, and shall cause each of its
---------------
subsidiaries to:
(a) use commercially reasonable efforts to take or cause to be taken
all actions, and to do or cause to be done all other things, necessary, proper
or advisable in order for it to fulfill and perform its obligations in respect
of this Agreement, or otherwise to consummate and make effective the
transactions contemplated hereby;
(b) as promptly as practicable, (i) make, or cause to be made, all
-
filings and submissions required under any applicable law or regulation, and
give such reasonable undertakings as may be required in connection therewith,
and (ii) use all reasonable efforts to obtain or make, or cause to be obtained
--
or made, all permits necessary to be obtained or made by the Company or any of
its subsidiaries, in each case in connection with this Agreement, the Plan, or
the consummation of the other transactions contemplated hereby or thereby;
(c) coordinate and cooperate with LGE in exchanging such information
and supplying such reasonable assistance as may be reasonably requested by LGE
in connection with the filings and other actions contemplated by this Agreement;
(d) not issue any press release or make any other public statement
regarding the Restructuring without the prior consent of LGE or except as
otherwise required by law (provided that in such an event the Company shall give
advance notice to LGE of any such release or statement); and
<PAGE>
(e) the Company shall promptly notify LGE in writing of any fact,
condition, event or occurrence that could reasonably be expected to result in
the failure of any of the conditions contained in Sections 8, 9 and 10 to be
satisfied, promptly upon becoming aware of the same.
6.1 Operating Plan. As soon as practicable after the end of each
--------------
fiscal month, and in no event later than the 20th business day after the end
thereof, the Company shall deliver to LGE a certificate of the Company, duly
executed by the President, the chief financial officer and the restructuring
officer, restating the representations and warranties contained in Section 4.13
of the Agreement.
6.1 Leveraged Lease Documents. From the date hereof through the
-------------------------
Closing Date, except as otherwise consented to in writing by LGE, the Company
and its subsidiaries shall perform all of their respective obligations under and
comply with all terms and provisions of the Leveraged Lease Documents other than
its obligation to pay Basic Rent (as defined therein) thereunder.
6.1 Interest Charges. On May 31, 1999, and thereafter at the end of
----------------
each month, the Company will pay LGE all accrued but unpaid interest under the
Reimbursement Agreement and the Financial Support Agreement.
ARTICLE VII
7. Agreements of LGE.
-----------------
7.1 Voting. Subject to compliance with applicable bankruptcy and
------
non-bankruptcy laws, LGE hereby agrees to vote all claims against and interests
in the Company that it holds in favor of the Plan to effectuate this Agreement
and the Financial Restructuring.
7.2 Further Action. LGE shall, and shall cause each of its
--------------
subsidiaries to, use commercially reasonable efforts to take or cause to be
taken all actions, and to do or cause to be done all other things, necessary,
proper or advisable in order for it to fulfill and perform its obligations in
respect of this Agreement, or otherwise to consummate and make effective the
transactions contemplated hereby, including without limitation:
(a) as promptly as practicable, (i) make, or cause to be made, all
-
filings
<PAGE>
and submissions required under any applicable law or regulation (including any
Korean law or regulation), and give such reasonable undertakings as may be
required in connection therewith, and (ii) use all reasonable efforts to obtain
--
or make, or cause to be obtained or made, all permits necessary to be obtained
or made by LGE or any of its subsidiaries, including such permits as are
required from any Korean Regulatory Authority, in each case in connection with
this Agreement, the Plan, or the consummation of the other transactions
contemplated hereby or thereby.
(b) make all necessary and desirable appearances before the
Bankruptcy Court and participate in the bankruptcy case;
(c) make in a timely fashion all necessary and desirable applications
and notices to any applicable entities in the United States for approval of this
Agreement and the transactions contemplated hereby, including, if applicable,
notice in accordance with the Hart-Scott-Rodino Antitrust Improvements Act of
1976;
(d) promptly notify the Company in writing of any fact, condition,
event, or occurrence that could reasonable be expected to result in the failure
of any of the conditions contained in Sections 8 and 9 to be satisfied, promptly
upon becoming aware of the same; and
(e) to obtain, and to refrain from taking any action that would be
likely to prevent, materially impede or delay or result in the revocation of (i)
-
the entry by the Bankruptcy Court of the Confirmation Order; (ii) the full and
--
complete discharge (to the fullest extent possible under Section 1141(d) of the
Bankruptcy Code) of the debts of the Company intended to be discharged under the
Plan; and (iii) the vesting upon the entry of the Confirmation Order of the
---
property of the Company in the reorganized Company free and clear of all claims
and interests of creditors and equity security holders in accordance with the
Plan.
7.3 Information. So long as this Agreement remains in effect, LGE
-----------
shall coordinate and cooperate with the Company or its agents in exchanging such
information and supplying such reasonable assistance as may be reasonably
requested by the Company in connection with the filings and other actions
contemplated in this Agreement. LGE shall also, as the Company may from time to
time reasonably request,
<PAGE>
timely provide the Company with any requested information regarding LGE's
performance under this Agreement, LGE's ability to perform under this Agreement,
LGE's ability to satisfy the conditions set forth in Section 9, and other
matters in any way related to this Agreement and the transactions contemplated
hereby.
7.4 Release of Zenith Texas. LGE hereby agrees to release Zenith
-----------------------
Texas upon consummation of the transactions contemplated by Sections 2(b) and
2(c) from any claims of LGE against Zenith Texas arising as a result of the
satisfaction by LGE of Zenith Texas' obligations under the Leveraged Lease
Documents.
ARTICLE VIII
8. Conditions to Obligations of the Parties. The Company and LGE
----------------------------------------
shall perform their obligations under this Agreement and implement the
transaction contemplated hereby in good faith and in accordance with the
standards of fair dealing. The obligations of the Company and LGE to consummate
the transactions contemplated to occur at the Closing shall be subject to the
satisfaction or waiver prior to the Closing of each of the following conditions;
any of which may be waived by the written consents of the Company and LGE to the
extent permitted by applicable law without the necessity for notice to, or
approval from, the Bankruptcy Court or any other party.
(a) Approvals. All material authorizations, permits, consents,
---------
orders or approvals of, or registrations, declarations or filings with, or
expirations of applicable waiting periods imposed by, any Regulatory Authority
(including, without limitation, the United States and the Republic of Korea)
necessary for the consummation of the transactions contemplated hereby
(collectively, the "Requisite Approvals"), shall have been obtained or filed or
shall have occurred, and such Requisite Approvals shall remain valid and
effective and shall not contain any condition or restriction that is reasonably
likely to have or result in a Material Adverse Effect or impair the Company's
ability to carry on its business as contemplated by the Operating Plan.
(b) No Litigation, Injunctions, or Restraints. Consummation of the
-----------------------------------------
transactions contemplated hereby or by the Plan shall not have been restrained,
enjoined or otherwise prohibited or made illegal by any applicable law, rule or
regulation, including any order, injunction, decree or judgment of any
Regulatory Authority; and no such law, rule, regulation, order, injunction,
decree or judgment that would have such an effect shall have been promulgated,
entered, issued or determined by any Regulatory Authority to be
<PAGE>
applicable to this Agreement or the Plan. No action or proceeding shall be
pending or threatened by any Regulatory Authority or other person or entity on
the Closing Date before any Regulatory Authority to restrain, enjoin or
otherwise prevent the consummation of the transactions contemplated hereby or by
the Plan or to recover any material damages or to obtain other material relief
as a result of such transactions, or that otherwise relates to the application
of such law, rule or regulation.
(c) Confirmation of Plan and Entry of Confirmation Order. The Plan
----------------------------------------------------
shall have been confirmed by the Bankruptcy Court and the Confirmation Order, in
form and substance satisfactory to LGE and the Company, shall have been entered.
Any motion for rehearing or reconsideration of the Confirmation Order shall have
been denied or withdrawn. The time allowed for appeals of the Confirmation
Order shall have expired without any appeal having been taken or, if the
Confirmation Order shall have been appealed, a final order of the district court
having jurisdiction to hear such appeal shall have affirmed the Confirmation
Order and the time allowed to appeal from such affirmance or to seek review or
rehearing thereof shall have expired and no further hearing, appeal or petition
for certiorari can be taken or granted. The Confirmation Order shall not have
been modified, amended, dissolved, revoked or rescinded, shall be in full force
and effect on the Closing Date and, without the necessity of any further action
or proceedings by the Company, the Bankruptcy Court shall have (x) as of the
-
date of the Confirmation Order and as of the Closing Date, effected a full and
complete discharge and release of, and thereby extinguished, all debts of the
Company (to the fullest extent possible under Section 1141(d)(1) of the
Bankruptcy Code) except as otherwise provided in the Plan and (y) vested the
-
property of the Company in the reorganized Company, free and clear of all claims
and interests of creditors and equity security holders except as otherwise
provided in the Plan and the Confirmation Order. The Plan shall have been
substantially consummated (other than the occurrence of the Closing hereunder).
(d) HSR Act Notification. The notifications of the Company and LGE
--------------------
pursuant to the HSR Act, if any, shall have been made and the applicable waiting
period and any extensions thereof shall have expired or been terminated.
(e) Releases. The Plan will contain releases, satisfactory in form
--------
and substance to LGE and the Company in their respective sole discretion, from
the Company and its creditors of any and all claims and liabilities against the
individual members of the
<PAGE>
Company's Board of Directors, the Company and LGE and their respective
associates, affiliates, subsidiaries, officers, directors, stockholders,
representatives, employees, attorneys, financial or investment advisors,
consultants, accountants or agents, and their respective successors and assigns.
LGE hereby acknowledges its agreement relating to such releases contained in the
Lock-Up Agreement.
ARTICLE IX
9. Conditions to the Obligations of the Company. The obligations of
--------------------------------------------
the Company to consummate the transactions contemplated to occur at the Closing
shall be subject to the satisfaction or waiver prior to the Closing of each of
the following conditions, any of which may be waived in writing by the Company
by notice to LGE, without the necessity for notice to, or approval from, the
Bankruptcy Court or any other party:
(a) Representations and Warranties. The representations and
------------------------------
warranties of LGE set forth in this Agreement that are qualified as to
materiality shall be true and correct, and those that are not so qualified shall
be true and correct in all material respects, as of the date of this Agreement
and as of the time of the Closing as though made at and as of such time, except
to the extent such representations and warranties expressly relate to an earlier
date (in which case such representations and warranties that are qualified as to
materiality shall be true and correct and those that are not so qualified shall
be true and correct in all material respects, on and as of such earlier date),
and the Company shall have received a certificate signed by a duly authorized
officer of LGE to such effect.
(b) Performance of Obligations. LGE shall have performed or complied
--------------------------
in all material respects with all obligations and covenants required to be
performed or complied with by it under this Agreement.
ARTICLE X
10. Conditions to the Obligations of LGE. The obligations of LGE to
------------------------------------
consummate the transactions contemplated to occur at the Closing shall be
subject to the satisfaction or waiver prior to the Closing of each of the
following conditions, any of which may be waived in writing by the LGE by notice
to Company, without the necessity for notice to, or approval from, the
Bankruptcy Court or any other party:
<PAGE>
(a) Representations and Warranties. The representations and
------------------------------
warranties of the Company set forth in this Agreement that are qualified as to
materiality shall be true and correct, and those that are not so qualified shall
be true and correct in all material respects, as of the date of this Agreement
and as of the time of the Closing as though made at and as of such time, except
to the extent such representations and warranties expressly relate to an earlier
date (in which case such representations and warranties that are qualified as to
materiality shall be true and correct, and those that are not so qualified shall
be true and correct in all material respects, on and as of such earlier date),
and LGE shall have received a certificate of the Company signed by the chief
executive officer and chief financial officer of the Company to such effect.
(b) Performance of Obligations. The Company shall have performed or
--------------------------
complied in all material respects with all obligations and covenants required to
be performed or complied with by the Company under this Agreement, and LGE shall
have received a certificate of the Company signed by the chief executive officer
and chief financial officer of the Company to such effect.
(c) Management. Jeffrey P. Gannon and his "Tier 1" and "Tier 2"
----------
reports shall not have resigned or indicated an intention to resign or, if any
such officer or employee shall have resigned, the Company shall have engaged a
replacement reasonably satisfactory to LGE.
(d) New Financing. The Company shall have entered into definitive
-------------
documentation with third parties for new senior financing on the terms
reasonably satisfactory to LGE in an amount of not less than $150 million and
such definitive documentation shall be reasonably satisfactory in form and
substance to LGE.
(e) Operating Plan. (i) All material changes to the Operating Plan
--------------
shall be satisfactory to LGE.
(ii) The Company shall have implemented the programs contemplated by
the Implementation Program in a manner satisfactory to LGE.
(ii) The Company and its subsidiaries shall have entered into, as
contemplated by the timetable in the Operating Plan, binding commitments
for the sale or liquidation of those non-essential assets to be disposed of
pursuant to the
<PAGE>
Operating Plan prior to the Closing Date at prices consistent with the
assumptions set forth in the Operating Plan for the 1999 fiscal year.
(f) Operating Results. The Company's operating results shall be
-----------------
consistent with the Operating Plan in the following respects:
(i) the projected Cumulative Funding Requirement from January 1,
1999 through August 31, 1999 shall not exceed $104 million;
(ii) the actual Cumulative Funding Requirement for any three-month
period commencing with the three-month period beginning January 1, 1999
shall not have exceeded the projections in the Operating Plan by more than
20%;
(iii) the projected cumulative EBITDA (loss) from January 1, 1999
through August 31, 1999 shall not exceed $(21) million; and
(iv) the actual EBITDA (loss) for any three-month period commencing
with the three-month period beginning January 1, 1999 shall not have
exceeded the loss projected by the Operating Plan by more than $3.75
million.
(g) Contingent Liabilities. The Company shall not have any material
----------------------
contingent liabilities (including environmental liabilities) other than
liabilities disclosed in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 included in the Company SEC Documents or in Section
4.5 of the Company Disclosure Letter.
(h) [Intentionally omitted.]
(i) Restructuring Costs. Actual and projected cash Restructuring
-------------------
and Reorganization Charges from January 1, 1999 through August 31, 1999 shall
not exceed $64 million and the sum of the projected cash Restructuring and
Reorganization Charges after January 1, 1999 (including, without limitation,
outstanding accruals for environmental costs) will not exceed $82 million.
(j) Plan Disclosure Documents. The Company shall have filed with
-------------------------
the SEC the Plan Disclosure Documents, which shall be reasonably satisfactory in
form and substance to LGE.
<PAGE>
(k) Definitive Agreements. The Company and LGE (or one of its
---------------------
subsidiaries in the case of the agreements identified in clause (i)) shall have
(i) entered into the Reynosa Purchase Agreement or the Reynosa Operating
-
Agreement, as the case may be, and (ii) the New Salaried Employee Documents, all
--
of which shall be satisfactory in form and substance to LGE.
(l) Opinion of the Company's Counsel. LGE shall have received
--------------------------------
opinions dated the Closing Date of the general counsel of the Company, and
special counsel to the Company, in form and substance reasonably satisfactory to
LGE.
(m) Corporate Proceedings. All corporate proceedings of the Company
---------------------
and its subsidiaries in connection with the transactions contemplated by this
Agreement and the Financial Restructuring, and all documents and instruments
incident thereto, shall be satisfactory in form and substance to LGE and its
counsel, and LGE and its counsel shall have received all such documents and
instruments, or copies thereof, certified or requested, as may be reasonably
requested.
(n) Material Adverse Effect. No state of facts, event, change or
-----------------------
development shall exist or have occurred which would reasonably be expected to
have or result in a Material Adverse Effect subsequent to the date of this
Agreement.
(o) Calamities. There shall not have occurred since the date hereof
----------
(i) any increase or decrease of 20% or more in the United States/Republic of
-
Korea currency exchange rate from the rate existing on the date hereof or a
suspension of, or limitation on, the markets therefor, (ii) a declaration of a
--
banking moratorium or any suspension of payments in respect of banks in the
United States or the Republic of Korea, (iii) any limitation (whether or not
---
mandatory) by any Regulatory Authority or other event that materially adversely
affects the ability of LGE to consummate the transactions contemplated hereby,
or (iv) a commencement of a war or armed hostilities or other national or
--
international calamity involving the United States or the Republic of Korea.
(p) Settlement. Any settlement arrangements with respect to licensing
----------
of technology entered into by the Company with the Sony Corporation or any of
its affiliates shall be satisfactory in form and substance to LGE.
(q) Tuner Patent Royalties. LGE shall have determined in its sole
----------------------
discretion that the aggregate tuner patent royalties between the Closing Date
and December 31, 2003 will not be less than 70% of the aggregate amount of such
royalties
<PAGE>
projected under the Operating Plan.
(r) Cross Defaults. Other than (i) that certain default pertaining to
-------------- -
the Old Subordinated Debentures with respect to the Company's failure to make an
interest and sinking fund payment on April 1, 1999 and (ii) that certain cross
--
default of the loan from Credit Agricole Indosuez related thereto, no default or
event of default shall have occurred and be continuing under any of the
Company's financing arrangements or any other agreement that is material to the
Company to which the Company or any of its subsidiaries is a party or by which
any of them is bound.
ARTICLE XI
11.1 Termination. This Agreement may be terminated at any time prior
-----------
to the Closing:
(a) by mutual written consent of LGE and the Company;
(b) by LGE or the Company:
(i) if the Closing shall not have occurred prior to September
15, 1999, provided, that the right to terminate this Agreement
pursuant to this clause (i) shall not be available to any party whose
failure to fulfill any obligation under this Agreement results in the
failure of the Closing to occur; or
(ii) if there shall be any statute, law, regulation or rule
that makes consummating the transactions contemplated hereby illegal
or if any court or other Regulatory Authority of competent
jurisdiction shall have issued a judgment, order, decree or ruling, or
shall have taken such other action restraining, enjoining or otherwise
prohibiting the consummation of the transactions contemplated hereby
and such judgment, order, decree or ruling shall have become final and
non-appealable;
(c) by LGE:
<PAGE>
(i) if the Company shall have failed to perform in any
material respect any of its obligations hereunder or shall have
breached in any respect any representation or warranty contained
herein qualified by materiality or shall have breached in any material
respect any representation or warranty not so qualified, and the
Company has failed to perform such obligation or cure any such breach
capable of being cured, within 30 days of its receipt of written
notice thereof from LGE, and such failure to perform shall not have
been waived in accordance with the terms of this Agreement;
(ii) if the Board of Directors of the Company or the Special
Committee withdraws or modifies (or publicly announces its intention
to do so, or resolves to do so) in a manner adverse to LGE (as
determined by LGE in its reasonable judgment) its approval or
recommendation of this Agreement or the transactions contemplated
hereby or by the Restructuring; or
(iii) if any of the conditions set forth in Sections 8 and 10
shall become impossible to fulfill (other than as a result of any
breach by LGE of the terms of this Agreement) and shall not have been
waived in accordance with the terms of this Agreement;
(d) by the Company:
(i) if LGE shall have failed to perform in any material
respect any of its obligations hereunder or shall have breached in any
respect any representation or warranty contained herein qualified by
materiality or shall have breached in any material respect any
representation or warranty not so qualified, and LGE have failed to
perform such obligation or cure any such breach capable of being
cured, within 30 days of its receipt of written notice thereof from
the Company, and such failure to perform shall not have been waived in
accordance with the terms of this Agreement;
(ii) if any of the conditions set forth in Sections 8 and 9
shall become impossible to fulfill (other than as a result of any
breach by the Company of the terms of this Agreement) and shall not
have been waived in accordance with the terms of this Agreement; or
<PAGE>
(iii) if there is an Alternative Proposal which the Board of
Directors in good faith determines represents a superior transaction
for the Company as compared to the Financial Restructuring and the
Board of Directors determines, after consultation with counsel, that
failure to terminate this Agreement would be inconsistent with the
compliance by the Board of Directors with its fiduciary duties imposed
by law; provided, however, that the right to terminate this Agreement
pursuant to this Section 11.1(d) shall not be available (i) if the
-
Alternative Proposal is subject to a financing condition, unless the
Board of Directors is of the opinion, after consultation with Peter J.
Solomon & Company or another nationally recognized investment banking
firm, that the Alternative Proposal is financeable, or (ii) if, prior
--
to or concurrently with any purported termination pursuant to this
Section 11.1(d), (x) the Company or the person or entity that made the
-
Alternative Proposal (the "New Investor") shall not have paid the
expenses and fees contemplated by Section 11.3 and (y) the Company and
-
the New Investor shall not have entered into a legal, valid and
binding agreement with LGE pursuant to which such New Investor agrees
to pay LGE the Transaction Fee contemplated by Section 11.3 upon the
earlier of (A) the consummation of such Alternative Proposal and (B)
- -
the termination of such Alternative Proposal, or (iii) if the Company
---
has not provided LGE with five business days' prior written notice of
its intent to so terminate this Agreement together with a summary of
the material terms and conditions of such Alternative Proposal.
11.2 Effect of Termination. In the event of termination of this
---------------------
Agreement by either the Company or LGE as provided in Section 11, this Agreement
shall forthwith become void and have no effect, without any liability or
obligation on the part of LGE or the Company with respect to the transactions
contemplated under this Agreement, other than the provisions of this Article XI
and Article XII and except to the extent that such termination results from the
wilful and material breach by a party of any of its representations, warranties,
covenants or agreements set forth in this Agreement.
11.3 Expenses; Transaction Fee. (a) In the event that (i) the Board
-------------------------
of Directors of the Company or the Special Committee shall have withdrawn or
modified in a manner adverse to LGE its approval of this Agreement or the
transactions contemplated
<PAGE>
hereby or by the Restructuring and LGE terminates the Agreement pursuant to
Section 11(c)(ii), or (ii) the Bankruptcy Court approves, or enters an order
--
authorizing, an offer, proposal or agreement to effect an Alternative Proposal,
or (iii) during the period ending twelve months after the termination of this
---
Agreement, the Company cosummates, becomes a party to or enters into an
agreement relating to or publicly announces, an Alternative Proposal, the
Company shall promptly, but in no event later than three business days after the
first of such events to occur, reimburse LGE and its affiliates for all
reasonable out-of-pocket expenses and fees (including, without limitation, fees
and expenses payable to all banks, investment banking firms and other financial
institutions and their respective agents and counsel, for structuring the
transactions contemplated hereby and all reasonable fees of counsel,
accountants, experts and consultants to LGE and its affiliates, and all printing
and advertising expenses) incurred or accrued by it or on its behalf in
connection with the negotiation, preparation, execution and performance of this
Agreement and the Restructuring (the "Transaction Expenses"), provided, however,
that LGE shall not be entitled to such Transaction Expenses if the Company
terminates this Agreement due to a material breach by LGE of its obligations
under this Agreement.
(b) In the event that during the twelve months after the termination
of this Agreement the Company consummates, becomes a party to or enters into an
agreement relating to, or publicly announces, an Alternative Proposal, the
Company shall, or shall cause the New Investor to, pay LGE a transaction fee of
$8 million (the "Transaction Fee") upon the earlier of (x) the consummation of
-
such Alternative Proposal or (y) the termination of such Alternative Proposal.
-
(c) The Transaction Expenses and Transaction Fee, if any, payable
pursuant to this Section 11.3 shall not be subject to any offset, return,
recoupment or counterclaim. The Company and LGE agree that the provisions of
this Section 11.3 are commercially reasonable and necessary to induce LGE to
enter into and consummate the transactions contemplated hereby.
ARTICLE XII
12.1 Notices. All notices and other communications made in connection
-------
with this Agreement shall be in writing and shall be deemed to have been duly
given if (a) mailed by first-class, registered or certified mail, return receipt
-
requested, postage prepaid, (b) transmitted by hand delivery, (c) sent by next-
- -
day or overnight mail or
<PAGE>
delivery, (d) transmitted by facsimile or (e) sent by telecopy or telegram,
- -
addressed as follows:
(i) if to LGE,
LG Electronics Inc.
LG Twin Towers
20, Yoido-dong
Youngdungpo-gu
Seoul, Korea 150-721
Telecopy: 011-82-2-3777-5303
Telephone: 011-82-2-3777-3049
Attention: Chief Financial Officer
and to:
LG Electronics Inc.
6133 North River Road
Rosemont, IL 600118
Telecopy: 847-692-3576
Telephone: 847-692-4630
Attention: Nam K. Woo
with copies to:
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Telecopy: (212) 909-6836
Telephone: (212) 909-6586
Attention: Steven R. Gross, Esq.
(ii) if to the Company,
Zenith Electronics Corporation
<PAGE>
1000 Milwaukee Avenue
Glenview, IL 60025-2493
Telecopy: (847) 391-8584
Telephone: (847) 391-8064
Attention: Richard F. Vitkus, General Counsel
with a copy to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, IL 60601
Telecopy: (312) 861-2200
Telephone: (312) 861-2200
Attention: James H.M. Sprayregen
or, in each case, at such other address as may be specified in writing to the
other party hereto in accordance with this Section 12.1.
12.2 Governing Law. This agreement shall be governed by the
-------------
internal laws of the State of Delaware without giving effect to the conflict of
laws rules thereof.
12.3 Specific Performance. The parties hereto agree that irreparable
--------------------
damage would occur in the event any of the provisions of this Agreement were not
to be performed in accordance with the terms hereof and that the parties shall
be entitled to specific performance of the terms hereof, in addition to any
other remedy at law or equity.
12.4 Miscellaneous. This Agreement (including the Annexes hereto) and
-------------
the Disclosure Letters constitute the entire agreement and supersede all prior
agreements and understandings, both written and oral, between the parties with
respect to the subject matter hereof. In the event of any conflict between this
Agreement and the Commitment Letter between the Company and LGE relating to the
subject matter of Section 2(e), this Agreement shall govern. If any term,
provision, covenant or restriction of this Agreement is held by a court of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions, covenants and restrictions of this Agreement shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated.
<PAGE>
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, successors and permitted assigns. Nothing in
this Agreement shall confer any rights upon any person or entity other than the
parties hereto and their respective heirs, successors and permitted assigns. No
consequential, punitive or exemplary damages shall under any circumstances be
recoverable by either party in respect of any claim pursuant to this Agreement
or in connection with the consummation of or any failure to consummate the
transactions contemplated hereby. This Agreement may be executed in
counterparts, each of which shall be deemed an original and all of which shall
together constitute one and the same instrument. The headings contained in this
Agreement are for purposes of convenience only and shall not affect the meaning
or interpretation of this Agreement. None of the terms of this Agreement may be
waived, altered or amended except by an instrument in writing duly executed by
the parties hereto. No failure or delay in exercising any right, power or
privilege hereunder will operate as a waiver thereof, nor will any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided are cumulative and are not exclusive of any rights or remedies that any
party may otherwise have at law or in equity or otherwise. All information set
forth in any of the Annexes hereto or in any Section of the Company Disclosure
Letter shall be deemed as if also set forth in each and all of the Annexes
hereto and each and all Sections of the Company Disclosure Letter, whether
actually set forth therein or not. The Company and LGE agree that the
representations and warranties and the Operating Plan of the Company shall not
be affected or deemed waived, modified, qualified or supplemented by reason of
(i) any disclosure by the Company or any of its advisors, consultants or
-
representatives to LGE or any of LGE's advisors, consultants or representatives
(other than as set forth in this Agreement, the Company Disclosure Letter hereto
or in the Company SEC Documents as of the date hereof), (ii) any investigation
--
made by or on behalf of LGE or any of its advisors, consultants or
representatives or (iii) the fact that LGE or any of such advisors, consultants
---
or representatives knew or should have known that any such representation or
warranty or the Operating Plan is or might be inaccurate.
12.5 Recommendations. Notwithstanding anything else contained in this
---------------
Agreement, either the Board of Directors of the Company or the Special Committee
may at any time withdraw or modify its approval or recommendation of this
Agreement or the transactions contemplated hereby or by the Restructuring in the
event that it determines, after consultation with counsel, that failure to so
withdraw or modify its recommendation would not be consistent with compliance
with its fiduciary duties imposed by law; provided, however, that such
withdrawal or modification shall not in any manner release
<PAGE>
the Company from its obligations under this Agreement unless LGE exercises its
right to terminate this Agreement pursuant to Section 11.1(c)(ii), in which case
Article XI shall govern.
<PAGE>
IN WITNESS WHEREOF, the Company and LGE have caused this Agreement to
be duly executed as of the day and year first above written.
ZENITH ELECTRONICS CORPORATION
By____________________________________
Name: Jeffrey P. Gannon
Title: President and Chief Executive Officer
LG ELECTRONICS INC.
By_______________________________
Name: Cha Hong (John) Koo
Title: Vice Chairman and Chief Executive Officer
<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. 5 to the
Registration Statement on Form S-4, Registration No. 333-61057, filed in June
1999.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
June 18, 1999
<PAGE>
EXHIBIT 99b
CONFIDENTIAL TREATMENT REQUESTED
(Redacted text indicated by "***")
PROJECT ELECTRO
PRESENTATION TO THE BOARD OF DIRECTORS
July 22, 1998
PETER J. SOLOMON COMPANY
1
<PAGE>
PROJECT ELECTRO
TABLE OF CONTENTS
<TABLE>
<CAPTION>
TAB PAGE
- --- ----
<S> <C>
I. Going Concern Valuation..................................... 1
II. Business Plan Comparison.................................... 6
III. One-Time Adjustments........................................ 9
IV. Methodological Comparison................................... 11
V. Electro Comparable Company Analysis......................... 13
VI. LG Plan Analysis............................................ 14
VII. Liquidation Analysis........................................ 16
VIII. Strategic Investor Contact List............................. 18
</TABLE>
2
<PAGE>
PROJECT ELECTRIC
I. GOING CONCERN ANALYSIS
Going Concern Implied Equity Valuation Under LG Proposal
- -------------------------------------------------------------------------------
(Dollars in Millions)
<TABLE>
<CAPTION>
Summary Going Concern Valuations Summary Going Concern Sensitivities
--------------------------------- --------------------------------------------------
5/21/98 Board Assumes '98 Q3 & Q4
Presentation Present Valuation Inventory Reduction
Valuation at Valuation at Per Sourcing Plan Assumes '99 Q1 & Q2
1/1/98 (a) 1/1/99 (b) Occurs in Q1 '99 Asset Sales Occur in Q3
Valuation at 1/1/99 (c) Valuation at 6/30/99 (d)
------------- ----------------- ----------------------- ------------------------
<S> <C> <C> <C> <C>
Enterprise Value (c) $127.0 $125.0 $125.0 $125.0
Domestic VSB
Technology Value (1) 186.0 $180.0 180.0 180.0
------ ------ ------ ------
Total Value $313.0 $305.0 $305.0 $305.0
====== ====== ====== ======
Reorganized Electro Debt
per I.G Proposal
Working Capital Facility $100.0 $84.5 (h) $100.0 (i) $100.0 (i)
Restructured LG Notes (g) 152.7 148.7 148.7 158.1
Subordinated Debentures (g) 40.0 40.0 40.0 40.0
New LG Financing 30.0 0.0 18.8 (i) 19.4 (i)
------ ------ ------ ------
Total $322.7 $273.2 $307.5 $317.5
Implied Equity of
Reorganized Electro $ (9.7) $ 31.8 $(2.5) $(12.5)
</TABLE>
- --------------------------------------------------------------------------------
(a) Per Electro Business Plan, dated April 16, 1998. Reflected in Electro Board
Presentation dated May 21, 1998.
(b) Per Electro Business Plan, dated June 26, 1998.
(c) Assumes that $64.2MM reduction in inventories scheduled to occur in Q-3 and
Q-4 of 1998 actually occur in Q-1 of 1999. Capitalization reflects
additional borrowing due to reduced cash flow.
(d) Assumes that asset sales scheduled to occur in Q-1 and Q-2 of 1999 are
delayed until Q-3. Reduction in asset proceeds results in elimination of
debt service in Q-1 and Q-2 of $43.2MM and $21.6MM respectively. In
addition, debt is increased by PIK interest of $4.6MM in Q-1 and $4.8MM in
Q-2.
(e) Business plan adjusted to exclude projected VSB royalties. Enterprise value
at 1/1/98 is based on 14.0x EBIT multiple and a 12.0% discount rate equal to
the weighted average cost of capital (WACC) of the comparable company
group. Enterprise value at 1/1/99 is based on the mid-range of the
illustrative LTM sales multiples and values Tuner Patent cash flows
separately.
(f) VSB valuation assumes a $2.50 PC royalty fee, 25.0% discount rate applied to
royalty fee income cash flows through 2011 and availability of Company NOLs
to shelter VSB and operating cash flow. Excludes any potential value for
international VSB royalties. Includes present value of Sony settlement per
Electro management.
(g) Assumes par value. Market value may be lower.
(h) Revolver balance based on average revolver balance for Q-3 1998, Q-4 1998,
Q-1 1999, and Q-2 1999.
(i) Balance based on modified projected cash needs and assumed availability.
3
<PAGE>
PROJECT ELECTRO
I. GOING CONCERN ANALYSIS
ELECTRO DISCOUNTED CASH FLOW ANALYSIS (VALUE AT JANUARY 1, 1999)
(Dollars in Millions)
EBIT EXCLUDES VSB AND TUNER PATENT INCOME AND COSTS & EXPENSES(a)
<TABLE>
<CAPTION>
PROJECTED FISCAL YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1999 2000 2001 2002 2003
------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
Net Revenue $916.0 $917.8 $961.9 $1,013.9 $1,039.9
- --% Growth (7.4)% 0.2 % 4.8 % 5.4 % 2.6 %
Gross Margin % 6.2 % 8.5 % 9.6 % 10.0 % 10.4 %
EBITDA (43.7) (20.5) (7.4) (2.1) 1.7
- --% of Revenues (4.8)% (2.2)% (0.8)% (0.2)% $ 0.0
EBIT (52.8) (23.3) (10.7) (5.8) (2.3) NORMALIZED
- --% of Sales (5.8)% (2.5)% (1.1)% (0.6)% (0.2)% TERMINAL
Taxes 0.0% 0.0 0.0 0.0 0.0 0.0 CASH FLOW
------ ------ ------- -------- -------- -----------
Tax-Adjusted EBIT (52.8) (23.3) (10.7) (5.8) (2.3) $ (2.3)
Depreciation and Amortization 9.1 2.8 3.3 3.7 4.0 4.0
Capital Expenditures (4.5) (4.5) (4.5) (4.5) (4.5) (4.5)
Change in Working Capital 1.6 36.0 (2.0) (3.5) (0.5) (0.5)
Proceeds from Asset Sales 93.2 0.0 0.0 0.0 0.0 0.0
Restructuring Costs (61.5) (9.1) (6.6) (4.2) (2.8) 0.0
------ ------ ------- -------- -------- ------
Free Cash Flow $(14.9) $ 1.9 $(20.5) $ (14.3) $ (6.1) $ (3.3)
====== ====== ======= ======== ======== ======
Growth in Free Cash Flow NM NM -1179 % NM NM
</TABLE>
ILLUSTRATIVE SALES MULTIPLE(b)
<TABLE>
<CAPTION>
12.5 % 15.0 % 17.5 %
-------------------------- ------------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Discount Rate 12.0 % 14.0 % 16.0 % 12.0 % 14.0 % 16.0 % 12.0 % 14.0 % 16.0 %
Present Value of Free Cash Flow $(38.9) $(37.1) $(35.4) $(38.9) $ (37.1) $ (35.4) $(38.9) $(37.1) $(35.4)
Present Value of Terminal Value 73.8 67.5 61.9 88.5 81.0 74.3 103.3 94.5 86.6
------ ------ ------ ------ -------- -------- ------ ------ -------
Total Terminal Value & Free
Cash Flow Value $ 34.8 $ 30.4 $ 26.5 $ 49.6 $ 43.9 $ 38.9 $ 64.3 $ 57.4 $ 51.3
------ ------ ------ ------ -------- -------- ------ ------ ------
Discount Rate 18.0 % 20.0 22.0 % 18.0 % 20.0 % 22.0 % 18.0 % 20.0 % 22.0 %
------ ------ ------ ------ -------- -------- ------ ------ ------
Present Value of Tuner Patent(c) $ 72.8 $ 69.9 $ 67.2 $ 72.8 $ 69.9 $ 67.2 $ 72.8 $ 69.9 $ 67.2
------ ------ ------ ------ -------- -------- ------ ------ ------
Total Enterprise Value $107.6 $100.3 $ 93.7 $122.4 $ 113.8 $ 106.1 $137.1 $127.3 $118.4
------ ------ ------ ------ -------- -------- ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
NET PRESENT VALUE OF
PROJECTED FISCAL YEAR ENDED DECEMBER 31, TUNER PATENT @
---------------------------------------------------------- --------------------------
1999 2000 2001 2002 2003
------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tuner Patent Cash Flows(c) $26.0 $26.0 $26.0 $26.0 $13.0 18.0% 20.0% 22.0%
Tuner Patent Costs and Expenses(d) (0.2) (0.2) (0.2) (0.2) (0.2) $72.8 $69.9 $67.2
Assumed Reduction(e) 0.0 0.0 0.0 (3.0) (1.5)
----- ----- ----- ----- -----
Tuner Patent Cash Flows
(incl. reductions)(c) $25.8 $25.8 $25.8 $22.8 $11.3
</TABLE>
Source: Electro 1998-2003 Business Plan dated June 26, 1998.
(a) Business plan projected income statement excludes VSB and Tuner Patent
income and certain R & D/engineering costs associated with these technology
patents. Electro income statement includes approximately $2.0MM a year in
royalties related to the use of the Zenith trademark and name.
(b) Illustrative LTM sales multiple range is based on the lowest comparable
company to Electro discounted at 50.0%-66.6%.
(c) Assumes Tuner Patent expires June 30, 2003 and a successful defense of
patent in current lawsuit proceedings.
(d) Per Electro management.
(e) Assumed reduction per Electro management. Assumes settlement with Sony.
4
<PAGE>
PROJECT ELECTRO
I. GOING CONCERN ANALYSIS
VSB VALUATION ASSUMING USE OF NOLs
(Dollars in millions)
Value At January 1, 1999
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
---- ---- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aggregate Royalty Income 0.0 0.0 0.0 3.6 14.8 32.2 53.7 70.1 85.8 102.4 115.1 127.0
VSB Associated Costs (b) 0.0 0.0 0.0 (7.1) (5.0) (5.2) (5.4) (5.5) (5.6) (5.7) (5.8) (6.0)
---- ---- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Royalty Income 0.0 0.0 0.0 (3.5) 9.8 27.0 48.3 64.6 80.2 96.7 109.2 121.0
Unsheltered Earnings 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Taxes 38.0% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
---- ---- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net VSB Royalty Income 0.0 0.0 0.0 (3.5) 9.8 27.0 48.3 64.6 80.2 96.7 109.2 121.0
CALCULATION OF REMAINING NOLs
Pre-LG NOLs (a) $481.0 $481.0 $481.0 $471.8 $442.2 $406.0 $325.8 $229.0 $184.0 $157.0
Utilizable Beginning 27.0 54.0 81.0 108.0 135.0 162.0 179.8 177.2 168.0 114.8 45.0 27.0
Pre-LG NOLs Utilized 0.0 0.0 0.0 0.0 0.0 (9.2) (29.5) (36.3) (80.2) (96.7) (45.0) (27.0)
---- ---- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Utilizable End 27.0 54.0 81.0 108.0 135.0 152.8 150.2 141.0 87.8 18.0 0.0 0.0
Post LG NOL (beginning) $354.6 $422.8 $445.8 $464.3 $464.3 $464.3 $464.3 $464.3 $464.3 $400.1
Post LG NOL Utilized 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (64.2) (94.0)
NOL Generated 68.2 23.0 18.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Post LG NOL (ending) $422.8 $445.8 $464.3 $464.3 $464.3 $464.3 $464.3 $464.3 $400.1 $306.1
<CAPTION>
2008 2009 2010 2011
------ ------ ----- -----
<S> <C> <C> <C> <C>
Aggregate Royalty Income 143.1 171.2 192.0 216.9
VSB Associated Costs (b) (6.1) (6.2) (6.3) (6.4)
------- ------- ------ -----
Net Royalty Income 137.1 165.0 185.7 210.4
Unsheltered Earnings 0.0 0.0 100.7 210.4
Taxes 38.0% 0.0 0.0 38.3 80.0
------- ------- ------ -----
Net VSB Royalty Income 137.1 165.0 147.5 130.5
CALCULATION OF REMAINING NOLs
Pre-LG NOLs (a) $ 130.0 $ 103.0 $ 76.0 $0.0
Utilizable Beginning 27.0 27.0 27.0 0.0
Pre-LG NOLs Utilized (27.0) (27.0) (27.0) 0.0
------- ------- ------ -----
Utilizable End 0.0 0.0 0.0 0.0
Post LG NOL (beginning) $ 306.1 $ 196.0 $ 58.0 $0.0
Post LG NOL Utilized (110.1) (138.0) (58.0) 0.0
NOL Generated 0.0 0.0 0.0 0.0
------- ------- ------ -----
Post LG NOL (ending) $ 196.0 $ 58.0 $ 0.0 $0.0
1998 Net Income $(300.0)
Cancellation of Debt Income (c) 231.8
-------
1998 NOL $ (68.2)
</TABLE>
CALCULATION OF NET INCOME ADJUSTED FOR THE EXCLUSION OF VSB ROYALTY INCOME:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003
------ ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Old EBIT $ (76.3) $(31.0) $ 11.8 $ 33.3 $ 46.5 $ 44.5
VSB Income 0.0 2.6 13.8 22.9 31.4 39.0
------- ------ ------ ------ ------ ------
Old EBIT (Excl. VSB) (76.3) (33.6) (2.0) 10.4 15.1 5.5
------- ------ ------ ------ ------ ------
EBIT Differential 0.0 (2.6) (13.8) (22.9) (31.4) (39.0)
Incremental Debt 0.0 2.6 16.4 39.3 70.7 109.7
------- ------ ------ ------ ------ ------
Incremental Interest Expense @ 9.3% 0.0 0.1 0.9 2.6 5.1 8.3
Old Net Income $(300.0) $(20.3) $(13.6) $ 7.7 $ 20.7 $ 20.5
New Net Income (Excl. VSB) (300.0) (23.0) (28.3) (17.8) (18.8) (28.3)
</TABLE>
<TABLE>
<CAPTION>
NET PRESENT VALUE OF
VSB TECHNOLOGY @
- ------------------------------
25.0% 30.0% 35.0% 40.0%
- ------- ------ ------ -----
<S> <C> <C> <C>
$180.3 $136.3 $105.4 $83.1
</TABLE>
(a) Source: Electro 1997 10-K. Utilizable at a maximum rate of $27MM per year up
until 2010. When unutilized the $27MM is cumulative.
(b) Per Electro management.
(c) Based on Arthur Andersen analysis.
5
<PAGE>
PROJECT ELECTRO
I. GOING CONCERN ANALYSIS
Summary Valuation: VSB Technology Base Case
(Amounts in Millions, Except Average Royalty Fees)
<TABLE>
<CAPTION>
Domestic 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cable Box Taxes: No
Market Size 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0
% Digital 20.0% 35.0% 50.0% 65.0% 80.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
% Using VSB Remodulation 0.0% 4.0% 7.0% 10.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0%
Total VSB Remodulation 0.0 0.1 0.3 0.5 0.9 1.1 1.1 1.1 1.1 1.1 1.1
Average Royalty Fee $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50
Sony Settlement (a) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Cross License Adjustment (b) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Royalty Income $0.0 $ 0.2 $ 0.4 $ 0.7 $ 1.2 $ 1.5 $ 1.5 $ 1.5 $ 1.5 $ 1.5 $ 1.5
TVs
Market Size 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0
% Digital 1.0% 4.0% 7.0% 10.0% 14.0% 20.0% 24.0% 28.0% 32.0% 42.0% 52.0%
% Using VSB Demodulation 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Total VSB Demodulation 0.3 1.0 1.8 2.5 3.5 5.0 6.0 7.0 8.0 10.5 13.0
% Zenith (No Royalties) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Average Royalty Fee $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00
Sony Settlement (a) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 0.0%
Cross License Adjustment (b) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Royalty Income $ 0.9 $ 3.6 $ 6.4 $ 9.1 $12.8 $18.2 $21.9 $25.5 $29.2 $38.3 $52.7
PCs
Market Size 11.0 13.0 14.5 16.0 17.8 19.6 21.5 23.7 26.0 28.6 31.5
% Digital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
% Using VSB Remodulation 0.0% 15.0% 40.0% 60.0% 75.0% 75.0% 75.0% 75.0% 75.0% 75.0% 75.0%
Total VSB Remodulation 0.0 2.0 5.8 9.6 13.3 14.7 16.1 17.7 19.5 21.5 23.6
Average Royalty Fee $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50
Sony Settlement (a) 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 0.0%
Cross License Adjustment (b) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Royalty Income $ 0.0 $ 4.3 $12.9 $21.4 $29.7 $32.7 $35.9 $39.5 $43.5 $47.8 $53.1
Add-In Cards
Market Size NA NA NA NA NA NA NA NA NA NA NA
% Digital NA NA NA NA NA NA NA NA NA NA NA
% Using VSB Remodulation NA NA NA NA NA NA NA NA NA NA NA
Total VSB Remodulation 1.0 1.3 1.5 1.8 2.0 1.7 1.2 0.7 0.2 0.0 0.0
Average Royalty Fee $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Sony Settlement (a) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Cross License Adjustment (b) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Royalty Income $ 0.9 $ 1.1 $ 1.4 $ 1.6 $ 1.8 $ 1.5 $ 1.1 $ 0.6 $ 0.2 $ 0.0 $ 0.0
<CAPTION>
Domestic 2010 2011 Total
----- ----- ------
<S> <C> <C> <C>
Cable Box Taxes: No
Market Size 8.0 8.0
% Digital 100.0% 100.0%
% Using VSB Remodulation 14.0% 14.0%
Total VSB Remodulation 1.1 1.1
Average Royalty Fee $1.50 $1.50
Sony Settlement (a) 0.0% 0.0%
Cross License Adjustment (b) 10.0% 10.0%
----- -----
Royalty Income $ 1.5 $ 1.5 $ 14.5
TVs
Market Size 25.0 25.0
% Digital 62.0% 75.0%
% Using VSB Demodulation 100.0% 100.0%
Total VSB Demodulation 15.5 18.8
% Zenith (No Royalties) 10.0% 10.0%
Average Royalty Fee $5.00 $5.00
Sony Settlement (a) 0.0% 0.0%
Cross License Adjustment (b) 10.0% 10.0%
----- -----
Royalty Income $62.8 $75.9 $357.2
PCs
Market Size 34.6 38.1
% Digital 100.0% 100.0%
% Using VSB Remodulation 75.0% 75.0%
Total VSB Remodulation 26.0 28.6
Average Royalty Fee $2.50 $2.50
Sony Settlement (a) 0.0% 0.0%
Cross License Adjustment (b) 10.0% 10.0%
----- -----
Royalty Income $58.5 $64.3 $443.7
Add-In Cards
Market Size NA NA
% Digital NA NA
% Using VSB Remodulation NA NA
Total VSB Remodulation 0.0 0.0
Average Royalty Fee $1.00 $1.00
Sony Settlement (a) 0.0% 0.0%
Cross License Adjustment (b) 10.0% 10.0%
----- -----
Royalty Income $ 0.0 $0.0 $ 10.2
</TABLE>
Note: Consumer electronic component roll-out is substantially per Forrester
Research, Inc. a Cambridge, Massachussetts based high technology research
firm.
(a) Per Electro management.
(b) Cross license assumes that 25.0% of market pays only 60.0% of royalty fee.
Per Electro management.
6
<PAGE>
PROJECT ELECTRO
I. GOING CONCERN ANALYSIS
Summary Valuation: VSB Technology Base Care
(Amounts in Millions, Except Average Royalty Fees)
<TABLE>
<CAPTION>
Domestic 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
VIDEO RECORDERS/DVD-R
Market Size 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0
% Digital 1.0% 5.0% 10.0% 15.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%
% Using VSB Remod/Demod 50.0% 80.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Total VSB Remod/Demod 0.1 0.6 1.5 2.3 3.0 4.5 6.0 7.5 9.0 10.5
% Zenith (No Royalties) 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%
Average Royalty Fee $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00
Sony Settlement (a) 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Cross License Adjustments (b) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Royalty income $0.3 $2.5 $6.3 $9.5 $12.6 $19.0 $25.3 $31.6 $37.9 $44.2
DVD-P
Market Size 0.4 0.7 0.7 0.7 0.0 0.0 0.0 0.0 0.0 0.0
% Digital 100.0% 100.0% 100.0% 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
% Using VSB Remod/Demod 10.0% 20.0% 40.0% 60.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Total VSB Remod/Demod 0.0 0.1 0.3 0.4 0.0 0.0 0.0 0.0 0.0 0.0
Average Royalty Fee $5.00 $5.00 $5.00 $5.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Sony Settlement (a) 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Cross License Adjustments (b) 10.0 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Royalty income $0.2 $0.6 $1.2 $1.8 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
CONVERTERS
Market Size N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
% Digital N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
% Using VSB Demodulation N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Total VSB Demodulation 0.3 0.4 0.5 1.9 2.2 2.5 3.8 3.9 3.7 3.0
Average Royalty Fee $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00
% Zenith (No Royalties) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Sony Settlement (a) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Cross License Adjustments (b) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Royalty income $1.1 $1.5 $1.8 $6.9 $8.0 $9.1 $13.9 $14.2 $13.5 $10.9
SATELLITE BOX
Market Size 1.5 1.5 1.5 1.5 1.5 1.3 1.1 0.9 0.7 0.5
% Digital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
% Using VSB Demodulation 4.7% 20.0% 40.0% 60.0% 86.7% 100.0% 100.0% 100.0% 100.0% 100.0%
Total VSB Demodulation 0.1 0.3 0.6 0.9 1.3 1.3 1.1 0.9 0.7 0.5
Average Royalty Fee $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00
Sony Settlement (a) 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%
Cross License Adjustments (b) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Royalty income $0.3 $1.1 $2.2 $3.2 $4.7 $4.7 $4.0 $3.2 $2.5 $1.8
Assumed Sharing Rate: 1.0%
Total Pre-Tax Income $3.6 $14.8 $32.2 $53.7 $70.1 $85.8 $102.4 $115.1 $127.0 $143.1
<CAPTION>
Domestic 2009 2010 2011 Total
-------- ------- -------- --------
<S> <C> <C> <C> <C>
VIDEO RECORDERS/DVD-R
Market Size 15.0 15.0 15.0
% Digital 80.0% 90.0% 100.0%
% Using VSB Remod/Demod 100.0% 100.0% 100.0%
Total VSB Remod/Demod 12.0 13.5 15.0
% Zenith (No Royalties) 3.5% 3.5% 3.5%
Average Royalty Fee $5.00 $5.00 $5.00
Sony Settlement (a) 0.0% 0.0% 0.0%
Cross License Adjustments (b) 10.0% 10.0% 10.0%
-------- -------- --------
Royalty income $52.1 $58.6 $65.1 $365.1
DVD-P
Market Size 0.0 0.0 0.0
% Digital 0.0% 0.0% 0.0%
% Using VSB Remod/Demod 0.0% 0.0% 0.0%
Total VSB Remod/Demod 0.0 0.0 0.0
Average Royalty Fee $0.00 $0.00 $0.00
Sony Settlement (a) 0.0% 0.0% 0.0%
Cross License Adjustments (b) 10.0% 10.0% 10.0%
-------- -------- --------
Royalty income $0.0 $0.0 $0.0 $ 3.8
CONVERTERS
Market Size N/A N/A N/A
% Digital N/A N/A N/A
% Using VSB Demodulation N/A N/A N/A
Total VSB Demodulation 3.0 3.0 3.0
Average Royalty Fee $5.00 $5.00 $5.00
% Zenith (No Royalties) 10.0% 10.0% 10.0%
Sony Settlement (a) 0.0% 0.0% 0.0%
Cross License Adjustments (b) 10.0% 10.0% 10.0%
-------- -------- -------
Royalty income $12.2 $12.2 $12.2 $117.4
SATELLITE BOX
Market Size 0.3 0.1 0.0
% Digital 100.0% 100.0% 100.0%
% Using VSB Demodulation 100.0% 100.0% 100.0%
Total VSB Demodulation 0.3 0.1 0.0
Average Royalty Fee $5.00 $5.00 $5.00
Sony Settlement (a) 0.0% 0.0% 0.0%
Cross License Adjustments (b) 10.0% 10.0% 10.0%
-------- -------- -------
Royalty income $1.4 $0.5 $0.0 $ 29.4
Assumed Sharing Rate: 1.0%
Total Pre-Tax Income $171.2 $192.0 $216.9 $1,327.9
</TABLE>
Note: Consumer electronic component roll-out is substantially per Forrester
Research, Inc. a Cambridge, Massachusetts based high technology research firm.
(a) Per Electro management.
(b) Cross license assumes that 25.0% of market pays only 60.0% of royalty fee.
Per Electro management.
7
<PAGE>
PROJECT ELECTRO
11. Business plan Comparison
(Dollar in Millions)
<TABLE>
<CAPTION>
Income Statement Items FY Ended December 31,
Business -------------------------------------------------------
Plan Date 1998 1999 2000 2001 2002 2003 Comments
--------- ---- ---- ---- ---- ---- ---- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales 6/26 $989.7 $916.0 $917.8 $961.9 $1,013.9 $1,039.9 The 6/26 Plan includes an
4/16 989.5 908.3 892.2 939.5 997.7 N/A additional year of projections
------ ------ ------ ------ --------
Difference (6/26 vs. 4/16) $ 0.2 $ 7.7 $ 25.6 $ 22.4 $ 16.2 N/A
Gross Margin 6/26 $ 60.6 $ 57.2 $ 77.6 $ 92.3 $ 101.6 $ 108.4 Gross margin drops as a % of
4/16 57.6 58.1 78.0 93.7 107.3 N/A sales from 1999-2002 in 6/26
------ ------ ------ ------ -------- Plan, ranging from .20% to .76%
Difference (6/26 vs. 4/16) $ 3.0 $ (0.9) $ (0.4) $ (1.4) $ (5.7) N/A
Selling 6/26 $ 72.5 $ 63.0 $ 65.3 $ 68.7 $ 72.6 $ 75.1
4/16 70.9 61.8 61.6 73.7 78.0 N/A
------ ------ ------ ------ --------
Difference (6/26 vs. 4/16) $ 1.6 $ 1.2 $ 3.7 $ (5.0) $ (5.4) N/A
G&A 6/26 $ 45.2 $ 34.4 $ 26.3 $ 24.8 $ 25.4 $ 25.9 Total 6/26 G&A is higher as a %
4/16 45.6 30.2 21.0 21.5 22.0 N/A of sale but excludes VSB &
------ ------ ------ ------ -------- Tuner Patent IP costs
Difference (6/26 vs. 4/16) $ (0.4) $ 4.2 $ 5.3 $ 3.3 $ 3.4 N/A
R&D 6/26 $ 38.4 $ 7.6 $ 4.3 $ 4.4 $ 4.4 $ 4.6 Most of the differential in
4/16 $ 40.5 13.3 7.9 8.2 8.4 N/A the 6/26 Plan is the exclusion
------ ------ ------ ------ -------- of VSB related R&D costs
Difference (6/26 vs. 4/16) $ (2.1) $ (5.7) $ (3.6) $ (3.8) $ (4.0) N/A
Operating Income 6/26 $(95.5) $(47.8) $(18.3) $ (5.6) $ (0.8) $ 2.8 Operating income difference
4/16 (99.5) (47.2) (12.5) (9.7) (1.1) -- due to changes in sales levels,
------- ------ ------ ------ -------- margin and the allocation of
Difference (6/26 vs. 4/16) $ 4.0 $ (0.6) $ (5.8) $ 4.1 $ 0.3 -- VSB costs and expenses
</TABLE>
8
<PAGE>
PROJECT ELECTRO
II. Business Plan Comparison
(Dollars in Millions)
Income Statement Items (cont'd)
<TABLE>
<CAPTION>
Business FY Ended December 31,
---------------------------------------------------------
Plan Date 1998 1999 2000 2001 2002 2003 Comments
--------- --------------------------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Royalty Income (now valued
separately) 6/26 $ 2.0 $ 2.0 $ 2.0 $ 2.0 $ 2.0 $ 1.9 6/26 reduces Tuner
4/16 31.4 29.0 29.0 29.0 29.0 NA Patent income by
------ ------ ------ ------ ------ $1.00MM, values it
Difference (6/26 vs. 4/16) ($29.4) ($27.0) ($27.0) ($27.0) ($27.0) NA separately, only
licensing & trademark
income
Other Expense (Income)(a) 6/26 $ 9.5 $ 7.0 $ 7.0 $ 7.0 $ 7.0 $ 7.0 6/26 reduction in other
4/16 12.9 10.7 10.6 10.3 10.3 NA expenses due to
------ ------ ------ ------ ------ acceleration of
Difference (6/26 vs. 4/16) ($3.4) ($3.7) ($3.6) ($3.3) ($3.3) NA amortization related to
cancelled financing
fully expensed in 1998
EBIT 6/26 ($103.0) ($52.8) ($23.3) ($10.7) ($5.8) ($2.3) EBIT difference due in
4/16 (81.0) (28.9) 5.9 9.0 17.6 -- (i) the changes in
------ ------ ------ ------ ------ operating income
Difference (6/26 vs. 4/16) ($22.0) ($23.9) ($29.2) ($19.7) ($23.4) -- identified above, (ii)
the exclusion of the
Tuner Patent in the 6/26
Plan and (iii) lower
other expenses in the
6/26 Plan
</TABLE>
- -------------------
(a) Other Expense in 1998 @ 6/26 excludes non-cash restructuring charge of
$35.2MM.
9
<PAGE>
PROJECT ELECTRO
II. BUSINESS PLAN COMPARISON
(DOLLARS IN MILLIONS)
CASH FLOW ITEMS
<TABLE>
<CAPTION>
FY ENDED DECEMBER 31,
BUSINESS --------------------------------------------------------
PLAN DATE 1998 1999 2000 2001 2002 2003 COMMENTS
--------- -------------------------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEPRECIATION & AMORTIZATION 6/26 $ 35.7 $ 9.1 $ 2.8 $ 3.3 $ 3.7 $ 4.0
4/16 34.7 11.3 6.7 6.7 7.0 --
Difference (6/26 vs. 4/16) $ 1.0 $ (2.2) $ (3.9) $ (3.4) $ (3.3) --
CAPITAL EXPENDITURES 6/26 $ (13.2) $ (4.5) $ (4.5) $ (4.5) $ (4.5) $(4.5) 1998 cap. ex. @ 4/16 includes
4/16 (107.4) (5.0) (5.0) (5.0) (5.0) -- cash outlays related to leveraged
Difference (6/26 vs. 4/16) $ 94.2 $ 0.5 $ 0.5 $ 0.5 $ 0.5 -- lease. 6/26 excludes VSB cap. ex.
CHANGE IN NET WORKING CAPITAL 6/26 $ 16.8 $ 1.6 $ 36.0 $ (2.0) $ (3.5) $(0.5) 1998 negative change in NWC @
4/16 (55.5) 57.4 46.0 (2.1) (7.8) -- 4/16 related to buildup of inven-
Difference (6/26 vs. 4/16) $ 72.3 $ (55.8) $(10.0) $ 0.1 $ 4.3 -- tories per Company sourcing plan
PROCEEDS FROM ASSET SALES 6/26 $ 31.9 $ 93.2 $ 0.0 $ 0.0 $ 0.0 $ 0.0 6/26 asset proceeds difference
4/16 62.7 159.6 0.0 0.0 0.0 -- includes *** reduction in NWS
Difference (6/26 vs. 4/16 $ (30.8) $ (66.4) $ 0.0 $ 0.0 $ 0.0 -- & transfer of Reynosa to
LG. 4/16 assumed sale of Reynosa.
RESTRUCTURING COSTS 6/26 $ (29.0) $ (61.5) $ (9.1) $ (6.6) $ (4.2) $(2.8)
4/16 (39.1) (51.5) (7.8) (5.6) (4.2) -- Differential primarily due to
Difference (6/26 vs. 4/16) $ 10.1 $ (10.0) $ (1.3) $ (1.0) $ 0.0 -- timing of cash flows
FREE CASH FLOW (a) 6/26 $ (60.8) $ (14.9) $ 1.9 $(20.5) $(14.3) $(6.1) 6/26 FCF excludes (i) $26.0MM
4/16 (185.6) 142.9 45.8 3.0 7.6 -- in annual Tuner Patent income
Difference (6/26 vs. 4/16) $ 124.8 $(157.8) $(43.9) $(23.5) $(21.9) -- (resulting in lower EBIT) in
1998-2002, (ii) *** in NWS
asset proceeds and lower
real estate and equipment
proceeds and (iii) leveraged
lease cash outlay in 1998
</TABLE>
- ---------------
(a) Free cash flow defined as EBIT plus all cash flow items.
10
<PAGE>
PROJECT ELECTRO
III. ONE-TIME ADJUSTMENTS
VALUE ADJUSTMENT
- ----------------
REDUCTION IN NWS SALE PROCEEDS
Projected sale proceeds have been reduced from *** to ***
VSB ADJUSTMENTS
VSB Technology cash flows have been reduced by (i) an anticipated
settlement with Sony Corporation which reduces cash flows based on Sony's
assumed market share in the applications used to value VSB up until 2008
(present value reduction = $9.0MM) and (ii) a 10.0% annual reduction in all
cash flows related to management's anticipation of certain royalty-free cross
licenses (present value reduction = $20.0MM).
CALCULATION AND TREATMENT OF LG LEVERAGED LEASE CLAIM
The 4/16 Valuation assumes that 1998 capital expenditures include a $90.5MM
buy-back of the leveraged lease equipment and restructuring payments of $21.8MM
related to the buyout of the leveraged lease penalty. The 6/26 Valuation assumes
that the leveraged lease is terminated in December 1998 without direct cash
outlay by the Company coinciding with the financial restructuring.
In addition, LG claim has been reduced from $112.3MM to $97.3MM due to
timing and negotiated terms of the LG lease settlement. A portion of the claim
is treated as secured and the deficiency is treated as unsecured based on legal
assessment on terms of reimbursement agreement. Secured claim equal to
Greenwich Industrial revised valuation made subsequent to 4/16 Valuation.
INVENTORY BUILD-UP
The 4/16 Plan assumes that Electro does not reduce its levels of inventory
until Q-1 of 1999 to reflect the timing of its sourcing plan. During Q-1 of
1999, there is a $97.1MM source of cash reflecting the reduction of inventories
per the Company's sourcing plan. The 6/26 Plan, however, begins to significantly
reduce inventories in Q-3 and Q-4 of 1998 to reflect the new timing of the
sourcing plan resulting in a $67.1MM source of cash from reduced inventories in
fiscal 1998 versus a $6.8MM reduction in cash in the 4/16 Plan. In addition to
the issue of timing, there is an aggregate $38.0MM reduction in inventories
related to a reduced need to build inventories for console and projection
television.
11
<PAGE>
PROJECT ELECTRO
III. ONE-TIME ADJUSTMENTS
REYNOSA VALUE
Reduction in value of Reynosa asset received by LG from $56.6MM to $45.7MM
(for LG's distribution in the restructuring plan) reflects LG's decision to take
only 3 of Reynosa's 6 facilities.
CAPITAL STRUCTURE
Reduced by $4.0MM to reflect a $15.0MM reduction in LG leveraged lease
claim which is offset by the $11.0MM reduction in Reynosa value.
The projected draw down of new LG Financing and the working capital
facility have declined due to (i) a $38.0MM reduction in inventories related to
console and projection television, the (ii) reversal of a $15.0MM treasury
adjustment relating to inventory turns, and (iii) a subsequent detailed
inventory forecast that further reduced inventories.
12
<PAGE>
PROJECT ELECTRO
IV. METHODOLOGICAL COMPARISON
The methodology utilized in the discounted cash flow valuation based on the June
26, 1998 Business Plan ("6/26 Valuation") differs from the methodology utilized
in valuing the April 16, 1998 Business Plan (the "4/16 Valuation") in the
following ways:
- TIME PERIOD: For purposes of the S-4, the 6/26 Valuation values
Electro's Business Plan and VSB royalties at 1/1/99 and assumes a
terminal cash flow in the fifth year at 12/31/03. The 4/16 Valuation
values Electro's Business Plan and VSB royalties at 1/1/98 and assumes
a terminal cash flow period at 12/31/02. This change resulted from the
assumption in the S-4 that Electro would emerge from bankruptcy at
1/1/99.
- TREATMENT OF VSB CASH FLOWS: VSB cash flows are valued separately in
both the 6/26 Valuation and the 4/16 Valuation. However, in the 6/26
Valuation VSB related costs are excluded from corporate SG&A and R&D
costs and are allocated directly to VSB cash flows. In addition, the
6/26 Valuation assumes a reduction in VSB cash flows related to (i) an
anticipated settlement with Sony Corporation and (ii) management's
anticipation of certain royalty-free cross licenses.
- TREATMENT OF TUNER PATENT CASH FLOWS: The Tuner Patent is valued
separately from the Business Plan cash flows in the 6/26 Valuation.
The 4/16 Valuation assumes the Tuner Patent as part of the Business
Plan operating cash flows. In the 4/16 Valuation, the Tuner Patent is
capitalized as it is incorporated into the 2002 EBIT under the
assumption that Electro has historically had a cash flow from IP
licensing. PJSC has modified its view towards capitalizing the Tuner
Patent cash flows as this income stream is finite and expires on June
30, 2003, and management has made no assumption with respect to
ongoing cash flows from replacement IP licensing. It is PJSC's
judgement that Electro's current levels of R&D spending for the
development of new technologies do not justify utilizing the Tuner
Patent as a proxy for cash flows potentially received in the future
from new patents. The Tuner Patent cash flows have been further
modified in the 6/26 Valuation by reducing the income in 2002 by
$3.0MM and $1.5MM in 2003 to account for an anticipated settlement
with Sony.
13
<PAGE>
PROJECT ELECTRO
IV. METHODOLOGICAL COMPARISON
- TERMINAL MULTIPLE: The 4/16 Valuation generates a terminal value for
the Electro business franchise by applying a multiple to the last year
(2002) projected EBIT. This multiple is based on the median EBIT
multiple of the comparable companies at May 19, 1998. The 6/26
Valuation no longer has a positive EBIT in 2002 or in 2003 after
removing the Tuner Patent cash flows. Free cash flow is also negative
in 2003. The 6/26 Valuation applies a range of sales multiples to
Electro's sales in 2003 to determine the terminal value of the
Company. Rather than using the median sales multiple of the comparable
companies, which all have positive cash flow and extensive
international sales, the 6/26 Valuation utilizes the lower end of the
comparable company sales multiples range, further adjusted by
discounts ranging from 50% to 66%, to reflect the difference between
the comparable companies and Electro. Using a discounted sales
multiple to value an unprofitable company reflects value represented
by Electro's presence and market share within the U.S. consumer
electronics industry (including its trademark, distribution network
and shelf space) and captures the potential value available if an
owner were to "cherry-pick" profitable sales from Electro's $1.0
billion of total sales.
- DISCOUNT RATE: The 6/26 Valuation and 4/16 Valuation utilize the same
discount rates in valuing the business plan of Electro and the royalty
income related to VSB technology. The Tuner Patent, which is valued
separately in the 6/26 Valuation, is valued utilizing 18.0%, 20.0%,
and 22.0% discount rates. These rates have been utilized to reflect
recent disputes and negotiations with Sony and Funai which suggest
greater uncertainty in the stability of these cash flows.
14
<PAGE>
PROJECT-ELECTRO
V. COMPARABLE COMPANY ANALYSIS
Analysis of Selected Consumer Electronics Companies
(Dollars in millions, except per share amounts)
MARKET DATA
<TABLE>
<CAPTION>
Equity Value Enterprise Value as a
Closing Price/Earnings Multiples as a Multiple Multiple of LTM
------------------------------------- -------------------------
Price on Equity CY 1998 CY 1999 of Tangible Enterprise
Selected Companies 7/15/98 Value LTM EPS EPS (a) EPS (a) Book Value Value (b) Net Sales EBIT EBITDA
- --------------------- -------- ------- ------- ------- ------- ------------- ---------- --------- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hitachi, Ltd.(c) 6.481 21,633.1 27.3 43.2 36.7 0.8 30,658.3 40.1% 11.8 4.1
Matsushita Electric
Industrial Co.(d) 16.619 35,103.6 39.2 38.7 33.6 1.2 37,280.8 59.3% 13.5 6.3
Mitsubishi Electric
Corp.(e) 2.175 4,669.9 68.0 NM NM NM 11,443.1 38.1% 14.6 4.3
Philips
Electronics N.V. 93.625 34,432.1 19.0 15.9 12.8 4.4 38,440.2 98.1% 14.3 8.3
Pioneer
Electronic Corp. 20.250 3,636.3 60.9 49.7 43.2 1.5 4,091.6 96.2% 26.5 10.6
Sony Corp. 92.700 37,206.4 20.4 21.7 20.0 3.3 44,537.2 81.4% 10.5 6.6
Mean (f) 68.9% 15.2 6.7
Median (f) 70.3% 13.9 6.5
</TABLE>
OPERATING DATA
<TABLE>
<CAPTION>
Net Income
Net Sales EBITDA EBIT to Common
------------------- ------------------- ---------------- ------------------
LTM CAGR LTM CAGR LTM CAGR LTM CAGR
--------- ------ ---------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ELECTRO $ 1,135.3 (4.0%) ($ 176.2) NM ($ 216.0) NM ($242.5) NM
Hitachi, Ltd. (c) 76,403.5 (0.5%) 7,435.1 (4.7%) 2,606.1 (5.7%) 817.7 (17.3%)
Matsushita Electric Industrial Co.(d) 62,868.0 (1.3%) 5,872.5 (9.1%) 2,766.2 6.9% 1,112.3 15.9%
Mitsubishi Electric Corp. (e) 30,041.9 (4.2%) 2,676.0 (7.9%) 785.1 (18.5%) 68.7 (59.7%)
Philips Electronics N.V. 39,188.6 (1.3%) 4,611.2 1.0% 2,693.6 (0.0%) 1,719.2 0.8%
Pioneer Electronic Corp. 4,254.9 (6.8%) 387.0 0.4% 154.2 12.1% 60.4 35.1%
Sony Corp. 54,719.8 11.9% 6,709.8 33.0% 4,229.8 91.9% 1,737.2 NM
</TABLE>
SELECTED RATIOS
<TABLE>
<CAPTION>
Net Working Return on Net Debt
Capital/Sales EBITDA/Sales EBIT/Sales Net Income/Sales Common Equity Total Cap.
------------- --------------- --------------- ---------------- ------------- ----------
LTM LTM Average LTM Average LTM Average LTM LTM
------------- ----- ------- ----- ------- ----- ------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hitachi, Ltd.(c) 17.0% 9.7% 10.5% 3.4% 3.8% 1.1% 1.4% 3.0% 5.9%
Matsushita Electric
Industrial Co.(d) (49.8%) 9.3% 9.3% 4.4% 4.0% 1.8% 1.2% 3.7% (6.2%)
Mitsubishi Electric
Corp.(e) 15.8% 8.9% 9.8% 2.6% 3.5% 0.2% 1.1% 1.1% 36.4%
Philips
Electronics N.V. 7.7% 11.8% 10.8% 6.9% 5.9% 4.4% 3.4% 17.9% 19.8%
Pioneer
Electronic Corp. 28.9% 9.1% 5.9% 3.6% 0.9% 1.4% 0.2% 2.4% 11.9%
Sony Corp. 11.9% 12.3% 9.3% 7.7% 4.2% 3.2% 0.1% 12.9% 25.0%
Mean (f) 10.2% 9.3% 4.8% 3.7%
Median (f) 9.5% 9.6% 4.0% 3.9%
</TABLE>
NOTE: CAGRs (Compounded Annual Growth Rates) and Averages are for the last three
completed fiscal years for each company. All operating data has been adjusted to
exercise unusual and extraordinary items.
(a) Source of projected EPS estimates: First Call - median estimate of Wall
Street analysis as of 07/15/98.
(b) Enterprise value represents equity value plus book values of total debt,
preferred stock and minority interest less cash.
(c) LTM data is as of September 30, 1997.
(d) LTM data is as of December 31, 1997.
(e) LTM data is as of March 31, 1997.
(f) Mean and median exclude ELECTRO.
15
<PAGE>
PROJECT ELECTRO
VI. LG PLAN ANALYSIS
Analysis of LG PROPOSAL (As Revised)
(Dollars in Millions)
<TABLE>
<CAPTION>
Estimated Proposed
Claim Amount Treatment
at 12/31/98 Under LG Proposal $ Recovery
----------- ----------------- ----------
<S> <C> <C> <C>
CITIBANK SECURED DEBT (a) $ 84.5 $100.0 $ 84.5
LG CLAIMS AND INTERESTS
SECURED
Secured Guarantee of Demand Notes 102.0
Secured Guarantee of Leveraged Lease(b) 33.7
Direct Loans 45.0
------
Subtotal $180.7 Exchanged for (i) $148.7 in restructured Notes (c), (ii)
100.0% of the equity of reorganized Zenith, (iii)
UNSECURED ownership of Reynosa plant ($45.7MM credit against 226.2 (d)
IG Extended Payable 140.0 claims) and (iv) general release. In addition LG is
Leveraged Lease Deficiency Claim 63.6 providing a revolving credit facility of $60.0MM.
Servicing Fees 10.0
------
Subtotal 213.6
------
Total LG Claims $394.3
GENERAL UNSECURED CLAIMS
General Unsecured (Trade) 85.0 Unimpaired 85.0
General Unsecured (Accruals) 140.9 140.9
6 1/4 Subordinated Convertible Debentures 103.6 $40.0 million new 6 1/4% Subordinated Debentures 40.0 (e)
due 2010
Common Equity NA Cancelled
</TABLE>
- --------------------------------------------------------------------------------
(a) LG Proposal assumes $100.0 million working capital facility.
(b) Reflects Greenwich Industrial Services value for leveraged lease at
fair-market-value-in-place.
(c) $97.3MM in leveraged lease claims, $45.0MM in direct loans, and $52.0MM
in the guarantee of demand note claims are exchanged for $148.7MM in
restructured notes and the value of Reynosa ($45.7MM).
(d) Excludes value of release, if any. Assumes equity value at 1/1/99 of
$31.8MM based on Company generating cash from inventory reductions and
asset sales per Business Plan projections.
(e) Assumes face value. Trading value may be lower.
16
<PAGE>
PROJECT ELECTRO
VI. LG PLAN ANALYSIS
ANALYSIS OF ORIGINAL LG PROPOSAL BASED ON 4/16 PLAN
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
ESTIMATED PROPOSED
CLAIM AMOUNT TREATMENT
3/28/98 UNDER LG PROPOSAL $ RECOVERY
------------ ----------------- ----------
<S> <C> <C> <C>
Citibank Secured Debt (a) $ 88.0 $100.0 $ 88.0
LG CLAIMS AND INTERESTS
Secured
Secured Guarantee of Demand Notes 102.0
Secured Guarantee of Leveraged Lease (b) 112.3
Direct Loans 45.0
------
Subtotal $259.3 Exchanged for (i) $152.7
in restructured Notes (b),
(ii) 100.0% of the equity of 209.3 (c)
reorganized Zenith, (iii)
ownership of Reynosa plant
UNSECURED ($66.6MM credit against
LG Extended Payable 140.0 claims) and (iv) general release.
Leveraged Lease Deficiency Claim 0.0
Servicing Fees 10.0
------
Subtotal 150.0
------
Total LG Claims $409.3
GENERAL UNSECURED CLAIMS
General Unsecured (Trade) 75.0 Unimpaired 75.0
General Unsecured (Accruals) 150.0 150.0
6 1/4 Subordinated Convertible Debentures 103.5 $40.0 million new 6 1/4% subordinated 40.0 (d)
debentures due 2010
Common Equity NA Cancelled
</TABLE>
(a) LG Proposal assumes $100.0 million working capital facility.
(b) $112.3MM in leveraged lease claims, $45.0MM in direct loans, and $52.0MM in
the guarantee of demand note claims are exchanged for $152.7MM in
restructured notes and the value of Reynosa ($56.6MM).
(c) Excludes value of release, if any. Assumes no equity value at 1/1/98.
(d) Assumes face value. Trading value may be lower.
17
<PAGE>
PROJECT ELECTRO
VII. LIQUIDATION ANALYSIS
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
VALUE AT ASSET RECOVERY
(Dollars in Millions) 1/1/99 (a) FROM LIQUIDATION
---------- ----------------
<S> <C> <C> <C>
ASSETS
Marketable Assets
VSB Technology (tax-affected) (b) $ 51.0
Trademark & Distribution (c) 42.0
Tuner Patent (d) 40.0
Other intangibles (e) 0.7
Flat Tension Mask (e) 2.1
ESTIMATED
% RECOVERY
----------
Current Assets
Cash $ 0.0 0.0
Accounts Receivable (f) 149.0 65.0% 96.9
Inventories (f)
Finished Goods 35.2 75.0% 26.4
Less Warranty (g) (23.3)
------
Net Finished Goods 3.1
Work in Process 10.8 5.0% 0.5
Raw Materials 43.1 20.0% 8.6
Fixed Assets 0.0
Real Estate (f)
Domestic 4.4
Mexican (h) 0.0
Furniture, Fixture and Equipment (f)
Domestic 13.4
Mexican (h) 25.5
------
Gross Asset Recovery $288.2
======
</TABLE>
Note: Excludes "Other Assets" which represents the book gain on sale of certain
assets.
(a) All estimated values subject to substantial due diligence and review.
(b) Represents present value discounted to 1/1/99. Assumes 38.0% tax rate. Value
assumes a 35.0% discount rate, and royalty assets lower than Company Base
Case. Reflects 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 strategic buyer that has a weighted
average cost of capital of 12.0% and an incremental tax rate of 38.0%.
(d) Tuner Patent cash flows are net of cost and expenses associated with them
and assume settlement with Sony. Cash flows are tax affected at 38.0% and
are discounted at 25.0%.
(e) Per Company senior patent counsel. Other intangibles relates primarily to
touch-screen technology. Represents 50.0% of management's estimate of fair
market value.
(f) Estimated value at 1/1/99 per Electro management.
(g) Per Electro management. Payment assumed to be necessary to achieve
liquidation value. Includes future warranty claims as well as estimated
administration expense.
(h) Mexican real estate and furniture, fixture and equipment have been reduced
by $44.2MM in Mexican claims per Electro management. Real estate has been
reduced first.
18
<PAGE>
PROJECT ELECTRO
VII. LIQUIDATION ANALYSIS
(DOLLARS IN MILLIONS)
<TABLE>
<S> <C>
GROSS ASSET RECOVERY $288.2
Less: Liquidation Expenses, & Administrative and Priority Tax Claims
Administrative Costs
Professional Fees (a) $ 24.0
Corporate Overhead (b) 24.8
Trustee Fees (c) 4.9
Brokerage Fees (d) 19.9
Wind Down Costs (e) 6.5
WARN Act (b) 21.0
Environmental (b) 24.5
------
Subtotal 125.6
------
Liquidation Proceeds Available for Distribution to Secured Creditors $162.7
</TABLE>
<TABLE>
<CAPTION>
SECURED DEBT CLAIM % RECOVERY
- ------------- ------ ----------
<S> <C> <C> <C>
Citibank $ 84.5 (f) $ 84.5 100.0%
Proceeds available for secured creditors after Citibank $ 78.2
LG Guarantee of Demand Notes 102.0 49.7 48.7%
LG Guarantee of Leveraged Lease 13.6 (g) 6.6 48.7%
LG Direct Loans 45.0 21.9 48.7%
------ ------
Total Secured Debt $245.1 $162.7
====== ======
Liquidation Proceeds Available for Priority Claims and Unsecured Creditors $ 0.0
and Equity
</TABLE>
(a) Assumes 4 year liquidation. Assumes fees of $2.0MM each month the first
6 months, $1.5MM for each of the next 6 months, $1.2MM for the entire
second year, $1.2MM for the entire third year, and $.6MM for the fourth and
final year.
(b) Per Electro management.
(c) Assumed as 3.0% of net liquidation proceeds.
(d) Brokerage fees assume 6.0% of gross asset recovery and $44.2MM Mexican
claim addback adjustment.
(e) Real estate taxes plus on-site security and wind down teams at each
location during an average twelve month disposition period.
(f) Based on average outstanding balance in Q-3 and Q-4 of 1998 and Q-1 and
Q-2 of 1999.
(g) Secured claim reflecting LG's guarantee of the leveraged lease equals the
value of the leveraged lease equipment in a liquidation per Greenwich
Industrial. Any deficiency claim is treated as unsecured.
19
<PAGE>
PROJECT ELECTRO
VIII. STRATEGIC INVESTORS CONTACT LIST
<TABLE>
<CAPTION>
Name(1) Contact Made By Comments
- -------- --------------- --------
<S> <C> <C>
- - Philips Jeff Gannon, Bill Leuhrs, Richard Interested only in certain potential assets
Lewis, Kevin Lynch, PJSC transactions and sourcing contracts.
- - Thomson Jeff Gannon, Bill Leuhrs, Richard Interested only in certain potential assets
Lewis, Kevin Lynch, PJSC transactions and sourcing contracts
- - Microsoft Jeff Gannon, Bill Leuhrs Interested only in potential technology
cooperation.
- - Mitsubishi LG Interested only in sourcing contract.
- - Hitachi Jeff Gannon, Bill Leuhrs Interested only in potential sourcing contract.
- - Sony Jeff Gannon, Bill Leuhrs No interest.
- - Oracle Jeff Gannon No interest.
- - Sun Microsystems Jeff Gannon, Bill Leuhrs, PJSC Interested only in potential technology.
</TABLE>
(1) In addition to the contacts with potential strategic investors set forth,
PJSC had contacts with the following potential financial investors:
Kohlberg Kravis Roberts & Co.; Accel Partners; Kelso & Company; Hellman &
Friedman; and Centre Partners. Additionally LG had discussions with
Clayton, Dublilier & Rice. None of the foregoing resulted in serious
expressions of interest.
20
<PAGE>
PROJECT ELECTRO
VIII. STRATEGIC INVESTORS CONTACT LIST - (cont'd)
<TABLE>
<CAPTION>
Name Contact Made By Comments
- ----- --------------- --------
<S> <C> <C>
- - Matsushita Bill Leuhrs Pending.
- - Intel LG Pending.
- - Sanyo LG Pending.
- - Texas Instruments Jeff Gannon, Bill Leuhrs, PJSC No interest.
</TABLE>
21
<PAGE>
ANNEX C--REPORTS OF PETER J. SOLOMON COMPANY LIMITED
PROJECT ELECTRO
SPECIAL COMMITTEE PRESENTATION
November 16, 1998
PETER J. SOLOMON COMPANY
C-1
<PAGE>
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- -------------------------------------------------------------------------------
This presentation has been prepared by Peter J. Solomon Company Limited
("PJSC") from materials and information supplied (whether orally or in writing)
by Zenith Electronics Corporation ("Zenith" or the "Company").
This presentation includes certain statements, estimates and projections
provided by the Company with respect to the historical and anticipated future
performance of the Company and certain potential strategic alternatives. Such
statements, estimates and projections contain or are based on significant
assumptions and subjective judgments made by Company management ("Management").
These assumptions and judgments may or may not be correct, and there can be no
assurance that any projected results are attainable or will be realized. PJSC
has not attempted to verify any such statements, estimates and projections, and
as such, PJSC makes no representation or warranty as to, and assumes no
responsibility for, their accuracy or completeness or for the effect which any
such inaccuracy or incompleteness may have on the results or judgments contained
in this presentation.
Except where otherwise indicated, this analysis speaks as of the date hereof.
Under no circumstances should the delivery of this document imply that the
analysis would be the same if made as of any other date.
THIS REPORT HAS BEEN ISSUED FOR THE BENEFIT OF THE SPECIAL COMMITTEE OF THE
COMPANY. IT IS NOT INTENDED TO BE USED, AND SHOULD NOT BE RELIED UPON, BY ANY
OTHER PERSON.
THIS REPORT IS CONFIDENTIAL AND SHOULD NOT, WITHOUT PRIOR WRITTEN CONSENT OF
PJSC, BE COPIED OR MADE AVAILABLE TO ANY PERSON OTHER THAN THE DIRECTORS OF
THE COMPANY.
PJSC SHALL NOT HAVE LIABILITY, WHETHER DIRECT OR INDIRECT, IN CONTRACT OR TORT
OR OTHERWISE, TO ANY PERSON IN CONNECTION WITH THIS PRESENTATION.
C-2
<PAGE>
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
TAB
---
I. Going Concern Valuation..............................................
II. Business Plan Comparison.............................................
III. One-Time Adjustments.................................................
IV. Domestic VSB Value Adjustments.......................................
V. S-4 Plan Analysis....................................................
VI. Liquidation Analysis.................................................
C-3
<PAGE>
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- -------------------------------------------------------------------------------
I. GOING CONCERN ANALYSIS
GOING CONCERN IMPLIED EQUITY VALUATION UNDER S-4 PROPOSAL (11-12-98 BUSINESS
PLAN)
- -------------------------------------------------------------------------------
(Dollars in Millions)
SUMMARY GOING CONCERN VALUATIONS
JULY 22 NOVEMBER 16
PRESENTATION PRESENTATION
VALUATION AT VALUATION AT
1/1/99 (A) 1/1/99 (B)
------------ ------------
Enterprise Value (c)............................. $125.0 $125.0
VSB Technology Value............................. 180.0(d) 130.6(e)(i)
====== ======
Total Value.................................... $305.0 $255.6
REORGANIZED ELECTRO DEBT PER LG PROPOSAL
Working Capital Facility......................... $ 84.5(f) $ 68.2(g)(ii)
Indo Suez........................................ 0.0 30.0
Restructured LG Notes (h)........................ 148.7 118.8
Subordinated Debentures (h)...................... 40.0 40.0
LGE New Credit Support........................... 0.0 0.0
------ ------
Total.......................................... $273.2 $257.0
====== ======
Implied Equity of Reorganized Electro............ $ 31.8 $ (1.4)
- -------------------------------------------------------------------------------
(a) Per Electro Business Plan, dated June 26, 1998. Reflected in Electro Board
Presentation dated July 22, 1998.
(b) Per Electro Business Plan, dated November 12, 1998.
(c) Business plan adjusted to exclude projected VSB royalties. Enterprise value
at 1/1/99 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 assumes a $2.50 PC royalty fee, 25.0% discount rate applied to
Domestic royalty fee cash flows through 2011 and availability of Company
NOLs to shelter VSB and operating cash flow. Excludes any potential value
for International VSB royalties. Includes present value of Sony settlement
per Electro management.
(e) VSB valuation 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.
(f) Revolver balance based on average revolver balance for Q-3 1998 ($110.5MM),
Q-4 1998 ($54.6MM), Q-1 1999 ($91.2MM) and Q-2 1999 ($81.7MM).
(g) 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).
(h) Does not reflect accruals of unpaid interest, if any. Assumes par value.
Market value may be lower.
- -------------------------------------------------------------------------------
Comments:
(i) Reflects adjustments in projected Domestic PC market and addition of
International VSB revenues.
(ii) Reflects debt balance reduction due to improvement in working capital.
C-4
<PAGE>
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
I. GOING CONCERN ANALYSIS
ELECTRO DISCOUNTED CASH FLOW ANALYSIS (VALUE AT JANUARY 1, 1999)
- -------------------------------------------------------------------------------
(Dollars in Millions)
EBIT EXCLUDES VSB AND TUNER PATENT INCOME AND COSTS & EXPENSES (A)
PROJECTED FISCAL YEAR ENDED DECEMBER
31, NORMALIZED
------------------------------------------- TERMINAL
1999 2000 2001 2002 2003 CASH FLOW
------ ------ ------ ------ -------- ----------
Net Revenue............. $876.1 $889.3 $935.1 $987.6 $1,018.3
--% Growth............. (9.3%) 1.5% 5.2% 5.6% 3.1%
Gross Margin %.......... 8.4% 9.2% 10.4% 10.8% 11.3%
EBITDA.................. (30.1) (16.1) 1.7 13.2 23.6
--% of Revenues........ (3.4%) (1.8%) 0.2% 1.3% 2.3%
EBIT.................... (36.2) (19.3) (1.9) 9.3 19.4
--% of Sales........... (4.1%) (2.2%) (0.2%) 1% 2%
AMT..................... 0.0 0.0 0.0 0.2 0.4
------ ------ ------ ------ --------
Tax-Adjusted EBIT....... (36.2) (19.3) (1.9) 9.1 19.0 $19.0
Depreciation and
Amortization........... 6.1 3.2 3.6 3.9 4.2 4.2
Capital Expenditures.... (4.9) (4.5) (4.5) (4.5) (4.5) (4.5)
Change in Working
Capital................ 10.7 17.0 (13.1) (3.3) (5.7) (5.7)
Proceeds from Asset
Sales.................. 47.9 0.0 0.0 0.0 0.0 0.0
Restructuring Costs..... (55.5) (2.4) 0.0 0.0 0.0 0.0
------ ------ ------ ------ -------- -----
Free Cash Flow.......... ($31.9) ($6.0) ($15.9) $ 5.2 $ 13.0 $13.0
====== ====== ====== ====== ======== =====
Growth in Free Cash
Flow................ NM NM NM NM 150%
<TABLE>
<CAPTION>
ILLUSTRATIVE SALES
MULTIPLE (B) 12.5% 15.0% 17.5%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Discount Rate........... 12.0% 14.0% 16.0% 12.0% 14.0% 16.0% 12.0% 14.0% 16.0%
--------------------------------------------------------------------
Present Value of Free
Cash Flow.............. ($33.9) ($33.5) ($33.1) ($33.9) ($33.5) ($33.1) ($33.9) ($33.5) ($33.1)
Present Value of
Terminal Value......... 72.2 66.1 60.6 86.7 79.3 72.7 101.1 92.6 84.8
------ ------ ------ ------ ------ ------ ------ ------ ------
Total Terminal Value &
Free Cash Flow Value... $ 38.3 $ 32.6 $ 27.5 $ 52.8 $ 45.8 $ 39.7 $ 67.2 $ 59.1 $ 51.8
Discount Rate........... 18.0% 20.0% 22.0% 18.0% 20.0% 22.0% 18.0% 20.0% 22.0%
--------------------------------------------------------------------
Present Value of Tuner
Patent (c)............. $ 70.5 $ 67.7 $ 65.0 $ 70.5 $ 67.7 $ 65.0 $ 70.5 $ 67.7 $ 65.0
Total Enterprise Value.. $108.9 $100.3 $ 92.6 $123.3 $113.5 $104.7 $137.8 $126.8 $116.8
</TABLE>
Projected Fiscal Year Ended
December 31,
--------------------------------- NET PRESENT VALUE
1999 2000 2001 2002 2003 OF TUNER PATENT @
----- ----- ----- ----- ----- -----------------
Tuner Patent Cash Flows
(a).................... $25.0 $25.0 $25.0 $25.0 $14.0 18.0% 20.0% 22.0%
----- ----- -----
Tuner Patent Costs and
Expenses (d)........... (0.2) (0.2) (0.2) (0.2) (0.2) $70.5 $67.7 $65.0
Assumed Reduction (e)... 0.0 0.0 0.0 (3.0) (1.5)
----- ----- ----- ----- -----
TUNER PATENT CASH FLOWS
(INCL. REDUCTIONS)
(C).................... $24.8 $24.8 $24.8 $21.8 $12.3
- -------------------------------------------------------------------------------
Source: Electro 1998-2003 Business Plan dated November 12, 1998.
(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. 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.
(b) Illustrative LTM sales multiple range is based on the lowest comparable
company discounted at 50.0%-66.6%.
(c) Assumes Tuner Patent expires June 30, 2003 and a successful defense of
patent in current litigation.
(d) Per Electro management.
(e) Assumed reduction Per Electro Management. Reflects settlement with Sony.
- -------------------------------------------------------------------------------
C-5
<PAGE>
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- -------------------------------------------------------------------------------
I. GOING CONCERN ANALYSIS
VSB VALUATION ASSUMING USE OF NOLS
(DOLLARS IN MILLIONS)
VALUE AT JANUARY 1, 1999
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
---- ---- ---- ---- ----- ---- ---- ---- ---- ---- ---- ----- ----- ----- ----- ------
DOMESTIC
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aggregate
Royalty Income.. 0.0 0.0 0.0 2.2 6.1 14.3 26.6 35.5 43.8 57.8 78.6 102.9 119.2 147.5 176.8 181.6
VSB Associated
Costs(a)........ 0.0 0.0 0.0 (8.0) (8.0) (8.0) (8.0) (8.0) (5.6) (3.9) (2.7) (2.7) (2.7) (2.7) (2.7) (2.7)
--- --- --- ---- ----- ---- ---- ---- ---- ---- ---- ----- ----- ----- ----- ------
Net Royalty
Income.......... 0.0 0.0 0.0 (5.8) (1.9) 6.3 18.6 27.5 38.2 53.9 75.9 100.2 116.5 144.8 174.1 178.9
Unsheltered
Earnings........ 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 82.2 117.8 147.1 178.9
AMT Due(b)...... 0.0 0.0 0.0 0.0 0.0 0.1 0.4 0.5 0.8 1.1 1.5 2.0 20.5 35.3 55.9 68.0
--- --- --- ---- ----- ---- ---- ---- ---- ---- ---- ----- ----- ----- ----- ------
NET VSB ROYALTY
INCOME.......... 0.0 0.0 0.0 (5.8) (1.9) 6.1 18.2 26.9 37.5 52.8 74.4 98.2 95.9 109.5 118.2 110.9
INTERNATIONAL ADOPTED
Aggregate
Royalty Income.. 0.0 0.0 0.0 0.5 2.3 7.3 17.0 31.9 35.9 40.6 46.2 52.4 59.7 83.0 92.5 100.5
VSB Associated
Costs(a)........ 0.0 0.0 0.0 (0.8) (2.1) (2.1) (2.1) (2.1) (1.5) (1.0) (0.7) (0.7) (0.7) (0.7) (0.7) (0.7)
Withholding(c)
11.0%........... 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
Income.......... 0.0 0.0 0.0 (0.3) 0.2 4.6 13.3 26.5 30.7 35.2 40.4 46.0 52.5 73.2 81.6 88.8
Unsheltered
Earnings........ 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 52.5 73.2 81.6 88.8
AMT Due(b)...... 0.0 0.0 0.0 0.0 0.0 0.1 0.3 0.5 0.6 0.7 0.8 0.9 13.1 22.0 31.0 33.7
--- --- --- ---- ----- ---- ---- ---- ---- ---- ---- ----- ----- ----- ----- ------
NET VSB ROYALTY
INCOME.......... 0.0 0.0 0.0 (0.3) 0.2 4.5 13.0 26.0 30.0 34.5 39.6 45.1 39.3 51.3 50.6 55.0
INTERNATIONAL LIKELY TO ADOPT
Aggregate
Royalty Income.. 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
VSB Associated
Costs(a)........ 0.0 0.0 0.0 (1.2) (3.2) (3.2) (3.2) (3.2) (2.2) (1.6) (1.1) (1.1) (1.1) (1.1) (1.1) (1.1)
Withholding(c)
11.0%........... 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
Income.......... 0.0 0.0 0.0 (1.2) (3.2) (0.3) 4.0 26.6 33.6 41.8 51.7 63.4 78.0 105.8 130.9 162.5
Unsheltered
Earnings........ 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 78.0 105.8 130.9 162.5
AMT Due(b)...... 0.0 0.0 0.0 0.0 0.0 (0.0) 0.1 0.5 0.7 0.8 1.0 1.3 19.5 31.7 49.7 61.7
--- --- --- ---- ----- ---- ---- ---- ---- ---- ---- ----- ----- ----- ----- ------
NET VSB ROYALTY
INCOME.......... 0.0 0.0 0.0 (1.2) (3.2) (0.3) 3.9 26.1 33.0 41.0 50.7 62.2 58.5 74.0 81.2 100.7
</TABLE>
- -------------------------------------------------------------------------------
(a) 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.
(b) 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 2008, 30.0% in 2009 and 38.0% thereafter. The
Valuation assumes no foreign tax credits, but treats assumed foreign
witholding as a deduction.
(c) The witholding tax rate is equal to the weighted average of the countries'
treaty defined witholding rate. For those countries where there is no treaty
defined rate, the country's internal witholding rate was used.
Assumed witholding rates per Arthur Andersen.
C-6
<PAGE>
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- -------------------------------------------------------------------------------
I. GOING CONCERN ANALYSIS
-------------------------
VSB VALUATION ASSUMING USE OF NOLS
(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 $473.8 $431.4 $344.1 $241.6 $ 211.0 $ 184.0 $ 157.0 $130.0 $103.0
Utilizable
Beginning...... 27.0 54.0 81.0 108.0 135.0 162.0 181.8 166.4 106.1 30.6 27.0 27.0 27.0 27.0
Pre-LG NOLs
Utilized....... 0.0 0.0 0.0 0.0 0.0 (7.2) (42.3) (87.3) (102.5) (30.6) (27.0) (27.0) (27.0) (27.0)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Utilizable End. 27.0 54.0 81.0 108.0 135.0 154.8 139.4 79.1 3.6 0.0 0.0 0.0 0.0 0.0
Post LG NOL
(beginning).... $354.6 $373.0 $407.3 $431.3 $431.3 $431.3 $431.3 $ 431.3 $ 330.9 $ 189.9 $ 7.3 $ 0.0
Post LG NOL
Utilized....... 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (100.4) (141.0) (182.6) (7.3) 0.0
NOL Generated.. 18.4 34.3 24.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Post LG NOL
(ending)....... $373.0 $407.3 $431.3 $431.3 $431.3 $431.3 $431.3 $ 330.9 $ 189.9 $ 7.3 $ 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... 0.0 0.0
------ ----
Post LG NOL
(ending)........ $ 0.0 $0.0
</TABLE>
<TABLE>
<S> <C>
1998 Net Income........... ($283.4)
Cancellation of Debt
Income(c)................. 265.0
-------
1998 NOL.................. ($ 18.4)
1998 Net Income...........
</TABLE>
<TABLE>
<CAPTION>
NET INCOME ADJUSTED FOR 1998 1999 2000 2001 2002 2003
VSB ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Business Plan EBIT........ ($105.1) ($16.7) $ 4.1 $ 29.7 $ 53.2 $ 61.2
Domestic VSB Income (net
of costs)................. 0.0 (5.8) (1.9) 6.3 18.6 27.5
------- ------ ------ ------ ------ ------
Business Plan EBIT (Excl.
VSB)...................... (105.1) (10.9) 6.0 23.4 34.6 33.7
EBIT Differential......... 0.0 5.8 1.9 (6.3) (18.6) (27.5)
------- ------ ------ ------ ------ ------
Incremental Debt.......... 0.0 (5.8) (7.7) (1.5) 17.1 44.6
Incremental Interest
Expense @ 9.5%............ 0.0 (0.3) (0.6) (0.4) 0.7 2.9
Business Plan Net
Income.................... ($283.4) ($33.1) ($21.6) $ 2.5 $ 25.8 $ 37.1
------- ------ ------ ------ ------ ------
New Net Income (Excl.
VSB)...................... (283.4) (27.0) (19.0) (3.3) 6.4 6.7
</TABLE>
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003
CALCULATION OF NOL ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
New Net Income (Excl.
VSB)...................... (283.4) (27.0) (19.0) (3.3) 6.4 6.7
Net VSB royalty before
AMT
(Int'l and Domestic)...... 0.0 (7.3) (5.0) 10.6 35.9 80.6
------- ------ ------ ------ ------ ------
Total Net Income.......... (283.4) (34.3) (24.0) 7.2 42.3 87.3
NOL
(Generated)/Utilized...... -- (34.3) (24.0) 7.2 42.3 87.3
</TABLE>
TOTAL
PRESENT NET PRESENT VALUE OF
VALUE DOMESTIC VSB TECHNOLOGY @
OF -------------------------------
VSB 25.0% 30.0% 35.0% 40.0%
TECHNOLOGY ------- ------- ------- -------
$130.6(d) $94.0 $67.2 $48.9 $36.1
NET PRESENT VALUE OF
INT'L (ADOPTED) VSB TECHNOLOGY @
--------------------------------
35.0% 40.0% 45.0% 50.0%
------- ------- ------- -------
$33.6 $26.1 $20.6 $16.5
NET PRESENT VALUE OF
INT'L (LIKELY TO ADOPT) VSB
TECHNOLOGY @
-------------------------------
45% 50% 55% 60%
------- ------- ------- -------
$18.3 $13.8 $10.5 $8.1
- -------------------------------------------------------------------------------
(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) Based on Arthur Andersen analysis and an assumed implied equity value of
reorganized Electro.
(d) 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.
C-7
<PAGE>
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- --------------------------------------------------------------------------------
II. BUSINESS PLAN COMPARISON
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FY ENDED DECEMBER 31,
BUSINESS BUDGET PROJECTED
PLAN ----------------------------------------------------
DATE 1998 1999 2000 2001 2002 2003
INCOME STATEMENT ITEMS
<S> <C> <C> <C> <C> <C> <C> <C>
SALES................... 11/12 $ 965.6 $876.1 $889.3 $935.1 $ 987.6 $1,018.3
6/26 989.7 916.0 917.8 961.9 1,013.9 1,039.9
------- ------ ------ ------ -------- --------
Difference (11/12 vs.
6/26)................ ($ 24.1) ($39.9) ($28.5) ($26.8) ($ 26.3) ($ 21.6)
======= ====== ====== ====== ======== ========
GROSS MARGIN............ 11/12 $ 72.2 $ 74.0 $ 81.7 $ 97.4 $ 106.9 $ 115.3
6/26 60.6 57.2 77.6 92.3 101.6 108.4
------- ------ ------ ------ -------- --------
Difference (11/12 vs.
6/26)................ $ 11.6 $ 16.8 $ 4.1 $ 5.1 $ 5.3 $ 6.9
======= ====== ====== ====== ======== ========
SELLING................. 11/12 $ 78.0 $ 59.0 $ 65.9 $ 69.0 $ 72.5 $ 73.7
6/26 72.5 63.0 65.3 68.7 72.6 75.1
------- ------ ------ ------ -------- --------
Difference (11/12 vs.
6/26)................ $ 5.5 ($ 4.0) $ 0.6 $ 0.3 ($ 0.1) ($ 1.4)
======= ====== ====== ====== ======== ========
G&A..................... 11/12 $ 51.4 $ 46.9 $ 30.1 $ 26.5 $ 22.5 $ 20.8
6/26 45.2 34.4 26.3 24.8 25.4 25.9
------- ------ ------ ------ -------- --------
Difference (11/12 vs.
6/26)................ $ 6.2 $ 12.5 $ 3.8 $ 1.7 ($ 2.9) ($ 5.1)
======= ====== ====== ====== ======== ========
R&D..................... 11/12 $ 45.9 $ 11.2 $ 8.7 $ 8.1 $ 7.5 $ 7.0
6/26 38.4 7.6 4.3 4.4 4.4 4.6
------- ------ ------ ------ -------- --------
Difference (11/12 vs.
6/26)................ $ 7.5 $ 3.6 $ 4.4 $ 3.7 $ 3.1 $ 2.4
======= ====== ====== ====== ======== ========
OPERATING INCOME........ 11/12 ($103.1) ($43.1) ($23.0) ($ 6.2) $ 4.4 $ 13.8
6/26 (95.5) (47.8) (18.3) (5.6) (0.8) 2.8
------- ------ ------ ------ -------- --------
Difference (11/12 vs.
6/26)................ ($ 7.6) $ 4.7 ($ 4.7) ($ 0.6) $ 5.2 11.0
======= ====== ====== ====== ======== ========
ROYALTY INCOME.......... 11/12 $ 0.0 $ 4.7 $ 5.2 $ 5.8 $ 6.4 $ 7.2
6/26 2.0 2.0 2.0 2.0 2.0 1.9
------- ------ ------ ------ -------- --------
Difference (11/12 vs.
6/26)................ ($ 2.0) $ 2.7 $ 3.2 $ 3.8 $ 4.4 $ 5.3
======= ====== ====== ====== ======== ========
OTHER EXPENSE (Income)
(a).................... 11/12 ($ 3.5) ($ 2.3) $ 1.5 $ 1.5 $ 1.5 $ 1.5
6/26 9.5 7.0 7.0 7.0 7.0 7.0
------- ------ ------ ------ -------- --------
Difference (11/12 vs.
6/26)................ ($ 13.0) ($ 9.3) ($ 5.5) ($ 5.5) ($ 5.5) ($ 5.5)
======= ====== ====== ====== ======== ========
EBIT.................... 11/12 ($ 99.6) ($36.2) ($19.3) ($ 1.9) $ 9.3 $ 19.4
6/26 (103.0) (52.8) (23.3) (10.6) (5.8) (2.3)
------- ------ ------ ------ -------- --------
Difference (11/12 vs.
6/26)................ $ 3.4 $ 16.6 $ 4.0 $ 8.7 $ 15.1 21.7
======= ====== ====== ====== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
(a) Other Expense in 1998 @ 6/26 excludes non-cash restructuring charge of
$35.2MM
Years 2000-2003 of 11/12 plan reflect bank financing fees. Per Electro
management.
C-8
<PAGE>
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- --------------------------------------------------------------------------------
II. BUSINESS PLAN COMPARISON
(DOLLARS IN MILLIONS)
FY ENDED DECEMBER 31,
BUDGET PROJECTED
BUSINESS PLAN ------ ----------------------------
DATE 1998 1999 2000 2001 2002 2003
------------- ------ ---- ---- ---- ---- ----
CASH FLOW ITEMS
DEPRECIATION &
AMORTIZATION........... 11/12 $ 35.8 $ 6.1 $ 3.2 $ 3.6 $ 3.9 $ 4.2
6/26 35.7 9.1 2.8 3.3 3.7 4.0
------- ------ ------ ------ ------ -----
Difference (11/12 vs.
6/26)................ $ 0.1 ($ 3.0) $ 0.4 $ 0.3 $ 0.2 0.2
======= ====== ====== ====== ====== =====
CAPITAL EXPENDITURES.... 11/12 ($ 99.8) ($ 4.9) ($ 4.5) ($ 4.5) ($ 4.5) ($4.5)
6/26 (13.2) (4.5) (4.5) (4.5) (4.5) (4.5)
------- ------ ------ ------ ------ -----
Difference (11/12 vs.
6/26)................ ($ 86.6) ($ 0.4) $ 0.0 $ 0.0 $ 0.0 0.0
======= ====== ====== ====== ====== =====
CHANGE IN NET WORKING
CAPITAL................ 11/12 ($ 4.3) $ 10.7 $ 17.0 ($13.1) ($ 3.3) ($5.7)
6/26 16.8 1.6 36.0 (2.0) (3.5) (0.5)
------- ------ ------ ------ ------ -----
Difference (11/12 vs.
6/26)................ ($ 21.1) $ 9.1 ($19.0) ($11.1) $ 0.2 (5.2)
======= ====== ====== ====== ====== =====
PROCEEDS FROM ASSET
SALES.................. 11/12 $ 70.3 $ 47.9 $ 0.0 $ 0.0 $ 0.0 $ 0.0
6/26 31.9 93.2 0.0 0.0 0.0 0.0
------- ------ ------ ------ ------ -----
Difference (11/12 vs.
6/26)................ $ 38.4 ($45.3) $ 0.0 $ 0.0 $ 0.0 0.0
======= ====== ====== ====== ====== =====
RESTRUCTURING COSTS..... 11/12 ($ 38.7) ($55.5) ($ 2.4) $ 0.0 $ 0.0 $ 0.0
6/26 (29.0) (61.5) (9.1) (6.6) (4.2) (2.8)
------- ------ ------ ------ ------ -----
Difference (11/12 vs.
6/26)................ ($ 9.7) $ 6.0 $ 6.7 $ 6.6 $ 4.2 2.8
======= ====== ====== ====== ====== =====
TAXES................... 11/12 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.2 $ 0.4
6/26 0.0 0.0 0.0 0.0 0.0 0.0
------- ------ ------ ------ ------ -----
Difference (11/12 vs.
6/26)................ $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.2 $ 0.4
======= ====== ====== ====== ====== =====
FREE CASH FLOW (A)...... 11/12 ($136.3) ($31.9) ($ 6.0) ($15.9) $ 5.2 $13.0
6/26 (60.8) (14.9) 1.9 (20.4) (14.3) (6.1)
------- ------ ------ ------ ------ -----
Difference (11/12 vs.
6/26)................ ($ 75.5) ($17.0) ($ 7.9) $ 4.5 $ 19.5 $19.1
======= ====== ====== ====== ====== =====
- --------------------------------------------------------------------------------
(a) Free cash flow defined as EBIT plus all cash flow items.
C-9
<PAGE>
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- --------------------------------------------------------------------------------
III. ONE-TIME ADJUSTMENTS
VALUE ADJUSTMENT
----------------
REDUCTION IN NWS SALE PROCEEDS Projected sale proceeds have been reduced
from *** to ***. Sale is now being
recognized in 1998 as opposed to Q1 1999.
SALE OF GLENVIEW PROPERTY 6/26 Valuation assumed the sale of
Glenview in Q1 1999. Sale occurred in
October of 1998.
SALE OF MELROSE PARK EQUIPMENT 6/26 Valuation assumed the sale of Melrose
Park equipment in Q1 1999. Sale occurred
in Q4 1998.
VSB ADJUSTMENTS VSB Technology cash flows have been
revised to reflect (i) updated input from
Forrester Research in respect to Domestic
VSB Technology and (ii) cash flow from
international markets based upon report
from GartnerConsulting.
TAX ADJUSTMENTS Tax Treatment revised per discussions
with Arthur Andersen to reflect impact of
alternative minimum tax and foreign tax
payments.
TRADEMARK & DISTRIBUTION ADJUSTMENTS 6/26 Valuation assumed all warranty
expenses against finished goods. Current
Valuation assumes a reduction in Trademark
& Distribution on account of warranty
claims of $33.3MM discounted for 8
quarters.
LIQUIDATION PROCEEDS ADJUSTMENTS Valuation assumes distribution of net
liquidation proceeds will occur over the
course of 2 to 4 years. Accordingly, a 10%
discount rate was applied to aggregate net
proceeds for 3 years.
C-10
<PAGE>
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- --------------------------------------------------------------------------------
IV. DOMESTIC VSB VALUE ADJUSTMENTS (A)
TVS Percent digital has been reduced for 1999-2005 due to
higher than expected retail pricing and slower price
reduction assumptions. Percent digital figures for 2006-
2011 have been increased due to an anticipated erosion in
the price disparity between analog and digital
televisions.
PCS The decrease in the percent using VSB for PCs reflects
the rapid transition to the low-end market in PCs and
the assumption that the low-end PC will not have VSB
capability. Earlier more aggressive assumptions were
predicated on the market power of the Wintel duopoly.
The Wintel duopoly's ability to dictate to the market
has not been demonstrated by recent market events.
Notwithstanding the foregoing, there will still be a
small market dominated by enthusiasts. Accordingly, the
royalty rate assumed for PCs is $5.00.
ADD-IN CARDS Assumed market share is based on 200,000 add-in cards
being sold for analog televisions in the past year.
Valuation assumes a $5.00 royalty rate for add-in cards.
VIDEO RECORDERS/DVD-R The reduction in percent digital in the
early years of VSB adoption reflects new market data
which indicates that the majority of products sold in
this group during that time period will be VCRs with
lower VSB/digital penetration rates than will be
experienced by the DVD-R product.
DVD-P The increase in the DVD-P market size in the early
years reflects updated market data. The decrease in the
market size in the later years reflects the new
assumption that the price disparity between DVD-R and
DVD-P will sufficiently erode to encourage a market shift
to DVD-R.
ATSC CONVERTERS The decrease in total VSB demodulation in years 2009-
2011 reflects updated market data indicating a projected
reduction in the number of analog televisions in use.
(a) All adjustments to Domestic VSB Valuation per Forrester Research, Inc.
C-11
<PAGE>
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- --------------------------------------------------------------------------------
V. S-4 PROPOSAL ANALYSIS
ANALYSIS OF S-4 PROPOSAL (BASED ON 11-12-98 BUSINESS PLAN)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ESTIMATED
CLAIM
AMOUNT
12/31/98 PROPOSED TREATMENT UNDER S-4 PROPOSAL $ RECOVERY % RECOVERY
--------- ------------------------------------- ---------- ----------
<S> <C> <C> <C> <C>
CITIBANK SECURED DEBT
(A).................... $ 68.2 $125.0 $68.2 100.0%
LG CLAIMS AND INTERESTS
SECURED
--------
Secured Guarantee of
Demand Notes.......... 72.0
Secured Guarantee of
Leveraged Lease (b)... 33.7
Direct Loans........... 45.0
------
Subtotal............. $150.7 Exchanged for (i) $118.8 in restructured Secured 100.0%
SENIOR UNSECURED Notes (c), (ii) 100.0% of the equity of $159.2 (d)
LG Extended Payable.... 140.0 reorganized Zenith, (iii) ownership of Senior Unsecured 6.1%
GENERAL UNSECURED Reynosa plant ($32.4MM credit against claims),
Leveraged Lease (iv) $8.0 in leverage lease equipment retained by
Deficiency Claim...... 56.4 LG and (v) general release. General Unsecured 0.0%
Service Fees........... 10.5
Guarantee Fees......... 1.6
------
Subtotal............. 68.5
------
Total LG Claims........ $359.2
--------
GENERAL UNSECURED
CLAIMS
--------
General Unsecured
(Trade)............... 55.8 Unimpaired....................................... $55.8 100.0%
General Unsecured
(Accruals)............ 122.4 $122.4 100.0%
--------
Indo Suez.............. 30.0 Modified Terms................................... $30.0 100.0%
6 1/4 Subordinated
Convertible $40.0 million new 6 1/4% subordinated
Debentures (f)........ 105.1 debentures due 2010............................. $40.0(e) 38.1%
Common Equity.......... NA Cancelled........................................
</TABLE>
- --------------------------------------------------------------------------------
(a) S-4 Proposal assumes $125.0 million working capital facility.
(b) Represents the amount paid by LGE to purchase claims, not legal contract
amount. Claim amount at appraised value of equipment, per Electro
management. Excludes impact, if any, of sale of certain Melrose Park
equipment to Philips.
(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 $0.0 million
at 12/31/98.
(e) Assumes face value. Trading value may be lower.
(f) Principal amount plus assumed accrued interest at 12/31/98.
C-12
<PAGE>
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- -------------------------------------------------------------------------------
VI. LIQUIDATION ANALYSIS
- -------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
ESTIMATED ESTIMATED
VALUE AT ESTIMATED ASSET RECOVERY
1/99 (A) % RECOVERY FROM LIQUIDATION
--------- ---------- ----------------
ASSETS
MARKETABLE ASSETS
VSB Technology (tax-affected) (b)....... $ 39.4
Trademark & Distribution (c)............ 12.1
Tuner Patent (d)........................ 38.0
Other Intangibles (e)................... 0.7
Flat Tension Mask (e)................... 2.1
CURRENT ASSETS
Cash.................................... $ 0.0 100.0% 0.0
Accounts Receivable (f)................. 158.3 65.0% 102.9
Inventories (g).........................
Finished Goods........................ 43.1 75.0% 32.3
Less: Warranty (i)...................... (0.4)
------
Net Finished Goods.................... 31.9
Work in Process....................... 10.5 5.0% 0.5
Raw Materials......................... 24.4 20.0% 4.9
FIXED ASSETS
Real Estate (h).........................
Domestic.............................. 4.4
Mexican (j)........................... 0.0
Furniture, Fixture and Equipment (h)....
Domestic (k).......................... 13.4
Mexican (j)........................... 18.9
------
Gross Asset Recovery................ $269.3
======
- -------------------------------------------------------------------------------
Note: Excludes "Other Assets" which represents the book gain on sale of
certain assets.
(a) All estimated values subject to substantial due diligence and review.
(b) Represents present value discounted to 1/1/99. Assumes 38.0% tax rate. Value
assumes a 35.0% discount rate 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 company's and the
majority shareholder's internal cost of capital of 12.0% and an incremental
tax rate of 38.0% also includes a reduction of $33.3 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%.
(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 1/1/99 net of reserves per Electro management.
(h) Estimated value at 1/1/99 per Electro management.
(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 $38.8MM in Mexican claims per Electro management. Real estate has been
reduced first.
(k) Does not reflect pending sale of certain equipment from Melrose Park to
Philips. Accordingly, actual recoveries may be lower.
C-13
<PAGE>
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- -------------------------------------------------------------------------------
VI. LIQUIDATION ANALYSIS
- -------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
GROSS ASSET RECOVERY............................... $269.3
LESS: LIQUIDATION EXPENSES, & ADMINISTRATIVE AND
PRIORITY TAX CLAIMS
Administrative Costs
- --------------------
Professional Fees(a)............................. $ 24.0
Corporate Overhead(b)............................ 24.8
Trustee Fees(c).................................. 4.7
Brokerage Fees(d)................................ 10.1
Wind Down Costs(e)............................... 5.6
WARN Act(b)...................................... 21.0
Environmental(b)................................. 23.8
------
Subtotal....................................... 113.9
------
AGGREGATE NET PROCEEDS............................. $155.3
LIQUIDATION PROCEEDS AVAILABLE FOR DISTRBUTION(F).. $116.7
CLAIM % RECOVERY
------ ----------
SECURED DEBT
Citibank......................................... $ 26.9(g) $ 26.9 100.0%
Proceeds available for secured creditors after
Citibank.......................................... $ 89.8
LG Guarantee of Demand Notes..................... 102.0 57.0 55.9%
LG Guarantee of Leveraged Lease.................. 13.6(h) 7.6 55.9%
LG Direct Loans.................................. 45.0 25.2 55.9%
------ ------
Total Secured Debt................................. $187.5 $116.7
====== ======
Liquidation Proceeds Available for Priority Claims and
Unsecured Creditors and Equity........................... $ 0.0
- -------------------------------------------------------------------------------
(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 $38.8MM 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.
(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 12/31/98 balance plus Q4 cash restructuring
costs including Melrose Park idle costs ($6.3MM), engineering severance
($2.5MM) and Q4 professional fees ($5.1MM).
(h) Secured claim reflecting LG's guarantee of the leveraged lease equals the
value of the leveraged lease equipment in a liquidation per Greenwich
Industrial. Any deficiency claim is treated as unsecured.
C-14
<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% senior 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 have 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 approximately $135.1 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 our subordinated debt and do not wish to consent to the
releases granted in favor of certain directors of the Company, certain investors
in the Company, certain holders of the subordinated debt as provided for in the
restructuring plan, you should check the box under Item 5 of your Ballot. The
Company is aware that certain security holders have asserted or may assert that
claims exist against one or more of the investors and/or directors designated by
LG Electronics Inc. relating to 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 the subordinated debt that
have accepted the restructuring, or if the class of holders of subordinated debt
has
<PAGE>
voted in favor of the restructuring or if the holder of subordinated debt is
entitled to receive a distribution of property under the restructuring, such
claims will be released by the terms of the restructuring, unless such holder of
subordinated debt has marked a ballot so as not to consent to the releases.
Moreover, all of the directors, investors and holders of subordinated debt
entitled to receive the releases, including the directors designated by LG
Electronics Inc., would receive the benefits of the exculpation provisions of
the restructuring, which might impair certain causes of action not affected by
the releases in the restructuring.
It is a condition to consummation of our restructuring plan 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.
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
numbers 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 _________________.
<PAGE>
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 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 2 - Citibank Secured 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 2 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 2 Vote.
The holder of the Class 2 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 5 - 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 5 Claim in the aggregate
outstanding amount of $__________.
Item 2. Description of Class 5 Claims.
Please provide the information required by this Item 2 in the following table
(use additional sheets of paper if necessary):
<TABLE>
<CAPTION>
Names of Holder* Account Number** Face Amount of Debentures Held
<S> <C> <C>
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
Total Amount of Claims $_________________________
(must be same as Item 1)
<PAGE>
* Insert your name if the Class 5 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 5 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 5 Vote.
The holder of the Class 5 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 5 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 Debenture Releasees and
do not consent to the release of claims by you against the Investor
Releasees, the D&O Releasees and the Debenture Releasees 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 5 CLAIMS CHECK THE BOX IN ITEM 5 OF THE
BALLOT. IF MORE THAN 5% OF THE HOLDERS OF CLASS 5 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 release 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
-2-
<PAGE>
vote on the Prepackaged Plan and, if you vote on the Prepackaged Plan, of
whether you vote to accept or reject the 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
-----------------------
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 release 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"). 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, other than a holder of Old Subordinated Debentures that has marked this
Ballot so as not to consent to the releases in favor of the D&O Releasees,
Investor Releasees and Debenture Releasees, 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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
-4-
<PAGE>
mailing address if different from that set forth on the attached mailing label
or if no such mailing label is attached to the Ballot.
9. 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.
10. 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.
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 6 - 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 6 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 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 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 5 - 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 5 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 5 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 5 Vote.
As instructed by the Beneficial Holders of the aggregate number of Class 5
Claims as set forth in Item 1 above, the undersigned transmits the following
votes of such Beneficial Holders in respect of their Class 5 Claims.
To Accept (vote FOR) the Prepackaged Plan:
__________________________________ ______________________________
Aggregate number of Class 5 Claims Aggregate Amount of Old
Subordinated Debentures Claims
To Reject (vote AGAINST) the Prepackaged Plan:
__________________________________ ______________________________
Aggregate number of Class 5 Claims Aggregate Amount of Old
Subordinated Debentures Claims
Item 3. Class 5 Vote - Number of Holders of Class 5 Claims
The following Beneficial Holders of Class 5 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):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Insert Amount of Claims Voted
- ------------------------------------------------------------------------------------------
Customer Account No. Accept the Prepackaged Plan Reject the Prepackaged Plan
and/or Customer Name (VOTE FOR) (VOTE AGAINST)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
1.
- ------------------------------------------------------------------------------------------
2.
- ------------------------------------------------------------------------------------------
3.
- ------------------------------------------------------------------------------------------
4.
- ------------------------------------------------------------------------------------------
5.
- ------------------------------------------------------------------------------------------
6.
- ------------------------------------------------------------------------------------------
7.
- ------------------------------------------------------------------------------------------
</TABLE>
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;
-2-
<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 5 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 Debenture Releasees and to not consent to
the permanent injunction precluding claims by them against the Investor
Releasees, the D&O Releasees and the Debenture Releasees as described in Clause
C of Article X of the Prepackaged Plan.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Insert Amount of Claims Voted
- ---------------------------------------------------------------
Customer Account No. (Elected to Preserve Rights)
and/or Customer Name
- ---------------------------------------------------------------
<S> <C>
1.
- ---------------------------------------------------------------
2.
- ---------------------------------------------------------------
3.
- ---------------------------------------------------------------
4.
- ---------------------------------------------------------------
5.
- ---------------------------------------------------------------
6.
- ---------------------------------------------------------------
7.
- ---------------------------------------------------------------
</TABLE>
IT IS A CONDITION TO CONSUMMATION OF THE PREPACKAGED PLAN THAT NOT MORE THAN 5%
OF THE HOLDERS OF CLASS 5 CLAIMS CHECK THE BOX IN ITEM 5 OF THE BALLOT. IF MORE
THAN 5% OF THE HOLDERS OF CLASS 5 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:
----------------
-3-
<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 5 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 5 Claims and take
any action required to enable each such Beneficial Holder to vote the Class 5
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 5 Claims should not surrender instruments or certificates
representing or evidencing their Class 5 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 5 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 5 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) the votes not to consent to Clause C of Article X of the
Prepackaged Plan, in Items 2 and 5 respectively for the Class 5 Claims
held by you as the registered holder on behalf of the Beneficial
Holders. 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, other than a
holder of Old Subordinated Debentures that has marked this Ballot so
as not to consent to the releases in favor of the D&O Releasees,
Investor Releasees and Debenture Releasees, 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
-5-
<PAGE>
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.
(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.
If you are both the registered holder and Beneficial Holder of any of
the Class 5 Claims and you wish to vote such Class 5 Claims, you
should return a Ballot for the Claims for which you are a Beneficial
Holder and a Master Ballot for the Claims for which you are a
registered holder.
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, though 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-
<PAGE>
Privileged and Confidential
Attorney Work Product
- ---------------------
================================================================================
ZENITH CAPITAL STRUCTURE ANALYSIS
PREPARED FOR
LG ELECTRONICS INC.
================================================================================
Lazard Freres & Co. LLC March 25, 1998
<PAGE>
Attorney Work Product
PROJECT LION Preliminary Draft - Confidential
- --------------------------------------------------------------------------------
Capital Structure Analysis
. Current Capital Structure
- Highly leveraged
- Much of debt is short-term
- Does not match business strategy
- Citicorp Facility is over collateralized
- 6 1/4% Subordinated Convertible Debentures must be serviced
- At year end 1997, book equity is negative
. Strategic Objectives of Financial Restructuring through a Pre-packaged
Bankruptcy
- Eliminate common equity in public hands
- Create an impaired consenting class for cramdown
- Complete restructuring in 1998
- Define future financial needs
- Stabilize capital structure
-1-
<PAGE>
Attorney Work Product
Project Lion Preliminary Draft - Confidential
- --------------------------------------------------------------------------------
Alternatives for Convertible Subordinated Debentures
. $103.5 million 6 1/4% Convertible Subordinated Debenture, due 2011 (the
"Debentures")
-- Sinking fund of $5.8 million due annually in April
-- Current bid/ask: 69 1/4 / 70 1/2
-- Unsecured general obligation
-- Convertible into common stock at $31.25 per share
. Ways to impair
-- Reduce face amount
-- Change maturity or average life
-- Eliminate convertibility feature
-- Modify interest rate
. Suggested approach to negotiations
Going In Coming Out
- --------------------------------------- ------------------------------------
Face Amount @ 110% of new trading level Face amount near par
Bullet maturity in 7 years (No SF) Probably acceptable
Eliminate convertibility Probably acceptable
BB market interest rate Single B market rate
No covenants Depends on financial deal but likely
limits on new secured and unsecured
debt and dividends
No equity to holders Probably acceptable if rate of
return attractive
<PAGE>
Alternatives for Equity
. Current equity has no value except "hold-up" value
- Prevents Zenith from rapid reorganization
- Exposes LG to unwanted publicity and litigation
. Be prepared to give equity some compensation during pre-pack negotiations
to "go away"
<TABLE>
<CAPTION>
Forms of Compensation Method Problem
---------------------- ------ -------
<S> <C> <C>
Cash Pre-pack cash Current market price
distribution ($6.875) leads to high
expectations
Debt or Preferred Stock Obligation to pay May be on balance sheet;
only under certain has to be disclosed
circumstances
Equity Warrants or other Difficult to value; public
out-of-the money shareholders might be
options created
Other Assets Participation in Difficult to value and
carved-out business distribute
or asset distribution
</TABLE>
. Preferable to issue security with contingent payment rights to existing
non-LG shareholders
-3-
<PAGE>
Attorney Work Product
PROJECT LION Preliminary Draft - Confidential
- -------------------------------------------------------------------------------
Alternatives for Equity (continued)
. Characteristics of "contingent payment right"
- Risk profile like a junior equity security although may be technically
debt or preferred stock
- May be reporting company under '34 Act
- No corporate governance rights
- Payments based on either cash flow or "market value"
<> Difficult to determine market value - would have to periodically
get investment bankers to value and opine
<> Preferable to base on achieving free cash flow benchmarks
. Illustrative terms of contingent payment right
- Beginning in 2000 (may need to begin after Debentures are repaid)
- Financial test measured annually
- Based on free cash flow after all debt service (including LG's)
exceeding $________
- Limited to $_______ in any given year and $_______ cumulatively
- Expires 10 years after first year of measurement
. Additional possibilities
- Offer shareholders choice of cash or the contingent payment right
- Reverse-split stock, cash out fractional holders, and distribute
contingent payment right to resulting small number of holders
-4-
<PAGE>
Restructured Debt
. Zenith's restructured debt will include an asset-based facility secured by
inventory, receivables, and intellectual property and the Debentures, as
renegotiated.
. From the latest version of the Business Plan (March 12, 1998), it would
appear that Zenith's balance sheet and cash flow cannot accommodate more
than $125 million - $175 million of cash-pay obligations.
- This amount is before taking into account any cash realized from the
VSB royalty stream
. LG may determine to keep a modest amount of debt on Zenith's balance sheet.
- Will be serviced out of "excess cash flow" and VSB royalty stream
- Until cash is available, can be structured as PIK security ("payment
in-kind")
- Should not exceed an amount necessary to provide Zenith with a capital
structure attractive to suppliers and third party creditors
. As long as Zenith has third-party creditors (secured debt facility and
Debentures), LG will have to conduct Zenith's business in a way that does
not materially impair Zenith's creditworthiness.
- May restrict sale/transfer of assets, transactions with affiliates,
debt incurrence, etc.
- Can maintain some flexibility by negotiating right to prepay at little
or no penalty
-5-
<PAGE>
Restructured Debt (cont'd)
($ in millions)
<TABLE>
<CAPTION>
Illustrative Restructured Debt
Current/(1)/ Adjustments/(2)/ Pro Forma
----------- --------------- ---------
<S> <C> <C> <C>
Secured Citicorp Agented Debt
Inventory Revolver $ 3.8 -- $ 3.8
Term Loan 36.0 -- 36.0
Receivables Securitization
(LG LoC) 47.8 -- 47.8
------- ------- -----
87.6 87.6
Unsecured, LG Guaranteed
4 Bank Revolvers 102.0 (102.0) --
Leveraged Lease 110.0 (110.0) --
Unsecured Debt, Non-LG
6 1/4% Debentures due 2011 103.6 (28.6)/(3)/ 75.0
Direct LG Debt -- -- --
LG Interest bearing time draft 140.0 (140.0)
New Bridge Financing/(4)/ 45.0 (45.0)
------ -----
500.6 75.0
------ -----
Total Debt $588.2 $162.6
====== ======
</TABLE>
- ----------------------------
/(1)/ Q1-98 Business Plan dated March 12, 1998 plus new LG Bridge Financing
/(2)/ "Adjustments" represent conversion of LG debt to equity and renegotiation
of Debentures.
/(3)/ For illustrative purposes only; amount not determinable at this time.
/(4)/ Implicit in this analysis is that any additional LG-backed or direct debt
is converted to equity.
-6-
<PAGE>
Restructured Debt (cont'd)
($ in millions)
Debt Ratios
<TABLE>
<CAPTION>
Zenith in
FY 2000/(1)/
-------------
<S> <C> <C>
EBIT $15.1
Depreciation & amortization 2.3
-------
EBITDA $17.4
=======
Cash Interest Expense
Inventory & Term Loan (8.75%) 3.5
Receivables (6.50%) 3.1
Debentures (10.0%) 7.5
-------
$14.1
=======
EBIT to Cash Interest 1.07x
EBITDA to Cash Interest 1.23x
Debt to EBITDA 9.34x
</TABLE>
- ----------------------------
/(1)/ Business Plan dated March 12, 1998, excludes cash flow, if any, VSB
royalty
-7-
<PAGE>
Attorney Work Product
PROJECT LION Preliminary Draft - Confidential
- --------------------------------------------------------------------------------
Restructured Debt (cont'd)
($ in millions)
ADDITIONAL DEBT CAPACITY
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
EBITDA in
Business Plan/(1)/ $(14.8) $17.4 $17.4 $17.4 $17.4
25% of PJSC Going
Concern VSB Cash Flows 7.9 15.6 21.1 26.8 32.8
----------- ----------- ----------- ----------- -----------
Adjusted EBITDA $ (6.9) $33.0 $38.5 $44.2 $50.2
=========== =========== =========== =========== ===========
Cash Interest Expense as
per prior page 14.1 14.1 14.1 14.1 14.1
Additional Interest/(2)/ - 0.6 3.0 5.5 8.2
----------- ----------- ----------- ----------- -----------
Total Interest $14.1 $14.7 $17.1 $19.6 $22.3
EBITDA to Cash Interest NM 2.25x 2.25x 2.25x 2.25x
Additional Debt Capacity/(3)/ N/A $7.1 $35.3 $64.7 $96.5
Debt to EBITDA/(4) N/A 5.14x 5.14x 5.14x 5.16x
</TABLE>
- -----------------
(1) Business Plan forecast of March 12, 1998 to the year 2000, held constant
thereafter.
(2) Based on S&P Single B coverage of 2.27x.
(3) Assume debt carries H.50% interest rate.
(4) S&P Single B Debt to EBITDA is 4.37x.
-8-
<PAGE>
Attorney Work Product
Project Lion Preliminary Draft - Confidential
- --------------------------------------------------------------------------------
Restructured Capitalization
($ in millions)
Illustrative Capitalization/(1)/
<TABLE>
<CAPTION>
Full Value for VSB 25% Value for VSB
------------------ -----------------
<S> <C> <C>
Enterprise Value based on Business Plan of 3/12/98 $ 90.0/(2)/ $ 90.0/(2)/
Domestic VSB value 222.5/(2)/ 55.6/(3)/
------------------ -----------------
Total Asset Value 312.5 145.6
Pro forma debt (162.6) (162.6)
------------------ -----------------
Equity Value $ 149.9 $ (17.0)
Debt % Total Assets 52.0% NM
Total Asset Value $ 312.5 $ 145.6
Pro forma debt (162.6) (162.6)
LG debt (100.0) (100.0)
------------------ -----------------
Equity Value $ 49.9 $(117.0)
Debt % Total Assets 84.0% NM
</TABLE>
- ---------------
/(1)/ Asset values are taken from "Going Concern" Analysis prepared by PJSC
dated March 23, 1998. All values are (1) subject to substantial due
diligence and review, (ii) assume utilization of NOL's without limitation
and (iii) are conditioned on numerous assumptions described in the
financial analysis compiled by PJSC.
/(2)/ Mid point of high/low range.
/(3)/ 25% of mid point of high/low range.
-9-
<PAGE>
December 13, 1998
Attorney Work Product
Prepared in Anticipation of Litigation
Privileged and Confidential
LG Electronics Inc.
-------------------
Key Financial Options for Structuring a Bondholder Security
- -----------------------------------------------------------
Proposed in S4 Options
-------------- -------
Coupon 6.25% Any coupon possible but likely to be
no higher than 15% (could be 0%)
Face Amount $40 million Any face amount possible but likely
between $40 million and $103.5 million
Term (maturity) 11 years Longer (15-25 years) or shorter (5 or
7 years)
Sinking Fund None Amortization of principle prior to maturity
(amortization) (Bullet)
<TABLE>
<CAPTION>
Value @ Market
--------------
12% 15%
----- -----
($ in millions)
<S> <C> <C>
Sensitivity:
- ------------
S-4 Proposal ($40MM 6 1/4% 11 years) $26.2 $21.4
Raise coupon to 10% 35.2 29.4
Raise coupon to 14% 44.8 37.9
Shorten maturity to 7 year bullet 29.3 25.1
Shorten maturity to 5 year bullet 31.5 28.0
SF of 10% ($4MM) in years 8-10, mature Year 11 26.6 21.9
SF of 10% ($4MM) in years 5-6, mature Year 7 29.6 25.6
Coupon @ 10%, 11 year maturity with SF 35.3 29.7
"Value" at 4/1/99 of existing sub. deb./(1)/ 80.1 70.4
</TABLE>
- ------------
/(1)/ Assumes all payments of principal and interest made when due.
<PAGE>
<TABLE>
<CAPTION>
Specific Ideas
- --------------
Face Amount Coupon Maturity Value/(1)/
--------------- ------ ---------- ---------------
($ in millions) (in years) ($ in millions)
<S> <C> <C> <C> <C>
$40 10% 7 $31.5
50 8 11 31.4
40 15 5 40.0
50 12 8-11 42.2
50 15 11 50.0
60 10 5 49.7
60 14 7 57.5
70 12 5-7 61.3
</TABLE>
- --------------
/(1)/ Based on 15% discount rate for illustrative purposes only.
<PAGE>
December 13, 1998
Attorney Work Product
Prepared in Anticipation of Litigation
Privileged and Confidential
LG Electronics Inc. ("LGE")
- ---------------------------
Contingent Payment Rights issued to holders of Subordinated Debentures
("Series A Rights") and non-LGE equity ("Series B Rights" and, collectively, the
"Rights")
General Concept
- ---------------
Participate in "upside" related to Zenith business in a capped amount during a
limited time period.
Calculation of Zenith Net Cash Flow
- -----------------------------------
On a cumulative basis starting with the quarter end after the effective date of
the Plan of Reorganization, consolidated Zenith net cash flow (as defined) will
be calculated. Net cash flow will include a management fee to LGE of $_________
per annum to reflect on-going LGE support of Zenith operations.
Calculation of Allocation of Cumulative Zenith Net Cash Flow
- ------------------------------------------------------------
First: To repay any debt of Zenith, including advances from LGE,
- -----
Second: To repay LGE $200 million plus an assumed return of 12%, such amount
- ------
representing LGE's cost of the debt foregiven in the chapter 11
proceeding,
Third: 33% to Series A Rights until earlier of paid in full or maturity of
- -----
Series A Rights, and
Fourth: Beginning only after payment in full of the Series A Rights, 25% to
- ------
non-LGE equity until the earlier of equity's having received $15
million, or 2010.
Rights Expire
- -------------
The Series A Rights expire the earlier of 2010 or when the bondholders have been
"paid in full," defined as the difference between the market value of the
security received and the market value of the existing convertible sub debs.
The Series B Rights expire the earlier of 2010 or when the holders have received
$15 million.
Other Provisions
- ----------------
Rights are detachable. Zenith can call the Rights at the remaining capped
amount.
Rights have no covenants, voting rights or other rights.
<PAGE>
Other Provisions (cont'd)
- -------------------------
Zenith net cash flow as defined above will be confirmed on an annual basis by a
recognized independent accounting firm and then payments under the Rights will
be made 60 days thereafter. Holders of the Series A Rights will receive the
financial confirmation. Holders of the Rights will not have any other access to
Zenith or its management.
* * * * * * * * * * * * * * * * * * * * *
Pros Cons
---- ----
If it is the last "card" to play, Until such time as the Series B
the contingent payment right Rights are paid in full or expire,
may represent the final step in a Zenith will remain a reporting company
consensual arrangement. subject to periodic SEC filings to
extent required by Federal Securities
A consensual plan may save time and laws.
expense in restructuring Zenith.
In the event that distributions are
made under the Rights, the Rights
represent a value give-up for LGE.
The holders of the Rights may seek to
place restrictions on transactions
between LGE and Zenith to preserve
value in Zenith.
<PAGE>
Exhibit 99 ak
[LOGO OF ZENITH APPEARS HERE]
U.S. Owned Facilities
Property Summary
and
Value Estimates
Prepared by
[LOGO OF ESG APPEARS HERE]
February, 1998
<PAGE>
[LOGO OF ZENITH APPEARS HERE]
- -------------------
TABLE OF CONTENTS
- -------------------
1. EXECUTIVE SUMMARY
2. HEADQUARTER BUILDING
PLANT #31
3. MELROSE PARK FACILITY
PLANT #25
4. FRANKLIN PARK FACILITY
PLANT #45
5. MCALLEN FACILITY
PLANT #15
<PAGE>
[LOGO OF ZENITH APPEARS HERE]
- ---------------------
EXECUTIVE SUMMARY
- ---------------------
Purpose of the Report
We have prepared the following report at the request of Mr. Richard Vitkus in an
effort to assist Zenith in its desire to properly evaluate the U.S. real estate
portfolio. Our evaluation is from a disposition perspective and focuses on
issues that aid or hinder the salability of the respective properties and the
ranges of values we believe will be realized if the properties are taken to
market. In addition, we prepared this report for review by board members at the
February 26, 1998 board meeting and made it as concise as possible.
Substantiating data such as sale comparables and discounted cash flow analysis
have been provided as a more extended version of this report on a property by
property basis and given to Mr. Vitkus.
Due Diligence/Investigation
Value conclusions are based upon inspections of each asset, proformas based on
what we know are good assumptions, sale comparable data and "conceptual"
conversations with purchasers. At no time have we disclosed Zenith's name or
the specific location of any facility. We have treated this assignment as a
confidential investigation for the purpose of assisting in Zenith's strategic
planning. Our conclusions and recommendations can be further refined at a time
when third parties can evaluate the facility directly for feedback on such
things as salvage value and purchase price.
<PAGE>
[LOGO OF ZENITH APPEARS HERE]
- ------------------
EXECUTIVE SUMMARY
- ------------------
Value Range Estimates
Headquarters Building (Plant #31) $ 27.0-30.0 mm
526,266 square feet, suburban office
Investor Buyer
Melrose Park (Plant #25) $ 2.8 - 4.0 mm
936,540 sf, manufacturing
User Buyer/Sale Leaseback
Franklin Park (Plant #45) $ 3.5 - 4.0 mm
211,941 sf, warehouse
Investor Buyer
McAllen Texas (Plant #15) $ 0.9 - 1.2 mm
50,000 sf, warehouse
Investor/User Buyer ____________
Total: $ 34.2- 39.2 mm
Environmental
All of our conclusions are exclusive of any environmental considerations. We
understand there is a desire of not wanting to proactively investigate the
possibility of contaminants, however if Zenith proceeds to a sale, we recommend
that a thorough investigation be done prior to going to market.
All buyers will undertake an investigation prior to committing funds. We
believe it would be a negotiating disadvantage to have such a buyer in
possession of more data than us and to be in a position of educating us on our
own site. In addition, there may be logical proactive steps to take prior to a
sale that can save costs and limit the concern by a buying group.
<PAGE>
[LOGO OF ZENITH APPEARS HERE]
- -------------------
HEADQUARTER BUILDING
GLENVIEW, IL.
PLANT #31
- -------------------
Property Description
Improvements: The subject is a seven story office building with approximately
- ------------
526,266 square feet and an eighth floor penthouse, built in 1974. There is
parking for 1,083 cars resulting in a ratio of 2.1 per 1,000 square feet of
nra. There are 6 passenger and 1 freight elevator, or one per 87,700 square
feet of nra. Roof and mechanical systems are original.
Land - Lot 2: "Lot 2" is the common reference for the site. It contains
- -------------
approximately 39.821 acres and is Zoned I-1 which allows business, office and
professional type uses including the existing use. Access is provided by Zenith
Dr. which intersects with Milwaukee Avenue at a lighted intersection. There is
no frontage along Milwaukee as two additional lots, referred to as Lots 3 & 4,
owned by Town & Country Homes, creates a buffer between Milwaukee Ave. and the
Subject. There is approximately 1,400 feet of frontage along the I-294. There
is the potential to construct additional office space on the site.
Property Tour Conclusions
Several of us have toured the facility many times and agree on the following
conclusions as it relates to a purchaser's analysis and the salability of the
subject.
Positives: Foremost, property fundamentals are very strong. The location in
- --------- --------
Glenview near the hotel and other office properties is very good. Surrounding
population density, income and housing stock have helped to keep demand for
office space high. Second, visibility along the Tri-State Tollway is excellent.
----------
The
<PAGE>
[LOGO OF ZENITH APPEARS HERE]
- -------------------
HEADQUARTER BUILDING
GLENVIEW, IL.
PLANT #31 (Cont'd)
- -------------------
building is very prominent and maintains a high profile for any tenant whose
name or address reflects that of the subject. Third, access, is very good.
------
There is a lighted interchange directly into the subject on Milwaukee Avenue, a
major artery. In addition, proximity to Willow Rd.'s full interchange with I-294
makes accessibility practical for a wide range of suburbs. The building's layout
------
within the site is practical and somewhat flexible given the amount of land
available to create solutions for shortfalls that might arise based on tenant
use. The potential to build an additional building on this site is high as well.
Challenges: The challenges we noted include Floor plates which are less than
- ---------- ------------
optimal given the large size and off-center core configuration. These large
floor plates result in a lower overall rental rate for underwriting. Secondly,
existing build-out and finishes which are not reusable and will need to be
- -------------------------------
gutted, result in an increase of initial tenant build out costs. Finally, the
parking ratio of 2.1/1,000 sfnra is below the desired standard of 4 per
thousand. We believe capacity can be increased because of the parcel size,
reducing the impact of the problem. In addition, buyers will plan for capital
expenditures on the roof, mechanical systems and the parking lot, as all are
--------------------------------------------
original and near the end of their useful life
Values
Our approach to value is based on the analysis of three different buyer profiles
and their respective motivations. Value estimates are different for each, as
are various other pro's and con's, such as timing and ability to close. We have
enclosed a chart that summarizes the differences for each later in this section.
<PAGE>
[LOGO OF ZENITH APPEARS HERE]
- -------------------
HEADQUARTER BUILDING
GLENVIEW, IL.
PLANT #31 (Cont'd)
- -------------------
Discounted cash flow analysis and sale comparable data are the two main sources
of information we have used to reach our conclusions.
Headquarter Building (Plant #31, Lot 2):
- ---------------------------------------
Office User: $30mm to $33 mm
Real Estate Investor: $27mm to $30 mm
REIT Sale/Leaseback: $25mm to $33 mm
<PAGE>
[LOGO OF ZENITH APPEARS HERE]
- -------------------
2407 NORTH AVE
MELROSE PARK, IL.
PLANT #25
- -------------------
Property Description
Improvements: The subject is a three level tube manufacturing facility with
- ------------
approximately 950,000 square feet. Zenith purchased the facility from a bakery
company in 1965. There is parking for 880 cars in addition to 13 truck docks.
Clear heights are 10' in the basement, 12.5' on the first level and 9 - 15' on
the second level. 80% of the building is sprinklered.
Land: The site contains approximately 21.5 acres and is zoned for
- ----
industrial/manufacturing and permits the existing use. Access is provided by
curb cuts on both North Ave. and 25th Ave. The property is also served by rail
which has not been utilized by current Zenith operations. I-294 is approximately
2.5 miles west and I-290 is approximately 2 miles south of the subject.
Property Tour Conclusions
Challenges: After four of us had a detailed tour of the building, we concluded
- ----------
that the basement and third floors have limited practical reuse given the
inaccessibility and low ceiling heights. Access to all floors is limited to one
freight elevator (there are no ramps), stairwells and small cutouts for conveyor
belts. In addition, ceiling heights are too low, less than 9' clear in the
basement and 14' on the third floor, for practical storage use. As a result we
view the main floor of 553,000 sf as the realistic size of the Facility for
comparisons to other per square foot sales and rentals.
Evaluation of the main floor itself is hindered by the amount of concrete
demising walls and suspended ceilings, resulting in a rough and wide demolition
cost
<PAGE>
[LOGO OF ZENITH APPEARS HERE]
- ----------------------
2407 NORTH AVE
MELROSE PARK, IL.
PLANT #25 (CONT.)
- ----------------------
estimate of $3-4 psf. The information we have received does not indicate which
walls are load bearing and where useable clear heights can be achieved. Both
elements are crucial for targeting a reuse value for storage to the first floor
and demolition costs. Finally, there are 13 truck docks for the entire
building, an amount far below that which would be required for a storage or
distribution use. The desired number could easily double, creating an
additional capital cost for the purchaser.
Positives: The positives, and there are some, include the location along North
- ---------
Ave. which has potential for continued manufacturing or redevelopment as retail.
Access and visibility are also good.
Value(s)
Our approach to value is based on an analysis from the perspective of four
different buyer profiles we consider logical for the Facility. Value estimates
are different for each, in addition to other pro's and con's for each buyer
type. We have enclosed a chart that summarizes the differences for each later
in this section. In general the breakdown is as follows:
Industrial User/Buyer: $2.8mm - $4.4mm
Retail Developer: $2.7mm - $2.9mm after demo.
Industrial Speculator: $0.0 No interest
REIT Sale Leaseback: $4.6mm to $7.4mm depending
on rent.
<PAGE>
[LOGO OF ZENITH APPEARS HERE]
- ----------------------
2155 N. ROSE STREET
FRANKLIN PARK, IL.
PLANT #45
- ----------------------
Property Description
Improvements
- ------------
The subject property is a single story warehouse facility consisting of
approximately 220,000 S.F. on a 9.2 acre site located at 2155 Rose Street,
Franklin Park, Illinois. The facility could be utilized for either warehouse/
distribution or manufacturing, however, it is currently used as a
warehouse/distribution facility for which it is most suited.
Property Tour Conclusions
Positives
- ---------
The Facility contains approximately 220,000 S.F. and is located on a site with
approximately 9.2 acres. After a detailed tour of the building, we concluded
that the building appears to be well maintained and in good condition given its
age. Per Mr. Ed Reszke, the entire building was re-roofed in 1995.
The building is well docked having 26 exterior docks and 4 interior docks and
good clear height of primarily 20' clear and 22' clear in approximately 53,000
S.F. The building is also rail served which is a benefit, although we
understand the rail is not active and would require some costs to activate. The
building can also accommodate outside storage for about 25 trailers. The
facility is well located with good access to major expressways and
thoroughfares. A full interchange at I-294 and North Avenue is approximately
2.5 miles west of the Facility in addition to a full interchange at I-290
approximately 2 miles south.
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[LOGO OF ZENITH APPEARS HERE]
- ----------------------
2155 N. ROSE STREET
FRANKLIN PARK, IL.
PLANT #45 (CONT.)
- ----------------------
Challenges
- ----------
Car parking is limited, however there is a possibility to park cars in the area
that used to contain the water tower, further investigation needs to be done to
qualify this area.
The property is also located in Cook County, which typically has higher real
estate taxes than the surrounding counties. Users are attempting to reduce
their occupancy cost. One way to achieve this goal is to move to DuPage County
where real estate taxes are roughly one-half of Cook County. Many users have
chosen to relocate to these collar counties.
Market
- ------
The Property is located in the East O'Hare submarket which has 65,000,000 S.F.
of industrial space, one of the largest in the Chicago area. The current
vacancy rate is approximately nine (9%) percent in the submarket. Demand has
been strong during the past 2 years.
The general area will provide a good base of prospective user/buyers.
<PAGE>
[LOGO OF ZENITH APPEARS HERE]
- ------------------------
2155 N. ROSE STREET
FRANKLIN PARK, IL.
PLANT #45
- ------------------------
Value(s)
Our approach to value is based on an analysis from the perspective of three
different buyer profiles we consider logical for the Facility. Value estimates
are different for each, in addition to other pro's and con's for each buyer
type. We have enclosed a chart that summarizes the differences for each later
in this section. In general the breakdown is as follows:
Industrial User/Buyer: $4.4-$5.3 Million
Industrial Speculator: $3.5-$4.0 Million
REIT Sale Leaseback: $4.2-$4.9 Million depending
on rent.
Environmental
All of our conclusions are exclusive of any environmental considerations,
pursuant to your instruction. We understand your current position of not
wanting to proactively investigate the possibility of contaminants, however if
Zenith proceeds to a sale, we recommend that a thorough investigation be done
prior to going to market.
All buyers will undertake an investigation prior to committing funds. We
believe it would be a negotiating disadvantage to have such a buyer in
possession of more data than us and to be in a position of educating us on our
own site. In addition, there may be logical proactive steps to take prior to a
sale that can save costs and limit the concern by a buying group.
<PAGE>
[LOGO OF ZENITH APPEARS HERE]
- ----------------------
6601 SOUTH 33/rd/ ST.
MCALLEN, TX.
PLANT #15
- ----------------------
Property Description
Improvements
- ------------
The subject property is a single story warehouse/production facility consisting
of approximately 52,500 S.F. on a 3.7 acre site located at 6601 South 33/rd/
Street, McAllen, Texas. The facility is currently owned by the Zenith
Corporation however, the land is leased from the McAllen Economic Trade
Corporation on a 99 year lease with approximately 77 years remaining.
Property Tour Conclusions
Positives
- ---------
The Facility contains approximately 52,000 S.F. on a 3.7 acre site, with 15,000
S.F. of finished office area. The facility has a single roof line, which would
allow for reduction of finished office space.
The condition of the building appears to be good and is situated on the McAllen
Economic Trade Zone, which is a gated and contained industrial park.
The building is approximately 25' clear and has 4 exterior loading docks,
trailer storage for 31 trailers and parking for 79 cars.
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[LOGO OF ZENITH APPEARS HERE]
- ----------------------
6601 SOUTH 33/rd/ ST.
MCALLEN, TX.
PLANT #15
- ----------------------
Challenges
- ----------
Although the building is a modern functional facility some buyers are going to
have a problem purchasing a building and not having title to the land because of
the land lease. The property also appears to be over improved with office space
with for most users will require a demolition of the office space down to a more
typical office percentage of 10% or 5,000 S.F.
The building also includes a second floor mezzanine which may or may not have
any value to a prospective buyer therefore no value should be placed on a second
floor space. This may also create a problem in reducing the office space. In
addition, there is a Right of First Refusal in the ground lease which creates a
slight burden from the marketing perspective.
Market
- ------
The City of McAllen is located within the Rio Grande Valley area, which has seen
a significant influx of corporations as a result of NAFTA. Companies have
established plants in Mexico and the United States in what is commonly known as
a "Maquiladora". The property is zoned I-2 for heavy industrial, which should
allow for almost all types of manufacturing, so long as the use does not
adversely affect the environment.
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[LOGO OF ZENITH APPEARS HERE]
- ----------------------
6601 SOUTH 33/rd/ ST.
MCALLEN, TX.
PLANT #15
- ----------------------
Value(s)
Our approach to value is based on an analysis from the perspective of two
different buyer profiles we consider logical for the facility. Value estimates
are different for each, in addition to other pro's and con's for each buyer
type. We have enclosed a chart that summarizes the differences for each later
in this section. In general the breakdown is as follows:
Industrial User/Buyer: $.9-$1.2 Million
Industrial Speculator: $.7-$.95 Million
Environmental
All of our conclusions are exclusive of any environmental considerations,
pursuant to your instruction. We understand your current position of not
wanting to proactively investigate the possibility of contaminants, however if
Zenith proceeds to a sale, we recommend that a thorough investigation be done
prior to going to market.
All buyers will undertake an investigation prior to committing funds. We
believe it would be a negotiating disadvantage to have such a buyer in
possession of more data than us and to be in a position of educating us on our
own site. In addition, there may be logical proactive steps to take prior to a
sale that can save costs and limit the concern by a buying group.
<PAGE>
[LOGO APPEARS HERE]
Exhibit 99al
Zentih Mexico Portfolio
Disposition Investigation and Proposal
[LOGO OF ESG APPEARS HERE]
<PAGE>
Zenith Mexican Portfolio Evaluation
Executive Summary
General
The following summarizes estimates of property values for the Zenith Electronic
Corporation's Mexican portfolio. We have highlighted the basic rational for the
respective industrial property where asking prices would be substantially
higher. We discussed and confirmed values, rental rates, capitalization rates
and resulting values with a local real estate firm familiar with the Mexican
markets and these particular assets. The following sections in this report
provide location maps, photos and comments from our building inspections, all of
which are considered prior to reaching the following evaluations. Values for the
respective properties are as follows:
Juarez, Mexico
<TABLE>
<CAPTION>
Plant No. 43 (904,000 sq. ft.)
- ------------
<S> <C> <C>
Improvements: $17,577,000 ($3.50 psf net rental rate @18% cap rate)
Additional Land: $ 4,300,000 (25 acres at $3.95 psf)
-----------
Total Juarez Value: $21,877,000 ($24.20 psf)
===========
Chihuahua, Mexico
Plant No. 11 (55,087 sq. ft.)
- ------------
Total Value: $1,220,000 ($4.00 psf nnn @18% cap rate)
==========
Plant No. 14 & 14A
- ------------------
(192,299 sq. ft.) These buildings are viewed as a package and priced together.
Improvements: $4,250,000 ($4.00 are @18% cap rate)
Land: $ 500,000 (3 acres @$4.00 psf rounded down to $500,000)
----------
Total Chihuahua, Mexico Value: $4,750,000
==========
</TABLE>
<PAGE>
Executive Summary
Page 2 of 3
Reynosa, Mexico
<TABLE>
<CAPTION>
<S> <C>
General Note: For the cap rate from was increased 18% to 20% this market
because of the requirement by any potential Buyer/User to
use union labor.
Plant No. 12 (454,000 sq. ft.)
- ------------
Total Value: $ 9,080,000 ($4.00 psf nnn @20% cap rate)
===========
Plant No. 13 (222,000 sq. ft.)
- ------------
Total Value: $ 4,440,000 ($4.00 psf net rent @20% cap rate)
===========
Improvements: $17,577,000 ($3.50 psf net rental rate @8% cap rate)
Additional Land: $ 4,300,000 (25 acres at $3.95 psf)
-----------
Total Juarez Value: $21,877,000
===========
Plant No. 27 (221,000 sq. ft.)
- ------------
Total Value: $ 4,420,000 ($4.00 psf net rent @20% cap rate)
=========
Plant 12A & 26 (224,000 sq. ft.)
- --------------
We have combined these plants because of their
layout and walk way connections. We expect them to be
sold as a package.
Improvements: $ 4,880,000 ($4.00 psf net rental rate @20% cap rate)
Additional Land: $ 653,400 ($1.00 psf for 15 additional acres)
---------
Total Value: $ 4,533,400
=========
Plant No. 13A (66,500 sq. ft.)
- -------------
Total Value: $ 1,330,000 ($4.00 psf net rental rate @20% cap rate)
=========
</TABLE>
<PAGE>
Executive Summary
Page 3 of 3
Matamoros
The asset quality and business environment for the Matamoros properties is less
desirable then others in the portfolio. As a result, capitalized rental rates
and overall values are lower than those assigned to other properties. In
addition, Plant No. 14A and 14W are vacant and in below average condition. Our
discussions of value reflect a Buyer/User for the existing assets in addition to
land value for redevelopment. The subjects location is very close to a border
crossing in a mature area a long major artery, CALLE REP.De CUBA. We have
received an initial offer of $780,000 and believe there is room for an increase.
The overall estimated value is $1,000,000 for both properties which reflects
$5.75 per sq. ft. land price and a $18.00 per sq. ft. improvement price, both of
which seem reasonable.
Plant No. 14
- ------------
Improvements: $ 2,120,000 ($3.00 psf net rental rate @20% cap rate)
=========
<PAGE>
[LOGO OF MEXICAN PORTFOLIO APPEARS HERE]
Zenith Mexican Portfolio
Table of Contents
Executive Summary.......................................Section I
Mexican Portfolio Real Estate Company
Investigations/Conclusions..............................Section II
Property Descriptions/Inspection
Comments - Juarez.......................................Section III
Property Descriptions/Inspection
Comments - Chihuahua....................................Section IV
Property Descriptions/Inspection
Comments - Reynosa......................................Section V
Property Descriptions/Inspection
Comments - Matamoros....................................Section VI
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[LOGO OF MEXICAN PORTFOLIO APPEARS HERE]
Executive Summary
Summary of
Assignment: Insignia/ESG ("ESG") has been asked by Zenith
Electronics Corporation ("Zenith") to do an
investigation and make a recommendation as to how ESG
would approach and execute the disposition of the
Zenith Mexican real estate portfolio, hereinafter the
"Portfolio". The Portfolio consists 13 properties
with over 2.4mm square feet in four different Mexican
cities.
Summary of
Approach: ESG's approach is to work with the most qualified
person/firm in each market, utilizing their expertise.
A partnership will be established with each firm where
ESG representatives will coordinate the sale
activities, police quality and maintain consistency
between firms. ESG representatives will also be the
single point of contact for Zenith representatives
through which all activities will be coordinated.
This approach results in substantial time savings and
efficiencies for Zenith representatives.
Partnership
Recommendations: Ciudad Juarez - Plant #43: Mr. Bob Duncan, President,
-------------------------
InterAmerica Property Company, 945 South Mesa Hills
Drive, El Paso, Texas 79912.
Chihuahua - Plant #'s 4, 4A, & 11: Mr. Andres Sandoval,
---------------------------------
Best/White LLC, P.T. de la Republica 3304, Suite 402,
32330 Cd. Juarez, Chih. Mexico. 011-52-16-29-1111
Reynosa - Plant #'s 12, 12A, 13, 13A, 26 & 27: Bryan
---------------------------------------------
Cook, 1203 Cardinal Ave., McAllen, TX., 78504, (958)
838-8948
Matamoros - Plan #'s 14, 14A1, & 14A2: Bryan Cook,
-------------------------------------
1203 Cardinal Ave., McAllen, TX., 78504, (958) 838-8948
Commissions &
Fees: The sale commission structure will be as follows:
Sale Price $15 mm and higher: 3%
$ 2 mm to $14.9 mm 4.5%
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[LOGO OF MEXICAN PORTFOLIO APPEARS HERE]
$ 0 to $ 1.9mm Market
-Co-brokerage incentives are included in these
amounts.
-Legal fees to close the transaction, excluding
environmental legal work are included in these
amounts.
-All marketing for the disposition are included in
these amounts.
Timing: Juarez: 6 - 12 months*
Chihuahua: 6 - 12 months
Reynosa: 8 - 14 months
Matamoros: No estimate
* There will be limited number of initial
prospects for the facility in Juarez because of
its size. To the extent a buyer is not forthcoming
within this group, time to disposition could be
increased substantially.
General Market
Comments: Based on discussions with local firms, Juarez,
Chihuahua and Reynosa are all healthy markets with
continuing demand. Chihuahua is the weakest of
these three due to its interior location and the
dilution of advantages to US companies being near
the border, however we still expect buyer
interest.
Matamoros is the most difficult of the four
markets. It is one of the original "Maquiladora"
towns and has gained a reputation for having the
highest incidence of environmental problems and
the oldest buildings. Fortunately is contains the
smallest amount of square footage within the
portfolio.
Desirable Building
Sizes: The most desirable space sizes for tenants in
all of the relevant markets range from 50,000
square feet to 150,000 square feet. This range
constitutes 7 of the 13 properties in the Zenith
portfolio and approximately 28% of the square
footage. With the exception of the two small
vacant properties in Matamoros, the balance of
properties range from 182,000 sf to 419,000 sf not
counting the Juarez facility that has 907,000 sf.
We expect properties in the desirable size range
to sell first.
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Mexican Portfolio Real Estate Company
Investigations/Conclusions
Approach:
- --------
We developed the following comprehensive list of referrals and firm
relationships to create a foundation from which to evaluate companies with the
personnel, expertise and experience for the disposition of assets in the
respective Mexican cities. Our goal is to identify all possible qualified
parties and proceed with qualifying phone conversations and interviews to
determine their interest and ability.
The search was narrowed substantially by follow up and discussions with the
respective parties. In many instances, candidates eliminated themselves for
geographic or transaction type reasons. The following names represent the
comprehensive list and the status of each.
Nick Criss - The
- ----------------
Staubach Company: Nick has invested a number of years in Mexico. His is
- ----------------
also an avid speaker on the subject. His focus is
mostly tenant representation, but disposition work is
within his scope of services. He was referred by David
O'Donnell.
Status: We spoke to Mr. Criss by phone, who is based in
Mexico city. He did not think that his coverage of the
required markets was sufficient to suit our needs. He,
along with an attorney friend of Insignia, Andreas
Ochoa, recommended Jon Best of Best/White for this
assignment.
Rex Maingot - Bermudez
- ----------------------
Bingswinger: We worked with Mr. Maingot breifly in the course of
- -----------
preparing the initial Zenith board presentation. In
addition, Mr. Maingot was referred to us by David
O'Donnell. They have a recognizable presence in Juarez,
Dallas and Chihuahua.
Status: We have not pursued them as a partner for this
assignment. We were informed that the Bermudez family
is
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[LOGO OF MEXICAN PORTFOLIO APPEARS HERE]
one of the largest owner developers of industrial
properties in the Juarez market, creating a potential
conflict of interest.
John K. Best -
- --------------
Best/White: They are an industrial real estate firm that focuses
- -----------
exclusively on border and Mexican markets. They have
offices in Juarez, El Paso, Harlingen and Monterrey
with one planned for McAllen, TX. Their personnel
includes several professionals who have lived in Mexico
and have worked on Mexican real estate transactions for
several years.
Status: We are recommending them for properties in
Chihuahua. See the "Recommendations" section of this
report.
Bob Duncan -
- ------------
Inter America: InterAmerica focus's primarily on industrial
- --------------
transactions. They office in El Paso and have a very
good reputation. Their focus is primarily tenant
representation, but have done some substantial
disposition and development brokerage.
Status: We are recommending him for the Juarez
facility. See the "Recommendations" section of this
report.
Enrique Portillo
- ----------------
Almuina - Cushman
- -----------------
& Wakefield: Enrique runs the office in Ciudad Juarez and has an
- ------------
excellent reputation. He is a Mexican resident with the
backing of the Cushman & Wakefield Organization. He was
a referral by Mr. Mark Robinson of Insignia's Dallas
office and Mr. David O'Donnell. Several others
recognize him as very capable.
Status: We consider Mr. Alum a qualified candidate and
have talked with him on the phone several times. He was
unable to meet with during our trip to Mexico the week
of March 23, but sent information to our attention in
Chicago. Because we met other good candidates for the
Juarez assignment, our current plans are to view him as
a backup.
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[LOGO OF MEXICAN PORTFOLIO APPEARS HERE]
Ernie Williams -
- ----------------
Cambridge Properties: Mr. Williams was a referral from Mr. Mike Allen of the
- ---------------------
McAllen Economic Development Corporation in McAllen,
TX. He focuses on industrial transactions, both lease
and sale along the border and throughout the Valley.
Status: After conceptual discussions regarding the
assignment, he concluded that it was not a good fit and
that the service they could provide would be below that
which is required for a good job. His expertise and
experience is almost exclusively on the U.S. side of
the border.
Bryan Cook: Mr. Cook was recommended by Ernie Williams of Cambridge
- -----------
Properties, Bob Duncan of InterAmerican and Mr. Nick
Criss of Staubach. His office is in McAllen and his
experience is focused almost exclusively on industrial
dispositions in Reynosa.
Status: We are recommending him for the Reynosa and
Matamoros properties, contingent on checking
references and resources. See Recommendations Below:
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[LOGO OF MEXICAN PORTFOLIO APPEARS HERE]
Recommendations By Market:
- --------------------------
Ciudad Juarez-
- --------------
Plant #43: Mr. Bob Duncan, InterAmerica Property Company: We met
- ---------- ----------------------------------------------
with Mr. Duncan on Tuesday, March 24/th/, 1998 in his
office in El Paso, Texas. He is formally a CB
Commercial broker that focused on the Oakbrook, IL.
market. He moved to El Paso over 5 years ago and has
focused on industrial leasing, sales and development
since that time. He has spent substantial time in
Mexico as his mother is from there. He presented
materials for our review prepared for other deals on
which he has worked that were of the quality we expect
(institutional). He has also done several large
transactions similar in size to the subject.
Chihuahua-
- ----------
Plants #4, 4A, 11: Mr. Andreas Sandoval, Best/White L.L.C.: We met with a
- ------------------ ----------------------------------------
majority of the personnel from the Best/White offices,
including Juarez, Harligen and El Paso on Tuesday March
24/th/, 1998. While we found that expertise between
their offices ranged widely, the group forming the core
of the company in Juarez and El Paso seemed strong. The
gentleman that covers Chihuahua, Mr. Sandoval, who is
officed in Juarez, was born and raised in Chihuahua and
seemed to have the expertise to perform within that
market place. In addition, the firm has resources and
depth to aid in that effort.
Reynosa &
- ---------
Matamoros-
- ----------
Plants #12, 12A
- ---------------
13, 13A, 26, 27, 14
- -------------------
14A1 & 14A2: Mr. Bryan Cook, 1203 Cardinal Ave., McAllen, TX. 78504:
- ------------ ------------------------------------------------------
Mr. Cook was born and raised in McAllen and specializes
in industrial property sales in Reynosa. He is a sole
proprietor who has probably sold more industrial
buildings in Reynosa than any other individual. He was
recommended by three people and is well versed in
Mexican real estate transactions. We have talked
several times on the phone and called several
references, all of whom were very
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[LOGO OF MEXICAN PORTFOLIO APPEARS HERE]
positive. Comments were consistently complementary with regard to
his ability to execute sale transactions in Mexico, his knowledge
of players in the Reynosa market, his integrity and his
motivation.
General: In all transactions we will encourage co-brokerage and
- -------
cooperation with the other brokers in the market to maximize
market exposure.
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Property Description & Inspection Comments
------------------------------------------
Ciudad Juarez
-------------
Plant #43
- ---------
Comments: We toured the facility on Tuesday, March 24, 1998 with Jose
Lerma of Zenith. Plastic injection molding, assembly and
wood working for T.V. cabinets are the main operations
performed in the plant. The building is currently
approximately 50% utilized/occupied, the balance of which is
unused and empty. It is the largest industrial building in
the portfolio and one of the largest in the market with a
total of 907,000 sf. Roof mounted evaporitive cooling
systems and the related duct work compromise otherwise
attractive ceiling heights of 22 to 25 feet in the warehouse
area. A portion of the 76 acre site is natural for an
additional and separate development. We were advised during
our meeting with Best/White that there would be demand for
that parcel separate from the building and that land in
general was trading for $4.00 to $5.00 psf. Its condition is
average to good. The roof is original. Modern facilities
built for a similar purpose place evaporative cooling
systems on the ground and pipe through the side walls for
easier maintenance and reduced roof traffic. The market is
healthy with investor and user buyers.
Basic Statistics: Size: 907,000 sf
Slab thickness: 6 inches
Bay Area: 39' - 4" x 49' - 2"
Built: 1984/85 additions in 1987 & 1991
Dock Doors: 39 all with levelers
Ceiling Heights: 22' to 25' Warehouse
16' to 19' Manufacturing area
Clear heights are lower due to duct
work.
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Property Description & Inspection Comments Chihuahua
----------------------------------------------------
Plant #4
- --------
Comments: We toured the facility on Wednesday, March 25, 1998
with Mr. Bob Kohler of Zenith. Cable box manufacturing,
upgrading and repair comprise the major operations
here. The plant is adjacent to plant 4A, separated only
by a common alley. Fire protection for all three
Chihuahua buildings is from a common system with large
water tanks shown on the plan. The building is on the
CAD system in Chicago, a positive for providing detail
to potential purchasers. The subject is about 15 years
old, however there were new roofs on all of the
buildings (4, 4A and 11) in 1993. Other building
features reflect its age however. Ceiling heights are
low compared to current market standards and
evaporative cooling systems are roof mounted. Full air
conditioning in office areas and compressed air systems
throughout the building are nice features on the
positive side. Property data indicates that the land
parcel consists of 16 acres including land for Plant
4A. There is a soccer field, basketball courts,
children's play ground areas and two additional small
buildings on this parcel. One of the buildings is a
9,200 sf warehouse of metal construction with no major
building systems like sprinklers or compressed air. It
is used for storing low value packing materials. There
is potential for additional development on the
recreational areas. Even though Plant 4 and 4A are
currently integrated in their operation, we believe
they could be sold separately if desired. Discussions
with a local real estate expert indicated that the
market was healthy and that there would be demand for
the buildings.
Basic Statistics: Size: 141,546 sf main
9,200 sf warehouse
3,100 sf work shop
Slab thickness: 4.5 inces
Bay Area: 49'- 3" x 25'- 3"
Built: 1982
Dock Doors: 2 with levelers
Ceiling Heights: 19' to 25' 4" at peak
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[LOGO OF MEXICAN PORTFOLIO APPEARS HER]
Plant #4
- --------
Comments: We toured the facility on Wednesday, March 25, 1998
with Mr. Bob Kohler of Zenith. The building is used for
bulk storage to aid the cable box manufacturing,
upgrading and repair operations in Plant #4. It is
adjacent to Plant #4, separated by a common alley. Fire
protection for all three Chihuahua buildings is from a
common system with large water tanks shown on the plan.
The building is on the CAD system in Chicago, a
positive for providing detail to potential purchasers.
The subject is about 11 years old and in average
condition, however there were new roofs on all of the
buildings (4, 4A and 11) in 1993. Other building
features reflect its age however. Ceiling heights are
low compared to current market standards and
evaporative cooling units are roof mounted. Property
data indicates that the land parcel consists of 16
acres including land for Plant 4. There is a soccer
field, children's playground area, basketball courts
and two additional small maintenance buildings on this
parcel directly behind the subject. There is potential
for additional development on these recreational areas.
Even though Plant 4 and 4A are currently integrated in
their operation, we believe they could be sold
separately if desired. Discussions with a local real
estate expert indicated that the market was healthy and
that there would be demand for the buildings.
Basic Statistics: Size: 50,000 sf
Slab thickness: 6.0 inces
Bay Area: 49'- 11" x 24' - 7"
Built: 1989
Dock Doors: 5
Ceiling Heights: 14' at eaves to 25' at peak
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Plant #11
- ---------
Comments: We toured the facility on Wednesday, March 25, 1998 with Mr.
Bob Kohler of Zenith. The building is used as the service,
repair and upgrade center for cable TV boxes. It is across
the street from Plants 4 and 4A. Fire protection is provided
by the same sprinkler system as for buildings 4 and 4A with
water provided by underground pipes. The building is on the
CAD system in Chicago, a positive for providing detail to
potential purchasers. The subject is about 12 years old and
in average condition, however there were new roofs on all of
the buildings (4, 4A and 11) in 1993. Other building
features reflect its age however. Ceiling heights are low
compared to current market standards and evaporative cooling
units are roof mounted. There is compressed air throughout
the building. The subject does not share a site with the
other Chihuahua buildings. Discussions with a local real
estate expert indicated that the market was healthy and that
there would be demand for the buildings.
Basic Statistics: Size: 54,140 sf
Slab thickness: 6.0" inches
Bay Area: 25'- 3" x 73'- 9"
Built: 1985
Dock Doors: 6
Ceiling Heights: 12' 0" lowest, 20' highest
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Property Description & Inspection Comments
------------------------------------------
Reynosa
-------
Plant #12
- ---------
Comments: We toured the facility on Wednesday, March 26, 1998 with Mr.
Fernando Sio of Zenith. TV chassis and final assembly are
performed at this facility. It is the second largest plant
in the Mexican portfolio with approximately 454,000 sf. The
building was purchased in 1977 and expanded several times.
The entire facility is air conditioned (not evaporative), a
positive compared to similar buildings. It seemed to be in
generally good condition with no recent major capital
improvements noted in our discussions. The building also
seemed fully utilized. Ceiling heights are low in certain
areas. The subject is connected via walkway to both Plants
#27 and #13. The grounds and exterior were well maintained.
Based on conversations with the firms with whom we met, the
market in Reynosa is strong with well capitalized investors
such as First Industrial and Security Capital expressing
interest in such facilities. The building is also on CAD.
Basis Statistics: Size: 454,000 sf per Mr. Sio.
Slab thickness: 5 - 6" inces
Bay Area: 32' - 9" x 89' - 10"
Built: Purchased in 1977
Dock Doors: 27 most with levelers
Ceiling Heights: 11' to 29' 10" at peak
[LOGO]
<PAGE>
[LOGO OF MEXICAN PORTFOLIO APPEARS HERE]
Plant #13
- ---------
Comments: We toured the facility on Wednesday, March 26, 1998 with Mr.
Fernando Sio of Zenith. This is the component manufacturing
area for television production purchased in 1980 according
to Mr. Sio. Completed components are transferred to and
from plant #12 to which the subject is connected via
enclosed bridge or suspende walkway. There have been several
additions including a large, high ceiling warehouse addition
that increased the square footage total to approximately
340,000 sf pursuant to Mr. Sio's best estimate, which is
substantially higher than the 182,243 in our documents.
Large portions of the area have low ceiling heights of 12
feet however the warehouse addition mentioned above was
designed for vertical racking and has ceiling heights up to
45'. General Electric has a facility across the street that
manufactures electric motors. They would be a logical
candidate to approach with regard to any sale. In general
the building seemed well maintained. It is on the CAD
system.
Basic Statistics: Size: 340,000 sf per Mr. Sio.
Slab thickness: 4" inches old portion, we believe
6" in new area.
Bay Area: 32' - 9" x 49' - 6"
Built: Purchased in 1980
Dock Doors: 11 most with levelers
Ceiling Heights: 12' to 45' at peak
[LOGO APPEARS HERE]
<PAGE>
[LOGO OF MEXICAN PORTFOLIO APPEARS HERE]
Plant #13A
- ----------
Comments: We toured the facility on Wednesday, March 26,
1998 with Mr. Fernando Sio of Zenith. This is
vacant and sometimes low use building. It remains
locked with a guard. There is no regular daily
activity here. The building is fully sprinklered
with a compressed air system throughout. The
exterior is in reasonably good condition. The
office spaces are air conditioned. We are not
sure of its age, however the site plan has a date
of 1986. Ceiling heights are low and range from
12' 8" to 20' 3". The slab is thin at 4". The
facility is not connected to the others however
it is just down the street from plants #26 and
#12-A. The subject is on the CAD system.
Basic Statistics: Size: 61,520 sf
Slab thickness: 4" inches
Bay Area: 32' - 9" x 66'
Built: 1986 (Estimate)
Dock Doors: 3
Ceiling Heights: 12' 8" to 20' 3" at peak
[LOGO]
<PAGE>
[LOGO OF MEXICAN PORTFOLIO APPEARS HERE]
Plant #12A
- ----------
Comments: We toured the facility on Wednesday, March 26, 1998 with
Mr. Fernando Sio of Zenith. The property serves as a
warehouse facility for plant 12 a few blocks away. It is
connected via covered walkway on grade to plant #26. There
is compressed air throughout the facility and sprinklers.
The site for plant #12 and #26 is 32.27 acres total and
includes substantial areas for expansion or additional stand
alone development, both of which are attractive features in
this market place. In addition, there is a natural gas line
which runs along the canal near the subject. While it is
currently not serving the property, we believe the potential
to tap into this energy source is not available to many
competing properties and provides an additional benefit to
any potential purchaser. Condition overall was average. Like
all of the Reynosa properties, the subject is on a CAD
system.
Basic Statistics: Size: 141,400 sf
Slab thickness: 4" inches
Bay Area: 32'-9" x 50'
Built: 1986 (Estimate)
Dock Doors: 15
Ceiling Heights: 14' 0" to 26' 7" at peak
[LOGO]
<PAGE>
[LOGO OF MEXICAN PORTFOLIO APPEARS HERE]
Plant #26
- ---------
Comments: We toured the facility on Wednesday, March 26, 1998 with Mr.
Fernando Sio of Zenith. The property serves as the
manufacturing facility for the module and magnetic
components. It is connected via covered walkway at grade to
plant #12A. There is compressed air throughout the facility
and sprinklers. The site for plant #12 and #26 is 32.27
acres total and includes substantial areas for expansion or
additional stand alone development, both of which are
attractive features in this market place. In addition, there
is a natural gas line which runs along the canal near the
subject. While it is currently not serving the property, we
believe the potential to tap into this energy source is not
available to many competing properties and provides an
additional benefit to any potential purchaser. Like plant
12A, the building condition is average and is on the CAD
system.
Basic Statistics: Size: 104,455 sf
Slab thickness: 6" inches
Bay Area: 32' - 9" x 50'
Built: 1986 (Estimate)
Dock Doors: 5
Ceiling Heights: 14' 0" to 23' 11" at peak
[LOGO]
<PAGE>
[LOGO OF MEXICAN PORTFOLIO APPEARS HERE]
PLANT #27
- ----------
Comments: We toured the facility on Wednesday, March 26, 1998 with
Mr. Fernando Sio of Zenith. The property utilizes injection
molding for production of TV chassis' along with painting
facilities to complete finishes. It is a newer facility
built in 1994/95 with a large warehouse component of
approximately 50,000 sf. It is connected via suspended
walkway to plant #12. The facility is well maintained and
shows well from the street. It has its own power substation
and air conditioning throughout (not evaporative cooling).
The site plan shows room for expansion to the rear, an
attractive feature for potential purchasers. Ceiling
heights, floor thickness, and column spacing are all
compatible with current market standards. From a physical
standpoint, this is one of the nicer facilities in the
portfolio.
Basic Statistics: Size: 219,000 sf
Slab thickness: 6" - 7" inches
Bay Area: 48' x 48'
Built: 1994/95
Dock Doors: 3
Ceiling Heights: 30' to 36' 5"
[LOGO]
<PAGE>
[LOGO OF MEXICAN PORTFOLIO APPEARS HERE]
Property Description & Inspection Comments
------------------------------------------
Matamoros
---------
Plant #14
- ---------
Comments: We toured the facility on Wednesday, March 26, 1998 with Mr.
Bob Kohler of Zenith. The facility is two stories with two
separate and distinct operations. The first floor is
dedicated to the production of the picture tube "guns" while
the second floor is dedicated to the production of remote
controls for televisions. The building is old compared to
the rest of the portfolio (1971) and is extremely
compartmentalized into small rooms, mostly by concrete block
demising walls. Adaptation to another manufacturer would be
difficult. Ceiling heights are low (13' to 18') and the
floor slab is thin at 4". The roof was treated with an
overlay approximately three years ago that came with a 10
year warranty. The building itself showed its age. We
learned from the tour that the entire gun manufacturing
process in completed here and that approximately 50% of the
units they produce are sold to Sony and Panasonic. Of all
the facilities we inspected, this one seemed the most
logical as a sale on the basis of a going concern with
logical buyers being Sony, Panasonic or other tube
manufactures. The quality of the picture tube guns produced
here are supposedly very high as well.
Basic Statistics: Size: 141,191 sf
Slab thickness: 4" inches
Bay Area: 20' x 25'
Built: 1971
Dock Doors: 4
Ceiling Heights: 13' 11" to 18'
[LOGO]
<PAGE>
[LOGO OF MEXICAN PORTFOLIO APPEARS HERE]
Plant #14A1 & 14A2
- ------------------
Comments: We toured the both buildings on Wednesday, March 26, 1998
with Mr. Bob Kohler of Zenith. Neither facility has been
used for 6 to 7 years. They are in tough shape. One building
has no air conditioning while the other has vandalized
units. Condition of all building systems is questionable.
They are the poorest of the properties in the portfolio,
fortunately they are the smallest as well.
Basic Statistics: Size: 23,278-14A1
31,972-14A2
Slab thickness: 4" inches
Bay Area: 27' 4" x 39' 4"
Built: Not specified
Dock Doors: 1-14A1
2-14A2
Ceiling Heights: 13' 11" to 18'
[LOGO]
<PAGE>
[LOGO OF MEXICAN PORTFOLIO APPEARS HERE]
Corporate Information on Recommendations
[LOGO]
<PAGE>
EXHIBIT 99am
[LOGO OF ZENITH APPEARS HERE]
Headquarters Facility
Plant #31
Evaluation
Prepared By:
[LOGO OF ANSIGNIA/ESA APPEARS HERE]
1 North Franklin Street
Suite 2300
Chicago, Illinois 60606-3421
(312) 332-0100
Fax (312) 332-0190
February, 1998
<PAGE>
[LOGO OF ZENITH APPEARS HERE]
- -------------------------
TABLE OF CONTENTS
- -------------------------
1. EXECUTIVE SUMMARY
2. OFFICE USER/BUYER VALUE
3. REAL ESTATE INVESTOR
4. REIT SALE/LEASEBACK
<PAGE>
[LOGO OF ZENITH APPEARS HERE]
- -------------------------
EXECUTIVE SUMMARY
- -------------------------
OVERVIEW
The purpose of the enclosed report is to provide a preliminary overview of the
alternative solutions and respective value ranges Insignia/ESG believes apply to
the Zenith facility at 1000 N. Milwaukee Ave. in Glenview, IL. hereinafter
referred to as the Facility. The enclosed review is pursuant to a request from
Mr. Richard Vitkus and represents a rough estimate based on a preliminary review
of market sale comparables and a tour of the facility itself.
PROPERTY DESCRIPTION
Improvements: The subject is a seven story office building with approximately
- ------------
526,266 square feet and an eighth floor penthouse, built in 1974. There is
parking for 1,083 cars resulting in a ratio of 2.1 per 1,000 square feet of
nra. There are 6 passenger and 1 freight elevator, or one per 87,700 square
feet of nra. Roof and mechanical systems are original.
Land - Lot 2: "Lot 2" is the common reference for the site. It contains
- -------------
approximately 39.821 acres and is Zoned I-1 which allows business, office and
professional type uses including the existing use. Access is provided by Zenith
Dr. which intersects with Milwaukee Avenue at a lighted intersection. There is
no frontage along Milwaukee as two additional lots, referred to as Lots 3 & 4,
owned by Town & Country Homes, creates a buffer between Milwaukee Ave. and the
Facility. There is approximately 1,400 feet of frontage along the I-294. There
is the potential to construct additional office space on the site.
<PAGE>
[LOGO OF ZENITH APPEARS HERE]
- -------------------------
EXECUTIVE SUMMARY
(Cont'd)
- -------------------------
PROPERTY TOUR CONCLUSIONS
Several of us have toured the facility many times and agree on the following
conclusions as it relates to a purchaser's analysis and the salability of the
subject.
Positives: Foremost, property fundamentals are very strong. The location in
- ---------- --------
Glenview near the hotel and other office properties is very good. Surrounding
population density, income and housing stock have helped to keep demand for
office space high. Second, visibility along the Tri-State Tollway is
----------
excellent. The building is very prominent and maintains a high profile for any
tenant whose name or address reflects that of the subject. Third, access, is
-------
very good. There is a lighted interchange directly into the subject on
Milwaukee Avenue, a major artery. In addition, proximity to Willow Rd.'s full
interchange with I-294 makes accessibility practical for a wide range of
suburbs. The building's layout within the site is practical and somewhat
------
flexible given the amount of land available to create solutions for shortfalls
that might arise based on tenant use. The potential to build an additional
building on this site is high as well.
Challenges: The challenges we noted include Floor plates which are less than
- ---------- ------------
optimal given the large size and off-center core configuration. These large
floor plates result in a lower overall rental rate for underwriting. Secondly,
existing build-out and finishes which are not reusable and will need to be
- -------------------------------
gutted, result in an increase of initial tenant build out costs. Finally, the
parking ratio of 2.1/1,000 sfnra is below the desired standard of 4 per
thousand. We believe capacity can be increased because of the parcel size,
reducing the impact of the problem. In addition, buyers will plan for capital
expenditures on the roof, mechanical systems and the parking lot, as all are
original and near the end of their useful life.
<PAGE>
[LOGO OF ZENITH APPEARS HERE]
- -------------------------
EXECUTIVE SUMMARY
(Cont'd)
- -------------------------
Values
Our approach to value is based on the analysis of three different buyer profiles
and their respective motivations. Value estimates are different for each, as
are various other pro's and con's, such as timing and ability to close. We have
enclosed a chart that summarizes the differences for each later in this section
Office User: $30mm to $33mm
Real Estate Investor: $27mm to $30mm
Sale/Lease Back: $25mm to $33mm
Environmental
All of our conclusions are exclusive of any environmental considerations. We
understand there is some hesitancy to proactively investigate the possibility of
contaminants, however if Zenith proceeds to a sale, we recommend that a thorough
investigation be done prior to going to market.
All buyers will undertake an investigation prior to committing funds. We
believe it would be a negotiating disadvantage to have such a buyer in
possession of more data than us and to be in a position of educating us on our
own site. In addition, there may be logical proactive steps to take prior to a
sale that can save costs and limit the concern by a buying group.
<PAGE>
[LOGO OF ZENITH APPEARS HERE]
- -------------------------
EXECUTIVE SUMMARY
(Cont'd)
- -------------------------
Comment
The results of our investigation as described in this report have been done with
"conceptual" conversation only. At no time have we disclosed Zenith's name or
the specific location of the Facility. We have treated this assignment as a
confidential investigation for the purposes of assisting in your strategic
planning. Our conclusions and recommendations can be further refined at a time
when third parties can evaluate the facility directly for feedback.
<PAGE>
[LOGO OF ZENITH APPEARS HERE]
- -------------------------
OFFICE
USER/BUYER
- -------------------------
PROFILE
The Office User Buyer is one that will assume the space for their own use and
will have a match between their desired corporate image and that which the
building provides. Marketing will include flyers direct to corporations, not
necessarily known for real estate acquisitions as a typical form of investment.
Value is harder to estimate for this profile because of the intangible amount
they are willing to pay if the building fits their vision for a corporate
presence. We have included the sale comparables in this section to provide an
idea of the range of prices paid in the market place and the detailed
descriptions of the corresponding buildings.
Please note that the comparable sales are leased, income producing properties of
similar quality. In addition, the subject is assumed to be vacant upon sale.
The price range from the comparable sale information is $72.36 psf to $133.32
psf, with the most competitive buildings in the $72.00 to $93.00 psf range.
Because of the Facility's unoccupied status at the time of sale, we believe the
most appropriate range is closer to $57.00 to $63.00 psf for this buyer profile.
----------------------
TIMING
12 to 24 months. This is the longest lead time of any buyer profile we have
identified. It is a needle in the haystack challenge. This group is generally
not experienced in this type of real estate transaction which can raise certain
issues regarding their ability to close.
<PAGE>
[LOGO OF ZENITH APPEARS HERE]
- -------------------------
OFFICE
USER/BUYER (Cont'd)
- -------------------------
Price
$30mm to $33 mm. There is usually no costs for carry and lease up risk. A
premium may be achieved for intangible value.
Summary
Higher sale price
Ability to close may be an issue
Longest marketing time
Finite group of buyers
<PAGE>
[LOGO OF ZENITH APPEARS HERE]
- -------------------------
REAL ESTATE
INVESTOR
- -------------------------
Profile
The real estate investor is the most logical and well capitalized buyer profile
for the Facility. They will underwrite market rents, lease up risk, tenant
improvement costs and required capital items plus a return to determine the
price they can pay. There are a number of qualified buyers that we can approach
who will be interested in pursuing the transaction. Our analysis is similar to
theirs and is included herein.
Timing
Approximately 6 months.
Price
$27 mm to $30mm
Summary
Competitive sale price
Reasonable marketing time
Greater Universe of Buyers
Qualified Ability to Close
<PAGE>
[LOGO OF ZENITH APPEARS HERE]
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REIT SALE/LEASEBACK
- -------------------------
Profile
There are a number of publicly traded Real Estate Investment Trusts (REIT's)
that might consider a sale/leaseback transaction supported by Zenith's credit
(with corporate guarantee) on the lease. They are well capitalized all cash
buyers that can act quickly.
Timing
6 to 12 months.
Price
$25 mm to $33 mm. Price is a function of yield to the buyer and rental rates
offered per the lease. Conceptually, we expect that this market will dictate
that parameters such as rent and purchase price per square foot be consistent
with market levels so that justification for the acquisition can be
substantiated both by Zenith's credit and the reasonableness of releasing the
facility at "market" rates to recoup the investment if Zenith fails. The later
argument is usually subordinate to the reliance on the tenant and their credit
to pay rent.
Summary
Highest Price
Operating Expenses Remain with Zenith
Well Capitalized Universe of Buyers
Long term commitment to the property by seller.
<PAGE>
Exhibit 99an
ZENITH
6601 South 33/rd/ Street
McAllen, Texas
Plant #15
<PAGE>
Table of Contents
1. EXECUTIVE SUMMARY
2. INDUSTRIAL USER/BUYER VALUE
3. INDUSTRIAL SPECULATOR VALUE
<PAGE>
EXECUTIVE SUMMARY
Property Description
Improvements
- ------------
The subject property is a single story warehouse/production facility consisting
of approximately 52,400 s.f. on a 2.7 acre site located at 6601 South 33rd
Street, McAllen, Texas. The facility is currently owned by the Zenith
Corporation however, the land is leased from the McAllen Economic Trade
Corporation on a 99 year lease with approximately 77 years remaining.
Property Tour Conclusions
Positives
- ---------
The Facility contains approximately 52,0000 s.f. on a 3.7 acre site, with 15,000
s.f. of finished office area. The facility has a single roof line, which would
allow for reduction of finished office space.
The condition of the building appears to be good and is situated on the McAllen
Economic Trade Zone, which is a gated and contained industrial park.
The building is approximately 25' clear and has 4 exterior loading docks,
trailer storage for 31 trailers and parking for 79 cars.
Challenges
- ----------
Although the building is a modern functional facility some buyers are going to
have a problem purchasing a building and not having title to the land because of
the land lease. The property also appears to be over improved with office space
with for most users will require a demolition of the office space down to a more
typical office percentage of 10% or 5,000 s.f.
The building also includes a second floor mezzanine which may or may not have
any value to a prospective buyer therefore no value should be placed on second
floor space. This may also create a problem in reducing the office space. In
addition, there is a right of first refusal in the ground lease that creates a
slight burden from the marketing prospective.
<PAGE>
Market
- ------
The City of McAllen is located within the Rio Grande Valley area, which has seen
a significant influx of corporations as a result of NAFTA. Companies have
established plants in Mexico and the United States in what is commonly known as
a "Maquiladora". The property is zoned I-2 for heavy industrial, which should
allow for almost all types of manufacturing, so long as the use does not
adversely affect the environment.
Value (s)
- ---------
Our approach to value is based on an analysis from the perspective of two
different buyer profiles we consider logical for the facility. Value estimates
are different for each, in addition to other pro's and con's for each buyer
type. We have enclosed a chart that summarizes the differences for each later
in this section. In general the breakdown is as follows:
Industrial User/Buyer: $.9-$1.2 Million
Industrial Speculator: $.7-$.95 Million
Environmental
- -------------
All of our conclusions are exclusive of any environmental considerations,
pursuant to your instruction. We understand your current position of not
wanting to proactively investigate the possibility of contaminants, however if
Zenith proceeds to a sale, we recommend that a thorough investigation be done
prior to going to market.
All buyers will undertake an investigation prior to committing funds. We
believe it would be a negotiating disadvantage to have such a buyer in
possession of more data than us and to be in a position of educating us on our
own site. In addition, there may be logical proactive steps to take prior to a
sale that can save costs and limit the concern by a buying group.
INDUSTRIAL USER/BUYER
Profile
- -------
The Industrial User Buyer is one that can essentially assume the operations and
benefit from the systems in place> The facility would have to represent a
logical fit to the buyers' existing business lines and future corporate goals.
<PAGE>
Timing
- ------
9-18 months. This is the longest lead-time of any buyer profile we have
identified. The buyer will find value in the physical improvement and the
location of the facility. This group is also very educated and will see the
positives and negatives of the current operation very clearly.
Price
- -----
$.9 to $1.20 Million. Our price range is based on the most applicable
comparable sales shown later in this section.
Summary
- -------
Highest sale price
Longest marketing time
Active user market
<PAGE>
INDUSTRIAL SPECULATOR
Profile
- -------
The Industrial Speculator is an opportunistic buyer that sees the potential to
buy low and convert to useable warehouse or distribution space. They accept the
leasing risk and compete on price with the rest of the market.
Timing
- ------
4 to 6 months. This is the shortest marketing. This is the shortest marketing
time a buyer could be identified quickly; however, they would discount the
property due to leasing risk.
Price
$.7 to $.95 Million. The buyer would discount the purchase price due to leasing
risk and potential retrofit costs.
Summary
We believe that there will be high level of interest by this type of buyer,
however, Zenith would have to make a decision if they wanted to sell the
property quickly or wait for a higher price.
<PAGE>
Exhibit 99ao
ZENITH
2155 ROSE STREET, FRANKLIN PARK
EVALUATION
<PAGE>
TABLE OF CONTENTS
1. EXECUTIVE SUMMARY
2. INDUSTRIAL USER/BUYER VALUE
3. INDUSTRIAL SPECULATOR VALUE
4. REIT SALE/LEASEBACK
<PAGE>
Property Description
Improvements
- ------------
The subject property is a single story warehouse facility consisting of
approximately 220,000 s.f. on a 9.2 acre site located at 2155 Rose Street,
Franklin Park, Illinois. The facility could be utilized for either
warehouse/distribution or manufacturing, however, it is currently used as a
warehouse/distribution facility for which it is most suited.
Property Tour Conclusions
Positives
- ---------
The Facility contains approximately 220,000 s.f. and is located on a site with
approximately 9.2 acres. After a detailed tour of the building, we concluded
that the building appears to be well maintained and in good condition given its
age. Per Mr. Ed Reszke, the entire building was re-roofed in 1995.
The building is well docked having 26 exterior docks and 4 interior docks and
good clear height of primary 20' clear and 22' clear in approximately 53,000
s.f. The building is also rail served which is a benefit, although we understand
the rail is not active and would require some costs to activate. The building
can also accommodate outside storage for about 25 trailers. The facility is well
located with good access to major expressways and thoroughfares. A full
interchange at I-294 and North Avenue is approximately 2.5 miles in addition to
a full interchange at I-2890 being approximately 2 miles south.
Challenges
Car parking is limited, however there is a possibility to park cars in the area
that used to contain the water tower, further investigation needs to be done to
qualify this area.
The property is also located in Cook County, which typically has higher real
estate taxes than the surrounding counties. Users are attempting to reduce their
occupancy cost. One way to achieve this goal is to move to DuPage County where
real estate taxes are roughly one-half of Cook County. Many users have chosen to
relocate to these collar counties.
Market
The Property is located in the East O'Hare submarket which has 65,000,000 s.f.
of industrial space, one of the largest in the Chicago area. The current vacancy
rate is approximately nine percent (9%) in the submarket. Demand has been strong
during the past 2 years.
The general area will provide a good base of prospective user/buyers.
<PAGE>
Value
Our approach to value is based on an analysis from the perspective of three
different buyer profiles we consider logical for the Facility. Value estimates
are different for each, in addition to other pro's and con's for each buyer
type. We have enclosed a chart that summarizes the differences for each later in
this section. In general the breakdown is as follows:
Industrial User/Buyer: $4.4-$5.3 Million
Industrial Speculator: $3.5-$4.0 Million
REIT Sale Leaseback: $4.2-$4.9 Million
Depending on rent.
Environmental
All of our conclusions are exclusive of any environmental considerations,
pursuant to your instruction. We understand your current position of not wanting
to proactively investigate the possibility of contaminants, however if Zenith
proceeds to a sale, we recommend that a thorough investigation be done prior to
going to market.
All buyers will undertake an investigation prior to committing funds. We believe
it would be a negotiating disadvantage to have such a buyer in possession of
more data than us and to be in a position of educating us on our own site. In
addition, there may be logical proactive steps to take prior to a sale that can
save costs and limit the concern by a buying group.
INDUSTRIAL USER/BUYER
Profile
The Industrial User Buyer is one that can essentially assume the operations and
benefit from the systems in place. The facility would have to represent a
logical fit to the buyers' existing business lines and future corporate goals.
The logical candidates are probably the users located in the general surrounding
area who currently have a base in the east O'Hare market, or who may be moving
out of the city of Chicago.
Timing
9-18 months. This is the longest lead time of any buyer profile we have
identified. The buyer will find value in the physical improvement and the
location of the facility. This group is also very educated and will see the
positives and negative of the current operation very clearly.
Price
<PAGE>
$4.4 to $5.3 Million. Our price range is based on the most applicable comparable
sales shown late in this section.
Summary
Highest sale price
Longest marketing time
Active user market
INDUSTRIAL SPECULATOR
Profile
These Industrial Speculator is an opportunistic buyer that sees the potential to
buy low and convert to useable warehouse or distribution space. They accept the
leasing risk and compete on price with the rest of the market.
Timing
4 to 6 months. This is the shortest marketing time a buyer could be identified
quickly; however, they would discount the property due to leasing risk.
Price
$3.5 to $4.0 Million. The buyer would discount the purchase price due to leasing
risk and potential retrofit costs.
Summary
We believe that there will be high level of interest by this type of buyer,
however, Zenith would have to make a decision if they wanted to sell the
property quickly or wait for a higher price.
REIT SALE/LEASEBACK
Profile
There are a number of publicly traded Real Estate Investment Trusts (REIT's)
that might consider a sale/leaseback transaction supported by Zenith's credit
(with corporate guarantee) on the lease. They are well capitalized all cash
buyers that can act quickly.
Timing
6 to 9 months. This represents a fast transaction timeframe.
Price
<PAGE>
$4.2 to $4.9 Million. Price is a function of yield to the buyer and rental rates
offered per the lease. Conceptually, we expect that this market will dictate
that parameters such as rent and purchase price per square foot be consistent
with market levels so that justification for the acquisition can be
substantiated both by Zenith's credit and the reasonableness of releasing the
facility at "market" rates to recoup the investment if Zenith fails. The later
argument is usually subordinate to the reliance on the tenant and their ability
to pay rent.
Summary
High Price
Short Transaction time
Active well capitalized universe of buyers
Long term commitment to property by seller
