<PAGE>
As filed with the Securities and Exchange Commission on January 29, 1999.
Registration No. 333-61057
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 2 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 Industrial (I.R.S. Employer
jurisdiction of Classification Number) Identification No.)
incorporation or
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 of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
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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 JANUARY 29, 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 (each as defined herein), hereby solicits from each
holder of Impaired Claims (as defined herein) 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
$40 million of new 6 1/4% Subordinated Debentures due 2010 (the "New
Subordinated Debentures"). In the event that holders of the Old Subordinated
Debentures do not approve the Prepackaged Plan, however, the Prepackaged Plan
provides for a "cram down" mechanism with respect to the Class (as defined
herein) composed of the holders of the Old Subordinated Debentures. If such a
"cram down" is approved by the Bankruptcy Court, holders of the Old
Subordinated Debenture Claims would receive no distribution and retain no
property. 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 (as defined
herein), including the Company's common stock, will be cancelled and the
holders thereof will receive no distributions and retain no property on account
of such interests. Confirmation of the Prepackaged Plan pursuant to section
1129 of the Bankruptcy Code ("Confirmation") is subject to judicial approval of
this solicitation and the terms of the Prepackaged Plan including, as
necessary, under the "cram down" provisions of the Bankruptcy Code.
In connection with the financial restructuring contemplated by the
Prepackaged Plan (the "Financial Restructuring"), the Company expects to
implement an operational restructuring plan (the "Operational Restructuring,"
and together with the Financial Restructuring, the "Restructuring") which is
designed to leverage the Company's brand, distribution and technology
strengths, and which includes reducing costs, outsourcing substantially all
components and products, selling certain assets and capitalizing on the
Company's patented digital television technologies, all as more fully described
in this Disclosure Statement.
The Company believes that confirmation of the Prepackaged Plan is necessary
for successful implementation of the Operational Restructuring. There can be no
assurance, however, that the Company will be able to consummate the Financial
Restructuring or the Operational Restructuring. If the Prepackaged Plan is not
confirmed, holders of claims (as defined in section 101(5) of the Bankruptcy
Code) ("Claims") against the Company would likely receive less than they would
receive pursuant to the Prepackaged Plan and in the case of the holders of the
Old Subordinated Debentures, would likely receive no distribution and retain no
property. The holders of Equity Interests (as defined herein) would receive no
distribution and retain no property under any circumstances. See "RISK
FACTORS."
(continued on next page)
-----------
THE VOTING DEADLINE TO ACCEPT OR REJECT THE PREPACKAGED PLAN IS 5:00 PM., NEW
YORK CITY TIME, ON , 1999, UNLESS EXTENDED.
The Solicitation Agent is:
Georgeson & Company Inc.
The date of this Disclosure Statement is , 1999.
<PAGE>
(cover page continued)
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 24.
For an index to the capitalized terms defined in this Proxy Statement-
Prospectus, see "Index to Defined Terms" beginning on page 191.
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.
Pursuant to the Restructuring Agreement, dated as of August 7, 1998 (as
amended, the "Restructuring Agreement"), between the Company and LG
Electronics Inc., a corporation organized under the laws of the Republic of
Korea ("LGE"), LGE has agreed to restructure substantially all of its Claims
against and all of its Equity Interests in the Company.
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 $118.8 million assuming an Effective Date of December 31, 1998,
and certain property, plant and equipment owned by Zenith's subsidiaries
located in Reynosa, Tamaulipas, Mexico (the "Reynosa Assets") having an
appraised value of approximately $32.4 million in satisfaction of the
following Claims against the Company held by LGE: (i) the LGE Leveraged Lease
Claims (as defined herein), (ii) the LGE Technical Services Claims (as defined
herein) and (iii) that portion of the LGE Reimbursement Claims (as defined
herein) and the LGE Demand Loan Claims (as defined herein) 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 (as
defined herein), not to exceed $140 million; (ii) the LGE Reimbursement Claims
(as defined herein), not to exceed $50 million; (iii) the LGE Guarantee Fee
Claims (as defined herein); and (iv) the LGE Demand Loan Claims (as defined
herein) 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 (as defined herein) of the Prepackaged
Plan. As of December 31, 1998, approximately $5.0 million of interest had
accrued on the LGE Leveraged Lease Claims and approximately $3.3 million of
interest had accrued on the LGE Reimbursement Claims. Such accrued 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, will be classified
and treated as General Unsecured Claims (as defined herein) under the
Prepackaged Plan.
ii
<PAGE>
For a description of LGE's additional financial support and relationships
with the Company, see "SPECIAL FACTORS--Events Leading to the Restructuring"
and "CERTAIN TRANSACTIONS."
Under the terms of the Prepackaged Plan, on the Effective Date, all of the
shares of common stock, par value $1.00 per share, of the Company (the "Old
Common Stock"), including the 38,315,000 shares of Old Common Stock (which
represents approximately 56.7% of the Old Common Stock including vested but
unexercised options) held by LGE and LG Semicon Co., Ltd. ("LG Semicon"),
together with all outstanding options, warrants or rights to acquire shares of
common stock (together with the Old Common Stock, "Equity Interests") will be
cancelled and the holders thereof will receive no distribution and retain no
property on account of such Equity Interests upon the occurrence of the
Effective Date ("Consummation") of the Prepackaged Plan.
The Company will not hold a creditors' or shareholders' meeting to vote on
the Prepackaged Plan. Rather, the Company is soliciting acceptances of the
Prepackaged Plan by means of Ballots and Master Ballots (the "Solicitation").
Any entity that is the beneficial owner of a Claim and is entitled to vote
with respect to the Prepackaged Plan should complete, sign and return the
applicable Ballot or Master Ballot in accordance with the instructions set
forth in this Disclosure Statement. See "SOLICITATION; VOTING PROCEDURES."
Under the Prepackaged Plan, all Claims and Equity Interests have been placed
in various classes, based on the nature and priority of the Claim or Equity
Interest. Each Class (as defined herein) is either impaired or unimpaired
under the Prepackaged Plan. See "SUMMARY--The Prepackaged Plan" and "THE
PREPACKAGED PLAN." Each Class of Unimpaired Claims is conclusively presumed to
have accepted the Prepackaged Plan under the Bankruptcy Code. Accordingly,
acceptances of the Prepackaged Plan are being solicited only from holders of
Impaired Claims. A Class of Impaired Claims will have accepted the Prepackaged
Plan if the Prepackaged Plan is accepted by creditors that hold at least two-
thirds in dollar amount and a majority in number of the Claims of holders in
that Class who cast Ballots or Master Ballots. Only those holders who vote to
accept or reject the Prepackaged Plan will be counted for purposes of
determining acceptance or rejection of the Prepackaged Plan. Therefore, the
Prepackaged Plan could be accepted by any Class of Impaired Claims with the
affirmative vote of significantly less than two-thirds in dollar amount and a
majority in number of Claims in a Class. The Prepackaged Plan also provides
that all of the Equity Interests of the Company, including the Old Common
Stock (including those held by LGE and LG Semicon) will be cancelled. The
holders of Equity Interests, including holders of Old Common Stock, will
receive no distributions and retain no property pursuant to the Prepackaged
Plan, and are therefore deemed to have rejected the Prepackaged Plan. The
Bankruptcy Court may nevertheless confirm the Prepackaged Plan at the
Company's request if at least one Class of Impaired Claims has accepted the
Prepackaged Plan (with such acceptance determined without including the
acceptance of any "insider" in such Class).
In deciding whether to vote in favor of the Prepackaged Plan, holders of
Claims should carefully consider the type, amount and terms of the securities
and other treatment being offered, as well as certain risk factors. See
"SPECIAL FACTORS--Purposes and Effects of the Financial Restructuring" and
"RISK FACTORS."
THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS OF THE COMPANY (THE "SPECIAL
COMMITTEE") HAS UNANIMOUSLY RECOMMENDED TO THE BOARD OF DIRECTORS OF THE
COMPANY (THE "BOARD"), AND THE BOARD HAS UNANIMOUSLY APPROVED, THE
RESTRUCTURING AGREEMENT AND THE PREPACKAGED PLAN. THE BOARD RECOMMENDS THAT
ALL HOLDERS OF IMPAIRED CLAIMS VOTE TO ACCEPT THE PREPACKAGED PLAN. THE
SPECIAL COMMITTEE IS COMPOSED OF FOUR DIRECTORS OF THE COMPANY WHO ARE NOT
OFFICERS OR DIRECTORS OF LGE OR CURRENT OFFICERS OF THE COMPANY. ONE MEMBER OF
THE SPECIAL COMMITTEE IS A FORMER OFFICER OF THE COMPANY, AND ONE MEMBER OF
THE SPECIAL COMMITTEE WAS ORIGINALLY DESIGNATED BY LGE AS A DIRECTOR IN 1995.
LGE HAS VOTED TO RE-ELECT EACH OF THE MEMBERS OF THE SPECIAL COMMITTEE TO THE
BOARD SINCE 1995.
iii
<PAGE>
Pursuant to the Restructuring Agreement, LGE has agreed to vote for the
Prepackaged Plan. LGE's obligation to consummate the transactions contemplated
by the Restructuring Agreement is subject to numerous conditions. See "SPECIAL
FACTORS--The Restructuring Agreement."
AT ALL TIMES, THE COMPANY RESERVES THE RIGHT IN ITS SOLE DISCRETION NOT TO
FILE THE PREPACKAGED PLAN, OR, IF IT FILES THE PREPACKAGED PLAN, TO WITHDRAW
THE PREPACKAGED PLAN AT ANY TIME PRIOR TO CONFIRMATION, IN WHICH CASE THE
PREPACKAGED PLAN WILL BE DEEMED TO BE NULL AND VOID.
The New Subordinated Debentures will not be listed on any exchange. There
can be no assurance that an active trading market will develop. There can be
no assurance as to the price at which the New Subordinated Debentures will
trade.
----------------
NEITHER THIS TRANSACTION NOR THESE SECURITIES NOR THE PREPACKAGED PLAN HAVE
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF THESE
TRANSACTIONS OR THE ACCURACY OR ADEQUACY OF THIS DISCLOSURE STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
SINCE NO BANKRUPTCY CASE HAS BEEN FILED, THIS DISCLOSURE STATEMENT HAS NOT
BEEN APPROVED BY ANY BANKRUPTCY COURT. HOWEVER, IF THE PREPACKAGED CHAPTER 11
CASE IS COMMENCED, THE COMPANY INTENDS TO PROMPTLY SEEK AN ORDER FROM THE
BANKRUPTCY COURT THAT THE SOLICITATION OF VOTES FOR THE PREPACKAGED PLAN BY
MEANS OF THIS DISCLOSURE STATEMENT WAS IN COMPLIANCE WITH THE BANKRUPTCY CODE.
----------------
This Disclosure Statement is first being mailed to holders of Claims and
Equity Interests on , 1999.
iv
<PAGE>
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-4 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Financial Restructuring. As permitted by the rules
and regulations of the Commission, this Disclosure Statement omits certain
information, exhibits and undertakings contained in the Registration
Statement. Such additional information, exhibits and undertakings can be
inspected at and obtained from the Commission in the manner set forth below.
For further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement, and the financial
schedules and exhibits filed as a part thereof and the exhibits thereto.
Statements contained in this Disclosure Statement as to the terms of any
contract or other documents are not necessarily complete, and, in each case,
reference is made to the copy of each such contract or other document that has
been filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files periodic reports and other information with the Commission.
Such reports and other information filed with the Commission, as well as the
Registration Statement, can be inspected and copied at the public reference
facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices located at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and
7 World Trade Center, New York, New York 10048. Copies of such material can
also be obtained by mail from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission also maintains an Internet web site at http://www.sec.gov that
contains reports, proxy statements and other information. Historically, the
Old Common Stock was listed on the New York, Chicago, Basel, Geneva and
Zurich, Switzerland Stock Exchanges and the Old Subordinated Debentures were
listed on the New York Stock Exchange. On May 22, 1998, the New York Stock
Exchange suspended trading of both the Old Common Stock and the Old
Subordinated Debentures. The Company believes that the Old Common Stock
continues to be traded in the over-the-counter market. Reports, proxy
statements and other information with respect to the Company are available for
inspection at the offices of the New York Stock Exchange, Inc. (the "NYSE"),
20 Broad Street, New York, New York 10005 and the Chicago Stock Exchange,
Inc., One Financial Place, 440 South LaSalle Street, Chicago, Illinois 60605.
No person has been authorized to give any information or make any
representation not contained in this Disclosure Statement and, if given or
made, such information or representation must not be relied upon. This
Disclosure Statement does not constitute an offer to sell or the solicitation
of an offer to buy any securities other than those to which it relates, or an
offer to sell or a solicitation of an offer to buy any securities in any
jurisdiction in which, or to any person to whom, it is unlawful to make such
offer or solicitation. Neither the delivery of this Disclosure Statement nor
the distribution of any securities hereunder shall, under any circumstances,
create an implication that there has been no change in the affairs of the
Company or in the information contained herein since the date hereof.
v
<PAGE>
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements in this Disclosure Statement are forward-looking
statements that involve known and unknown risks, uncertainties and other
factors which may cause the actual results of the Company to be materially
different from any future results expressed or implied by such forward-looking
statements. Forward-looking statements include, among others, statements
regarding the ability of the Company to successfully implement the Operational
Restructuring and achieve the Business Plan Projections (as defined herein)
and the projected or assumed future operations and financial results of the
Company. Factors that may cause actual results of the Company to differ from
future results expressed or implied by forward-looking statements include,
among others, the following: general economic and business conditions, both in
the United States and other countries in which the Company sells its products
and from which the Company obtains supplies; the effect of competition in the
markets served by the Company; the risks described under the caption "RISK
FACTORS"; the ability of the Company to obtain confirmation of the Prepackaged
Plan; and the ability of the Company to successfully implement the
Restructuring and achieve the Business Plan Projections. Given these
uncertainties, holders of Impaired Claims are cautioned not to place undue
reliance on any forward-looking statements in determining whether to vote to
accept or reject the Prepackaged Plan. The Company claims the protection of
the disclosure liability safe harbor for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995.
vi
<PAGE>
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
The Prepackaged Plan.................................................... 4
Special Factors......................................................... 9
The Prepackaged Proceeding; Classification and Impairment of Creditors.. 13
Historical and Pro Forma Capitalization................................. 17
Business Plan Projections............................................... 18
Comparison of the Old Subordinated Debentures to the New Subordinated
Debentures............................................................. 22
Voting Procedures....................................................... 23
U.S. Federal Income Tax Matters......................................... 26
Risk Factors............................................................ 27
RISK FACTORS.............................................................. 28
Recent Operating Results, Independent Auditor's Report and High
Leverage............................................................... 28
Certain Risks Relating to the Business Plan Projections................. 28
Risks Associated with Proposed Operational Restructuring................ 32
Legal Proceedings....................................................... 39
Financing Agreement Restrictions........................................ 40
Possible Defaults; Risk of Acceleration or Termination.................. 40
Control by LGE.......................................................... 40
Certain Bankruptcy Considerations....................................... 41
Readiness for the Year 2000............................................. 44
Dependence on Patents and Proprietary Technology........................ 45
SPECIAL FACTORS........................................................... 47
Events Leading to the Restructuring..................................... 47
Purposes and Effects of the Financial Restructuring..................... 58
LGE Agreements Related to Common Stock.................................. 59
Alternatives to Confirmation and Consummation of the Prepackaged Plan... 59
Going Private Transaction............................................... 60
Recommendation of the Board............................................. 60
LGE's Position Regarding the Financial Restructuring.................... 64
Liquidation and Going Concern Analyses.................................. 64
The Restructuring Agreement............................................. 69
Amendments to Certificate of Incorporation and By-Laws.................. 74
Interests of Certain Persons in the Financial Restructuring; Conflicts
of Interest............................................................ 74
Liquidity Pending Consummation of the Restructuring..................... 77
Dissenters' Rights...................................................... 78
THE PREPACKAGED PLAN...................................................... 79
General................................................................. 79
Classification of Claims and Equity Interests under the Prepackaged
Plan................................................................... 80
Summary of Treatment Under the Prepackaged Plan......................... 82
Summary of Other Provisions of the Prepackaged Plan..................... 85
Conditions to Confirmation/Consummation................................. 92
Effect of Consummation of the Prepackaged Plan.......................... 92
</TABLE>
vii
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<TABLE>
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Modification of the Prepackaged Plan.................................... 93
Intended Actions During the Prepackaged Chapter 11 Case................. 94
Confirmation Standards.................................................. 95
Confirmation of the Prepackaged Plan Without Acceptance by All Classes
of Impaired Claims..................................................... 96
Certain Consequences of Non-Acceptance of the Prepackaged Plan.......... 97
MARKET PRICES OF THE COMMON STOCK......................................... 98
MARKET PRICES OF THE OLD SUBORDINATED DEBENTURES.......................... 99
HISTORICAL AND PRO FORMA CAPITALIZATION................................... 100
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA........................... 101
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.............................. 102
BUSINESS PLAN PROJECTIONS................................................. 108
Assumptions Underlying all Business Plan Projections.................... 117
ACCOUNTING TREATMENT...................................................... 122
LIQUIDATION ANALYSIS...................................................... 122
DESCRIPTION OF DEBT AND CREDIT ARRANGEMENTS............................... 127
Short-Term Debt......................................................... 127
Long-Term Debt.......................................................... 128
DESCRIPTION OF NEW SUBORDINATED DEBENTURES................................ 129
SUMMARY OF LGE NEW RESTRUCTURED SENIOR NOTE............................... 133
SUMMARY OF LGE NEW CREDIT FACILITY........................................ 134
SOLICITATION; VOTING PROCEDURES........................................... 136
General................................................................. 136
Voting Record Date...................................................... 137
Expiration Date; Extensions; Amendments................................. 137
Voting Procedures and Other Requirements................................ 138
Agreements Upon Furnishing Ballots...................................... 141
Method of Delivery of Ballots........................................... 141
Withdrawal of Ballots; Revocation....................................... 141
Solicitation Agent...................................................... 142
Notice Agent............................................................ 142
Waivers of Defects, Irregularities, Etc................................. 142
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS............................................................ 144
Results of Operations: Third Quarter of 1998 Compared to Third Quarter
of 1997................................................................ 144
Nine Months of 1998 Compared to Nine Months of 1997..................... 145
Liquidity and Capital Resources......................................... 146
Results of Operations for 1995-1997..................................... 147
Cash Flows.............................................................. 150
Financial Condition..................................................... 152
Readiness for the Year 2000............................................. 154
BUSINESS.................................................................. 155
General................................................................. 155
Raw Materials........................................................... 155
Patents................................................................. 155
Seasonal Variations in Business......................................... 156
</TABLE>
viii
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
Major Customers........................................................ 156
Competitive Conditions................................................. 156
Research and Development............................................... 156
Environmental Matters.................................................. 156
Employees.............................................................. 156
Financial Information about Foreign and Domestic Operations and Export
Sales................................................................. 157
Properties of the Company.............................................. 158
Subsidiaries........................................................... 158
Legal Proceedings...................................................... 159
OPERATIONAL RESTRUCTURING................................................ 161
MANAGEMENT............................................................... 164
Current Directors of the Company....................................... 164
Board and Committee Meetings and Directors' Compensation............... 166
Current Executive Officers of the Company.............................. 168
Executive Compensation and Other Information........................... 171
Employment Agreements..................................................
Options/SAR Grants in 1997............................................. 172
Aggregated Option/SAR Exercises in 1997 and Year-End Option/SAR
Values................................................................ 172
SECURITY OWNERSHIP....................................................... 173
Security Ownership of Certain Beneficial Owners........................ 173
DESCRIPTION OF CAPITAL STOCK............................................. 174
Old Common Stock and Old Preferred Stock............................... 174
New Common Stock....................................................... 174
Delaware Anti-Takeover Law............................................. 174
CERTAIN TRANSACTIONS..................................................... 175
APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS TO RESALES OF NEW
SECURITIES.............................................................. 179
Transfers of New Subordinated Debentures............................... 179
Certain Transactions by Stockbrokers................................... 180
Issuance of New Common Stock........................................... 180
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS........................... 180
Consequences to Holders of the Old Subordinated Debentures............. 181
Consequences to Holders of Other Claims................................ 184
Consequences to Holders of Equity Interests in the Company............. 185
Consequences to LGE.................................................... 185
Consequences to the Company............................................ 185
ESTIMATED FEES AND EXPENSES.............................................. 189
Advisors............................................................... 189
LEGAL MATTERS............................................................ 190
EXPERTS.................................................................. 190
INDEX OF CERTAIN DEFINED TERMS........................................... 191
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................... F-1
ANNEX A--THE PREPACKAGED PLAN............................................ A-1
ANNEX B--REPORTS OF PETER J. SOLOMON COMPANY LIMITED..................... B-1
</TABLE>
ix
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements contained elsewhere in this Disclosure
Statement. Unless the context otherwise requires, references in this Disclosure
Statement to "Subsidiaries" shall mean the Company's subsidiaries.
The Company
Zenith was founded in 1918. The Company's operations include the design,
development, manufacturing and marketing of video products (including color
television sets and other consumer products) along with parts and accessories
for such products. These products, along with purchased VCRs and accessories,
are sold principally to retail dealers in the United States and to retail
dealers and wholesale distributors in other countries. The Company also sells
directly to buying groups, private label customers and customers in the
lodging, health care and rent-to-own industries. The Company also produces
video products, such as color picture tubes, for other manufacturers, and
network systems products, such as digital and analog set-top boxes and cable
modems, interactive television and data communication products for cable
television operators, telecommunications companies and other commercial users
of these products in the United States and abroad.
The Company has incurred losses in all but one of the years since 1985, and
is currently experiencing severe financial difficulties. The Company projects
that fiscal 1998 cash flows will be insufficient to meet all of the Company's
working capital requirements, scheduled cash debt service obligations and
anticipated capital expenditures. As a result, during the first quarter of
fiscal 1998, management developed and began implementing the Operational
Restructuring to enhance the long-term viability of the Company by reducing
production costs and concentrating on areas in which the Company believes it
can operate profitably. Pursuant to the Operational Restructuring, the Company
intends to become a sales, distribution and technology company by discontinuing
substantially all of its manufacturing operations, outsourcing substantially
all components and products, selling certain assets and focusing on the
development of its technologies, patent rights, parts and service operations
and accessory business. The Company 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 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 December 31, 1998.
<TABLE>
<CAPTION>
Classification
Projected as of under
Type of Support December 31, 1998 LGE Claims
- --------------- ----------------- ------------------------------------
<S> <C> <C>
LGE Demand Loan Claims:
Direct secured loan to $45.0 million LGE Tranche B Claims (as defined
Zenith (the "LGE Demand herein) to the extent (if any) that
Loan Claims") the sum of (i) the 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 (as defined herein).
LGE Reimbursement
Claims:
Guarantees of Zenith's $72.0 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"). As of
September 26, 1998, LGE
had made payments under
demands against
guarantees on $72
million of the
Unsecured Bank Loans
and $30 million of
Unsecured Bank Loans
remain outstanding.
Under the Reimbursement
Agreement (as defined
herein), the Company is
obligated to LGE for
these payments (the
"LGE Reimbursement
Claims"). Interest
accrues on the LGE
Reimbursement Claims at
a rate per annum equal
to Bank of America
National Trust and
Savings Association's
announced reference
rate plus two percent.
Such interest is
classified as a General
Unsecured Claim.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Classification
Projected as of under
Type of Support December 31, 1998 LGE Claims
- --------------- ----------------- ------------------------------------
<S> <C> <C>
LGE Leveraged Lease
Claims:
Guarantees of Zenith's $ 90.1 million LGE Tranche A Claims
obligations under or
related to leveraged
leases with respect to
equipment at its
Melrose Park, Illinois
plant (the "Leveraged
Lease (Melrose Park)")
and at its Reynosa,
Mexico and Juarez,
Mexico facilities (the
"Leveraged Lease
(Mexico)") and together
with the Leveraged
Lease (Melrose Park),
the "Leveraged
Leases"). On July 22,
1998, LGE made a
payment under the
guarantees of the
Leveraged Leases in the
amount of approximately
$90.1 million following
a default by the
Company under the
Leveraged Leases
resulting from the
Company's decision to
idle equipment covered
by the Leveraged Lease
(Melrose Park) in
connection with its
Operational
Restructuring. Under
the Restructuring
Agreement,
approximately $8.0
million of these Claims
will be satisfied by
LGE retaining title to
certain equipment
(collectively, the "LGE
Leveraged Lease
Claims"). Interest
accrues on these claims
at a rate per annum
equal to LIBOR plus six
and one-half percent.
Such interest is
classified as a General
Unsecured Claim. The
Company estimates that
its obligations under
the Leveraged Leases
exceeded $97 million.
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
September 26, 1998, the
outstanding balance on
the vendor credit line
was approximately $134
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 $ 1.6 million LGE Tranche B Claims
of 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.
<TABLE>
<CAPTION>
Class/Type of
Claim/Estimated
Amount
as of December
31, 1998 Description and Treatment of Claims
- --------------- -----------------------------------
<S> <C>
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 (as
claims in this Class) defined herein) of preserving the estate of the
Company and operating the business of the Company
(such as wages, salaries or commissions for
services and payments for goods and other services
and leased premises); (b) compensation for legal,
financial advisory, accounting and other services
and reimbursement of expenses awarded or allowed
under section 330(a) or 331 of the Bankruptcy Code;
and (c) all fees and charges assessed against the
estate under Chapter 123 of Title 28 United States
Code, 28 U.S.C. (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.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Class/Type of
Claim/Estimated
Amount
as of December
31, 1998 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
507(a) of the Bankruptcy Code, other than Priority
(Unimpaired, not entitled Tax Claims or Administrative Claims ("Other
to vote) Priority Claims"). Unless the holder of such Claim
and the Company agree to a different treatment,
(The Company is not each holder of an allowed Other Priority Claim
currently able to shall receive one of the following alternative
estimate the number of treatments, at the election of the Company: (a) to
holders or amount of the extent then due and owing on the Effective
claims in this Class) 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
relating to the Company's $125 million senior
(Unimpaired, not entitled secured credit facility (the "Amended Citibank
to vote) Credit Facility"). On the Effective Date, unless
the holders of such Claims and the Company agree to
(This Class has 9 holders a different treatment, the holders of such Claims
and $44.4 million of (i) will be paid in full in cash by New Zenith or
Claims) (ii) will be otherwise treated in any manner so
that such Claims shall otherwise be unimpaired
pursuant to section 1124 of the Bankruptcy Code.
Class 3--Other Secured This Class of Claims consists of all secured Claims
Claims against the Company, other than secured Claims
classified in a different Class (the "Other Secured
(Unimpaired, not entitled Claims"). The legal, equitable and contractual
to vote) rights of the holders of Other Secured Claims are
unaltered by the Prepackaged Plan. Unless the
(The Company is not holder of such Claim and the Company agree to a
currently able to different treatment, each holder of an allowed
estimate the number of Other Secured Claim shall receive one of the
holders or amount of following alternative treatments, at the election
claims in this Class) of the Company: (a) the legal, equitable and
contractual rights to which such Claim entitled the
holder thereof shall be unaltered by the
Prepackaged Plan; (b) the Company shall surrender
all collateral securing such Claim to the holder
thereof, without representation or warranty by or
recourse against the Company or New Zenith; or (c)
such Claim will be otherwise treated in any other
manner so that such Claims shall otherwise be
rendered unimpaired pursuant to section 1124 of the
Bankruptcy Code.
Class 4--Bank Lender This Class of Claims consists of all Claims arising
Claims from or relating to the Unsecured Bank Loan (the
"Bank Lender Claims"). On the Effective Date, the
(Impaired, entitled to holder of the Bank Lender Claims shall receive a
vote) new unsecured term note that shall mature one year
from the Effective Date in full satisfaction of its
(This Class has 1 holder Claims (the "New Bank Lender Note").
and $30 million of
Claims)
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Class/Type of
Claim/Estimated
Amount
as of December
31, 1998 Description and Treatment of Claims
- --------------- -----------------------------------
<S> <C>
Class 5--General
Unsecured Claims This Class of Claims consists of all unsecured
(Unimpaired, not entitled Claims against the Company that are not Bank Lender
to vote) Claims, Old Subordinated Debenture Claims or LGE
Tranche A Claims or LGE Tranche B Claims (the
(The Company estimates "General Unsecured Claims"). This Class includes,
this Class has but is not limited to, the interest payable to LGE
approximately 900 trade on the LGE Reimbursement Claims and the LGE
creditors, 60 carrier Leveraged Lease Claims. Unless the holder of such
claimants, 70,000 service Claim and the Company agree to a different
contract creditors, 200 treatment, each holder of an allowed General
holders of unknown claims Unsecured Claim shall receive one of the following
and an undetermined alternative treatments, at the election of the
number of warranty and Company: (a) to the extent then due and owing on
other claimants, the Effective Date, such Claim will be paid in full
aggregating approximately in cash by New Zenith; (b) to the extent not due
$184.3 million of Claims; and owing on the Effective Date, such Claim (X)
this Class also includes will be paid in full in cash by New Zenith, or (Y)
certain interest on LGE will be paid in full in cash by New Zenith when and
Reimbursement Claims and as such Claim becomes due and owing in the ordinary
LGE Leveraged Lease course of business; or (c) such Claim will be
Claims in the aggregate otherwise treated in any other manner so that such
amount of approximately Claims shall otherwise be rendered unimpaired
$8.3 million) pursuant to section 1124 of the Bankruptcy Code.
Class 6--Old Subordinated This Class of Claims consists of all Claims arising
Debenture Claims from or relating to the Old Subordinated Debentures
(the "Old Subordinated Debenture Claims"). If the
(Impaired, entitled to holders of the Old Subordinated Debenture Claims
vote) accept the Prepackaged Plan, they will receive a
pro rata distribution of the New Subordinated
(This Class has Debentures. If the holders of these Claims do not
approximately 264 holders accept the Prepackaged Plan, the Company intends to
of record and $105.1 initiate a "cram down" procedure with respect to
million of Claims the Class composed of the holders of the Old
including principal and Subordinated Debentures. If such a "cram down" is
interest) 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 $40 million as a
result.
Class 7--LGE Claims The LGE Tranche A Claims consist of the following
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 Claims
and the LGE Demand Loan Claims not classified as
LGE Tranche A Claims: LGE Tranche B Claims. On the Effective Date, LGE
will receive the LGE New Restructured Senior Note
and the Reynosa Assets in full satisfaction of the
(This Class has 1 LGE Tranche A Claims. If for any reason the Reynosa
holder and Assets are not transferred to LGE, LGE and Zenith
approximately $159.2 expect to enter into a management or lease
million of Claims) 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
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Class/Type of
Claim/Estimated
Amount
as of December
31, 1998 Description and Treatment of Claims
- --------------- -----------------------------------
<S> <C>
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:
(This Class has 1 The LGE Tranche B Claims consist of $200 million of
holder and $200 million the following Claims held by LGE: (i) the LGE
of Claims) 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. On the Effective Date, LGE will
receive the New Common Stock in full satisfaction
of the LGE Tranche B Claims.
Class 8--Equity Interests This Class consists of holders of Equity Interests.
(Impaired, deemed to Holders of Equity Interests in the Company shall
reject, not entitled to receive no distribution and retain no property
vote) under the Prepackaged Plan. All Old Common Stock
(The Company estimates will be cancelled.
this Class has 11,470
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."
Releases
In consideration of the contributions of certain parties to the chapter 11
case commenced by the Company ("Prepackaged Chapter 11 Case"), including, but
not limited to, (i) the commitment and obligation of LGE to provide the
financial support necessary for Consummation of the Prepackaged Plan, and (ii)
the continued service of certain designated individuals in connection with the
expeditious reorganization of the Company and the implementation of the
Restructuring, the Prepackaged Plan provides for certain waivers, exculpation,
releases and injunctions. The Prepackaged Plan provides an injunction barring
the commencement or continuation of any Claims released pursuant to its terms.
Specifically, the Prepackaged Plan provides that the Company and its
Subsidiaries will release, upon the Effective Date, (i) all officers,
directors, employees, attorneys, financial advisors, agents and representatives
of the Company and its Subsidiaries who served in such capacity on or after
January 1, 1998, in each case in their capacity as such (collectively, "D&O
Releasees"), and (ii) LGE, LG Semicon, and each of their current and former
parents, subsidiaries and affiliates and their respective officers, directors,
employees, attorneys, financial advisors, agents and representatives
(collectively, "Investor Releasees"), from any and all Claims and causes of
action, whether known or unknown, foreseen and unforeseen, existing or
hereafter arising, that the Company or its Subsidiaries would have been legally
entitled to assert in their own right or on behalf of the holder of any Claim
or Equity Interest or other person or entity against any of them relating to
any event occurring on or before the Effective Date of the Prepackaged Plan,
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.
7
<PAGE>
In addition, the Prepackaged Plan provides that each holder of any Claim that
has accepted the Prepackaged Plan, whose Claim is part of a Class of Claims as
defined in the Prepackaged Plan (a "Class") that has accepted (or is deemed to
accept) the Prepackaged Plan, or that is entitled to receive a distribution of
property under the Prepackaged Plan, is deemed to release, upon the Effective
Date, any and all Claims and causes of action, whether known or unknown,
foreseen or unforeseen, existing or hereafter arising, that it would have been
legally entitled to assert against the D&O Releasees and the Investor Releasees
relating to the Company or its Subsidiaries, the Prepackaged Chapter 11 Case,
or the negotiation, formulation and preparation of the Prepackaged Plan and
related documents. Under the Prepackaged Plan, holders of Equity Interests do
not grant releases to the D&O Releasees or the Investor Releasees.
The Prepackaged Plan also provides that the Company, each of its
Subsidiaries, the D&O Releasees, and the Investor Releasees shall be exculpated
from any liability to any person or entity (as defined in the Bankruptcy Code)
for any act or omission in connection with or related to the negotiation,
formulation, preparation and Confirmation of the Prepackaged Plan, the
Consummation and administration of the Prepackaged Plan, the Prepackaged
Chapter 11 Case, or the property distributed under the Prepackaged Plan, except
by virtue of any willful misconduct or gross negligence, as determined by a
court of competent jurisdiction. 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.
In the course of the Special Committee's work and review of the proposed
release of LGE, the Special Committee sought to determine whether impaired
classes would be likely to receive a greater recovery in a hypothetical
restructuring occurring without the Investor Releases and without LGE's
participation. In that regard, the Special Committee and its counsel reviewed
and investigated significant transactions between LGE and the Company. Based on
that investigation, the Special Committee concluded that any value that might
be attributed to these releases was less than the overall value created by the
Restructuring, and that absent LGE's agreement to participate in a
restructuring (which was conditioned on, among other things, obtaining the
releases) there was no value available for distribution to holders of either
the Old Common Stock or the Old Subordinated Debentures.
The Company is not generally aware of, and accordingly the Special Committee
did not investigate, any specific avoidance actions or other potential causes
of action against non-LGE-related D&O Releasees.
The Company does not believe that any avoidance action or other potential
causes of action exist or will exist with respect to the transactions
contemplated by the Operational Restructuring because the Company has received
and expects to receive reasonably equivalent value and/or fair consideration in
connection with such transactions. Moreover, since substantially all of the
transactions contemplated by the Operational Restructuring are with
unaffiliated third parties, any avoidance actions or other potential causes of
action arising from such transactions will not be affected by the releases
provided under the Prepackaged Plan.
The Company believes that these provisions of the Prepackaged Plan are
permissible under the Bankruptcy Code but acknowledges that arguments exist
that certain case law would permit a contrary conclusion. Parties with standing
may object to such provisions of the Prepackaged Plan in the Bankruptcy Court.
It is a condition to LGE's obligations under the Restructuring Agreement that
the Investor Releasees receive the releases, waivers and injunctions as set
forth in the Prepackaged Plan. See "SPECIAL FACTORS--Interests of Certain
Persons in the Financial Restructuring; Conflicts of Interest" and "--The
Restructuring Agreement."
General Unsecured Creditors
During the pendency of the Prepackaged Chapter 11 Case, the Company intends
to operate its business in the ordinary course and to make payment in full on a
timely basis to all of its general unsecured creditors. The Company also will
seek approval of the United States Bankruptcy Court (the "Bankruptcy Court")
immediately
8
<PAGE>
upon the filing of the petition to pay in full in the ordinary course of
business the pre-petition claim of each holder of a General Unsecured Claim.
Management expects that the Company will have sufficient funds from operations
and a debtor in possession credit facility to continue to pay its general
unsecured creditors in the ordinary course of business through the conclusion
of the Prepackaged Chapter 11 Case, and to have sufficient liquidity under its
lending facilities and from operations to make such payments thereafter. Under
the Prepackaged Plan, holders of General Unsecured Claims will not be required
to file proofs of claim with the Bankruptcy Court, and it is not expected that
they will be required to take any other action to receive payment on their
Claims.
The Subsidiaries of Zenith are not parties to the Prepackaged Plan and will
not file for chapter 11 bankruptcy protection as part of the Prepackaged Plan.
Accordingly, those Subsidiaries intend to continue to operate their businesses
in the ordinary course of business and pay their trade and other creditors in
full and on time.
Special Factors
Events Leading to the Restructuring
For a description of events leading to the Restructuring, see "SPECIAL
FACTORS--Events Leading to the Restructuring."
Purposes and Effects of the Financial Restructuring
The purpose of the Financial Restructuring is to reduce the Company's debt
service obligations, to facilitate future borrowing to fund liquidity needs and
to permit it to implement the Operational Restructuring. The Prepackaged Plan
will benefit the Company and reduce its overall debt and other obligations by
approximately $300 million by exchanging (i) $200 million of debt and other
liabilities owed to LGE for the New Common Stock; (ii) the Old Subordinated
Debentures in an aggregate principal amount of $103.5 million plus accrued
interest thereon for New Subordinated Debentures in an aggregate principal
amount of $40 million; and (iii) approximately $32.4 million of indebtedness to
LGE for the Reynosa Assets, which have an appraised value equal to such amount.
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, assuming Consummation of the
Prepackaged Plan, on a projected basis as of December 31, 1998, the Company's
annual interest obligations are expected to be reduced to approximately $23.2
million in 1999 (compared to projected interest charges of approximately $37.3
million for 1999 assuming the Restructuring does not occur).
As a result of the Financial Restructuring, the Company will also have
significantly more liquidity. For example, the Company's cash interest
obligations will be reduced because the LGE New Restructured Senior Note will
have a "payment in kind" ("PIK") interest feature pursuant to which interest
will be payable at a rate of LIBOR plus 6.5% per annum during the two years
following consummation of the Prepackaged Plan by the issuance of additional
LGE New Restructured Notes unless the Company's ratio of operating income
including royalties before interest expense, income taxes, depreciation,
amortization and restructuring expenses ("EBITDA") to cash interest expense for
the immediately preceding four fiscal quarters exceeds 1.5. See "SUMMARY OF LGE
NEW RESTRUCTURED NOTE--Payment of Principal and Interest; Maturity." The
Company's existing debt accrues interest at the following per annum rates: Bank
Lender Claims: LIBOR + 0.9375%; Amended Citibank Credit Facility: LIBOR +
3.25%; LGE Leveraged Lease Claims: LIBOR + 6.5%; LGE Reimbursement Claims:
10.5%; LGE Demand Loan Claims: LIBOR + 6.5%; and Old Subordinated Debentures:
6.25%. In addition, pursuant to the Restructuring Agreement, LGE has agreed to
provide additional credit support of up to $60 million that, if needed by the
Company, may take the form of direct loans or credit support, such as a
guarantee provided to a third-party lender, in form and in an amount to be set
on the Effective Date based on the financing necessary to enable the Company to
implement the Operational Restructuring (the
9
<PAGE>
"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. Finally, the Company is in discussions with potential
lenders regarding credit facilities following Consummation of the Prepackaged
Plan. It is a condition to Consummation pursuant to the Restructuring Agreement
that the Company have such a credit facility in an amount not less than $100
million. The combination of the PIK feature of the LGE New Restructured Senior
Note, the LGE New Credit Support and the financing to be provided by a third-
party lender is expected to enhance the liquidity of the Company following the
Consummation of the Prepackaged Plan.
Finally, as a consequence of the Financial Restructuring, the Old Common
Stock will be cancelled and the holders of the Old Common Stock (including LGE
and LG Semicon) will receive no distributions and retain no property in respect
of their holdings of Old Common Stock under the Prepackaged Plan. See "SPECIAL
FACTORS--Purposes and Effects of the Financial Restructuring."
Upon consummation of the Prepackaged Plan, New Zenith will be a wholly owned
subsidiary of LGE. Material existing transactions between LGE and Zenith have
been approved by at least a majority of the disinterested members of Zenith's
Board. LGE has advised Zenith that no general policy has been established for
intercompany transactions after New Zenith becomes a wholly owned subsidiary of
LGE. Following the Restructuring, Zenith expects to continue purchasing some
finished products from LGE, including VCRs. Additionally, Zenith expects to
purchase mid-size televisions produced by LGE in its operation of the Reynosa
Assets. Because the Company intends to outsource substantially all of its
product lines following the Restructuring, the Company expects that it will
continue to purchase some finished products, components and other technical
services from LGE.
Alternatives to Confirmation and Consummation of the Prepackaged Plan
If the Company commences the Prepackaged Chapter 11 Case and the Prepackaged
Plan is not subsequently confirmed by the Bankruptcy Court and consummated, the
alternatives include (i) liquidation of the Company under chapter 7 or chapter
11 of the Bankruptcy Code and (ii) confirmation of an alternative plan of
reorganization under chapter 11 of the Bankruptcy Code. The Company believes
the Prepackaged Plan is significantly more attractive than these alternatives
because it could, among other things, maximize the value of the Company's net
operating loss tax attributes ("NOLs"), minimize disputes during such
proceeding concerning the reorganization of the Company, significantly shorten
the time required to accomplish the reorganization, reduce the expenses of a
case under chapter 11 of the Bankruptcy Code, minimize the disruption to the
Company's business that would result from a protracted and contested bankruptcy
case and ultimately result in a larger distribution to creditors than would
other types of reorganizations under chapter 11 of the Bankruptcy Code or a
liquidation under chapter 7 of the Bankruptcy Code. One of the conditions to
consummation of the Prepackaged Plan is the availability to the Company of a
credit facility in an amount not less than $100 million on terms and conditions
set forth in the Restructuring Agreement. This is also a condition to LGE's
obligations in connection with the Prepackaged Plan. If the Company is unable
to obtain such a credit facility, it is possible that LGE could waive such
condition to its obligations. In such an event, however, the Company would
probably not have sufficient financing for its operations and would be unable
to consummate the Prepackaged Plan. The Company's ability to implement the
Operational Restructuring is dependent upon the Confirmation and Consummation
of the Prepackaged Plan, among other things, because its ability to obtain or
retain contracts for outsourcing of products would be substantially more
difficult if the Company were in a traditional chapter 11 bankruptcy
proceeding. See "SPECIAL FACTORS--Alternatives to Confirmation and Consummation
of the Prepackaged Plan."
Pursuant to the Restructuring Agreement, in the event that the Company
pursues an alternative reorganization, restructuring, liquidation or similar
transaction during the period ending 12 months after termination of the
Restructuring Agreement, the Company may be required to reimburse LGE for
certain fees and expenses incurred in connection with the proposed
Restructuring and LGE may be entitled to a transaction fee of $8 million. SEE
"SPECIAL FACTORS--The Restructuring Agreement--Transaction Expenses and
Transaction Fee upon Termination under Certain Circumstances."
10
<PAGE>
Recommendation of the Board
The Special Committee has unanimously recommended to the Board, and the Board
has unanimously approved, the Restructuring Agreement and the Prepackaged Plan.
The Board recommends that all holders of Impaired Claims vote to accept the
Prepackaged Plan. For a description of the material factors considered by the
Special Committee and the Board in reaching their respective conclusions, see
"SPECIAL FACTORS--Recommendation of the Board."
Liquidation and Going Concern Analyses
The Board has reviewed and considered liquidation and going concern analyses
with respect to the Company, each developed by Peter J. Solomon Company Limited
("PJSC"), the Company's investment banker and financial advisor. See "SPECIAL
FACTORS--Liquidation and Going Concern Analyses" for a description of the
review undertaken and assumptions made by PJSC in developing its analyses.
Based upon the enterprise value of the Company under the liquidation and going
concern analyses, and based upon the assumptions utilized therein, these
analyses concluded that there was no value available to holders of Equity
Interests, and demonstrated that under the Financial Restructuring, the value
to be received by holders of Impaired Claims was equal to or greater than the
amount that would be received by such holders in the hypothetical absolute
priority distribution of the Company's assets, under both the going concern
valuation and the liquidation valuation. These analyses also concluded that
under the treatment offered in the Prepackaged Plan, LGE would receive less
with 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. Further, described below under the heading "--Retention and
Incentive Programs," a number of the Company's executives and senior managers
participate in incentive programs that are based on achieving certain
performance goals in connection with the Restructuring. The Company's Senior
Vice President--Restructuring 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. 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."
11
<PAGE>
Although the Board recognizes the existence of the conflicts of interest
described herein, the Board does not believe that such conflicts of interest
had the effect of causing the terms of the Financial Restructuring to be
different in any material respect than such terms would have been in the
absence of such conflicts of interests. Moreover, the Board established the
Special Committee specifically to address and mitigate potential conflicts of
interest involving LGE and its affiliates. The Special Committee did not
resolve or address any other conflicts of 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 (as defined herein) to supplement cash flow from
operations. The Amended Citibank Credit Facility expires on the earlier of the
Company's filing for bankruptcy and April 30, 1999. The Company is in
negotiations with potential lenders regarding financing during the Prepackaged
Chapter 11 Case. See "RISK FACTORS--Recent Operating Results, Independent
Auditor's Report and High Leverage" and "--Possible Defaults; Risk of
Acceleration or Termination" and "SPECIAL FACTORS--Liquidity Pending
Consummation of Restructuring."
Dissenters' Rights
There are no dissenters' rights available under applicable law with respect
to the Restructuring. If the Prepackaged Plan is confirmed by the Bankruptcy
Court and the Restructuring is consummated in accordance therewith, holders of
the Old Subordinated Debentures that do not vote in favor of the Prepackaged
Plan will nevertheless be bound by all the terms and conditions thereof.
Retention and Incentive Programs
In connection with the Restructuring, in early 1998 the Company developed a
retention program for 14 key executives and senior managers, not including the
Chief Executive Officer. Under this executive retention program, the Company
may be obligated to pay participants up to an aggregate of $1.2 million in
retention bonuses. The Company's Senior Vice President and General Counsel is
the only Named Executive Officer (as defined herein) 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. The Company may be obligated to make payments to the two tiers
of 15 key executives and senior managers aggregating up to $2.1 million under
the short-term incentive program and $6.5 million under the long-term incentive
program, including up to $1.2 million and $1.1 million payable under the
retention, short-term and long-term incentive programs to the Company's Senior
Vice President and General Counsel and the Company's Senior Vice President and
Chief Financial Officer, respectively. The following chart summarizes the
retention bonuses and incentives the Company may be obligated to pay.
<TABLE>
<CAPTION>
Maximum Maximum
Short-Term Long-Term
Retention Incentive Incentive
Executive Group Bonus Payment Payment Total
- --------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Tier One Executives and Senior
Managers......................... $ 670,332 $1,615,680 $4,847,040 $7,133,052
Tier Two Executives and Senior
Managers......................... 553,280 461,572 1,659,840 2,674,692
---------- ---------- ---------- ----------
Total........................... $1,223,612 $2,077,252 $6,506,880 $9,807,744
========== ========== ========== ==========
</TABLE>
12
<PAGE>
The executives in tier one are: Richard F. Vitkus, Edward J. McNulty, William
G. Luehrs, Kevin Lynch, Kathryn Wolfe, William J. Sims and John I. Taylor. The
executives in tier two are: Nick Mehta, Richard Lewis, Hector Escobedo, Gerald
Reid, Wendy Weil, Gregg Gronowski, Tom Sorensen and Michael Thomas.
The Company's Chief Executive Officer'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.
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. See "MANAGEMENT--Executive Retention Programs" and "--Current
Executive Officers of the Company." The Company intends to seek court authority
to honor its obligations under the retention programs after the filing of the
Prepackaged Chapter 11 Case. See "THE PREPACKAGED PLAN--Intended Actions During
the Prepackaged Chapter 11 Case--Provisions for Employees; Retention Programs;
Employment Contracts."
The Prepackaged Proceeding; Classification and Impairment of Creditors
The Prepackaged Proceeding
The Prepackaged Plan provides specified treatment to the various Classes of
Claims against and Equity Interests in the Company. The Company believes the
Prepackaged Plan provides treatment for all Classes of Claims and Equity
Interests that reflects an appropriate resolution of the Claims and Equity
Interests taking into account the differing nature and priority (including
applicable contractual subordination) of such Claims and Equity Interests. The
Bankruptcy Court must find, however, that a number of statutory tests are met
before it may confirm the Prepackaged Plan. See "THE PREPACKAGED PLAN--
Confirmation Standards."
The Company intends to seek relief from the Bankruptcy Court as to various
matters, including, for example, approvals to honor outstanding payroll checks,
to make scheduled payments under employment, consulting and retirement
agreements, to permit employees to utilize their accrued paid vacation time, to
continue paying medical benefits under health plans, to maintain their cash
management systems, to retain certain attorneys, financial advisors and other
professionals (the "Professionals") to represent or assist the Company in the
Prepackaged Chapter 11 Case, and to maintain and continue their insurance
programs, including workers' compensation, as such programs are presently
administered. There can be no assurance, however, that any such approvals will
be granted.
In accordance with Section 1102 of the Bankruptcy Code, as soon as
practicable after the filing of the petition for relief in this case, the U.S.
trustee may appoint a committee of creditors holding unsecured claims and may
appoint additional committees of creditors or of Equity Interest holders as the
U.S. trustee deems appropriate. Any such committee may, among other things:
consult with the trustee or Company concerning the 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
13
<PAGE>
administrative convenience, the Prepackaged Plan may place a Claim or Equity
Interest in a particular Class only if such Claim or Equity Interest is
substantially similar to the other Claims or Equity Interests of such Class.
The Company believes that all Claims and Equity Interests have been
appropriately classified in the Prepackaged Plan. The Company has elected to
separately classify General Unsecured Claims because this Class is comprised
largely of trade creditors. Many of these creditors are key suppliers of
products and services used by the Company. Accordingly, any impairment of these
Claims could be detrimental to the ability of the Company to obtain essential
trade credit and could substantially impair the ability of the Company to do
business with trade creditors whose goods and services are essential to the
Company. Bank Lender Claims have been separately classified because the Company
believes that LGE's guaranty of these Claims renders their legal and financial
position substantially unlike other unsecured Claims. LGE Claims have been
separately classified because the holder of these Claims has voluntarily agreed
to convert a substantial portion of its Claims to equity and because LGE is an
insider. LGE has consented to the separate classification of its Claims as
provided in the Prepackaged Plan. Finally, because the Old Subordinated
Debenture Indenture contains subordination provisions, the Old Subordinated
Debentures are not held by insiders, and the Old Subordinated Debenture Claims
are not guaranteed by LGE, the Company contends that the Old Subordinated
Debenture Claims are significantly different from the other unsecured debt and
therefore may be classified separately. The LGE Demand Loan Claims, the LGE
Reimbursement Claim and the LGE Guarantee Fee Claims, as secured claims, are
senior in priority to the Old Subordinated Debentures to the extent provided in
Section 502 of the Bankruptcy Code. In addition, the LGE Extended Payables
Claims, the LGE Demand Loan Claims and the LGE Reimbursement Claims are senior
in right of payment to the Old Subordinated Debentures pursuant to the
subordination provision of the Old Subordinated Debenture Indenture. The LGE
Technical Services Claims and the LGE Leveraged Lease Claims are pari passu
with the Old Subordinated Debentures. The Company has been advised by legal
counsel to the Debenture Committee (as defined herein) 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. If the Debenture Committee
is successful in equitably subordinating or recharacterizing the LGE Claims,
the Company will be unable to comply with its obligations under the
Restructuring Agreement. Unless waived by LGE, any such failure would release
LGE from its commitments under the Restructuring Agreement, including its
commitment to provide the LGE New Credit Support. The Company does not believe
that the Restructuring can be achieved in such event and that the Company may
consequently be forced to liquidate. For a more detailed description of the
classification and treatment of Claims, see "THE PREPACKAGED PLAN--
Classification and Treatment of Claims and Equity Interests under the
Prepackaged Plan."
Impairment of Creditors
Only Classes that are impaired under the Prepackaged Plan are entitled to
vote to accept or reject the Prepackaged Plan, unless the Class is to receive
no distribution under the Prepackaged Plan and is, consequently, deemed to have
rejected the Prepackaged Plan. Under section 1124 of the Bankruptcy Code, a
class of claims or interests is impaired unless, with respect to each claim or
interest of such class, the plan:
(i) leaves unaltered the legal, equitable and contractual rights to which
the claim or interest entitles the holder thereof; or
(ii) with certain exception, cures any default which occurred before or
after the commencement of the chapter 11 case, reinstates the original
maturity of the claim or interest and compensates the holder for any
damages resulting from any reasonable reliance by the holder on a
contractual provision or applicable law that permits acceleration of the
debt.
The Prepackaged Plan has four Impaired Classes: (1) Class 4 which consists of
the Bank Lender Claims; (2) Class 6 which consists of the Old Subordinated
Debenture Claims; (3) Class 7 which consists of the LGE Claims; and (4) Class 8
which consists of Equity Interests.
14
<PAGE>
The Prepackaged Plan provides that the holder of Bank Lender Claims shall
receive the New Bank Lender Note in full satisfaction of its Claims. The New
Bank Lender Note shall have the same principal but will not be payable upon
demand to Zenith.
The Prepackaged Plan provides that the holders of the Old Subordinated
Debenture Claims shall receive a pro rata distribution of the New Subordinated
Debentures. See "DESCRIPTION OF NEW SUBORDINATED DEBENTURES--Comparison of the
Old Subordinated Debentures and the New Subordinated 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
November 13, 1998 the last trading price for the Old Common Stock was $0.4531
per share.
Notice to Creditors and Holders of Equity Interests
The Company intends to deliver a notice, as soon after the commencement of
the Prepackaged chapter 11 case as the Company is authorized by the Bankruptcy
Court, advising parties in interest of the commencement of the case, the date
set for the hearing on confirmation of the Prepackaged Plan, and such other
matters as the Bankruptcy Court may direct. Such notice will instruct parties
in interest on the procedure for objecting to confirmation of the Prepackaged
Plan. Due to large number of creditors and holders of Equity Interests and the
volume of documents involved in this case, the Company will not send all
documents and pleadings to all parties in interest. Should a party in interest
who was not designated by the Bankruptcy Court wish to receive copies of
documents related to this case, it may seek to do so by filing an appropriate
motion with the Bankruptcy Court.
In accordance with section 1125 of the Bankruptcy Code and Bankruptcy Rule
3018(b), the Bankruptcy Court must determine whether all impaired creditors and
holders of Equity Interests were provided with sufficient information and time
in order to consider the Prepackaged Plan. If insufficient information or
inadequate time was provided, the ballots received from those creditors and
holders of Equity Interests regarding the Prepackaged Plan may be voided, in
whole or in part, by the Bankruptcy Court.
Conditions to Confirmation/Consummation
It is a condition to Confirmation of the Prepackaged Plan that all
provisions, terms and conditions of the Prepackaged Plan have been approved in
the Confirmation Order.
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");
15
<PAGE>
3. a revolving credit facility and letter of credit subfacility shall be
available to the Company in an amount not less than $100 million and on
such terms and conditions as set forth in the Restructuring Agreement; and
4. all conditions precedent to the "Closing," as defined in the
Restructuring Agreement, shall have been satisfied or waived pursuant to
the terms thereof.
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."
16
<PAGE>
Historical and Pro Forma Capitalization
The following table sets forth the consolidated capitalization and cash and
cash equivalents of the Company at (i) September 26, 1998 on an historical
basis and on a pro forma basis giving effect to the Financial Restructuring as
if it had occurred on September 26, 1998 and (ii) December 31, 1998 on a
projected basis as if the Financial Restructuring had not occurred and on a pro
forma basis giving effect to the Financial Restructuring as if it had occurred
on December 31, 1998. During 1998, the Company expects to incur certain charges
associated with its Operational Restructuring that are not included herein. The
table should be read in conjunction with "ANNEX B--MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the Company's
consolidated financial statements, including the notes thereto, located
elsewhere in this Disclosure Statement. See "SELECTED HISTORICAL CONSOLIDATED
FINANCIAL DATA" and "PRO FORMA CONSOLIDATED FINANCIAL INFORMATION."
<TABLE>
<CAPTION>
As of
September 26, Projected As of
1998 December 31, 1998
--------------- ---------------------------
Without With
Pro Financial Financial
Actual Forma Restructuring Restructuring
------- ------ ------------- -------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Cash.............................. $ -- $ 15.0 $ -- $ --
======= ====== ======= ======
LGE Extended Payables Claims...... $ 134.0 $ -- $ 140.0 $ --
======= ====== ======= ======
Debt:
Bank Lender Claims(1)........... $ 30.0 $ 30.0 $ 30.0 $ 30.0
Amended Citibank Credit
Facility....................... 77.9 -- 13.1 --
Post-Restructuring bank credit
facility....................... -- 77.9 -- 13.1
LGE Leveraged Lease Claims...... 90.1 -- 90.1 --
LGE Reimbursement Claims........ 72.0 -- 72.0 --
LGE Demand Loan Claims.......... 30.0 -- 45.0 --
Old Subordinated Debentures (at
face value).................... 103.5 -- 103.5 --
New Subordinated Debentures (at
face value).................... -- 40.0 -- 40.0
LGE New Restructured Senior
Note........................... -- 111.7 -- 118.8
------- ------ ------- ------
Total debt.................... $ 403.5 $259.6 $ 353.7 $201.9
======= ====== ======= ======
Stockholders' equity:
Old Common Stock, $1.00 par
value, 150,000,000 shares
authorized, 67,525,447 shares
issued and outstanding(2)...... $ 67.6 $ -- $ 67.6 $ --
New Common Stock, $0.01 par
value, 1,000 shares authorized,
1,000 shares issued and
outstanding(3)................. -- -- -- --
Additional paid-in capital,
old............................ 506.8 572.7 506.8 572.7
Additional paid-in capital,
new............................ -- 200.0 -- 200.0
Retained earnings (deficit)..... (849.5) (805.6) (858.9) (814.7)
Treasury stock.................. (1.7) -- (1.7) --
------- ------ ------- ------
Total stockholders' equity.... $(276.8) $(32.9) $(286.2) $(42.0)
======= ====== ======= ======
</TABLE>
- --------
(1) Represents the Company's credit facility with Credit Agricole Indosuez.
(2) Excludes 3,233,800 shares of Old Common Stock issuable upon exercise of
outstanding stock options as of December 31, 1998, of which 1,746,000
shares are issuable to LGE and 1,487,800 shares are issuable to employees.
There will be no such options outstanding on a pro forma basis.
(3) New Common Stock does not show a value due to rounding in millions.
17
<PAGE>
Business Plan Projections
In connection with the planning and development of the Prepackaged Plan,
certain financial projections were prepared by the Company in November 1998 to
present the anticipated impact of the Prepackaged Plan and the Operational
Restructuring (the "Business Plan Projections"). Such projections assume that
the Prepackaged Plan will be implemented in accordance with its terms. Since
the projections are based on forecasts of key economic variables, including
without limitation estimated domestic market television sales, the introduction
of digital television products, the Company's ability to exit manufacturing in
an efficient manner, and the availability of externally sourced product at
acceptable prices, the estimates and assumptions underlying the projections are
inherently uncertain, and are subject to significant business, economic and
competitive uncertainties. Accordingly, such projections, estimates and
assumptions are not necessarily indicative of current values or future
performance of the Company, which may be significantly less favorable or more
favorable than as set forth. Holders of Claims are cautioned not to place undue
reliance on the following projections. See "BUSINESS PLAN PROJECTIONS"; "RISK
FACTORS--Certain Risks Relating to the Business Plan Projections" and
"CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS."
For presentation purposes, it is assumed that the Company files and emerges
from chapter 11 in the fourth quarter of 1998 (the "Reorganization Period")
thus completing the Financial Restructuring of the Company. All costs presented
in the Restructuring columns of the Business Plan Projections are assumed to
take place during the Reorganization Period. However, not all costs presented
in the column relate directly to the Financial Restructuring; some costs relate
to the Operational Restructuring which coincides with the timing of the
Financial Restructuring.
18
<PAGE>
ZENITH ELECTRONICS CORPORATION
PROJECTED STATEMENT OF OPERATIONS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Projected for the year ended
1998 December 31,
------------------------------------------------------ ------------------------------------------
Actual
First
Through Projected Projected
Third Fourth Projected Restructuring Projected
Quarters Quarter Unadjusted Adjustments Adjusted 1999 2000 2001 2002 2003
-------- --------- ---------- ------------- --------- ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................... $ 675.1 $290.5 $ 965.6 $ 0.0 $ 965.6 $876.1 $889.3 $935.1 $987.6 $1,018.3
Cost of products sold... 621.6 267.3 888.9 4.5(a) 893.4 802.1 807.6 837.7 880.7 903.0
------- ------ ------- ------ ------- ------ ------ ------ ------ --------
Gross Margin............ 53.5 23.2 76.7 (4.5) 72.2 74.0 81.7 97.4 106.9 115.3
Gross Margin............ 7.9% 8.0% 7.9% 7.5% 8.4% 9.2% 10.4% 10.8% 11.3%
Selling, general and
administrative......... 89.8 35.3 125.1 4.3(h) 129.4 110.4(h) 100.4 99.9 99.4 98.9
Engineering and
research............... 31.9 14.0 45.9 -- 45.9 14.5 12.0 11.4 10.8 10.3
Restructuring
expense (b)............ 75.5 -- 75.5 -- 75.5 -- -- -- -- --
Other operating expense
(income), net (c)...... (16.9) (15.2) (32.1) -- (32.1) (34.2) (34.8) (43.6) (56.5) (55.2)
------- ------ ------- ------ ------- ------ ------ ------ ------ --------
Operating income
(loss)................. (126.8) (10.9) (137.7) (8.8) (146.5) (16.7) 4.1 29.7 53.2 61.3
Gain (loss) on asset
sales.................. (0.2) 15.9 15.7 -- 15.7 6.8 -- -- -- --
Finance guarantee fee
charge (d)............. (32.3) -- (32.3) (1.8) (34.1) -- -- -- -- --
Interest expense, net... (28.5) (14.5) (43.0) -- (43.0) (23.2) (25.7) (27.1) (27.4) (24.2)
------- ------ ------- ------ ------- ------ ------ ------ ------ --------
Income (loss) before
reorganization items... (187.8) (9.5) (197.3) (10.6) (207.9) (33.1) (21.6) 2.6 25.8 37.1
Reorganization
items (e).............. -- -- -- 139.1 139.1 -- -- -- -- --
Taxes on income/ (income
tax benefit)........... -- -- -- -- -- -- -- -- -- --
------- ------ ------- ------ ------- ------ ------ ------ ------ --------
Net earnings (loss)
before extraordinary
items.................. (187.8) (9.5) (197.3) (149.7) (347.0) (33.1) (21.6) 2.6 25.8 37.1
Extraordinary gain on
debt retirement (f) ... -- -- -- 63.6 63.6 -- -- -- -- --
------- ------ ------- ------ ------- ------ ------ ------ ------ --------
Net earnings (loss)..... $(187.8) $ (9.5) $(197.3) $(86.1) $(283.4) $(33.1) $(21.6) $ 2.6 $ 25.8 $ 37.1
======= ====== ======= ====== ======= ====== ====== ====== ====== ========
Memo:
Operating income
(loss)................ $(126.8) $(10.9) $(137.7) $ (8.8) $(146.5) $(16.7) $ 4.1 $ 29.7 $ 53.2 $ 61.3
Restructuring
expense (b)........... 75.5 -- 75.5 -- 75.5 -- -- -- -- --
Depreciation and
Amortization.......... 23.8 7.5 31.3 4.5 35.8 6.1 3.2 3.6 3.9 4.2
------- ------ ------- ------ ------- ------ ------ ------ ------ --------
EBITDA (g).............. $ (27.5) $ (3.4) $ (30.9) $ (4.3) $ (35.2) $(10.6) $ 7.3 $ 33.3 $ 57.1 $ 65.5
======= ====== ======= ====== ======= ====== ====== ====== ====== ========
</TABLE>
19
<PAGE>
- --------
(a) Cost of products sold increase represents the estimated provision required
to write-down inventories of raw materials and work-in-process to net
realizable value upon shutdown of the manufacturing facilities.
(b) Restructuring expenses are as follows:
<TABLE>
<C> <S> <C>
(i) Professional Fees............................................ $10.8
(ii) Melrose Park shift reduction................................. 1.4
Exit from Analog Set-Top Boxes............................... 3.6
(iii) Loss on Leveraged Lease termination.......................... 68.8
Deferred gain from 1997 sale of Leveraged Lease assets....... (9.1)
Total........................................................ $75.5
</TABLE>
--------
(i) Professional fees for advisors and consultants to assist in
formulating and implementing the Prepackaged Plan.
(ii) Various costs incurred to implement the Operational Restructuring
including staff reductions, facility closures, and product line
eliminations.
(iii) The loss on the termination of the leveraged Leases is measured as
the difference between the liability to LGE, of $90.1, based upon
its payment in performance of its gaurantee 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 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.
These costs are classified as Restructuring expenses 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 other miscellaneous items in amounts per
year as follows:
<TABLE>
<CAPTION>
Royalty
Income Other
----------- Income/
VSB Other (Expense)
----- ----- ---------
<S> <C> <C> <C>
1998................................................. $-- $28.6 $ 3.5
1999................................................. 2.2 29.7 2.3
2000................................................. 6.1 30.2 (1.5)
2001................................................. 14.3 30.8 (1.5)
2002................................................. 26.6 31.4 (1.5)
2003................................................. 35.5 21.2 (1.5)
</TABLE>
Royalty income amounts represent estimated gross revenues. Accordingly, the
foregoing does not include any adjustments 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. These are non-cash amortization expenses.
(e) Reorganization items of $139.1 are as follows:
<TABLE>
<S> <C>
Reorganization expenses (i):
Severance......................................................... $ 48.6
Legal for plant closures.......................................... 2.4
Outplacement...................................................... 1.1
Headquarters relocation expenses.................................. 1.7
Plant closure/exit costs.......................................... 17.7
Purchase contracts................................................ 1.1
Professional fees................................................. 9.4
Exit from analog set-top boxes.................................... 2.9
------
Total Reorganization expenses...................................... 84.9
Asset impairment (ii).............................................. 54.2
------
Total.............................................................. $139.1
======
</TABLE>
--------
(i) estimated Reorganization expenses related to executing the
Prepackaged Plan and Business Plan Projections. The timing and
amount of these charges could vary significantly from the estimates
presented depending on the actual implementation of the Business
Plan Projections and the timing of the bankruptcy proceedings.
(ii) the estimated impairment, of $54.2, on property, plant and
equipment that occurs at the confirmation of the Prepackaged Plan.
It is measured as the difference between the book value of assets
and the estimated (by appraisal) fair value in an orderly
liquidation, including estimated environmental obligations.
20
<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
less: New Subordinated Debentures (at face value)............... (40.0)
------
Gain........................................................... $ 63.6
======
</TABLE>
(g) EBITDA represents operating income (loss) including royalties before
interest expense, income taxes, depreciation and amortization, and
restructuring expenses. EBITDA is not intended to represent cash flow from
operations or net income as defined by generally accepted accounting
principles and should not be considered as a measure of liquidity or an
alternative to, or more meaningful than, operating income or operating cash
flow as an indication of the Company's operating performance. EBITDA is
included herein because management believes that certain investors find it
a useful tool for measuring the Company's ability to service its debt.
(h) Selling, general and administrative expenses in 1998 include retention plan
payments of $4.3 for corporate and manufacturing employees. Selling,
general and administrative expenses in 1999 include $1.8 in retention plan
expenses.
21
<PAGE>
Comparison of the Old Subordinated Debentures to the New Subordinated
Debentures
The following is a brief comparison of certain provisions of the Old
Subordinated Debentures with the New Subordinated Debentures. For a more
detailed description of the provisions of the New Subordinated Debentures, see
"DESCRIPTION OF NEW SUBORDINATED DEBENTURES."
<TABLE>
<CAPTION>
Old Subordinated Debentures New Subordinated Debentures
---------------------------- ----------------------------
<S> <C> <C>
Aggregate Principal
Amount Outstanding...... $103.5 million $40 million
Maturity Date........... April 1, 2011 April 1, 2010
Interest................ 6 1/4% per annum, payable in 6 1/4% per annum, payable in
cash on April 1 and October cash on April 1 and October
1 of each year 1 of each year
Redemption.............. The Old Subordinated The New Subordinated
Debentures may be redeemed Debentures may be redeemed
at the option of the at the option of the
Company, in whole or in Company, in whole or in
part, at a premium which part, at par.
declined to par on April 1,
1996.
Conversion.............. The Old Subordinated The New Subordinated
Debentures are convertible Debentures are not
into shares of the Company's convertible.
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 Same
Debentures are subordinated
to the prior payment when
due of all Senior
Indebtedness (as defined in
the Old Subordinated
Debenture Indenture,
including the Citibank
Secured Claims, the Other
Secured Claims, the Bank
Lender Claims, and certain
LGE Claims) and are not
secured.
Sinking Fund............ The Company is required to None
provide through the
operation of a sinking fund
for the retirement on April
1 in each of the years 1997
to and including 2010 of 5%
of the principal amount of
the Old Subordinated
Debentures at par. The
Company may increase any
sinking fund payment to
retire up to an additional
5% of the principal amount
of the Old Subordinated
Debentures originally issued
at par.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Old Subordinated Debentures New Subordinated 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.
23
<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 (as defined herein) are conclusively
presumed under the Bankruptcy Code to have accepted the Prepackaged Plan.
Consequently, the Company is not soliciting acceptance of the Prepackaged Plan
from holders of Unimpaired Claims.
Any Class not receiving or retaining any consideration under the Prepackaged
Plan is deemed to have rejected the Prepackaged Plan. Consequently, holders of
Equity Interests are presumed under the Bankruptcy Code to have rejected the
Prepackaged Plan, and the Company is not soliciting acceptance of the
Prepackaged Plan from holders of Equity Interests.
The following Classes of Claims are impaired under the Prepackaged Plan, and
all holders of Claims in such Classes as of the Voting Record Date are entitled
to vote to accept or reject the Prepackaged Plan: (i) Class 4--Bank Lender
Claims; (ii) Class 6--Old Subordinated Debenture Claims; and (iii) Class 7--LGE
Claims. A Class of Claims will have accepted the Prepackaged Plan if votes to
accept are cast by the holders of at least two-thirds in amount and more than
one-half in number of Claims of such Class that vote on the Prepackaged Plan.
See "RISK FACTORS--Certain Bankruptcy Considerations--Nonacceptance of the
Prepackaged Plan--Confirmation by Cram Down." Any holder of Claims in more than
one Class is required to vote separately with respect to each Class in which
such holder has Claims. Please use a separate Ballot of the appropriate form to
vote each such Class of Claims.
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. Because LGE
is an "insider" within the meaning of Section 101(31) of the Bankruptcy Code,
the Class containing its claims cannot be an impaired accepting class for
purposes of the "cram down" provisions of the Bankruptcy Code, however. No
other creditor that is entitled to vote has any agreement with the Company with
respect to its voting for or against the Prepackaged Plan, or has indicated to
the Company whether it will vote for or against the Prepackaged Plan.
In the event any impaired Class of Claims does not accept the Prepackaged
Plan, the Bankruptcy Court may nevertheless confirm the Prepackaged Plan at the
Company's request pursuant to the "cram down" provisions of the Bankruptcy Code
if at least one impaired Class has accepted the Prepackaged Plan (with such
acceptance being determined without including the acceptance of any "insider"
in such Class) and, as to each impaired Class which has not accepted the
Prepackaged Plan, the Bankruptcy Court determines, among other things, that the
Prepackaged Plan "does not discriminate unfairly" and is "fair and equitable"
with respect to such Class of impaired Claims. See "THE PREPACKAGED PLAN--
Confirmation of the Prepackaged Plan Without Acceptance by All Classes of
Impaired Claims." Because the holders of Equity Interests will receive no
distribution and retain no property under the Prepackaged Plan, that Class is
presumed to have rejected the Prepackaged Plan pursuant to section 1126(g) of
the Bankruptcy Code. Therefore, that Class will be subject to "cram down" as
part of the Confirmation of the Prepackaged Plan. In addition, if the holders
of the Old Subordinated Debenture Claims do not accept the Prepackaged Plan,
the Company intends to initiate a "cram down" procedure with respect to the
Class composed of the holders of the Old Subordinated Debentures. If such a
"cram down" is approved by the Bankruptcy Court, holders of the Old
Subordinated Debenture Claims would receive no distribution and retain no
property.
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
24
<PAGE>
holders of the Old Subordinated Debentures (i.e., holders whose respective
names (or the names of whose nominees) appear as of the Voting Record Date on
the securityholder lists maintained by State Street Bank & Trust Company,
indenture trustee under the Old Subordinated Debenture Indenture or, if
applicable, who are listed as participants in a clearing agency's security
position listing). If such persons or entities do not hold for their own
account, they should provide copies of this Disclosure Statement and the
appropriate Solicitation Materials to the beneficial owners of the Old
Subordinated Debentures for whose account they hold.
THE SOLICITATION PURSUANT TO THIS DISCLOSURE STATEMENT WILL EXPIRE ON
. TO BE COUNTED, BALLOTS AND, WHEN APPROPRIATE, MASTER BALLOTS,
MUST BE RECEIVED BY 5:00 PM., NEW YORK CITY TIME, ON (THE
"EXPIRATION DATE"), UNLESS THE COMPANY, IN ITS SOLE DISCRETION, EXTENDS OR
WAIVES THE PERIOD DURING WHICH BALLOTS AND MASTER BALLOTS WILL BE ACCEPTED BY
THE COMPANY, IN WHICH CASE THE TERM "EXPIRATION DATE" FOR SUCH SOLICITATION
SHALL MEAN THE LAST TIME AND DATE TO WHICH SUCH SOLICITATION IS EXTENDED.
Except to the extent the Company so determines or as permitted by the
Bankruptcy Court, Ballots or Master Ballots received after the Expiration Date
will not be accepted or counted in connection with the request for Confirmation
of the Prepackaged Plan.
The Company expressly reserves the right, at any time or from time to time,
to extend the period during which the Solicitation is open. During any
extension of the Solicitation, all Ballots and Master Ballots previously given
will remain subject to all the terms and conditions of the Solicitation,
including the revocation rights specified herein. To extend the Expiration
Date, the Company will notify the Solicitation Agent of any extension by oral
or written notice and will make a public announcement thereof, each at any time
prior to 10:00 a.m., New York City Time, on the next business day after the
previously scheduled Expiration Date. Without limiting the means by which the
Company may choose to make any public announcement, the Company will not have
any obligation, unless otherwise required by law, to publish, advertise or
otherwise communicate any such public announcement other than by issuing a news
release through the Dow Jones News Service. There can be no assurance that the
Company will exercise its right to extend the Solicitation.
Ballots or Master Ballots previously delivered may be withdrawn or revoked at
any time prior to the Expiration Date by the beneficial owner on the Voting
Record Date who completed the original Ballot or by the nominee who completed
the Master Ballot on such beneficial owner's behalf, as the case may be. The
Company does not intend to commence a case under chapter 11 of the Bankruptcy
Code prior to the Expiration Date, although it reserves the right to do so in
its sole discretion. After commencement of a case under the Bankruptcy Code,
withdrawal or revocation of any Ballot or Master Ballot may be effected only
with the approval of the Bankruptcy Court.
The Company expressly reserves the right to amend, at any time and from time
to time, the terms of the Solicitation and the Prepackaged Plan (subject to
compliance with the requirements of section 1127 of the Bankruptcy Code, the
Federal Rules of Bankruptcy Procedure ("Bankruptcy Rules") and any applicable
non-bankruptcy laws and, pursuant to the Restructuring Agreement, the approval
of LGE).
Beneficial owners of Claims as of the Voting Record Date electing to vote on
the Prepackaged Plan should complete and sign the applicable Ballot and, when
applicable, Master Ballot, and check the box entitled "Accepts the Prepackaged
Plan" or "Rejects the Prepackaged Plan," as appropriate. Except as provided on
the applicable Ballot or Master Ballot, the applicable duly completed Ballot or
Master Ballot must be mailed or delivered to the Solicitation Agent at the
address listed on the back cover of this Disclosure Statement. It is incumbent
upon each holder of an Impaired Claim to select a delivery method for the
submission of its Ballot or Master Ballot that will ensure timely receipt
thereof in accordance with the instructions for voting set forth herein. Any
beneficial owner whose securities were registered or held of record in the name
of his broker, dealer,
25
<PAGE>
commercial bank, trust company, savings and loan or other nominee ("Nominee")
who wishes to vote on the Prepackaged Plan, but who does not have a Ballot,
should contact such Nominee and request a Ballot from such Nominee and return a
completed Ballot to such Nominee.
Under the Bankruptcy Code, for purposes of determining whether the requisite
acceptances have been received by an impaired Class of Claims, only beneficial
owners who vote will be counted. Failure of a beneficial owner to send to its
Nominee or to the Solicitation Agent a properly executed Ballot or Master
Ballot will be deemed to constitute an abstention by such beneficial owner with
respect to a vote regarding the Prepackaged Plan. Abstentions, as a result of
not submitting a properly executed Ballot or Master Ballot, will not be counted
as votes for or against the Prepackaged Plan.
Issues or disputes relating to the classification of holders of Claims or
Equity Interests could result in a delay in the Confirmation and Consummation
of the Prepackaged Plan, and could increase the risk that the Prepackaged Plan
will not be consummated. See "RISK FACTORS--Certain Bankruptcy Considerations."
Solicitation Agent
Georgeson & Company Inc. will act as the solicitation and voting agent (the
"Solicitation Agent") in connection with the Solicitation. Its telephone number
is (800) 223-2064. All inquiries relating to the Solicitation, including any
inquiries concerning the voting, should be directed to the Solicitation Agent
at such telephone number. All deliveries to the Solicitation Agent relating to
the Solicitation should be directed to the address set forth on the back cover
page of this Disclosure Statement. Requests for information or additional
copies of this Disclosure Statement or Ballots should be directed to the
Solicitation Agent. See "SOLICITATION; VOTING PROCEDURES--Withdrawal of
Ballots; Revocation."
Notice Agent
The Company intends to seek approval of the Bankruptcy Court to hire Poorman
Douglas Corporation as the notice agent in connection with the Prepackaged
Chapter 11 Case (the "Notice Agent"). The Notice Agent will process and deliver
notices as required during the Prepackaged Chapter 11 Case. It may also assist
the Company with other tasks.
U.S. Federal Income Tax Matters
Upon consummation of the transactions contemplated by the Prepackaged Plan,
the Company anticipates realizing approximately $63.5 million of cancellation
of debt income attributable to the exchange of New Subordinated Debentures for
the Old Subordinated Debentures and possibly an additional amount of
cancellation of debt income attributable to the satisfaction of certain other
Claims. The Company had an estimated $835.6 million NOL carryover as of
December 31, 1997, which may be decreased by the amount of cancellation of debt
income realized as a result of the Restructuring.
In addition, the Company anticipates that it will undergo an "ownership
change" within the meaning of Section 382 of the Internal Revenue Code of 1986,
as amended ("Tax Code") as a result of the Restructuring. Generally, if a
corporation undergoes an ownership change, its annual use of its NOL carryover
to offset taxable income in taxable years after the ownership change will be
limited by Section 382 of the Tax Code (the "Section 382 Limitation"). The
Section 382 Limitation is generally equal to the product of the net equity
value of all of the corporation's stock immediately before the ownership change
and the long-term tax-exempt rate for the month in which the ownership change
occurs. (The long-term tax exempt rate for January 1999 is 4.70%).
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
26
<PAGE>
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. The Company believes that the exchanges contemplated by the
Prepackaged Plan will qualify for the Section 382(l)(5) exception so that the
Company's use of its NOL carryover after consummation of the Prepackaged Plan
will generally continue unimpaired. However, under Section 382(l)(5), such NOL
carryover will not survive a subsequent ownership change if such ownership
change occurs during the 2-year period immediately following Consummation of
the Prepackaged Plan.
If the Company does not qualify for Section 382(l)(5) or elects not to apply
Section 382(l)(5), Section 382(l)(6) will apply, in which case the Section 382
Limitation will be calculated by reference to the net equity value of the
Company's stock immediately after the ownership change (as opposed to
immediately before the ownership change, as is the case for non-bankruptcy
ownership changes). In such case, since it is unclear what the net equity value
of the Company immediately after consummation of the Prepackaged Plan will be,
the Company's use of its NOL carryover may be substantially limited after the
ownership change.
The rules regarding ownership changes are very complicated, and although the
Company believes there will be an ownership change upon consummation of the
Prepackaged Plan, it is possible that such change will not constitute an
ownership change. In such case, any change after the Effective Date that
affects the percentage stock ownership of a 5% shareholder may trigger an
ownership change upon such event. If the Company is not in bankruptcy at such
time, neither the Section 382(l)(5) nor Section 382(l)(6) exception will be
available, and the Company's use of its NOL carryover will be subject to the
general Section 382 Limitation as described above.
Risk Factors
Acceptance of the Prepackaged Plan and ownership of the Company's securities
involves a high degree of risk. Prior to deciding whether and how to vote on
the Prepackaged Plan, each holder of Impaired Claims should consider carefully
all of the information contained in this Disclosure Statement, especially the
factors described in "RISK FACTORS."
27
<PAGE>
RISK FACTORS
Holders of Impaired Claims should read and carefully consider the factors
set forth below, as well as the other information set forth or otherwise
referenced in this Disclosure Statement, prior to voting to accept or reject
the Prepackaged Plan. See "CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS."
Recent Operating Results, Independent Auditor's Report and High Leverage
The Company faces liquidity problems caused by its significant debt burden
and its historical net losses. The Company incurred net losses of $178.0
million and $299.4 million for the years ended December 31, 1996 and 1997,
respectively. The Company had a net loss of $187.8 million (including $107.8
million of restructuring charges) for the nine months ended September 26,
1998. The Company's cash flows in 1996 and 1997 were, and its projected cash
flows in the current and future years are projected to be, insufficient to
meet its operating expenses, including its current interest and principal
repayment obligations. The Company's independent public accountants included
in their report on the Company's consolidated financial statements for the
fiscal year ended December 31, 1997 an explanatory paragraph that describes
the significant uncertainty about the Company's ability to continue as a going
concern due to recurring losses and a negative working capital position, and
that the Company's financial statements do not reflect any adjustment that
might result from the outcome of this uncertainty. See "INDEX TO FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA" and "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
As of September 26, 1998 the Company had $672.4 million in total current
liabilities (including a $134.0 million vendor credit line payable to LGE) and
a deficit in stockholders' equity of $276.8 million. As of September 26, 1998,
the Company's current liabilities included $30 million in demand loans
guaranteed by LGE, and $72 million of LGE Reimbursement Claims resulting from
LGE payments of $72 million under guarantees of other demand loans. Although
the Financial Restructuring will reduce the Company's debt obligations by
approximately $300 million upon the Confirmation of the Prepackaged Plan, the
Company projects it will still have $233.2 million of indebtedness and will
therefore remain highly leveraged after the Financial Restructuring. The
Company's high leverage poses substantial risks to holders of the Company's
debt and equity securities.
The Amended Citibank Credit Facility currently expires on the earlier of a
bankruptcy filing by the Company and April 30, 1999. In December 1998, the
Company negotiated an extension of the Amended Citibank Credit Facility to the
earlier of a bankruptcy filing by the Company and April 30, 1999. Further
extensions or a replacement of the Amended Citibank 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. See "--Possible
Defaults; Risk of Acceleration or Termination." In addition, the Company is in
discussions with potential lenders regarding financing during the Prepackaged
Chapter 11 Case and following Consummation of the Prepackaged Plan. The
Company believes that if it obtains satisfactory financing, following
Consummation of the Prepackaged Plan, the Company's cash generated by
operations and the estimated levels of liquidity available to the Company will
be sufficient to permit the Company to satisfy its debt service requirements
and other capital requirements. However, such belief is based on various
assumptions, including those regarding the terms of new financing and those
underlying the Business Plan Projections. Accordingly, there can be no
assurance that the Company's financial resources will be sufficient for the
Company to satisfy its debt service obligations and other capital
requirements.
Certain Risks Relating to the Business Plan Projections
The Company has developed its 1999-2003 business plan based on certain
assumptions concerning its business, its ability to implement the Operational
Restructuring, the general domestic market for consumer electronics products,
its ability to sell assets, and timelines relating to its restructuring
activities. See "BUSINESS PLAN PROJECTIONS." In the event that the actual
performance of the Company is below that projected, the domestic market or
demand for consumer electronics products is less than projected or the time
28
<PAGE>
required to achieve certain milestones in the Operational Restructuring is
greater than expected, the Company may not be able to generate sufficient cash
flow to meet its debt service requirements or operating cash needs.
The Company prepared the Business Plan Projections in connection with the
planning and development of the Operational Restructuring and the Prepackaged
Plan. The Business Plan Projections assume that all aspects of the Prepackaged
Plan and the Operational Restructuring will be successfully implemented on the
terms outlined in this Disclosure Statement. Because such projections are
based on forecasts of key economic 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 current 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 1998, as the Business Plan
Projections assume that all or a portion of those business lines will be sold
during 1998. 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 incorporate the proceeds of the sale of
manufacturing facilities and also include certain expenses associated with
such sales, including environmental clean-up costs, employee severance and
relocation expenses and brokerage fees associated with the sale of assets or
operating businesses. The Business Plan Projections contemplate that the
Company will outsource all or substantially all products and exit
manufacturing by the end of the first quarter of 1999, and that all
manufacturing facilities will be transferred or sold to third parties by the
third quarter of 1999. The Company has taken charges in 1998 related to the
termination of the Leveraged Leases in the amount of $68.8 million,
representing the loss difference between the $90.1 million payment made by LGE
and the $21.3 million appraised fair market value of the equipment.
The Business Plan Projections assume that products required for the
Company's offered lines in 1999 and later years will be available and
obtainable from third parties, including LGE, at the prices or margins set
forth in the Business Plan Projections. No allowances have been made or
contingencies budgeted for in the event there are shortages in raw materials,
component parts or finished product within the requirements of the Company's
projected product lines. No allowances have been made for increased costs or
for extraordinary costs associated with procuring or shipping necessary
component parts or finished product in the event of unforseen economic or
political difficulties in the locations from which the Company currently
expects to obtain such goods. If the Company is unable to obtain outsourced
product on expected terms or due to shortages or political or economic
uncertainties or hostilities in any location from which it currently expects
to obtain products, the Company may not be able to meet the timetable or
budget for outsourced products.
The Business Plan Projections also include and assume certain costs and
expenses associated with the transformation from manufacturing to a sales,
distribution and technology strategy. Such costs and expenses include
severance and vacation relating to layoffs in the manufacturing segments of
the Company's business, legal costs for contract terminations, environmental
charges associated with the disposition of facilities, outplacement expenses
for personnel, retention program costs for key personnel and consultant fees
for
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professionals. The Company's estimates and assumptions with respect to all
such fees include estimates of the time required to complete project phases.
If the outsourcing initiatives take more time than assumed in the Business
Plan Projections, or if unexpected additional expenses are incurred, the
Company may not be able to achieve its timetable and budget for the
outsourcing initiatives.
The Business Plan Projections also include certain assumptions concerning
accounts receivables and inventory turns, as well as for capital budget
requirements and depreciation expense. Those assumptions are based on current
performance and the expectation of improved performance during the Company's
restructuring and conversion to outsourcing. Such improvements in performance,
particularly with respect to inventory and accounts receivable turns, depend
in part on factors outside of the control of the Company, such as the market
for consumer electronics and the general economy. Lack of demand for consumer
goods and a general downturn in the economy would have a detrimental effect on
the Company's planned performance in these areas. The Company anticipates that
additional costs will be incurred, including increased interest and carrying
costs, if it is unable to achieve the performance levels and timing for
performance as contemplated in the Operational Restructuring. If the Company
is unable to meet improved performance goals, the Company may not be able to
meet the budget established under the Business Plan Projections.
Assumptions Concerning Credit Facilities
The Company executed the Amended Citibank Credit Facility as of June 29,
1998, and it was further amended in December 1998 to extend the term of the
facility until the earlier of a bankruptcy filing by the Company and April 30,
1999. Further extensions of the Amended Citibank Credit Facility may be
necessary if the Company has not filed its Prepackaged Chapter 11 Case by
April 30, 1999, but there can be no assurance that such extensions will be
granted. See "--Possible Defaults; Risk of Acceleration or Termination." The
Company also is in discussions with lenders regarding debtor-in-possession
financing to cover the period during the pendency of the bankruptcy proceeding
and a new credit facility to cover the period following Consummation of the
Prepackaged Plan. In addition, pursuant to the Restructuring Agreement, LGE
has agreed to provide the LGE New Credit Support 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 certain assumptions about the terms,
conditions and available borrowings under both the debtor-in-possession
("DIP") and post-restructuring financing arrangements. In particular, the
Company assumes that it would be able to obtain a DIP facility of not less
than $125 million in total availability, secured by the Company's assets,
including inventory, receivables, fixed assets and intellectual property, at
an assumed per annum interest rate of 9.5%. The Company assumes that it will
be able to obtain post-restructuring financing in an amount of not less than
$100 million on terms satisfactory to the Company at an assumed per annum
interest rate of 8.5%. 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.
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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 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 absorption rate of VSB technology into other non-television consumer
electronics, such as personal computers, is uncertain at this time. There can
be no assurance that VSB technologies will be incorporated into non-television
consumer electronics within the time periods and at the absorption rates
contemplated by the Business Plan Projections.
There can be no assurance that the ATSC digital television standard will be
adopted in other countries. Canada, Taiwan, the Republic of Korea and
Argentina have adopted the ATSC digital television standard that would
incorporate VSB technologies but Western Europe and Australia have already
adopted a non-VSB digital broadcast standard and Japan appears likely to adopt
a non-VSB standard. The Business Plan Projections do not include non-domestic
(i.e., non-United States) revenues from licensing activity and royalties
relating to VSB technologies because the Company believes such revenues to be
highly speculative and unreliable for business planning purposes. Potential
non-domestic VSB revenues are subject to certain risks and variables that are
far more extensive and material than the risks and variables presented by the
Company's domestic VSB revenue projections. These risks and variables include:
international economic conditions, both market-by-market and global; standards
adoption processes and the interaction between de facto and government decreed
standards (for countries that have yet to adopt a standard); influence of
infrastructural elements; lack of historical information for the potential
market; market drivers and consumer adoption; political and economic
influences as among potential market countries; source of transmission
content; lack of patent protection in some countries; technical
considerations; broadcaster plans; and consumer electronics equipment
manufacturer plans. See "BUSINESS PLAN PROJECTIONS--Assumptions Concerning
VSB."
Additionally, the ATSC digital television standard is one of several
technologies currently competing for dominance in digital broadcasting
internationally. In addition to the alternative broadcast standard adopted in
Western Europe and Australia, cable television and satellite providers each
employ a different competing standard that allows for digital broadcasts over
those systems. Japan has also developed an alternative digital broadcasting
standard. In all cases, the companies associated with competing digital
broadcast standards are currently involved in efforts to seek adoption of
those competing standards in other countries that have not yet established
national standards. In many cases, those companies have greater resources
available to promote the competing standards than those resources available to
the Company for similar efforts. There can be no assurance that the ATSC
standard, and therefore VSB technology, will achieve a significant market
share globally, or that, in the face of technological innovation, will remain
the standard in markets where it is currently adopted.
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Risks Associated with Proposed Operational Restructuring
The Company has formulated the Operational Restructuring, which contemplates
that the Company will substantially restructure the way in which it does
business. The Company plans to transform its primary business operations from
those of a vertically integrated television manufacturer, with research and
development design, manufacturing, marketing, sales, distribution, parts and
service functions, to a sales, distribution, and technology company with all
or substantially all product lines produced on an outsourced basis. There are
potential disadvantages, adverse consequences and risks associated with the
Operational Restructuring.
Exiting Manufacturing
Zenith currently operates six major manufacturing centers in the United
States and Mexico for the production and assembly of televisions and
television components and accessories, and for cable and satellite set-top
boxes. The Operational Restructuring includes initiatives to sell or close its
Melrose Park, Illinois operations by the end of the fourth quarter of 1998.
The Operational Restructuring contemplates that the other manufacturing
facilities will close by the end of the first quarter of 1999 and be sold by
the end of the third quarter of 1999. Until a sale or closure of any facility
has been finalized, the Company would continue to bear some costs associated
with basic maintenance relating to plant and equipment. With respect to the
closing or sale of the Company's Mexican operations, under Mexican law,
certain tax, administrative, severance and other employee benefit claims enjoy
priority treatment and will be paid first from potential proceeds of the sale
or transfer of such assets. The Company currently estimates the aggregate of
such payments to be approximately $44.2 million. Additionally, the Company
expects that it will incur additional expenses related to expatriate U.S.
workers assigned to Mexican facilities, including relocation costs.
The Company may not be able to accomplish the sale of each of its facilities
within the time frame contemplated by the Operational Restructuring or may be
unable to obtain offers at the price levels contemplated in the Business Plan
Projections. Failure to finalize any sale within the schedule of the
Operational Restructuring will result in additional costs and expenses to the
Company. Failure to achieve the sale price contemplated by the Business Plan
Projections may result in a shortfall in cash required to accomplish the
Operational Restructuring. Such additional costs and expenses or cash
shortfalls could have a material adverse effect on the Company's business,
financial condition, results of operations, ability to implement the
Restructuring and ability to meet its financial obligations, including those
under the New Subordinated Debentures. Additionally, the disposition schedule
contemplated by the Operational Restructuring and the nature of the market for
the facilities may adversely affect the selling price for the facilities. The
Company's plants vary in layout, age, features and condition, and may not be
suitable for alternative uses.
In October 1998, the Company announced plans to close its Melrose Park color
picture tube plant in December 1998 and notified its labor unions and
employees concerning the possible plant closure. In November 1998, the Company
entered into agreements with Philips Electronics North America Corporation
("Philips") for the purchase 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 sale of color
picture tubes by Philips to the Company. Under these agreements, the Company
may receive up to approximately $24 million in cash or credits against picture
tube purchases in the future. The final amount that the Company will receive
depends on the amount of picture tubes purchased in the future by the Company
and its contract manufacturers from Philips. The sale and removal of such
equipment will preclude additional picture tube manufacturing at the Melrose
Park facility after the plant closure. There can be no assurance that the
Company will be successful in its attempts to locate a buyer or achieve the
selling prices within the schedule or budget set forth in the Operational
Restructuring for the property, plant and the remaining equipment located in
Melrose Park.
On October 7, 1998, the Company sold its Glenview, Illinois headquarters
building to BRE/Glenview I Inc. for $23.3 million. The terms of the sale
included a lease agreement under which the Company will continue to be a
tenant in the building through December 1999. Under the lease, the Company
continues its occupancy of substantially all of the building. However, the
landlord may reduce the size of the premises occupied by the
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Company between March 1, 1999 and June 30, 1999, as necessary to accommodate
additional tenants. From July 1, 1999 to the end of the lease, the Company may
reduce its occupancy within the building to certain pre-designated floors. The
base rent payable by the Company is $5 per rentable square foot, and the
Company is required to pay its pro-rata share of the operating expenses and
real estate taxes associated with the building. The proceeds of the sale of
the building were used, as required under the Amended Citibank Credit
Facility, to repay certain debt under that facility, which permanently reduced
that portion of the facility secured by the Company's real estate assets.
The sale of the Mexican manufacturing facilities is dependent in part on the
condition of the real estate market in Mexico in general and in the
"maquiladora" designated regions in particular. International trade
considerations, including customs, duties, North American Free Trade Agreement
("NAFTA") requirements and the currency markets with respect to the Mexican
Peso and currencies of other competing off-shore manufacturing areas influence
the decision of other companies to select Mexico as a manufacturing location.
There are substantial risks associated with changes in international economies
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 Subordinated
Debentures.
The Financial Restructuring currently anticipates that the Company will
transfer the Reynosa Assets to LGE in exchange for the forgiveness of debt
owed by the Company to LGE, and the Operational Restructuring currently
provides that the Company will outsource certain products from the LGE-owned
Reynosa Assets after the Restructuring. The Company and LGE have not yet
entered into any agreement or contract concerning the products to be
outsourced from the Reynosa Assets after the transfer to LGE, nor has pricing
for those products been established; however, the parties are engaged in
negotiations while the structure of the Reynosa Assets transfer under the
Financial Restructuring is being finalized. The Company believes that it would
be beneficial to its outsourcing efforts to have the Reynosa Assets (while
owned by LGE) provide certain products due to the general unavailability of
certain screen-sized televisions and uniquely designed commercial products
models through other manufacturers. The Company currently anticipates
purchasing approximately $431 million in finished products and components from
the Reynosa facility for its 1999 model year. Because no contract concerning
transfer of the Reynosa Assets or outsourcing from the Reynosa Assets
following the transfer to LGE currently exists, there can be no assurance that
the Company will be able to procure products from this source at prices or in
volumes anticipated by the Operational Restructuring.
The Company currently manufactures certain components and sub-assemblies at
the Reynosa facility that may be required by suppliers to the Company
following its exit from manufacturing. The Company and LGE have not yet
reached agreement on whether LGE will continue the manufacture of those
components and sub-assemblies following the transfer of the Reynosa Assets. If
those components and sub-assemblies are not manufactured at Reynosa following
the transfer, the Company may need to seek alternative sources, pre-build
parts and inventories of finished goods, or delay some of its intended product
lines until suitable component and sub-assembly manufacturers can be located
and contracts secured for the Company's products. If the Company is unable to
reach agreement with LGE concerning outsourcing and component supply, the
Company may not be able to implement the Operational Restructuring. See "--
Outsourcing Initiatives."
Environmental issues associated with each property may also affect the value
from the sale of the manufacturing facilities realized by the Company. The
manufacture of televisions and television components
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involves the use of hazardous chemicals and substances including metals,
caustics, acids, volatile and semivolatile organic chemicals, plastics and
resins. Potential purchasers of any one of the manufacturing facilities
offered for sale by the Company may require escrows, indemnities or other
financial considerations from the Company. See "RISK FACTORS--Legal
Proceedings."
Outsourcing Initiatives
The Operational Restructuring calls for the Company to outsource all or
substantially all of its product lines beginning in 1999. While the Company
currently outsources some small screen televisions, all of its VCRs, and many
television components and accessories, there are substantial risks associated
with the Company's plan to outsource all or substantially all of its product
lines within the time frame provided for in the Operational Restructuring,
including without limitation: (i) limited manufacturing capacity within the
television and consumer electronics industries; (ii) many sources of
manufacturing capacity for the Company's outsourcing requirements are the
Company's competitors within the United States domestic television market and
may be unwilling to supply products with features and at prices assumed in the
Business Plan Projections; (iii) trade restrictions and customs duties related
to products produced outside of the territories covered by NAFTA may
significantly affect the Company's ability to import goods or components,
particularly high end or high featured televisions, at competitive prices;
(iv) the Company may not be able to meet financial requirements, including
payment and security terms, imposed by outsourcing manufacturers and component
suppliers; and (v) long lead-times required for the design and sourcing of
televisions and consumer electronics (generally in the six- to twelve-month
range) may delay implementation or continued performance of the Operational
Restructuring.
Between October and December 1998, Zenith signed definitive supply
agreements with vendors relating to significant portions of its 1999 model
year requirements. These contracts cover console televisions, small and medium
screen direct-view sets, TV/VCR combination sets and large screen projection
television sets. The Company has agreed to purchase direct view television
sets from Action Electronics Co., Ltd, Daewoo Electronics Company, Ltd. and
from the Company's facilities in Reynosa, Mexico which are to be transferred
to LGE under the terms of the Prepackaged Plan. The Company has contracted
with Five Rivers Electronics Innovations, LLC for the manufacture and assembly
of console television sets, which will incorporate picture tubes produced
under agreement with Philips and Thomson Consumer Electronics and chassis
assembled in the Reynosa facility. Front and rear projection televisions and
components will be purchased from several manufacturers, including Hitachi
Home Electronics (America), Inc. and from the Company's Reynosa facility. No
minimum purchase volume is established under any of the contracts. Each
agreement provides for price adjustments for changes in Zenith's product
specifications. Other provisions pertaining to scheduling and unique parts
procurement have not been finalized in some agreements. 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 yet entered into definitive agreements
concerning its 1999 model year requirements for HDTV products, front-
projection televisions, VCRs or the medium screen and large screen direct view
televisions, all of which the Company expects to purchase from an affiliate of
LGE.
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The ability of the Company to achieve its Operational Restructuring requires
that all outsourcing contract negotiations 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 Subordinated 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 for the 1999 model year or for
any model year thereafter. With the exception of the picture tube agreement
described above, the Company has not yet entered into any agreements with
suppliers for model years after 1999. Failure of the Company to provide its
planned product line at the designated price points could adversely impact the
ability of the Company to place products in targeted retail outlets or
maintain targeted market share and could have a material adverse effect on the
Company's business, financial condition, results of operations, ability to
implement the Restructuring and ability to meet its financial obligations,
including those under the New Subordinated Debentures. Continued delays in the
implementation of 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
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against the Company seeking a declaratory judgment that the Company's tuner
patents were invalid and unenforceable, or that the plaintiff's use of certain
technologies in its current products did not infringe on the Company's tuner
patents. The complaint seeks the return of previously paid royalties. The
plaintiff is also seeking a preliminary injunction precluding the Company from
terminating its licensing agreement and allowing it to pay future royalties
into an escrow. See "RISK FACTORS--Legal Proceedings" and "BUSINESS--Legal
Proceedings." If a challenge to the tuner patents were successful prior to
2003, or if an alternative technology was developed which alleviated the
requirement that televisions or VCRs include the Company's patented processes,
income received from such patents could be significantly reduced during the
term of the Operational Restructuring. The loss of all or a substantial
portion of such tuner patent royalties would have a material adverse effect on
the Company's business, financial condition, results of operations, ability to
implement the Operational Restructuring and ability to meet its financial
obligations, including those under the New Subordinated Debentures.
Timing
The Business Plan Projections include a number of assumptions concerning the
time within which the Company will achieve certain milestones in its
conversion from a manufacturing to a sales, distribution and technology
company. 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 waive until November 30, 1998 the Company's obligation to pay interest
to LGE on certain amounts owed by the Company to LGE.
The Company anticipates that additional modifications to the Restructuring
Agreement will be necessary before the Restructuring can be consummated. For
instance, the Company has revised its business plan projections. Pursuant to
the Restructuring Agreement, material changes to the business plan projections
must be satisfactory to LGE. In addition, LGE may terminate the Restructuring
Agreement if the Prepackaged Plan is not consummated prior to December 15,
1998. Because the Prepackaged Plan was not consummated prior to such date, the
Company and LGE are in discussions concerning the revisions to the business
plan projections, the extension of the December 15 deadline and related
matters. There can be no assurance that an agreement can be reached with
respect to these issues. If an agreement is not reached with respect to these
issues, the Company will be in default of the Restructuring Agreement, the
conditions to LGE's participation in the Restructuring will not be met, and
the Company will not likely be able to complete the Restructuring.
The Business Plan Projections assumed that consummation of the Financial
Restructuring would occur on December 31, 1998. This delay in consummation of
the Financial Restructuring will affect the Business Plan Projections
primarily by (a) increasing carrying costs for the Reynosa Assets, which were
assumed to be transferred to LGE in 1998, (b) increasing the interest expense
for 1999, by approximately $10.1 million, related to higher pre-restructuring
debt levels for a portion of the year, (c) delaying the recognition of $63.6
million in
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extraordinary gain on debt retirement related to the Old Subordinated
Debentures, and (d) delaying the recognition of $5.0 million of restructuring
expenses, primarily legal and advisory fees.
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. 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, 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
contemplated the sale of NWS in 1998, and the delay in the sale of NWS will
result in increased costs for continuing NWS operations and some increased
revenues from sales of NWS products. The Company believes that the costs of
operating NWS will be approximately offset by revenues generated by NWS,
although there can be no assurances that costs will not exceed revenues. The
delay in the sale of NWS will also delay receipt of any NWS sale proceeds and
is expected to increase borrowing requirements for 1999. There can be no
assurance that the Company will be able to locate an investor in or to sell
NWS within the time period or for the price contemplated in the Operational
Restructuring or that Americast or News Corporation or their successors will
consent to any such transaction.
Sales, Distribution and Technology Company
The Company's Operational Restructuring contemplates that the Company will
exit manufacturing and will become a sales, distribution and technology
company, capable of designing and specifying features for its products on a
year-by-year basis and largely outsourcing the manufacture of those goods. The
Operational Restructuring assumes that the Company will be able to adopt a
"best of the breed" design philosophy, incorporating the newest and highest
demand features and capacities into its models each year, without regard to
the restrictions of manufacturing capabilities within any supplier's
facilities. The Operational Restructuring also contemplates that the Company
will maintain or build its current warranty, parts and service and accessory
businesses. Failure to implement such design philosophy (or to maintain or
build warranty, accessory, parts and service businesses, including increasing
margins in some of those areas) could have a material adverse effect on the
Company's business, financial condition, results of operations, ability to
implement the Operational Restructuring and ability to meet its financial
obligations, including those under the New Subordinated Debentures.
The Business Plan Projections also assume that the Company's market share
will remain consistent with the Company's historical market share, except that
the Operational Restructuring contemplates that the Company
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will focus its efforts in larger screen sizes and in digital products. The
Business Plan Projections assume that the Company will be able to achieve at
least a 4% to 7% share of the digital product market in the later years of the
Operational Restructuring. There can be no assurance, however, that the
Company will be able to achieve such market share. The Business Plan
Projections assume certain timing and absorption of digital products by
consumer markets, and that the current federally mandated timing of HDTV and
digital broadcasts would be met. While initial digital television broadcasts
began in November 1998, the amount of programming is expected to be limited
for some time. In addition, television manufacturers, including the Company,
are experiencing delays in getting digital products to market at mass-market
price points. The Company has delayed the consumer release of its rear-
projection HDTV due to manufacturing issues and cost considerations.
The television and consumer electronics industries have seen substantial
price erosion since the late 1980s. Since 1994, consumer prices have declined,
on average, from 2% to 5% per year. While high end, large screen sizes have
historically exhibited price erosion at lesser rates or levels than smaller
screen sizes, the price erosion has accelerated in higher end products. The
Business Plan Projections forecast similar price erosion will occur in future
years, with accelerated price erosion in digital products as those products
are more widely produced and available. The Company cannot predict or control
further price erosion. Most television and consumer electronics companies are
vertically integrated, allowing absorption of price erosion across a broad
band of related functions. The highest profit margins within an integrated
business generally are obtainable in the research and development areas
(royalty and licensing payments) and in the sale of after market applications
such as gaming software or accessories. The next highest margins are generally
available in the components and parts and service segments of the industry.
The lowest profit margins generally exist in the assembly and sales segments
of the industry. The Operational Restructuring contemplates that the Company
will retain one segment--sales--with traditionally the lowest margins, one
segment in the mid-range (parts and service), and limited functions in one
high range segment (research and development). Continued price erosion in
consumer electronics beyond that forecast by the Business Plan Projections
would severely impact the Company's ability to maintain profit margins
contemplated in the Operational Restructuring and would have a material
adverse effect on the Company's business, financial condition, results of
operations, ability to implement the Operational Restructuring and ability to
meet its financial obligations, including those under the New Subordinated
Debentures. The Business Plan Projections also assume that the Company will be
able to reposition its brand, which repositioning will allow the Company to
increase its prices while maintaining projected volume. There can be no
assurance that the Company will be able to reposition its brand while
maintaining projected volumes with increased prices 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 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 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
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contemplated by the Operational Restructuring does not require that LGE will
be one of the parties with whom the Company seeks joint venture or
technological partnerships.
There can be no assurance that the Company will be successful in locating
joint venture partners or technology alliance partners in order to achieve
market or financial returns on its technologies. Many of the Company's
competitors in the consumer electronics industry may have similar technologies
or strategies and the financial resources to proceed without the requirement
of a joint venture or technology alliance. If the competitors are successful
in advocating alternative strategies and technologies that do not include the
Company's patents, the Company will be unable to achieve significant licensing
income from its applications. Failure to locate joint venture partners or
technology alliance partners to achieve acceptable returns on its technology
would have a material adverse effect on the Company's business, financial
condition, results of operations, ability to implement the Operational
Restructuring and ability to meet its financial obligations, including those
under the New Subordinated Debentures.
Employee Retention
The Company's ability to consummate the Operational Restructuring is
dependent in part on its ability to retain and motivate its officers and key
employees. The Company's current financial difficulties have had a detrimental
effect on its ability to attract or retain key officers and employees. The
Company has experienced over the last 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 which includes base salary adjustments, short-term and long-
term incentive bonuses and retention and stay bonuses for key senior
management personnel and approximately 175 other key managers and employees.
See "MANAGEMENT--Executive Officers of the Company." There can be no
assurance, however, that such programs will be successful, and the Company's
inability to retain key individuals could have a material adverse effect on
the Company's business, financial condition, results of operations, its
ability to implement the Operational Restructuring and ability to meet its
financial obligations, including those under the New Subordinated 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 is also seeking a preliminary
injunction precluding the Company from terminating its licensing agreement and
allowing it to pay future royalties into an escrow. The court has denied the
plaintiff's request for a temporary restraining order against the Company. See
"--Risks Associated with Proposed Operational Restructuring--Assumptions
Concerning Other Royalty Revenue."
In June 1998, the Company's president and chief executive officer, its
directors, and an affiliate of LGE were named as defendants in a suit filed by
a shareholder in a state court in New Jersey entitled Vengrove v. Gannon, et
al. In December 1998, the suit was amended to name the Company, a former
director and chief executive officer of the Company, LGE, LG Semicon and LG
Group as additional defendants. The suit alleges breach of fiduciary duties
and violations of securities laws by the defendants arising out of certain
alleged misstatements that "artificially inflated" the price of the Company's
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 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.
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The Company is also involved in various other legal actions, environmental
matters, and other proceedings relating to a wide range of matters that are
incidental to the conduct of its business. See "BUSINESS--Legal Proceedings."
Financing Agreement Restrictions
The Company is currently engaged in discussions of the terms of both DIP and
post-restructuring facilities with potential lenders. No binding commitment
has been issued by any lender and no facility has been entered into by the
Company covering the DIP or post-restructuring periods. The Business Plan
Projections incorporate assumptions about the terms, conditions and available
borrowings under both the DIP and post-restructuring financing arrangements.
See "BUSINESS PLAN ASSUMPTIONS--Financing Assumptions." Such assumptions were
based on preliminary proposals received from prospective lenders. In
particular, the Company assumes that it will be able to obtain a DIP facility
of not less than $125 million in total availability, secured by the Company's
assets, including inventory, receivables, fixed assets and intellectual
property, at an assumed per annum interest rate of 9.5%. The Company assumes
that it will be able to obtain post-restructuring financing in an amount of
not less than $100 million on terms satisfactory to the Company, at an assumed
per annum interest rate of 8.5%. There can be no assurance that the Company
will obtain either DIP or post-restructuring financing, or that the terms or
conditions of or availability of borrowings under such facilities, if
obtained, will be consistent with the assumptions underlying the Business Plan
Projections. If the Company is unable to obtain financing in an amount and
under terms sufficient to meet the requirements of the Business Plan
Projections, the Company may be unable to complete its Operational
Restructuring. See "DESCRIPTION OF DEBT AND CREDIT ARRANGEMENTS--Short-Term
Debt."
Possible Defaults; Risk of Acceleration 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 Amended Citibank Credit
Facility expires on the earlier of a bankruptcy filing by the Company and
April 30, 1999. In December 1998, the Company negotiated an extension of the
Amended Citibank Credit Facility from December 31, 1998 to April 30, 1999.
Further extensions or a replacement of the Amended Citibank Credit Facility
may be necessary, but there can be no assurance that the Company will be able
to do so, or of the terms upon which if would be able to do so. If a material
amount of the Company's indebtedness were to be accelerated (which could occur
at any time and whether or not there are delays in obtaining requisite
acceptances of the Prepackaged Plan and the filing of the Prepackaged Chapter
11 Case) or to become due without a replacement facility, the Company likely
would be unable to repay such indebtedness. Under such circumstances, the
Company might have no choice but to seek immediate relief under the Bankruptcy
Code. In the event the Company were required to commence a chapter 11 case
without a pre-approved plan of reorganization, the Company believes that there
is a risk that little, if any, value would be available for distribution to
unsecured creditors. Furthermore, there can be no assurance that the Company
would be able to emerge from such a proceeding under the Bankruptcy Code, in
which case the Company might be forced into a liquidation proceeding under
chapter 7 or chapter 11 of the Bankruptcy Code. If the Company is sold, the
Company believes that the ability of holders of Claims to recover on their
investments would be impaired to an even greater degree.
Control by LGE
LGE and LG Semicon presently beneficially own 56.7% of the Old Common Stock
(including vested but unexercised options) and control a majority of the
Board. Following consummation of the Financial
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Restructuring, LGE will own 100% of the New Common Stock. Accordingly, LGE
will continue to have the ability to control the management policy of the
Company and all fundamental corporate actions, including mergers, substantial
acquisitions and divestitures and other agreements and the election of the
Board. See "SECURITY OWNERSHIP."
LGE may have an interest in pursuing acquisitions, divestitures, financings
or other transactions that, in their judgment, could enhance their investment
in the Company even though such transactions might involve increased risk to
the holders of the New Subordinated Debentures. In addition to their
investment in the Company, LGE is a global consumer electronics company and
along with its affiliates, has, and may develop, additional relationships with
businesses that are or may be competitive with the Company. The Company has
engaged in, and expects to continue to engage in, a number of other
transactions with LGE. 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."
Certain Bankruptcy Considerations
Method of Solicitation
Section 1126(b) of the Bankruptcy Code provides that the holder of a Claim
against, or Equity Interest in, a debtor who accepts or rejects a plan of
reorganization before the commencement of a chapter 11 case is deemed to have
accepted or rejected such plan under the Bankruptcy Code so long as the
solicitation of such acceptance was made in accordance with applicable non-
bankruptcy law governing the adequacy of disclosure in connection with such
solicitations, or, if such laws do not exist, such acceptance was solicited
after disclosure of "adequate information," as defined under the Bankruptcy
Code. This Disclosure Statement is being presented to all holders of Impaired
Claims in order to satisfy the requirements of section 1126(b) of the
Bankruptcy Code.
The Company believes that the use of the Disclosure Statement and of Ballots
and Master Ballots for the purpose of obtaining acceptances of the Prepackaged
Plan and the Solicitation is in compliance with the Bankruptcy Code. However,
there can be no assurance that the Bankruptcy Court will decide that the
Solicitation meets the requirements of section 1126(b) of the Bankruptcy Code.
If the Bankruptcy Court determines that the Solicitation does not comply with
the requirements of section 1126(b) of the Bankruptcy Code, the Company may
seek to resolicit acceptances, and, in such event, Confirmation of the
Prepackaged Plan could be delayed and possibly jeopardized.
Classification and Treatment of Claims and Equity Interests
Section 1122 of the Bankruptcy Code requires that the Prepackaged Plan
classify Claims against, and Equity Interests in, the Company. The Bankruptcy
Code also provides that, except for certain Claims classified for
administrative convenience, the Prepackaged Plan may place a Claim or Equity
Interest in a particular Class only if such Claim or Equity Interest is
substantially similar to the other Claims or Equity Interests of such Class.
The Company believes that all Claims and Equity Interests have been
appropriately classified in the Prepackaged Plan. The Company has elected to
separately classify General Unsecured Claims because this Class is comprised
largely of trade creditors. Many of these creditors are key suppliers of
products and services used by the Company. Accordingly, any impairment of
these Claims could be detrimental to the ability of the Company to obtain
essential trade credit and could substantially impair the ability of the
Company to do business with trade creditors whose goods and services are
essential for the Company. Bank Lender Claims have been separately classified
because the Company believes that LGE's guaranty of these Claims renders their
legal and financial
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position substantially unlike other unsecured Claims. LGE Claims have been
separately classified because the holder of these Claims has voluntarily
agreed to convert their debt to equity and because LGE is an insider. LGE has
consented to the separate classification of its Claims as provided in the
Prepackaged Plan. Finally, because the Old Subordinated Debenture Indenture
contains subordination provisions, the Old Subordinated Debentures are not
held by insiders, and the Old Subordinated Debenture Claims are not guaranteed
by LGE, the Company believes that the Old Subordinated Debenture Claims are
significantly different from the other unsecured debt and therefore must be
classified separately.
To the extent that the Bankruptcy Court finds that a different
classification is required for the Prepackaged Plan to be confirmed, the
Company presently anticipates that it would seek (i) to modify the Prepackaged
Plan to provide for whatever reasonable classification might be required for
Confirmation and (ii) to use the acceptances received from any creditor
pursuant to this solicitation for the purpose of obtaining the approval of the
Class or Classes of which such creditor ultimately is deemed to be a member.
Any such reclassification of creditors, although subject to the notice and
hearing requirements of the Bankruptcy Code, could adversely affect the Class
in which such creditor was initially a member, or any other Class under the
Prepackaged Plan, by changing the composition of such Class and the vote
required for approval of the Prepackaged Plan. There can be no assurance that
the Bankruptcy Court, after finding that a classification was inappropriate
and requiring a reclassification, would approve the Prepackaged Plan based
upon such reclassification. Except to the extent that modification of
classification in the Prepackaged Plan requires resolicitation, the Company
will, in accordance with the Bankruptcy Code and the Bankruptcy Rules, seek a
determination by the Bankruptcy Court that acceptance of the Prepackaged Plan
by any holder of Claims pursuant to this solicitation will constitute a
consent to the Prepackaged Plan's treatment of such holder regardless of the
Class as to which such holder is ultimately deemed to be a member. The 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
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Subordinated Debenture Claims would receive no distribution and retain no
property. If the Prepackaged Plan is not consummated, the Company may be
required to sell its assets, and the Company believes that in the event of a
liquidation, holders of the Old Subordinated Debentures would receive no
distribution and retain no property. Because the holders of Equity Interests
receive no distribution and retain no property under the Prepackaged Plan,
that Class is presumed to have rejected the Prepackaged Plan pursuant to
section 1126(g) of the Bankruptcy Code. Therefore, that Class will be subject
to "cram down" as part of the Confirmation of the Prepackaged Plan.
The Company also reserves the right to modify the terms of the Prepackaged
Plan as necessary for the Confirmation of the Prepackaged Plan without the
acceptance of other Classes of Impaired Claims. Such modification could result
in a less favorable treatment to any non-accepting Class or Classes, as well
as any Classes junior to such non-accepting Classes, than the treatment
currently provided in the Prepackaged Plan. Such less favorable treatment
could include a distribution to the affected Class of property of less value
than that currently provided in the Prepackaged Plan or, in certain cases, no
distribution of property under the Prepackaged Plan, as modified. Any such
modification may require resolicitation of one or more Classes of Impaired
Claims and could result in a delay in the Confirmation and Consummation of the
Prepackaged Plan and could increase the risk that the Prepackaged Plan will
not be consummated. See "THE PREPACKAGED PLAN--Modification of the Prepackaged
Plan." However, except as described above, the Company may choose not to seek
Confirmation of the Prepackaged Plan in the event one or more Classes of
Claims do not accept the Prepackaged Plan, but may choose instead to pursue an
alternative means to restructure the Company.
Certain Risks of Non-Confirmation
Even if the requisite acceptances are received, there can be no assurance
that the Bankruptcy Court will confirm the Prepackaged Plan. A non-accepting
creditor of the Company might challenge the adequacy of the disclosure or the
solicitation procedures and results as not being in compliance with the
Bankruptcy Code. Even if the Bankruptcy Court were to determine that the
disclosure and the balloting procedures and results were appropriate, the
Bankruptcy Court could still decline to confirm the Prepackaged Plan if it
were to find that any statutory conditions to confirmation had not been met.
Section 1129 of the Bankruptcy Code sets forth the requirements for
confirmation and requires, among other things, a finding by the Bankruptcy
Court that the confirmation of the Prepackaged Plan is not likely to be
followed by a liquidation or a need for further financial reorganization and
that the value of distributions to non-accepting Classes of Impaired Claims
and Equity Interests will not be less than the value of distributions such
Classes of Impaired Claims and Equity Interests would receive if the Company
were liquidated under chapter 7 of the Bankruptcy Code. See "THE PREPACKAGED
PLAN--Confirmation Standards." While there can be no assurance that the
Bankruptcy Court will conclude that these requirements have been met, the
Company believes that the Prepackaged Plan will not be followed by a
liquidation or the need for further financial reorganization and that non-
accepting holders of Impaired Claims and Equity Interests will receive
distributions at least as great as would be received following a liquidation
pursuant to chapter 7 of the Bankruptcy Code. The Company believes that
holders of Old Common Stock would receive no distribution under either a
liquidation pursuant to chapter 7 or a liquidation or reorganization pursuant
to chapter 11. See "THE PREPACKAGED PLAN--Confirmation Standards."
The Prepackaged Plan provides for certain releases and injunctions to be
provided by parties other than the Company that run in favor of the D&O
Releasees and the Investor Releasees. While the Company believes that these
provisions in the Prepackaged Plan are permissible under the Bankruptcy Code,
arguments exist that certain case law would permit a contrary conclusion
which, if accepted by the Bankruptcy Court, may result in the Prepackaged Plan
not being confirmed.
The Confirmation and Consummation of the Prepackaged Plan are also subject
to certain other conditions. See "THE PREPACKAGED PLAN--Summary of Other
Provisions of the Prepackaged Plan." No assurance can be given that these
conditions will be satisfied or if not satisfied that the Company would waive
such conditions.
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If the Prepackaged Plan, or a plan determined not to require resolicitation
of any Classes by the Bankruptcy Court, were not to be confirmed in a timely
manner, it is unclear whether the Restructuring could be implemented and what
holders of Claims and Equity Interests would ultimately receive with respect
to their Claims and Equity Interests. If an alternative reorganization could
not be agreed to in a timely manner, it is possible that the Company would
have to liquidate its assets, in which case it is likely that holders of
Claims and Equity Interests would receive less than they would have received
pursuant to the Prepackaged Plan. See "SPECIAL FACTORS--Alternatives to
Confirmation and Consummation of the Prepackaged Plan--Liquidation Under
Chapter 7."
Risk of Subsequent Insolvency Proceeding
There may be significant consequences to holders of the New Subordinated
Debenture in the event of a subsequent bankruptcy. A holder of New
Subordinated Debentures will have a smaller claim with respect to New
Subordinated Debentures in a subsequent bankruptcy than it currently has with
respect to the Old Subordinated Debentures and may therefore receive a smaller
distribution in a subsequent bankruptcy. Similarly, there may be significant
consequences to LGE in the event of a subsequent bankruptcy. LGE will have a
smaller claim, and will hold equity interests in the Company, in a subsequent
bankruptcy (as opposed to holding the LGE Claims), and may therefore receive a
smaller distribution in a subsequent bankruptcy.
Readiness for the Year 2000
The Company 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 has identified certain information and computer systems that are not
Year 2000 Ready and is in the process of purchasing software and hardware
upgrades and replacements for these systems. The Company anticipates that each
of these upgrades and replacements will be implemented prior to the Year 2000.
Additionally, the Company believes that its material non-information
technology systems will be Year 2000 Ready prior to the Year 2000. The Company
believes that most of its currently manufactured products are Year 2000 Ready.
The Company has sent Year 2000 Readiness Questionnaires to its existing key
vendors and suppliers to assess the Year 2000 Readiness of their systems and
products. The responses to these Questionnaires have indicated that the
Company's vendors or suppliers are addressing their Year 2000 issues and
expect to be Year 2000 Ready by the Year 2000. While the Company is working to
achieve Year 2000 Readiness, there can be no assurance that it will
successfully achieve all of its goals. At this time, and based on the
Company's current implementation plan, the Company does not believe that its
Year 2000 related issues will have a material adverse effect on the Company's
business. Although no contingency plan has been deemed to be necessary at this
time, the Company is in the process of formulating various contingency plans
as a precautionary measure.
In connection with the Operational Restructuring, the Company plans to
discontinue substantially all of its manufacturing operations and to outsource
substantially all components and products. The Company believes its principal
exposure to Year 2000 risks are related to the ability of its vendors to
provide the Company with Year 2000 Ready components and products and to assure
that 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 has not yet determined all of those vendors on which it will rely
following completion of the Operational Restructuring. The Company is aware,
however, that Year 2000 issues may exist with respect to vendors with which
they have
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or will have a material relationship, and Year 2000 Readiness will be a
material consideration in the Company's selection of, and contract
negotiations with, such third-party vendors.
Prior to 1998, the Company spent in the aggregate approximately $1.8 million
on software and hardware upgrades and replacements and approximately $200,000
in other costs (i.e., labor, consulting fees and other expenses) in connection
with Year 2000 Readiness. The Company spent a total of $2.5 million in 1998
(approximately $800,000 for software and hardware upgrades and approximately
$1.7 million for other costs). The Company has estimated it will spend $3.6
million in 1999 (approximately $1 million for software and hardware upgrades
and approximately $2.6 million for other expenses) with respect to Year 2000
Readiness. Most of the costs incurred by the Company in addressing Year 2000
Readiness are expected to be expensed as incurred, in compliance with
generally accepted accounting principles. The Company continues to evaluate
the estimated costs associated with its Year 2000 Readiness efforts. While the
Year 2000 transition efforts may involve costs in addition to those currently
budgeted or anticipated to be budgeted, at this time, the Company has not yet
determined the full costs of the modifications that may be necessary to
address all Year 2000 issues.
Dependence on Patents and Proprietary Technology
In connection with the Operational Restructuring, the Company intends to
become a sales, distribution and technology development company. As a result,
the Company will continue to be dependent on its ability to protect and
utilize its proprietary technologies. The Company currently holds many patents
relating to VSB technologies, HDTV and digital television related inventions.
The Company's ability to commercialize many of the products it has under
development will depend, in part, on its ability, both in the United States
and in other countries, to obtain and maintain patents, enforce those patents,
preserve trade secrets, operate without infringing on the proprietary rights
of third parties and obtain licenses to use patents held by third parties when
necessary.
There can be no assurance that the patents currently owned or licensed by
the Company, or any future patents owned or licensed by the Company, will
prevent other companies from developing similar or technologically equivalent
products, or that other companies will not be issued patents that may prevent
the sale of the Company's products or require licensing and the payment of
significant fees or royalties by the Company. There can be no assurance that
pending or future patent applications licensed to or owned by the Company will
result in issued patents, patent protection will be secured for any particular
technology, any patent rights that have been or may be issued to the Company
or its licensors will be valid or enforceable, any patent rights that have
been or may be issued to the Company or its licensors will not infringe upon
the patents of third parties or that the Company's patents will provide
meaningful protection to the Company. The Company may be unable to avoid
infringement of third-party patents and may have to obtain licenses, defend
infringement actions or challenge the validity of those patents in court.
There can be no assurance that a license will be available to the Company on
terms and conditions acceptable to the Company, if at all, or that the Company
will prevail in any patent dispute. Patent litigation is costly and time
consuming, and there can be no assurance the Company will have, or will
devote, resources sufficient to pursue such litigation. If the Company does
not obtain a license under such patents, is found liable for infringement, or
is not able to have such patents declared invalid, the Company may be liable
for significant monetary damages, may encounter significant delays in bringing
products to market, or may be precluded from participating in the manufacture,
use or sale of products or technologies protected by such patents.
The Company relies on trade secrets and other unpatented proprietary
information in connection with its product development activities. To the
extent that the Company relies on confidential information to maintain its
competitive position, there can be no assurance that other parties may not
independently develop the same or similar information. The Company seeks to
protect trade secrets and proprietary knowledge, in part, through
confidentiality agreements with its employees, consultants, advisors and
collaborators. These agreements may not effectively prevent disclosure of the
Company's confidential information and may not provide the Company with an
adequate remedy in the event of unauthorized disclosure of such information.
If the Company's
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employees, scientific consultants or collaborators develop inventions or
technologies independently that may be applicable to the Company's products
under development, disputes may arise about ownership of proprietary rights to
those inventions and technologies. Such inventions and technologies will not
necessarily become the Company's property, but may remain the property of
those persons or their employers. Protracted and costly litigation could be
necessary to enforce and determine the scope of the Company's proprietary
rights. There can be no assurance that the Company will have, or will devote,
sufficient resources to pursue such litigation. The Company's failure to
obtain or maintain patent and trade secret protection, for any reason, could
have a material adverse effect on the Company's business, financial position
and results of operations.
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SPECIAL FACTORS
Events Leading to the Restructuring
The Company has for many years experienced and continues to experience,
severe financial difficulties, resulting in the immediate need to restructure
both its business operations and its capital structure. The Company has
incurred losses in all but one of the years since 1985. These results
generally reflect, among other things: significant and persistent declines in
the Company's gross margins, largely resulting from reductions in color
television prices driven by competitive factors, and high operating costs and
performance difficulties associated with product development programs and new
automated production processes.
In light of the Company's net losses, the competitive environment and
inflationary cost pressures over the past several years, and in an effort to
increase gross margins and lower costs, the Company has undertaken various
cost reduction programs, profit improvement initiatives, design,
manufacturing, logistics and distribution improvements and various business
consolidations. While the Company has been able to achieve some operating
improvements through these measures, it has been unable to generate sufficient
revenues to support its continued business operations in the absence of a
significant operational and financial restructuring.
LGE Acquisition of Controlling Interest
Beginning in 1994 and as part of its strategy to return to profitability,
the Company developed plans to expand and modernize its production facilities
in the United States and Mexico. Those plans, which in 1994 had projected
costs of $150 million, necessitated that the Company initiate discussions with
possible joint venture partners because the Company did not have sufficient
financial resources to undertake the planned projects without additional
capital. In January 1995, the Company retained Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") to assist in the exploration of possible
strategic alternatives, focusing on alternatives for raising equity and
locating potential investors or strategic partners. In early 1995, the Company
had discussions with potential investors, none of which resulted in a
transaction. At this time, the Company also approached and had numerous
discussions with LGE, with which the Company had a long-term supply
relationship and which had already purchased 4.97% of the Company's Old Common
Stock in 1991 for $15 million, concerning its willingness to make an
investment in the Company to provide capital necessary for the Company's
expansion and modernization plans. Discussions between the Company and LGE
resulted in an agreement (the "LGE Stock Purchase Agreement"), which was
approved by the stockholders of the Company. In November 1995, pursuant to the
LGE Stock Purchase Agreement, LGE and LG Semicon purchased 18,619,000 shares
of Old Common Stock at $10.00 per share from the Company's stockholders
pursuant to a tender offer and 16,500,000 newly issued shares of Old Common
Stock at $10.00 per share from the Company. After giving effect to such
transactions, which resulted in a $186.2 million aggregate payment to the
stockholders of the Company and a $165 million capital contribution to the
Company, LGE and LG Semicon owned approximately 57.7% of the Old Common Stock.
Pursuant to the Prepackaged Plan, the $366.2 million equity investment of LGE
and LG Semicon will be cancelled.
Financing Transactions
In 1996 the Company continued to experience price competition in the color
television markets and delays in production of new high-margin products. The
Company's losses accelerated in 1996 and 1997 as it attempted to modernize and
automate its manufacturing facilities. The Company invested heavily in
upgrading portions of its color picture tube operations in Melrose Park and in
setting up a new automated manufacturing line for computer display terminals
("CDTs"). The Company's CDT line was set up to produce low definition, small
screen size displays. By the time the CDT line was operational, the market for
such displays was limited, having been replaced in demand by higher
definition, larger screen sizes capable of handling the requirements of
advanced gaming and software developments. In order to make the CDT line
economically feasible, the Company would have to invest substantial additional
funding. Such funding will not be available under the
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Business Plan Projections. Additionally, reconfiguring the production line
would take substantial time and expense relating to the process of bringing
the production line up to capacity.
After an initial investment of $9.8 million, the Company abandoned its plans
to build a fully automated plant in Woodridge, Illinois to provide larger
screen size picture tubes when the projected cost of the facility
significantly exceeded its budget and available funding.
Despite initiatives to reduce costs, including restructuring some of its
business lines and reducing its workforce, the Company experienced
deteriorating working capital levels. In response, LGE began to provide
additional funding to the Company through extended payment terms on interest
bearing acceptances for products, such as VCRs, manufactured by LGE for the
Company. LGE also extended payment terms to the Company on other payables owed
by the Company to LGE.
In 1997, facing decreasing liquidity due to losses of $178 million in 1996
and expenditures in excess of $100 million on the revised expansion and
modernization plan for its Melrose Park facility, the Company sought to
refinance its existing credit facility. During March and April 1997, the
Company entered into financing arrangements with two consortia of financial
institutions led by Citibank. The Company obtained a three year $110 million
secured credit facility (the "Citibank Credit Facility") and a three year
trade receivables securitization facility (the "Citibank Receivables
Facility"). In 1997, the Company also consummated $87 million in sale-
leaseback transactions in which the Company sold and leased back new and
existing manufacturing equipment in its Melrose Park, Illinois plant and the
Reynosa, Mexico and Juarez, Mexico facilities pursuant to the Leveraged
Leases. 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, 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, 1996 and 1997, $106.8
million and $144.3 million, respectively, of accounts payable were extended
pursuant to these arrangements. Such extended payables bear interest at market
rates. Accounts receivable from LGE and LG Semicon during such periods were
not material at such dates.
In consideration of such support, the Audit Committee of the Board (the
"Audit Committee"), which is comprised of independent directors of the Board,
approved a guarantee fee equal to 2% per annum of the fair value of the
amounts of such LGE commitments, payable in stock options to purchase 3.9
million shares of Old Common Stock at an exercise price of $0.01 per share.
All such options will be cancelled pursuant to the Prepackaged Plan.
In August 1997, due to losses of $74.5 million in the first two quarters,
the Company required an additional infusion of cash to meet operating
expenses. The Company received $30.0 million from an LGE subsidiary,
representing payments in advance for 1997 sales of products from the Company
to several LGE subsidiaries. As of March 28, 1998, this liability to LGE had
been applied in full by the Company against amounts owed to the Company by
LGE's Canadian affiliate.
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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 at the end of the term. The facility is secured by a
second lien on the assets that secure the Company's obligations under the
Reimbursement Agreement and a second lien on the Company's VSB patents.
In June 1998, LGE paid $50 million of the Unsecured Bank Loans pursuant to
its guarantees of those obligations. In September 1998, LGE paid an additional
$22 million of the Unsecured Bank Loans pursuant to such guarantees. Pursuant
to the Reimbursement Agreement, the Company is obligated to LGE for these
payments plus interest.
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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 estimates that its obligations
under the Leveraged Leases exceeded $97 million. The Company is obligated
under documents related to the Leveraged Leases for the repayment of this
settlement amount. As a result of these payments by LGE, the claims of the
lenders to the lessor against the lessor and the related security interests
were extinguished and 100% of the ownership interests in the lessor were
transferred to LGE. As a result, through its newly acquired interest in the
lessor, LGE now indirectly holds title to the equipment subject to the
Leveraged Leases.
In December 1998, the term of the Amended Citibank Credit Facility was
extended to the earlier of a bankruptcy filing by the Company and April 30,
1999. The Company and LGE amended the LGE Demand Loan Facility to provide that
no demand for repayment may be made under the facility, absent an event of
default, prior to April 30, 1999.
Other Transactions with LGE
In addition to the financing transactions described above, the Company has
engaged in a number of transactions with LGE, including purchases of products
and equipment, sales of products, technical agreements and service agreements.
The Company believes that the transactions between the Company and LGE have
been conducted on terms no less favorable to the Company than could have been
obtained with unrelated third parties. See "CERTAIN TRANSACTIONS" for
additional information about these transactions, including the amounts of such
transactions.
Product purchases: In the ordinary course of business, the Company purchases
VCRs, television-VCR combinations and components from LGE and LG Semicon. The
amount of such purchases was $34.7 million, $93.3 million and $128.8 million
for the nine months ended September 28, 1998 and the years ended December 31,
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. 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. License fees received from LGE
under these arrangements were approximately $1.4 million for the nine months
ended September 26, 1998 and were less than $0.1 million for 1997. The
licensee fee payable by LGE 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 $0.5 million,
$13 million and $24 million in 1998, 1997 and 1996, respectively.
Product and other sales: The Company sells televisions, picture tubes, yokes
and other manufactured subassemblies to LGE at prices that are comparable to
prices charged by the Company to its major customers. Such sales totalled
approximately $30.7 million, $55.1 million and $29.4 million in the nine
months ended September 26, 1998 and the years ended December 31, 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
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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 product in
Mexico. The Company's sales to the LGE Canadian and Mexican subsidiaries were
$16.2 million and $11.0 million, respectively, during the nine months ended
September 26, 1998 and $25.5 million and $16.8 million during 1997. The
Company did not have any such sales during 1996. In 1997, an affiliate of LGE
entered into an agreement with the Company concerning a license for the use of
the Company's "Z-Tac" set-top box technology pursuant to which the Company
received a $250,000 up-front license fee as well as approximately $850,000
from the sale of set-top box kits.
LGE's U.S. affiliate, LG Alabama, Inc. ("LGAI") and the Company's Reynosa
maquiladora have entered into a maquila agreement (the "LGAI Maquila
Agreement") pursuant to which the Reynosa facility will assemble small and
medium screen size television sets for LGAI, using components, equipment and
other assets provided by LGAI. The LGAI Maquila Agreement was approved by
Mexican authorities in December 1998. The material terms of the assembly
relationship between LGAI and the Reynosa maquiladora are currently being
negotiated between the parties. The parties expect to finalize the terms of
this assembly relationship in the first quarter of 1999. In connection with
the LGAI Maquila Agreement, the Company's subsidiaries with assets located in
the Reynosa maquiladora will also negotiate and may 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 September 26, 1998.
Under a separate agreement, the Company has licensed its tuner patents to LGE.
LGE's payments to the Company under tuner licenses were approximately $0.2
million, $0.6 million and $1.0 million in the nine months ended Septemer 26,
1998 and the years ended December 31, 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 September 26, 1998, the Company had assigned to LGE or its
affiliates for a total of approximately $6,000 one U.S. patent, one foreign
patent and one foreign patent application relating to television and
telecommunication technology. The Company has made a decision not to protect
or maintain those patents already assigned to LGE under the agreement. Under a
separate agreement, the Company has assigned to LGE's telecommunications
affiliate a patent relating to cordless telephone technology for $75,000. The
Company retained a royalty-free, non-exclusive license and 50% of all
royalties collected by the LGE affiliate related to such patent. An affiliate
of LGE has also licensed certain technological information from Zenith
relating to the manufacture of VSB modulation equipment under a 1998
agreement. That agreement allows the LGE affiliate to use technical
information and design schematics as the basis for further development of
commercial products. Under the agreement, Zenith is to receive $300,000 in
1998 in up-front payments and additional royalty payments per units sold by
the LGE affiliate based on Zenith's designs. The agreement does not include a
VSB patent license.
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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 at cost that
were covered under service agreements. The Company's obligations to LGE for
such services totaled $1.3 million, $4.8 million and $0.3 million in the nine
months ended September 26, 1998 and the years ended December 31, 1997 and 1996,
respectively. In addition, a U.S. affiliate of LGE has provided a guarantee of
the Company's obligations under the employment agreement and indemnity
agreement with Jeffrey P. Gannon, the Company's President and Chief Executive
Officer.
In late December 1997, the Company entered into an agreement with LG Software
India Ltd. pursuant to which LG Software India Ltd. provides certain software
development, design and support services to the Company. Projects under the
agreement include the Company's Year 2000 Readiness support. Payments to LG
Software India Ltd. were approximately $1.1 million and $0.1 million in 1998
and 1997, respectively.
Other Items: The Company currently leases space from an LGE subsidiary in (i)
Huntsville, Alabama, for its Parts and Service group, (ii) Ontario, California,
for a warehouse and (iii) San Jose, California, for NWS. Lease payments to LGE
were approximately $0.5 million, $0.3 million and $2,000 in 1998, 1997 and
1996, respectively. The Company and LGE are in discussions concerning the joint
development of HDTV products, which may eventually be manufactured by LGE for
the Company for resale by the Company in the United States.
The Development of the Restructuring
In August 1997, as a result of the Company's worsening operational
performance, the Company and LGE began evaluating the Company's business and
operations to identify possible means by which the Company's operations could
be improved. LGE also explored through the fall of 1997 the possibility of
bringing in a partner, but advised the Company that such a strategy appeared
untenable due to the Company's persistent losses and the absence of any
concrete business plan or strategy to return to profitability. LGE advised the
Company that it believed that the Company could not demonstrate to a potential
investor the means by which an investment in the Company would generate an
attractive return.
In October 1997, the Company began to evaluate options for additional
financing or capital in light of its continuing cash requirements and
continuing losses from operations. Beginning in November 1997, LGE advised 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.
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On January 12, 1998, the Board elected Jeffrey P. Gannon as President and
Chief Executive Officer of the Company, and elected Robert N. Dangremond as
Acting Chief Financial Officer of the Company. The Company also engaged JA&A as
restructuring advisors. JA&A was engaged by the Company based on its prior
experience in the restructuring of other public companies in similar types of
transactions. Robert N. Dangremond, a principal with JA&A, served as the
Company's Acting Chief Financial Officer from January 1998 to June 1998, and
currently serves as the Company's Senior Vice President, Restructuring. Mr.
Dangremond has served as chief executive officer and as a director of other
companies which have undergone restructuring, including companies which have
sought protection under the Bankruptcy Code. Other JA&A employees serve in
financial positions at the Company. The Company has engaged JA&A pursuant to an
engagement letter dated as of December 1997, as amended, under which JA&A
agreed to assist the Company in business planning, cash management and
forecasting, financial reporting, contingency and restructuring planning and
such other matters as may be mutually agreed upon. See "ESTIMATED FEES AND
EXPENSES--Advisors." LGE advised the Company that it and its affiliates (other
than the Company) have not had, and do not presently contemplate having, any
material relationship with JA&A. None of the fees or expenses of JA&A will be
borne by LGE.
Also in January 1998, the Company's independent auditors communicated to
management of the Company and the Audit Committee that the Company's 1997
financial statements would likely contain an explanatory paragraph that
describes the significant uncertainty about the Company's ability to continue
as a going concern due to recurring losses and a negative working capital
position, and that the Company's financial statements do not reflect any
adjustment that might result from the outcome of this uncertainty.
During January and February 1998, Mr. Gannon and his management team began
developing a new business strategy (which subsequently evolved into the
Operational Restructuring) while at the same time implementing a number of
changes designed to reduce costs and improve revenues. In February 1998, the
Company's management presented a proposed outsourcing strategy for the Company
to the Board and outlined its key elements, including cessation of
substantially all manufacturing operations, outsourcing of most product lines
and focusing on sales, distribution and technology. The proposed strategy also
addressed the need for additional credit sources, the possibility of a
strategic investment in the Company, the sale of certain of the Company's
assets or businesses, recruiting and retention programs and work force
restructuring, the search for partners to aid in market development, steps in
the transition from manufacturing to outsourcing and the need to explore
opportunities to improve the value of VSB rights.
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
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participation in any such long-term restructuring of the Company. On March 12,
1998, LGE's advisors provided the Company with a timeline and conditions
related to a possible long-term restructuring in the event that LGE determined
it would provide financial support in connection with any such restructuring.
The outline contemplated, subject to LGE's willingness and ability to proceed,
that the restructuring would be accomplished pursuant to a prepackaged plan of
reorganization, but did not make any specific proposal with respect to the
treatment of any Class of Claims or Equity Interests, including the Claims and
Equity Interests of LGE. The conditions included: (i) the continued service of
Mr. Gannon as Chief Executive Officer of the Company; (ii) the formulation and
implementation of detailed programs satisfactory to LGE for the Company to
outsource production, the sale of certain nonessential assets and maximization
of the value of VSB technology; (iii) the availability of at least $150 million
of financing from sources other than LGE; (iv) business results consistent with
the Company's business plan; (v) the absence of default under any LGE short-
term financing; (vi) LGE's satisfaction with the terms of the restructuring,
including the availability of releases in favor of LGE and Zenith's officers
and directors; (vii) Korean governmental approvals; and (viii) various other
customary conditions. Notwithstanding the possibility of LGE support of a long-
term restructuring, the Company continued to explore all possible restructuring
and financing alternatives, including investments in the Company, the sale of
all or certain of the Company's assets, possible partnerships or alliances and
additional financing sources as alternatives to an LGE-sponsored restructuring.
On March 26, 1998, the Board established the Special Committee, comprised of
directors T. Kimball Brooker, Eugene B. Connolly, Andrew McNally IV and Peter
S. Willmott, and authorized the Special Committee to assess and negotiate along
with management any proposal made by LGE with respect to providing long-term
financial support necessary or appropriate to allow the Company to pursue its
proposed business plan. None of the members of the Special Committee is an
officer or director of LGE or an officer of the Company, although Mr. Connolly
was one of the directors designated by LGE in 1995 pursuant to the LGE Stock
Purchase Agreement and Mr. Willmott served as the Company's Chief Executive
Officer from January 1997 to January 1998. At its first meeting on March 29,
1998, the Special Committee retained Sidley & Austin as its special counsel.
Prior to this time, Sidley & Austin had regularly acted as one of the Company's
outside counsel.
At the end of March 1998, LGE made the $45 million LGE Demand Loan Facility
available to the Company, which was secured by a second lien on the assets
securing the Company's obligations under the Reimbursement Agreement and a
second lien on the Company's VSB patents. The loan was intended to provide
sufficient funds for operations of the Company through June 30, 1998 and to
provide additional time for the Company to refine its business plan and for LGE
to decide whether it would participate in a restructuring of the Company. The
Special Committee recommended the terms of the LGE Demand Loan Facility to the
Board which approved the LGE Demand Loan Facility.
During March and early April of 1998, the Company, LGE and their advisors
considered alternatives for the Company, including attracting a new investor
for the Company, a cash-out merger, a traditional chapter 11 reorganization, a
liquidation and a prepackaged plan of reorganization. LGE advised the Company
that it favored the Prepackaged Plan, and rejected other alternatives, for the
reasons stated in "--Alternatives to Confirmation and Consummation of the
Prepackaged Plan" and "--LGE's Position Regarding the Financial Restructuring."
On April 16, 1998, LGE presented its initial proposal, which contemplated that
pursuant to a prepackaged plan of restructuring: (i) the Citibank Credit
Facility and the Citibank Receivables Facility would be restructured or
refinanced; (ii) the Company's general unsecured claims would be unimpaired;
(iii) the holders of Old Subordinated Debentures would receive an aggregate of
$26 million of new 10% subordinated debentures due 2011 (which debentures would
not be convertible); (iv) LGE would receive all of the common stock of New
Zenith, the Reynosa Assets and an aggregate of $152.7 million of new senior
notes due 2008 in exchange for its extended payables, guarantee of the
Company's demand loans and leveraged leases, direct loans, and servicing fees;
and (v) Zenith's existing Common Stock would be canceled. The conditions to
LGE's obligations in the initial proposal were substantially identical to those
provided to the Company on March 12, although the requirement regarding
available non-LGE financing was reduced to $100 million, and the provision
regarding releases was modified to require releases from the Company, its
creditors and interest holders. Discussions among the Company, the Special
Committee and representatives of LGE concerning possible restructuring
alternatives continued throughout April and May of 1998.
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The Special Committee, in person or by conference telephone, met seven times
in April and May to consider various long-term financing alternatives for the
Company, including the financial restructuring outlined by LGE. The Special
Committee discussed and reviewed with PJSC and the Company certain preliminary
going concern and liquidation scenarios as well as certain related hypothetical
sensitivity analyses and discussed and reviewed with management and LGE the
Company's business plan at the time and the various alternatives for the
Company on a going-forward basis. In light of the expressed intention of LGE to
include releases in favor of itself in a possible restructuring, the Special
Committee also discussed and reviewed with its special counsel the
reasonableness and effects of any such releases. In that regard, the Special
Committee's deliberations focused on whether the value, if any, attributable to
the requested release of LGE would cause LGE to obtain a disproportionate
recovery relative to other creditors and whether other creditors would receive
more with LGE participating in the Company's proposed financial restructuring
and receiving releases than if no such releases were provided and the proposed
restructuring did not proceed. Throughout this period, the Special Committee,
the Company's management and their advisors and representatives of LGE
continued their discussions and negotiations concerning the terms of a
financial restructuring. As a consequence of those negotiations, LGE made a
subsequent proposal which provided for the same treatment of the Citibank
Credit Facility and the Citibank Receivables Facility, the Company's general
unsecured claims, LGE and holders of the Old Common Stock, but contemplated
that the holders of Old Subordinated Debentures would receive an aggregate of
$40 million of new 6 1/4% subordinated debentures due 2010 (which debentures
would not be convertible). The conditions to LGE's obligations in the
subsequent proposal were similar to those included in the initial proposal, but
the conditions contained in the subsequent proposal also included: (i) the
continued service of Mr. Gannon's direct reports or appointment of replacements
satisfactory to the Board; (ii) implementation on or before June 30, 1998 of a
comprehensive compensation plan for Zenith salaried employees, including
retention bonuses, incentive compensation and employment agreements
satisfactory to LGE; (iii) a July 31, 1998 deadline for formulation of detailed
programs to outsource production, sell nonessential assets and maximize VSB
technology and a requirement of execution of necessary contracts satisfactory
to LGE of such programs; (iv) commitments of the sale or liquidation of
nonessential assets at prices consistent with the Company's business plan; (v)
caps on the deviation of results from the Company's business plan with respect
to the projected cumulative funding requirement to December 15, 1998, actual
cumulative funding requirement for any three-month period, projected cumulative
EBITDA to December 31, 1998 and actual EBITDA; (vi) review on or before June
30, 1998 by the Company's independent public auditors of the assets listed on
the Company's June 30, 1998 balance sheet satisfactory to LGE; (vii) absence of
material contingent liabilities other than specified liabilities; (viii) a cap
on actual and projected cash restructuring expenses; and (ix) execution of
definitive documentation satisfactory to LGE on or before the earlier of the
filing of the Registration Statement or June 30, 1998, filing of the
Registration Statement on or before June 30, 1998 and confirmation of the
Prepackaged Plan on or before December 15, 1998. In addition, LGE withdrew its
request for a release from interest holders.
At a Special Committee meeting on May 21, 1998, PJSC presented to the Special
Committee and to the Company's management and their advisors a report
summarizing the history of the negotiations and PJSC's preliminary analyses of
the terms of the proposed financial restructuring as negotiated with LGE. PJSC
advised the Special Committee that, based upon the going concern and
liquidation analyses and reasonable variations of the assumption contained
therein, no value existed for the holders of Old Common Stock. PJSC further
advised the Special Committee (and subsequently the Board) that under its
liquidation analysis, the holders of unsecured Claims, including the holders of
the Old Subordinated Debentures, were likely to receive no distribution or a
lower distribution than if the Company were restructured as a going concern
pursuant to the terms of the proposed financial restructuring as negotiated
with LGE. Mr. Gannon reported to the Special Committee on the status of
contacts with potential acquirors and outside investors, concluding that no
outside party contacted by PJSC or the Company was presently willing to provide
the financing or other investment required to provide the funding to implement
the Operational Restructuring. Based on the factors described herein, the
Special Committee unanimously recommended to the Board that the Company accept
in principle the terms of the proposed financial restructuring as negotiated
with LGE. See "--Liquidation and Going Concern Analyses." This recommendation
included a recommended acceptance of the releases requested by LGE, which had
been presented as a prerequisite to LGE's proceeding with its restructuring
proposal. In that regard the Special
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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 Restructuring Agreement to the Board
for its approval.
At a meeting of the Board on July 22, 1998, the Board received a further
report from Mr. Gannon and PJSC regarding the status of contacts with potential
acquirors and stating that no outside party contacted by PJSC or the Company
appeared willing to provide the financing or investment required to provide the
funding to implement the Operational Restructuring. PJSC presented to the Board
its report on a liquidation analysis and a going concern analysis with respect
to the Company. See "--Liquidation and Going Concern Analyses." PJSC also
discussed with the Board the terms of the Company's business plan and the terms
of the Restructuring Agreement. The Special Committee reported its
recommendation to the Board that the Restructuring Agreement be approved.
Management of the Company also recommended that the Board accept the
Restructuring Agreement as negotiated. The Board unanimously voted to approve
the terms of the Restructuring Agreement, subject only to management's
completion of documentation. The Company and LGE entered into the Restructuring
Agreement on August 7, 1998 and entered into Amendment No. 1 and Waiver to the
Restructuring Agreement on November 16, 1998. See "--The Restructuring
Agreement."
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On November 16, 1998, PJSC presented to the Special Committee a liquidation
analysis and a going concern analysis based on the Company's November Business
Plan Projections. See "--Liquidation and Going Concern Analyses" for a
description of the review undertaken and assumptions made by PJSC in developing
its analyses and "BUSINESS PLAN PROJECTIONS."
On January 20, 1999, the Special Committee met by conference call and
unanimously reconfirmed its recommendation and approval of the Restructuring
Agreement.
Debenture Committee
In June 1998, the Company was contacted by two significant holders of Old
Subordinated Debentures, Loomis Sayles & Company and Mariner Investment Group,
Inc./Caspian Capital Partners, L.L.P. (the "Debenture Committee"), to discuss
the proposed Prepackaged Chapter 11 Case and Prepackaged Plan. The members of
the Debenture Committee represented to the Company that they collectively held
or controlled over 50% of outstanding principal amount of the Old Subordinated
Debentures. The Debenture Committee retained Crossroads Capital Partners, LLC
("Crossroads") as its financial advisor and Hebb & Gitlin as its legal advisor.
The Company entered into a letter agreement, dated June 30, 1998, with
Crossroads pursuant to which, among other things, the Company agreed to pay to
Crossroads certain fees in consideration of Crossroad's agreement to render
financial advisory services on behalf of the Debenture Committee in connection
with the Prepackaged Chapter 11 Case and the Prepackaged Plan. As compensation
for its services, the Company agreed to pay to Crossroads $80,000 per month for
the ninety day period from and after June 8, 1998. At the later to occur of (i)
ninety days, (ii) the entry of an agreement in principle between the Company
and the Debenture Committee with respect to the restructuring of the Old
Subordinated Debentures, and (iii) a cessation of negotiations between the
Company and the Debenture Committee, the fee payable to Crossroads will be
reduced to $25,000 per month, plus an additional amount, if any, at Crossroad's
hourly billing rates if Crossroads incurs greater than sixty hours service on
behalf of the Debenture Committee in such month. The letter agreement is
terminable by the Company upon five business days notice at any time after the
initial ninety day period. Through September 26, 1998, the Company has paid
$340,120 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
September 26, 1998, the Company has paid $233,164 to Hebb & Gitlin in respect
of such arrangements.
Commencing in June 1998, the Debenture Committee's advisors embarked upon a
due diligence investigation of the Company and its legal and financial affairs.
The Company and the Debenture Committee presently are engaged in discussions
regarding the Prepackaged Plan.
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. The Company has not engaged in any negotiations with such persons.
Purposes and Effects of the Financial Restructuring
The purpose of the Financial Restructuring is to reduce the Company's debt
service obligations, to facilitate future borrowing to fund liquidity needs and
to permit it to implement the Operational Restructuring. The Prepackaged Plan
will benefit the Company and reduce its overall debt and other obligations by
approximately $300 million by exchanging (i) $200 million of debt and other
liabilities owed to LGE for the New Common Stock; (ii) the Old Subordinated
Debentures in an aggregate principal amount of $103.5 million plus accrued
interest thereon for New Subordinated Debentures in an aggregate principal
amount of $40 million; and (iii) approximately $32.4 million of indebtedness to
LGE for the Reynosa Assets, which have an appraised value equal to such amount.
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, assuming consummation of the
Prepackaged Plan, on a projected basis as of December 31, 1998, the Company's
annual interest obligations are expected to be reduced to approximately $23.2
million in 1999 (compared to projected interest charges of approximately $37.3
million for 1999 if the Restructuring does not occur).
As a result of the Financial Restructuring, the Company will also have
significantly more liquidity. For example, the Company's cash interest
obligations will be reduced because the LGE New Restructured Senior Note will
have a PIK interest feature pursuant to which interest will be payable during
the two years following consummation of the Prepackaged Plan by the issuance of
additional LGE New Restructured Notes unless the Company's ratio of EBITDA to
cash interest expense for the immediately preceding four fiscal quarters
exceeds 1.5. See "SUMMARY OF LGE NEW RESTRUCTURED NOTE--Payment of Principal
and Interest; Maturity." In addition, pursuant to the Restructuring Agreement,
LGE has agreed to provide additional credit support of up to $60 million
pursuant to the LGE New Credit Support. Finally, the Company is in discussions
with potential lenders regarding credit facilities following Consummation of
the Prepackaged Plan. It is a condition to Consummation pursuant to the
Restructuring Agreement that the Company have such a credit facility in an
amount not less than $100 million. The combination of the PIK feature of the
LGE New Restructured Senior Note, the LGE New Credit Support and the financing
to be provided by a third-party lender is expected to enhance the liquidity of
the Company following the Consummation of the Prepackaged Plan.
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 $40 million in principal amount of New
Subordinated 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 $118.8 million plus the New
Common Stock in exchange for $359.2 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. The Financial Restructuring
has a detrimental effect on holders of Old Common Stock (including LGE and LG
Semicon), who receive no distribution and retain no property pursuant to the
Prepackaged Plan. In addition, following the Effective Date LGE will own all of
the Common Stock of New Zenith and will, therefore, have 100% (increased from
approximately 56%) of the interests in New Zenith's net book value, which is
projected to be negative $172.5 million at year end 1998 and negative $205.6
million at year end 1999, and net earnings (losses), which are projected to be
$(283.4) million for 1998 and $(33.1) 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
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its operation of the Reynosa Assets. Because the Company intends to outsource
substantially all of its product lines following the Restructuring, the Company
expects that it will continue to purchase some finished products, components
and technical services from LGE.
The Company will not pay the fees and expenses of LGE or its professionals in
connection with the Restructuring, except as provided in the Restructuring
Agreement. See "SPECIAL FACTORS--The Restructuring Agreement."
LGE Agreements Related to Common Stock
On March 25, 1997, LG Semicon granted LGE an irrevocable proxy to vote all
shares of common stock owned by LG Semicon. By its terms, the proxy terminates
after thirteen years. On March 3, 1998, LGE purchased 2,000,000 shares of Old
Common Stock from LG Semicon.
Alternatives to Confirmation and Consummation of the Prepackaged Plan
If the Company commences the Prepackaged Chapter 11 Case and the Prepackaged
Plan is not subsequently confirmed by the Bankruptcy Court and consummated, the
alternatives include (i) liquidation of the Company under chapter 7 or chapter
11 of the Bankruptcy Code and (ii) confirmation of an alternative plan of
reorganization under chapter 11 of the Bankruptcy Code. One of the conditions
to consummation of the Prepackaged Plan is the availability to the Company of a
credit facility in an amount not less than $100 million on terms and conditions
set forth in the Restructuring Agreement. This is also a condition to LGE's
obligations in connection with the Prepackaged Plan. If the Company is unable
to obtain such a credit facility, it is possible that LGE could waive the
condition to its obligations. In such an event, however, the Company would
probably not have sufficient financing for its operations, and would be unable
to consummate the Prepackaged Plan. If the Prepackaged Plan is not confirmed,
the Company will decide which alternative to pursue by weighing each of the
available options and choosing the alternative or alternatives that are in the
best interests of the Company, its creditors and other parties in interest.
Liquidation Under Chapter 7 or Chapter 11
If no plan of reorganization is confirmed (and in certain other
circumstances), the Prepackaged Chapter 11 Case may be converted to a case
under chapter 7 of the Bankruptcy Code, pursuant to which a trustee would be
elected or appointed to liquidate the assets of the Company for distribution to
creditors in accordance with the priorities established by the Bankruptcy Code.
A discussion of the potential effects that a chapter 7 liquidation would have
on the recovery of holders of Claims and Equity Interests is set forth under
"LIQUIDATION ANALYSIS." In a liquidation, the assets of the Company would be
sold in exchange for 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.
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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 any purchaser of the Company other than LGE could take advantage of the
Company's accumulated NOLs. 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 implement the Operational Restructuring is dependent upon the
confirmation and consummation of the Prepackaged Plan.
Going Private Transaction
As of September 26, 1998, there were issued and outstanding 67,525,447 shares
of Old Common Stock and approximately 11,470 holders of record of Old Common
Stock. As a consequence of the Financial Restructuring, the Old Common Stock
will be cancelled (including that of LGE and LG Semicon) and the holders of the
Old Common Stock (including LGE and LG Semicon) will receive no distributions
and retain no property in respect of their holdings of the Old Common Stock.
The Company believes that the Old Common Stock has no value, and after
evaluating various factors, the Board believes that the Financial Restructuring
provides the Company with best opportunity to enhance its long-term viability.
See "--Recommendation of the Board."
In satisfaction of the LGE Tranche B Claims of $200 million, LGE will receive
all of the issued and outstanding New Common Stock of New Zenith. After
consummation of the Financial Restructuring, all of the outstanding New Common
Stock of New Zenith will be held by LGE and thus, with respect to such New
Common Stock, New Zenith will no longer be subject to the proxy rules under the
Exchange Act.
The New Subordinated Debentures will not be convertible. However, the New
Subordinated Debentures will continue to be publicly held after the Financial
Restructuring and New Zenith will remain subject to the reporting requirements
under the Exchange Act. LGE has advised Zenith that it intends for New Zenith
to file periodic reports with the Commission for such time as the New
Subordinated Debentures remain outstanding.
Recommendation of the Board
The Special Committee of the Board has unanimously recommended to the Board,
and the Board has unanimously approved, the Restructuring Agreement and the
Prepackaged Plan. Since the holders of the Old Common Stock will receive no
distributions and retain no property under the Financial Restructuring, they
are
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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 LGE's
ability to utilize the Company's NOLs.
The Special Committee noted that under both the going concern analysis
and the liquidation analysis there was no value available to holders of
Equity Interests, and that under the terms of the proposed financial
restructuring as negotiated with LGE, even considering the release
requested by LGE, the treatment offered to holders of Impaired Claims
(other than LGE) was equal to or greater than the amount that would be
received by such holders in the hypothetical absolute priority distribution
of the Company's assets which is a part of both the going concern valuation
and the liquidation valuation prepared by PJSC. See "LIQUIDATION ANALYSIS."
The Special Committee also noted that under the terms of the proposed
financial restructuring as negotiated with LGE, the distributions to be
received by LGE with respect to its Claims, including consideration of the
value, if any, of the releases, are reasonable in comparison to the
distributions offered to holders of the Old Subordinated Debentures. In
this regard, the Special Committee noted that it had been advised that a
significant portion of the LGE unsecured Claims are contractually senior to
the claims of the holders of the Old Subordinated Debentures. The Special
Committee further noted that, under PJSC analyses, the percentage face
value to be received by LGE with respect to its unsecured Claims is less
than the percentage face value to be received by the holders of the Old
Subordinated Debentures with respect to their claims (assuming the holders
of the Old Subordinated Debentures approve the restructuring and thereby
receive a distribution). The Special Committee further noted that absent
LGE's agreement to participate in the proposed restructuring, and its
willingness to accept impairment of its secured and unsecured Claims
otherwise entitled to priority, there would likely be no value at all
available for distribution to holders of the Old Subordinated Debentures.
In addition, the Special Committee concluded that the more favorable
treatment of other Classes of unsecured Claims was appropriate, because (a)
such treatment is essentially being funded at the expense of LGE, and not
the holders of the Old Subordinated Debentures, and (b) the Company's
ability to announce favorable treatment of trade creditors would optimize
value for the benefit of all Classes of Claims and the Company as a whole.
Based on the foregoing, the Special Committee viewed the going concern
and liquidation analyses as strongly supporting its recommendation to the
Board that it approve the terms of the financial restructuring as
negotiated with LGE.
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(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 and
that for the reasons described herein, the proposed financial restructuring
is fair to unaffiliated securityholders. Based on the Special Committee's
recommendation, the Board also believes that the proposed financial
restructuring is fair to unaffiliated securityholders.
With respect to the procedural fairness of a prepackaged bankruptcy
proceeding to the holders of the Old Subordinated Debentures, the Special
Committee noted that (i) confirmation of a prepackaged plan would require
that the Bankruptcy Court find that the prepackaged plan is in the "best
interests" of the holders of the Old Subordinated Debentures who do not
vote to accept the prepackaged plan; and (ii) any holder of the Old
Subordinated Debentures that objects to the confirmation of a prepackaged
plan will be entitled, subject to compliance with the procedural, standing
and other requirements of the Bankruptcy Code, to file an objection with
the Bankruptcy Court and to have such objection considered at the
Confirmation Hearing. The Bankruptcy Code requires, subject to certain
exceptions, that the Prepackaged Plan be accepted by all Impaired Classes
of Claims, with acceptance defined to be acceptance by holders of at least
66 2/3% in dollar amount and more than one-half of the number of Allowed
Claims in a class, but counts only those claims that have been voted on the
plan. See "--Events Leading to the Restructuring" and "THE PREPACKAGED
PLAN--Confirmation Standards."
A finding by the Bankruptcy Court that a prepackaged plan is in the "best
interests" of the holders of the Old Subordinated Debentures who do not
vote to accept such prepackaged plan generally means that the court has
determined that they will receive property of a value that is not less than
the value such holders
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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.
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.
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LGE's Position Regarding the Financial Restructuring
LGE 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 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 engaged Lazard to provide advice
concerning LGE's negotiating strategy and positions but not to prepare an
independent valuation of the Company. LGE informed the Company that to the
extent the formulation of such negotiating strategy and positions required
financial or valuation information concerning the Company, LGE and Lazard
utilized the financial analyses prepared by the Company's management and PJSC,
which are included elsewhere in this Disclosure Statement. LGE has advised the
Company that Lazard was not engaged to and did not render an opinion,
valuation, appraisal or report with respect to the terms of the proposed
Restructuring. Lazard was retained based on its prior experience in
restructurings of other public companies in similar types of transactions. LGE
advised the Company that Lazard has not provided investment banking services
to LGE or its affiliates (including the Company) in the last two years.
LGE has 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, (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 meetings in November 1998 and January 1999, the Special Committee
considered the liquidation and going concern analyses developed by PJSC based
on the Company's November 1998 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."
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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 July 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 November 12, 1998; (ii) reviewed the financial terms and provisions of
the Financial Restructuring; (iii) reviewed certain historical, financial and
other information for recent years and interim periods that was publicly
available or furnished to PJSC by the Company, including information provided
during discussions with representatives thereof; (iv) compared certain
financial and securities data of the Company with various other companies
deemed generally comparable to the operating business of the Company whose
securities are traded in public markets; and (v) conducted such other
financial studies, analyses and investigations as PJSC deemed appropriate for
purposes of preparing its analyses. The following is a brief summary of the
liquidation and going concern analyses. For purposes of this summary, "Company
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.
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. Each of Forrester and Gartner/Dataquest provided information to the
Company and PJSC regarding projected adoption rates for VSB technology in
consumer electronics products, and the projected adoption rates contained in
PJSC's reports are the result of information provided by Forrester (with
respect to domestic adoption rates) or Gartner/Dataquest (with respect to
international adoption rates). 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 $37,500
and $69,750, respectively through December 31, 1998.
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.
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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 $80,000 for their initial appraisals of the Company's real estate
assets in the United States and Mexico, and $7,500 relating to additional work
performed subsequent to the delivery of their initial appraisals through
December 31, 1998.
The Company engaged the services of Greenwich Industrial Services, a
subsidiary of Greenwich Financial Group, to provide appraisals of the
Company's machinery and equipment. Greenwich Industrial Services 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 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 $102,800 through December 31, 1998.
The Company selected Bermudez-Binswanger, the Mexican affiliate of
Chesterton Blumenauer Binswanger, as its real estate advisor and broker in
Mexico for the disposition of its Mexican properties after soliciting
recommendations from other U.S. companies with Mexican real estate interests
and after interviewing a number of real estate brokers and advisors who
specialize in or have experience with maquila manufacturing operations.
Bermudez-Binswanger is an internationally recognized real estate firm with
technical knowledge and market experience in the Mexican real estate market in
general and the maquila real estate areas in particular. Through the
association with Chesterton Blumenauer Binswanger, the Mexican brokerage firm
has access to offices and potential buyers in 50 countries. Bermudez-
Binswanger had previously been retained by the Company in a prior year for the
successful sale of a Mexican manufacturing property. Bermudez-Binswanger was
not specifically compensated for its summary and value estimate concerning the
Company's Mexican real estate, but may be entitled to a commission on the sale
of the Company's Mexican properties in accordance with the terms of its
brokerage agreement with the Company.
There is no material relationship between any of Forrester Research, Inc.,
Gartner Consulting/Dataquest or the Appraisers and Zenith, and LGE has advised
Zenith that there is no such relationship between LGE and any of such firms.
Bermudez-Binswanger has, however, been engaged by the Company to act as
brokers for the sale of the property covered by their value estimates and will
be compensated for those activities on terms the Company believes to be
customary. In addition, Zenith is a client of Forrester and purchases research
reports from Forrester from time to time.
Liquidation Analysis
The liquidation analysis presented to the Special Committee is substantially
identical to the liquidation analysis set forth herein under the heading
"LIQUIDATION ANALYSIS."
Going Concern Analysis
The going concern analysis presented to the Special Committee utilized a
discounted cash flow analysis procedure to separately value the cash flows
generated by the Company's Business Plan Projections, net of the VSB royalties
and tuner patent royalties. In the case of the Business Plan Projections, the
going concern analysis
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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. To arrive at a terminal value, the going concern analysis utilizes
a range of illustrative sales multiples derived from the lowest end of the
Company Peer Group's latest twelve months sales multiples discounted by 50% to
66.6% (the "Sales Multiples Approach"). With respect to 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 Consulting/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. 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 recent disputes and
negotiations regarding the tuner patent that suggest uncertainty in the
stability of these cash flows.
In addition, the going concern analysis utilized the following material
assumptions and/or methodologies: (i) with respect to VSB, that the Company
will be able to utilize certain carry-forward tax attributes to offset future
taxable royalty income, (ii) with respect to VSB, that the Company will
realize royalty rates between $5.00/unit and $1.00/unit for different classes
of consumer products, including televisions, video recorders, DVD
players/recorders, converter boxes, satellite boxes, cable boxes, personal
computers and computer add-in cards, (iii) with respect to VSB, that the
technology will receive, over time, varying rates of adoption and absorption
in the different classes of consumer products, (iv) with respect to VSB, that
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 $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.
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The going concern and liquidation analyses referred to herein are based upon
a number of significant assumptions. While presented with numerical
specificity, these analyses are based upon a variety of assumptions (which the
Company believes are reasonable) and are subject to significant business,
economic, and competitive uncertainties and contingencies, many of which are
beyond the control of the Company. Consequently, the inclusion of these
analyses herein should not be regarded as a presentation by the Company (or
PJSC) that the values contained in the analyses would be realized, and actual
values may vary materially and adversely from those presented herein. Such
analyses are subject to significant uncertainty and are based upon certain
assumptions which may or may not prove to be correct. Neither the Company nor
PJSC intends to update or otherwise revise the going concern or liquidation
analyses to reflect circumstances existing after the date hereof or to reflect
the occurrence of unanticipated events, even in the event that any or all of
the underlying assumptions are shown to be in error, except as required by
applicable law.
Other Board Review
At a meeting of the Board on July 22, 1998, the Board considered certain
liquidation and going concern analyses with respect to the Company developed
by PJSC in connection with the Company's then existing business plan
projections dated June 26, 1998. The Company updated its business plan
projections in November 1998 and asked PJSC to update its liquidation and
going concern analyses to reflect the updated business plan projections,
including reduced realizations on asset sales, reduced sales, higher
administrative costs and increased royalty revenue, the value of international
VSB and Forrester's updated projections regarding domestic VSB revenues from
sales of personal computers and related products. In response to the Company's
request, PJSC updated its analyses and presented the updated analyses to the
Special Committee in November 1998. A copy of PJSC's November 1998 report to
the Special Committee is attached hereto as Annex B.
The principal differences between the July analyses and the November
analyses are as follows:
. the November going concern and liquidation analyses include $36.6
million of discounted (reflecting a 40% discount rate for international
(adopted) VSB technology and a 55% discount rate for international
(likely to adopt) VSB technology) international VSB royalty and
licensing revenue, which values were not capable of reasonable
estimation at the time the July analyses were prepared;
. the July analyses were generated using the business plan projections
dated June 26, 1998, while the November analyses incorporated the
Business Plan Projections dated November 12, 1998;
. the November analyses give effect to the Company's sale of its
headquarters and certain equipment at its Melrose Park in 1998, which
reflect a $10.8 million increase compared to the July analyses.
. the November analyses include updated assumptions concerning certain
domestic VSB revenue projections for personal computers, principally
relating to:
. a decrease of $387.8 million in anticipated aggregate royalty
revenue from the inclusion of VSB technology in personal computer
products based on the demonstrated market trend towards lower-cost
units, which are unlikely to have VSB capability; and
.an increase in the assumed VSB royalty rate for personal computers
($5.00 per unit in the November analyses, as compared to $2.50 per
unit in the July analyses);
.with respect to the going concern analyses, the November analysis utilized
updated tax assumptions to reflect:
.the projection of the Company's accountants that the Company will be
subject to a domestic alternative minimum tax of $186.2 million,
which was not included in the July analysis; and
.the Company's assumed aggregate tax liability of $418.1 million with
respect to international VSB revenues (which includes both non-
domestic alternative minimum tax and withholding taxes), which was
not included in the July analysis;
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.with respect to the liquidation analyses:
.the November analysis allocates projected warranty expenses of $33.7
million against both finished goods and trademark and distribution
values, while the July analysis allocated such expenses of $23.3
million solely to finished goods value; and
.the November analysis applies a three year discount rate of 10% to
projected net liquidated proceeds to more accurately reflect the
present value of anticipated distributions of net liquidation
proceeds at the conclusion of the assumed 2 to 4 year hypothetical
liquidation period of the Company, while the July analysis did not
provide for such discount.
Prior to the July 22, 1998 meeting of the Board, including at the May 21,
1998 meetings of the Board, the Board and the Special Committee reviewed
certain preliminary liquidation and going concern analyses also prepared by
PJSC which were based on the Company's then-existing business plan projections
dated April 16, 1998. In June 1998, the Company updated its business plan
projections to give effect to the Financial Restructuring and to reflect more
realistic financial estimates. The Company asked PJSC to update its
liquidation and going concern analyses to reflect the updated business plan
projections, which included increased projected sales, reduced interest
expenses, decreased estimates of realizations for asset sales, and increased
freight and product costs.
The principal differences between the preliminary analyses previously
reviewed by the Board and the Special Committee and the analyses presented on
July 22, 1998 are as follows:
.the preliminary analyses estimated values as of January 1, 1998, while the
July analyses estimated values as of January 1, 1999, the assumed
confirmation date of the Prepackaged Plan;
.the preliminary analyses were generated using financial projections from a
preliminary draft of the business plan projections, while the July
analyses incorporated projections from the business plan projections
dated June 26, 1998;
.with respect to VSB, the July analyses utilized reduced royalty revenue
projections to reflect projected royalty-free cross-licenses, which were
included in the July analyses to reflect the Company's market
experience;
.the July valuation analysis included a $78.6 million reduction in the
projected value of LGE's secured claim against the Company arising from
the leveraged lease guaranty resulting from bifurcation of the claim to
reflect that the leased property had a value of less than the claim;
.with respect to the liquidation analyses:
.the preliminary analysis utilized a 15% estimated recovery rate for
raw materials inventory, while the July analysis utilized a 20%
estimated recovery rate, resulting in a $2.1 million increase in
projected available liquidation proceeds;
.the July analysis assumed that projected liquidation recoveries of
$25.5 million from certain Mexican assets of the Company would be
net of projected liquidation and severance costs associated with
such assets (estimated at $44.2 million), whereas the preliminary
analysis did not estimate such obligations.
. with respect to the going concern analyses:
. the enterprise value in the preliminary analysis was derived from a
14.0x earnings before income and taxes ("EBIT") multiple (the median
enterprise value multiple of last twelve months EBIT derived from
the Company Peer Group) and a 12% discount rate (the weighted
average cost of capital of the Company Peer Group), while the
enterprise value for the July analysis was derived from a Sales
Multiples Approach; and
. in the July analysis, the Company's tuner patent technology was
separately valued, in part to better reflect the anticipated
cessation of the patents and to better account for an appropriate
estimate of risk related to the tuner patent cash flows;
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. certain categories of assets included in the preliminary analysis are
omitted in the July analysis because such assets are projected to have
already been liquidated as of the effective date of the analysis.
In the preliminary analyses, the enterprise value of the Company was
estimated at $127.0 million, derived from (i) a present value of free cash
flow (using a discount rate that ranged from 12% to 16%) that ranged from
$(13.0) million to $(19.2) million and (ii) a present value of the terminal
value (using an EBIT multiple of 14x and a discount rate that ranged from 12%
to 16%) that ranged from $139.8 million to $117.3 million. The VSB technology
value was estimated at $186.0 million, representing the net present value of
domestic VSB technology revenue (using a discount rate of 25%). The total
value was thus estimated at $313.0 million.
In the July analyses, the Company's enterprise value (which includes net
indebtedness) was estimated at $125.0 million, derived from (i) a present
value of free cash flow (using a discount rate that ranged from 12% to 16%)
that ranged from $(38.9) million to $(35.4) million, (ii) a present value of
the terminal value (using a multiple of 17.5% of sales and a discount rate
that ranged from 12% to 16%) that ranged from $64.3 million to $51.3 million
and (iii) a present value of the tuner patent cash flow (using a discount rate
that ranged from 18.0% to 22.0%) that ranged from $72.8 million to $67.2
million. The domestic VSB technology value was estimated at $180.0 million
(using a discount rate of 25%). The total going concern value was thus
estimated as $305.0 million.
With respect to the liquidation analyses, the estimated gross asset recovery
from liquidation under the preliminary analyses, the July analysis and the
November analysis was $430.3 million, $288.2 million and $269.3 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, respectively.
The reduction in the gross asset recovery from liquidation under the
preliminary analysis to the July analysis is derived primarily from (i) the
implementation of the Operational Restructuring (pursuant to which the Company
decided to exit manufacturing), which reduced the work-in-process and
inventories by approximately $104.2 million and (ii) a reduction in the value
of the Mexican real estate and furniture fixture and equipment of $44.2
million as a result of statutory severance and labor costs not reflected in
the preliminary analysis.
The Restructuring Agreement
Based upon the agreement in principle of the Board and LGE, in June of 1998,
the Company and LGE began to negotiate the terms of a definitive agreement to
effectuate the Financial Restructuring. On August 7, 1998, the Company and LGE
executed the Restructuring Agreement.
On November 16, 1998, the Company and LGE entered into Amendment No. 1 and
Waiver to the Restructuring Agreement to extend the delivery date of the
Implementation Program (as defined) from August 31, 1998 to November 30, 1998
and to waive until November 30, 1998 the Company's obligation to pay interest
to LGE on certain amounts owed by the Company to LGE.
The Company anticipates that additional modifications to the Restructuring
Agreement will be necessary before the Restructuring can be consummated. For
instance, the Company revised its business plan projections in November 1998.
Pursuant to the Restructuring Agreement, material changes to the business plan
projections in effect at the time the agreement was entered into must be
approved by LGE. In addition, LGE may terminate the Restructuring Agreement if
the Prepackaged Plan is not consummated prior to December 15, 1998. Because
the Prepackaged Plan was not consummated prior to such date, the Company and
LGE are currently in discussions concerning an extension of the December 15,
1998 deadline, the revisions to the Business Plan Projections and related
matters. There can be no assurance that an agreement can be reached with
respect to these issues.
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The description of the Restructuring Agreement contained in this Disclosure
Statement describes the material terms of the Restructuring Agreement but does
not purport to be complete and is qualified in its entirety by reference to
the Restructuring Agreement, a copy of which is included as an exhibit to the
Registration Statement of which this Disclosure Statement forms a part and is
incorporated herein by reference.
The Transactions
In addition to the transactions contemplated by the Financial Restructuring,
the Restructuring Agreement provides that, upon the terms and subject to the
conditions set forth in the Restructuring Agreement, LGE may, at the option of
LGE and the Company, lend to the Company or provide indirect credit support to
the Company, such as a guarantee of financing provided by a third-party
lender, in an amount not to exceed $60 million, to the extent necessary to
enable the Company to implement the Operational Restructuring.
Agreements
Pursuant to the Restructuring Agreement, the Company has agreed to, and to
cause its subsidiaries to, use commercially reasonable efforts to, among other
things, consummate the Financial Restructuring and the other transactions
provided for in the Prepackaged Plan. The Company has also agreed, among other
things, (i) not to consent to any amendment of the Prepackaged Plan or the
Disclosure Statement without the prior written consent of LGE; (ii) to deliver
to LGE prior to November 30, 1998 an implementation program (the
"Implementation Program"), reasonably satisfactory to LGE, for the
discontinuation of the manufacturing operations of the Company and its
Subsidiaries, the outsourcing of the production of the Company's products and
the maximization of the value of the VSB technology; (iii) to give LGE and its
representatives full access to all properties and records relating to the
Company and its Subsidiaries, keep LGE generally informed as to the Company's
affairs and deliver to LGE certain financial statements; (iv) to promptly
notify LGE if any information is requested from it or any negotiations or
discussions are sought to be initiated with the Company concerning any merger,
consolidation, business combination, liquidation, reorganization, sale of
substantial assets, sale of shares of capital stock, purchase of claims or
similar transactions involving the Company or any subsidiary or any division
of any thereof (an "Alternative Proposal") and promptly communicate to LGE the
terms of any proposal or inquiry which it may receive in respect of any
Alternative Proposal; (v) to deliver to LGE after the end of each fiscal month
a certificate of the Company restating certain representations and warranties
relating to the Business Plan Projections contained in the Restructuring
Agreement; and (vi) to pay LGE each month in arrears (x) all interest accruing
on amounts owed but unpaid by the Company to LGE under the Reimbursement
Agreement and (y) up to $2,635,468 of interest accruing on amounts owed but
unpaid by the Company to LGE under the Financial Support Agreement. The
Company has agreed to conduct business in the ordinary course and to use
commercially reasonable efforts to retain key employees and business
relationships. The Company has agreed not to, and to cause its subsidiaries
not to, without the consent of LGE, (i) acquire or agree to acquire any
business or any assets (other than inventory) that would be material to the
Company; (ii) sell, lease, license or otherwise dispose of any of the assets
or properties of the Company or its subsidiaries other than in the ordinary
course of business or pursuant to the Business Plan Projections; (iii) amend
its Certificate of Incorporation or By-laws; (iv) redeem or otherwise acquire
any shares of its capital stock or issue any capital stock or any option,
warrant or right relating thereto; (v) incur any liabilities, obligations or
indebtedness for borrowed money or guarantee any such liabilities, obligations
or indebtedness; (vi) permit or allow any of the assets or properties of the
Company or any subsidiary to be subject to any lien, subject to certain
customary exceptions; (vii) cancel any material indebtedness or waive any
claims or rights of material value; (viii) make any change in any method of
accounting or accounting practice or policy; (ix) modify, amend, terminate or
permit the lapse of any material lease of real property; (x) enter into any
material contract or arrangement; (xi) enter into any agreement or take any
action in violation of the terms of the Restructuring Agreement or the
Restructuring; (xii) settle any material tax audit or make or change any
material tax election, (xiii) hire any new 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
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benefit plan or arrangement or amend any such plan; (xv) enter any new line of
business; or (xvi) agree, whether in writing or otherwise, to do any of the
foregoing. The Company has also agreed to, and to cause its subsidiaries to,
(i) use commercially reasonable efforts to take all actions to fulfill its
obligations in respect of the Restructuring Agreement; (ii) make all filings
required under any applicable law or regulation and use all reasonable efforts
to obtain all permits necessary to be obtained by the Company or any of its
subsidiaries, (iii) cooperate with LGE in exchanging information and supplying
assistance in connection with filings contemplated by the Restructuring
Agreement; (iv) not issue any press release or make any other public statement
regarding the Restructuring without the prior consent of LGE; and (v) perform
all obligations under and comply with all terms and provisions of the
Leveraged Leases other than obligations to pay "Basic Rent" under the
Leveraged Leases. The Company has agreed to promptly notify LGE in writing of
any fact, condition, event or occurrence that could reasonably be expected to
result in the failure of any conditions contained in the Restructuring
Agreement to be satisfied.
Pursuant to the Restructuring Agreement, LGE has agreed: (i) subject to
compliance with applicable non-bankruptcy and bankruptcy laws, to vote all
Claims against and Equity Interests in the Company in favor of the Prepackaged
Plan; (ii) to use commercially reasonable efforts to take all actions in order
for it to fulfill its obligations under the Restructuring Agreement, including
making all filings required under any applicable law or regulation, obtaining
all permits necessary to be obtained by LGE or any of its subsidiaries, making
all necessary and desirable appearances before the Bankruptcy Court, and
promptly notifying the Company of any fact, condition, event or occurrence
that could reasonably be expected to result in the failure of any conditions
contained in the Restructuring Agreement to be satisfied; and (iii) to
cooperate with the Company in exchanging information and supplying assistance
in connection with filings contemplated by the Restructuring Agreement and
provide the Company with information regarding LGE's performance and ability
to perform under the Restructuring Agreement.
Conditions to the Consummation of the Restructuring
Each party's obligation to consummate the transaction contemplated by the
Restructuring Agreement is subject to the following conditions: (i) obtaining
necessary regulatory approvals; (ii) the absence of pending or threatened
litigation, injunctions or restraints in respect of the transactions
contemplated by the Prepackaged Plan or seeking material damages; (iii) the
confirmation by the Bankruptcy Court of the Prepackaged Plan and the existence
of a Final Order with respect to such confirmation; (iv) the notification of
the Company and LGE pursuant to the Hart-Scott-Rodino Antitrust Improvement
Act of 1976 and expiration of the applicable waiting period; and (v) to LGE's
and the Company's satisfaction, in their respective sole discretion, that the
Prepackaged Plan contain releases from the Company and its creditors of any
potential claims and liabilities against the individual members of the Board,
the Company and LGE and their respective affiliates and representatives.
The Company's obligation to consummate the transaction contemplated by the
Restructuring Agreement is subject to the following additional conditions: (i)
the accuracy of LGE's representations and warranties; and (ii) LGE's
performance in all material respects of its obligations under the
Restructuring Agreement.
LGE's obligation to consummate the transaction contemplated by the
Restructuring Agreement is subject to various additional conditions, which
include, in addition to certain other customary closing conditions, the
following: (i) the accuracy of the Company's representations and warranties;
(ii) the Company's performance in all material respects of its obligations;
(iii) the retention of Mr. Gannon and certain key employees, or replacements
who are reasonably satisfactory to LGE; (iv) obtaining new senior financing by
the Company of not less than $100 million on terms reasonably satisfactory to
LGE; (v) LGE's satisfaction with all material changes to the Business Plan
Projections and with the Company's actions under the Implementation Program;
(vi) the Company's operating results being consistent with the Business Plan
Projections; (vii) the absence of any material, undisclosed, contingent
liabilities on the part of the Company; (viii) LGE's satisfaction with the
Arthur Andersen LLP report relating to the Company's June 27, 1998 balance
sheet; (ix) LGE's reasonable satisfaction with, and the Company's filing with
the Commission of, the Disclosure Statement; (x) LGE's satisfaction with the
purchase or other agreement with respect to certain employee benefit plan
arrangements and
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with the agreement relating to the purchase by LGE of the Reynosa Assets as
contemplated under the Prepackaged Plan, and in the event that such purchase
does not occur, the agreement relating to the operation by LGE of such Reynosa
Assets; (xi) the absence of a material adverse effect on the business,
properties, assets, results of operation, liabilities, condition (financial or
otherwise) or prospects of the Company and its Subsidiaries taken as a whole
or on the ability of the Company or its subsidiaries to consummate the
transaction contemplated by the Restructuring Agreement or to perform their
respective obligations under the definitive transaction agreements to be
entered into in connection with the Restructuring Agreement subsequent to the
date of the Restructuring Agreement; (xii) the absence of any increase or
decrease of 20% or more in the United States/Republic of Korea currency
exchange rate from the rate existing on the date of the Restructuring
Agreement (or a suspension of, or limitation on, the markets therefor), a
declaration of a banking moratorium in the United States or the Republic of
Korea, any limitation by any regulatory authority or other event that
materially adversely affects the ability of LGE to consummate the transactions
contemplated by the Restructuring Agreement, or a commencement of a war or
other national or international calamity involving the United States or the
Republic of Korea; (xiii) LGE's satisfaction with any settlement arrangements
with respect to licensing of technology entered into by the Company with the
Sony Corporation or any of its affiliates; (xiv) LGE's determination, in its
sole discretion, that the aggregate tuner patent royalties between the date of
the consummation of the Prepackaged Plan and December 31, 2003 will not be
less than 70% of the aggregate amount of such royalties projected under the
Business Plan Projections; and (xv) the absence of any default or event of
default under any of the Company's financing arrangements or any other
agreement that is material to the Company to which the Company or any of its
subsidiaries is a party or by which any of them is bound.
Waiver of Conditions
To the extent permitted by law, the Company and LGE may waive any of their
respective conditions set forth in the Restructuring Agreement without notice
to, or approval from, the Bankruptcy Court or any other party.
Termination by Either Party
The Restructuring Agreement may be terminated at any time prior to the
consummation of the Prepackaged Plan by mutual written consent of the Company
and LGE, or by either the Company or LGE if (i) the transactions contemplated
by the Restructuring Agreement shall not have occurred prior to December 15,
1998; or (ii) any statute shall make consummating the transactions under the
Restructuring Agreement illegal, or any court or other regulatory authority
shall have issued a judgment, order, decree or ruling enjoining the
consummation of the transactions contemplated by the Restructuring Agreement
and such judgment, order, decree or ruling shall have become final and non-
appealable.
Termination by LGE
The Restructuring Agreement may also be terminated by LGE if (i) the Company
fails to perform in any material respect any obligation or breaches any
representation or warranty, and the Company fails to perform such obligation
or cure any such breach capable of being cured within 30 days' notice by LGE;
(ii) the Board or the Special Committee withdraws or modifies, in a manner
adverse to LGE (as determined by LGE in its reasonable judgment), its approval
or recommendation of the Restructuring Agreement or the Restructuring; or
(iii) any condition to LGE's obligations under the Restructuring Agreement
becomes impossible to fulfill (other than as a result of any breach by LGE).
Termination by the Company
The Restructuring Agreement may be terminated by the Company if (i) LGE
fails to perform in any material respect any obligation or breaches any
representation or warranty, and LGE fails to perform such obligation or 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
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the Company may not terminate the Restructuring Agreement (i) if the
Alternative Proposal is subject to a financing condition, unless the Board is
of the opinion, after consultation with PJSC or another nationally recognized
investment banking firm, that the Alternative Proposal is financeable, (ii)
if, prior to or concurrently with any purported termination, (x) the Company
or the person or entity that made the Alternative Proposal (the "New
Investor") shall not have paid the Transaction Expenses (as defined below)
contemplated by the Restructuring Agreement and (y) the Company and the New
Investor shall not have entered into a legal, valid and binding agreement with
LGE pursuant to which such New Investor agrees to pay LGE the Transaction Fee
(as defined below) contemplated by the Restructuring Agreement upon the
earlier of (A) the consummation of such Alternative Proposal and (B) the
termination of such Alternative Proposal, or (iii) if the Company has not
provided LGE with five business days' prior written notice of its intent to so
terminate the Restructuring Agreement together with a summary of the material
terms and conditions of such Alternative Proposal.
Effect of Termination
Termination by either the Company or LGE will void the Restructuring
Agreement, without any liability or obligation on the part of LGE or the
Company with respect to the transactions contemplated under the Restructuring
Agreement, except to the extent that such termination results from the willful
and material breach by a party of any of its representations, warranties,
covenants or agreements set forth in the Restructuring Agreement, and except
under circumstances in which the Transaction Expenses and the Transaction Fee
are due.
Transaction Expenses and Transaction Fee upon Termination under Certain
Circumstances
In the event that (i) the Board or the Special Committee shall have
withdrawn or modified, in a manner adverse to LGE, its approval of the
Restructuring Agreement or the transactions contemplated by the Restructuring
Agreement or by the Restructuring, and LGE terminates the Restructuring
Agreement, (ii) the Bankruptcy Court approves, or enters an order authorizing,
an offer, proposal or agreement to effect an Alternative Proposal, or (iii)
during the period ending twelve months after the termination of the
Restructuring Agreement, the Company consummates, becomes a party to or enters
into an agreement relating to, or publicly announces, an Alternative Proposal,
the Company shall promptly, but in no event later than three business days
after the first of such events to occur, reimburse LGE and its affiliates for
all reasonable out-of-pocket expenses and fees (including, without limitation,
fees and expenses payable to all banks, investment banking firms and other
financial institutions and their respective agents and counsel, for
structuring the transactions contemplated hereby and all reasonable fees of
counsel, accountants, experts and consultants to LGE and its affiliates, and
all printing and advertising expenses) incurred or accrued by it or on its
behalf in connection with the negotiation, preparation, execution and
performance of the Restructuring Agreement and the Restructuring (the
"Transaction Expenses"); provided, however, that LGE shall not be entitled to
such Transaction Expenses if the Company terminates the Restructuring
Agreement due to a material breach by LGE of its obligations under the
Restructuring Agreement.
In the event that during the twelve months after the termination of the
Restructuring Agreement the Company consummates, becomes a party to or enters
into an agreement relating to, or publicly announces, an Alternative Proposal,
the Company shall, or shall cause the New Investor to, pay LGE a transaction
fee of $8 million (the "Transaction Fee") upon the earlier of (x) the
consummation of such Alternative Proposal or (y) the termination of such
Alternative Proposal.
Withdrawal or Modification of Recommendations
Either the Board or the Special Committee may at any time withdraw or modify
its approval or recommendation of the Restructuring Agreement or the
transactions contemplated thereby or by the 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
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Company from its obligations under the Restructuring Agreement unless LGE
exercises its right to terminate the Restructuring Agreement, in which case
the termination and expense provisions of the Restructuring Agreement shall
govern.
Amendments to Certificate of Incorporation and By-Laws
The Bankruptcy Code requires that upon the confirmation of a plan of
reorganization a debtor's charter documents must contain certain provisions
including a provision prohibiting the issuance of non-voting equity
securities. To comply with such requirement, the Prepackaged Plan provides
that the Company will file an amended Certificate of Incorporation with the
Secretary of State of the State of Delaware in accordance with the Delaware
General Corporation Law (the "Amended Certificate of Incorporation"). The
Amended Certificate of Incorporation will prohibit the issuance of nonvoting
equity securities to the extent required by section 1123(a) of the Bankruptcy
Code, change the number of authorized shares of New Common Stock to 1,000,
change the par value of the New Common Stock to $0.01 and eliminate the
authorization of preferred stock. Following confirmation of the Prepackaged
Plan, there is no legal requirement for New Zenith's certificate of
incorporation to contain provisions prohibiting the issuance of nonvoting
equity securities. After the Effective Date, New Zenith reserves the right to
amend and restate its Amended Certificate of Incorporation and other
constituent documents as permitted by the Delaware General Corporation Law. At
present, the Company does not contemplate any such amendments.
Interests of Certain Persons in the Financial Restructuring; Conflicts of
Interest
In considering the recommendation of the Board with respect to the
Restructuring, holders of Impaired Claims should be aware that the Board and
members of the Company's management have certain interests described below,
which give rise to actual and potential conflicts of interest with respect to
the Prepackaged Plan. The Board was aware of these conflicts in making its
recommendation regarding the Restructuring to holders of the Old Subordinated
Debentures. However, in recommending the Restructuring, the Board itself is
acting upon the recommendation of the Special Committee, which is comprised
solely of directors who are not officers or directors of LGE or current
officers of the Company and which the Board had established specifically to
mitigate some of the conflicts of interest described below. The Special
Committee did not resolve or address any other conflicts of interest,
including any conflicts created by the releases or indemnification provisions
contained in the Prepackaged Plan as they related to members of the Special
Committee. See "--Events Leading to the Restructuring."
LGE Directors
The current Board consists of eleven directors. LGE and LG Semicon
beneficially own approximately 56.7% 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
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 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.
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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 and the
Investor Releasees from any and all Claims and causes of action, whether known
or unknown, foreseen and unforeseen, existing or hereafter arising, that the
Company or its Subsidiaries would have been legally entitled to assert in
their own right or on behalf of the holder of any Claim or Equity Interest or
other person or entity against any of them relating to any event occurring on
or before the Effective Date of the Prepackaged Plan, 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, is
deemed to release, upon the Effective Date, any and all Claims and causes of
action, whether known or unknown, foreseen and unforeseen, existing or
hereafter arising, that it would have been legally entitled to assert against
the D&O Releasees or the Investor Releasees relating to the Company or its
Subsidiaries, the Prepackaged Chapter 11 Case, or the negotiation, formulation
and preparation of the Prepackaged Plan and related documents.
The Prepackaged Plan also provides that the Company, its Subsidiaries, the
D&O Releasees, and the Investor Releasees shall be exculpated from any
liability to any person or entity (as defined in the Bankruptcy Code) for any
act or omission in connection with or related to the negotiation, formulation,
preparation and Confirmation of the Prepackaged Plan, the Consummation and
administration of the Prepackaged Plan, the Prepackaged Chapter 11 Case, or
the property distributed under the Prepackaged Plan, except by virtue of any
willful misconduct or gross negligence, as determined by a court of competent
jurisdiction. 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.
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, such claims will be released by the
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terms of the Prepackaged Plan. Moreover, all of the D&O Releasees and Investor
Releasees, including the LGE-related D&O Releasees, would receive the benefits
of the exculpation provisions of the Prepackaged Plan, which might impair
certain causes of action not affected by the releases in the Prepackaged Plan.
To the extent claims against the D&O Releasees and Investor Releasees exist,
the Company believes that the release of the D&O Releasees and the Investor
Releasees is appropriate and warranted under the facts, circumstances and
equities of the Company's current financial condition and the terms of the
proposed Restructuring. Each of the D&O Releasees and the Investor Releasees
has made and will make a substantial contribution to the success of the
Restructuring, in the case of the Investor Releasees, through their
commitments set forth in the Restructuring Agreement, and in the case of the
D&O Releasees, through their service to the Company to facilitate the
expeditious reorganization of the Company and the implementation of the
Restructuring. Because the willingness of LGE to participate in the
Restructuring is conditioned on a grant of the release to the D&O Releasees
and the Investor Releasees, the release is a necessary and essential component
of the Prepackaged Plan. Moreover, there exist contractual and common law
rights of indemnity by the D&O Releasees and Investor Releasees against the
Company. Indeed, in the event a cause of action were brought against the D&O
Releasees or Investor Releasees as to which the D&O Releasees or Investor
Releasees were entitled to indemnity from the Company, such indemnification
claims would constitute General Unsecured Claims and the Company would be
required to pay such claims in full under the terms of the Prepackaged Plan.
Review by Special Committee
In the course of the Special Committee's work and review of the proposed
releases for LGE, the Special Committee sought to determine whether impaired
classes would be likely to receive a greater recovery in a bankruptcy
proceeding occurring without the Investor Releases and without LGE's
participation than they would under the proposed Restructuring. In that
regard, the Special Committee considered and reviewed transactions
contemplated by the proposed Restructuring Agreement. In connection with
evaluating the proposed releases, the Special Committee and its counsel also
considered and reviewed past significant financial assistance transactions
involving LGE, including credit support arrangements in April and October
1997, the vendor credit extended to the Company by LGE, the Reimbursement
Agreement and the LGE Demand Loan Facility. See "CERTAIN TRANSACTIONS--
Financial Assistance." The Special Committee and its counsel also considered
and reviewed certain material non-financing transactions between the Company
and LGE, including technical support services provided by LGE and affiliates
to the Company and manufacturing and production equipment purchases related to
upgrading portions of the Company's color picture tube operations in Melrose
Park and setting up a new automated manufacturing line for computer display
terminals. The Special Committee and its counsel also considered the existence
of (i) certain ongoing product transactions, such as ordinary course purchases
of VCRs, television-VCR combinations and components by the Company from LGE
and its affiliates, and (ii) certain technology agreements and licenses with
LGE or its affiliates entered into since LGE had obtained majority ownership.
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.
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Based on its investigation, the Special Committee concluded that any value
that might reasonably be attributed to the releases was clearly likely to be
less than the overall value created by the Restructuring, and that absent
LGE's agreement to participate in a restructuring (which was conditioned on,
among other things, obtaining the releases) there would likely be no value
available for distribution to unsecured creditors or holders of Equity
Interests. The Special Committee concluded that the Company's creditors,
including in particular holders of its unsecured Old Subordinated Debentures,
would receive far more with LGE participating in the Company's proposed
financial restructuring and receiving releases than if no such releases were
provided and the proposed restructuring did not proceed, in which event there
would likely be no value at all available for distribution to the holders of
unsecured Old Subordinated Debentures.
The Company is not generally aware of any transactions with the non-LGE-
related D&O Releasees other than in the ordinary course of business and
accordingly the Special Committee did not investigate any avoidance or other
potential causes of action against non-LGE related D&O Releasees. However, to
the extent any such claims exist, such claims will be released by the terms of
the Prepackaged Plan.
Effect of Conflicts of Interest on the Board's Recommendation
The releases and indemnification provisions provided by the Prepackaged Plan
may create a conflict of interest for all of the Company's directors and
officers in that such provisions may cause the directors and officers to
support the Prepackaged Plan as opposed to any alternative that did not
provide such releases or indemnification.
Although the Board recognizes the existence of the conflicts of interest
described in the foregoing paragraphs, the Board does not believe that such
conflicts of interest had the effect of causing the terms of the Financial
Restructuring to be different in any material respect than such terms would
have been in the absence of such conflicts of interests. Moreover, the Board
established the Special Committee specifically to address and mitigate against
any potential conflicts of interest of LGE or certain LGE-affiliated
directors. See "--Events Leading to the Restructuring."
Management's Interest in the Transaction
In connection with the Restructuring, the Company developed a retention
program for 14 key executives and senior managers, not including the Chief
Executive Officer. Under this executive retention program, the Company may be
obligated to pay participants up to an aggregate of $1.2 million in retention
bonuses. Additionally, in July 1998, the Company established short-term and
long-term incentive programs for two tiers of 15 key executives and senior
managers, not including the Chief Executive Officer. Those incentive programs
are based on achieving certain performance goals in connection with the
Restructuring. See "MANAGEMENT--Executive Retention Programs." In addition,
the Company's Senior Vice President--Restructuring is also a Principal of
JA&A, which has been engaged by the Company to assist it in the Restructuring.
JA&A receives a fixed monthly fee (plus expenses) for such services, and upon
successful completion of the Financial Restructuring, will receive a success
fee of $1.0 million. See "ESTIMATED FEES AND EXPENSES--Advisors."
Liquidity Pending Consummation of the Restructuring
Until the Prepackaged Plan is implemented on the Effective Date, the Company
may be required to rely on its cash resources to operate the business of the
Subsidiaries, service certain of its debt and pay other costs. Currently, the
Company has access to funds under the Amended Citibank Credit Facility and the
LGE Demand Loan Facility to supplement cash flow from operations. The Amended
Citibank Credit Facility currently expires on the earlier of a bankruptcy
filing by the Company and April 30, 1999. The Company is in discussions with
potential lenders regarding DIP financing during the Prepackaged Chapter 11
Case. See "RISK FACTORS--Recent Operating Results, Independent Auditor's
Report and High Leverage" and "--Possible Defaults; Risk of Acceleration or
Termination."
Dissenters' Rights
There are no dissenters' rights available under applicable law with respect
to the Restructuring. If the Prepackaged Plan is confirmed by the Bankruptcy
Court and the Restructuring is consummated in accordance therewith, holders of
the Old Subordinated Debentures that do not vote in favor of the Prepackaged
Plan will nevertheless be bound by all the terms and conditions thereof.
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THE PREPACKAGED PLAN
General
Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under chapter 11 of the Bankruptcy Code, a debtor is
authorized to reorganize its business for the benefit of its creditors and
stockholders. In addition to permitting rehabilitation of the debtor, chapter
11 seeks to promote equality of treatment of creditors and equity security
holders of equal rank with respect to the distribution of a debtor's assets.
In furtherance of these two goals, upon the filing of a petition for
reorganization under chapter 11, section 362 of the Bankruptcy Code generally
provides for an automatic stay of substantially all acts and proceedings
against the debtor and its property, including all attempts to collect Claims
or enforce liens that arose prior to the commencement of the debtor's case
under chapter 11.
The consummation of a plan of reorganization is the principal objective of a
chapter 11 reorganization case. A plan of reorganization sets forth the means
for satisfying Claims against, and Equity Interests in, a debtor. Confirmation
of a plan of reorganization by the Bankruptcy Court makes the plan binding
upon the debtor, any issuer of securities under the plan, any person acquiring
property under the plan and any creditor, equity security holder or general
partner in the debtor. Subject to certain limited exceptions, the confirmation
order discharges the debtor from any debt that arose prior to the date of
confirmation of the plan and substitutes therefore the obligations specified
under the confirmed plan. If sufficient votes for acceptance of the
Prepackaged Plan are received, the Company intends to file a chapter 11
reorganization case and promptly seek Confirmation by the Bankruptcy Court of
the Prepackaged Plan.
The Prepackaged Plan provides specified treatment to the various Classes of
Claims against and Equity Interests in the Company. The Company believes the
Prepackaged Plan provides treatment for all Classes of Claims and Equity
holders that reflects an appropriate resolution of their Claims and Equity
Interests taking into account the differing nature and priority (including
applicable contractual subordination) of such Claims and Equity Interests. The
Bankruptcy Court must find, however, that a number of statutory tests are met
before it may confirm the Prepackaged Plan. See "--Confirmation Standards."
Many of these tests are designed to protect the interests of holders of Claims
or Equity Interests that do not vote to accept the Prepackaged Plan but that
will be bound by the provisions of the Prepackaged Plan if it is confirmed by
the Bankruptcy Court.
The Bankruptcy Code generally provides for the appointment of a committee of
unsecured creditors in a Chapter 11 case. The appointment is made by either
the bankruptcy judge (in non-U.S. Trustee districts) or the U.S. Trustee.
Ordinarily, the committee will consist of the seven largest unsecured
creditors that are willing to serve, however, the Bankruptcy Code does not
place a limitation as to the size of any particular committee. Under certain
circumstances, additional committees may be appointed as well, or no
committees may be appointed. If appointed, a Chapter 11 creditors' committee
possesses authority to promote and to protect the interests of its creditor
constituency. In this regard, Section 1103(c) of the Bankruptcy Code provides,
among other things, that a duly-appointed committee may: consult with the
trustee or debtor in possession concerning the administration of the case;
investigate the acts, conduct, assets, liabilities, and financial condition of
the debtor, the operation of the debtor's business and the desirability of the
continuance of such business, and any other matter relevant to the case or to
the formulation of a plan; and perform such other services as are in the
interest of those represented. To carry out these functions, a creditors'
committee appointed pursuant to Section 1102 of the Bankruptcy Code may employ
professionals, may raise and may appear and be heard on any issue in the case,
and may transact such business as may be necessary and proper with the trustee
or debtor in possession.
THE FOLLOWING IS A SUMMARY OF CERTAIN OF THE MORE SIGNIFICANT MATTERS TO
OCCUR EITHER PURSUANT TO OR IN CONNECTION WITH CONFIRMATION OF THE PREPACKAGED
PLAN, A COPY OF WHICH ACCOMPANIES THIS DISCLOSURE STATEMENT AS ANNEX A AND TO
WHICH REFERENCE SHOULD BE MADE FOR A FULL STATEMENT OF ITS TERMS. THIS SUMMARY
ONLY HIGHLIGHTS CERTAIN SUBSTANTIVE PROVISIONS OF THE PREPACKAGED PLAN AND IS
NOT A COMPLETE DESCRIPTION OF, OR A SUBSTITUTE
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FOR, A FULL AND COMPLETE READING OF THE PREPACKAGED PLAN, WHICH ALL HOLDERS OF
CLAIMS AND EQUITY INTERESTS ARE URGED TO REVIEW CAREFULLY. THE PREPACKAGED
PLAN, IF CONFIRMED, WILL BE BINDING UPON THE COMPANY AND ALL HOLDERS OF CLAIMS
AND EQUITY INTERESTS. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE PREPACKAGED PLAN.
The Prepackaged Plan defines two significant dates, the Confirmation Date
and the Effective Date. The "Confirmation Date" is the date on which the
Bankruptcy Court enters an Order confirming the Prepackaged Plan in its
docket, within the meaning of Bankruptcy Rules 5003 and 9021. The Effective
Date is the date selected by the Company on or after the Confirmation Date on
which (a) no stay of the Confirmation Order is in effect and (b) the
conditions specified in the Prepackaged Plan shall all have been satisfied or
waived pursuant to the Prepackaged Plan.
DURING THE PENDENCY OF THE BANKRUPTCY CASE THAT WILL BE FILED IN CONNECTION
WITH THE RESTRUCTURING, THE COMPANY INTENDS TO OPERATE ITS BUSINESS IN THE
ORDINARY COURSE OF BUSINESS AND TO MAKE PAYMENT IN FULL ON A TIMELY BASIS TO
ALL OF ITS GENERAL UNSECURED CREDITORS. THE COMPANY ALSO WILL SEEK APPROVAL
IMMEDIATELY UPON THE FILING OF THE PETITION TO PAY IN FULL IN THE ORDINARY
COURSE OF BUSINESS THE PRE-PETITION CLAIM OF EACH HOLDER OF A GENERAL
UNSECURED CLAIM. MANAGEMENT EXPECTS THAT THE COMPANY WILL HAVE SUFFICIENT
FUNDS FROM OPERATIONS AND A DEBTOR IN POSSESSION CREDIT FACILITY TO CONTINUE
TO PAY ITS GENERAL UNSECURED CREDITORS IN THE ORDINARY COURSE OF BUSINESS
THROUGH THE CONCLUSION OF THE PREPACKAGED CHAPTER 11 CASE, AND TO HAVE
SUFFICIENT LIQUIDITY UNDER ITS LENDING FACILITIES AND FROM OPERATIONS TO MAKE
SUCH PAYMENTS THEREAFTER. Under the Prepackaged Plan, holders of General
Unsecured Claims will not be required to file proofs of claim with the
Bankruptcy Court, and it is not expected that they will be required to take
any other action to receive payment on their Claims.
Classification of Claims and Equity Interests under the Prepackaged Plan
Section 1122 of the Bankruptcy Code requires that the Prepackaged Plan
classify the Claims against, and Equity Interests in, the Company. The
Bankruptcy Code also provides that, except for certain Claims classified for
administrative convenience, the Prepackaged Plan may place a Claim or Equity
Interest in a particular Class only if such Claim or Equity Interest is
substantially similar to the other Claims or Equity Interests of such Class.
The Company believes that all Claims and Equity Interests have been
appropriately classified in the Prepackaged Plan. The Company has elected to
separately classify General Unsecured Claims because this Class is comprised
largely of trade creditors. Many of these creditors are key suppliers of
products and services used by the Company. Accordingly, any impairment of
these Claims could be detrimental to the ability of the Company to obtain
essential trade credit and could substantially impair the ability of the
Company to do business with trade creditors whose goods and services are
essential for the Company. Bank Lender Claims have been separately classified
because the Company believes that LGE's guaranty of these Claims renders their
legal and financial position substantially unlike other unsecured Claims. LGE
Claims have been separately classified because LGE has voluntarily agreed to
convert its debt to equity and because LGE is an insider. LGE has consented to
the separate classification of its Claims as provided in the Prepackaged Plan.
Finally, because the Old Subordinated Debenture Indenture contains
subordination provisions, the Old Subordinated Debentures are not held by
insiders, and the Old Subordinated Debenture Claims are not guaranteed by LGE,
the Company contends that the Old Subordinated Debenture Claims are
significantly different from the other unsecured debt and therefore must be
classified separately.
To the extent that the Bankruptcy Court finds that a different
classification is required for the Prepackaged Plan to be confirmed, the
Company would seek (i) to modify the Prepackaged Plan to provide for whatever
reasonable classification might be required for Confirmation and (ii) to use
the acceptances received from any
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holder of Claims pursuant to this solicitation for the purpose of obtaining
the approval of the Class or Classes of which such holder ultimately is deemed
to be a member. Any such reclassification of holders, although subject to the
notice and hearing requirements of the Bankruptcy Code, could adversely affect
the Class in which such holder was initially a member, or any other Class
under the Prepackaged Plan, by changing the composition of such Class and the
vote required for approval of the Prepackaged Plan. There can be no assurance
that the Bankruptcy Court, after finding that a classification was
inappropriate and requiring a reclassification, would approve the Prepackaged
Plan based upon such reclassification. Except to the extent that modification
of classification in the Prepackaged Plan adversely affects the treatment of a
holder of Claims and requires resolicitation, the Company will, in accordance
with the Bankruptcy Code and the Bankruptcy Rules, seek a determination by the
Bankruptcy Court that acceptance of the Prepackaged Plan by any holder of
Claims pursuant to this solicitation will constitute a consent to the
Prepackaged Plan's treatment of such holder regardless of the Class as to
which such holder is ultimately deemed to be a member.
The Bankruptcy Code also requires that the Prepackaged Plan provide the same
treatment for each Claim or Equity Interest of a particular Class unless the
holder of a particular Claim or Equity Interest agrees to a less favorable
treatment of its Claim or Equity Interest. The Company believes it has
complied with the requirement of equal treatment.
Only Classes that are impaired (as defined under section 1124 of the
Bankruptcy Code) under the Prepackaged Plan are entitled to vote to accept or
reject the Prepackaged Plan, unless the Class is deemed to have rejected the
Prepackaged Plan. As a general matter, a Class of Claims or Equity Interests
is considered to be "unimpaired" under a plan of reorganization if the plan
does not alter the legal, equitable and contractual rights of the holders of
such Claims or Equity Interests. Under the Bankruptcy Code, holders of
Unimpaired Claims are conclusively presumed to have accepted the Prepackaged
Plan. Holders of Claims or Equity Interests which do not receive or retain
anything under the Prepackaged Plan are deemed to have rejected the
Prepackaged Plan.
The categories of Claims and Equity Interests listed below classify Claims
and Equity Interests for all purposes, including voting, confirmation and
distribution pursuant to the Prepackaged Plan and pursuant to sections 1122
and 1123(a)(1) of the Bankruptcy Code. A Claim or Equity Interest shall be
deemed classified in a particular Class only to the extent that the Claim or
Equity Interest qualifies within the description of that Class and shall be
deemed classified in a different Class to the extent that any remainder of
such Claim or Equity Interest qualifies within the description of such
different Class. A Claim or Equity Interest is in a particular Class only to
the extent that such Claim or Equity Interest is Allowed in that Class and has
not been paid or otherwise settled prior to the Effective Date. A Claim or
Equity Interest is "Allowed" if the Claim or Equity Interest is: (a) a Claim
that has been scheduled by the Company in its schedule of liabilities as other
than disputed, contingent or unliquidated and as to which the Company or other
party in interest has not filed an objection by the Effective Date; (b) a
Claim that either is not subject to a timely objection in accordance with the
Bankruptcy Code or disputed by the Company or has been allowed by a Final
Order; (c) a Claim that is allowed: (i) in any stipulation of amount and
nature of Claim executed prior to the Confirmation Date and approved by the
Bankruptcy Court; (ii) in any stipulation with the Company of amount and
nature of Claim executed on or after the Confirmation Date; or (iii) in any
contract, instrument, indenture or other agreement entered into or assumed in
connection with the Prepackaged Plan; (d) a Claim relating to a rejected
executory contract or unexpired lease that either (i) is not subject to a
timely objection in accordance with the Bankruptcy Code or disputed by the
Company or (ii) has been allowed by a Final Order, in either case only if a
proof of Claim has been deemed timely filed under the Prepackaged Plan; or (e)
a Claim that is allowed pursuant to the terms of the Prepackaged Plan.
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The classification of Claims and Equity Interests pursuant to the Prepackaged
Plan is as follows:
<TABLE>
<CAPTION>
Class Status Voting Rights
----- ------ -------------
<S> <C> <C>
Class 1--Other Priority Claims Unimpaired --not entitled to vote
Class 2--Citibank Secured Claims Unimpaired --not entitled to vote
Class 3--Other Secured Claims Unimpaired --not entitled to vote
Class 4--Bank Lender Claims Impaired --entitled to vote
Class 5--General Unsecured Claims Unimpaired --not entitled to vote
Class 6--Old Subordinated Debenture Impaired --entitled to vote
Claims
Class 7--LGE Claims: Impaired --entitled to vote
LGE Tranche A Claims
LGE Tranche B Claims
Class 8--Equity Interests Impaired --not entitled to vote;
deemed to reject
</TABLE>
The Prepackaged Plan divides Claims against the Company into eight Classes
and Equity Interests in the Company are in one Class. Distributions will be
made to persons holding Claims and Equity Interests in various Classes as
described below.
Summary of Treatment Under the Prepackaged Plan
A. Administrative Claims
Administrative Claims consist of the Claims for the costs and expenses of
administration under sections 503(b), 507(b) or 1114(e)(2) of the Bankruptcy
Code, including: (a) the actual and necessary costs and expenses in preserving
the estates of the Company following the commencement of the chapter 11 case
and operating the business of the Company (such as wages, salaries or
commissions for services and payments for goods and other services and leased
premises); (b) compensation for legal, financial advisory, accounting and other
services and reimbursement of expenses awarded or allowed under sections 330(a)
or 331 of the Bankruptcy Code; and (c) all fees and charges assessed against
the estate under Chapter 123 of Title 28 United States Code, 28
U.S.C.(S)(S) 1911-1930. Subject to the provisions of sections 330(a) and 331 of
the Bankruptcy Code, each holder of an Allowed Administrative Claim will be
paid the full unpaid amount of such Allowed Administrative Claim in cash on the
Effective Date, or upon such other terms as may be agreed upon by such holder
and the Company or otherwise upon order of the Bankruptcy Court; provided,
however, that Allowed Administrative Claims representing obligations incurred
in the ordinary course of business by the Company pursuant to the Prepackaged
Plan will be paid or performed by New Zenith when due in accordance with the
terms and conditions of the particular agreements governing such obligations.
B. Priority Tax Claims
The Bankruptcy Code provides for priority payment of certain other Claims,
subject to certain limitations, such as allowed unsecured Claims of
governmental units for certain taxes of the kind specified in section 507(a)(8)
of the Bankruptcy Code. On the Effective Date, each holder of a Priority Tax
Claim due and payable on or prior to the Effective Date shall be paid cash in
an amount equal to the amount of such Allowed Claim, or shall be paid on
account of its Allowed Claim on such other terms as have been or may be agreed
upon by such holder and the Company. The amount of any Priority Tax Claim that
is not an Allowed Claim or that is not otherwise due and payable on or prior to
the Effective Date, and the rights of the holder of such Claim, if any, to
payment in respect thereof shall (i) be determined in the manner in which the
amount of such Claim and the rights of the holder of such Claim would have been
resolved or adjudicated if the Prepackaged Chapter 11 Case had not been
commenced, (ii) survive the Effective Date and Consummation of the Prepackaged
Plan as if the Prepackaged Chapter 11 Case had not been commenced, and (iii)
not be discharged pursuant to section 1141 of the Bankruptcy Code. In
accordance with section 1124 of the Bankruptcy Code, the Prepackaged Plan shall
leave unaltered the legal, equitable, and contractual rights of each holder of
a Priority Tax Claim.
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Class 1--Other Priority Claims
Classification: Other Priority Claims consist of all Claims accorded priority
in right of payment under section 507(a) of the Bankruptcy Code, other than a
Priority Tax Claim or Administrative Claims.
Treatment: The legal, equitable and contractual rights of the holders of
Other Priority Claims are unaltered by the Prepackaged Plan. Unless the holder
of such Claim and the Company agree to a different treatment, each holder of an
Allowed Other Priority Claim shall receive one of the following alternative
treatments, at the election of the Company:
(a) to the extent then due and owing on the Effective Date, such Claim
will be paid in full in cash by New Zenith;
(b) to the extent not due and owing on the Effective Date, such Claim (A)
will be paid in full in cash by New Zenith, or (B) will be paid in full in
cash by New Zenith when and as such Claim becomes due and owing in the
ordinary course of business; or
(c) such Claim will be otherwise treated in any other manner so that such
Claims shall otherwise be rendered unimpaired pursuant to section 1124 of
the Bankruptcy Code.
Any default with respect to any Other Priority Claim that existed immediately
prior to the filing of the Prepackaged Chapter 11 Case shall be deemed cured
upon the Effective Date.
Voting: Other Priority Claims are not impaired and the holders of Other
Priority Claims are conclusively deemed to have accepted the Prepackaged Plan
pursuant to section 1126(f) of the Bankruptcy Code. Therefore, the holders of
Other Priority Claims are not entitled to vote to accept or reject the
Prepackaged Plan.
Class 2--Citibank Secured Claims
Classification: Citibank Secured Claims consist of all Claims arising from or
relating to the Amended Citibank Credit Facility.
Treatment: The legal, equitable and contractual rights of the holders of
Citibank Secured Claims are unaltered by the Prepackaged Plan. On the Effective
Date, unless the holder of such Claims and the Company agree to a different
treatment, at the election of the Company, the Allowed Citibank Secured Claims
(i) will be paid in full in cash by New Zenith or (ii) will be otherwise
treated in any other manner so that such Claims shall otherwise be rendered
unimpaired pursuant to section 1124 of the Bankruptcy Code.
Voting: Citibank Secured Claims are not impaired and the holders of Citibank
Secured Claims are conclusively deemed to have accepted the Prepackaged Plan
pursuant to section 1126(f) of the Bankruptcy Code. Therefore, the holders of
Citibank Secured Claims are not entitled to vote to accept or reject the
Prepackaged Plan.
Class 3--Other Secured Claims
Classification: Other Secured Claims consist of all Other Secured Claims
against the Company, other than secured Claims classified in a different Class.
Treatment: The legal, equitable and contractual rights of the holders of
Other Secured Claims are unaltered by the Prepackaged Plan. Unless the holder
of such Claim and the Company agree to a different treatment, each holder of an
Allowed Secured Claim shall receive one of the following alternative
treatments, at the election of the Company:
(a) the legal, equitable and contractual rights to which such Claim
entitled the holder thereof shall be unaltered by the Prepackaged Plan;
(b) the Company shall surrender all collateral securing such Claim to the
holder thereof, without representation or warranty by or recourse against
the Company or New Zenith; or
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(c) such Claim will be otherwise treated in any other manner so that such
Claims shall otherwise be rendered unimpaired pursuant to section 1124 of
the Bankruptcy Code.
Any default with respect to any Secured Claim that existed immediately prior
to the filing of the Prepackaged Chapter 11 Case shall be deemed cured upon the
Effective Date.
Voting: Other Secured Claims are not impaired and the holders of Secured
Claims are conclusively deemed to have accepted the Prepackaged Plan pursuant
to section 1126(f) of the Bankruptcy Code. Therefore, the holders of Other
Secured Claims are not entitled to vote to accept or reject the Prepackaged
Plan.
Class 4--Bank Lender Claims
Classification: Bank Lender Claims consist of the Claims of the Bank Lender
arising from or relating to the Unsecured Bank Loans.
Treatment: The holder of Bank Lender Claims shall receive the New Bank Lender
Note in full satisfaction of its Claims.
Voting: Bank Lender Claims are impaired and the holder of Bank Lender Claims
is entitled to vote to accept or reject the Prepackaged Plan.
Class 5--General Unsecured Claims
Classification: General Unsecured Claims consist of the unsecured Claims that
are not Bank Lender Claims, Old Subordinated Debenture Claims, or LGE Tranche A
Claims or LGE Tranche B Claims. This Class includes, but is not limited to,
interest owed to LGE on the LGE Leveraged Lease Claims and the LGE
Reimbursement Claims.
Treatment: The legal, equitable and contractual rights of the holders of
General Unsecured Claims are unaltered by the Prepackaged Plan. Unless the
holder of such Claim and the Company agree to a different treatment, each
holder of an Allowed General Unsecured Claim shall receive one of the following
alternative treatments, at the election of the Company:
(a) to the extent then due and owing on the Effective Date, such Claim
will be paid in full in cash by New Zenith;
(b) to the extent not due and owing on the Effective Date, such Claim (X)
will be paid in full in cash by New Zenith, or (Y) will be paid in full in
cash by New Zenith when and as such Claim becomes due and owing in the
ordinary course of business; or
(c) such Claim will be otherwise treated in any other manner so that such
Claims shall otherwise be rendered unimpaired pursuant to section 1124 of
the Bankruptcy Code.
Any default with respect to any General Unsecured Claim that existed
immediately prior to the filing of the Prepackaged Chapter 11 Case shall be
deemed cured upon the Effective Date.
Voting: General Unsecured Claims are not impaired and the holders of General
Unsecured Claims are conclusively deemed to have accepted the Prepackaged Plan
pursuant to section 1126(f) of the Bankruptcy Code. Therefore, the holders of
General Unsecured Claims are not entitled to vote to accept or reject the
Prepackaged Plan.
Class 6--Old Subordinated Debenture Claims
Classification: Old Subordinated Debenture Claims consist of the Claims of
holders of the Old Subordinated Debentures.
Treatment: If Class 6 accepts the Prepackaged Plan, on or as soon as
practicable after the Effective Date, each holder of an Allowed Old
Subordinated Debenture Claim shall receive, in full and final satisfaction of
such
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Claim, a pro rata distribution of the New Subordinated Debentures. If Class 6
rejects the Prepackaged Plan, the holders of the Old Subordinated Debentures
will not receive or retain any property on account of their Claims. The Company
believes that this treatment is permissible under the Bankruptcy Code. The
Company recognizes that arguments exist that certain case law would permit a
contrary conclusion.
Voting: Old Subordinated Debenture Claims are impaired and the holders of
Allowed Old Subordinated Debenture Claims are entitled to vote to accept or
reject the Prepackaged Plan.
Class 7--LGE Claims
Classification: The LGE Claims consist of the LGE Tranche A Claims and the
LGE Tranche B Claims. The division of the LGE Claims into two groups is for
distribution purposes only. The LGE Tranche A Claims consist of (i) the LGE
Leveraged Lease Claims, (ii) the LGE Technical Services Claims and (iii) that
portion of the LGE Reimbursement Claims and the LGE Demand Loan Claims not
classified as LGE Tranche B Claims. The LGE Tranche B Claims consist of (i) the
LGE Extended Payables Claims, not to exceed $140 million; (ii) the LGE
Reimbursement Claims, not to exceed $50 million; (iii) the LGE Guarantee Fee
Claims; and (iv) the LGE Demand Loan Claims in an amount (if any) sufficient
when aggregated with the amounts described in clauses (i) through (iii) to
equal $200 million.
Treatment:
LGE Tranche A Claims--On the Effective Date, or as soon thereafter as
practicable, LGE shall receive (A) the LGE New Restructured Senior Note, and
(B) the Reynosa Assets, in full and complete satisfaction of the Allowed LGE
Tranche A Claims.
LGE Tranche B Claims--On the Effective Date, or as soon thereafter as
practicable, LGE shall receive 100% of the New Common Stock, in full and
complete satisfaction of the Allowed LGE Tranche B Claims.
Voting: LGE Claims are impaired and the holder of the Allowed LGE Claims is
entitled to vote to accept or reject the Prepackaged Plan.
Class 8--Equity Interests
Classification: Class 8 consists of all Equity Interests of the Company,
including the Old Common Stock.
Treatment: On the Effective Date, the holders of Equity Interests shall
receive no distributions and retain no property under the Prepackaged Plan.
Voting: No distributions will be made to holders of Equity Interests nor will
such holders retain any property, and consequently such holders are deemed to
reject the Prepackaged Plan. Holders of Equity Interests are not entitled to
vote to accept or reject the Prepackaged Plan.
Summary of Other Provisions of the Prepackaged Plan
Releases
In consideration of the contributions of certain parties to the Prepackaged
Chapter 11 Case, including, but not limited to, (i) the commitment and
obligation of LGE to provide the financial support necessary for Consummation
of the Prepackaged Plan, and (ii) the service of certain designated individuals
to facilitate the expeditious reorganization of the Company and the
implementation of the Restructuring, the Prepackaged Plan provides for certain
waivers, exculpation, releases and injunctions. The Prepackaged Plan provides
an injunction barring the commencement or continuation of any Claims released
pursuant to its terms.
Specifically, the Prepackaged Plan provides that the Company and its
Subsidiaries will release, upon the Effective Date, (i) the D&O Releasees, and
(ii) the Investor Releasees, from any and all Claims and causes of
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action, whether known or unknown, foreseen and unforeseen, existing or
hereafter arising, that the Company or its Subsidiaries would have been legally
entitled to assert in their own right or on behalf of the holder of any Claim
or Equity Interest or other person or entity against any of them relating to
any event occurring on or before the Effective Date of the Prepackaged Plan,
including avoidance actions under sections 544, 547, 548, 549 and 550 of the
Bankruptcy Code. The release of the D&O Releasees by the Company and its
Subsidiaries does not affect certain loans or contracts such parties have
entered into in the ordinary course of business.
In addition, the Prepackaged Plan provides that each holder of any Claim
against the Company that has accepted the Prepackaged Plan, whose Claim is part
of a Class that has accepted (or is deemed to accept) the Prepackaged Plan, or
that is entitled to receive a distribution of property under the Prepackaged
Plan, is deemed to release, upon the Effective Date, any and all Claims and
causes of action, whether known or unknown, foreseen or unforeseen, existing or
hereafter arising, that it would have been legally entitled to assert against
the D&O Releasees and the Investor Releasees relating to the Company or its
Subsidiaries, the Prepackaged Chapter 11 Case, or the negotiation, formulation
and preparation of the Prepackaged Plan and related documents.
The Prepackaged Plan also provides that the Company, each of its
Subsidiaries, the D&O Releasees, and the Investor Releasees shall be exculpated
from any liability to any person or entity (as defined in the Bankruptcy Code)
for any act or omission in connection with or related to the negotiation,
formulation, preparation and Confirmation of the Prepackaged Plan, the
Consummation and administration of the Prepackaged Plan, the Prepackaged
Chapter 11 Case, or the property distributed under the Prepackaged Plan, except
by virtue of any willful misconduct or gross negligence, as determined by a
court of competent jurisdiction.
In the course of the Special Committee's work and review of the proposed
release of LGE, the Special Committee sought to determine whether impaired
classes would be likely to receive a greater recovery in a hypothetical
restructuring occurring without the Investor Releases and without LGE's
participation. In that regard, the Special Committee and its counsel reviewed
and investigated significant transactions between LGE and the Company. Based on
that investigation, the Special Committee concluded that any value that might
be attributed to these releases was less than the overall value created by the
Restructuring, and that absent LGE's agreement to participate in a
restructuring (which was conditioned on, among other things, obtaining the
releases) there was no value available for distribution to holders of either
the Old Common Stock or the Old Subordinated Debentures.
It is a condition to LGE's obligations under the Restructuring Agreement that
the Investor Releasees receive the releases, waivers and injunctions as set
forth in the Prepackaged Plan. See "SPECIAL FACTORS--Interests of Certain
Persons in the Financial Restructuring; Conflicts of Interest" and "--The
Restructuring Agreement." The Company believes that these provisions of the
Prepackaged Plan are permissible under the Bankruptcy Code but acknowledges
that arguments exist that certain case law would permit a contrary conclusion.
Parties with standing may object to such provision in the Bankruptcy Court
proceeding.
Executory Contracts and Unexpired Leases
Under the Bankruptcy Code, the Company may assume or reject executory
contracts and unexpired leases. As a general matter, an "executory contract"
has been determined to be a contract under which material performance (other
than solely the payment of money) remains to be made by each party. On the
Effective Date, all executory contracts and unexpired leases of the Company
will be deemed assumed in accordance with the provisions and requirements of
sections 365 and 1123 of the Bankruptcy Code, except those executory contracts
and unexpired leases that (i) have been rejected by order of the Bankruptcy
Court, (ii) are the subject of a motion to reject pending on the Effective
Date, (iii) are identified on a list to be filed with the Bankruptcy Court on
or before the Confirmation Date, as to be rejected, or (iv) are rejected
pursuant to the terms of the Prepackaged Plan. All proofs of Claim with respect
to Claims arising from rejection must be filed with the Bankruptcy Court within
60 days after the later of (i) the date of entry of an order of the Bankruptcy
Court approving such rejection and (ii) the Confirmation Date. Any Claims not
timely filed will be forever barred from assertion.
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Notwithstanding anything to the contrary contained herein, on the Effective
Date, the Leveraged Leases shall be deemed rejected pursuant to section 365(a)
of the Bankruptcy Code. Any Claim arising from or out of rejection, including,
but not limited to those arising under section 502 of the Bankruptcy Code,
shall be part of and included in the LGE Leveraged Lease Claims. Other than on
account of the LGE Leveraged Lease Claims, LGE shall not receive any property
or distribution arising from or related to such rejection. Except as otherwise
provided in the Restructuring Agreement, on the Effective Date, all property
that is the subject of the Leveraged Leases shall be vested in New Zenith free
and clear of all liens, claims and encumbrances.
Indemnification of Directors, Officers and Employees
The Prepackaged Plan provides that the obligations of the Company to
indemnify any person serving at any time on or prior to the Effective Date as
one of its directors, officers or employees by reason of such person's service
in such capacity, to the extent provided in the Company's constituent documents
or by written agreement or Delaware law, shall be deemed and treated as
executory contracts that are assumed by the Company as of the Effective Date.
Accordingly, such indemnification obligations shall be treated as General
Unsecured Claims and shall survive unimpaired and unaffected by entry of the
Confirmation Order, irrespective of whether such indemnification is owed for an
act or event occurring before or after the filing of the Prepackaged Chapter 11
Case.
The Company is not aware of any material actual or contingent indemnification
obligations of the Company, except as might arise as a result of certain
shareholder litigation discussed herein. See "RISK FACTORS--Legal Proceedings."
In the event any such claims were asserted against the Company, such claims
would likely constitute general unsecured claims of the Company, which would be
paid in full under the terms of the Prepackaged Plan. Accordingly, the
Company's proposed treatment of such indemnification obligations provides the
holders of such claims with the same economic treatment that such persons would
otherwise be entitled to receive under the Prepackaged Plan.
Continued Corporate Existence and Vesting of Assets in New Zenith
The Company shall continue to exist after the Effective Date as a separate
corporate entity, with all the powers of a corporation under the laws of the
State of Delaware and without prejudice to any right to alter or terminate such
existence (whether by merger or otherwise) under such applicable state law.
Except as otherwise provided in the Prepackaged Plan, the Restructuring
Agreement, the LGE New Credit Facility, the LGE New Restructured Senior Note,
the New Subordinated Debentures, or any agreement, instrument or indenture
relating thereto, on and after the Effective Date, all property of the Company
and any property acquired by the Company under the Prepackaged Plan shall vest
in New Zenith, free and clear of all Claims, liens, charges, or other
encumbrances and Equity Interests. On and after the Effective Date, New Zenith
may operate its business and may use, acquire or sell property and compromise
or settle any Claims or Equity Interests, without supervision or approval by
the Bankruptcy Court and free of any restrictions of the Bankruptcy Code or
Bankruptcy Rules, other than those restrictions expressly imposed by the
Prepackaged Plan and the order of the Bankruptcy Court confirming the
Prepackaged Plan.
Amendments to Certificate of Incorporation and By-Laws
The Bankruptcy Code requires that upon the confirmation of a plan of
reorganization a debtor's charter documents must contain certain provisions
including a provision prohibiting the issuance of non-voting equity securities.
To comply with this requirement, the Prepackaged Plan provides that the Company
will file an Amended Certificate of Incorporation with the Secretary of State
of the State of Delaware in accordance with sections 102 and 103 of the
Delaware General Corporation Law. The Amended Certificates of Incorporation
will prohibit the issuance of nonvoting equity securities to the extent
required by section 1123(a) of the Bankruptcy Code, change the number of
authorized shares of New Common Stock to 1,000, change the par value of the New
Common Stock to $0.01 and eliminate the authorization of preferred stock. After
the Effective Date, New Zenith reserves the right to amend and restate its
Amended Certificate of Incorporation and other constituent
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documents as permitted by the Delaware General Corporation Law. At present, the
Company does not contemplate any such amendments.
Retention of Jurisdiction by the Bankruptcy Court
Under the terms of the Prepackaged Plan, the Bankruptcy Court will retain
jurisdiction in the following instances notwithstanding entry of the
Confirmation Order or the occurrence of the Effective Date. The Bankruptcy
Court will retain exclusive jurisdiction over the reorganization proceedings
relating to the Company to: (i) allow, disallow, determine, liquidate,
classify, estimate or establish the priority or secured or unsecured status of
any Claim, including the resolution of any request for payment of any
Administrative Claim and the resolution of any and all objections to the
allowance or priority of Claims; (ii) grant or deny any applications for
allowance of compensation or reimbursement of expenses authorized pursuant to
the Bankruptcy Code or the Prepackaged Plan, for periods ending on or before
the Effective Date; (iii) resolve any matters related to the assumption,
assumption and assignment or rejection of any executory contract or unexpired
lease to which the Company is a party or with respect to which the Company may
be liable and to hear, determine and, if necessary, liquidate, any Claims
arising therefrom, including those matters related to the amendment after the
Effective Date pursuant to the Prepackaged Plan to add any executory contracts
or unexpired leases to the list of executory contracts and unexpired leases to
be rejected; (iv) ensure that distributions to holders of Allowed Claims are
accomplished pursuant to the provisions of the Prepackaged Plan, including
ruling on any motion filed pursuant to the Prepackaged Plan; (v) decide or
resolve any motions, adversary proceedings, contested or litigated matters and
any other matters and grant or deny any applications involving the Company that
may be pending on the Effective Date; (vi) enter such orders as may be
necessary or appropriate to implement or consummate the provisions of the
Prepackaged Plan and all contracts, instruments, releases, indentures and other
agreements or documents created in connection with the Prepackaged Plan or the
Disclosure Statement; (vii) resolve any cases, controversies, suits or disputes
that may arise in connection with the Consummation, interpretation or
enforcement of the Prepackaged Plan or any obligations incurred in connection
with the Prepackaged Plan; (viii) issue injunctions, enter and implement other
orders or take such other actions as may be necessary or appropriate to
restrain interference with Consummation or enforcement of the Prepackaged Plan;
(ix) resolve any cases, controversies, suits or disputes with respect to the
releases, injunction and other provisions contained in the Prepackaged Plan and
enter such orders as may be necessary or appropriate to implement such
releases, injunction and other provisions; (x) enter and implement such orders
as are necessary or appropriate if the Confirmation Order is for any reason
modified, stayed, reversed, revoked or vacated; (xi) determine any other
matters that may arise in connection with or relate to the Prepackaged Plan,
the Disclosure Statement, the Confirmation Order or any contract, instrument,
release, indenture or other agreement or document created in connection with
the Prepackaged Plan or the Disclosure Statement; and (xii) enter an order
and/or final decree concluding the Prepackaged Chapter 11 Case.
Cancellation of Securities and Agreements
On the Effective Date, the Old Subordinated Debentures and all Equity
Interests will be deemed cancelled. In addition, the Old Subordinated Debenture
Indenture will be cancelled and will have no further force or effect.
Issuance of New Securities and Execution of Certain Documents
On the Effective Date, New Zenith shall issue all securities, notes,
instruments, certificates, and other documents required to be issued pursuant
to the Prepackaged Plan, including, without limitation, the LGE New
Restructured Senior Note, the New Bank Lender Note, the New Subordinated
Debentures, and the New Common Stock, all of which shall be distributed as
provided in the Prepackaged Plan. New Zenith shall execute and deliver such
other agreements, documents and instruments as are required to be executed
pursuant to the terms of the Prepackaged Plan.
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
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respective capacities. Upon the Effective Date, the Board shall consist of
members elected by LGE, the owner of 100% of the New Common Stock following
Consummation of the Prepackaged Plan.
Subordination
The classification and manner of satisfying all Claims and Equity Interests
and the respective distributions and treatments under the Prepackaged Plan
takes into account the relative priority of the Claims and Equity Interests in
each Class in connection with any contractual, legal or equitable subordination
rights relating thereto, whether arising under general principles of equitable
subordination, section 510(b) of the Bankruptcy Code or otherwise, and any and
all such rights are settled, compromised and released pursuant to the
Prepackaged Plan. Accordingly, without limitation, the Confirmation Order will
permanently enjoin, effective as of the Effective Date, all persons and
entities from enforcing or attempting to enforce any contractual, legal or
equitable subordination rights satisfied, compromised and settled under the
Prepackaged Plan.
Resolution of Disputed Claims
With respect to holders of Claims that are not Impaired Claims ("Unimpaired
Claims"), their legal, equitable and contractual rights will be unaltered by
the Prepackaged Plan. Consequently, it is anticipated that any disputes with
respect to such Claims will be resolved outside of the Prepackaged Chapter 11
Case. As such, all General Unsecured Claims, including litigation against the
Company, will be substantially unaffected by the Prepackaged Chapter 11 Case
and will remain subject to all legal and equitable defenses of the Company.
Nothing under the Prepackaged Plan will affect the Company's rights, including,
but not limited to, all rights in respect of legal and equitable defenses to or
setoffs or recoupments against such Unimpaired Claims, except as expressly
provided in the Prepackaged Plan.
After the Confirmation Date, only the Company will have the authority to file
objections to Claims or settle, compromise, withdraw or litigate to judgment
objections to Claims. As of the Confirmation Date, the Company can settle or
compromise disputed Claims without Bankruptcy Court approval. The Company
reserves the right to ask the Bankruptcy Court to estimate any contingent Claim
regardless of whether there has been a previous objection to such Claim. The
estimated amount will be either the allowed amount or a maximum limitation on
such Claim, as determined by the Bankruptcy Court. If the estimated amount
constitutes a maximum limitation, the Company can pursue a supplemental
proceeding to object to the payment of such Claim.
Under the Prepackaged Plan, holders of Claims (other than Claims arising from
the rejection of executory contracts or unexpired leases) would not be required
to file proofs of Claim with the Bankruptcy Court. In order to utilize the
Claims disallowance procedures of the Bankruptcy Code against a holder of a
Claim, the Company would be required to schedule as disputed, unsold or
contingent any Claim to which it objects or to file a separate objection to
such Claim and to obtain an order from a court sustaining such objection.
Additionally, the Company would be permitted to object to or contest any Claim
in the Bankruptcy Court or in any appropriate non-bankruptcy forum, and, if
such Claim is discharged pursuant to the Prepackaged Plan, to assert as a
defense that such Claim has been discharged.
Distributions for Claims Allowed as of the Effective Date
Except as otherwise provided in the Prepackaged Plan or as may be ordered by
the Bankruptcy Court, distributions to be made on the Effective Date on account
of Claims that are allowed as of the Effective Date and are entitled to receive
distributions under the Prepackaged Plan shall be made on the Effective Date or
as soon thereafter as is practical. Distributions on account of Claims that
become Allowed Claims after the Effective Date shall be made pursuant to the
applicable provisions of the Prepackaged Plan described below.
For purposes of determining the accrual of interest or rights in respect of
any other payment from and after the Effective Date, the LGE New Restructured
Senior Note, the New Bank Lender Note, the New Subordinated Debentures, and the
New Common Stock to be issued under the Prepackaged Plan shall be deemed issued
as of
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the Effective Date regardless of the date on which they are actually dated,
authenticated or distributed; provided, however, that New Zenith shall withhold
any actual payment until such distribution is made and no interest shall accrue
or otherwise be payable on any such withheld amounts.
Distributions by the Company; Distributions with Respect to the Old
Subordinated Debentures
The Company shall make all distributions required under the Prepackaged Plan.
Notwithstanding provisions in the Prepackaged Plan regarding the cancellation
of the Old Subordinated Debenture Indenture, the Old Subordinated Debenture
Indenture shall continue in effect to the extent necessary to allow the Company
to receive and make distributions pursuant to the Prepackaged Plan on account
of the Old Subordinated Debentures.
Delivery and Distributions and Undeliverable or Unclaimed Distributions
Distributions to holders of Allowed Claims shall be made at the address of
the holder of such Claim as indicated on the records of the Company. Except as
otherwise provided by the Prepackaged Plan or the Bankruptcy Code with respect
to undeliverable distributions, distributions to holders of Citibank Secured
Claims, Bank Lender Claims and Old Subordinated Debenture Claims shall be made
in accordance with the provisions of the applicable indenture, participation
agreement, loan agreement or analogous instrument or agreement, and
distributions will be made to holders of record as of the close of business on
the business day immediately preceding the Effective Date (the "Distribution
Record Date"). 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 Subordinated Debentures) shall not be
entitled to any interest, dividends or other accruals of any kind.
Within 20 days after the end of each calendar quarter following the Effective
Date, the Company shall make all distributions that become deliverable during
the preceding calendar quarter.
Any holder of an Allowed Claim that does not assert a Claim pursuant to the
Prepackaged Plan for an undeliverable distribution within five years after the
Effective Date shall have its Claim for such undeliverable distribution
discharged and shall be forever barred from asserting any such Claim against
New Zenith or its respective property. As described in the Prepackaged Plan, in
such cases: (i) any cash held for distribution on account of such Claims shall
be property of New Zenith, free of any restrictions thereon; and (ii) any New
Subordinated Debentures held for distribution on account of such Claims shall
be cancelled and of no further force or effect. Nothing contained in the
Prepackaged Plan requires the Company to attempt to locate any holder of an
Allowed Claim.
In connection with the Prepackaged Plan, to the extent applicable, the
Company shall comply with all tax withholding and reporting requirements
imposed on it by any governmental unit, and all distributions pursuant to the
Prepackaged Plan shall be subject to such withholding and reporting
requirements.
Distribution Record Date
As of the close of business on the Distribution Record Date, the transfer
register for the Old Subordinated Debentures as maintained by the Company, the
trustee of the Old Subordinated Debenture Indenture, or their respective
agents, shall be closed and the transfer of the Old Subordinated Debentures, or
any interest therein, will be prohibited. Moreover, the Company shall have no
obligation to recognize the transfer of any Old
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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.
Minimum Distribution
The New Subordinated Debentures will be issued in denominations of $1,000 and
integral multiples thereof. No New Subordinated Debenture will be issued in a
denomination of less than $1,000. In the event a holder of an Allowed Class 6
Claim is entitled to distribution of New Subordinated Debentures that is not an
integral multiple of $1,000, such distribution shall be aggregated by the
Company (or its agent), and as soon as practicable after the Effective Date,
such interests shall be sold by the Company (or its agent) in a commercially
reasonable manner and, upon the completion of such sale, the net proceeds
thereof shall be distributed (without interest) pro rata to the holders of
Allowed Class 6 Claims based upon the fraction of New Subordinated Debentures
each such holder would have been entitled to receive or deemed to hold had the
Company issued New Subordinated Debentures in integral multiples smaller than
$1,000, such distribution being in lieu of any other distribution thereon. The
Company believes that the sale of New Subordinated 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 Subordinated
Debentures or New Common Stock to be distributed pursuant to the Prepackaged
Plan on account of any such Claim shall, pending such surrender, be treated as
an undeliverable distribution.
Notes and Debentures
Each holder of an impaired Allowed Claim shall tender any notes or debentures
relating to such Claim to the Company in accordance with written instructions
to be provided to such holders by the Company as promptly as practicable
following the Effective Date. Such instructions shall specify that delivery of
such notes or debentures will be effected, and risk of loss and title thereto
will pass, only upon the proper delivery of such notes or debentures with a
letter of transmittal in accordance with such instructions.
Failure to Surrender Cancelled Instruments
Any holder that fails to surrender or is deemed to have failed to surrender
its Old Subordinated Debentures required to be tendered hereunder within five
years after the Effective Date shall have its Claim for a distribution pursuant
to the Prepackaged Plan on account of such Old Subordinated Debentures
discharged and shall be forever barred from asserting any such Claim against
New Zenith or its property.
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<PAGE>
Lost, Stolen, Mutilated or Destroyed Debt Securities
In addition to any requirements under the applicable note or debenture, or
any related agreement, any holder of a Claim evidenced by a note or debenture
that has been lost, stolen, mutilated or destroyed shall, in lieu of
surrendering such note or debenture, deliver to the Company: (1) evidence
satisfactory to the Company of the loss, theft, mutilation or destruction; and
(2) such security or indemnity as may be required by the Company to hold the
Company harmless from any damages, liabilities or costs incurred in treating
such individual as a holder of an Allowed Claim. Upon compliance with this
provision by a holder of a Claim evidenced by a note or debenture, such holder
shall, for all purposes under the Prepackaged Plan, be deemed to have
surrendered such note or debenture.
Conditions to Confirmation/Consummation
It is a condition to Confirmation of the Prepackaged Plan that all
provisions, terms and conditions of the Prepackaged Plan have been approved in
the Confirmation Order.
It is a condition to Consummation of the Prepackaged Plan that the following
conditions have been satisfied or waived pursuant to the Prepackaged Plan:
1. the Confirmation Order shall have been signed by the Bankruptcy Court
and duly entered on the docket for the Prepackaged Chapter 11 Case by the
Clerk of the Bankruptcy Court in form and substance acceptable to the
Company;
2. the Confirmation Order shall be a Final Order;
3. a revolving credit facility and letter of credit subfacility shall be
available to the Company in the amounts and on such terms and conditions as
set forth in the Restructuring Agreement; and
4. all conditions precedent to the "Closing," as defined in the
Restructuring Agreement, shall have been satisfied or waived pursuant to
the terms thereof.
Waiver of Conditions
Other than as set forth in the Prepackaged Plan, the Company, in its sole
discretion, may waive any of the conditions to Confirmation of the Prepackaged
Plan and/or to Consummation of the Prepackaged Plan set forth in the
Prepackaged Plan at any time, without notice, without leave or order of the
Bankruptcy Court, and without any formal action other than proceeding to
confirm and/or consummate the Prepackaged Plan. 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.
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Discharge
Except as provided in the Prepackaged Plan, the Restructuring Agreement or in
the LGE New Restructured Senior Note, the New Bank Lender Note or the New
Subordinated Debentures, (1) the rights afforded in the Prepackaged Plan and
the treatment of all Claims and Equity Interests therein, shall be in exchange
for and in complete satisfaction, discharge and release of Claims and Equity
Interests of any nature whatsoever, including any interest accrued on such
Claims from and after the date the Company files the Prepackaged Chapter 11
Case with the Bankruptcy Court ("Petition Date"), against the Company, or any
of its assets or properties, (2) on the Effective Date, all such Claims
against, and Equity Interests in the Company shall be satisfied, discharged and
released in full and (3) all persons and entities shall be precluded from
asserting against New Zenith, its successors or its assets or properties any
other or further Claims or 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.
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<PAGE>
Intended Actions During the Prepackaged Chapter 11 Case
In addition to seeking Confirmation of the Prepackaged Plan, during the
pendency of the Prepackaged Chapter 11 Case, the Company intends to seek relief
from the Bankruptcy Court as to various matters, certain of which are described
below. While the Company believes each of the requests, if granted, would
facilitate the Prepackaged Chapter 11 Case, there can be no assurance that the
Bankruptcy Court will grant any such relief.
Provisions for Employees; Retention 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 and Kirkland & Ellis as its attorneys.
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.
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<PAGE>
Trade Payables
The Company intends to seek the authority to pay all pre-petition trade
payables and to honor all obligations to its trade vendors.
Utility Service
The Company intends to seek an order restraining utilities from
discontinuing, altering or refusing service.
Confirmation Standards
Section 1129 of the Bankruptcy Code sets forth the requirements that must be
satisfied to confirm a plan of reorganization. A number of the more significant
Confirmation requirements are discussed below. The Company believes that it has
complied or will comply with each of these requirements.
Good Faith and Compliance with Law
The Bankruptcy Code requires that a plan of reorganization be proposed in
good faith and disclose certain relevant information regarding payments due and
the nature of compensation to insiders. The Company believes it has satisfied
these requirements and will seek a ruling to that effect from the Bankruptcy
Court in connection with Confirmation of the Prepackaged Plan.
Best Interests
Section 1129(a)(7) of the Bankruptcy Code requires that, with respect to each
Impaired Class, each member of such Class either (a) has accepted the
Prepackaged Plan, or (b) will receive or retain under the 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,
95
<PAGE>
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 under the Bankruptcy Code is furnished in connection
with the solicitation. The Company intends to use the Ballots or Master Ballots
received pursuant to this Solicitation to confirm the Prepackaged Plan once it
has filed its Prepackaged Chapter 11 Case. The Company believes that this
Solicitation complies with such applicable non-bankruptcy law and otherwise
contains "adequate information" and will seek appropriate findings from the
Bankruptcy Court in this regard.
Confirmation of the Prepackaged Plan Without Acceptance by All Classes of
Impaired Claims
The requirements for acceptance of the Prepackaged Plan by impaired Classes
are described under""--Classification and Treatment of Claims and Equity
Interests under the Prepackaged Plan." The Bankruptcy Code also provides a
procedure by which the Prepackaged Plan may be confirmed despite the non-
acceptance of one or more Impaired Classes. This procedure is known as a "cram
down." If less than all of the impaired Classes accept the Prepackaged Plan,
the Prepackaged Plan may nevertheless be confirmed by the Bankruptcy Court
under section 1129(b) of the Bankruptcy Code, so long as at least one impaired
Class has affirmatively voted to accept the Prepackaged Plan, ignoring for this
purpose any acceptance by insiders of the Company as defined under the
Bankruptcy Code. To obtain Confirmation pursuant to section 1129(b) of the
Bankruptcy Code, the Company must demonstrate to the Bankruptcy Court that, as
to each non-accepting Class, the Prepackaged Plan "does not discriminate
unfairly" and is "fair and equitable." In general, a plan does not discriminate
unfairly if, among other things, it accords a dissenting class treatment
substantially equivalent to that accorded to other classes of equal rank,
taking into account for this purpose the effect of applicable subordination
rights. The Company believes that the Prepackaged Plan does not discriminate
unfairly against any Class. The Bankruptcy Code establishes different "fair and
equitable" tests for secured creditors, unsecured creditors and interest
holders as follows:
1. Secured Creditors. A secured creditor in a dissenting class of secured
claims must retain the lien(s) securing its claim and receive under the
plan cash payments that total at least the allowed amount of the secured
claim and have a present value at least equal to the value of the
collateral securing such creditor's claim.
2. Unsecured Creditors. An unsecured creditor in a dissenting class of
unsecured claims must receive or retain under the plan property of a value
at least equal to the amount of its allowed claim, or the holders of the
claims or equity interests junior to the claims of the dissenting class of
unsecured creditors must neither receive nor retain any property under the
plan on account of such junior claim or interest.
3. Equity Interest Holders. An equity interest holder must receive or
retain under the plan property of a value equal to the greatest of the
allowed amount of any fixed liquidation preference to which such holder is
entitled, any fixed redemption price to which such holder is entitled, or
the value of such interest or the holder of any equity interest that is
junior to the equity interests of such class must neither receive nor
retain any property under the plan on account of such junior interest.
The Company will seek Confirmation of the Prepackaged Plan under section
1129(b) of the Bankruptcy Code in view of the deemed rejection by the holders
of Equity Interests. In the event that any impaired Class fails to accept the
Prepackaged Plan (other than the Equity Interest holders) in accordance with
section 1129(a)(8) of the Bankruptcy Code, the Company reserves the right (i)
to request that the Bankruptcy Court confirm the Prepackaged Plan in accordance
with section 1129(b) of the Bankruptcy Code and/or (ii) to modify
96
<PAGE>
the Prepackaged Plan in accordance with the Prepackaged Plan. In the event that
holders of the Old Subordinated Debentures do not approve the Prepackaged Plan,
the Company intends (and the Prepackaged Plan so provides) to seek confirmation
of the Prepackaged Plan under the "cram down" provisions with respect to the
Class composed of the holders of the Old Subordinated Debentures. If such a
"cram down" is approved by the Bankruptcy Court, holders of the Old
Subordinated Debenture Claims would receive no distribution and retain no
property. Any such Confirmation would be subject to judicial approval of this
solicitation and the Prepackaged Plan, including as required under the "cram
down" provisions of the Bankruptcy Code. See "RISK FACTORS--Certain Bankruptcy
Considerations--Nonacceptance of the Prepackaged Plan--Confirmation by Cram
Down." At the hearing on Confirmation the Company would likely introduce PJSC's
liquidation and going concern analyses as evidence in support of the Company's
request for Confirmation. Based on the circumstances at such time, including,
in particular, the existence of any objections to Confirmation, the Company may
introduce additional evidence at the hearing on Confirmation.
Certain Consequences of Non-Acceptance of the Prepackaged Plan
If the requisite acceptances are not received by the Expiration Date, the
Company will be forced to evaluate options then available to it. Options
available to the Company could include extending the Solicitation period,
seeking non-consensual confirmation of the Prepackaged Plan on the basis
described above or on some other basis, submission of a revised prepackaged
plan of reorganization to its creditors and Equity Interest holders, filing for
protection under the Bankruptcy Code without a preapproved plan of
reorganization or pursuing a non-bankruptcy restructuring.
In the event a bankruptcy proceeding is commenced without the prior
acceptance of the Prepackaged Plan, there is a risk that the Prepackaged Plan
may be found not to satisfy the "cram down" standards and would not be
confirmed. In this scenario, there may be little, if any, value available for
distribution to unsecured creditors of the Company, including holders of the
Old Subordinated Debentures. Furthermore, there can be no assurance that the
Company would be able to emerge from such a proceeding under the Bankruptcy
Code, in which case the Company might be forced into a liquidation proceeding
under chapter 7 of the Bankruptcy Code. See "RISK FACTORS--High Leverage and
Recent Operating Results; Independent Auditor's Report; and High Leverage" and
"--Certain Bankruptcy Considerations--Certain Risks of Nonconfirmation." If, on
the other hand, the requisite acceptances are obtained and the Prepackaged Plan
is confirmed, the treatment and settlement of Claims provided for in the
Prepackaged Plan for each Class of the Company's debt and equity securities
will be made to each holder of a Claim or Equity Interest, whether or not they
have voted to accept the Prepackaged Plan.
In addition, the Prepackaged Plan may be confirmed if certain conditions are
met even if the Prepackaged Plan is not accepted by each Class of Claims
entitled to vote. As described above, the Prepackaged Plan provides for certain
alternative treatments in the event requisite approval of the Prepackaged Plan
by holders of the Old Subordinated Debentures is not obtained. The Company also
reserves the right to modify the terms of the Prepackaged Plan as necessary for
the confirmation of the Prepackaged Plan without acceptance by other Impaired
Classes. Such modification could result in a less favorable treatment to
holders of the Old Subordinated Debentures than the treatment currently
provided in the Prepackaged Plan or a distribution of no property. See "THE
PREPACKAGED PLAN--Confirmation of the Prepackaged Plan Without Acceptance by
All Classes of Impaired Claims." However, except as described above with
respect to a "cram-down" of the Old Subordinated Debentures, the Company may
choose not to seek Confirmation of the Prepackaged Plan in the event one or
more Classes of Claims do not accept the Prepackaged Plan, but may choose
instead to seek an alternative means to restructure the Company, including the
options described above.
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MARKET PRICES OF THE COMMON STOCK
The Old Common Stock was historically listed and traded on the NYSE. On May
21, 1998, the Company announced the terms of the Financial Restructuring. On
May 22, 1998, the NYSE suspended trading of the Old Common Stock. The Old
Common Stock has traded in the over-the-counter market since that time. The
following table sets forth for the periods indicated the high and low trading
prices per share of Old Common Stock on the NYSE through May 21, 1998 and in
the over-the-counter market since May 22, 1998.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
1997
First Quarter.......................................... 12 1/2 9
Second Quarter......................................... 13 1/8 9 5/8
Third Quarter.......................................... 12 15/16 9 3/4
Fourth Quarter......................................... 10 1/4 5 1/8
1998
First Quarter.......................................... 7 3/4 5 7/16
Second Quarter (through May 21, 1998).................. 6 13/16 5/8
Second Quarter (from May 22, 1998)..................... .71875 .25000
Third Quarter.......................................... .75000 .26563
Fourth Quarter......................................... .63000 .25000
1999
First Quarter (through January 26, 1999)............... .37500 .25000
</TABLE>
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<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.
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<PAGE>
HISTORICAL AND PRO FORMA CAPITALIZATION
The following table sets forth the consolidated capitalization and cash and
cash equivalents of the Company at (i) September 26, 1998 on an historical
basis and on a pro forma basis giving effect to the Financial Restructuring as
if it had occurred on September 26, 1998 and (ii) December 31, 1998 on a
projected basis as if the Financial Restructuring had not occurred and on a
pro forma basis giving effect to the Financial Restructuring as if it had
occurred on December 31, 1998. During 1998, 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.
<TABLE>
<CAPTION>
As of September Projected
26, 1998 As of December 31, 1998
------------------ ---------------------------
Without With
Financial Financial
Actual Pro Forma Restructuring Restructuring
------- --------- ------------- -------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Cash............................ $ -- $ 15.0 $ -- $ --
======= ====== ======= ======
LGE Extended Payables Claims.... $ 134.0 $ -- $ 140.0 $ --
======= ====== ======= ======
Debt:
Bank Lender Claims(1)......... $ 30.0 $ 30.0 $ 30.0 $ 30.0
Amended Citibank Credit
Facility..................... 77.9 -- 13.1 --
Post-Restructuring bank credit
facility..................... -- 77.9 -- 13.1
LGE Leveraged Lease Claims.... 90.1 -- 90.1 --
LGE Reimbursement Claims...... 72.0 -- 72.0 --
LGE Demand Loan Claims........ 30.0 -- 45.0 --
Old Subordinated Debentures
(at face value).............. 103.5 -- 103.5 --
New Subordinated Debentures
(at face value).............. -- 40.0 -- 40.0
LGE New Restructured Senior
Note......................... -- 111.7 -- 118.8
------- ------ ------- ------
Total debt.................. $ 403.5 $259.6 $ 353.7 $201.9
======= ====== ======= ======
Stockholders' equity:
Old Common Stock, $1.00 par
value, 150,000,000 shares
authorized, 67,525,447 shares
issued and outstanding (2)... $ 67.6 $ -- $ 67.6 $ --
New Common Stock, $0.01 par
value, 1,000 shares
authorized, 1,000 shares
issued and outstanding(3).... -- -- -- --
Additional paid-in capital,
old.......................... 506.8 572.7 506.8 572.7
Additional paid-in capital,
new.......................... -- 200.0 -- 200.0
Retained earnings (deficit)... (849.5) (805.6) (858.9) (814.7)
Treasury stock................ (1.7) -- (1.7) --
------- ------ ------- ------
Total stockholders' equity.. $(276.8) $(32.9) $(286.2) $(42.0)
======= ====== ======= ======
</TABLE>
- --------
(1) Represents the Company's credit facility with Credit Agricole Indosuez.
(2) Excludes 3,233,800 shares of Old Common Stock issuable upon exercise of
outstanding stock options as of December 31, 1998, of which 1,746,000
shares are issuable to LGE and 1,487,800 shares are issuable to employees.
There will be no such options outstanding on a pro forma basis.
(3) New Common Stock does not show a value due to rounding in millions.
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<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, 1997, and the
nine-month periods ended September 26, 1998 and September 27, 1997. The
selected annual historical consolidated financial information presented below
has been derived from and should be read in conjunction with the Consolidated
Financial Statements of the Company and its Subsidiaries which were audited by
Arthur Andersen LLP, whose report with respect to certain of such financial
statements appears elsewhere in this Disclosure Statement. The selected
unaudited historical financial information for the nine-month periods ended
September 26, 1998 and September 27, 1997 has been derived from unaudited
consolidated financial statements prepared by the Company, which reflect all
adjustment, consisting only of normal recurring adjustments, that, in the
opinion of the Company, are necessary for a fair presentation. The following
financial information should be read in conjunction with "PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION," "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>
Nine Months Ended Years Ended December 31,
--------------------------- ------------------------------------------------
(Unaudited)
September 26, September 27,
1998 1997 1997 1996 1995(1) 1994(1) 1993(1)
------------- ------------- -------- -------- -------- -------- --------
(Dollars in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Results of operations:
Net sales............. $ 675.1 $ 825.4 $1,173.1 $1,287.9 $1,273.9 $1,469.0 $1,228.2
Pre-tax income
(loss)............... (187.8) (144.7) (300.2) (177.8) (98.5) (14.8) (93.2)
Net income (loss)..... (187.8) (143.7) (299.4) (178.0) (90.8) (14.5) (93.2)
Financial Position:
Total assets.......... $ 504.4 $ 707.3 $ 527.7 $ 765.3 $ 700.7 $ 662.4 $ 568.5
Long term debt........ 97.8 161.6 132.8 152.7 168.8 182.0 170.0
Stockholders' equity
(deficit)............ (276.8) 64.6 (85.3) 162.0 317.5 237.1 161.5
Per share of common
stock:
Net income (loss)..... $ (2.78) $(2.16) $ (4.49) $ (2.73) $ (1.85) $ (0.35) $ (2.89)
Book value (deficit).. (4.10) 0.96 (1.27) 2.44 5.00 5.19 4.50
Other Financial Data:
Ratio of losses to
fixed charges (2).... -- -- -- -- -- -- --
</TABLE>
- --------
(1) Restated to reflect the Company's change in its inventory costing method
for its picture tube inventories from LIFO to FIFO.
(2) The Company's deficiency of earnings to cover fixed charges for the nine
months ended September 26, 1998 and the years ended December 31, 1997,
1996, 1995, 1994 and 1993 was $187.8 million, $300.2 million, $177.8
million, $98.5 million, $14.8 million and $93.2 million, respectively.
101
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma condensed consolidated balance sheet as of September
26, 1998 set forth below has been prepared as if the Financial Restructuring
had been completed as of September 26, 1998. The unaudited pro forma statements
of consolidated operations for the year ended December 31, 1997 and the nine
months ended September 26, 1998 set forth below have been prepared as if the
Financial Restructuring had been completed as of January 1, 1997. Pro forma
adjustments solely reflect the pro forma effects of the Financial
Restructuring. During 1998, the Company expects to incur certain charges
associated with its Operational Restructuring that are not included herein. The
Business Plan Projections included in this Disclosure Statement include the
projected financial statement impact of the Company's Financial and Operational
Restructuring and should be read in conjunction with this pro forma financial
information. Upon consummation of the Financial Restructuring, the Company's
consolidated financial statements will continue to be accounted for on a
historical basis. "Fresh start" reporting has not been applied in the pro forma
statements, since upon consummation of the Financial Restructuring, no change
in control will occur as defined by the American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code." The pro forma financial information
should be read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the Company's Consolidated
Financial Statements and related notes thereto appearing elsewhere in this
Disclosure Statement. The pro forma financial data does not purport to
represent the Company's actual financial condition or results of operations had
the prepackaged Plan actually been completed on the date indicated, nor does it
project the Company's financial position or results of operations for any
future dates of periods.
The purpose of the Financial Restructuring is to reduce the Company's debt
service obligations, to facilitate future borrowing to fund liquidity needs and
to permit it to implement the Operational Restructuring. The Prepackaged Plan
will benefit the Company and reduce its overall debt and other obligations by
approximately $300 million by exchanging (i) $200 million of debt and other
liabilities owed to LGE for the New Common Stock; (ii) the Old Subordinated
Debentures in an aggregate principal amount of $103.5 million plus accrued
interest thereon for New Subordinated Debentures in an aggregate principal
amount of $40 million; and (iii) approximately $32.4 million of indebtedness to
LGE for the Reynosa Assets, which have an appraised value equal to such amount.
Such appraisals should be read in their entirety and state an opinion of value
as of the date of the report and are subject to assumptions and limiting
conditions stated in each report.
As a consequence of the Financial Restructuring, the Old Common Stock will be
cancelled and the holders of the Old Common Stock (including LGE and LG
Semicon) will receive no distributions and retain no property in respect of
their holdings of Old Common Stock under the Prepackaged Plan.
102
<PAGE>
ZENITH ELECTRONICS CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in millions)
<TABLE>
<CAPTION>
September 26, 1998
---------------------------------------------------
Historical Pro Forma Adjustments Pro Forma
---------- --------------------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash..................... $ -- $ 15.0 (a) $ 15.0
Receivables, net......... 143.4 -- 143.4
Inventories.............. 164.8 -- 164.8
Other.................... 14.5 (1.1)(b) 13.4
------- ------- -------
Total current assets... 322.7 13.9 336.6
Property, plant and
equipment, net.......... 155.1 (36.4)(c)(d) 118.7
Receivable from related
party................... 21.3 (21.3)(d)(g) --
Other.................... 5.3 (1.3)(b) 4.0
------- ------- -------
Total assets........... $ 504.4 $ (45.1) $ 459.3
======= ======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.......... $ 107.8 $ -- $ 107.8
Short-term debt with
related party........... 192.1 (192.1)(a)(e)(f)(g) --
Current portion of long-
term debt............... 5.8 (5.8)(h) --
Accounts payable......... 87.8 -- 87.8
Accounts payable to
related party........... 134.9 (134.0)(i) 0.9
Income taxes payable..... 0.6 -- 0.6
Other accrued expenses... 143.4 -- 143.4
------- ------- -------
Total current
liabilities........... 672.4 (331.9) 340.5
Long-term debt............. 97.8 (57.8)(h) 40.0
Long-term debt with related
party..................... -- 111.7 (c)(e)(f)(g)(j) 111.7
Other long term
liabilities............... 11.0 (11.0)(j) --
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)............... (849.5) 43.9 (b)(c)(h) (805.6)
Old treasury stock....... (1.7) 1.7 (k) --
------- ------- -------
Total stockholders'
equity.................. (276.8) 243.9 (32.9)
------- ------- -------
Total liabilities and
stockholders' equity.. $ 504.4 $ (45.1) $ 459.3
======= ======= =======
</TABLE>
103
<PAGE>
Notes to the Pro Forma Balance Sheet
(a) The Company receives $15.0 million of additional direct secured loans from
LGE. The cash is required to fund operating losses through the remainder of
the year.
<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 $0.8 $0.9
LGE Extended Payables Claims deferred charges...... 1.0 0.5 1.5
----- ---- ----
$ 1.1 $1.3 $2.4
===== ==== ====
</TABLE>
<TABLE>
<C> <S> <C> <C>
Dr. Restructuring expense....................................... $ 2.4
Cr. Other current assets...................................... $ 1.1
Cr. Other non-current assets.................................. 1.3
</TABLE>
(c) The Reynosa Assets, having a book value of $49.7 million, will be written
down to their appraised fair value of $32.4 million and 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. Asset impairment charge..................................... $17.3
Dr. Long-term debt with related party........................... 32.4
Cr. Property, plant and equipment............................. $49.7
</TABLE>
(d) Upon cancellation of the Leveraged Leases, machinery and equipment with an
appraised fair value of $13.3 million will be distributed to the Company.
<TABLE>
<C> <S> <C> <C>
Dr. Property, plant and equipment............................... $13.3
Cr. Receivable from related party............................. $13.3
</TABLE>
(e) The LGE Demand Loan Claims, which will total $45.0 million, will be settled
partially through the issuance of New Common Stock ($14.7 million) and
partially by the LGE New Restructured Senior Note ($30.3 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............................ 14.7
Cr. Long-term debt with related party......................... 30.3
</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>
104
<PAGE>
(g) The Leveraged Lease Claims ($90.1 million) will be settled partially by the
LGE New Restructured Senior Note ($82.1 million) and partially by LGE
retaining title to certain equipment related to the Leveraged Leases that
has an appraised fair value of approximately $8.0 million.
<TABLE>
<C> <S> <C> <C>
Dr. Short-term debt with related party........................ $ 90.1
Cr. Long-term debt with related party....................... $ 82.1
Cr. Receivable from related party........................... 8.0
(h) The Old Subordinated Debentures will be retired and as a result, current
portion of long-term debt ($5.8 million) and long-term debt ($97.8 million)
will be reduced. The New Subordinated Debentures ($40.0 million) will be
recorded at face value. The retirement of the Old Subordinated Debentures
will give rise to an extraordinary gain of $63.6 million.
Dr. Current portion of long-term debt......................... $ 5.8
Dr. Long-term debt............................................ 97.8
Cr. Long-term debt.......................................... $ 40.0
Cr. Extraordinary gain...................................... 63.6
(i) The LGE Extended Payable Claims ($134.0 million) will be settled through
the issuance of New Common Stock.
Dr. Accounts payable to related party......................... $134.0
Cr. New Common Stock........................................ $ --
Cr. New additional paid-in capital.......................... 134.0
(j) The LGE Technical Services Claims ($9.7 million) and the LGE Guarantee Fee
Claims ($1.3 million) will be settled partially through the issuance of New
Common Stock ($1.3 million) and partially by the LGE New Restructured
Senior Note ($9.7 million).
Dr. Other long-term liabilities............................... $ 11.0
Cr. New Common Stock........................................ $ --
Cr. New additional paid-in capital.......................... 1.3
Cr. Long-term debt with related party....................... 9.7
(k) As part of the Financial Restructuring, the Old Common Stock ($67.6
million) and the old treasury stock ($1.7 million) will be cancelled and
the net amount ($65.9 million) is transferred to old additional paid-in
capital.
Dr. Old Common Stock.......................................... $ 67.6
Cr. Old additional paid-in capital.......................... $ 65.9
Cr. Old treasury stock...................................... 1.7
</TABLE>
105
<PAGE>
ZENITH ELECTRONICS CORPORATION
PRO FORMA STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited)
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
September 26, 1998 Year Ended December 31, 1997
---------------------------------- --------------------------------
Pro Forma Pro Pro Forma Pro
Historical Adjustments Forma Historical Adjustments Forma
---------- ----------- ------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ 675.1 $ -- $ 675.1 $1,173.1 $ -- $1,173.1
------- ----- ------- -------- ----- --------
Cost, expenses and
other:
Cost of products
sold................. 621.6 (5.4)(a) 616.2 1,180.5 (9.1)(a) 1,171.4
Selling, general and
administrative....... 93.4 -- 93.4 178.3 -- 178.3
Engineering and
research............. 32.0 -- 32.0 42.9 -- 42.9
Other operating
expense (income),
net.................. (24.3) -- (24.3) 42.4 -- 42.4
Restructuring
charges.............. 107.8 (b) -- 107.8 -- -- --
------- ----- ------- -------- ----- --------
Operating income
(loss)................. (155.4) (5.4) (150.0) (271.0) 9.1 (261.9)
Gain (loss) on asset
sales, net............. 0.1 -- 0.1 (4.6) -- (4.6)
Interest expense........ (12.2) 4.3 (c) (7.9) (11.9) 4.4 (c) (7.5)
Interest expense-related
party.................. (21.0) 10.9 (c) (10.1) (13.6) 0.3 (c) (13.3)
Interest income......... 0.7 -- 0.7 0.9 -- 0.9
------- ----- ------- -------- ----- --------
Income (loss) before
income taxes........... (187.8) 20.6 (167.2) (300.2) 13.8 (286.4)
Income tax (credit)..... -- -- -- (0.8) -- (0.8)
------- ----- ------- -------- ----- --------
Net income (loss)....... $(187.8) $20.6 $(167.2) $ (299.4) $13.8 $ (285.6)
======= ===== ======= ======== ===== ========
Net income (loss) per
common share........... $ (2.78) $0.31 $ (2.47) $ (4.49) $0.21 $ (4.28)
======= ===== ======= ======== ===== ========
</TABLE>
- --------
(a) Decrease in cost of products sold reflects the elimination of lease
expense related to the cancelled Leveraged Leases.
(b) Represents costs incurred as a direct result of the Company's efforts to
achieve an operational restructuring including costs related to (i) a
$68.8 million loss on the termination of the Company's Leveraged Leases,
(ii) $32.3 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) $11.6 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),
and (v) $4.2 million of severance charges and other charges related
primarily to the Company's exiting of its analog set-top box product line.
Excluding these nonrecurring items, pro forma net loss and pro forma net
loss per share for the nine months ended September 30, 1998 would have
been $59.4 million and $0.88, respectively.
106
<PAGE>
(c) Net reduction of interest expense as a result of the Financial
Restructuring has been estimated as follows:
<TABLE>
<CAPTION>
Nine Months Year Ended
Ended 9/26/98 12/31/97
------------- ----------
<S> <C> <C>
Interest expense on the new debt:
LGE New Restructured Senior Note, at LIBOR
(adjusted quarterly) + 6.5%, (estimated herein
as 12%) (principal --$111.7 million)............ $ 10.1 $13.4
New Subordinated Debentures (principal --$40.0
million at face value).......................... 1.9 2.5
Reversal of actual interest expense:
Old Subordinated Debentures...................... (5.0) (6.9)
A portion ($30.0 million) of the Unsecured Bank
Loans........................................... (1.2) --
LGE Extended Payables............................ (12.3) (9.6)
Amortization of LGE Guarantee Fee Claims related
to various financing activities................. (4.7) (4.1)
LGE Leveraged Lease payable...................... (1.6) --
LGE Reimbursement Claims......................... (1.2) --
LGE Demand Loan Claims........................... (1.2) --
------ -----
Net reduction in interest.......................... $(15.2) $(4.7)
====== =====
</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>
$(0.9) Old Subordinated Debentures deferred charges written off. See footnote (b).
(1.5) LGE Extended Payables Claims deferred charges written off. See footnote (b).
63.6 Extraordinary gain on retirement of the Old Subordinated Debentures. See footnote (h).
(17.3) Writedown of Reynosa Assets to fair market value. See footnote (c).
------
$43.9
======
</TABLE>
107
<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 November 1998 to
present the anticipated impact of the Prepackaged Plan and the Operational
Restructuring. The Business Plan Projections assume that the Prepackaged Plan
will be implemented in accordance with its terms. Because the projections are
based on forecasts of key economic variables, including without limitation
estimated domestic market television sales, the introduction of digital
television products, and the Company's ability to implement the Operational
Restructuring as planned, the estimates and assumptions underlying the
Business Plan Projections are inherently uncertain. Though considered
reasonable by the Company as of the date hereof, the Business Plan Projections
are subject to significant business, economic and competitive uncertainties.
Accordingly, such projections, estimates and assumptions are not necessarily
indicative of current values or future performance, which may be significantly
less favorable or more favorable than as set forth.
The Business Plan Projections are only an estimate of future results of
operations, and actual results may vary considerably from the Business Plan
Projections. In addition, the uncertainties which are inherent in the Business
Plan Projections increase for later years in the projection period, due to the
increased difficulty associated with forecasting levels of economic activity
and corporate performance at more distant points in the future. Consequently,
the projected information included herein should not be regarded as a
representation by the Company, the Company's advisors or any other person that
the projected results will be achieved. The projections were not prepared with
a view towards public disclosure or compliance with Generally Accepted
Accounting Principles, the published guidelines of the Securities and Exchange
Commission or the American Institute of Certified Public Accountants regarding
projections or forecasts. Arthur Andersen LLP, the Company's independent
auditors, have neither examined nor compiled the Business Plan Projections,
and consequently do not express an opinion or any other form of assurance with
respect thereto.
From time to time the Company has evaluated its operations, performance and
productivity, including the implementation of the Operational Restructuring,
to assess and compare the Company's actual experience to the Company's
projections. Moreover, the Company monitors markets, consumer sentiment,
technological developments, political and legislative affairs and other
economic and non-economic criteria, both domestically and internationally, to
help the Company evaluate current and anticipated changes in the demand for
the Company's products and the impact, if any, on the Restructuring. As a
consequence of these undertakings by the Company, as well as other factors,
including those beyond the control of the Company, the Company, from time to
time, has made revisions to its Business Plan Projections. The Company
disclaims any obligation to further update or otherwise revise the Business
Plan Projections to reflect circumstances existing after the date thereof or
to reflect the occurrence of unanticipated events.
The projections should be read together with the other information contained
herein under the headings "The Restructuring," "Selected Financial
Information," "Pro Forma Financial Information," and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements of the Company and related notes included
elsewhere in the Disclosure Statement.
Certain statements in this Disclosure Statement are forward-looking
statements that involve known and unknown risks, uncertainties and other
factors which may cause the actual results of the Company to be materially
different from any future results expressed or implied by such forward-looking
statements. Forward-looking statements include, among others, statements
regarding the ability of the Company to successfully implement the
Restructuring and the Business Plan Projections and the projected or assumed
future operations and financial results of the Company. Factors that may cause
actual results of the Company to differ from future results expressed or
implied by forward-looking statements include, among others, the following:
general economic and business conditions, both in the United States and other
countries in which the Company sells its products and from which the Company
obtains supplies; the effect of competition in the markets served by the
108
<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.
109
<PAGE>
ZENITH ELECTRONICS CORPORATION
PROJECTED STATEMENT OF OPERATIONS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Projected for the year ended
1998 December 31,
------------------------------------------------------ ------------------------------------------
Actual
First
Through Projected Projected
Third Fourth Projected Restructuring Projected
Quarters Quarter Unadjusted Adjustments Adjusted 1999 2000 2001 2002 2003
-------- --------- ---------- ------------- --------- ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales.................. $ 675.1 $290.5 $ 965.6 $ 0.0 $ 965.6 $876.1 $889.3 $935.1 $987.6 $1,018.3
Cost of products sold.. 621.6 267.3 888.9 4.5(a) 893.4 802.1 807.6 837.7 880.7 903.0
------- ------ ------- ------ ------- ------ ------ ------ ------ --------
Gross Margin........... 53.5 23.2 76.7 (4.5) 72.2 74.0 81.7 97.4 106.9 115.3
Gross Margin %......... 7.9% 8.0% 7.9% 7.5% 8.4% 9.2% 10.4% 10.8% 11.3%
Selling, general and
administrative........ 89.8 35.3 125.1 4.3(q) 129.4 110.3(q) 100.4 99.9 99.4 98.9
Engineering and
research.............. 31.9 14.0 45.9 -- 45.9 14.5 12.0 11.4 10.8 10.3
Restructuring
expense(b)............ 75.5 -- 75.5 -- 75.5 -- -- -- -- --
Other operating expense
(income), net(c)...... (16.9) (15.2) (32.1) -- (32.1) (34.2) (34.8) (43.6) (56.5) (55.2)
------- ------ ------- ------ ------- ------ ------ ------ ------ --------
Operating income
(loss)................ (126.8) (10.9) (137.7) (8.8) (146.5) (16.7) 4.1 29.7 53.2 61.3
Gain (loss) on asset
sales................. (0.2) 15.9 15.7 -- 15.7 6.8 -- -- -- --
Finance guarantee fee
charge(d)............. (32.3) -- (32.3) (1.8) (34.1) -- -- -- -- --
Interest expense, net.. (28.5) (14.5) (43.0) -- (43.0) (23.2) (25.7) (27.1) (27.4) (24.2)
------- ------ ------- ------ ------- ------ ------ ------ ------ --------
Income (loss) before
reorganization items.. (187.8) (9.5) (197.3) (10.6) (207.9) (33.1) (21.6) 2.6 25.8 37.1
Reorganization
items(e).............. -- -- -- 139.1 139.1 -- -- -- -- --
Taxes on income/
(income tax benefit).. -- -- -- -- -- -- -- -- -- --
------- ------ ------- ------ ------- ------ ------ ------ ------ --------
Net earnings (loss)
before extraordinary
items................. (187.8) (9.5) (197.3) (149.7) (347.0) (33.1) (21.6) 2.6 25.8 37.1
Extraordinary gain on
debt retirement(f).... -- -- -- 63.6 63.6 -- -- -- -- --
------- ------ ------- ------ ------- ------ ------ ------ ------ --------
Net earnings (loss).... $(187.8) $ (9.5) $(197.3) $(86.1) $(283.4) $(33.1) $(21.6) $ 2.6 $ 25.8 $ 37.1
======= ====== ======= ====== ======= ====== ====== ====== ====== ========
Memo:
Operating income
(loss)............... $(126.8) $(10.9) $(137.7) $ (8.8) $(146.5) $(16.7) $ 4.1 $ 29.7 $ 53.2 $ 61.3
Restructuring
expense(b)........... 75.5 -- 75.5 -- 75.5 -- -- -- -- --
Depreciation and
Amortization......... 23.8 7.5 31.3 4.5 35.8 6.1 3.2 3.6 3.9 4.2
------- ------ ------- ------ ------- ------ ------ ------ ------ --------
EBITDA(g)............. $ (27.5) $ (3.4) $ (30.9) $ (4.3) $ (35.2) $(10.6) $ 7.3 $ 33.3 $ 57.1 $ 65.5
======= ====== ======= ====== ======= ====== ====== ====== ====== ========
</TABLE>
110
<PAGE>
ZENITH ELECTRONICS CORPORATION
PROJECTED BALANCE SHEETS
(Unaudited)
(Dollars In Millions)
<TABLE>
<CAPTION>
1998 Projected as of December 31,
-------------------------------------------------- -------------------------------------------
Projected
Actual Unadjusted Projected Projected
September December Restructuring Adjusted
26 31 Adjustments December 31 1999 2000 2001 2002 2003
--------- ---------- ------------- ----------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash.................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Accounts receivable..... 143.4 182.2 -- 182.2 155.1 148.5 143.3 144.1 148.3
Inventory............... 164.8 82.6 (4.5)(h) 78.1 58.8 60.0 62.2 65.4 67.1
Other current assets.... 14.5 9.0 -- 9.0 16.9 11.2 11.5 11.5 11.5
------- ------- ------- ------- ------- ------- ------- ------- -------
Total current assets.... 322.7 273.8 (4.5) 269.3 230.8 219.7 217.0 221.0 226.9
Plant, property and
equipment, net......... 155.1 101.9 (45.2)(j) 56.7 14.9 16.6 18.0 19.1 19.9
Plant, property and
equipment,
environmental reserve.. -- -- (23.9)(k) (23.9) -- -- -- -- --
Other assets............ 5.3 6.8 (1.8)(l) 5.0 2.7 2.3 3.9 2.9 1.9
Other receivable........ 21.3 21.3 (i) (21.3) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total assets............ $ 504.4 $ 403.8 $ (96.7) $ 307.1 $ 248.4 $ 238.6 $ 238.9 $ 243.0 $ 248.7
======= ======= ======= ======= ======= ======= ======= ======= =======
LIABILITIES AND DEFICIT:
Short-term debt......... $ 305.8 $ 256.0 $(181.6) $ 74.4 $ 157.8 $ 157.7 $ 159.5 $ 138.1 $ 107.5
Accounts payable........ 88.7 48.1 -- 48.1 57.0 74.1 76.9 80.8 82.9
Accrued liabilities..... 144.0 136.2 -- 136.2 98.8 94.2 82.8 82.8 82.8
Restructuring........... -- -- 57.9 (m) 57.9 2.4 0.0 0.0 0.0 0.0
Long-term debt.......... 97.8 97.8 61.0 158.8 111.5 120.4 130.5 130.5 130.5
Other liabilities....... 11.0 12.1 (7.9)(n) 4.2 26.5 19.4 13.8 9.6 6.8
LGE Extended Payables
Claims................. 134.0 140.0 (140.0) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total liabilities....... 781.3 690.1 (210.6) 479.6 454.0 465.8 463.5 441.8 410.4
------- ------- ------- ------- ------- ------- ------- ------- -------
Stockholders' Equity.... (276.9) (286.4) 113.9 (o) (172.5) (205.6) (227.2) (224.6) (198.8) (161.7)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total liabilities and
stockholders' equity... $ 504.4 $ 403.8 $ (96.7) $ 307.1 $ 248.4 $ 238.6 $ 238.9 $ 243.0 $ 248.7
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
111
<PAGE>
ZENITH ELECTRONICS CORPORATION
PROJECTED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
1998 Projected as of December 31,
----------------------------- --------------------------------------
Actual
First
Through Projected
Third Fourth Full Year
Quarters Quarter Projected 1999 2000 2001 2002 2003
-------- --------- --------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDA.................. $ (27.5) $ (3.4) $ (30.9) $(10.6) $ 7.3 $ 33.3 $ 57.1 $ 65.5
======= ====== ======= ====== ====== ====== ====== ======
Working capital changes:
Accounts receivable.... (11.0) (38.8) (49.8) 27.1 6.6 5.2 (0.8) (4.2)
Inventory.............. 0.7 82.2 82.9 19.3 (1.2) (2.2) (3.2) (1.7)
Accounts payable....... (4.2) (40.6) (44.8) 8.9 17.1 2.8 3.9 2.0
Accrued liabilities.... 1.6 (7.8) (6.2) (37.4) (4.6) (11.4) -- --
Others, net............ 8.5 5.1 13.6 (7.2) (0.9) (7.5) (3.2) (1.8)
------- ------ ------- ------ ------ ------ ------ ------
Cash flow from
operations before
restructuring charges.. (31.9) (3.3) (35.2) 0.1 24.3 20.2 53.8 59.8
Restructuring payments.. (10.5) (28.2) (38.7) (55.5) (2.4) -- -- --
Loss of Leveraged
Leases................. (68.8) -- (68.8) -- -- -- -- --
Other receivable, asset
interests.............. (21.3) -- (21.3) -- -- -- -- --
Capital expenditures.... (6.7) (3.0) (9.7) (5.4) (5.0) (5.0) (5.0) (5.0)
Proceeds from asset
sales, net............. 5.7 64.6 70.3 47.9 -- -- -- --
------- ------ ------- ------ ------ ------ ------ ------
Free cash flow from
operations............. (133.5) 30.1 (103.4) (12.9) 16.9 15.2 48.8 54.8
Long-term debt
(service)/borrowing.... (35.0) -- (35.0) (59.7) -- -- -- --
LGE Extended Payables
Claims, net............ (10.3) 6.0 (4.3) -- -- -- -- --
Interest................ (28.5) (14.5) (43.0) (10.8) (16.7) (17.1) (27.4) (24.2)
Change in cash
position............... -- -- -- -- -- -- -- --
------- ------ ------- ------ ------ ------ ------ ------
Short-term debt
service/(borrowing).... $(207.3) $ 21.6 $(185.7) $(83.4) $ 0.2 $ (1.9) $ 21.4 $ 30.6
======= ====== ======= ====== ====== ====== ====== ======
</TABLE>
112
<PAGE>
ZENITH ELECTRONICS CORPORATION
PROJECTED DEBT STRUCTURE
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
1998 Projected as of December 31,
--------------------------------------------------- ----------------------------------
Projected Projected Projected
Actual Unadjusted Reorganization Adjusted
September 26 December 31 Adjustments December 31 1999 2000 2001 2002 2003
------------ ----------- -------------- ----------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term debt:
Secured Tranche A
(working capital)...... $ 77.9 $ 13.1 $ 31.3 $ 44.4 $ 90.9 $ 92.5 $ 77.9 $ 80.0 $ 77.5
Bank Lender Claims...... 30.0 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 90.1 (90.1) -- -- -- -- -- --
LGE Demand Loan Claims.. 30.0 45.0 (45.0) -- -- -- -- -- --
LGE New Credit Support.. -- -- 0.0 0.0 36.9 35.2 51.6 28.1 --
------ ------ ------- ------ ------ ------ ------ ------ ------
300.0 250.2 (175.8) 74.4 157.8 157.7 159.5 138.1 107.5
Current portion of
long-term debt:
Old Subordinated
Debentures............. 5.8 5.8 (5.8) -- -- -- -- -- --
------ ------ ------- ------ ------ ------ ------ ------ ------
Total Short-term debt... $305.8 $255.9 $(181.6) $ 74.4 $157.8 $157.7 $159.5 $138.1 $107.5
====== ====== ======= ====== ====== ====== ====== ====== ======
Long-term debt:
Old Subordinated
Debentures............. 97.8 97.8 (97.8) -- -- -- -- -- --
New Subordinated
Debentures............. -- -- 40.0 40.0 40.0 40.0 40.0 40.0 40.0
LGE New Restructured
Senior Note(r)......... -- -- 118.8 118.8 71.5 80.4 90.5 90.5 90.5
------ ------ ------- ------ ------ ------ ------ ------ ------
Total Long-term debt.... 97.8 97.8 61.0 158.8 111.5 120.4 130.5 130.5 130.5
====== ====== ======= ====== ====== ====== ====== ====== ======
Total debt.............. $403.6 $353.8 $(120.6) $233.2 $269.3 $278.1 $290.0 $268.6 $238.0
====== ====== ======= ====== ====== ====== ====== ====== ======
LGE Extended Payables
Claims................. $134.0 $140.0 $(140.0) $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
113
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO THE PROJECTED FINANCIAL STATEMENTS
(Dollars in Millions)
For presentation purposes, it is assumed that the Company files and emerges
from chapter 11 in the fourth quarter of 1998, thus completing the Financial
Restructuring of the Company. All costs presented in the restructuring columns
of the statements are assumed to take place during the Reorganization Period
(the fourth quarter of 1998). However not all of the costs presented in that
column relate directly to the Financial Restructuring, rather some costs relate
to the Operational Restructuring which coincides with the timing of the
Financial Restructuring.
(a) Cost of products sold increase represents the estimated provision required
to write-down inventories of raw materials and work-in-process to net
realizable value upon shutdown of the manufacturing facilities.
(b) Restructuring expenses are as follows:
<TABLE>
<S> <C>
Professional Fees(i)................................................ $10.8
Melrose Park shift reduction(ii).................................... 1.4
Exit from Analog Set-Top Boxes...................................... 3.6
Loss on Leveraged Lease termination(iii)............................ 68.8
Deferred gain from 1997 sale of Leveraged Lease assets.............. (9.1)
-----
Total............................................................... $75.5
=====
</TABLE>
(i) Professional fees for advisors and consultants to assist in
formulating and implementing the Prepackaged Plan.
(ii) Various costs incurred to implement the Operational Restructuring
including staff reductions, facility closures, and product line
eliminations.
(iii) The loss on the termination of the Leveraged Leases is measured
as the difference between the liability to LGE, of $90.1, 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 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.
These costs are classified as Restructuring expenses 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 other miscellaneous items in amounts per
year as follows:
<TABLE>
<CAPTION>
Royalty
Income Other
----------- Income/
VSB Other (Expense)
----- ----- ---------
<S> <C> <C> <C>
1998................................................ $ -- $28.6 $ 3.5
1999................................................ 2.2 29.7 2.3
2000................................................ 6.1 30.2 (1.5)
2001................................................ 14.3 30.8 (1.5)
2002................................................ 26.6 31.4 (1.5)
2003................................................ 35.5 21.2 (1.5)
</TABLE>
Royalty amounts represent estimated gross revenues. Accordingly, the
foregoing does not include any adjustments 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. These are non-cash amortization expenses.
114
<PAGE>
(e) Reorganization items of $139.1 are as follows:
<TABLE>
<S> <C>
Reorganization expenses (i):
Severance......................................................... $ 48.6
Legal for plant closures.......................................... 2.4
Outplacement...................................................... 1.1
Headquarters relocation expenses.................................. 1.7
Plant closure/exit costs.......................................... 17.7
Purchase contracts................................................ 1.1
Professional fees................................................. 9.4
Exit from analog set-top boxes.................................... 2.9
Total Reorganization expenses...................................... 84.9
Asset impairment (ii).............................................. 54.2
------
Total.............................................................. $139.1
======
</TABLE>
(i) estimated Reorganization expenses related to executing the
Prepackaged Plan and Business Plan Projections. The timing and
amount of these charges could vary significantly from the estimates
presented depending on the actual implementation of the Business
Plan Projections and the timing of the bankruptcy proceedings.
(ii) the estimated impairment, of $54.2, on property, plant and
equipment that occurs at the confirmation of the Prepackaged Plan.
It is measured as the difference between the book value of assets
and the estimated (by appraisal) fair value in an orderly
liquidation, including estimated environmental obligations.
(f) Extraordinary Gain represents the gain realized on the retirement of the
Old Subordinated Debentures at a discount from face value:
<TABLE>
<S> <C>
Old Subordinated Debentures before restructuring (Current
portion)........................................................ $ 5.8
Old Subordinated Debentures before restructuring (Long Term
portion)........................................................ 97.8
less: New Subordinated Debentures (at face value)................ (40.0)
-----
Gain........................................................... $63.6
=====
</TABLE>
(g) EBITDA represents operating income (loss) including royalties before
interest expense, income taxes, depreciation and amortization, and
restructuring expenses. EBITDA is not intended to represent cash flow from
operations or net income as defined by generally accepted accounting
principles and should not be considered as a measure of liquidity or an
alternative to, or more meaningful than, operating income or operating cash
flow as an indication of the Company's operating performance. EBITDA is
included herein because management believes that certain investors find it
a useful tool for measuring the Company's ability to service its debt.
(h) Inventory decrease represents the estimated provision required to write-
down inventories of raw materials and work-in-process to net realizable
value upon shutdown of the manufacturing facilities.
(i) Other Receivable, created at the third quarter termination of the Leveraged
Lease, represents the Company's rights, under the Restructuring Agreements.
The asset is stated at the appraised value (see also footnotes (b) and
(j)).
(j) Property, Plant and Equipment decreases are due to transferring a portion
of the Company's Reynosa Assets to LGE at an independently appraised value,
receiving the Leveraged Lease assets from LGE, transferring a portion of
the assets previously under the Leveraged Lease to LGE, and a charge for an
impairment of the assets. The 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 and the equipment has an appraised value of $14.4.
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
Leases.......................................................... 21.3
Reynosa Leveraged Lease assets transferred to LGE................ (8.0)
Asset Impairment per appraisal................................... (26.1)
------
Total........................................................... $(45.2)
======
</TABLE>
115
<PAGE>
(k) Property, plant and equipment Environmental Reserves are from the
additional asset impairment charge attributable to estimated environmental
obligations associated with manufacturing facilities still held by the
Company. After the disposal of the facilities, as the Company will retain
the liability for remediation, the Reserve will be reclassified to Other
Liabilities (see footnote (e)(ii) for further information).
(l) Other Assets decrease represents the write-off of the Long Term portion of
unamortized LGE guarantee fees Claims on the LGE Extended Payables Claims.
It is assumed that the unamortized LGE guarantee fees will be expensed at
the time of the recapitalization of the Company and the termination of the
financing arrangements to which these costs relate. These are non-cash
amortization expenses.
(m) The Restructuring liability represents the accrued cash portion of
estimated Reorganization expenses referred to above in Note (e)(i), less
payments which were made in conjunction with executing the Prepackaged
Plan.
<TABLE>
<S> <C>
Estimated cash reorganization charges.......................... $ 84.9
Estimated cash payments made coincident with the Prepackaged
Plan.......................................................... (27.0)
------
Total......................................................... $(57.9)
======
</TABLE>
(n) Other Liabilities changes reflect the following:
<TABLE>
<S> <C>
LGE Technical Service Claims..................................... $(10.5)
LGE Guarantee Fee Claims......................................... (1.6)
Reclassification of Environmental Obligations (see footnote(k)).. 4.2
------
Total........................................................... $ (7.9)
======
</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)
Write-off of excess obsolete inventory (see footnote (h))....... $ (4.5)
Retention Plan expenses (see footnote (q))..................... (4.3)
Accelerated write-off of unamortized deferred charges (see
footnote (d))................................................. (1.8)
Reorganization items (see footnote (e))........................ (139.1)
Extraordinary gain on debt retirement (see footnote (f))....... 63.6
-------
Total of income statement effects.............................. $ (86.1)
-------
Total........................................................ $ 113.9
=======
</TABLE>
(p) Assumes that the Company is able to refinance their current Amended
Citibank Credit Facility with new facilities titled Secured Tranche A
(Working Capital). The projections of borrowing availability are based on a
current proposed financing package offered by a potential lender.
(q) Selling, general and administrative expenses in 1998 include retention plan
payments of $4.3 for corporate and manufacturing employees. Selling,
general and administrative expenses in 1999 include $1.8 in retention plan
expenses.
(r) The LGE New Restructured Senior Note of $118.8 represents the Company's
obligations under the following LGE Claims:
<TABLE>
<S> <C>
LGE Leveraged Lease Claims...................................... $ 90.1
Less: Leveraged Lease equipment retained by LGE (at appraised
value)......................................................... (8.0)
Less: Reynosa Assets transferred by the Company to LGE (at
appraised value--see note (j))................................. (32.4)
LGE Demand Loan Claims.......................................... 36.6
LGE Technical Services Claims................................... 10.5
LGE Reimbursement Claims........................................ 22.0
------
$118.8
======
</TABLE>
116
<PAGE>
Assumptions Underlying all Business Plan Projections
In 1998, the Company intends to operate as an integrated manufacturer and
distributor of consumer electronics products. In 1999 and for all years beyond
1999, the Company intends to operate as a sales, distribution and technology
company. The Business Plan Projections assume that in 1998 and for significant
periods relating to the 1998 model year production requirements (which is a
12-month period beginning April 1, 1998), the Company will operate its own
manufacturing facilities in the United States and Mexico for the production of
significant portions of its product line. The Company has historically
outsourced some of its product lines and, for the 1998 model year, that
outsourcing includes VCRs, DVDs, small screen televisions and certain
accessories. In 1999 and for the 1999 model year and going forward, the
Company intends to outsource all or substantially all of its product lines.
The Business Plan Projections assume that the Company will obtain the balance
of most 1998 model year requirements and some portion of its future
outsourcing requirements from the Reynosa Assets following Confirmation and
the transfer of the Reynosa Assets to LGE.
The Business Plan Projections also include certain assumptions concerning
the outsourcing initiatives of the Company under the Operational
Restructuring. The Business Plan Projections assume that the Company will be
successful in locating sources for all or substantially all of its intended
product lines at prices and with resulting margins to the Company as reflected
in the Business Plan Projections.
The Business Plan Projections include projected income, expenses and cash
requirements of the Company's consumer electronics core businesses for all
periods covered by the Business Plan Projections. The Business Plan
Projections do not include income, expenses or cash requirements of NWS after
1998, as the plan assumed that all or a portion of those business lines will
be sold at 1998 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 delay in the sale of NWS will result in increased costs for
continuing NWS operations and some increased revenues from sales of NWS
products. The Company believes that the costs of operating NWS will be
approximately offset by revenues generated by NWS, although there can be no
assurances that costs will not exceed revenues. The delay in the sale of NWS
will also delay receipt of any NWS sale proceeds and is expected to increase
borrowing requirements for 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, or that
the current contracts will remain in force for the term of the Business Plan
Projections. The Business Plan Projections incorporate the proceeds of the
sale of manufacturing facilities and also includes certain expenses associated
with such sales, including environmental clean-up costs, employee severance
and relocation expenses and brokerage fees associated with the sale of assets
or operating businesses. The Business Plan Projections contemplate that the
Company will outsource all or substantially all products and exit
manufacturing during the first quarter of 1999, and that all manufacturing
facilities will be transferred or sold to third parties by the third quarter
of 1999. Equipment leases, including the Leveraged Leases, are expected to be
terminated and certain charges associated with those terminations will be made
against the Company's capital structure.
The Business Plan Projections assumed that consummation of the Financial
Restructuring would occur on December 31, 1998. This delay in consummation of
the Financial Restructuring will affect the Business Plan Projections
primarily by (a) increasing carrying costs for the Reynosa Assets, which were
assumed to be transferred to LGE in 1998, (b) increasing the interest expense
for 1999, by approximately $10.1 million, related to higher pre-restructuring
debt levels for a portion of the year, (c) delaying the recognition of $63.6
million in extraordinary gain on debt retirement related to the Old
Subordinated Debentures, and (d) delaying the recognition of $5.0 million of
restructuring expenses, primarily legal and advisory fees.
Financing Assumptions
The Business Plan incorporates certain assumptions about the terms,
conditions and available borrowings under both the DIP and post-restructuring
financing arrangements. The Company assumes that it would be able to obtain a
DIP facility of not less than $125 million, secured by the Company's assets,
including inventory,
117
<PAGE>
receivables, fixed assets and intellectual property, at an assumed per annum
interest rate of 9.5% and margins for similar facilities offered to other
debtors. The Company assumes that it will be able to obtain post-restructuring
financing in an amount of not less than $100 million on terms satisfactory to
the Company, at an assumed per annum interest rate of 8.5%. 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 Subordinated Debentures will be as described herein.
Working Capital Assumptions
The Business Plan Projections assume certain inventory, accounts payable and
accounts receivable balances applicable to a typical sales and distribution
company, which are different from the historical performance of the Company.
The Business Plan Projections assume accounts receivable days outstanding
will be reduced from approximately 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 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 $9.7 million in 1998
and decrease to $5 million per year from 1999 through 2002 while depreciation
decreases from $31.3 million in 1998 to approximately $4.2 million in 2002. 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
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 1998 incorporate the product plan and
expected sales and margins for the current model year. The Business Plan
Projections for 1999 and 2000 reflect detailed product plans that have been
developed by the Company for those years, taking into consideration certain
product lines and product features of the 1998 model year and currently
available products and features not included in the Company's 1998 product line
which the Company intends to add to its lines in the future. For Business Plan
Projections in
118
<PAGE>
the years of 2001 and following, the Company has relied on industry forecasts
compiled by the Electronics Industry Association concerning demand for screen
size, features and products, and for overall market demand during those
periods. The Business Plan Projections for those years assume that the
Company's market share will remain constant with the Company's historical
market share, except that the Business Plan Projections contemplate that the
Company will focus its efforts in larger screen sizes and in digital products.
The Business Plan Projections assume that the Company will be able to achieve
at least a 4% to 7% share of the digital product market in the later years of
the projections. This digital market share would be lower than the Company's
current or projected market share in non-digital products.
Cost of Goods Assumptions
The Business Plan Projections assume that the Company will be able to secure
outsourced products in all or substantially all of its product lines and that
those products will be purchased by the Company at certain price ranges which
were derived from the Company's standard cost structure currently in use and
certain industry differentials currently known to exist relating to picture
tube prices. The Business Plan Projections also assume certain profit margins
will be obtainable by the Company over its costs of goods. The Business Plan
Projections assume that the Company will be able to obtain annual cost
improvements from sourced products from materials and manufacturing savings
that reflect historical cost improvements in the industry. The Company has
assumed that, with the exception of its Melrose Park operations, its historical
costs and cost improvements have been representative of overall industry
trends. The Company believes that improvements in the business can be obtained
through annual material cost savings and design-to-cost savings. As a result of
applying the cost of goods assumptions listed above, the Company projects the
following gross margins:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003
---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Gross Margin............................. 7.5% 8.4% 9.2% 10.4% 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 "green field" methodology. That is,
putting aside its current structure and operating methods, the Company has
developed a structure which it believes reflects what an industry leader in
consumer electronics would require in terms of head count, facilities, capital
expenditures and tooling, assuming a distribution and technology operation
without manufacturing. The Business Plan Projections reflect overhead, general
and administrative and other costs in accordance with the model developed.
Tax Assumptions
It is assumed that New Zenith will be able to utilize NOLs thus shielding
income from taxation for the projection period. As a result no income tax
liability is presented. Additionally the Company may or may not have enough
state tax NOLs available to shelter state income taxes.
Assumptions Concerning VSB
The assumptions relating to 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
119
<PAGE>
Consulting/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;
. 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
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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
$80,000 for their initial appraisals of the Company's real estate assets, and
$7,500 relating to additional work performed subsequent to the delivery of
their initial appraisals through December 31, 1998.
The Company engaged the services of Greenwich Industrial Services, a
subsidiary of Greenwich Financial Group, to provide appraisals of the
Company's machinery and equipment. Greenwich Industrial Services 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 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 $102,800 through December 31, 1998.
The Company selected Bermudez-Binswanger, the Mexican affiliate of the
Chesterton Blumenauer Binswanger as its real estate advisor and broker in
Mexico for the disposition of its Mexican properties after soliciting
recommendations from other U.S. companies with Mexican real estate interests
and after interviewing a number of real estate brokers and advisors who
specialize or have experience with maquila manufacturing operations. Bermudez-
Binswanger is an internationally recognized real estate firm with technical
knowledge and market experience in the Mexican real estate market in general
and the maquila real estate areas in particular. Through the association with
Chesterton Blumenauer Binswanger, the Mexican brokerage firm has access to
offices and potential buyers in 50 countries. Bermudez-Binswanger had
previously been retained by the Company in a prior year for the successful
sale of a Mexican manufacturing property. Bermudez-Binswanger was not
specifically compensated for its summary and value estimate concerning the
Company's Mexican real estate, but may be entitled to a commission on the sale
of the Company's Mexican properties in accordance with the terms of its
brokerage agreement with the Company.
Based on the appraisals described above, the Business Plan Projections
include proceeds, net of selling costs, from the sale of assets equal to $70.3
million in 1998 and $47.9 million in 1999. The Business Plan Projections also
assume that cash realized from the sale of assets will be used to repay credit
facilities then outstanding, as required by the anticipated terms of those
facilities.
In its assumptions concerning environmental costs associated with the
disposition of its manufacturing facilities and other real estate, the Company
retained environmental professionals to evaluate historical site use and to
estimate clean-up costs and reserves likely to be associated with such
disposition.
Assumptions Concerning Certain Other Areas of the Company's Business
The Business Plan Projections assume that the Company's relative share of
the total consumer electronics market will not vary significantly from its
present market share during the term of the Business Plan Projections. As a
result, the Business Plan Projections also assume that the Company's service
business will not grow significantly during the terms of the Business Plan
Projections. The Business Plan Projections do assume that the Company will be
able to expand its current parts and accessories business significantly.
Historically, this segment of the Company's business has been underutilized.
The Business Plan Projections assume that the Company will continue to achieve
above-average margins (when compared to its television lines) in its parts and
accessories businesses.
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ACCOUNTING TREATMENT
The Restructuring will be accounted for in accordance with the requirements
of AICPA Statement of Position 90-7 "Financial Reporting By Entities in
Reorganization Under the Bankruptcy Code." Based upon the provisions of the
SOP, New Zenith will not qualify for "fresh start" reporting because a
substantive and non-temporary change in control in the Company will not occur.
Assets will be recorded at their historical cost prior to the Restructuring.
Liabilities compromised by the Prepackaged Plan will be adjusted to the present
values of amounts to be paid, determined at appropriate current interest rates.
Forgiveness of debt by unrelated third parties will be reported as an
extraordinary item in the Company's results of operations. Forgiveness of debt
due to related parties will be accounted for as a capital contribution.
LIQUIDATION ANALYSIS
General
If the Prepackaged Plan is not confirmed, and the Prepackaged Chapter 11 Case
is converted to a case under chapter 7 of the Bankruptcy Code, a trustee would
be elected to liquidate the Company's assets. The proceeds of the liquidation
would be distributed to the respective holders of Allowed Claims against the
Company in accordance with the priorities established by the Bankruptcy Code.
The chapter 7 trustee would be entitled to a percentage fee for 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 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
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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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STATEMENT OF ASSETS AND LIQUIDATION PROCEEDS:
January 1, 1999
(Dollars in millions)
<TABLE>
<CAPTION>
Estimated
Recovery
Estimated as a Estimated
Book Value as of Percentage Liquidation
Note January 1, 1999 of Book Value
Reference (Unaudited) Value (Unaudited)
------------ ---------------- ---------- -----------
<S> <C> <C> <C> <C>
Cash..................... $ 0 0% $ 0
Accounts Receivable...... (p) 158.3 65 102.9
Inventories.............. (e)
Finished Good.......... 43.1 75 32.3
Less Warranty........ (0.4)
Net Finished Goods..... 31.9
Work in Process........ 10.5 5 0.5
Raw Materials.......... 24.4 20 4.9
Fixed Assets............. (f)(g) n/a 36.7
Brand and Technology
Assets.................. (a)(b)(c)(d) n/a 92.3
-------
Total Assets............. 269.3
Less Costs Associated
with Liquidation:
Professional Fees...... (h) (24.0)
Corporate Overhead..... (e) (24.8)
Trustee Fees........... (i) (4.7)
Brokerage Fees......... (j) (10.1)
Wind Down Costs........ (k) (5.6)
WARN Act............... (l) (21.0)
Environmental.......... (o) (23.8)
-------
Total Costs Associated
with Liquidation........ (114.0)
Aggregate net proceeds... 155.3
Net Estimated Liquidation
Proceeds Available for
Distribution............ (q) 116.7
</TABLE>
Calculation of Net Proceeds Available to Holders of Claims
under Prepackaged Plan and in a Liquidation Under a Hypothetical Chapter 7
(Dollars in millions)
<TABLE>
<CAPTION>
Hypothetical
Chapter 7 Liquidation
---------------------
Claim %
Amount Distribution Recovery
------ ------------ --------
<S> <C> <C> <C>
Net Estimated Liquidation Proceeds Available for
Distribution.................................... $116.7
Citibank Secured Claims (r)...................... $26.9 26.9 100.0%
LGE Secured Claims(m)............................ 160.6 89.8 55.9
Other Priority Claims............................ -- $0.0 0.0
General Unsecured Claims......................... -- $0.0 0.0
LGE Unsecured Claims(n).......................... 228.6 $0.0 0.0
Old Subordinated Debenture Claims................ 103.5 $0.0 0.0
Equity Interests................................. n/a $0.0 0.0
</TABLE>
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The accompanying notes are an integral part of this liquidation analysis.
Unless otherwise stated, estimates were made by the Company's management. The
aggregate amount of Claims in certain Classes projected to receive no recovery
in the event of a chapter 7 liquidation are not expected due to the potentially
material amount of contingent and unliquidated Claims in such Classes.
(a) VSB Technology (tax-affected): VSB value discounted to January 1, 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 Research, Inc. (for domestic
markets) and a report prepared by Gartner Consulting/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 January 1, 1999. Assumes liquidation will occur
through the sale of Zenith's trademark and distribution network to a
strategic buyer who would absorb Zenith's market share at an assumed EBIT
(earnings before interest and taxes) 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 January 1, 1999 at a
rate of 25.0%, assumes a sale to a third party and utilizes Business Plan
Projections of tuner patent cash flow, net of associated cost and expenses.
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 January 1, 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 January 1, 1999.
(f) Real Estate:
. Domestic real estate at liquidation values provided by Insignia/ESG.
. Mexican gross real estate value at liquidation values provided by
Bermudez-Binswanger in a summary and value estimate of the Company's
Mexican real estate that was prepared prior to
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Binswanger/Bermudez's engagement by Zenith as real estate broker
concerning the Mexican properties. Such summary and estimate is not an
appraisal, nor was it prepared in accordance with MAI standards.
. Mexican real estate and Mexican furniture, fixtures and equipment are
presented net of $38.8 million in Mexican severance, benefit and other
priority claims. Assumes reduction in Mexican real estate first, which
nets liquidation value of Mexican real estate to $0.0 million.
(g) Furniture, Fixture and Equipment:
. Domestic furniture, fixture and equipment at liquidation values provided
by Greenwich Industrial Services.
. Mexican furniture, fixture and equipment at liquidation values provided
by Greenwich Industrial Services.
. Gross value of Mexican furniture, fixture and equipment of $28.7 million
has been reduced to $18.9 million by the balance of the Mexican
severance, benefit and other priority claims that were not met by the
value of the Mexican real estate.
. Mexican furniture, fixture and equipment includes the liquidation value
of certain leveraged lease equipment per Greenwich Industrial Services.
(h) Professional Fees: Assumes a 4-year liquidation. Assumes fees of $2.0
million each month the first 6 months, $1.5 million for each of the next
six months, $1.2 million for the entire third year, and $0.6 million for
the fourth and final year.
(i) Trustee Fees: Assumed at 3.0% of net liquidation proceeds.
(j) Brokerage Fees: Assumes 6.0% of gross asset recovery, plus $38.8 million
Mexican claim addback adjustment, but excludes Accounts Receivable and
Inventory.
(k) Wind Down Costs: Comprised of real estate taxes plus on site security and
wind down teams at each location during an assumed 12 month disposition
period.
(l) WARN Act: Estimated by the Company based on headcount and assumed
compensation levels.
(m) The LGE Secured Claims are as follows:
<TABLE>
<CAPTION>
Claim Amount
----- --------------
<S> <C>
LGE Reimbursement Claims.................................. $ 72.0 million
LGE Demand Loan Claims.................................... $ 45.0 million
LGE Payment of Bank Lender Claims......................... $ 30.0 million
Secured portion of LGE Leveraged Lease Claims
(representing the estimated liquidation value of the
equipment under the Leveraged Leases) per Greenwich
Industrial Services...................................... $ 13.6 million
</TABLE>
(n) The LGE Unsecured Claims are as follows:
<TABLE>
<CAPTION>
Claim Amount
----- --------------
<S> <C>
LGE Extended Payables Claims.............................. $140.0 million
Deficiency portion of LGE Leveraged Leases Claims......... $ 76.5 million
LGE Guarantee Fee Claims.................................. $ 1.6 million
LGE Technical Services Claims............................. $ 10.5 million
</TABLE>
(o) Environmental: Estimated by the Company.
(p) Accounts Receivable: The balance of Accounts Receivable at December 31,
1998 projected by the Company is adjusted to exclude receivables on account
of the sale of certain equipment.
(q) A three year 10% discount rate is applied to the aggregate net liquidation
proceeds to reflect the projected 2 to 4 year hypothetical liquidation
period of the Company.
(r) The Citibank Secured Claim amount is comprised of the debt balance
projected by the Company at December 31, 1998 prior to restructuring costs,
plus assumed fourth quarter 1998 cash restructuring costs anticipated to be
incurred in a liquidation scenario.
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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 April 30,
1999. In addition, the Company is required to make repayments: (i) to the
extent of the excess of borrowings over the borrowing base and (ii) with the
proceeds of any sale of capital stock (other than upon exercise of certain
options) or assets (other than ordinary course sales of inventory and the sale
of undeveloped real estate it owns in Woodridge, Illinois).
At the Company's option, the interest rates applicable to the loans under the
Amended Citibank Credit Facility will be floating rate of interest measured by
reference to one or more of (i) the Base Rate (as defined in the Amended
Citibank Credit Facility) plus 2.0% per annum or (ii) the relevant Eurodollar
Rate (as defined in the Amended Citibank Credit Facility) plus 3.25%.
The obligations of the Company under the Amended Citibank Credit Facility are
secured by certain of the Company's assets, including its inventory accounts,
accounts receivable, deposit accounts, trademark property, tuning patents,
stock in subsidiaries and domestic properties, plant and equipment.
The Amended Citibank Credit Facility requires the Company to meet financial
tests regarding the amount of tuning patent royalties and the average
outstanding payables to LGE for products purchased in the ordinary course. The
Amended Citibank Credit Facility also contains covenants which, among other
things, restrict the ability of the Company and its Subsidiaries to incur
indebtedness, issue guarantees, incur liens, declare dividends or pay
management or consulting fees to affiliates, make loans and investments, engage
in transactions with affiliates, liquidate, sell assets or engage in mergers.
The Amended Citibank Credit Facility also requires the Company to satisfy
certain customary affirmative covenants.
The Amended Citibank Credit Facility contains certain customary events of
default, including payment defaults, breach of representations or warranties,
covenant defaults, a change of control, certain bankruptcy events with respect
to the Company or LGE, judgment defaults, violations under the Employee
Retirement Income Security Act ("ERISA") and cross-defaults to certain other
indebtedness.
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<PAGE>
The LGE Demand Loan Facility
In March 1998, the Company entered into the LGE Demand Loan Facility, which
provides for borrowings of up to $45 million. The term of the facility is one
year from the date of the first borrowing, subject to LGE's right to demand
repayment at anytime after June 30, 1998. In June 1998, this facility was
amended to provide that demand for repayment may not occur prior to December
31, 1998. In December 1998, in conjunction with the extension of the Amended
Citibank Credit Facility to April 30, 1999, the Company and LGE amended the LGE
Demand Loan Facility to provide that no demand for repayment may be made under
the facility, absent an event of default, prior to April 30, 1999. Repayment is
due in full at the end of the term. The facility is secured by a second lien on
the assets that secure the Company's obligations under the Reimbursement
Agreement and a second lien on the Company's VSB patents. As of September 26,
1998, the Company had borrowed $30 million under the LGE Demand Loan Facility.
Other Facilities
Between November 1997 and February 1998 the Company entered into a series of
new financing transactions designed to enhance the Company's liquidity and
financial flexibility. The Company obtained a total of $110 million in
unsecured and uncommitted credit facilities through four lines of credit with
Bank of America ($30 million), the First National Bank of Chicago--NBD ($30
million), Societe Generale ($20 million) and Credit Agricole Indosuez ($30
million). As of June 27, 1998, a total of $102 million was outstanding under
these credit lines. Amounts owed to First National Bank of Chicago--NBD,
Societe Generale and Bank of America totaling $72 million have been paid by LGE
pursuant to its guarantee as of September 26, 1998. Under the terms of the
Reimbursement Agreement, the Company is obligated to pay back LGE the amount
paid by LGE plus interest.
The credit lines are guaranteed by LGE for which LGE has a Claim against the
Company for a fee in an amount up to 2% per annum of the outstanding amount of
the loan, in the form of cash or the Company's equity and subject to the
approval of the Finance Committee of the Board and in the case of equity, the
approval of the Company's stockholders. Under the Reimbursement Agreement, the
Company granted certain second liens in favor of LGE to secure the Company's
reimbursement obligations with respect of the guarantees of LGE for borrowings
under these credit lines.
Borrowings and interest rates on short-term debt were:
<TABLE>
<CAPTION>
Year Ended December
31
--------------------
1997 1996 1995
------ ------ ------
(Dollars in
millions)
<S> <C> <C> <C>
Maximum month-end borrowings......................... $72.0 $72.6 $69.5
Average daily borrowings............................. 26.4 18.3 37.2
Weighted average interest rate....................... 9.1% 8.8% 10.5%
</TABLE>
Long-Term Debt
The components of long-term debt were:
<TABLE>
<CAPTION>
Year Ended
December 31
---------------------
1997 1996
---------- ----------
(Dollars in millions)
<S> <C> <C>
6 1/4% Convertible Subordinated Debentures due
2011............................................. $ 109.3 $ 115.0
8.5% Senior Subordinated Convertible Debentures
due 2000......................................... -- 23.8
8.5% Senior Subordinated Convertible Debentures
due 2001......................................... 0.5 0.5
Term Loans........................................ 38.3 31.2
---------- ----------
Total............................................. 148.1 170.5
Less current portion.............................. 15.3 17.8
---------- ----------
Total long-term debt.............................. $132.8 $ 152.7
========== ==========
</TABLE>
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<PAGE>
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 LGE Demand Loan Claims, the LGE Reimbursement Claim and the LGE Guarantee
Fee Claims, as secured claims, are senior in priority to the Old Subordinated
Debentures to the extent provided in Section 502 of the Bankruptcy Code. In
addition, the LGE Extended Payables Claims, the LGE Demand Loan Claims and the
LGE Reimbursement Claims are senior in right of payment to the Old Subordinated
Debentures pursuant to the subordination provision of the Old Subordinated
Debenture Indenture. The LGE Technical Services Claims and the LGE Leveraged
Lease Claims are pari passu with the Old Subordinated Debentures. The Company
has been advised by legal counsel to the Debenture Committee that the Debenture
Committee may dispute the seniority of the LGE Extended Payables. In addition,
the Company has been advised by legal counsel to the Debenture Committee that
the Debenture Committee may assert that some or all of the LGE Claims are
capable of being equitably subordinated to the Old Subordinated Debenture
Claims and/or recharacterized as Equity Interests of the Company.
In April 1997, the Company redeemed at par value $5.75 million of the Old
Subordinated Debentures in accordance with the regular sinking fund procedures
set forth in the Old Subordinated Debenture Indenture. In April 1998, the
Company met its regular sinking fund requirements by purchasing $5.735 million
face value Old Subordinated Debentures in the open market and delivering those
securities for cancellation. The balance of the Company's 1998 required sinking
fund payment was satisfied by certain holders' elections to convert their Old
Subordinated Debentures to common stock.
Payment on Senior Subordinated Debentures
In December 1997 the Company redeemed the 8.5% Senior Subordinated
Convertible Debentures due November 2000. There was $23.8 million principal
amount of such debentures outstanding and the redemption price of such
debentures was 104% of such principal amount plus accrued interest through the
redemption date. The loss on extinguishment of this debt was not material.
In January, 1998, the Company redeemed the 8.5% Senior Subordinated
Convertible Debentures due January 2001. There was $0.5 million principal
amount of such debentures outstanding and the redemption price of such
debentures was 104% of such principal amount plus accrued interest through the
redemption date. The loss on extinguishment of this debt was not material.
DESCRIPTION OF NEW SUBORDINATED DEBENTURES
In satisfaction of all amounts owed with respect to the Old Subordinated
Debentures, the Company intends to issue New Subordinated Debentures pursuant
to an indenture (the "New Indenture") dated as of the Effective Date between
the Company and , as Trustee. The following description
makes use of terms described in the New Indenture 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 Subordinated Debentures are to be issued under the New Indenture and
will represent unsecured general obligations of the Company, subordinate in
right of payment to certain other debt obligations of the Company. See "--
Subordination of New Subordinated Debentures." The New Subordinated Debentures
will bear interest from , 1999, at the rate shown by their title,
payable on April 1 and October 1 in each year, commencing , 1999, to
holders of record at the close of business on the immediately preceding
129
<PAGE>
March 15 and September 15. Interest will be paid by check mailed to such
holders. The New Subordinated Debentures mature on April 1, 2010. The New
Subordinated Debentures are not convertible.
Principal of and premium, if any, on the New Subordinated Debentures are
payable, and the New Subordinated Debentures may be presented for conversion,
transfer and exchange, at the office of the Trustee in and at the
office of its agent in . New Subordinated Debentures will be
issued in denominations of $1,000 and integral multiples of $1,000. The New
Subordinated Debentures are not subject to a sinking fund.
Redemption of New Subordinated Debentures
The New Subordinated 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 Subordinated Debentures are to be redeemed, the
Trustee shall select, in such manner as in its sole discretion it shall deem
appropriate and fair, the New Subordinated Debentures or portions thereof to be
redeemed.
Subordination of New Subordinated Debentures
The indebtedness evidenced by the New Subordinated Debentures is subordinate
to the prior payment when due of the principal of and premium, if any, and
interest on all Senior Indebtedness (as defined herein). During the continuance
of any default with respect to Senior Indebtedness, or if any such default
would be caused by any payment upon or in respect of the New Subordinated
Debentures, no payment may be made by the Company upon or in respect of the New
Subordinated Debentures. Upon any distribution of assets of the Company in any
dissolution, winding up, liquidation or reorganization of the Company, payment
of the principal of and premium, if any, and interest on the New Subordinated
Debentures will be subordinated, to the extent and in the manner set forth in
the New Indenture, to the prior payment in full of all Senior Indebtedness. As
of the Effective Date, the New Subordinated Debentures will be subordinate to
all of the Company's short-term and long-term debt (as defined in the New
Indenture). By reason of such subordination, in the event of the Company's
insolvency, holders of Senior Indebtedness may receive more, ratably, and
holders of the New Subordinated Debentures may receive less, ratably, than the
other creditors of the Company. Such subordination will not prevent the
occurrence of any Event of Default (as defined in the attached New Indenture).
Definition of Senior Indebtedness
The term "Senior Indebtedness" is defined to mean the principal of and
premium, if any, and interest on the following, whether outstanding on the date
of execution of the New Indenture or thereafter incurred or created: (a)
indebtedness of the Company for money borrowed by the Company (including
purchase money obligations with an original maturity in excess of one year) or
evidenced by debentures (other than the New Subordinated Debentures), notes,
banker's acceptances or other corporate debt securities or similar instruments
issued by the Company; (b) obligations with respect to letter of credit; (c)
indebtedness of the Company constituting a guarantee of indebtedness of others
of the type referred to in the preceding clauses (a) and (b); or (d) renewals,
extensions or refunding of any of the indebtedness referred to in the preceding
clauses (a), (b) and (c) unless, in the case of any particular indebtedness,
renewal, extension or funding, under the express provisions of the instrument
creating or evidencing the same, or pursuant to which the same is outstanding,
such indebtedness or such renewal, extension or refunding thereof is not
superior in right of payment to the New Subordinated Debentures.
Events of Default
An "Event of Default" is defined in the New Indenture as being: default in
payment of any principal of or premium on the New Subordinated Debentures;
default for 30 days in payment of any interest on the New Subordinated
Debentures; default for 90 days after notice in the observance or performance
of any other covenant
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<PAGE>
in the New Indenture; failure to pay at maturity, or the acceleration of,
$5,000,000 or more in principal amount of any indebtedness for money borrowed
by the Company or any Subsidiary under the terms of the instrument under which
such indebtedness is outstanding if such acceleration is not annulled or such
indebtedness is not paid, within 10 days after written notice; or certain
events in bankruptcy, insolvency, or reorganization (each, individually, an
"Indenture Event of Default").
In case an Indenture Event of Default shall occur and be continuing, the
Trustee or the holders of not less than 25% in principal amount of the New
Subordinated Debentures then outstanding may declare the principal of all the
New Subordinated Debentures to be due and payable. The New Indenture provides
that the Trustee shall, within 90 days after the occurrence of a default, mail
to the holders of the New Subordinated Debentures notice of all uncured
defaults known to it (the term default to include the events specified above
without grace); provided, that, except in the case of default in the payment of
principal (or premium, if any) or interest on any of the New Subordinated
Debentures or in the making of any sinking fund payment, the Trustee shall be
protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the interests of the holders of the New
Subordinated Debentures.
The New Indenture includes a covenant that the Company will file with the
Trustee and the Commission, in accordance with the rules and regulations of the
Commission, such additional information, documents and reports with respect to
compliance by the Company with the conditions and covenants provided for the
New Indenture as may be required by such rules and regulations.
Subject to the provisions of the New Indenture relating to the duties of the
Trustee in case an Indenture Event of Default shall occur and be continuing,
the Trustee is under no obligation to exercise any of the rights or powers
under the New Indenture at the request, order or direction of any of the New
Subordinated Debenture holders, unless such New Subordinated Debenture holders
shall have offered to the Trustee reasonable security or indemnity. Subject to
such provision for the indemnification of the Trustee and certain limitations
contained in the Indenture, the holders of a majority in principal amount of
the New Subordinated Debentures at the time outstanding shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust or power conferred on the
Trustee.
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 Subordinated Debentures at the time outstanding, to modify the New
Indenture or any supplemental indenture or the rights of the holders of the New
Subordinated Debentures, except that no such modification shall (i) extend the
fixed maturity of any New Subordinated Debenture, reduce the rate or extent the
time of payment of interest thereon, reduce the principal amount thereof or
redemption premium thereon or change the currency in which the New Subordinated
Debentures are payable, without the consent of the holder of each New
Subordinated Debenture so affected, or (ii) reduce the aforesaid percentage of
New Subordinated Debentures, the consent of the holders of which is required
for any such modification, without the consent of the holders of all of the New
Subordinated Debentures.
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<PAGE>
Concerning the Trustee
is the Trustee under the New Indenture (the "Trustee").
Comparison of the Old Subordinated Debentures and the New Subordinated
Debentures
<TABLE>
<CAPTION>
Old Subordinated Debentures New Subordinated Debentures
--------------------------- ---------------------------
<S> <C> <C>
Aggregate Principal $103.5 million $40 million
Amount
Outstanding
Maturity Date........... April 1, 2011 April 1, 2010
Interest................ 6 1/4% per annum, payable in 6 1/4% per annum, payable in
cash on April 1 and October 1 cash on April 1 and October 1
of each year of each year
Redemption.............. The Old Subordinated Debentures The New Subordinated
may be redeemed at the option Debentures may be redeemed at
of the Company, in whole or in the option of the Company, in
part, at a premium which whole or in part, at par.
declined to par on April 1,
1996.
Conversion.............. The Old Subordinated Debentures The New Subordinated
are convertible into shares of Debentures are not
the Company's common stock at convertible.
any time prior to maturity at a
conversion price of $31.25 per
share (subject to adjustment).
Ranking; Security....... The Old Subordinated Debentures Same
are subordinated to the prior
payment when due of all Senior
Indebtedness (as defined in the
Old Subordinated Debenture
Indenture, including the
Citibank Secured Claims, the
Other Secured Claims, the Bank
Lender Claims, and certain LGE
Claims) and are not secured.
Sinking Fund............ The Company is required to None
provide through the operation
of a sinking fund for the
retirement on April 1 in each
of the years 1997 to and
including 2010 of 5% of the
principal amount of the Old
Subordinated Debentures at par.
The Company may increase any
sinking fund payment to retire
up to an additional 5% of the
principal amount of the Old
Subordinated Debentures
originally issued at par.
Events of Default....... Events of Default with respect 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
</TABLE>
132
<PAGE>
<TABLE>
<CAPTION>
Old Subordinated Debentures New Subordinated Debentures
------------------------------- ------------------------------
<S> <C> <C>
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.
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
$32,379,300 if the Reynosa Assets are transferred to LGE and will mature on
November 1, 2008. The LGE New Restructured Senior Note will bear interest from
the Effective Date, at a rate per annum equal to LIBOR plus 6.5%, payable on
February 1, May 1, August 1 and November 1 in each year, commencing February 1,
1999, to holders of record at the close of business on the immediately
preceding January 15, April 15, July 15 and October 15. Interest will be paid
in cash only to the extent that the Company's ratio of EBITDA to cash interest
expense for the immediately preceding four fiscal quarters exceeds 1.5; if such
test is not met, interest will be payable by the issuance of additional LGE New
Restructured Senior Notes.
Collateral and Guarantees
Except as otherwise agreed to by LGE and the Company, the LGE New
Restructured Senior Note will be secured by a second lien on all assets of the
Company and its Subsidiaries other than receivables and inventory, junior only
to the lien granted pursuant to the LGE New Credit Facility. The LGE New
Restructured Senior Note will be guaranteed by each of the Company's
Subsidiaries.
133
<PAGE>
Mandatory Prepayment
To the extent permitted under the Company's senior bank credit agreement and
subject to any restrictions set forth in other financing agreements executed
by the Company, the Company will be required to make mandatory prepayments on
the LGE New Restructured Senior Note, upon any sale of assets of the Company
(other than inventory sold in the ordinary course of the Company's business)
and to the extent the Company has excess cash (to be defined in a mutually
satisfactory manner) following payments under its other indebtedness,
including under the LGE New Credit Support.
Ranking
Except as otherwise agreed to by LGE and the Company, the indebtedness
evidenced by the LGE New Restructured Senior Note is pari passu with all
Senior Indebtedness of the Company existing at the Effective Date or incurred
thereafter and will rank senior to all subordinated indebtedness of the
Company, including the New Subordinated Debentures.
Events of Default
An "Event of Default" is defined in the LGE New Restructured Senior Note as
being: default in payment of any principal of or premium on the LGE New
Restructured Senior Note; default for 5 days in payment of any interest on the
LGE New Restructured Senior Note; default for 30 days after notice in the
observance or performance of any other covenant in the LGE New Restructured
Senior Note; failure to pay at maturity, or any event of default relating to,
$5 million or more in principal amount of any indebtedness for money borrowed
by the Company or any Subsidiary under the terms of the instrument under which
such indebtedness is outstanding; 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 (including the New
Subordinated Debentures). 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
134
<PAGE>
Credit Support takes the form of a direct loan, LGE and the Company will enter
into a credit agreement (the "LGE New Credit Facility"). The terms of the LGE
New Credit Facility will be as follows.
Principal Amount
The Company will be permitted to borrow under the LGE New Credit Facility up
to a maximum amount to be set by LGE and the Company on the Effective Date
based on the financing deemed necessary to enable the Company to execute the
Operational Restructuring. Such amount may not exceed $60 million.
Maturity
November 1, 2001.
Payment of Interest
The obligations of the Company under the LGE New Credit Facility will bear
interest from the Effective Date, at a rate per annum equal to LIBOR plus
6.5%, payable on February 1, May 1, August 1 and November 1 in each year,
commencing , 1999. Interest will be paid in cash.
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
all assets of the Company and its Subsidiaries other than receivables and
inventory. 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 assets of the Company (other than inventory sold in the ordinary course of
the Company's business) and to the extent the Company has excess cash (to be
defined in a mutually satisfactory manner) following payments under its other
indebtedness.
Ranking
The obligations of the Company under the LGE New Credit Facility (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 (including the New
Subordinated Debentures).
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
135
<PAGE>
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.
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.
136
<PAGE>
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
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.
137
<PAGE>
Voting Procedures and Other Requirements
Persons Entitled to Vote
The following Classes of Claims are impaired under the Prepackaged Plan and
all holders of Claims in such Classes as of the Voting Record Date are entitled
to vote to accept or reject the Prepackaged Plan upon the terms and subject to
the conditions set forth herein and in the Prepackaged Plan:
Class 4--Bank Lender Claims
Class 6--Old Subordinated Debenture Claims
Class 7--LGE Claims
To be entitled to vote to accept or reject the Prepackaged Plan, a person
must be the beneficial interest holder of a Claim in the impaired, voting Class
on the Voting Record Date, regardless of whether such Claims are held of record
on the Voting Record Date in such holder's name or in the name of such holder's
broker, dealer, commercial bank, trust Company or other nominee. For purposes
of determining whether the requisite number of acceptances is received to
approve the Prepackaged Plan, only votes which are cast at the direction of
beneficial interest holders in accordance with the procedures set forth herein
may be counted. The Ballots are being distributed to holders of Claims in Class
4, Class 6 and Class 7. The Master Ballots are being distributed to holders of
Claims in Class 6.
Voting Procedures
Holders of Impaired Claims are requested to complete an appropriate Ballot
and, when appropriate, Master Ballot, in accordance with the instructions set
forth thereon and the procedures set forth below and in the Prepackaged Plan.
Beneficial Interest Holders
Any beneficial interest holder of Claims can vote on the Prepackaged Plan
through a nominee by following these instructions:
1. Provide all the applicable information on the Ballot in accordance
with the instructions set forth thereon, including the amount of the Claims
held.
2. Indicate acceptance or rejection of the Prepackaged Plan by checking
either the box entitled "Accepts the Prepackaged Plan" or "Rejects the
Prepackaged Plan" set forth on the Ballot.
3. Sign and date the Ballot and provide your name and mailing address if
different from the printed address which appears on the Ballot or if no
preprinted address appears on the Ballot. If you are completing the Ballot
on behalf of another entity, indicate the name of such entity, your
relationship with such entity and/or the capacity in which you are signing.
4. (a) If you hold Old Subordinated Debentures in "street name" through a
brokerage firm, bank, trust company or other source, return the Ballot to
the nominee as promptly as possible so that the nominee may complete and
submit a Master Ballot prior to the Expiration Date. If no pre-addressed,
postage-paid envelope was enclosed, contact the Solicitation Agent for
instructions.
(b) If you are both the beneficial interest holder and the record holder
of Claims return the Ballot directly to the Solicitation Agent in the
enclosed pre-addressed envelope so that it will be received prior to the
Expiration Date.
Brokerage Firms, Banks and Other Nominees
A brokerage firm which is the registered or record holder of the Old
Subordinated Debentures for a beneficial interest holder can vote on behalf of
such beneficial interest holder by (i) distributing a copy of this Disclosure
Statement, all appropriate Ballots and the other Solicitation Materials to such
beneficial interest holder
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for execution; (ii) collecting all such completed and executed Ballots; (iii)
completing a Master Ballot compiling the votes and other information from the
Ballots collected; and (iv) transmitting such Master Ballot to the Solicitation
Agent on or before the Expiration Date. A proxy intermediary acting on behalf
of a brokerage firm or bank may follow the procedures outlined in the preceding
sentence to vote on behalf of such beneficial interest holder.
Each brokerage firm, bank, or other nominee which submits a Master Ballot
must retain all ballots submitted to it by beneficial interest holders for
disclosure to the Bankruptcy Court, if so ordered.
Any Ballot submitted to a brokerage firm, proxy intermediary or other nominee
will not be counted until such nominee properly completes and delivers to the
Solicitation Agent a corresponding Master Ballot that reflects such beneficial
interest holder's vote. Any record holder which is also a beneficial interest
holder of the Old Subordinated Debentures should either (i) return a Ballot to
the Solicitation Agent or (ii) prepare and retain a Ballot and include the
information from such ballot on the Master Ballot submitted to the Solicitation
Agent.
Holders may receive multiple mailings containing Ballot(s), especially if
holders own Old Subordinated Debentures, in street name through more than one
broker, bank or other nominee. A beneficial interest holder that holds the Old
Subordinated Debentures through more than one broker, bank or other nominee
must so disclose on each ballot such holder completes and must cast the same
vote on the Prepackaged Plan on each ballot such holder completes. A beneficial
interest holder's vote either to accept or to reject the Prepackaged Plan will
be counted only once for each Class of Claims held by the holder, regardless of
the number of record holders through which such Claims are held. By executing a
ballot, a holder certifies, among other things, that, to the extent applicable,
such holder has disclosed any bifurcation of beneficial ownership of the Old
Subordinated Debentures and that such holder has cast the same vote on any
multiple ballots for holdings in a single Class of Claims. THE NAMES OF ALL
BROKER-DEALERS OR OTHER INTERMEDIARIES OR PERSONS THAT HOLD THE OLD
SUBORDINATED DEBENTURES FOR A BENEFICIAL INTEREST HOLDER SHOULD BE INDICATED ON
THE BALLOTS. AUTHORIZED SIGNATORIES (OTHER THAN BROKERAGE FIRMS AND OTHER
PARTICIPANTS) SHOULD SUBMIT SEPARATE BALLOTS FOR EACH BENEFICIAL INTEREST
HOLDER FOR WHOM THEY ARE VOTING.
Other
If a Ballot is signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations, or others acting in a fiduciary or
representative capacity, such persons should indicate such capacity when
signing in accordance with the procedures set forth under "Certifications"
below and, unless otherwise determined by the Company, must submit proper
evidence satisfactory to the Company of authority to so act on behalf of a
beneficial interest holder.
The Company, in its sole discretion, may waive any defect in any Ballot or
Master Ballot at any time, either before or after the close of voting, and
without notice. Except as provided below, unless the Ballot or Master Ballot
being furnished is timely submitted to the Solicitation Agent on or prior to
the Expiration Date together with any other documents required by such Ballot
or Master Ballot, as the case may be, the Company may, in its sole discretion,
reject such Ballot or Master Ballot as invalid and, therefore, decline to
utilize it in connection with seeking Confirmation of the Prepackaged Plan by
the Bankruptcy Court.
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
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Claims may be counted. By executing and returning a Ballot, a person or entity
(i) will certify to the Bankruptcy Court and the Company that either (a) such
person or entity is the beneficial interest holder of the Claims or securities
being voted or (b) such person or entity is an authorized signatory for someone
or some entity that or which is a beneficial interest holder of the Claims or
securities being voted; (ii) will certify to the Bankruptcy Court and the
Company that such person or entity (or in the case of an authorized signatory,
the beneficial interest holder) has received a copy of this Disclosure
Statement and Solicitation Materials and will acknowledge that the Solicitation
is being made pursuant to the terms and conditions set forth therein; (iii)
will certify to the record holder, the Bankruptcy Court and the Company that
either (a) such person or entity has not submitted any other Ballots for such
Class of Claims, as the case may be, held in other accounts or other registered
names or (b) such person or entity has disclosed on each Ballot completed by
such person or entity the existence of Claims in the same Class held in other
accounts, or other registered names and the submission of other Ballots for
such Claims; (iv) will certify to the record holder, the Bankruptcy Court and
the Company that such person or entity has cast the same vote on every Ballot
completed by such person or entity with respect to holdings in a single Class
of Claims; and (v) will request that such person or entity (or in the case of
an authorized signatory, the beneficial interest holder) be treated as the
record holder of such securities for purposes of voting on the Prepackaged
Plan.
A brokerage firm or other nominee which is a registered holder will prepare,
execute and deliver a Master Ballot to the Solicitation Agent to reflect the
votes of the beneficial interest holders it represents. By executing and
returning a Master Ballot, such nominee (i) will certify to the Bankruptcy
Court and the Company that (a) such nominee has received a copy of this
Disclosure Statement, Ballot and other Solicitation Materials and has delivered
the same to the beneficial interest holders listed thereon by such nominee, (b)
such nominee has received a completed and signed Ballot from each such
beneficial interest holder, (c) such nominee is the registered holder of the
securities being voted, (d) such nominee has been authorized by each such
beneficial interest holder to vote on the Prepackaged Plan, and (e) the
beneficial interest holder has certified to such nominee that such beneficial
interest holder has not submitted any other Ballots for such Class of Claims
held in other accounts or other registered names, or, if held in other accounts
or registered names, that the beneficial interest holder has certified to such
nominee that such beneficial interest holder has cast the same vote for such
Class of Claims, and such nominee will disclose such other accounts or
registered holders and such other ballots; (ii) will request that such nominee
be treated as the beneficial interest holder of the securities for purposes of
voting on the Prepackaged Plan, unless otherwise authorized by the Bankruptcy
Court; (iii) will disclose (a) the number of such beneficial interest holders,
(b) the respective principal amounts and issues of the Old Subordinated
Debentures owned, as the case may be, by each such beneficial interest holder,
(c) each beneficial interest holder's respective vote concerning the
Prepackaged Plan, (d) the customer account or other identification number for
each such beneficial interest holder; and (iv) will agree to maintain Ballots
returned by beneficial interest holders (whether properly completed or
defective) for disclosure to the Bankruptcy Court if so ordered.
Ballots
A separate form of Ballot and, when applicable, Master Ballot, is to be used
for each Class of Impaired Claims. Holders of Claims should take care to use
the correct Ballot(s) in voting on the Prepackaged Plan. See "--Incomplete
Ballots." If any Ballots are damaged or lost, or if a holder has any questions
concerning this Solicitation, it may contact the Solicitation Agent at the
address or phone number listed on the back cover of this Disclosure Statement.
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
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interest holder's vote on the Prepackaged Plan will be counted only once for
each Class of Claims held by the holder, regardless of the number of Ballots
submitted for such Class.
A holder may not split its vote within a Class of Impaired Claims. For
example, if a holder of the Old Subordinated Debentures is submitting a Ballot
as to the Old Subordinated Debentures which such holder beneficially owns, such
holder must vote all its Old Subordinated Debentures the same way (i.e., all
"Accepts the Prepackaged Plan" or "Rejects the Prepackaged Plan"). If a holder
of Claims in more than one Class executes one or more Ballots for only one such
Class, such holder's vote will count as a vote only once with respect to such
Class and will not count as a vote with respect to any Claims in other Classes
held by such holder.
Incomplete Ballots
It is important that all holders of Impaired Claims vote to accept or reject
the Prepackaged Plan, because under the Bankruptcy Code, for purposes of
determining whether the requisite acceptances have been received by an Impaired
Class of Claims, the vote will be tabulated based on the ratio of accepting
holders of Impaired Claims to all voting holders of Impaired Claims. Therefore,
it is possible that the Prepackaged Plan could be approved by any Impaired
Class of Claims with the affirmative vote of significantly less than two-thirds
in amount and one-half in number of the entire Class of Claims. Failure by a
holder of an Impaired Claim to submit a properly executed Ballot or Master
Ballot (as appropriate) or to indicate acceptance or rejection of the
Prepackaged Plan in accordance with the instructions set forth thereon and the
procedures set forth herein shall be deemed to constitute an abstention by such
holder with respect to a vote regarding the Prepackaged Plan, unless cured or
waived. Abstentions as a result of failing to submit a properly executed Ballot
or Master Ballot (when appropriate) or failing to indicate a vote either for
acceptance or rejection of the Prepackaged Plan will not be counted as votes
for or against the Prepackaged Plan. The Company, in its sole discretion, may
waive any defect in any Ballot or Master Ballot at any time, either before or
after the close of voting, and without notice. No assurance can be given,
however, that the Bankruptcy Court will recognize any such waiver.
Agreements Upon Furnishing Ballots
The delivery of a Ballot or Master Ballot indicating a vote to accept the
Prepackaged Plan by a holder of an Impaired Claim pursuant to the procedures
set forth above will constitute an agreement between such holder and the
Company to accept (i) all the terms of, and conditions to, this Solicitation
and (ii) all the terms of the Prepackaged Plan.
Method of Delivery of Ballots
The method of delivery of Ballots and Master Ballots to be delivered to the
Solicitation Agent is at the election and risk of each holder of an Impaired
Claim. Except as otherwise provided herein, such delivery will be deemed made
only when 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.
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A notice of withdrawal, to be valid, must (i) contain the description of the
Claim to which it relates and the aggregate principal amount represented by
such Claim, (ii) be signed by the holder of such Claim in the same manner as
the original Ballot or Master Ballot, (iii) contain a certification that the
withdrawing party was the beneficial interest holder of the Claim on the Voting
Record Date and possesses the right to withdraw the vote sought to be withdrawn
and (iv) be received by the Solicitation Agent in a timely manner as described
above. Prior to the filing of the Prepackaged Plan, the Company intends to
consult with the Solicitation Agent to determine whether any withdrawals of
Ballots were received. The Company expressly reserves the absolute right to
contest the validity of any such withdrawals of Ballots. See "--Waivers of
Defects, Irregularities, Etc."
Unless otherwise determined by the Company or directed by the Bankruptcy
Court, a purported notice of withdrawal of a Ballot or Master Ballot which is
not received in a timely manner by the Solicitation Agent will not be effective
to withdraw a previously furnished Ballot or Master Ballot.
The Company will pay all reasonable and customary costs, fees and expenses
relating to the Solicitation, including without limitation, mailing and
handling costs of brokers, dealers, commercial banks, trustees, indenture
trustees and other nominees. The Company will not pay any incentive or
acceptance fees in connection with the Solicitation.
Solicitation Agent
The Company has engaged Georgeson & Company Inc. as the Solicitation Agent in
connection with the Solicitation. The Company expects that the Solicitation
Agent will receive reasonable and customary compensation for services rendered
in connection with the Solicitation, will be reimbursed for reasonable out-of-
pocket expenses and will be indemnified against certain expenses in connection
therewith. All deliveries to the Solicitation Agent relating to the
Solicitation should be directed to one of the addresses set forth on the back
cover page of this Disclosure Statement. Requests for information or additional
copies of this Disclosure Statement, Ballots or Master Ballots should be
directed to the Solicitation Agent at (800) 223-2064.
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
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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 nine months of 1998 compared with the
first nine months of 1997, set forth below, have largely been excerpted from
the Company's Quarterly Report on Form 10-Q for the quarter ended September
26, 1998. Management's discussion and analysis of the Company's results of
operations and financial condition for the fiscal years 1997, 1996 and 1995,
also set forth below, have largely been excerpted from the Company's 1997
Annual Reports on Form 10-K. Accordingly, such discussions generally do not
reflect the financial impact of the Restructuring and should therefore be read
in conjunction with the information contained in "PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION," "SELECTED CONSOLIDATED FINANCIAL DATA" and the
Company's Consolidated Financial Statements and related notes thereto
contained elsewhere in this Disclosure Statement. See "INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
Results of Operations: Third Quarter of 1998 Compared to Third Quarter of 1997
The Company's third-quarter net loss, excluding restructuring and asset
impairment charges, was $18.6 million in 1998 compared to $59.2 million a year
ago. Including a $100.4 million restructuring charge, the Company reported a
third-quarter net loss of $119.0 million or $1.76 per share. In the 1997 third
quarter, including a $10 million asset impairment charge, the Company reported
a net loss of $69.2 million or $1.04.
The third-quarter 1998 restructuring charge related to (i) a $68.8 million
loss on the termination of the Leveraged Leases, (ii) $32.3 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) $7.0
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 Citibank Credit Facility), and (v) $1.4 million of other charges,
related primarily to the Company's exiting of its analog set-top box product
line.
Total third-quarter sales were $230.4 million in 1998 compared with $304.5
million in 1997. Consumer electronics sales declined in the 1998 quarter
compared with the same period last year, driven largely by planned sales
reductions in lower-margin color TV products and a change in distribution
strategy whereby certain VCRs are sold directly from the manufacturer (LGE)
rather than through the Company's direct sales organization. The Company
receives a royalty for these sales. Sales of NWS products increased
significantly in the third quarter of 1998 compared with a year ago due to
shipments of digital set-top boxes.
The Company's 1998 third-quarter gross margin was $27.1 million compared to
the prior year of $(3.8) million. This was primarily the result of (i)
significant 1997 third-quarter excess and obsolete inventory charges, (ii)
decreased 1998 third-quarter raw material costs, (iii) lower depreciation
expense in the 1998 third quarter (due to the asset impairment charges the
Company recorded in December 1997) and (iv) large 1997 third-quarter 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.
Selling, general and administrative expenses were $31.5 million in the third
quarter of 1998, compared with $44.6 million in the previous year. The
decrease was primarily caused by (i) the 1997 third quarter bad debt charge of
$6.0 million related to a Brazilian customer's receivable, (ii) lower
advertising costs in the 1998 third quarter compared to the prior year and
(iii) expense savings related to lower sales.
Other operating expense (income) for the third quarter of 1998 includes $7.7
million of accrued royalty income from tuner patent licenses. This income was
$5.7 million in the third quarter of 1997. During the third
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quarter of 1997, the Company recorded a charge of $10.0 million related to the
impairment of certain long-lived assets to be disposed. 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).
Interest expense was $13.7 million in the third quarter of 1998, compared
with $7.1 million in the previous year. The change resulted from higher funding
requirements (at generally higher interest rates) for Company operations and
the Company began accruing 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.
For the first nine months of 1998 the Company reported a net loss of $187.8
million, or $2.78 per share, compared with a net loss of $143.7 million, or
$2.16 per share for the first nine months of 1997. Nine-month sales were $675.1
million in 1998 compared with $825.4 million in 1997.
Nine Months of 1998 Compared to Nine Months of 1997
The Company's 1998 nine-month net loss, excluding restructuring and asset
impairment charges, was $80.0 million compared to $133.7 million a year ago.
Including a $107.8 million restructuring charge, the Company reported a 1998
nine-month net loss of $187.8 million or $2.78 per share. In the 1997 nine-
month period, including a $10 million asset impairment charge, the Company
reported a net loss of $143.7 million or $2.16.
The 1998 restructuring charge related to (i) a $68.8 million loss on the
termination of the Leveraged Leases, (ii) $32.3 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) $11.6 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 Citibank
Credit Facility), (v) $1.4 million of severance costs and (vi) $2.8 million of
other charges, related primarily to the Company's exiting of its analog set-top
box product line.
Total nine-month sales were $675.1 million in 1998 compared with $825.4
million in 1997. Consumer electronics sales declined in the 1998 period
compared with the same period last year, driven largely by planned sales
reductions in lower-margin color TV products and a change in distribution
strategy whereby certain VCRs are sold directly from the manufacturer (LGE)
rather than through the Company's direct sales organization. The Company
receives a royalty for these sales. Sales of NWS products increased
significantly in the nine-month period of 1998 compared with a year ago due to
shipments of digital set-top boxes.
The Company's 1998 nine-month gross margin was $53.5 million compared to the
prior year of $24.6 million. This was primarily the result of (i) significant
1997 excess and obsolete inventory charges, (ii) decreased 1998 raw material
costs, (iii) lower depreciation expense in the 1998 period (due to the asset
impairment charges the Company recorded in December 1997) and (iv) 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.
Selling, general and administrative expenses were $93.4 million in the nine-
month period of 1998, compared with $122.7 million in the previous year. The
decrease was primarily caused by (i) the 1997 bad debt charge of $21.0 million
related to a Brazilian customer's receivable, (ii) lower advertising costs in
the 1998 period compared to the prior year and (iii) expense savings related to
lower sales.
Other operating expense (income) for the nine-month period of 1998 includes
$20.4 million of accrued royalty income from tuner patent licenses. This income
was $16.9 million in the same period of 1997. During the nine-month period of
1997, the Company recorded a charge of $10.0 million related to the impairment
of
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certain long-lived assets to be disposed. 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).
Interest expense was $33.2 million in the first nine months of 1998,
compared with $21.0 million in the previous year. The change resulted from
higher funding requirements (at generally higher interest rates) for Company
operations and the Company began accruing 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.
Liquidity and Capital Resources
During the nine months ended September 26, 1998, $192.8 million of cash was
used by operating activities principally to fund $68.0 million of net losses
from operations, as adjusted for $95.4 million of non-cash restructuring
charges and $24.4 million of depreciation. In addition, $129.0 million of cash
was used to fund the change in current accounts, which was principally
composed of a $121.7 million increase in receivables and a $14.7 million
decrease in accounts payable and accrued expenses, offset by a $6.8 million
decrease in other assets. The increase in receivables was mainly due to the
Citibank Receivables Facility 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.
During the nine months ended September 26, 1998, $99.5 million of cash was
provided by investing activities. This was primarily attributable to the
$110.7 million decrease in Transferor Certificates due to the termination of
the Citibank Receivables Facility. Additionally, cash was provided from $30.0
million of cash received from the sale of receivables prior to the termination
of the Citibank Receivables Facility, and $6.2 million of cash received from
the sale of certain property held for disposal, offset by $6.4 million of cash
used for capital additions and $41.0 million used to pay off the investor
certificates upon the termination of the Citibank Receivables Facility. The
capital additions during the first nine months of 1998 were significantly
lower than the $68.0 million spent during the same period in 1997. The 1997
capital additions were 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.
During the nine months ended September 26, 1998, $93.3 million of cash was
provided by financing activities. This was composed of $77.8 million of
borrowings under the Amended Citibank Credit Facility, $30.0 million of
borrowings under the Company's remaining unsecured and uncommitted credit
facilities, $30.0 million of borrowings under the secured credit facility with
LGE, offset by cash used to pay the current portion ($5.8 million) of the
Subordinated Debentures, cash used to pay off the old term loan ($38.2
million) and cash used to redeem the Company's 8.5 percent Senior Subordinated
Convertible Debentures due January 2001 ($0.5 million).
As of September 26, 1998, the Company had $537.4 million of interest-bearing
obligations which consisted of: (i) $134.0 million of extended-term payables
with LGE, (ii) $103.5 million of Old Subordinated Debentures (the current
portion of which is $5.8 million), (iii) $30.0 million currently payable under
the remaining unsecured and uncommitted credit facilities, (iv) $77.8 million
currently payable under the Amended Citibank Credit Facility, (v) $30.0
million outstanding under a secured credit facility with LGE, (vi) $90.1
million owed to LGE as a result of LGE's payment under the guarantees of the
Leveraged Leases and (vii) $72.0 million owed to LGE as a result of LGE's
payments under demands against guarantees on the unsecured and uncommitted
credit facilities.
Between November 1997 and February 1998, the Company obtained a total of
$110.0 million in unsecured and uncommitted credit facilities through lines of
credit with Bank of America ($30.0 million), First Chicago NBD ($30.0
million), Societe Generale ($20.0 million) and Credit Agricole Indosuez ($30.0
million). 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
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outstanding amount of the loans. 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 September 26,
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.
In March 1998, the Company entered into a secured credit facility with LGE
which provides for borrowings of up to $45 million. The term of the facility is
one year from the date of the first borrowing, subject to LGE's right to demand
repayment at anytime after April 30, 1999 (as amended). Repayment is due in
full at the end of the term. The first such borrowing occurred in May 1998, and
as of September 26, 1998, $30.0 million was outstanding under the facility. The
facility is secured by liens on certain of the Company's assets and is subject
to certain terms and conditions.
During the third quarter of 1998, the Citicorp Credit Facility (initially
composed of a $45.0 million amortizing term loan and a $65.0 million revolving
credit line) was amended and restated. The Amended Citibank Credit Facility
provides for up to $125.0 million of revolving loans, subject to borrowing base
restrictions. In December 1998 the Amended Citicorp Credit Facility was amended
to extend the term until the earlier of (a) the Company's court filing for the
Prepackaged Plan and (b) April 30, 1999. The Company is in discussions with
lenders regarding debtor-in-possession financing to cover the period during the
court proceeding related to the Prepackaged Plan and a new credit facility to
cover the period following consummation of the Prepackaged Plan. In addition,
pursuant to the Restructuring Agreement, LGE has agreed to provide additional
credit support. LGE's obligation to provide such financing is subject to the
conditions set forth in the Restructuring Agreement.
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 lease in the amount of $90.1 million as a result of a demand
made under the guarantees by the lessor.
Following the filing of the 1997 Form 10-K, the New York Stock Exchange
("NYSE") contacted the Company regarding the continuing listing status of the
Old Common Stock. On May 21, 1998, the Company announced the terms of the
Financial Restructuring, and 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.
Results of Operations for 1995-1997
Revenues
Sales in 1997 were $1,173 million down 9% from 1996 sales of $1,288 million.
Sales in 1996 increased 1% as compared to 1995 sales of $1,274 million.
The Company's core business--the development, manufacture and distribution of
a broad range of products for the delivery of video entertainment--is composed
of two major product areas, Consumer Electronics (which includes color picture
tube operations) ("Consumer Electronics") and NWS.
In Consumer Electronics, the color television market remains extremely
competitive. Price competition continued during 1997 and 1996 forcing the
Company to reduce color television prices in each year to maintain sales
volumes and market share. This price competition may continue to adversely
affect the Company's performance.
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,
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sales continued to be negatively impacted as the Company suffered delays in
production of new high-margin Consumer Electronics products. Because of picture
tube availability problems, the Company's domestic direct-view color television
unit sales declined compared with 1996, but the Company gained market share in
key large-screen categories. The industry color television unit sales to
dealers (including projection television) decreased by 4% in 1997 to 24.5
million units (following a decrease of 3% to 25.5 million units in 1996 and a
decrease of 4% to 26.2 million units in 1995). The Zenith brand remains one of
the top three U.S. color television brands.
Sales in 1997 were negatively impacted as a result of a dispute the Company
had with a Brazilian customer. The Company shipped dramatically less to this
customer during 1997, and as a result the Company's international sales have
been lower than expected.
Consumer Electronics sales increased 3% in 1996 from 1995, driven largely by
higher VCR sales. The Company's domestic direct-view color television unit
sales in 1996 were flat compared with 1995, while industry color television
unit sales to dealers declined. As a result, the Company's market share
increased slightly during 1996. The industry color television unit sales to
dealers (including projection televisions) decreased by 3% to 25.5 million
units in 1996 (following a decrease of 4% to 26.2 million units in 1995 and an
increase of 10% to 27.4 million units in 1994).
Sales in 1996 were negatively impacted as the Company suffered delays in
production of new high-margin Consumer Electronics products.
In NWS, which includes the design and manufacture of digital and analog set-
top boxes, along with data modems sold primarily to cable television operators,
1997 sales were down significantly compared with 1996 due to slowing industry-
wide demand for analog set-top boxes as cable operators prepare to launch
digital networks. Industry and the Company's shipments of cable modems, while
still relatively small, rose during 1997. During 1996, the Company signed a
multi-year agreement with the Americast programming venture to provide digital
set-top boxes to a consortium of telecommunications companies. Initial
shipments under this contract began in 1997. NWS 1996 sales were down
significantly compared with 1995 for the reasons discussed above.
Costs and Expenses
In light of the Company's net losses, the competitive environment and
inflationary cost pressures, the Company has undertaken major cost reduction
programs in each of the last three years. These programs included cost control
and profit improvement initiatives; design, manufacturing, logistics and
distribution improvements; and business consolidations. The Company continues
to seek ongoing additional cost reduction opportunities.
The 1997 results included large losses in color picture tube operations along
with significant charges related to inventory valuation (approximately $44
million) and bad debts (approximately $25 million) which are significantly
higher that last year. The large losses in the Company's color picture tube
plant resulted from high operating costs and performance difficulties
associated with new product start-up and new automated production processes.
These product and process problems created a large amount of rework inventory
that necessitated significant charges for excess and obsolete inventory. These
items combined to negatively impact the Company's gross margin. The charges for
bad debts affected selling, general and administrative expenses and are
discussed below.
The 1996 results also included significant charges. The majority of these
charges related to selling, general and administrative expenses, but a
significant amount of the charges were included in costs of products sold and
negatively impacted the Company's gross margin. The charges included in costs
of products sold were primarily associated with inventories (particularly
write-offs of excess and obsolete inventory), and also included charges for
hourly employees severance.
Selling, general and administrative expenses were $178 million in 1997, $168
million in 1996 and $129 million in 1995. These expenses as a percent of
revenues were 15% in 1997, 13% in 1996 and 10% in 1995. The
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increase in 1997, as compared to 1996, was primarily the result of a $21
million bad debt charge related to a dispute the Company had with a Brazilian
customer. See Note Four to the Company's Consolidated Financial Statements for
further information. The increase in 1996, as compared to 1995, was the result
of the unusual charges which included severance charges for salaried employees
(including executive severance), consulting fees and provisions for bad debts.
Amounts that the Company spends each year on engineering and research
relating to new products and services and to improvements of existing products
and services are expensed as incurred. These amounts were $43 million in 1997,
$47 million in 1996 and $44 million in 1995. These expenses as a percentage of
revenues were approximately 4% in each year during the three years ended
December 31, 1997.
Other Operating Expense (Income)
Other Operating Expense (Income) contains royalty income received from
manufacturers of television sets and VCRs who have taken licenses under some of
the Company's U.S. tuning system patents. Royalty income from tuning system
patents was $26 million in 1997, $27 million in 1996 and $26 million in 1995.
Also included in Other operating expense (income) are foreign exchange gains
and losses. These amounts have traditionally not been material.
In 1997, Other Operating Expense (Income) was significantly impacted as the
Company recorded $64 million in charges for asset impairments. As required by
Statement of Financial Accounting Standards (FAS) No. 121, long-lived assets to
be held and used are reviewed for impairment whenever events or changes in
circumstances indicate that the related carrying amount may not be recoverable.
During the fourth quarter of 1997, an impairment was recognized for the
Consumer Electronics business since the future undiscounted cash flows of
assets were estimated to be insufficient to recover their related carrying
values. As such, the Company recognized an expense of $54 million and
established a valuation reserve for the write-down of the excess carrying value
over fair market value. The fair market value used in determining the
impairment loss was based upon management and third party valuations.
Also in accordance with FAS 121, certain long-lived assets to be sold are
reported at the lower of carrying amount or fair value less cost to sell.
During the third quarter of 1997, the Company recorded a charge of $10 million
related to the impairment of certain long-lived assets to be sold. The charge
relates primarily to (i) assets that will be sold or scrapped as a result of
the Company's decision to phase out of its printed circuit board operation (ii)
assets that will be sold or scrapped as a result of the Company's decision not
to develop the proposed large-screen picture tube plant in Woodridge, Illinois
and (iii) a building in Canada that was sold in December 1997.
The impairment charges discussed above are based upon management's best
estimates of the recoverability of long-lived assets and the fair value of the
related assets. It is reasonably possible that the Company's estimates of the
recoverability of long-lived assets and the fair value will change. See the
Outlook section of Management's Discussion and Analysis of Financial Condition
and Results of Operations for further information.
Restructuring and Other Charges
There were no Restructuring and Other Charges during 1997, however, if the
Company executes its business plan for 1998, significant restructuring charges
are expected to be incurred during 1998. See the Outlook section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations for further information.
During the fourth quarter of 1996, the Company recorded $9 million of
restructuring charges. The restructuring was composed of $5 million of charges
related to severance costs associated with employment reductions (mostly in the
Company's U.S. salaried workforce) and $4 million of charges associated with
the shutdown of the Company's wholly-owned Canadian distributor. Substantially
all of the provisions are related to cash expenditures that were made during
1997.
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During 1995, the Company recorded $22 million of restructuring and other
charges. The main component of this was a second-quarter charge of $18 million
primarily to restructure its core Consumer Electronics and NWS business. The
charge was mainly comprised of provisions made in anticipation of cash
expenditures that were paid in the second half of 1995 or in the first half of
1996. The major elements of the restructuring related to severance expenses
($10 million) associated with employment reductions (mostly in the Company's
U.S. salaried workforce) and costs associated with realigned distribution
activities ($3 million) as the Company changed to direct-to-retail
distribution on a nationwide basis. The remaining charges related to other
non-recurring items, including certain environmental, legal and other
regulatory matters, and trade receivable write-offs (primarily for accounts in
Mexico as a result of the peso devaluation).
The remainder of the 1995 charges related to fourth-quarter charges totaling
$4 million that were incurred as a consequence of the LGE purchase of Old
Common Stock.
Interest Expense
Interest expense was $26 million in 1997, $15 million in 1996 and $20
million in 1995. The increased amounts in 1997 and 1995, when compared to
1996, resulted from higher funding requirements for Company operations. To
assist in funding these requirements, the Company entered into various
financing transactions.
Income Taxes
Due to the Company's continuing losses, provisions made for income taxes
during the last three years have not been material. In 1995, the Company
recorded an income tax credit of $8 million (including interest) that related
to a tax refund due the Company as a result of certain foreign tax credit
issues in audits of prior years.
Net Income
As a result of the factors described above, net losses were $299 million in
1997, $178 million in 1996 and $91 million in 1995. Corresponding per share
losses were $4.49 in 1997, $2.73 in 1996 and $1.85 in 1995.
In recent years, the Company has announced product initiatives based on its
digital set-top box and cable modem technologies. The Company has not yet
recognized any significant revenues from these product initiatives. Whether
the Company will achieve significant revenues or profits from these product
initiatives in the near term or ever will depend largely on market acceptance
of the products and the existence of competitive products. The Company expects
from time to time in the future to announce other product initiatives. The
ultimate contribution of any such initiatives to the financial performance of
the Company will similarly depend on such factors.
Cash Flows
Operating Activities
A principal use of the Company's liquidity is the cash used by operating
activities which consists of the Company's net loss as adjusted for non-cash
operating items and the changes in current assets and liabilities such as
receivables, inventories and payables.
In 1997, 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 was composed of 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 in 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 Old Common Stock to the retirement savings plans to fulfill the 1996
obligation to salaried employees. This issuance increased stockholders' equity
by $5 million.
In 1996, $24 million of cash was used by operating activities principally to
fund $143 million of net losses from operations as adjusted for depreciation.
The change in current accounts provided $116 million of cash and was
principally composed of a $180 million increase in accounts payable and
accrued expenses offset by a $53 million increase in inventories and 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 Claims is due to a lengthening of the terms, while the
increase in the other accounts payable is due mainly to the increased levels
of inventory. In addition, the Company reduced cash used by operating
activities by issuing common stock to the profit-sharing retirement plans to
fulfill the 1995 obligation to salaried employees and some hourly employees.
This issuance increased stockholders' equity by $5 million.
In 1995, $33 million of cash was used by operating activities principally to
fund $57 million of net losses from operations as adjusted for depreciation
and a loss on asset sales. The change in current accounts provided $20 million
of cash and was principally composed of a $51 million decrease in inventories
offset by a $38 million decrease in accounts payable and accrued expenses. The
decreases in inventories and accounts payable were due in part to lower levels
of color television production caused by lower sales levels. Inventories also
were reduced as a result of process improvements implemented during 1995.
Investing Activities
The principal recurring investing activity is the addition of property,
plant and equipment. These expenditures are primarily for equipment and
tooling related to product improvements, more efficient production methods and
replacement for normal wear. Beginning in 1997, another major investing
activity became the initial investment in transferor certificates and the
distribution of investor certificates that were both generated under the
receivable securitization with Citibank.
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 Citibank Receivables Facility) and $87
million of cash received in connection with a sale-leaseback transaction
whereby the Company sold and leased back new and existing manufacturing
equipment in its Melrose Park, Illinois, picture tube plant and in its Reynosa
and Juarez, Mexico, facilities. Capital additions in 1997 included
expenditures related to projects primarily in the color picture tube area,
which include new automated production processes and the addition of new
production lines for computer display tubes.
In 1996, investing activities used $125 million of cash, which consisted of
capital additions of $129 million offset by $4 million of proceeds from asset
sales. The level of capital additions in 1996 was significantly higher 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.
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In 1995, investing activities used $49 million of cash, which consisted of
capital additions of $52 million offset by $3 million of proceeds from asset
sales. Capital additions in 1995 included a new production line for projection
television picture tubes in the Company's Juarez, Mexico, plant and new
industrial robotics to perform labor-intensive production processes in the
Melrose Park, Illinois, picture tube plant.
The Company is planning a significant reduction in capital investment
projects during 1998.
Financing Activities
In 1997, financing activities provided $4 million of cash, which included $45
million provided as a result of borrowings under the Company's new term loan,
$25 million of increased borrowings under the Company's short-term debt
agreements and $1 million provided from sales of the Company's Old Common Stock
to employees of the Company via the exercise of previously issued stock
options. This was offset by $31 million of cash used to pay off the old term
loan, $24 million of cash used to redeem the 8.5% senior subordinated
convertible debentures due November 2000, $7 million of cash used to pay
maturities of the new term loan and $6 million of cash used to pay maturities
of the 6 1/4% convertible subordinated debentures due 2011.
In 1996, financing activities provided $55 million of cash, which included
$47 million provided as a result of borrowings under the Company's credit
agreement and $15 million provided from sales of the Company's Old Common Stock
to employees of the Company via the exercise of previously issued stock
options. This was offset by $7 million of cash used to pay maturities of the
GECC Term Loan.
The 1995 increase in cash provided was due to the Company selling $171
million of Old Common Stock to investors, principally the sale at $10 per share
of 16.5 million shares to LGE in November. In addition, the Company sold 1.3
million shares to investors under a shelf registration statement. Cash also was
provided during 1995 as the Company entered into a Term Loan Agreement for $40
million. Cash was used during 1995 as the Company repurchased $43 million
principal amount of its 8.5% Convertible Senior Subordinated Debentures due
2000 and 2001, at par plus accrued interest. This repurchase resulted from the
exercise by certain holders of the debentures of the right to require
repurchase of all or a portion of the debentures following a change of control
of the Company, which occurred upon the purchase of a controlling interest in
the Company by LGE.
Financial Condition
As of March 28, 1998, the Company had $377.5 million of interest-bearing
obligations which consisted of: (i) $133.7 million of extended-term payables
with LGE; (ii) $103.5 million of the Old Subordinated Debentures due 2011 (the
current portion of which was $5.8 million); (iii) $102 million payable under
various unsecured and uncommitted credit facilities; and (iv) a $38.3 million
term loan with Citicorp (the current portion of which was $9 million). In
addition, the Company had $1 million aggregate principal amount of 8.5% Senior
Subordinated Convertible Debentures due 2001 which are classified as current as
they were redeemed subsequent to December 31, 1997.
In April 1997, the Company obtained several financing commitments. One of the
commitments is a three year $110 million credit facility composed of a $45
million term loan and a $65 million revolving credit line. This facility
replaces the Company's previous credit agreement and term loan with GECC. The
term loan requires scheduled quarterly principal payments of $2 million with a
balloon payment of $20 million at maturity in the year 2000. Under the
revolving credit line, the maximum commitment of funds available for borrowing
is limited by a defined borrowing base formula related to eligible inventory.
The facility is secured by the Company's inventory, domestic fixed assets,
stock of the Company's subsidiaries and tuner patent royalties, along with the
related patents, licenses and other general intangibles. Interest on borrowings
is based on market rates.
The facility contains certain covenants that must be met in order to remain
in compliance with the facility, including financial covenants that must be
maintained as of the end of each fiscal quarter. During 1997, the Company
amended its credit facility to relax certain financial covenants. As amended,
the financial covenants
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include a minimum EBITDA amount, a current ratio test, a funded debt/total
capitalization ratio test, a tuning patent royalties test and an LGE payable
test. As a result of waivers obtained from the bank group, in December 1997 and
March 1998, only the tuning patent royalties test and the LGE payable test were
in effect as of December 31, 1997 and March 31, 1998, and the Company was in
compliance with both of these covenants.
A second commitment is a three year trade receivables securitization which is
provided through a Citibank commercial paper conduit. The availability of funds
under this receivable securitization is subject to receivables eligibility
based on such items as agings, concentrations, dilution and loss history,
subject to a maximum amount that was $165 million as of December 31, 1997, but
can be increased to $200 million, assuming additional bank commitments. LGE
provides support for this facility through a performance undertaking and a
letter of credit. This trade receivable securitization was accounted for as a
sale of receivables.
Also, in April 1997, the Company entered into an $87 million sale-leaseback
transaction whereby the Company sold and leased back new and existing
manufacturing equipment in its Melrose Park, Illinois, picture tube plant and
in its Reynosa and Juarez, Mexico, facilities. The term of the lease is 12 1/2
years and annual payments under the lease will average approximately $10
million. The Company's payment obligations, along with certain other items
under the lease agreement are fully guaranteed by LGE. The lease of the
manufacturing equipment was accounted for as an operating lease.
Upon the closing of the new financing agreements described above, the Company
received $142 million of which $77 million was used to pay off outstanding
balances under the credit agreement and term loan agreement with GECC. The
remainder of the funds was used to pay certain vendors, to pay fees related to
the new financing agreements and for general corporate purposes.
Additionally in April 1997 the Company and LGE entered into an arrangement
whereby certain of the Company's accounts payables arising in the ordinary
course of business with LGE will be extended for certain periods of time with
interest being charged on the amounts extended at negotiated rates.
In return for LGE providing support for the securitizations and the sale-
leaseback transaction and the extended-term payables arrangement, the Company
has granted options to LGE to purchase approximately 3.9 million common shares
of the Company at an exercise price of $0.01 per share, exercisable over time.
The accounting for these stock options is based upon their fair value with that
fair value being amortized straight-line over the term of the associated
commitments.
In August 1997 the Company received $30 million from LGE representing
payments in advance for 1997 sales from the Company to LGE. The amount was
recorded as a liability and as sales were made to LGE, the liability balance
was reduced. As of December 31, 1997, $0.6 million of the liability to LGE
remained and is included in accrued expenses.
Between November 1997 and February 1998 the Company entered into a series of
new financing transactions designed to enhance the Company's liquidity and
financial flexibility. The Company obtained a total of $110 million in
unsecured and uncommitted credit facilities through four lines of credit with
Bank of America ($30 million), First National Bank of Chicago--NBD ($30
million), Societe Generale ($20 million) and Credit Agricole Indosuez ($30
million). The credit lines are guaranteed by LGE for which LGE will receive a
fee in an amount up to 2% of the face amount of the loan, in the form of cash
or the Company's equity and subject to the approval of the Finance Committee of
the Company's Board of Directors and in the case of equity, the approval of the
Company's shareholders. The Company granted liens in favor of LGE on the
capital stock of the Company's domestic subsidiaries and on the Company's
intellectual property (other than tuning patents, tuning patent royalties and
related license agreements) to secure the guarantees of LGE for borrowings
under these credit lines. As a result of this financing, the Company redeemed,
in December 1997, its 8.5% senior subordinated convertible debentures due
November 2000. There was $24 million principal amount of such debentures
outstanding and the redemption price of such debentures was 104% of such
principal amount plus accrued interest through the redemption date. The Company
also called for redemption, in January, 1998 its 8.5% senior subordinated
convertible debentures due January 2001. There was $1 million principal amount
of such debentures outstanding.
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In March 1998, the Company entered into a secured credit facility with LGE
which provides for borrowings of up to $45 million. The term of the facility is
one year from the date of the first borrowing, subject to LGE's right to demand
repayment at any time after June 30, 1998. The facility has been amended to
allow demand for repayment any time after April 30, 1999. Repayment is due in
full at the end of the term. The facility is secured by liens on certain of the
Company's assets and is subject to certain terms and conditions.
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 has identified certain information and computer systems that are not
Year 2000 Ready and is in the process of purchasing software and hardware
upgrades and replacements for these systems. The Company anticipates that each
of these upgrades and replacements will be implemented prior to the Year 2000.
Additionally, the Company believes that its material non-information technology
systems will be Year 2000 Ready prior to the Year 2000. The Company believes
that most of its currently manufactured products are Year 2000 Ready. The
Company has sent Year 2000 Readiness Questionnaires to its existing key vendors
and suppliers to assess the Year 2000 Readiness of their systems and products.
The responses to these Questionnaires have indicated that the Company's vendors
or suppliers are addressing their Year 2000 issues and expect to be Year 2000
Ready by the Year 2000. While the Company is working to achieve Year 2000
Readiness, there can be no assurance that it will successfully achieve all of
its goals. At this time, and based on the Company's current implementation
plan, the Company does not believe that its Year 2000 related issues will have
a material adverse effect on the Company's business. Although no contingency
plan has been deemed to be necessary at this time, the Company is in the
process of formulating various contingency plans as a precautionary measure.
In connection with the Operational Restructuring, the Company plans to
discontinue substantially all of its manufacturing operations and to outsource
substantially all components and products. The Company believes its principal
exposure to Year 2000 risks are related to the ability of its vendors to
provide the Company with Year 2000 Ready components and products and to assure
that 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 has not yet determined those vendors on which it will rely following
completion of the Operational Restructuring. The Company is aware, however,
that Year 2000 issues may exist with respect to vendors with which they have or
will have a material relationship, and Year 2000 Readiness will be a material
consideration in the Company's selection of, and contract negotiations with,
such third-party vendors.
Prior to 1998, the Company spent in the aggregate approximately $1.8 million
on software and hardware upgrades and replacements and approximately $200,000
in other costs (i.e., labor, consulting fees and other expenses) in connection
with Year 2000 Readiness. The Company spent a total of $2.5 million in 1998
(approximately $800,000 for software and hardware upgrades and approximately
$1.7 million for other costs). The Company has estimated it will spend $3.6
million in 1999 (approximately $1 million for software and hardware upgrades
and approximately $2.6 million for other expenses) with respect to Year 2000
Readiness. Most of the costs incurred by the Company in addressing Year 2000
Readiness are expected to be expensed as incurred, in compliance with generally
accepted accounting principles. The Company continues to evaluate the estimated
costs associated with its Year 2000 Readiness efforts. While the Year 2000
transition efforts may
involve costs in addition to those currently budgeted or anticipated to be
budgeted, at this time, the Company has not yet determined the full costs of
the modifications that may be necessary to address all Year 2000 issues.
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BUSINESS
The following discussion of the business of the Company has largely been
excerpted from the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997. Accordingly, the following discussion does not reflect
the Restructuring and should therefore be read in conjunction with the
information contained in "PURPOSES AND EFFECTS OF THE RESTRUCTURING." For
financial information with respect to the Company's industry segments, see
"INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--Significant Accounting
Policies and Practices."
General
The Company was founded in 1918 and has been a leader in consumer
electronics, first in radio and later in monochrome and color television and
other video products. The Company's operations involve a dominant industry
segment, the design, development, manufacture and marketing of video products
(including color television sets and other consumer products) along with parts
and accessories for such products. These products, along with purchased VCRs,
are sold principally to retail dealers in the United States and to retail
dealers and wholesale distributors in foreign countries. The Company also sells
directly to buying groups, private label customers and customers in the
lodging, health care and rent-to-own industries. The Company's video products
also include color picture tubes that are produced for and sold to other
manufacturers and NWS products which include digital and analog set-top boxes
and cable modems, interactive television and data communication products which
are sold primarily to cable television operators, telecommunications companies
and other commercial users of these products.
The Company has incurred losses in all but one of the years since 1985. These
results reflected the cumulative effect of frequent and significant color
television price reductions during the 1980s and 1990s, and also reflected
earlier recessionary conditions in the United States. In addition, the Company
has invested significant amounts in engineering and research in recent years,
which amounts have been expensed as incurred.
In November 1995, a change in control of the Company occurred, in which LGE
purchased shares of the Company pursuant to a combined tender offer and
purchase of newly issued shares of Old Common Stock from the Company. As of
December 31, 1998, LGE and LG Semicon owned 38,315,000 shares, including vested
but unexercised options, of Old Common Stock of the Company, which represents
56.7% of the outstanding Old Common Stock.
Raw Materials
Many materials, such as copper, plastic, steel, wood, glass, aluminum and
zinc, are essential to the business. Adequate sources of supply exist for these
materials.
Patents
The Company holds many patents and is licensed under a number of patents
which are of importance to its business. The Company has patents and patent
applications for numerous HDTV and digital television related inventions. To
the extent these inventions are incorporated into the HDTV standard adopted by
the Federal Communications Commission, the Company expects to receive royalties
from these patents. In addition, royalties have been and may be received from
these patents for non-HDTV applications as well. Major manufacturers of
television sets and VCRs agreed during 1992 to take licenses under some of the
Company's U.S. tuner system patents. Based on 1997 U.S. industry unit sales
levels and technology, more than $25 million royalty income is expected for
each of the years 1998-2002 and $14 million in 2003, when the last of these
patents expire. The loss of any substantial portion of the Company's patent
royalties would have a material adverse effect on the Company's business,
financial condition, results of operations, ability to implement the
Operational Restructuring and ability to meet its creditor obligations.
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Seasonal Variations in Business
Sales of the Company's consumer electronics products are generally at a
higher level during the second half of the year. Sales of consumer electronics
products typically increase in the fall, as the summer vacation season ends and
people spend more time indoors with the new fall programming on television and
during the Christmas holiday season. During each of the last three years,
approximately 55% of the Company's net sales were recorded in the second half
of the year and approximately 30% of the Company's net sales were recorded in
the fourth quarter of the year.
Major Customers
Sales to a single customer, Circuit City Stores, Inc., amounted to $138.6
million (12%) in 1997, $187.2 million (15%) in 1996, and $172.1 million (14%)
in 1995. Sales to a second customer, Sears, Roebuck and Company, accounted for
$132.4 million (11%) in 1997 and $140.9 million (11%) in 1996. No other
customer accounted for 10% or more of net sales.
Competitive Conditions
Competitive factors in North America include price, performance, quality,
brand strength and reputation, variety of products and features offered,
marketing and sales capabilities, manufacturing costs, and service and support.
The Company's major product areas, including the color television market, are
highly competitive. The Company's major competitors are significantly larger,
100% foreign-owned companies, generally with greater worldwide television
volume and overall resources. In efforts to increase market share or achieve
higher production volumes, the Company's major competitors have aggressively
lowered their selling prices in the past several years.
Research and Development
During 1997 expenditures for Company-sponsored research and engineering
relating to new products and services and to improvements of existing products
and services were $42.9 million. Research and engineering expenditures were
$46.7 million in 1996 and $43.5 million in 1995.
Environmental Matters
Compliance with federal, state and local environmental protection provisions
is not expected to have a material effect on capital expenditures, earnings or
the competitive position of the Company. Further information regarding
environmental compliance is set forth in "--Legal Proceedings."
Employees
At December 31, 1998, the Company employed approximately 6,785 people, of
whom approximately 4,020 were hourly workers covered by collective bargaining
agreements.
At December 31, 1998, approximately 1,635 of the Company's employees were
located in the Chicago, Illinois, area, of whom approximately 800 were
represented by unions. Approximately 4,950 of the Company's employees are
located in Mexico, of whom approximately 3,220 were represented by unions.
Mexican labor contracts expire every two years and wages are renegotiated
annually or more frequently under rapid devaluation or high inflation periods.
The Company believes that it has good relations with its employees.
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Financial Information about Foreign and Domestic Operations and Export Sales
Financial information regarding foreign and domestic operations is summarized
as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1997 1996 1995
-------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Net Sales:
Domestic companies.......................... $1,144.9 $1,221.4 $1,212.7
Foreign companies........................... 28.2 66.5 61.2
-------- -------- --------
Total net sales............................. $1,173.1 $1,287.9 $1,273.9
======== ======== ========
Income (loss) before income taxes:
Domestic companies.......................... $ (195.3) $ (171.5) $(94.5)
Foreign companies........................... (4.9) (6.3) (4.0)
-------- -------- --------
Total income (loss) before income taxes..... $ (200.2) $ (177.8) $ (98.5)
======== ======== ========
Identifiable assets:
Domestic companies.......................... $ 405.1 $ 615.5 $ 548.5
Foreign companies........................... 122.6 149.8 152.2
-------- -------- --------
Total identifiable assets................... $ 527.7 $ 765.3 $ 700.7
======== ======== ========
</TABLE>
Foreign operations consist of manufacturing and sales subsidiaries in Mexico,
a distribution subsidiary in Canada (which was closed in December 1996) and a
purchasing office in Taiwan. Sales to affiliates are principally accounted for
at amounts based on local costs of production plus a reasonable return. Export
sales are less than 10% of consolidated net sales.
Sales to a single customer, Circuit City Stores, Inc., amounted to $138.6
million (12%) in 1997, $187.2 million (15%) in 1996, and $172.1 million (14%)
in 1995. Sales to a second customer, Sears, Roebuck and Company, accounted for
$132.4 million (11%) in 1997 and $140.9 million (11%) in 1996. No other
customer accounted for 10% or more of net sales.
The Company's product lines are dependent on the continuing operations of the
Company's manufacturing and assembly facilities located in Mexico.
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Properties of the Company
The Company utilizes a total of approximately 5.1 million square feet for
manufacturing, warehousing, engineering and research, administration and
distribution, as described below.
<TABLE>
<CAPTION>
Location Nature of Operation Square Feet
-------- ------------------- -------------
(In millions)
<C> <S> <C>
Domestic:
Chicago, Illinois Five administration, 1.9
(including suburban locations) production and
warehousing facilities
(approximately
1.0 million square feet
is leased by
the Company)
Fort Worth, El Paso, Brownsville Seven locations-- 0.8
and Dallas, Texas; Huntsville, warehouses/offices
Alabama; Ontario and San Jose, (all of which are leased
California by the Company)
Foreign:
Mexico Four locations with 2.4
(twelve
manufacturing and
warehouse
buildings)
Taiwan One purchasing office --
---
Total 5.1
===
</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.
Subsidiaries
The companies listed below are the significant subsidiaries of the Company.
<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
Zenith Partes De Matamoras, S.A. de C.V. Mexico
Productos Magneticos de Chihuahua, S.A. de C.V. Mexico
Partes de Television de Reynosa, S.A. de C.V. Mexico
Telson, S.A. de D.V. Mexico
Zenco de Chihuahua, S.A. de C.V. Mexico
Radio Componentes de Mexico, S.A. de C.V. Mexico
</TABLE>
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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, if adversely determined. 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 is also seeking a preliminary
injunction precluding the Company from terminating its licensing agreement and
allowing it to pay future royalties into an escrow. The court has denied the
plaintiff's request for a temporary restraining order against the Company. The
case was filed in the U.S. District Court in Los Angeles.
In June 1998, the Company's president and chief executive officer, its
directors, and an affiliate of LGE were named as defendants in a suit filed by
a shareholder in a state court in New Jersey entitled Vengrove v. Gannon, et
al. In December 1998, the suit was amended to name the Company, a former
director and chief executive officer of the Company, LGE, LG Semicon and LG
Group as additional defendants. The suit alleges breach of fiduciary duties
and violations 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 Old Common Stock held by minority
shareholders.
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, 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
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<PAGE>
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, 136(th) 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 ("PRP"s) under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), as a
generator of allegedly hazardous waste disposed of at eight contaminated sites
in the United States. These are: the Rocky Flats Industrial Park Superfund
Site in Jefferson County, Colorado, the Liquid Dynamics Superfund Site in
Chicago, Illinois, the Midwest Solvent Recovery Superfund Sites in Gary,
Indiana, the Galaxy/Spectron, Inc. Superfund Site in Elkton, Maryland, the
Master Metals Superfund Site in Cleveland, Ohio, the Fisher-Calo Superfund
Site in Kingsbury, Indiana, the North Penn Area 7 Superfund Site in Lansdale,
Pennsylvania and the Boarhead Farms Superfund Site in Bridgeton Township,
Pennsylvania.
Based on information available to the Company at this time, the Company
believes its share of liability at each of these Sites (other than North Penn
& Boarhead) will not be material. At the North Penn and Boarhead sites, no
cost estimates are available nor has liability been imposed. The Company has
finalized a Consent Decree with the United States of America regarding the
Moyer Landfill matter in Collegeville, Pennsylvania. Under the Consent Decree,
the Company has resolved its alleged liability for hazardous wastes disposed
of at Moyer Landfill for $300,000.
In a letter dated August 13, 1997, the United States Environmental
Protection Agency ("US EPA") gave notice to Zenco de Chihuahua and,
subsequently, Zenith Electronics Corporation of Texas, wholly-owned
subsidiaries of the Company, of their alleged liability as PRPs at the Rocky
Flats Industrial Park Superfund Site under CERCLA. The US EPA issued an order
to perform a "Non-Time Critical Removal" and established the framework for an
investigation. The total cost to perform the investigation is currently
estimated not to exceed $850,000 of which the Company paid $85,000 in 1998. In
the event the investigation costs exceed $850,000, the Company may be required
to contribute an additional sum equal to 10% of the such excess costs. No
allocation has been established for future response costs. In addition, the
liability for US EPA past costs and any remedial work that may be required has
not been determined.
On September 17, 1997 the US EPA served the Company with a General Notice of
Potential Liability pursuant to Section 107(a) of CERCLA with regard to the
Liquid Dynamics, Inc., Superfund Site in Chicago, Illinois. The US EPA advised
PRPs that it would perform a preliminary investigation. US EPA advised the
PRPs that it believes the entire Liquid Dynamics portion of the investigation
will not exceed $200,000. Future US EPA response costs incurred performing the
investigation and the cost of any remedial work have not yet been determined
but will be allocated among the members of the PRP group. However, based on
information currently available, the Company believes it will be allocated a
significant share of the cost of investigation and future response costs, if
any.
The Master Metals, Inc. Superfund site is located in Cleveland, Ohio. The
Company received notice from US EPA in 1996 that it was identified as a PRP
under CERCLA and would be held responsible for a portion of the clean up costs
associated with the site. A PRP group was formed to conduct Phase I remedial
activities which
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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.
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 Company is
implementing a customer notification and retrofit program, and believes it has
adequate reserves to cover the cost of such program.
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 announced that it intends to close its Melrose Park manufacturing
facility in December 1998, and has entered into 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 sale of color picture tubes
by Philips to the Company. Under these agreements, the Company may receive up
to approximately $24 million in cash or credits against future picture
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<PAGE>
tube purchases. The final amount depends on the amount of future tube
purchases from Philips by Zenith and its contract manufacturers. The Company's
Glenview, Illinois headquarters building was sold to BRI/Glenview I Inc. in
October 1998 for $23.3 million.
The Company is currently marketing other portions of its operations,
properties, equipment and inventories for sale as going concerns or as
individual asset sales. To date, no other definitive agreements have been
entered into concerning the sale of any of these operations or assets.
Outsourcing Contracts
Between October and December 1998, the Company has entered into definitive
supply agreements with vendors relating to significant portions of its 1999
model year requirements. These contracts cover console television sets, small
and medium screen direct-view sets, 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. These contracts are with a number of international consumer
electronics companies and a major specialty consumer electronics assembler. 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 or for some accessories and
components have been completed.
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 agreement
requires that company to supply the majority of the Company'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 picture tube supply agreement includes provisions relating
to the purchase of some of the equipment and assets located at the Company's
Melrose Park facility, including Leveraged Lease (Melrose Park) assets. The
projection television agreement provides for the manufacture of Zenith-
designed 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. At the
present time, all manufacturing has ceased, and the limited workforce on
hand at the facility is engaged in rework of some portion of existing out-
of-flow inventories and decommissioning of equipment and the facility. The
Company has sold a portion of the equipment housed at Melrose Park to
Philips and expects to begin shipments of equipment to the purchaser during
January 1999. Inventory at Melrose Park currently consists primarily of
out-of-flow tubes, some of which may not be recoverable and which will be
scrapped. 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.
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Chihuahua, Chihuahua, Mexico. The Company's NWS division products are
produced at the Chihuahua facility, including digital set-top boxes for
Americast, Sky Latin America, Sky New Zealand, NetSat and NDS. The Company
is in the process of discontinuing its analog set-top box lines, as
previously announced. In all cases, the Company's contracts for these
products are non-exclusive and the customer may secure products from
multiple sources. The Business Plan Projections assumed that NWS, including
the Chihuahua manufacturing operations, would be sold as an ongoing
business in 1998. The Company is continuing to attempt to sell the NWS
business.
Matamoros, Tamaulipas, Mexico. The Matamoros operations currently produce
electron guns, tuners and remote controls. The Company does not have long-
term contracts for the products produced at the facility. Inventory levels
have been reduced as the Company has implemented its program to close this
facility. The Company is seeking to sell these operations as an ongoing
business to a third party. The Company expects that equipment will be
liquidated or scrapped and the facility "moth balled" if a transaction for
the sale of the facility is not completed.
Reynosa, Tamaulipas, Mexico. The Company's Reynosa facility currently
manufactures direct view television sets and chassis for console
televisions. The Company expects to transfer the Reynosa facility to LGE
pursuant to the Prepackaged Plan.
Cd. Juarez, Chihuahua, Mexico. The Company assembles console televisions
and projections televisions at its Cd. Juarez facility, and previously
manufactured projection television picture tubes at this facility. The
Company has begun to decommission the plant, and expects that it will cease
operations at the plant in the second quarter of 1999 if it is unable to
sell all or a portion of the business. 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. The Company is seeking to sell the operations
as a going business. If unsuccessful, the Company will seek to sell the
equipment and the real estate as separate assets. If the Company is not
successful in selling all assets, unsold equipment will be liquidated or
scrapped, and the facility will be "moth balled."
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MANAGEMENT
The following table sets forth the name, age at December 31, 1998 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 December 1998, Managing Director 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...... 66 1995 Chairman Emeritus and former President and
Chief Executive Officer of USG Corporation and
employed in varying capacities with USG
Corporation and its affiliates since 1958;
Director of the Pepper Companies, Inc. and
LaSalle National Bank; Advisory Board member
of Good Shepherd Hospital, Kellogg Graduate
School of Management, Northwestern University
and Indiana University School of Business.
Robert A. Helman........ 64 1996 Partner in the law firm of Mayer, Brown &
Platt since 1967; also Director, Northern
Trust Corporation, Dreyer's Grand Ice Cream,
Inc. and the Chicago Stock Exchange.
Cha Hong (John) Koo..... 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 December
1998; 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>
164
<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 December 1998;
Executive Vice President of LG Electronics
Inc. from 1996 to 1998; a Director of LG
Electronics Inc. from 1996 to 1998; President
of Display Division, LG Electronics Inc. since
1992; Senior Managing Director of LG
Electronics Inc. from 1995 to 1996; Managing
Director of LG Electronics from 1991 to 1995,
Vice President of TV Display Division 1990 to
1992.
Hun Jo Lee......... 66 1995 Chairman of the Board of Zenith Electronics
Corporation since 1995; Advisor to LG
Electronics Inc. since 1998; Chairman of LG
Academy from 1996 to 1998; Director of LG
Electronics Inc. from 1989 to 1998; Chairman
of LG Academy from 1996 to 1998; Chairman and
Chief Executive Officer of LG Electronics Inc.
from 1994 to 1995; Vice-Chairman and Chief
Executive Officer of LG Electronics Inc. from
1993 to 1994; President and Chief Executive
Officer of LG Electronics Inc. from 1989 to
1993.
Andrew McNally IV.. 59 1990 Managing Director of Hammond, Kennedy, Whitney
& Company, Inc. (private equity investments).
Former Chairman and Chief Executive Officer
and current Director of Rand McNally & Company
(printing, publishing and map making);
Director of Hubbell Incorporated, Mercury
Finance Company, Borg-Warner Securities
Corporation and Morgan Stanley Funds.
Yong Nam........... 50 1995 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>
165
<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 December 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 provided
legal services to LGE. Messrs. Cho, C.H. Koo, S.P. Koo, Woo and Nam are
employees of LGE or its affiliates, and Mr. Lee is a retired employee of LGE.
Pursuant to the Stock Purchase Agreement under which LGE and LG Semicon
acquired a majority stake in the Company in 1995, LGE and LG Semicon were
provided with the right to designate six directors to the Board immediately
following the stock purchase. At that time, LGE and LG Semicon designated Mr.
Lee, Mr. C. H. Koo, Mr. Nam, Mr. Woo, Mr. Cho and Mr. Connolly as directors.
Since 1995, candidates for the Board have been nominated by the sitting Board.
With the exception of Mr. S. P. Koo and Mr. Woo, the current Board was
nominated for election by the Board at its January 31, 1997 meeting. Mr. S. P.
Koo and Mr. Woo were nominated and elected to the Board at its October 27,
1997 meeting. As the holder or beneficial owner of the majority of the
Company's outstanding shares of Old Common Stock, LGE has the ability to elect
all of the Company's directors. Together with LG Semicon, LGE collectively
beneficially owns approximately 56.7% 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 ("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.
166
<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 ("Organization and Compensation
Committee") currently consists of Messrs. Connolly (Chairman), Helman and
McNally. The Committee establishes compensation policies, as well as salary
ranges, salaries and annual incentive awards for executives and approves
employment contracts.
The Stock Compensation Committee ("Stock Compensation Committee"), which
currently consists of Messrs. Connolly and McNally, authorizes grants of stock,
stock options and other equity-based awards under the Long-Term Equity
Compensation Plan.
Directors of the Company who are also employees of the Company, of LGE or its
affiliates receive no remuneration for serving on the Board or on any
Committees. Other directors are compensated at the rate of $18,000 per year,
payable in quarterly installments. The Chairman of the Audit Committee and the
Chairman of the Organization and Compensation Committee each receives $2,000
annually for serving in those capacities. In addition, directors who are not
employees of the Company, LGE or its affiliates receive $1,000 for each Board
meeting and for each Committee meeting attended. All directors are entitled to
be reimbursed for their expenses for attending Board or Committee meetings.
Under the terms of the Company's Long-Term Equity Compensation Plan, approved
by the stockholders in May 1997, directors are eligible to receive awards of
stock options, stock appreciation rights, restricted stock and performance
units/shares. Messrs. Brooker, Connolly, Helman and McNally were each granted
an option to purchase 2,000 shares of Company stock on July 18, 1997, at the
market price of the Company stock on that date. In 1987 the Company adopted a
contingent compensation plan for non-employee directors ("Contingent
Compensation Plan"). The number of phantom stock appreciation units granted to
each named non-employee director in previous years under the Contingent
Compensation Plan (all of which are vested) are as follows: Mr. Brooker, 3,000;
Messrs. McNally and Willmott, 2,000 each. The units are valued at the closing
price of the Company's common stock on the date of grant. Participants are paid
for each unit the amount by which the average price of a share of the Company's
common stock over the 20 trading days immediately preceding the distribution
date exceeds the grant price. Distributions may be, at the election of the
participant, in a lump sum, in five annual installments 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.
167
<PAGE>
Current Executive Officers of the Company
The following table sets forth the name, age at December 31, 1998 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..... 47 President and Chief Executive Officer, since
January 1998. Previously held a variety of senior
positions at General Electric during a 24-year
career, including Corporate Vice President,
International Business Development from October
1997 to January 1998 and President & Chief
Executive Officer of General Electric Lighting's
Asia Pacific Operations from 1994 to 1997.
Edward J. McNulty..... 58 Senior Vice President and Chief Financial Officer
since June 1998. Previously Chief Financial Officer
of General Binding Corporation from 1984 to 1998.
Richard F. Vitkus..... 59 Senior Vice President, General Counsel since 1994.
Secretary since 1995. Previously Senior Vice
President, General Counsel, and Director of
Corporate Development at Vanstar Corporation
(formerly ComputerLand Corporation) from 1991 to
1994.
Robert N. Dangremond.. 55 Senior Vice President, Restructuring since June
1998; Acting Chief Financial Officer from January
1998 to June 1998. Principal with Jay Alix &
Associates, a consulting and accounting firm
specializing in corporate restructurings and
turnaround activities, since August 1989.
Previously, beginning in August 1995, Mr.
Dangremond has held the position of interim Chief
Executive Officer and President of Forstmann &
Company, Inc. and was Chairman of the Board,
President and Chief Executive Officer of AM
International, Inc. from February 1993 to September
1994. Currently Mr. Dangremond is a Director of
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 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. The Company's Senior Vice President and General Counsel is
the only Named Executive Officer (as defined herein) 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. Such
program was developed based on benchmarked, publicly available studies of
similar programs. The short- and long-term incentive bonuses have been divided
into two tiers, with seven key executives in tier one and eight key executives
and senior managers in tier two. The Company's Chief Executive Officer's
incentive programs and bonuses are established under his employment contract.
See "--Employment Agreements."
The aggregate amount of retention bonuses payable to the fourteen key
executives totals $1.2 million and is payable in two equal installments, the
first having been paid on or about December 31, 1998 and the second scheduled
to be paid on July 1, 1999. The short-term incentive program for tier 1
executives is targeted at 50% of base salary and has a maximum payment of 100%
of base salary for any individual. For tier 2 executives, the
168
<PAGE>
short-term incentive program is targeted at 20 to 30% of base salary and has a
maximum payment of 30 to 45% of base salary for any individual. Tier 1 and tier
2 short-term incentive programs have a maximum pay out value of approximately
$1.6 million and $0.5 million, respectively, and are payable on 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 $4.8
million and $1.7 million. All long-term incentive bonus payments are payable on
March 31, 2001. Tier 1 and tier 2 short-term and long-term incentive programs
cover 15 key executives and senior managers, not including the Chief Executive
Officer. Those incentive programs are based on achieving certain performance
goals in connection with the Restructuring. The Company could be required to
make payments to 15 key executives and senior managers aggregating up to $2.1
million under the short-term incentive program and $6.5 million under the long-
term incentive program. The following chart summarizes the retention bonuses
and incentives the Company may be obligated to pay.
<TABLE>
<CAPTION>
Maximum Maximum
Short-Term Long-Term
Retention Incentive Incentive
Executive Group Bonus Payment Payment Total
- --------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Tier One Executives and Senior
Managers......................... $ 670,332 $1,615,680 $4,847,040 $7,133,052
Tier Two Executives and Senior
Managers......................... 553,280 461,572 1,659,840 2,674,692
---------- ---------- ---------- ----------
Total............................. $1,223,612 $2,077,252 $6,506,880 $9,807,744
========== ========== ========== ==========
</TABLE>
The executives in tier one are: Richard F. Vitkus, Edward J. McNulty, William
G. Luehrs, Kevin Lynch, Kathryn Wolfe, William J. Sims and John I. Taylor. The
executives in tier two are: Nick Mehta, Richard Lewis, Hector Escobedo, Gerald
Reid, Wendy Weil, Gregg Gronowski, Tom Sorensen and Michael Thomas.
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. 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.
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
169
<PAGE>
benefit of Mr. Gannon permitting him to draw against it under certain
circumstances for his base salary and guaranteed bonuses for the term of his
employment agreement. A subsidiary of LGE has guaranteed Mr. Gannon's base
salary and guaranteed bonuses in the event the letter of credit is unavailable.
In connection with the Restructuring, the Company has entered into amended
employment agreements (the "Employment Agreements") with a number of key
executives, including Richard F. Vitkus (the "Key Executives"). The Employment
Agreements generally provide for an employment period which ends on December
31, 2000. Each Employment Agreement provides for payment of a retention bonus
payable in two installments, each in the amount of 25% of the Key Executives'
salary, the first paid on or about January 1, 1999 and the second scheduled to
be paid July 1, 1999, so long as the Key Executive remains continuously in the
Company's employ through the date such installment is due. Upon either a non-
renewal of the Employment Agreements by the Company or upon termination of
employment by the Company without cause, a Key Executive will be entitled to
receive (a) a lump sum severance payment equal to, if the termination occurs
prior to January 1, 2000, an amount equal to one and one-half times the sum of
the Key Executive's annual base compensation and annual incentive compensation
for the year in which termination occurs, or if the termination occurs after
January 1, 2000, an amount equal to one times the sum of the Key Executive's
base compensation and annual incentive compensation for the year in which
termination occurs; (b) a pro rata portion of the Key Executive's (i) targeted
annual incentive compensation for the year in which termination occurs and (ii)
long-term incentive compensation (based on the appropriate percentage of the
Key Executive's aggregate base compensation earned from January 1, 1998 through
the end of the month in which termination occurs, as determined by the Board
after prorating the applicable performance criteria through the end of the
month in which termination occurs on a straight-line basis over the three year
period); (c) continued coverage, or substantially equivalent coverage (for
either one and one-half years or one year, as determined according to the
severance payment), under all welfare plans including group medical and dental,
health and accident, long-term disability, short-term disability, group life
insurance and executive insurance in which the Key Executives were
participating at the time of termination (if the Company is unable to provide
such continued coverage or substantially similar coverage, the Company will pay
the Key Executive a lump sum cash amount equal to the present value of such
benefits); and (d) outplacement services not to exceed 15% of the Key
Executive's base compensation. Mr. Vitkus' Employment Agreement further
provides that, upon at least 90 days notice, he may voluntarily terminate his
contract effective December 31, 1999 and still be entitled to receive (i) his
severance payment, (ii) his actual annual incentive compensation for 1999 and
(iii) the benefits described in (c) and (d) above.
Upon termination of employment of any of the Key Executives within two years
after a change in control of the Company ("Change in Control Period"), the
Employment Agreements provide for various severance pay and benefits. Change in
control is defined in the Employment Agreements to exclude any further
acquisition by LGE and the Restructuring. During the Change in Control Period,
severance pay and benefits will not be paid if employment is terminated because
of death, disability or retirement, or by the Company for cause, or by the Key
Executive other than for good reason. Upon termination of employment during a
Change in Control Period, the Employment Agreements provide for (i) a pro rata
portion of the Key Executive's annual incentive compensation and long-term
incentive bonus, (ii) a lump sum payment equal to three times the highest
annual base compensation during the three full fiscal years prior to
termination, (iii) three times the greater of (A) the highest 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
170
<PAGE>
been imposed on any payments which are contingent on a change in control and
which equal or exceed three times the average taxable compensation for the
prior five years or their period of employment. The Company is obligated to
reimburse the Key Executive for legal fees and expenses incurred in
successfully enforcing the Employment Agreements.
The Company intends to seek court authority to honor its obligations under
the retention programs and to assume the employment contracts of Messrs.
Gannon and Vitkus and other executives and managers after the filing of the
Prepackaged Chapter 11 Case. See "THE PREPACKAGED PLAN--Intended Actions
During the Prepackaged Chapter 11 Case--Provisions for Employees; Retention
Programs; Employment Contracts."
Other employees of the Company may be parties to employment agreements that
will not be affected by the Restructuring or the Prepackaged Plan.
Executive Compensation and Other Information
The following Summary Compensation Table sets forth, for the periods
indicated, the cash compensation and certain other components of compensation
of the Company's Chief Executive Officer, the other three executive officers
of the Company and the former Chief Executive Officer of the Company, Peter S.
Willmott, who left the Company in January, 1998. Those listed in the table are
hereinafter referred to as the "Named Executive Officers."
Summary Compensation Table
<TABLE>
<CAPTION>
Other Restricted Securities
Annual Stock Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($)(1) Awards($)(2) Options/SARs(#) Compensation
- --------------------------- ---- --------- -------- ------------------ ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jeffrey P. Gannon(3).... 1998 527,727 880,273 0 2,780,000 300,000(2) 83,946
President and Chief 1997 0 0 0 0 0 0
Executive Officer 1996 0 0 0 0 0 0
Edward J. McNulty(4).... 1998 150,024 0 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....... 1998 275,018 91,754(5) 0 0 0 9,600(6)
Senior Vice President, 1997 229,999 23,000 0 0 25,000 8,600(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 (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.
171
<PAGE>
(5) Of the amount shown, $68,754 reflects amounts earned by Mr. Vitkus under
the Company's executive retention program. See "--Current Executive
Officers of the Company--Executive Retention and Incentive Programs."
(6) The amount reflects the annual contribution to the Company's defined
contribution plan for Messrs. Vitkus and Willmott. Since Mr. Willmott was
not fully vested at the time of his termination of employment, the Company
contribution was forfeited.
(7) Mr. Dangremond is a principal in the firm of JA&A which was hired as a
consultant to the Company for the restructuring. Mr. Dangremond's
compensation is paid to him by JA&A. Fees paid to JA&A are discussed under
"Estimated Fees And Expenses--Advisors."
(8) The amount reflects a negotiated separation payment of $500,000 in lieu of
termination benefits provided for under an employment agreement and $9,585
of imputed income for Company paid life insurance premiums.
Ramesh G. Amin served as an Executive Vice President of the Company from
1996 to October 1997. In connection with Mr. Amin's termination of employment
with the Company, he received severance payments of $600,000 during 1998. No
additional payments are required in 1999.
Option/SAR Grants in 1998
Mr. Gannon is the only Named Executive Officer who was granted stock options
in 1998. Mr. Gannon's employment agreement was amended as part of plans
relating to the Restructuring. The stock option grants provided under Mr.
Gannon's original employment agreement were eliminated with the amendment. No
stock appreciation rights (SARs) were granted to the Named Executive Officers
in 1998.
Aggregated Option/SAR Exercises in 1998 and Year-End Option/SAR Values
Shown below is information concerning the unexercised options to purchase
Company common stock held by the Named Executive Officers at December 31,
1998. No Named Executive Officers exercised stock options or SARs in 1998 and
no Named Executive Officer currently holds any SARs.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Fiscal Options/SARs at Fiscal
Year-End(#) Year-End($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
<S> <C> <C>
Jeffrey P. Gannon........... 0/0 0/0
Edward J. McNulty........... 0/0 0/0
Richard F. Vitkus(1)........ 26,333/36,667 0/0
Robert Dangremond........... 0/0 0/0
Peter S. Willmott........... 0/0 0/0
</TABLE>
(1) The exercise price of options held by Mr. Vitkus exceeds $0.25 (the
closing price of the Company's Old Common Stock on December 31, 1998).
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SECURITY OWNERSHIP
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information regarding the beneficial
ownership of the Old and New Common Stock as of December 31, 1998 and after
the Restructuring by (i) all persons who are known by the Company to
beneficially own more than 5% of the outstanding shares of the common stock of
the Company; (ii) each director and Executive Officer of the Company; and
(iii) all directors and Executive Officers as a group:
<TABLE>
<CAPTION>
Shares Beneficially Shares
Owned Prior to Beneficially Owned
Restructuring(1) After Restructuring
------------------------ ----------------------
Name Number Percent(2) Number Percent
- ---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
LG Electronics Inc........... 12,219,800(3) 18.1% 1,000 100%
LG Semicon Company Ltd....... 26,095,200 38.6% 0 0
Richard F. Vitkus............ 33,000(4) * 0 0
Peter S. Willmott............ 25,000 * 0 0
T. Kimball Brooker........... 11,000 * 0 0
Andrew McNally IV............ 8,000 * 0 0
Eugene B. Connolly........... 2,000 * 0 0
Robert A. Helman............. 1,000 * 0 0
Ki-Song Cho.................. 0 0 0 0
Robert Dangremond............ 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 (14
persons).................... 80,000 * 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 660,235 shares of Old Common Stock as of September 30, 1998.
(2) Percentage based on shares issued and outstanding on December 31, 1998.
(3) As of December 31, 1998, LGE beneficially owned 12,219,800 shares directly
as to which it had sole voting and dispositive power. Such amount includes
1,746,000 shares obtainable through the exercise of stock options. In
April 1997, pursuant to the Financial Support Agreement, LGE was granted
options to purchase 3.9 million shares of Old Common Stock. Upon early
termination of the Leveraged Leases, the vesting of 160,000 of the stock
options issued pursuant to the Financial Support Agreement between LGE and
the Company was accelerated. The remaining 2,219,000 options issued
pursuant to the Financial Support Agreement were forfeited. LG Semicon has
given LGE an irrevocable proxy to vote the 26,095,200 shares owned by LG
Semicon as to which LG Semicon retains dispositive power.
(4) Includes 30,000 outstanding shares for Mr. Vitkus which are subject to
conditions of vesting (one-third vests on the third, fourth and fifth
anniversary of the May 21, 1996 grant date), forfeiture, restrictions on
sales, transfer and other dispositions.
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DESCRIPTION OF CAPITAL STOCK
Old Common Stock and Old Preferred Stock
The Company is presently authorized to issue 150,000,000 shares of Old
Common Stock, par value $1.00 per share, and 8,000,000 shares of preferred
stock, par value $1.00 per share (the "Old Preferred Stock"). As of September
26, 1998, there were issued and outstanding 67,525,447 shares of Old Common
Stock and no shares of Old Preferred Stock. Except as may be otherwise
required by applicable law, the holders of the Old Common Stock vote together
as a Class and are entitled to one vote per share on any matter submitted to a
vote of the Company's stockholders. The issuance, designations, preferences
and voting rights of the Old Preferred Stock are as determined from time to
time by the Board. The shares of Old Common Stock have no preemptive or other
subscription rights and there are no conversion, redemption or sinking fund
provisions with respect to such shares.
New Common Stock
Giving effect to the transactions contemplated by the Prepackaged Plan, the
Old Common Stock will be cancelled and, pursuant to the Amended Certificate of
Incorporation, the Company will be authorized to issue 1,000 shares of New
Common Stock, par value $0.01 per share. Immediately after the Restructuring,
there will be issued and outstanding 1,000 shares of New Common Stock, all of
which will be owned by LGE. Holders of the New Common Stock will be entitled
to one vote per share on any matter submitted to a vote of the Company's
stockholders. The shares of New Common will have no preemptive or other
subscription rights and there will be no conversion, redemption or sinking
fund provisions with respect to such shares.
Delaware Anti-Takeover Law
The Company presently is (and, upon Consummation of the Restructuring, will
be) subject to the provisions of section 203 (the "Delaware Anti-Takeover
Law") of the Delaware General Corporation Law (the "DGCL"). Under the Delaware
Anti-Takeover Law, certain "business combinations" between a Delaware
corporation, whose stock generally is publicly traded or held of record by
more than 2,000 stockholders, and an "interested stockholder" are prohibited
for a three-year period following the date that such stockholder became an
interested stockholder, unless, among other conditions, (i) the corporation
has elected in its certificate of incorporation not to be governed by the
Delaware Anti-Takeover Law, (ii) the business combination was approved by the
board of directors of the corporation before the other party to the business
combination became an interested stockholder, (iii) upon consummation of the
transaction that made it an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
commencement of the transaction (excluding voting stock owned by directors who
are also officers or held in employee benefit plans in which the employees do
not have a confidential right to tender or vote stock held by the plan) or
(iv) the business combination was approved by the board of directors of the
corporation and ratified by 66 2/3% of the voting stock which the interested
stockholder did not own. The three-year prohibition also does not apply to
certain business combinations proposed by an interested stockholder following
the announcement or notification of certain extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the corporation's directors.
The term "business combination" is defined generally to include mergers or
consolidations between a Delaware corporation and an "interested stockholder,"
transactions with an "interested stockholder" involving the assets or stock of
the corporation or its majority-owned subsidiaries and transactions which
increase an interested stockholder's percentage ownership of stock. The term
"interested stockholder" is defined generally as any person who becomes the
beneficial owner of 15% or more of a Delaware corporation's voting stock. The
Delaware Anti-Takeover Law could prohibit or delay the accomplishment of
mergers or other takeover or change in control attempts with respect to the
Company and, accordingly, may discourage attempts to acquire the Company.
174
<PAGE>
CERTAIN TRANSACTIONS
The Company has several financings, supply and other arrangements with LGE
and its affiliates. See "SPECIAL FACTORS--Events Leading to the
Restructuring--Financing Transactions" and "--Other Transactions with LGE."
In November 1995, a change in control of the Company occurred, in which LGE
and LG Semicon purchased shares of the Company pursuant to a combined tender
offer and purchase of newly issued shares of common stock from the Company. As
of September 26, 1998, LGE beneficially owned or held an irrevocable proxy to
vote 38,315,000 shares of common stock of the Company which represents 56.7%
of the outstanding common stock. Because LGE owns and/or has the ability to
vote a majority of the issued and outstanding common stock, it effectively
controls the outcome of any matter requiring action by a majority of the
Company's stockholders, including the election of a majority of the Company's
directors and any future change in control of the Company.
LGE is a leading international brand-name manufacturer of five main groups
of products: televisions; audio and video equipment; home appliances;
computers and office automation equipment; and other products, including video
displays, telecommunication products and components, and magnetic media. The
Company and LGE engaged in the following material transactions in 1996 and
1997 and the first three quarters of 1998.
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 $34.7 million, $93.3 million and $128.8 million of these
items in the nine months ended September 26, 1998 and the years ended December
31, 1997 and 1996, respectively. Sales of products purchased from LGE and LG
Semicon contributed $46.5 million, $112.3 million and $141.4 million to sales
in the nine months ended September 26, 1998 and the years ended December 31,
1997 and 1996. The purchase prices were the result of negotiations between the
parties, and were consistent with third party bids.
In 1998, the Company and LGE entered into a direct shipment arrangement
pursuant to which LGE sells and ships VCRs directly to the Company's two
largest customers and pays the Company a license fee for the use of the
Company's brand names on such products and the inclusion of the Company's
patented tuner technology in such products. The license fee payable by LGE is
comparable to royalty 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 first
three quarters of 1998, the Company received approximately $1.4 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 less than $60,000 in 1997 and approximately $100,000
during the first three quarters of 1998.
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 $0.5 million, $13 million and
$24 million in 1998, 1997 and 1996, respectively. The machinery and equipment
related primarily to new production lines for the manufacture of computer
display tubes and the automation of existing production lines in the Company's
Melrose Park picture tube plant. A portion of the purchased machinery and
equipment was manufactured by LGE, with the balance procured by LGE on the
Company's behalf from third party vendors. LGE acted as the coordinating
purchasing agent for the Company because the equipment and machinery was part
of an integrated production system based on a similar facility designed,
operated and owned by LGE in Kumi, South Korea. The purchase prices for the
equipment were the result of negotiations between the parties.
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<PAGE>
Product and other sales: The Company sells televisions, picture tubes, yokes
and other manufactured subassemblies to LGE at prices that equate to amounts
charged by the Company to its major customers. Sales in 1996, 1997 and the
first three quarters of 1998 by the Company to LGE and to subsidiaries of LGE
were $29.4 million, $55.1 million and $30.7 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 product in Mexico. The Company sold the inventory of its
Canadian distributor to LGE after consideration of the business alternatives
for continuing operation 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 first three quarters of 1998, the
Company's sales to the LGE Canadian and Mexican subsidiaries were $16.2 million
and $11.0 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 may 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 September 26, 1998, the Company had not received any such royalties,
however, and accordingly no payments have been made to LGE pursuant to such
agreement. The Company originally licensed flat tension mask technology to LGE
on a non-exclusive basis in 1991. The license provided for an initial five year
term with automatic one year renewals unless otherwise terminated. Under the
agreement, the Company is to receive a $2.5 million payment on the first sale
of flat tension mask products by LGE, and a running royalty on all products
sold by LGE incorporating the technology at royalty rates ranging from 2.5% to
1.5%, based on units sold. In December 1996 the license was amended to
eliminate LGE payments until December of 2001 in exchange for LGE's assistance
in the development and manufacture of the Company's planned computer display
tubes and a paid up cross-license to the Company from LGE on LGE's related
technology. LGE has informed the Company that it has not sold any products
incorporating the flat tension mask 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.
176
<PAGE>
Under a separate agreement, the Company has licensed its tuner patents to
LGE. LGE's payments to the Company under tuner licenses were approximately
$0.2 million, $0.1 million and $1.0 million in the nine months ended September
26, 1998 and the years ended December 31, 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 September 26, 1998, the Company had assigned to LGE or its
affiliates for a total of approximately $6,000 one U.S. patent, one foreign
patent and one foreign patent application relating to television and
telecommunication technology. The Company has made a decision not to protect
or maintain those patents already assigned to LGE under the agreement. The
Company retains a non-exclusive, royalty-free license to the use of any
patents so assigned. The agreement also provides that LGE may file patent
applications in respect of the Company's technologies in any foreign
jurisdiction in which the Company does not intend to protect its potential
patent rights, provided that LGE pays the Company 10% of all royalties
received by LGE in respect of such rights. As of September 26, 1998, the
Company believes that LGE had exercised its right to file foreign applications
in respect of 35 of the Company's U.S. patented technologies. No royalty
income from such foreign rights assignments had been realized by Zenith as of
September 26, 1998. Additionally, under a separate agreement the Company
assigned to LGE's telecommunications affiliate a patent relating to cordless
telephone technologies for $75,000. The Company retained a royalty-free, non-
exclusive license and 50% of all royalties collected by the LGE affiliate
related to such patent.
An affiliate of LGE has also licensed certain technological information from
Zenith relating to the manufacture of VSB modulation equipment under a 1998
agreement. That agreement allows the LGE affiliate to use technical
information and design schematics as the basis for further development of
commercial products. Under the agreement, Zenith received $300,000 in 1998 in
up-front payments and additional royalty payments per unit sold by the LGE
affiliate based on Zenith's designs. The agreement does not include a VSB
patent license.
The Company currently produces modulators on a small scale to facilitate the
roll out of digital TV in the U.S. but the Company does not have any definite
long term plans to remain in that business. Even if the Company decides to
remain in the modulator manufacturing business on a long-term basis, the
Company's outsourcing strategy would require it to buy the modulators from a
third party. The LGE affiliate could be such a third party. While the
technology license agreement provides the LGE affiliate with a world-wide
license, the LGE affiliate has informed the Company that it currently expects
to market such products only in Korea. The Company has no plans to market
modulators in Korea. For these reasons, the LGE affiliate should not have an
impact on the Company's competitive standing in this product line.
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 (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 at cost that were covered under service agreements.
The Company's obligations to LGE for such services totaled $1.3 million, $4.8
million and $0.3 million in the nine months ended September 26, 1998 and the
years ended December 31, 1997 and 1996, respectively. 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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<PAGE>
In late December 1997, the Company entered into an agreement with LG
Software India Ltd. pursuant to which LG Software India Ltd. provides certain
software development, design and support services to the Company. Projects
under the agreement include the Company's Year 2000 Readiness support.
Payments to LG Software India Ltd. were $1.1 million and $0.1 million in 1998
and 1997, respectively. No such payments were made during 1996.
Financial Assistance: In 1997, the Company consummated $87 million in sale-
leaseback transactions in which it sold and leased back new and existing
manufacturing equipment in its Melrose Park, Illinois plant and the Reynosa,
Mexico and Juarez, Mexico facilities pursuant to the Leveraged Leases. 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. In March 1998,
the Company entered into the LGE Demand Loan Facility, which provides for
borrowings of up to $45 million. The interest rate is LIBOR plus 6.5% per
annum. The term of the facility is one year from the date of the first
borrowing, subject to LGE's right to demand repayment at anytime after June
30, 1998. In June 1998, this facility was amended to provide that, in the
absence of an event of default, demand for repayment may not occur prior to
December 31, 1998. In December 1998, in conjunction with the extension of the
Amended Citibank Credit Facility to the earlier of a bankruptcy filing by the
Company and April 30, 1999, the Company and LGE amended the LGE Demand Loan
Facility to provide that no demand for repayment may be made under the
facility, absent an event of default, prior to April 30, 1999. Repayment is
due in full at the end of the term. The Company has borrowed $30 million under
such facility through October 31, 1998 and has paid $1.2 million of interest
through September 26, 1998. The facility is secured by a second lien on the
assets that secure the Company's obligations under the Reimbursement Agreement
and a second lien on the Company's VSB patents. In October 1997, in
conjunction with amendments to the Citibank Credit Facility, LGE agreed to
provide credit support for up to $160 million of third-party financing in
consideration of a credit support fee of approximately 2% per annum of the
facilities actually obtained by the Company and guaranteed by LGE (to be paid
in cash or equity). With credit support from LGE, between November 1997 and
February 1998, the Company entered into the Unsecured Bank Loans pursuant to
which the Company borrowed approximately $102 million. In connection with the
Unsecured Bank Loans, the Company entered into the Reimbursement Agreement
pursuant to which the Company agreed to reimburse LGE for amounts paid
pursuant to the guarantees (plus interest at the Reference Rate announced by
Bank of America plus 2% per annum) and granted liens, junior to the liens
securing the Citibank Credit Facility, in favor of LGE on the capital stock of
the Company's domestic subsidiaries and the equipment, real property and
certain intellectual property of the Company and its Subsidiaries. As of
September 26, 1998, LGE had made payments pursuant to demands on its
guarantees in connection with $72 million of the Unsecured Bank Loans. As of
September 26, 1998, $1.3 million of interest had accrued on amounts owed LGE
under the Reimbursement Agreement. LGE has waived payment of such interest
through November 30, 1998.
In September 1997, the Company and LGE entered into an High Definition TV
Receiver Project Agreement. As called for in the agreement, the Company
received $4.5 million from LGE toward funding for the project. In return, LGE
will receive a percentage of applicable royalties the Company anticipates
receiving until such time as LGE has received $4.5 million. The $4.5 million
is included in long-term liabilities.
In August 1997, the Company received $30.0 million from subsidiaries of LGE
representing payments in advance for 1997 sales from the Company to LGE. The
amount was recorded as a liability and as sales were made to LGE, the
liability balance was reduced. As of December 31, 1997, $0.6 million of the
liability to subsidiaries of LGE remained and is included in other accrued
expenses. During 1998 this balance has been 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
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<PAGE>
payables was $106.8 million, $144.3 million and $134 million as of December
31, 1996, 1997 and September 26, 1998, respectively. The Company is charged
interest in respect of each vendor credit advance at varying rates equal to
LIBOR plus an applicable margin, which has increased over the period during
which such vendor credit remains outstanding. As a result, the interest rate
per annum payable in respect of individual credit advances varies over time.
The average interest rates per annum charged in 1998, 1997, and 1996 were
13.4%, 7.9% and 6.4% respectively. During 1997 and the first three quarters of
1998, the Company has accrued approximately $9.6 million and $12.3 million of
interest, respectively, under this credit arrangement.
As of December 31, 1997 and 1996, accounts payable included $145.9 million
and $124.5 million, respectively, to LGE and its affiliates. The amount of
receivables from LGE and its affiliates was not material as of December 31,
1997 and 1996.
In return for LGE providing support for certain financing activities of the
Company entered into in April 1997, the Company granted options to LGE to
purchase approximately 3.9 million common shares of the Company at an exercise
price of $0.01 per share, exercisable over time. The accounting for these
stock options was based upon their fair value with that fair value being
amortized on a straight-line basis over the term of the associated
commitments. The related deferred financing charge, net of amortization, is
recorded as follows: $30.1 million in noncurrent other assets and $5.1 million
in current other assets. LGE's stock options will be cancelled under the
Prepackaged Plan.
Other Items: The Company currently leases space from an LGE subsidiary in
(i) Huntsville, Alabama, for its Parts and Service group, (ii) Ontario,
California, for a warehouse and (iii) San Jose, California, for NWS. Zenith's
rental payments in respect of the Huntsville, Ontario and San Jose properties
totaled approximately $138,000, $135,000 and $59,000, respectively, in 1997
and approximately $218,000, $180,000, and $54,000, respectively, for the first
three quarters of 1998. During part of 1996, the Company made lease payments
for use of the Ontario facility totaling $2,000.
The Company and LGE are in discussions concerning the joint development of
HDTV products, which may eventually be manufactured by LGE for the Company for
resale by the Company in the United States. The Company is currently in
negotiations with LGE for a joint development agreement that would provide for
the development of the next generation of HDTV products, incorporating design
changes to improve on an earlier jointly developed design by improving
features and manufacturability and lowering prices. Under the Zenith proposed
agreement, either LGE or a third party would manufacture the resulting product
for the Company, depending on pricing, performance and quality. The
negotiations to date have assumed that the Company would have the sole
distribution rights in North America for any jointly developed design, and
that each party would have non-exclusive distribution rights in other regions.
No patent licenses are currently included in the discussions, except that
intellectual property mutually developed under the program would be cross-
licensed by 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.
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APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS
TO RESALES OF NEW SECURITIES
Certain holders of Claims are offered securities under the Prepackaged Plan.
Section 1145 of the Bankruptcy Code creates certain exemptions from the
registration and licensing requirements of federal and state securities laws
with respect to the distribution of securities pursuant to a plan of
reorganization as well as resales of the securities by certain recipients
thereof.
Transfers of New Subordinated Debentures
The New Subordinated Debentures to be issued pursuant to the Prepackaged
Plan may be freely transferred by most recipients thereof, and all resales and
subsequent transactions in the New Subordinated Debentures are exempt from
registration under federal and state securities laws, unless the holder is an
"underwriter" with respect to such securities. Section 1145(b) of the
Bankruptcy Code defines four types of "underwriters":
(i) persons who purchase a Claim against, an interest in, or a Claim for
administrative expense against the debtor with a view to distributing any
security received or to be received in exchange for such a Claim or
interest;
(ii) persons who offer to sell securities offered or sold under the plan
for the holders of such securities;
(iii) persons who offer to buy such securities from the holders of such
securities, if the offer to buy is (a) with a view to distributing such
securities and (b) made under an agreement made in connection with the
plan, with the consummation of the plan or with the offer or sale of
securities under the plan; and
(iv) a person who is an "issuer" with respect to the securities, as the
term "issuer" is defined in section 2(11) of the Securities Act.
Whether or not any particular person would be deemed to be an "underwriter"
or an "affiliate" with respect to the New Subordinated Debentures to be issued
pursuant to the Prepackaged Plan would depend upon various facts and
circumstances applicable to that person. Accordingly, the Company expresses no
view as to whether any person would be an "underwriter" or an "affiliate" with
respect to any security to be issued pursuant to the Prepackaged Plan.
GIVEN THE COMPLEX, SUBJECTIVE NATURE OF THE QUESTION OF WHETHER A PARTICULAR
PERSON MAY BE AN UNDERWRITER OR AN AFFILIATE, THE COMPANY MAKES NO
REPRESENTATIONS CONCERNING THE RIGHT OF ANY PERSON TO TRADE IN THE NEW
SUBORDINATED DEBENTURES TO BE DISTRIBUTED PURSUANT TO THE PREPACKAGED PLAN.
THE COMPANY RECOMMENDS THAT POTENTIAL RECIPIENTS OF THE NEW SUBORDINATED
DEBENTURES CONSULT THEIR OWN COUNSEL CONCERNING WHETHER THEY MAY FREELY TRADE
SUCH NEW SUBORDINATED DEBENTURES.
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.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
Kirkland & Ellis, special counsel to the Company ("Tax Counsel"), has
advised the Company that the following discussion, except as otherwise
indicated, 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. This summary
and the Tax Opinion are based upon the Tax Code, the United States Treasury
Department regulations promulgated thereunder (the "Treasury Regulations"),
judicial authority and current administrative rulings and practice now in
effect, all of which are subject to change at any time (possibly with
retroactive effect) or different interpretations. Prospective participants in
the Prepackaged Plan should be aware that many of the tax consequences are
unclear under existing law and, as a result, many alternative tax consequences
are possible. This summary and the Tax Opinion do 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 summary and the Tax Opinion do not discuss any aspects
of state, local or foreign tax laws.
Due to the complexity of certain aspects of the Prepackaged Plan, the lack
of applicable legal precedent, the possibility of changes in the law, the
differences in the nature of the Claims (including Claims within the same
Class), the holder's status and methods of accounting (including holders
within the same Class) and the potential for disputes as to legal and factual
matters with the Internal Revenue Service ("IRS"), the tax consequences
described herein and in the Tax Opinion are subject to significant
uncertainties.
NO RULING WILL BE SOUGHT FROM THE 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 SUMMARY AND THE 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
In general, a holder of an Old Subordinated Debenture will realize gain or
loss on the exchange of an Old Subordinated Debenture for a New Subordinated
Debenture in an amount equal to the difference between (i) the amount realized
(i.e., the "issue price" of the New Subordinated Debenture as described under
"Issue Price" below ("Issue Price")) in respect of the Old Subordinated
Debenture and (ii) his or her adjusted tax basis in the Old Subordinated
Debenture.
Whether or not a holder of an Old Subordinated Debenture will be required or
allowed to recognize the gain or loss realized on the exchange of such
debenture for a New Subordinated Debenture depends on whether the exchange
constitutes a tax-free recapitalization. This, in turn, depends upon whether
the Old and New Subordinated Debentures constitute "securities" for federal
income tax purposes. Whether an instrument constitutes a "security" is
determined based on all the facts and circumstances. Certain authorities have
held that the length of the term of a debt instrument is a factor in
determining whether such instrument is a security for federal income tax
purposes. These authorities have indicated that a term of less than five years
is evidence that the instrument is not a security, whereas a term of ten years
or more is evidence that it is a security. There are numerous other factors
that could be taken into account in determining whether a debt instrument is a
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security, including, among others, the security for payment, the
creditworthiness of the obligor, the subordination or lack thereof to other
creditors, the right to vote or otherwise participate in the management of the
obligor, convertibility of the instrument into an equity interest of the
obligor, whether payments of interest are fixed, variable or contingent, and
whether such payments are made on a current basis or accrued. Since the Old
Subordinated Debentures mature in 2011 and the New Subordinated Debentures
mature in 2010, both debentures have terms greater than ten years, and it is
likely that they will be treated as securities for federal income tax
purposes.
In general, if they are treated as securities, the exchange of the Old
Subordinated Debentures for New Subordinated Debentures will constitute a
recapitalization and a holder will not recognize any gain or loss on the
exchange, except that a holder will recognize gain, but not loss, to the
extent of the lesser of (i) the amount of gain realized or (ii) the amount of
cash received (reduced by the amount of such cash that is allocated to accrued
but unpaid interest, as discussed below). The tax basis of a holder of a New
Subordinated Debenture received in the exchange generally will be equal to the
adjusted tax basis of such holder in the Old Subordinated Debenture
surrendered in the exchange therefor increased by the gain, if any,
recognized, and reduced by the amount of cash received, by the holder. The
holding period of a holder of a New Subordinated Debenture received in the
exchange generally will include the holding period of such holder in the Old
Subordinated Debenture surrendered in exchange therefor (provided such Old
Subordinated Debenture was held as a capital asset at the time of the
exchange).
If the Old and New Subordinated Debentures do not constitute securities, the
exchange will not constitute a recapitalization, and a holder will recognize
the entire amount of gain or loss realized, as discussed above. The tax basis
of a holder in a New Subordinated Debenture, in such case, will be equal to
the issue price of the New Subordinated Debenture at the time of the exchange
(as described in "--Issue Price" below). In such event, the holding period of
a holder of a New Subordinated Debenture will begin on the day following the
day of the exchange.
Except for the amount of gain attributable to accrued market discount on an
Old Subordinated Debenture that was purchased with market discount (as
described in "--Accrued Market Discount" below), any gain or loss recognized
on the exchange will be capital gain or loss if the Old Subordinated Debenture
is a capital asset in the hands of the holder. Such gain or loss will be long-
term capital gain or loss if the holder's holding period with respect to the
Old Subordinated Debenture surrendered exceeds one year at the time of the
exchange.
Accrued Interest
Regardless of whether a holder of the Old Subordinated Debentures recognizes
gain on the exchange, such holder will be treated as receiving an interest
payment to the extent that a portion of a New Subordinated Debenture received
is allocable to accrued interest on an Old Subordinated Debenture exchanged
therefor. Accordingly, a holder of the Old Subordinated Debentures who had not
previously included such accrued interest in income would recognize taxable
income with respect to such interest payment, and a holder who had previously
included such accrued interest in income would recognize gain or loss (or,
possibly, a write-off against a reserve for bad debts) equal to the difference
between the holder's basis in such interest (i.e., the amount of such accrued
interest recognized as income by such holder) and the amount of the payment.
Original Issue Discount
In general, a New Subordinated Debenture will be considered for federal
income tax purposes to be issued with original issue discount ("OID") if the
"stated redemption price at maturity" of the debenture exceeds its "issue
price" by more than a de minimis amount (0.25% of the stated redemption price
at maturity multiplied by the number of complete years from the issue date to
the maturity date). OID with respect to a New Subordinated Debenture is
includible in the income of a holder on a constant-yield-to-maturity basis,
based on the original yield-to-maturity of the debenture calculated by
reference to its issue price, regardless of the holder's method of accounting
and regardless of when interest is actually paid in cash. Accordingly, if a
New
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Subordinated Debenture is issued with OID, a holder of such a debenture may be
required to take OID into income prior to the receipt of cash payments with
respect to the New Subordinated Debenture.
The stated redemption price at maturity of a New Subordinated Debenture is
the aggregate of all payments due to the holder under such debenture at or
before its maturity date, other than "qualified stated interest." Qualified
stated interest is generally interest that is unconditionally payable in cash
or property (other than debt instruments of the issuer) at fixed intervals of
one year or less during the entire term of the instrument at certain specified
rates. See "--Issue Price" below. It is unclear whether the stated redemption
price at maturity of a New Subordinated Debenture will exceed its issue price
by more than a de minimis amount at the time of its issuance.
The amount of OID, if any, allocable to an accrual period is an amount equal
to the excess, if any, of (a) the product of the New Subordinated Debenture's
"adjusted issue price" at the beginning of such accrual period and its yield-
to-maturity (determined on the basis of compounding at the close of each
accrual period and properly adjusted for the length of the accrual period)
over (b) the sum of any qualified stated interest payments on the New
Subordinated Debenture allocable to the accrual period. The "adjusted issue
price" of a New Subordinated Debenture at the start of any accrual period is
equal to its issue price increased by the accrued OID for each prior accrual
period and reduced by any prior payments with respect to such debenture that
were not qualified stated interest payments.
If a New Subordinated Debenture is issued with OID, and if a holder's tax
basis on the issue date in a New Subordinated Debenture exceeds its issue
price, the debt instrument will be treated as having been acquired with
"acquisition premium," and the holder may be allowed to reduce its OID
accruals with respect to such debenture by the proportion of the aggregate
amount of OID remaining to be accrued that is represented by the amount of
such excess.
Accrued Market Discount
A debt instrument has "market discount" if its stated redemption price at
maturity exceeds its tax basis in the hands of the holder immediately after
its acquisition, unless a statutorily defined de minimis exception applies. If
the exchange of an Old Subordinated Debenture with market discount for a New
Subordinated Debenture pursuant to the Prepackaged Plan does not qualify as a
recapitalization, a holder generally will recognize ordinary income on the
exchange equal to the lesser of (a) the holder's gain on the exchange and (b)
the amount of market discount that accrued during the holder's period of
ownership. This rule will not apply to a holder who had previously elected to
include market discount in income as it accrued for federal income tax
purposes.
Amortizable Bond Premium
If the tax basis of an exchanging holder's New Subordinated Debenture
exceeds the debenture's stated redemption price at maturity, then such
debenture will not be treated as issued with OID and such excess will be
"amortizable bond premium." If the holder makes (or has made) a timely
election under Section 171 of the Tax Code, such holder may amortize the bond
premium, on a constant yield basis, by offsetting the interest income from the
New Subordinated Debenture.
If the holder of a New Subordinated Debenture makes an election to amortize
bond premium, the tax basis of the debt instrument must be reduced by the
amount of the aggregate amortization deductions allowable for the bond
premium. Any such election to amortize bond premium would apply to all debt
instruments held or subsequently acquired by the electing holder and cannot be
revoked without permission from the IRS.
This discussion of amortizable bond premium will not apply to a holder of a
New Subordinated 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 Subordinated Debenture. Such holder will also not be
required to reduce its basis in the debt instrument as described in the
preceding paragraph.
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Issue Price
The "issue price" of a New Subordinated Debenture issued pursuant to the
Prepackaged Plan is relevant in determining a holder's gain or loss on an
exchange and whether the debt instrument is issued with OID. The issue price
of a New Subordinated Debenture depends, in part, on whether the New
Subordinated Debentures or the Old Subordinated Debentures are publicly
traded. In general, the New Subordinated Debentures or the Old Subordinated
Debentures will be treated as publicly traded if, at any time during the 60-
day period ending 30 days after the issue date of the New Subordinated
Debentures (the "60-Day Period"), a substantial amount of the New Subordinated
Debentures or the Old Subordinated Debentures are traded on an established
market, as defined in Treasury Regulations. Subject to certain exceptions, the
New Subordinated Debentures or the Old Subordinated Debentures will be treated
as traded on an established market if (1) either is listed on certain
securities exchanges, interdealer quotation systems, or designated foreign
exchanges or boards of trade, (2) either is traded on certain boards of trade
that are designated as contract markets or on an interbank market, (3) either
appears on a system of general circulation that provides a reasonable basis to
determine fair market value by disseminating either recent price quotations of
identified brokers, dealers or traders, or actual prices of recent sales
transaction, or (4) price quotations are readily available from brokers,
dealers or traders. If the New Subordinated Debentures or the Old Subordinated
Debentures are traded on an established market, the issue price of a New
Subordinated Debenture will be the fair market value of the New Subordinated
Debenture or the Old Subordinated Debenture for which it is issued, as the
case may be, on the issue date as determined by such trading.
The issue price of a New Subordinated Debenture that is neither publicly
traded nor issued for an Old Subordinated Debenture so traded will be its
stated principal amount if the New Subordinated Debenture provides for
"adequate stated interest," and otherwise will be its "imputed principal
amount." In general, a New Subordinated Debenture will have adequate stated
interest so long as interest is payable on the instrument at a rate at least
equal to the appropriate applicable federal rate ("AFR") published by the IRS.
The "imputed principal amount" of a New Subordinated Debenture is computed by
discounting all cash payments, including interest, required to be made under
the New Subordinated Debenture at the AFR. Because the AFR that will apply in
determining the issue price of a New Subordinated Debenture is presently
unknown, the Company cannot predict with certainty whether a New Subordinated
Debenture will have adequate stated interest. While the Company anticipates
that the interest rate payable under the terms of the New Subordinated
Debentures will exceed the AFR, it is possible that the interest rate will be
less than the AFR as of the issue date and that, in such an event, the issue
price of a New Subordinated Debenture will be its "imputed principal amount."
If, however, the IRS were to contend successfully that either (i) the New
Subordinated Debentures or the Old Subordinated Debentures are traded on an
established securities market during the 60-Day Period or (ii) the New
Subordinated Debentures do not bear adequate stated interest, then the issue
price of a New Subordinated Debenture could be materially less than the issue
price that would result if neither were publicly traded and the New
Subordinated Debentures bore adequate stated interest. In that event, a New
Subordinated Debenture could have OID or additional OID, as the case may be,
that would be includible in a holder's income. Since the determination of
whether (i) the New Subordinated Debentures and the Old Subordinated
Debentures will be treated as publicly traded or (ii) the New Subordinated
Debentures will have adequate stated interest will depend in large part upon
facts as they exist in the future, Tax Counsel is unable to express an opinion
on such issues.
Backup Withholding
A holder of a New Subordinated Debenture may be subject to backup
withholding at the rate of 31% with respect to "reportable payments," which
include payments in respect of interest or accrued OID, and the proceeds of a
sale, exchange or redemption of a New Subordinated Debenture. The Company will
be required to deduct and withhold the prescribed amount if (a) the holder
fails to furnish a taxpayer identification number ("TIN") to the Company in
the manner required, (b) the IRS notifies the Company that the TIN furnished
by the holder is incorrect, (c) there has been a failure of the holder to
certify under penalty of perjury that the holder is not subject to withholding
under Section 3406(a)(1)(C) of the Tax Code, or (d) the holder is notified by
the
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IRS that he or she failed to report properly payments of interest and
dividends and the IRS has notified the Company that he or she is subject to
backup withholding.
Amounts paid as backup withholding do not constitute an additional tax and
will be credited against the holder's U.S. federal income tax liabilities, so
long as the required information is provided to the IRS. The Company will
report to the holders of New Subordinated Debentures and to the IRS the amount
of any "reportable payments" for each calendar year and the amount of tax
withheld, if any, with respect to payments on such securities to any
noncorporate holder other than an "exempt recipient."
Consequences to Holders of Other Claims
A holder of another Claim whose Claim is satisfied in full on the Effective
Date will recognize gain or loss for federal income tax purposes on the
exchange of such Claim for cash equal to the difference between (i) the amount
realized (i.e., the amount of cash received) in respect of such Claim and (ii)
his or her adjusted tax basis in such Claim.
A holder of any such Claim which is restructured, provided that such
restructuring does not result in a "significant modification" of the Claim for
federal income tax purposes, will not realize gain or loss as a result of the
Prepackaged Plan. However, a holder whose Claim is restructured or modified in
a way that is considered a "significant modification" for federal income tax
purposes, or who is treated as having received interest, damages, or other
income in connection with a restructuring or modification, will realize gain
or loss for U.S. federal income tax purposes. Such gain or loss will be
recognized unless such restructuring or modification constitutes a tax-free
recapitalization, which is unlikely.
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:
Generally, a debtor recognizes an amount of cancellation of debt ("COD")
income upon satisfaction of its outstanding indebtedness equal to the excess
of (i) the amount of the indebtedness discharged, over (ii) the issue price of
any new indebtedness issued, the amount of cash paid, and the fair market
value of any other consideration (including stock of the debtor) given in
satisfaction of the indebtedness. As discussed below, there is a bankruptcy
exception to the recognition of COD income which will apply to the Company in
connection with the Prepackaged Plan.
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A debtor is not required to include COD income in gross income if the debt
discharge occurs in a Title 11 case. However, under the Tax Code the debtor
must, as of the first day of the next taxable year, reduce its tax attributes
(in general, first its NOL carryover and then tax credits and capital loss
carryovers, and then the tax basis of its assets) by the amount of COD income
excluded from gross income by this exception. As an exception to the order of
tax attribute reduction described above, a taxpayer can elect to reduce its
tax basis in its depreciable assets first, then its NOL carryforwards.
The Company believes that under the Prepackaged Plan it will realize
approximately $63.5 million of COD income attributable to the exchange of New
Subordinated Debentures for the Old Subordinated Debentures and possibly an
additional amount of COD income attributable to satisfaction of certain other
Claims. Because the COD income will be realized in a case filed under the
Bankruptcy Code, the Company will not be required to include the COD income in
taxable income, but will be required to reduce its NOL carryover by the amount
of the COD income. The Company had an estimated $835.6 million NOL carryover
as of December 31, 1997, which may be decreased by the amount of COD income
realized as a result of the Restructuring.
Section 382 Limitation
Generally, pursuant to Section 382 of the Tax Code, if there is an
"ownership change" with respect to a corporation with NOL carryovers, such
corporation will be subject to 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 January 1999 is 4.70%).
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
generally treated as a pre-change loss and is subject to the Section 382
Limitation described above. If the corporation has a "net unrealized built-in
gain," subject to certain limitations, the Section 382 Limitation for any
taxable year within the recognition period will be increased by the
"recognized built-in gain" for such taxable year. A net unrealized built-in
gain or net unrealized built-in loss exists to the extent the fair market
value of the corporation's assets is more or less, respectively, than the
aggregate adjusted tax basis of the its assets immediately before an ownership
change, provided the resulting net unrealized built-in gain or net unrealized
built-in loss is greater than the lesser of (i) 15% of the fair market value
of the corporation's assets or (ii) $10 million. Under current IRS
administrative policy, the amount of the COD income recognized upon an
ownership change is treated as an item of income attributable to the pre-
change period under Section 382(h)(6) of the Tax Code, and such COD income is
added to the gross fair market value of the corporation's assets in
determining whether the loss corporation has a net unrealized built-in loss.
An "ownership change" occurs if the percentage of stock of the corporation
owned actually or constructively by one or more "5-percent shareholders"
increases by more than 50 percentage points on any "testing date" (taking into
account all relevant adjustments as of the end of a "testing date") as
compared to the lowest percentage of stock of the corporation owned by those
5% shareholders at any time during the statutory "testing period" (generally,
the past three years or, if shorter, the period since the last ownership
change). Generally, a "testing date" is any date on which there is any change
in the ownership of stock that affects the percentage stock ownership of a 5%
shareholder. A "5% shareholder" is one who owns at least 5% of the stock of
the corporation, and all stock owned by shareholders who are not 5%
shareholders is generally treated as being owned by one 5% shareholder.
The Company believes that the implementation of the Prepackaged Plan will
cause an ownership change for U.S. federal income tax purposes. As a result,
to the extent not reduced by the amount of realized COD income as discussed
above, the use of the remaining NOL carryover will be subject to the Section
382 Limitation unless the exception described below applies.
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Section 382(l)(5) of the Tax Code provides a special rule applicable in the
case of a bankruptcy reorganization. If a corporation qualifies for and does
not elect out of the application of Section 382(l)(5), Section 382 will not
limit the use of the corporation's NOL carryover on account of the ownership
change occurring as a result of the bankruptcy reorganization. The corporation
will qualify if the corporation's pre-bankruptcy shareholders and holders of
certain debt ("Qualifying Debt") own at least 50% of the stock of the
corporation after the bankruptcy reorganization. Qualifying Debt is a Claim
which (i) was held by the same creditor for at least 18 months prior to the
bankruptcy filing or (ii) arose in the ordinary course of a corporation's
trade or business and has been owned at all times by the same creditor.
Indebtedness will be treated as arising in the ordinary course of a
corporation's trade or business if such indebtedness is incurred by the
corporation in connection with the normal, usual or customary conduct of the
corporation's business. For the purpose of determining whether a Claim
constitutes Qualifying Debt, special rules may apply to treat a subsequent
transferee as the transferor creditor.
The Company believes that the exchanges contemplated by the Prepackaged Plan
will qualify for the bankruptcy reorganization exception under Section
382(l)(5). However, since rules relating to Section 382(l)(5) are extremely
complicated, there can be no assurance that the exchanges will qualify for
such tax treatment, that the IRS will not challenge the Company's conclusion
or that a court will sustain such conclusion if challenged by the IRS. Tax
Counsel consequently is unable to express an opinion as to this issue. The
material tax consequences of both qualifying and not qualifying for the tax
treatment under Section 382(l)(5) are discussed immediately below.
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(1)(5) or the Company elects not to utilize Section 382(l)(5), the
Company's use of its NOL carryover to offset taxable income earned after the
ownership change will be subject to the Section 382 Limitation. Since the
Company will be in bankruptcy, however, Section 382(l)(6) of the Tax Code will
generally apply. Under Section 382(l)(6), the Section 382 Limitation will be
calculated by reference to the net equity value of the Company's stock
immediately after the ownership change (rather than immediately before the
ownership change, as is the case for non-bankruptcy ownership changes). In
such case, since it is unclear what the net equity value of the Company
immediately after the exchanges contemplated by the Prepackaged Plan will be,
the Company's use of its NOL carryover may be substantially limited after the
ownership change.
The rules regarding ownership changes are very complicated, and although the
Company believes there will be an ownership change upon consummation of the
Prepackaged Plan, it is possible that such change will not constitute an
ownership change. Tax Counsel consequently is unable to express an opinion as
to this issue. If consummation of the Prepackaged Plan does not result in an
ownership change, however, any change after the Effective Date that affects
the percentage stock ownership of a 5% shareholder may trigger an ownership
change upon such event. If the Company is not in bankruptcy at such time,
neither the Section 382(l)(5) nor Section 382(l)(6) exception will be
available, and the Company's use of its NOL carryover will be subject to the
general Section 382 Limitation.
Applicable High Yield Discount Obligations
In general, OID, if any, on the New Subordinated Debentures will not be
deductible until paid by the Company if the New Subordinated Debentures are
treated as "applicable high yield discount obligations" ("AHYDOs"). Under the
AHYDO rules contained in Sections 163(e) and 163(i) of the Tax Code, if the
New
187
<PAGE>
Subordinated Debentures have a term of more than five years, "significant" OID
(as defined in the Tax Code), and a yield to maturity of 5% or more in excess
of the AFR in effect for the month that includes the issue date, interest
deductions in respect of OID accruing on such debenture will be deferred until
amounts in respect of such OID are paid in cash. Moreover, to the extent the
yield to maturity of an AHYDO exceeds the AFR in effect for the month that
includes the issue date plus 6%, the deduction for a ratable portion of the
OID will be permanently disallowed (the "Disqualified OID").
It is not expected that the New Subordinated Debentures will be AHYDOs.
However, if the Old Subordinated Debentures or New Subordinated Debentures are
treated as traded on an established securities market within the 60-Day
Period, it is possible that the New Subordinated Debentures may be treated as
AHYDOs. Because the determination of whether the New Subordinated Debentures
or the Old Subordinated Debentures will be treated as publicly traded depend
in large part upon facts as they exist in the future, Tax Counsel cannot
provide an opinion as to whether the New Subordinated Debentures will be
AHYDOs. If the New Subordinated Debentures are treated as AHYDOs, the Company
would not be permitted to deduct any OID in respect of the New Subordinated
Debentures until such OID is paid. In addition, the Company will be denied OID
deductions in respect of a ratable portion of the OID equal to any
Disqualified OID.
THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PREPACKAGED PLAN ARE
COMPLEX. THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF U.S. FEDERAL
INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF CERTAIN CLAIMS
AND EQUITY INTERESTS IN LIGHT OF SUCH HOLDER'S PARTICULAR CIRCUMSTANCES AND
INCOME TAX SITUATION. ALL HOLDERS SHOULD CONSULT WITH THEIR TAX ADVISORS AS TO
THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE TRANSACTIONS CONTEMPLATED BY
THE PREPACKAGED PLAN, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE,
LOCAL OR FOREIGN TAX LAWS, AND OF ANY CHANGE IN APPLICABLE TAX LAWS.
188
<PAGE>
ESTIMATED FEES AND EXPENSES
The estimated fees and expenses expected to be incurred by the Company and
that LGE has advised the Company that it expects to incur in connection with
the Restructuring are approximately $24.4 million.
Estimated Costs and Fees of the Company
<TABLE>
<S> <C>
Investment banking fees and expenses......................... $ 5,700,000
Bank transaction fees and expenses........................... 3,200,000
Fees of other advisors....................................... 4,000,000
Legal fees and expenses...................................... 3,200,000
Accounting fees and expenses................................. 500,000
Printing and mailing fees.................................... 500,000
Fees relating to new securities.............................. 250,000
Miscellaneous................................................ 250,000
-----------
Total.................................................... $17,600,000
===========
Estimated Costs and Fees of LGE
Investment banking fees and expenses......................... $ 2,000,000
Fees of other advisors....................................... 700,000
Legal fees and expenses...................................... 4,000,000
Accounting fees and expenses................................. 100,000
-----------
Total.................................................... $ 6,800,000
===========
</TABLE>
Advisors
PJSC has been engaged by the Company in connection with the Restructuring.
PJSC was chosen to act as financial advisor and investment banker in the
Restructuring because of its experience in the restructuring of other public
companies in similar types of transactions. For its services as financial
advisor and investment banker, PJSC will receive (i) a fixed monthly cash
advisory fee, a portion of which will be applied against future transaction
fees, and (ii) transaction fees based upon (a) successful completion of a
refinancing or new financing transaction ($2.25 million); (b) restructuring or
replacement of certain existing debt ($1.0 million); and (c) other
transactions, including asset dispositions or mergers (in which case the fee
would be based on a graduated, decreasing percentage of total consideration).
The Company currently estimates that the total fees payable to PJSC will be
$5,700,000. 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 Jay Alix 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
189
<PAGE>
Company had paid $2.3 million in fees and expenses to JA&A. The Company will
request approval of these fees through the filing of appropriate applications
with the Bankruptcy Court.
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 Subordinated Debentures
offered hereby will be passed upon by Kirkland & Ellis, counsel to the
Company.
EXPERTS
The Company's annual historical audited financial statements included in
this Disclosure Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in giving said report.
190
<PAGE>
INDEX OF CERTAIN DEFINED TERMS
<TABLE>
<S> <C>
60-Day Period............................................................... 184
Administrative Claims....................................................... 4
AFR......................................................................... 184
AHYDOs...................................................................... 187
Allowed..................................................................... 81
Alternative Proposal........................................................ 71
Amended Certificate of Incorporation........................................ 75
Amended Citibank Credit Facility............................................ 5
Appraisers.................................................................. 65
ATSC........................................................................ 30
Audit Committee............................................................. 48
Ballots..................................................................... 23
Bank Lender Claims.......................................................... 5
Bankruptcy Code............................................................. i
Bankruptcy Court............................................................ 8
Bankruptcy Rules............................................................ 25
Board....................................................................... iii
Business Plan Projections................................................... 18
CDT......................................................................... 47
CERCLA...................................................................... 160
Change in Control Period.................................................... 170
Citibank.................................................................... 12
Citibank Credit Facility.................................................... 48
Citibank Receivables Facility............................................... 48
Citibank Secured Claims..................................................... 5
Claims...................................................................... i
Class....................................................................... 8
COD......................................................................... 185
Commission.................................................................. v
Company..................................................................... i
Company Peer Group.......................................................... 65
Confirmation................................................................ i
Confirmation Date........................................................... 80
Consumer Electronics........................................................ 147
Consummation................................................................ iii
Contingent Compensation Plan................................................ 167
Crossroads.................................................................. 57
D&O Releasees............................................................... 7
Delaware Anti-Takeover Law.................................................. 174
Debenture Committee......................................................... 57
DGCL........................................................................ 174
DIP......................................................................... 30
Directors' Retirement Plan.................................................. 167
Disclosure Statement........................................................ i
Disqualified OID............................................................ 188
Distribution Record Date.................................................... 90
EBIT........................................................................ 69
EBITDA...................................................................... 9
Effective Date.............................................................. i
Employment Agreements....................................................... 170
Equity Interests............................................................ iii
ERISA....................................................................... 127
Exchange Act................................................................ v
Executive Committee......................................................... 166
Expiration Date............................................................. 25
Final Order................................................................. 15
Financial Restructuring..................................................... i
Forrester................................................................... 65
Gartner/Dataquest........................................................... 65
GECC Credit Facility........................................................ 127
</TABLE>
<TABLE>
<S> <C>
General Unsecured Claims.................................................... 6
Impaired Claims............................................................. 4
Implementation Program...................................................... 71
Indenture Event of Default.................................................. 131
Investor Releasees.......................................................... 7
IRS......................................................................... 181
Issue Price................................................................. 181
JA&A........................................................................ 11
Key Executives.............................................................. 170
Lazard...................................................................... 53
Leveraged Lease (Melrose Park).............................................. 3
Leveraged Lease (Mexico).................................................... 3
Leveraged Leases............................................................ 3
LG Semicon.................................................................. iii
LGAI........................................................................ 51
LGAI Maquila Agreement...................................................... 51
LGE......................................................................... ii
LGE Claims.................................................................. ii
LGE Demand Loan Claims...................................................... 2
LGE Demand Loan Facility.................................................... 49
LGE Extended Payables Claims................................................ 3
LGE Guarantee Fee Claims.................................................... 3
LGE Leveraged Lease Claims.................................................. 3
LGE New Credit Facility..................................................... 135
LGE New Credit Facility Event of Default.................................... 136
LGE New Credit Support...................................................... 10
LGE New Restructured Senior Note............................................ ii
LGE Reimbursement Claims.................................................... 2
LGE Restructured Notes Default.............................................. 134
LGE Stock Purchase Agreement................................................ 47
LGE Technical Services Claims............................................... 3
LGE Tranche A Claims........................................................ ii
LGE Tranche B Claims........................................................ ii
Master Ballots.............................................................. 23
Merrill Lynch............................................................... 47
NAFTA....................................................................... 33
Named Executive Officers.................................................... 171
New Bank Lender Note........................................................ 5
New Common Stock............................................................ ii
New Indenture............................................................... 129
New Investor................................................................ 74
New Subordinated Debentures................................................. i
New Zenith.................................................................. ii
NOLs........................................................................ 10
Nominee..................................................................... 26
Notice Agent................................................................ 26
NWS......................................................................... 29
NYSE........................................................................ v
OID......................................................................... 182
Old Common Stock............................................................ iii
Old Preferred Stock......................................................... 174
Old Subordinated Debenture Claims........................................... 6
Old Subordinated Debenture Indenture........................................ i
Old Subordinated Debentures................................................. i
Operational Restructuring................................................... i
Organization and Compensation Committee..................................... 167
Other Priority Claims....................................................... 5
Other Secured Claims........................................................ 5
Petition Date............................................................... 93
Philips..................................................................... 32
</TABLE>
191
<PAGE>
<TABLE>
<S> <C>
PIK......................................................................... 9
PJSC........................................................................ 11
Prepackaged Chapter 11 Case................................................. 7
Prepackaged Plan............................................................ i
Priority Tax Claims......................................................... 4
Professionals............................................................... 13
PRP......................................................................... 160
Qualifying Debt............................................................. 187
Registration Statement...................................................... v
Reimbursement Agreement..................................................... 49
Reorganization Period....................................................... 18
Restructuring............................................................... i
Restructuring Agreement..................................................... ii
Reynosa Assets.............................................................. ii
Sales Multiples Approach.................................................... 67
Section 382 Limitation...................................................... 26
Securities Act.............................................................. v
Senior Indebtedness......................................................... 130
Solicitation................................................................ iii
</TABLE>
<TABLE>
<S> <C>
Solicitation Agent.......................................................... 26
Solicitation Materials...................................................... 24
Special Committee........................................................... iii
Stock Compensation Committee................................................ 167
Subsidiaries................................................................ 1
Tax Code.................................................................... 26
Tax Counsel................................................................. 181
Tax Opinion................................................................. 181
TIN......................................................................... 184
Transaction Expenses........................................................ 74
Transaction Fee............................................................. 74
Treasury Regulations........................................................ 181
Trustee..................................................................... 132
Unimpaired Claims........................................................... 89
Unsecured Bank Loans........................................................ 2
US EPA...................................................................... 160
Voting Record Date.......................................................... i
VSB......................................................................... 30
Zenith...................................................................... i
</TABLE>
192
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Statements of Operations (Unaudited) for the Three
and Nine Months Ended September 26, 1998 and September 27, 1997.......... F-2
Condensed Consolidated Balance Sheets (Unaudited) at September 26, 1998,
December 31, 1997 and September 27, 1997................................. F-3
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine
Months Ended September 26, 1998 and September 27, 1997................... 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, 1997, 1996 and 1995......................... F-10
Consolidated Balance Sheets at December 31, 1997 and 1996................. F-11
Statements of Consolidated Cash Flows for the Years Ended December 31,
1997, 1996 and 1995...................................................... F-12
Notes to Consolidated Financial Statements................................ F-13
Report of Independent Public Accountants.................................. F-30
</TABLE>
F-1
<PAGE>
ZENITH ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
In Millions, Except Per Share Amounts
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales............... $ 230.4 $304.5 $ 675.1 $ 825.4
------- ------ ------- -------
Costs, expenses and
other:
Cost of products
sold................. 203.3 308.3 621.6 800.8
Selling, general and
administrative....... 31.5 44.6 93.4 122.7
Engineering and
research............. 9.8 10.6 32.0 31.4
Other operating
expense (income), net
(Note 4)............. (9.2) 5.2 (24.3) (5.0)
Restructuring charges
(Note 3)............. 100.4 -- 107.8 --
------- ------ ------- -------
Operating income
(loss)................. (105.4) (64.2) (155.4) (124.5)
Gain (loss) on asset
sales, net............. -- 1.1 0.1 0.2
Interest expense........ (4.1) (3.5) (12.2) (11.8)
Interest expense--
related party.......... (9.6) (3.6) (21.0) (9.2)
Interest income......... 0.1 -- 0.7 0.6
------- ------ ------- -------
Income (loss) before
income taxes........... (119.0) (70.2) (187.8) (144.7)
Income taxes (credit)... -- (1.0) -- (1.0)
------- ------ ------- -------
Net income (loss)....... $(119.0) $(69.2) $(187.8) $(143.7)
======= ====== ======= =======
Net income (loss) per
share of common stock
(Note 5)............... $ (1.76) $(1.04) $ (2.78) $ (2.16)
======= ====== ======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-2
<PAGE>
ZENITH ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
In Millions
<TABLE>
<CAPTION>
September 26, December 31, September 27,
1998 1997 1997
------------- ------------ -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................ $ -- $ -- $ --
Receivables, net of allowance for
doubtful accounts of $36.3, $-- and
$--, respectively (Note 6)......... 143.4 21.7 17.1
Inventories (Note 7)................ 164.8 165.5 275.4
Transferor certificates............. -- 99.7 102.4
Other............................... 14.5 26.3 29.0
------- ------- -------
Total current assets.............. 322.7 313.2 423.9
Property, plant and equipment, net.... 155.1 171.1 243.5
Receivable from related party (Note
8)................................... 21.3 -- --
Other................................. 5.3 43.4 39.9
------- ------- -------
Total assets...................... $ 504.4 $ 527.7 $ 707.3
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt (Note 8)............ $ 107.8 $ 72.0 $ 25.0
Short-term debt with related party
(Note 8)........................... 192.1 -- --
Current portion of long-term debt
(Note 8)........................... 5.8 15.3 14.7
Accounts payable.................... 87.8 92.9 119.1
Accounts payable with related party
(Note 9)........................... 134.9 144.3 140.2
Income taxes payable................ 0.6 0.7 0.8
Cccrued expenses.................... 143.4 141.7 172.3
------- ------- -------
Total current liabilities......... 672.4 466.9 472.1
Long-term liabilities................. -- 8.8 9.0
Long-term liabilities with related
party................................ 11.0 8.2 --
Long-term debt (Note 8)............... 97.8 132.8 161.6
Stockholders' equity:
Preferred stock..................... -- -- --
Common stock........................ 67.6 67.1 67.1
Additional paid-in capital.......... 506.8 507.3 505.2
Retained earnings (deficit)......... (849.5) (661.7) (506.0)
Treasury stock...................... (1.7) (1.7) (1.7)
------- ------- -------
Total stockholders' equity........ (276.8) (89.0) 64.6
------- ------- -------
Total liabilities and
stockholders' equity............. $ 504.4 $ 527.7 $ 707.3
======= ======= =======
</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
Nine Months Ended
---------------------------
September 26, September 27,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $(187.8) $(143.7)
Adjustments to reconcile net income (loss) to net
cash used by operations:
Depreciation................................... 24.4 26.4
Employee retirement plan contribution made in
stock......................................... -- 4.9
Other.......................................... (1.8) (0.2)
Gain on asset sales, net....................... (0.1) (0.2)
Non-cash restructuring charges................. 95.4 --
Changes in assets and liabilities:
Current accounts............................. (129.0) 204.9
Other assets................................. 3.0 1.4
Other liabilities............................ 3.1 --
------- -------
Net cash provided (used) by operating
activities...................................... (192.8) 93.5
------- -------
Cash flows from investing activities:
Capital additions................................ (6.4) (68.0)
Proceeds from asset sales........................ 36.2 161.8
Transferor certificates decrease (increase)...... 110.7 (167.4)
Distribution of investor certificates............ (41.0) (5.0)
------- -------
Net cash provided (used) by investing
activities...................................... 99.5 (78.6)
------- -------
Cash flows from financing activities:
Short-term borrowings, net....................... 137.8 (22.0)
Proceeds from issuance of long-term debt......... -- 45.0
Proceeds from issuance of common stock, net...... -- 1.3
Principal payments on long-term debt............. (44.5) (39.2)
------- -------
Net cash provided (used) by financing
activities...................................... 93.3 (14.9)
------- -------
Increase (decrease) in cash........................ -- --
Cash at beginning of period........................ -- --
------- -------
Cash at end of period.............................. $ -- $ --
======= =======
Increase (decrease) in cash attributable to changes
in current accounts:
Receivables, net................................. $(121.7) $ 191.2
Income taxes, net................................ (0.1) (0.5)
Inventories...................................... 0.7 (19.7)
Other assets..................................... 6.8 (12.4)
Accounts payable and accrued expenses............ (14.7) 46.3
------- -------
Net change in current accounts................... $(129.0) $ 204.9
======= =======
Supplemental disclosure of cash flow information:
Cash paid (refunded) during the period for:
Interest....................................... $ 28.4 $ 18.9
Income taxes................................... (0.8) (8.1)
Non-cash activity:
Asset and additional paid-in capital recorded
related to guarantee fee...................... $ -- $ 39.7
Liability recorded related to deferred gain on
sale leaseback................................ -- 10.2
</TABLE>
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, 1997.
Note Two--Subsequent events
Subsequent to September 26, 1998, the company announced plans to close its
Melrose Park, Illinois, color picture tube plant in December 1998. This
decision is consistent with the company's restructuring plan announced earlier
this year, which disclosed plans to sell or close the plant by the end of 1998
unless operations improved considerably. Costs associated with the plant
closure are included in the potential 1998 restructuring and reorganization
charges discussed in "Note Three--Restructuring charges".
Subsequent to September 26, 1998, the company completed the sale of its
headquarters building in Glenview, Illinois. As a result of the sale, the
company's fourth-quarter financial statements will reflect a significant gain
on the sale of the building.
Note Three--Restructuring charges
During the first nine months of 1998, the company recorded $107.8 million of
restructuring charges. Of this total amount, $100.4 million was recorded
during the third quarter of 1998 and related to (i) a $68.8 million loss on
the termination of the company's leveraged lease (as discussed in "Note
Eight--Short-term debt and credit arrangements; Long-term debt"), (ii) $32.3
million of deferred charges (bank, attorney and guarantee fees) that were
written off (as discussed in "Note Six--Receivables" and "Note Eight--Short-
term debt and credit arrangements; Long-term debt"), (iii) accelerated
amortization of the remaining deferred gain ($9.1 million) related to the 1997
sale of the assets into the leveraged lease (as discussed in "Note Eight--
Short-term debt and credit arrangements; Long-term debt"), (iv) $7.0 million
of professional fees (associated with work performed by outside consultants to
support the development of the operational and financial restructuring plans
and the pre-packaged plan of reorganization) and financing charges (relative
to amending the Citicorp credit agreement), and (v) $1.4 million of other
charges, related primarily to the company's exiting of its analog set-top box
product line.
F-5
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the restructuring charges for the first nine months of 1998 is
as follows:
<TABLE>
<CAPTION>
Restructuring
Restructuring Reserve at
Charges at Asset Cash September 26,
Inception Writeoff Payment 1998
------------- -------- ------- -------------
<S> <C> <C> <C> <C>
Loss on termination of
leveraged lease............. $ 68.8 $(68.8) $ -- $--
Deferred finance charges..... 32.3 (32.3) -- --
Accelerated amortization of
deferred gain............... (9.1) 9.1 -- --
Professional fees and
financing charges........... 11.6 (1.5) (9.5) 0.6
Severance costs.............. 1.4 -- (0.9) 0.5
Other........................ 2.8 (1.9) (0.3) 0.6
------ ------ ------ ----
Total restructuring charges.. $107.8 $(95.4) $(10.7) $1.7
====== ====== ====== ====
</TABLE>
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 pre-
packaged plan of reorganization. The Company's board of directors unanimously
approved both the financial and operational restructuring plans during 1998.
Certain elements of the operational restructuring have already been
implemented and recorded as shown above, and the significant portion of the
operational restructuring is expected to be completed in 1999. The financial
restructuring is expected to be completed in 1999. The Registration Statement
discusses potential 1998 restructuring, reorganization and special one-time
charges that are projected to be approximately $242 million for the full year.
The $242 million of potential restructuring, reorganization and special one-
time charges are composed of (i) non-cash asset impairments ($70 million),
(ii) the non-cash loss on termination of a lease ($69 million) which was
recorded in the third quarter and is shown above, (iii) severance and costs
for staff reductions ($47 million), (iv) plant closure and business exit costs
($18 million), (v) professional fees ($17 million) (vi) non-cash inventory
writedowns ($9 million) and (vii) other costs associated with the
restructuring effort. A portion of the foregoing charges have already been
recognized and the remainder will be recognized upon the occurrence of a
number of specific events, including the cessation of manufacturing activity
at the company's plant locations, the incurrence of various exit costs and
professional fees and the filing of a chapter 11 petition. The 1998
restructuring and reorganization charges are partially offset by a potential
extraordinary gain on debt retirement of approximately $64 million.
Note Four--Other operating expense (income)
Royalty income accrued in relation to tuning system patents was $7.7 million
and $20.4 million for the three and nine months ended September 26, 1998,
respectively, and $5.7 million and $16.9 million for the three and nine months
ended September 27, 1997, respectively. These amounts are included in other
operating expense (income).
During the third quarter of 1997, the company recorded a charge of $10.0
million related to the impairment of certain long-lived assets to be disposed
of. The charge 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 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).
Note Five--Earnings per share
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", the company computed earnings per share by dividing net
income (loss) by the weighted average number of shares
F-6
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of common stock outstanding during the period. Diluted earnings (loss) per
share, assuming conversion of the 6 1/4 percent convertible subordinated
debentures and outstanding stock options are not presented because the effect
of the assumed conversion is antidilutive. The weighted average number of
shares was 67.5million for both the three and nine months ended September 26,
1998, and 66.6 million and 66.5 million for the three and nine months ended
September 27, 1997, respectively.
Note Six--Receivables
During the third quarter of 1998, the company's trade receivables
securitization (which was provided through a Citicorp commercial paper
conduit) was terminated. As a result, the company's third quarter financial
statements reflect the following: (i) 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, 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 Seven--Inventories
Inventories consisted of the following (in millions):
<TABLE>
<CAPTION>
September 26, December 31, September 27,
1998 1997 1997
------------- ------------ -------------
<S> <C> <C> <C>
Raw materials and work-in-
process...................... $ 71.2 $ 96.9 $144.6
Finished goods................ 93.6 68.6 130.8
------ ------ ------
Total inventories............. $164.8 $165.5 $275.4
====== ====== ======
</TABLE>
Note Eight--Short-term debt and credit arrangements; Long-term debt
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.
Between November 1997 and February 1998 the company entered into a series of
financing transactions designed to enhance the company's liquidity and
financial flexibility. The company obtained a total of $110 million in
unsecured and uncommitted credit facilities through four lines of credit with
Bank of America ($30 million), First Chicago NBD ($30 million), Societe
Generale ($20 million) and Credit Agricole ($30 million). The credit lines are
guaranteed by LG Electronics Inc. ("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 September 26, 1998, only the Credit Agricole loan remains outstanding, in
the amount of $30.0 million. During the second and third quarter of 1998, LGE
made payments under demands against guarantees on $72.0 million of the
facilities and the company is obligated to LGE for these payments plus
interest. The company's obligations to LGE are secured by a second lien on
certain assets of the company.
In March 1998, the company entered into a secured credit facility with LGE
which provides for borrowings of up to $45 million. As of September 26, 1998,
$30.0 million was outstanding under the facility. See Note Nine 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
F-7
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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) December 31, 1998. In addition, the company is required to make
repayments: (i) to the extent of the excess of borrowings over the borrowing
base and (ii) with the proceeds of 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.
At September 26, 1998, the outstanding balance on the facility was $77.9
million at an average interest rate of 9.92%. For December 31, 1997 and
September 27, 1997, the outstanding balance (term and revolver) was $38.5
million and $67.7 million, respectively, at an average interest rate of 8.79%
and 9.18%, respectively.
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. 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, 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 under a lease default at that time 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 third
quarter financial statements reflect a $90.1 million current liability to LGE
(included in "Short-term debt with related party" on the balance sheet), a
$21.3 million Other 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. Upon
the company's repayment to LGE of the settlement amount, the company will
again take title to this equipment. The value of the equipment is now
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. A portion of the 3.7
million options to purchase the company's stock issued to LGE under the
Financial Support Agreement were issued to LGE in return for its guarantee of
the company's lease payment obligations. The options were valued at the then
market price of the stock and the deferred charge was historically being
expensed over the life of the lease. This charge was partially 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.
F-8
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 September 26, 1998, LGE "beneficially" owned 36,569,000 shares 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 agreement is listed as exhibit 10 under
"Item 6. Exhibits and Reports on Form 8-K".
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 and nine months ended September 26, 1998 and September
27, 1997.
Product purchases: In the ordinary course of business, the company purchases
VCRs, TV-VCR combinations and components from LGE and its affiliates. The
company purchased $11.6 million and $34.7 million of these items during the
three and nine months ended September 26, 1998, and $38.1 million and $64.8
million during the three and nine months ended September 27, 1997,
respectively. Sales of products purchased from LGE and its affiliates
contributed $11.2 million and $46.5 million to sales during the three and nine
months ended September 26, 1998, respectively, and $31.7 million and $75.5
million to sales during the three and nine months ended September 27, 1997,
respectively.
Product and other sales: The company sells TVs, picture tubes, yokes and
other manufactured subassemblies to LGE and its affiliates. Sales by the
company to LGE and its affiliates were $8.2 million and $30.7 million during
the three and nine months ended September 26, 1998, respectively, and $18.6
million and $32.0 million during the three and nine months ended September 27,
1997, respectively.
Other Items: In March 1998, the company entered into a secured credit
facility with LGE which provides for borrowings of up to $45 million. The term
of the facility is one year from the date of the first borrowing, subject to
LGE's right to demand repayment at anytime after December 31, 1998 (as
amended). Repayment is due in full at the end of the term. The first such
borrowing occurred in May 1998, and as of September 26, 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 included $134.9 million and $140.2 million to LGE and its
affiliates as of September 26, 1998 and September 27, 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 $134.0 million
and $133.5 million as of September 26, 1998 and September 27, 1997,
respectively. The company is charged interest on the extended period at rates
reflecting then-current market conditions in Korea.
F-9
<PAGE>
ZENITH ELECTRONICS CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1996 1995
-------- -------- --------
(In millions, except per
share amounts)
<S> <C> <C> <C>
Revenues
Net sales...................................... $1,173.1 $1,287.9 $1,273.9
-------- -------- --------
Costs, Expenses and Other
Cost of products sold.......................... 1,180.5 1,257.0 1,188.8
Selling, general and administrative (Note
Four)......................................... 178.3 167.8 128.8
Engineering and research....................... 42.9 46.7 43.5
Other operating expense (income), net (Notes
One, Three and Ten)........................... 42.4 (26.3) (30.1)
Restructuring and other charges (Note Seven)... -- 9.3 21.6
-------- -------- --------
Income
Operating income (loss)........................ (271.0) (166.6) (78.7)
Gain (loss) on asset sales, net................ (4.6) 0.3 (1.7)
Interest expense............................... (11.9) (12.5) (19.1)
Interest expense--related party (Note Six)..... (13.6) (2.6) (0.8)
Interest income................................ 0.9 3.6 1.8
-------- -------- --------
Income (loss) before income taxes.............. (300.2) (177.8) (98.5)
Income taxes (credit) (Note Eight)............. (0.8) 0.2 (7.7)
-------- -------- --------
Net income (loss).............................. $ (299.4) $ (178.0) $ (90.8)
======== ======== ========
Per Share
Income (loss) per common share (Note
Eighteen)..................................... $ (4.49) $ (2.73) $ (1.85)
======== ======== ========
Retained Earnings (Deficit)
Balance at beginning of year................... $ (362.3) $ (184.3) $ (93.5)
Net income (loss).............................. (299.4) (178.0) (90.8)
-------- -------- --------
Retained earnings (deficit) at end of year..... $ (661.7) $ (362.3) $ (184.3)
======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-10
<PAGE>
ZENITH ELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------
1997 1996
------- -------
(In millions,
except share
and per share
data)
<S> <C> <C>
ASSETS
Current Assets
Cash (Note One)............................................ $ -- $ --
Receivables, net of allowance for doubtful accounts of $--
and $6.2.................................................. 21.7 208.3
Inventories (Note Eleven).................................. 165.5 255.7
Transferor Certificates (Note Twelve)...................... 99.7 --
Other...................................................... 26.3 11.1
------- -------
Total current assets..................................... 313.2 475.1
Noncurrent Assets
Property, plant and equipment, net (Note Thirteen)......... 171.1 278.3
Other (Note Six)........................................... 43.4 11.9
------- -------
Total assets............................................. $ 527.7 $ 765.3
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt (Note Fifteen)............................. $ 72.0 $ 47.0
Current portion of long-term debt (Note Sixteen)........... 15.3 17.8
Accounts payable........................................... 91.3 109.6
Accounts payable to related party (Note Six)............... 145.9 124.5
Compensation and retirement benefits (Note Nineteen)....... 41.2 43.2
Product warranties......................................... 18.3 32.1
Co-op advertising and merchandising programs............... 30.6 20.5
Income taxes payable....................................... 0.7 1.3
Other accrued expenses..................................... 51.6 54.6
------- -------
Total current liabilities................................ 466.9 450.6
Noncurrent Liabilities
Long-term liabilities (Note Six)........................... 8.8 --
Long-term liabilities to related party (Note Six).......... 8.2 --
Long-term debt (Note Sixteen).............................. 132.8 152.7
Stockholders' Equity
Preferred stock, $1 par value; 8,000,000 shares authorized;
none outstanding.......................................... -- --
Common stock, $1 par value; 150,000,000 shares authorized;
67,130,628 and 66,564,119 shares issued................... 67.1 66.6
Additional paid-in capital................................. 507.3 459.4
Retained earnings (deficit)................................ (661.7) (362.3)
Cost of 105,181 common shares in treasury.................. (1.7) (1.7)
------- -------
Total stockholders' equity (Note Seventeen).............. (89.0) 162.0
------- -------
Total liabilities and stockholders' equity............... $ 527.7 $ 765.3
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-11
<PAGE>
ZENITH ELECTRONICS CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Increase (Decrease) in
Cash
Year Ended December
31,
------------------------
1997 1996 1995
------- ------- ------
(In millions)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss).................................. $(299.4) $(178.0) $(90.8)
Adjustments to reconcile net income (loss) to net
cash used by operations:
Depreciation..................................... 38.0 35.0 32.1
Charge for asset impairment...................... 63.7 -- --
Employee retirement plan contribution in stock... 4.9 5.3 --
(Gain) loss on asset sales, net.................. 4.6 (.3) 1.7
Charge for donated services...................... 2.2 -- --
Other............................................ .5 1.6 .5
Changes in assets and liabilities:
Current accounts............................... 260.1 116.4 19.9
Other assets................................... 3.6 (3.9) 3.4
Other liabilities.............................. 7.6 -- --
------- ------- ------
Net cash provided (used) by operating activities... 85.8 (23.9) (33.2)
------- ------- ------
Cash Flows from Investing Activities
Capital additions.................................. (69.5) (105.0) (51.9)
Capital additions purchased from related party..... (13.0) (24.0) --
Proceeds from asset sales.......................... 187.7 4.3 2.9
Transferor Certificates increase................... (110.7) -- --
Distribution of Investor Certificates.............. (84.0) -- --
------- ------- ------
Net cash provided (used) by investing activities... (89.5) (124.7) (49.0)
------- ------- ------
Cash Flows from Financing Activities
Short-term borrowings, net......................... 25.0 47.0 --
Proceeds from issuance of long-term debt........... 45.0 -- 40.0
Proceeds from issuance of common stock, net........ 1.1 15.7 170.7
Principal payments on long-term debt............... (67.4) (7.3) (44.2)
------- ------- ------
Net cash provided by financing activities.......... 3.7 55.4 166.5
------- ------- ------
Cash
Increase (decrease) in cash........................ -- (93.2) 84.3
Cash at beginning of year.......................... -- 93.2 8.9
------- ------- ------
Cash at end of year................................ $ -- $ -- $ 93.2
======= ======= ======
Changes in Current Assets and Liabilities
Increase (decrease) in cash attributable to changes
in:
Receivables, net................................. 186.6 $ (7.5) $ 10.2
Income taxes, net................................ (0.6) .1 (6.0)
Inventories...................................... 90.2 (53.1) 51.4
Other assets..................................... (9.7) (3.3) 2.2
Accounts payable and accrued expenses............ (6.4) 180.2 (37.9)
------- ------- ------
Net change in current accounts................... $ 260.1 $ 116.4 $ 19.9
======= ======= ======
Supplemental Disclosure
Supplemental disclosure of cash flow information--
Cash paid (refunded) during the period for:
Interest....................................... $ 24.8 $ 14.1 $ 20.6
Income taxes................................... (9.3) .9 (.1)
Non-cash activity:
Asset and additional paid-in capital recorded
related to guarantee fee $ 39.7 $ -- $ --
Liability recorded related to deferred gain on
sale leaseback................................ 10.2 -- --
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-12
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note One--Significant Accounting Policies:
Principles of consolidation: The consolidated financial statements include
the accounts of Zenith Electronics Corporation and all domestic and foreign
subsidiaries (the company). All significant intercompany balances and
transactions have been eliminated.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Statements of consolidated cash flows: The company considers time deposits,
certificates of deposit and all highly liquid investments purchased with an
original maturity of three months or less to be cash.
Inventories: Inventories are stated at the lower of cost or market. Costs
are determined for all inventories using the first-in, first-out (FIFO)
method.
Properties and depreciation: Property, plant and equipment is stated at
cost. Additions of machinery and equipment with lives of eight years or more
are depreciated by the straight-line method over their useful lives, which
range between 8 to 12 years. Accelerated methods are used for depreciation of
all other machinery and equipment items, including high technology equipment
that may be subject to rapid economic obsolescence. Useful lives for these
items range from 4 to 5 years. Additions of buildings are depreciated by the
straight-line method over their useful lives, which range from 10 to 33 years.
Property held for disposal is reported at the lower of carrying amount or
fair value, less cost to sell, and is included in Other noncurrent assets.
This property includes certain facilities and land no longer used in the
company's operations.
Rental expenses under operating leases were $20.7 million, $12.8 million,
and $15.3 million in 1997, 1996 and 1995, respectively. The 1997 increase in
rental expense was due to the sale-leaseback transaction that was entered into
in April 1997. See Note Fourteen for additional information on the sale-
leaseback transaction.
The company capitalizes interest on major capital projects. The company
capitalized $4.1 million and $2.3 million of interest in 1997 and 1996,
respectively. The amount was not material in 1995.
Engineering, research, product warranty and other costs: Engineering and
research costs are expensed as incurred. Estimated costs for product
warranties are provided at the time of sale based on experience factors. The
costs of co-op advertising and merchandising programs are also provided at the
time of sale.
Foreign currency: The company uses the U.S. dollar as the functional
currency for all foreign subsidiaries. Foreign exchange gains and losses are
included in Other operating expense (income) and were not material in 1997,
1996 and 1995.
Stock options: During 1996, the company adopted Statement of Financial
Accounting Standards ("FAS") No. 123, "Accounting for Stock-Based
Compensation". The accounting standard requires the company to value all
stock-based compensation based on the estimated fair value at the grant date
and spread the deemed cost over the vesting period. The standard permits a
choice of whether to charge operations or disclose the calculated cost, as pro
forma information. The company has chosen to disclose the calculated cost, as
pro forma information (see Note Seventeen).
F-13
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impairment of Long-lived Assets: The company periodically assesses whether
events or circumstances have occurred that may indicate the carrying value of
its long-lived assets may not be recoverable. When such events or
circumstances indicate the carrying value of an asset may be impaired, the
company uses an estimate of the future undiscounted cash flows to be derived
from the remaining useful life of the asset to assess whether or not the asset
is recoverable. If the future undiscounted cash flows to be derived over the
life of the asset do not exceed the asset's net book value, the company
recognizes an impairment loss for the amount by which the net book value of
the asset exceeds its estimated fair market value. See Note Three for
additional information.
Note Two--Financial Results and Liquidity:
The company has incurred net losses of $299.4 million, $178.0 million, and
$90.8 million in 1997, 1996 and 1995, respectively. For many years the
company's major competitors, many with greater resources, have aggressively
lowered their selling prices in an attempt to increase market share. Although
the company has benefited from cost reduction programs, these lower color
television prices together with inflationary cost increases have more than
offset such cost reduction benefits.
Since joining the company in January 1998, the new Chief Executive Officer,
along with the rest of the company's management team has been developing a
broad operational and financial restructuring plan. A broad outline of that
plan has been presented to the company's Board of Directors in March 1998. The
plan, which is designed to leverage the company's brand, distribution and
technology strengths, includes reducing costs, outsourcing of certain
components and products, disposition of certain assets and capitalizing on the
company's patented digital television technologies. Restructuring costs must
be incurred to implement the plan.
Despite its negative cash flow, the company has been able to secure
financing to support its operations to date, based on credit support from LGE.
Between November 1997 and February 1998, the company (with the guarantee of
LGE) entered into a series of new lending agreements with commercial lenders
for unsecured lines of credit totaling more than $100 million, all of which
has been drawn as of March 31, 1998.
Going forward, significant amounts of additional cash will be needed to pay
the restructuring costs to implement the proposed business plan and to fund
losses until the company has returned to profitability. Based on management's
proposed plan, the company estimates that at least $225 million would be
required to fund the company's restructuring costs and operations through the
end of 1998 and that additional amounts could be required thereafter.
While there is no assurance that funding will be available to execute the
plan, the company is continuing to seek financing to support its turnaround
efforts and is exploring a number of alternatives in this regard. LGE has
agreed to provide up to $45 million in additional funding for one year from
the date of the first borrowing, subject to LGE's right to demand repayment at
anytime after June 30, 1998, and is secured by certain assets of the company.
The company believes that this additional short-term financing, along with its
current credit facilities, will be sufficient to support the company's
liquidity requirements through June 30, 1998, depending on operating results
and the level of continued trade support. In addition, the company is engaged
in ongoing discussions with LGE concerning the company's business plan, and
LGE is considering whether to provide additional long-term financial support.
However, LGE has no obligation to do so. Any such support by LGE would be
subject to a number of conditions, including the operating results of the
company, third-party consents, Republic of Korea regulatory approvals and
other conditions. No decision has been made at this time by LGE or the company
regarding additional financial support, and there can be no assurance that any
additional financial support will be forthcoming from LGE.
In the absence of long-term financial support from LGE, there can be no
assurance that additional financing can be obtained from conventional sources.
Management is exploring alternatives that include seeking strategic
F-14
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
investors, lenders and/or technology partners, selling substantial company
assets or pursuing other transactions that could result in diluting LGE to a
less than majority position. There can be no assurance that management's
efforts in this regard will be successful.
To implement the proposed business plan and to fund associated restructuring
costs and operating losses, the company will be required to restructure
certain of its outstanding debt and other financing arrangements (See Notes
Six, Fourteen, Fifteen and Sixteen for a description of certain debt and
financing arrangements.) A number of alternatives, including out-of-court and
in-court financial restructurings, are being considered. Management believes
that, under any restructuring scenario, the company's common stock would
likely be subject to massive dilution as a result of the conversion of debt to
equity or otherwise. There can be no assurances as to what value, if any,
would be ascribed to the common stock in a restructuring. In addition, the
company's subordinated debentures could suffer substantial impairment in a
restructuring. Due to a number of uncertainties, many of which are outside the
control of the company, there can be no assurance that the company will be
able to consummate any operational or financial restructuring.
The company's independent public accountants have included a "going concern"
emphasis paragraph in their audit report accompanying the 1997 financial
statements. The paragraph states that the company's recurring losses and
negative working capital raise substantial doubt about the company's ability
to continue as a going concern and cautions that the financial statements do
not include adjustments that might result from the outcome of this
uncertainty.
Existing credit facilities are not expected to be sufficient to cover
liquidity requirements after June 30, 1998, and the company is currently
facing the prospect of not having adequate funds to operate its business.
There can be no assurance that additional credit facilities can be arranged or
that any long-term restructuring alternative can be successfully initiated or
implemented by June 30, 1998, in which case the company may be compelled to
pursue a bankruptcy filing in the absence of a proposed or pre-approved
financial restructuring. The company will be required to obtain waivers under
its financing arrangements for periods subsequent to June 30, 1998 and the
lenders thereunder are under no obligation to provide such waivers.
Management believes that, despite the financial hurdles and funding
uncertainties going forward, it has under development a business plan that, if
successfully funded and executed as part of a financial restructuring, can
significantly improve operating results. The support of the company's vendors,
customers, lenders, stockholders and employees will continue to be key to the
company's future success.
Note Three--Impairment of Long-Lived Assets:
During the fourth quarter of 1997, an impairment was recognized for the
Consumer Electronics business since the future undiscounted cash flows of
assets were estimated to be insufficient to recover their related carrying
values. As such, the company recognized an expense of $53.7 million and
established a valuation reserve for the write-down of the excess carrying
value over fair market value. The fair market value used in determining the
impairment loss was based upon management and third party valuations,
including estimates of potential environmental liabilities. This FAS 121
charge is included in Other operating expense (income).
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 19/209 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 either technologically or
F-15
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
economically; sudden adverse market developments in 159-CDT demand, and 15/179
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 TV assembly; the relocation of certain
parts/service operations to Huntsville, Alabama; and the planned vacating
certain buildings on site. These factors during 1997, coupled with historic
and projected operating cash flow losses, the need for continuing maintenance
capital, and uncertainties discussed in Note Two 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 relates primarily to (i) assets that will be sold or scrapped
as a result of the company's decision to phase out of its printed circuit
board operation (ii) assets that will be sold or scrapped as a result of the
company's decision not to develop the proposed large-screen picture tube plant
in Woodridge, Illinois and (iii) a building in Canada that was sold in
December 1997. The amount of the charge is included in Other operating expense
(income).
The impairment charges discussed above are based upon management's best
estimates of the recoverability of long-lived assets and the fair value of the
related assets. It is reasonably possible that the company's estimates of the
recoverability of long-lived assets and the fair value will change. See Note
Two for additional information.
Note Four--Charge for Bad Debts:
In November 1995 the company entered into a contract with a customer in
Brazil to purchase TVs and TV kits and to assemble and distribute Zenith brand
TVs in that country. In early 1997, this customer discontinued timely payments
of its obligations, and sought to renegotiate both the timing and the amount
of the obligations to the company. While the company and this customer
continued to negotiate in an attempt to reach a business solution, litigation
was commenced by both parties in Brazil. The company had also initiated
litigation against this customer in the United States. In late 1997, this
matter was settled. The agreement provides that the company will make certain
parts and components available to this customer, and will receive an $11.0
million settlement payable in installments over eleven months. As a result of
the above problems, the company recorded a $21.3 million bad debt charge
during 1997 related to this customer, which reflects the company's estimated
loss as of December 31, 1997. The bad debt charge affected the transferor
certificate valuation allowance.
Note Five--Accounting Changes:
During 1997 the company changed its accounting policy for most tooling
expenditures. The old policy was to charge most tooling expenditures to
expense in the period acquired. The new policy is to defer the tooling charges
incurred subsequent to March 29, 1997, over a 20-month period in order to more
appropriately match the costs with their period of benefit. The accounting
policy for picture tube tooling remains the same, which is to amortize that
tooling over a four-year period. This change was accounted for as a change in
accounting estimate effected by a change in accounting principle and will be
accounted for on a prospective basis. The change decreased tooling expense by
$8.9 million, and decreased the loss per share by $.13 in 1997.
Effective January 1, 1996, the company changed its inventory costing method
for its picture tube inventories from LIFO to FIFO. There has been a strategic
marketing shift in the company toward selling more larger-screen television
sets and less smaller-screen sets. The picture tubes for the smaller-screen
television sets are manufactured by the company and have been costed using
LIFO. It is expected that the LIFO picture tube inventory pool will decrease
and this decrease would create a LIFO liquidation resulting in a poor matching
of current costs with current revenues. As a result, the company believes that
the FIFO method is preferable as it will provide a more appropriate and
consistent matching of costs against revenues. This change in accounting
F-16
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
had no material impact on quarterly results and as a result, quarterly
information is not restated. The effect of this change in accounting principle
was to reduce the net loss reported for 1996 by $2.7 million, or $.04 per
share, retroactively restating the financial statements. The effect of this
change for 1995 was to reduce the net loss reported by $1.6 million, or $.03
per share.
Note Six--Related Party:
In November 1995, a change in control of the company occurred, in which LGE
purchased shares of the company pursuant to a combined tender offer and
purchase of newly issued shares of common stock from the company. As of
December 31, 1997, LGE owned 36,569,000 shares of common stock of the company
which represents 55 percent of the outstanding common stock. Because LGE owns
a majority of the issued and outstanding common stock, it effectively controls
the outcome of any matter requiring action by a majority of the company's
stockholders, including the election of a majority of the company's directors
and any future change in control of the company.
LGE is a leading international brand-name manufacturer of five main groups
of products: televisions; audio and video equipment; home appliances;
computers and office automation equipment; and other products, including video
displays, telecommunication products and components, and magnetic media. The
following represent the most significant transactions between the company and
LGE during 1997 and 1996.
Product purchases: In the ordinary course of business, the company purchases
VCRs, TV-VCR combinations and components from LGE and its affiliates. The
company purchased $93.3 million and $128.8 million of these items in 1997 and
1996, respectively. Sales of products purchased from LGE and its affiliates
contributed $112.3 million and $141.4 million to sales in 1997 and 1996,
respectively, and $19.0 million and $12.6 million to gross margin in 1997 and
1996, respectively.
Equipment purchases: The company purchased approximately $37 million of
production machinery and equipment from LGE during 1997 and 1996. The
machinery and equipment related primarily to new production lines in the
company's picture tube plant for the manufacture of computer display tubes.
Product and other sales: The company sells TVs, picture tubes, yokes and
other manufactured subassemblies to LGE and its affiliates at prices that
equate to amounts charged by the company to its major customers. Sales in 1997
and 1996 by the company to LGE and its affiliates were $55.1 million and $29.4
million, respectively.
In December 1996, the company closed its wholly-owned Canadian distributor
and sold the remaining inventory to LGE at book value. The company entered
into a Distributor Agreement with an LGE subsidiary whereby LGE will be the
Canadian distributor for the company. During 1997, the company entered into a
similar agreement with an LGE subsidiary in Mexico to sell the company's
product in Mexico.
Technical agreements: The company and LGE are currently operating under
several technology agreements and licenses, including: LGE engineering support
for HDTV development and related technical and intellectual property;
technology and patent licenses to LGE to develop flat tension mask products;
and agreements granting LGE the right to use the company's patents on TV
tuners. LGE's payment in 1997 and 1996 to the company under these agreements
and licenses was $.6 million and $1.0 million, respectively.
Service Assistance: In 1997, employees of LGE provided certain services to
the company for which LGE was not compensated. These donated services were
valued at $2.2 million and the accounting treatment was to
F-17
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
recognize the value of these expenses in the company's income statement and in
additional paid-in capital. In 1996, employees of LGE provided certain
services to the company for which LGE was not compensated. The value of these
services was not material in 1996.
In 1997, employees of LGE provided certain services to the company that were
covered under service agreements. The company's payments ($1.1 million) and
payable ($3.7 million) to LGE for such services totaled $4.8 million. The
payable is included in Long-term liabilities.
Other Items: In March 1998, the company entered into a secured credit
facility with LGE which provides for borrowings of up to $45 million. The term
of the facility is one year from the date of the first borrowing, subject to
LGE's right to demand repayment at anytime after June 30, 1998. Repayment is
due in full at the end of the term. The facility is secured by liens on
certain of the company's assets and is subject to certain terms and
conditions.
In September 1997, the company and LGE entered into an High Definition TV
Receiver Project Agreement. As called for in the agreement, the company
received $4.5 million from LGE toward funding for the project. In return, LGE
will receive a percentage of applicable royalties the company anticipates
receiving until such time as LGE has received $4.5 million. The $4.5 million
is included in Long-term liabilities.
In August 1997, the company received $30.0 million from LGE representing
payments in advance for 1997 sales from the company to LGE. The amount was
recorded as a liability and as sales were made to LGE, the liability balance
was reduced. As of December 31, 1997, $.6 million of the liability to LGE
remained and is included in Other accrued expenses.
In April 1997, the company and LGE entered into an arrangement whereby the
company's accounts payables arising in the ordinary course of business to LGE
would be extended for certain periods of time. Prior to April 1997, the
company's accounts payables arising in the ordinary course of business to LGE
were extended for certain periods of time, but no formal arrangement was in
place. The amount of extended payables was $144.3 million and $106.8 million
as of December 31, 1997 and 1996, respectively. Interest expense related to
the extended payables was $9.6 million, $2.6 million and $0.8 million in 1997,
1996 and 1995, respectively.
In return for LGE providing support for certain financing activities of the
company entered into in April 1997, the company granted options to LGE to
purchase approximately 3.9 million common shares of the company at an exercise
price of $0.01 per share. These options are 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. The accounting for these stock options was based upon their fair
value with that fair value being amortized straight-line over the term of the
associated commitments. The 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, is recorded as follows: $30.1 million in Noncurrent other assets
and $5.1 million in Current other assets.
As of December 31, 1997 and 1996, accounts payable included $145.9 million
and $124.5 million, respectively, to LGE and its affiliates. The amount of
receivables from LGE and its affiliates was not material as of December 31,
1997 and 1996.
The company currently leases space from an LGE subsidiary in (i) Huntsville,
Alabama, for its Parts & Service group, (ii) Ontario, California, for a
warehouse and (iii) San Jose, California, for its Network Systems group.
F-18
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note Seven--Restructuring and Other Charges:
During the fourth quarter of 1996, the company recorded $9.3 million of
restructuring charges. The restructuring was composed of $5.2 million of
charges related to severance costs associated with employment reductions
(mostly in the company's U.S. salaried workforce) and $4.1 million of charges
associated with the shutdown of the company's wholly-owned Canadian
distributor. Substantially all of the provisions were related to cash
expenditures made during 1997. A summary of the restructuring reserve activity
related to the restructuring is as follows:
<TABLE>
<CAPTION>
Restructuring Restructuring
Reserve at Reserve at
December 31, Asset Cash Reserve December 31,
1996 Writeoff Payments Releases 1997
------------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Severance costs......... $5.2 $ -- $(5.2) $ -- $--
Canadian distributor
shutdown............... 4.1 (0.3) (2.7) (1.1) --
---- ----- ----- ----- ----
Total restructuring
charges.. $9.3 $(0.3) $(7.9) $(1.1) $--
==== ===== ===== ===== ====
</TABLE>
During the fourth quarter of 1995, the company recorded charges totaling
$3.6 million that were incurred as a consequence of the LGE purchase of common
stock as described in Note Six. During the second quarter of 1995, the company
recorded a charge of $18.0 million primarily to restructure its core Consumer
Electronics and Network Systems business. The major elements of the
restructuring related to severance expenses associated with employment
reductions, primarily in the company's U.S. salaried workforce and costs
associated with realigned distribution activities as the company changed to
direct-to-retail distribution on a nationwide basis. The remaining charges
related to other non-recurring items, including certain environmental, legal
and other regulatory matters, along with trade receivable write-offs
(primarily for accounts in Mexico as a result of the December 1994 peso
devaluation). A summary of the restructuring and other reserves activity is as
follows:
<TABLE>
<CAPTION>
Beginning Restructuring
Restructuring Reserve at
and Other Asset Cash Reserve December 31,
Reserve Writeoff Payments Releases 1996
------------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Restructuring charges:
Severance costs....... $ 9.6 $ -- $ (9.6) $-- $--
Realigned distribution
costs................ 2.7 -- (2.7) -- --
----- ----- ------ ---- ----
Total restructuring
charges.............. 12.3 -- (12.3) -- --
----- ----- ------ ---- ----
Other charges:
Environmental, legal
and regulatory
costs................ 4.8 (0.3) (4.5) -- --
LGE transaction
costs................ 3.6 (2.3) (1.3) -- --
Trade receivable
write-offs........... 0.9 (0.9) -- -- --
----- ----- ------ ---- ----
Total other charges... 9.3 (3.5) (5.8) -- --
----- ----- ------ ---- ----
Total restructuring and
other charges.......... $21.6 $(3.5) $(18.1) $-- $--
===== ===== ====== ==== ====
</TABLE>
F-19
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note Eight--Income Taxes:
The components of income taxes (credit) were:
<TABLE>
<CAPTION>
Year Ended
December 31
----------------
1997 1996 1995
---- ---- -----
(In millions)
<S> <C> <C> <C>
Currently payable (refundable):
Federal.............................................. $ .1 $-- $(7.8)
State................................................ (.9) .2 .1
---- ---- -----
Total income taxes (credit).......................... $(.8) $ .2 $(7.7)
==== ==== =====
</TABLE>
The $7.7 million income tax credit in 1995 included a $7.5 million tax
refund (including interest) due the company as a result of certain foreign tax
credit issues in audits of prior years. The company received this tax refund
during 1997.
The statutory federal income tax rate and the effective tax rate are
compared below:
<TABLE>
<CAPTION>
Year Ended
December 31
---------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate............... (35.0)% (35.0)% (35.0)%
State income taxes, net......................... -- -- .1
Foreign tax effects............................. 2.2 1.0 1.5
Tax benefits not recognized subject to future
realization.................................... 32.8 34.0 33.5
Net operating loss carryback/refund............. -- -- (8.4)
----- ----- -----
Effective tax rate.............................. (--)% (--)% (8.3)%
===== ===== =====
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------
1997 1996
------- -------
(In millions)
<S> <C> <C>
Loss carryforwards...................................... $ 353.5 $ 228.2
Inventory valuation..................................... 22.6 23.8
Transferor certificate valuation reserve................ 14.6 --
PP&E valuation reserve.................................. 22.9 --
Product warranty........................................ 9.4 11.5
Co-op advertising....................................... 3.7 6.3
Merchandising........................................... 2.6 3.8
Other................................................... 35.6 38.0
------- -------
Deferred tax assets................................... 464.9 311.6
------- -------
Depreciation............................................ 3.4 (6.6)
Other................................................... (1.3) 5.5
------- -------
Deferred tax liabilities.............................. 2.1 (1.1)
------- -------
Valuation allowance..................................... (467.0) (310.5)
------- -------
Net deferred tax assets............................... $ -- $ --
======= =======
</TABLE>
The valuation allowance was established since the realization of these
assets cannot be reasonably assured, given the company's recurring losses.
F-20
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 1997, the company had $835.6 million of total net
operating loss carryforwards (NOLs) available for federal income tax purposes
(which expire from 2004 through 2011) and unused tax credits of $3.9 million
(which expire from 2000 through 2002).
The stock purchase by LGE described in Note Six created an "ownership
change" of the company for federal income tax purposes, with the effect that
the company's annual usage of its NOLs will be limited to approximately $27
million, which represents the product of (i) a tax-exempt rate of return
announced monthly by the Internal Revenue Service (5.75 percent for ownership
changes occurring in the month of November 1995) and (ii) the value of the
company immediately before the ownership change, as determined under
applicable tax regulations. This limitation applies to approximately $481
million of the company's available NOL carryovers, which represents the losses
generated prior to the "ownership change". The company's remaining loss
carryovers are not subject to this limitation. In addition, this limitation,
appropriately modified, will also apply to the company's utilization of most
of its tax credit carryovers. The effect of this annual limit will depend upon
the generation of sufficient taxable income in the future and certain other
factors.
Note Nine--Geographic Segment Data:
The company's operations involve a dominant industry segment -- the design,
development, manufacture and distribution of video products, including color
TV sets, VCRs and other consumer electronics products, color picture tubes,
cable TV products and parts and accessories for these products.
Financial information, summarized by geographic area, is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1996 1995
-------- -------- --------
(In millions)
<S> <C> <C> <C>
Net sales:
Domestic companies...................... $1,144.9 $1,221.4 $1,212.7
Foreign companies....................... 28.2 66.5 61.2
-------- -------- --------
Total net sales......................... $1,173.1 $1,287.9 $1,273.9
======== ======== ========
Income (loss) before income taxes:
Domestic companies...................... $ (295.3) $ (171.5) $ (94.5)
Foreign companies....................... (4.9) (6.3) (4.0)
-------- -------- --------
Total income (loss) before income
taxes.................................. $ (300.2) $ (177.8) $ (98.5)
======== ======== ========
Identifiable assets:
Domestic companies...................... $ 405.1 $ 615.5 $ 548.5
Foreign companies....................... 122.6 149.8 152.2
-------- -------- --------
Total identifiable assets............... $ 527.7 $ 765.3 $ 700.7
======== ======== ========
</TABLE>
Foreign operations consist of manufacturing and sales subsidiaries in
Mexico, a distribution subsidiary in Canada (which was closed in December
1996) and a purchasing office in Taiwan. Sales to affiliates are principally
accounted for at amounts based on local costs of production plus a reasonable
return.
Sales to a single customer, Circuit City Stores, Inc., amounted to $138.6
million (12 percent) in 1997, $187.2 million (15 percent) in 1996, and $172.1
million (14 percent) in 1995. Sales to a second customer, Sears, Roebuck and
Company, accounted for $132.4 million (11 percent) in 1997 and $140.9 million
(11 percent) in 1996. No other customer accounted for 10 percent or more of
net sales.
F-21
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note Ten--Other Operating Expense (Income):
Major manufacturers of TVs and VCRs agreed during 1992 to take licenses
under some of the company's U.S. tuning system patents (the licenses expire in
2003). Royalty income related to the tuning system patents was $26.0 million,
$26.6 million, and $25.9 million in 1997, 1996 and 1995, respectively, and is
included in Other operating expense (income). See Note Three for further
discussion on Other operating expense (income).
Note Eleven--Inventories:
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1997 1996
------ ------
(In millions)
<S> <C> <C>
Raw materials and work-in-process.......................... $ 96.9 $152.1
Finished goods............................................. 68.6 103.6
------ ------
Total inventories.......................................... $165.5 $255.7
====== ======
</TABLE>
Note Twelve--Transferor Certificates:
The Financial Accounting Standards Board issued FAS 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," in 1996. The accounting standard provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. This statement was adopted by the company
during the second quarter of 1997 in connection with the three-year trade
receivables securitization that was entered into in April 1997. Pursuant to
the new statement, the trade receivable securitization was accounted for as a
sale of receivables.
Transferor certificates represent the company's retained interest in the
pool of saleable receivables that have been sold by the company to a special-
purpose trust, but can not or have not yet been sold to outside investors in
the commercial paper market via a multi-seller conduit pursuant to the trade
receivables securitization agreement. The transferor certificates are
classified as current held-to-maturity securities and mature 30 to 60 days
from the date of acquisition. Outside investors hold investor certificates
which evidence their ownership of a portion of the assets contained in the
special multi-purpose trust. Transferor certificates are valued at historical
cost which reasonably approximates their fair value. This cost approximates
the value of the previous carrying amount (prior to transfer), allocated
between the assets sold and the retained interest, based on their relative
fair values at the date of the transfer, as required by FAS 125.
Note Thirteen--Property, Plant and Equipment:
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1997 1996
------- -------
(In millions)
<S> <C> <C>
Land $ 2.7 $ 9.9
Buildings............................................... 147.9 135.5
Machinery and equipment................................. 640.9 696.6
------- -------
791.5 842.0
Less accumulated depreciation........................... (562.0) (563.7)
Less valuation reserve.................................. (58.4) --
------- -------
Total property, plant and equipment, net................ $ 171.1 $ 278.3
======= =======
</TABLE>
F-22
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1997, the company reclassed $8.7 million of property pending
disposal out of Property, Plant and Equipment into Other Noncurrent Assets.
Included in this amount is $6.0 million of land, which is the primary reason
for the 1997 decrease in land, when compared to 1996.
Note Fourteen--Sale Leaseback Transaction:
In April 1997 the company entered into an $86.6 million sale-leaseback
transaction whereby the company sold and leased back new and existing
manufacturing equipment in its Melrose Park, Ill., plant and in its Reynosa
and Juarez, Mexico, facilities. The result of the sale was a $10.2 million
gain for the company, which was deferred and is being amortized over the 12
1/2 year lease term.
The disaggregation of the transaction by location is (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 .9
</TABLE>
As discussed in Note Six Related Party--Other Items, 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 million of the option value is
related to the lease obligation and this value is being amortized over the
life of the lease.
The related lease is being accounted for as an operating lease. The rental
expense under this lease in 1997 was $8.1 million. The minimum lease payments
required by the lease over the next five years are as follows (in million):
<TABLE>
<S> <C>
Year ending December 31:
1998............................ $ 12.3
1999............................ 10.6
2000............................ 9.6
2001............................ 9.7
2002............................ 9.7
Thereafter...................... 78.6
------
Total minimum lease payments.... $130.5
======
</TABLE>
The company's payment obligations, along with certain other items under the
lease agreement are fully guaranteed by LGE (see discussion in Note Six). The
sale-leaseback agreement contains financial penalties which would be triggered
if the company was to terminate the lease early. The amounts the Company would
be required to pay are based upon stipulated loss values, and tax-benefit and
investment opportunity losses.
Note Fifteen--Short-Term Debt and Credit Arrangements:
In April 1997, the company obtained a $65 million revolving credit line with
Citicorp. This facility replaces the company's previous credit agreement with
General Electric Capital Corporation. Under the revolving credit line, the
maximum commitment of funds available for borrowing is limited by a defined
borrowing base formula related to eligible inventory. The facility is secured
by the company's inventory, domestic fixed assets, stock of the company's
subsidiaries and tuner patent royalties, along with the related patents,
licenses and other general intangibles. Interest on borrowings is based on
market rates.
F-23
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The credit line contains certain covenants that must be met in order to
remain in compliance with the facility, including financial covenants that
must be maintained as of the end of each fiscal quarter. During 1997, the
company amended the credit facility to relax certain financial covenants. As
amended, the financial covenants include a minimum EBITDA amount, a current
ratio test, a funded debt/total capitalization ratio test, a tuning patent
royalties test and an LGE payable test. As a result of waivers obtained from
Citicorp, N.A., in December 1997 and March 1998, only the tuning patent
royalties test and the LGE payable test were in effect as of December 31, 1997
and March 31, 1998, and the company was in compliance with both of these
covenants. In addition, there are restrictions regarding investments,
acquisitions, guaranties, transactions with affiliates, sales of assets,
mergers and additional borrowings, along with limitations on liens. The credit
agreement prohibits dividend payments on the company's common stock, restricts
dividend payments on any of its preferred.
Between November 1997 and February 1998 the company entered into a series of
new financing transactions designed to enhance the company's liquidity and
financial flexibility. The company obtained a total of $110 million in
unsecured and uncommitted credit facilities through four lines of credit with
Bank of America ($30 million), the First Chicago NBD ($30 million), Societe
Generale ($20 million) and Credit Agricole ($30 million). As of December 31,
1997, a total of $72.0 million was outstanding under these credit lines.
The credit lines are guaranteed by LGE for which LGE will receive a fee in
an amount up to 2 percent of the face amount of the loan, in the form of cash
or the company's equity and subject to the approval of the Finance Committee
of the company's Board of Directors and in the case of equity, the approval of
the company's shareholders. The company granted liens in favor of LGE on the
capital stock of the company's domestic subsidiaries and on the company's
intellectual property (other than tuning patents, tuning patent royalties and
related license agreements) to secure the guaranties of LGE for borrowings
under these credit lines.
In March 1998, the company entered into a secured credit facility with LGE
which provides for borrowings of up to $45 million. See Note Six for further
discussion.
Borrowings and interest rates on short-term debt were:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1996 1995
------- ------- -------
(In millions)
<S> <C> <C> <C>
Maximum month-end borrowings................... $72.0 $72.6 $69.5
Average daily borrowings....................... 26.4 18.3 37.2
Weighted average interest rate................. 9.1% 8.8% 10.5%
</TABLE>
Note Sixteen--Long-Term Debt:
The components of long-term debt were:
<TABLE>
<CAPTION>
December 31,
-------------
1997 1996
------ ------
(in millions)
<S> <C> <C>
6 1/4 percent convertible subordinated debentures due
2011..................................................... $109.3 $115.0
8.5 percent senior subordinated convertible debentures due
2000..................................................... -- 23.8
8.5 percent senior subordinated convertible debentures due
2001..................................................... .5 .5
Term Loan................................................. 38.3 31.2
------ ------
148.1 170.5
Less current portion...................................... 15.3 17.8
------ ------
Total long-term debt...................................... $132.8 $152.7
====== ======
</TABLE>
F-24
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The 6 1/4 percent convertible subordinated debentures are unsecured general
obligations, subordinate in right of payment to certain other debt
obligations, and are convertible into common stock at $31.25 per share. Terms
of the debenture agreement include annual sinking-fund payments of $5.8
million beginning in April 1997 and provisions which could result in the
acceleration of their payment in the event the company is in default on
provisions of other debt agreements. The debentures are redeemable at the
option of the company, in whole or in part, at specified redemption prices at
par or above.
In December 1997 the company redeemed the 8.5 percent Senior Subordinated
Convertible Debentures due November 2000. There was $23.8 million principal
amount of such debentures outstanding and the redemption price of such
debentures was 104 percent of such principal amount plus accrued interest
through the redemption date. The loss on extinguishment of this debt was not
material.
The 8.5 percent debentures due 2001 are unsecured general obligations,
subordinate in right of payment to certain other debt obligations, and are
convertible into shares of common stock at an initial conversion price of
$10.00 per share. Subsequent to December 31, 1997, the company redeemed the
8.5 percent Senior Subordinated Convertible Debentures due January 2001. There
was $.5 million principal amount of such debentures outstanding and the
redemption price of such debentures was 104 percent of such principal amount
plus accrued interest through the redemption date. The loss on extinguishment
of this debt was not material.
In April 1997 the company entered into a $45 million term loan with
Citicorp. This facility replaces the company's previous credit term loan with
General Electric Capital Corporation. The term loan requires scheduled
quarterly principal payments of $2.3 million with a balloon payment of $20.3
million at maturity. The facility is secured by the company's inventory,
domestic fixed assets, stock of the company's subsidiaries and tuner patent
royalties, along with the related patents, licenses and other general
intangibles. Interest on borrowings is based on market rates.
The term loan contains certain covenants that must be met in order to remain
in compliance with the facility, including financial covenants that must be
maintained as of the end of each fiscal quarter. During 1997, the company
amended the credit facility to relax certain financial covenants. As amended,
the financial covenants include a minimum EBITDA amount, a current ratio test,
a funded debt/total capitalization ratio test, a tuning patent royalties test
and an LGE payable test. As a result of waivers obtained from Citicorp, N.A.,
in December 1997 and March 1998, only the tuning patent royalties test and the
LGE payable test were in effect as of December 31, 1997 and March 31, 1998,
and the company was in compliance with both of these covenants. The long-term
portion of the term loan has been classified in the accompanying balance sheet
based on the company's intention to seek additional waivers or amendments for
any future noncompliance prior to the expiration of the March 1998 waiver in
June 1998 that extent to a period subsequent to January 1, 1999. There are no
assurances that such waivers or amendments will be granted.
In addition, the term loan contains restrictions regarding investments,
acquisitions, guaranties, transactions with affiliates, sales of assets,
mergers and additional borrowings, along with limitations on liens. The term
loan prohibits dividend payments on the company's common stock and restricts
dividend payments on any of its preferred stock.
The fair value of long-term debt is $90.8 million as of December 31, 1997,
as compared to the carrying amount of $132.8 million. The fair value of the 6
1/4 percent convertible subordinated debentures is based on the quoted market
price from the New York Stock Exchange. The fair value of the 8.5 percent
convertible senior subordinated debentures is based on the quoted price
obtained from third party financial institutions. The fair value of the term
loan approximates the carrying value as interest on the loan is based on
market rates. As of December 31, 1997, the company's credit agreement and term
loan would not allow the company to extinguish the long-term debt through
purchase and thereby realize the gain.
F-25
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note Seventeen--Stockholders' Equity:
Changes in stockholders' equity accounts are shown below:
<TABLE>
<CAPTION>
Additional
Common Paid-In Treasury
Stock Capital Shares
------ ---------- --------
(In millions)
<S> <C> <C> <C>
Balance, December 31, 1994.................... $45.7 $285.4 $ (.5)
Sales of common stock....................... 17.8 152.6 --
Stock issued for stock options.............. -- .3 --
Other....................................... -- 1.7 (1.2)
----- ------ -----
Balance, December 31, 1995.................... 63.5 440.0 (1.7)
Stock issued for benefit plans.............. .8 4.5 --
Stock issued for stock options.............. 1.9 13.9 --
Other....................................... .4 1.0 --
----- ------ -----
Balance, December 31, 1996.................... 66.6 459.4 (1.7)
Stock issued for benefit plans.............. .5 4.4 --
Stock issued for stock options.............. .1 1.0 --
Paid in capital--LGE guarantee.............. -- 39.7 --
Paid in capital--LGE services............... -- 2.2 --
Other....................................... (.1) .6 --
----- ------ -----
Balance, December 31, 1997.................... $67.1 $507.3 $(1.7)
===== ====== =====
</TABLE>
During 1997, the company entered into certain transactions with LGE that
effected paid in capital. These transaction dealt with the granting of stock
options and donated services. See Note Six for further discussion on these
items.
During 1996, the company sold 1.9 million shares of authorized but unissued
common stock to employees of the company via the exercise of previously issued
stock options. During 1995, the company sold 16.5 million shares of authorized
but unissued common stock to LGE for a price of $10 per share (see Note Six
for further discussion). Also during 1995 the company sold 1.3 million shares
of authorized but unissued shares of common stock to investors under
registration statements that had been filed with the Securities and Exchange
Commission.
The company has authorized 8 million shares of preferred stock of which none
are issued or outstanding as of December 31, 1997. The Board of Directors of
the company is authorized to issue the preferred stock from time to time in
one or more series and to determine all relevant terms of each such series,
including but not limited to the following (i) whether and upon what terms,
the shares of such series would be redeemable; (ii) whether a sinking fund
would be provided for the redemption of the shares of such series and, if so,
the terms thereof; and (iii) the preference, if any, to which shares of such
series would be entitled in the event of voluntary or involuntary liquidation
of the company.
Note Eighteen--Stock Options and Awards:
Stock Options: The 1987 Stock Incentive Plan, which expired in April 1997,
and the Long Term Equity Compensation Plan, approved by the company's
shareholders in May 1997, authorize the granting of incentive and non-
qualified stock options and restricted stock awards to key management
personnel. The purchase price of shares under option is the market price of
the shares on the date of grant. Options expire 10 years from the date
granted. The company accounts for employee stock options under APB Opinion No.
25, under which no
F-26
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
compensation cost has been recognized. Had compensation cost been determined
based on the fair value of options at their grant dates consistent with the
method of FAS 123, the company's net income (loss) and earnings (loss) per
share would have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
(In millions)
<S> <C> <C> <C>
Net income (loss):
As reported.................................. $(299.4) $(178.0) $(90.8)
Pro forma.................................... (301.1) (179.1) (92.5)
Earnings (loss) per share:
As reported.................................. $ (4.49) $ (2.73) $(1.85)
Pro forma.................................... (4.52) (2.75) (1.88)
</TABLE>
Because the FAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the pro forma compensation cost may not be
representative of the pro forma cost to be expected in future years.
A summary of the status of the company's outstanding stock options at
December 31, 1997, 1996 and 1995 and changes during the years then ended is
presented in the table and narrative below:
<TABLE>
<CAPTION>
Non-Employees Employees
---------------- ---------------------------------------------------
1997 1997 1996 1995
---------------- ---------------- ----------------- ----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Shares Exercise Shares Exercise Shares Exercise Shares Exercise
(000'S) Price (000'S) Price (000'S) Price (000'S) Price
------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at
January 1.............. -- $ -- 968 $ 9.92 2,588 $8.25 2,027 $8.66
Options granted......... 3,965 0.01 952 11.10 456 12.54 738 7.16
Options exercised....... -- -- (154) 7.80 (1,889) 8.33 (38) 7.69
Options canceled........ -- -- (260) 11.20 (187) 9.30 (139) 8.66
----- ----- ----- ------ ------ ----- ----- -----
Options outstanding at
December 31............ 3,965 $0.01 1,506 $10.66 968 $9.91 2,588 $8.25
===== ===== ===== ====== ====== ===== ===== =====
Options exercisable at
December 31............ 793 $0.01 486 $ 9.05 427 $8.27 2,081 $8.34
Shares available for
grant at
December 31............ N/A 1,340 1,329 1,269
</TABLE>
The non-employee stock options were granted to LGE during 1997. See Note Six
for further discussion.
Of the employee options outstanding at December 31, 1997, 516,300 had
exercise prices between $6.25 and $10.69, with a weighted average exercise
price of $8.30 and a weighted average remaining contractual life of 6.52
years. The remaining 989,500 had exercise prices between $11.00 and $14.75,
with a weighted average exercise price of $11.90 and a weighted average
remaining contractual life of 9.05 years.
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option pricing model, using the following assumptions;
weighted average risk-free interest rates of 5.76 percent, 6.25 percent and
6.83 percent for grants in 1997, 1996, and 1995, respectively; zero expected
dividend yields, and expected volatility of 43.69 percent for 1997 and 62.35
percent for years 1996 and 1995. A 3.5 year estimated life was used for all
employee grants. The weighted average fair value of employee options granted
during 1997, 1996 and 1995 was $11.16, $13.93 and $7.16, respectively.
F-27
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Restricted stock awards: The company had 234,500 and 270,090 restricted
stock awards issued and outstanding as of December 31, 1997 and 1996,
respectively. The market value of the restricted shares is deferred in the
additional paid-in capital account and is generally amortized over the years
the restrictions lapse. The 1996 increase in restricted stock was caused by
issuances to new members of the company's management. Total compensation
expense in 1997 and 1996, related to these awards, was not material.
Note Nineteen--Retirement Plans and Employee Benefits:
Virtually all employees in the United States are eligible to participate in
noncontributory defined contribution retirement plans after completing one
full year of service. The plans provide for an annual minimum contribution of
between 3 and 6 percent of employees' eligible compensation, based partially
on employees' contribution to the plans. Contributions above the minimum could
be required based upon profits in excess of a specified return on net worth.
Retirement plan expenses were $7.8 million, $8.6 million, $8.8 million and in
1997, 1996 and 1995, respectively. The company's 1997 contribution to the
retirement plans will be made during 1998. The company's 1996 and 1995
contributions to the retirement plans were partially funded through the
issuance of approximately 466,535 and 782,000 shares, respectively, of the
company's common stock.
Employees in Mexico are covered by government-mandated plans, the costs of
which are accrued by the company.
Benefits payable to employees when they leave the company other than by
reason of retirement did not have a material effect on the financial
statements of the company.
Note Twenty--Earnings Per Share:
In accordance with FAS 128, "Earnings Per Share", the company computed
earnings per share by dividing net income (loss) by the weighted average
number of shares of common stock outstanding during the year. Diluted earnings
(loss) per share, assuming conversion of the 6 1/4 percent convertible
subordinated debentures, the 8.5 percent Senior Subordinated Convertible
Debentures due 2001 and outstanding stock options are not presented because
the effect of the assumed conversion is antidilutive.
<TABLE>
<CAPTION>
For the Year Ended
------------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Net Income (Loss).............................. $(299.4) $(178.0) $(90.8)
Weighted average common shares outstanding..... 66.6 65.2 49.2
Earnings per share............................. $ (4.49) $ (2.73) $(1.85)
</TABLE>
Note Twenty One--Contingencies:
The company is involved in various legal actions, environmental matters,
patent claims, and other proceedings relating to a wide range of matters that
are incidental to the conduct of its business. In addition, the company
remains liable for certain retained obligations of a discontinued business,
principally income and other taxes prior to the closing of the sale.
Furthermore, the company has been named as a defendant in certain cases which
relate to keyboards allegedly manufactured or designed by the company for the
discontinued business.
In 1994, the company notified its 15 independent distributors of its intent
to change to direct-to-retail distribution on a nationwide basis during 1995.
A suit arising in connection with this change in distribution was filed in
April 1995 by an independent distributor. The lawsuit sought approximately $13
million in damages under the Wisconsin Fair Dealership Law. In January 1996
the court denied the company's motion for summary judgment and granted the
plaintiff's motion for summary judgment, finding the company liable. A jury
trial on
F-28
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
damages was held in May 1996, and the jury awarded the plaintiff $2.37
million. The company has appealed the judgment, contesting both the summary
judgment finding of liability and the damages awarded and is awaiting the
appellate court's decision.
The company believes that, after reviewing such matters with the company's
counsel, any liability that may ultimately be incurred with respect to these
matters is not expected to have a material effect on either the company's
consolidated financial position or results of operations.
Note Twenty Two--Subsequent Event
In August 1998, the Company filed a registration statement with the
Securities and Exchange Commission which disclosed plans for a prepackaged
plan of reorganization under Chapter 11 of the United States Code. The
prepackage plan, if approved, would result in holders of the Company's 6 1/4%
convertible subordinated debentures, which have an aggregate principle amount
of $103.5 million, receiving new 6 1/4% subordinated debentures having a
principle amount of $40 million. The prepackaged plan, if approved, would also
result in the Company becoming a wholly owned subsidiary of LGE. In connection
with this prepackaged plan, the Company also expects to implement an
operational restructuring which is designed to leverage the Company's brand,
distribution and technology strengths. As a result of the implementation of
the prepackaged plan and operational restructuring, the Company estimates it
will incur approximately $242 million of restructuring and reorganization
costs.
F-29
<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, 1997 and 1996, and the related statements of consolidated
operations and retained earnings and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Zenith
Electronics Corporation and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the company will continue as a going concern. As discussed in
Note Two to the financial statements, the Company has suffered recurring
losses from operations and has negative working capital that raises
substantial doubt about the ability to continue as a going concern.
Management's plans in regards to these matters are also described in Note Two.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
As explained in Note Five to the financial statements, the Company changed
its methods of accounting for tooling costs in 1997, and picture tube
inventories in 1996.
/s/ Arthur Andersen LLP
-------------------------------------
Arthur Andersen LLP
Chicago, Illinois
March 27, 1998, except with
respect to the matter
discussed in Note Twenty-Two,
as to which the date is
January 28, 1999.
F-30
<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. 98- ( )
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 P......... 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 chapter 11, title 11 of the United States Code, 11 U.S.C. (S)(S)
101 et seq., Zenith Electronics Corporation, debtor and debtor-in-possession
in the above-captioned and numbered case, hereby respectfully proposes the
following Prepackaged Plan of Reorganization under Chapter 11 of the
Bankruptcy Code:
ARTICLE I.
DEFINED TERMS, RULES OF INTERPRETATION,
COMPUTATION OF TIME AND GOVERNING LAW
A. Rules of Interpretation, Computation of Time and Governing Law
1. For purposes of the Plan: (a) whenever from the context it is
appropriate, each term, whether stated in the singular or the plural, shall
include both the singular and the plural, and pronouns stated in the
masculine, feminine or neuter gender shall include the masculine, feminine and
the neuter gender; (b) any reference in the Plan to a contract, instrument,
release, indenture or other agreement or document being in a particular form
or on particular terms and conditions means that such document shall be
substantially in such form or substantially on such terms and conditions; (c)
any reference in the Plan to an existing document or exhibit Filed, or to be
Filed, shall mean such document or exhibit, as it may have been or may be
amended, modified or supplemented; (d) unless otherwise specified, all
references in the Plan to Sections, Articles and Exhibits are references to
Sections, Articles and Exhibits of or to the Plan; (e) the words "herein" and
"hereto" refer to the Plan in its entirety rather than to a particular portion
of the Plan; (f) captions and headings to Articles and Sections are inserted
for convenience of reference only and are not intended to be a part of or to
affect the interpretation of the Plan; (g) the rules of construction set forth
in section 102 of the Bankruptcy Code shall apply; and (h) any term used in
capitalized form in the Plan that is not defined herein but that is used in
the Bankruptcy Code or the Bankruptcy Rules shall have the meaning assigned to
such term in the Bankruptcy Code or the Bankruptcy Rules, as the case may be.
2. In computing any period of time prescribed or allowed by the Plan, the
provisions of Bankruptcy Rule 9006(a) shall apply.
3. Except to the extent that the Bankruptcy Code or Bankruptcy Rules are
applicable, and subject to the provisions of any contract, instrument,
release, indenture or other agreement or document entered into in connection
with the Plan, the rights and obligations arising under the Plan shall be
governed by, and construed and enforced in accordance with, the laws of the
State of in which the Bankruptcy Court resides, without giving effect to the
principles of conflict of laws thereof.
B. Defined Terms
Unless the context otherwise requires, the following terms shall have the
following meanings when used in capitalized form in the Plan:
1. "Administrative Claim" means a Claim for costs and expenses of
administration under section 503(b), 507(b) or 1114(e)(2) of the Bankruptcy
Code, including: (a) the actual and necessary costs and expenses incurred
after the Petition Date of preserving the Estate and operating the business
of the Debtor (such as wages, salaries or commissions for services and
payments for goods and other services and leased premises); (b)
compensation for legal, financial advisory, accounting and other services
and reimbursement of expenses awarded or allowed under section 330(a) or
331 of the Bankruptcy Code; and (c) all fees and
A-4
<PAGE>
charges assessed against the Estate under chapter 123 of title 28 United
States Code, 28 U.S.C. (S)(S) 1911-1930.
2. "Allowed" means, with respect to any Claim, except as otherwise
provided herein: (a) a Claim that has been scheduled by the Debtor in its
schedule of liabilities as other than disputed, contingent or unliquidated
and as to which the Debtor or other party in interest has not Filed an
objection by the Effective Date; (b) a Claim that either is not a Disputed
Claim or has been allowed by a Final Order; (c) a Claim that is allowed:
(i) in any stipulation of amount and nature of Claim executed prior to the
Confirmation Date and approved by the Bankruptcy Court; (ii) in any
stipulation with the Debtor of amount and nature of Claim executed on or
after the Confirmation Date; or (iii) in any contract, instrument,
indenture or other agreement entered into or assumed in connection with the
Plan; (d) a Claim relating to a rejected executory contract or unexpired
lease that either (i) is not a Disputed Claim or (ii) has been allowed by a
Final Order, in either case only if a proof of Claim has been Filed by the
Bar Date or has otherwise been deemed timely Filed under applicable law; or
(e) a Claim that is allowed pursuant to the terms of this Plan.
3. "Allowed . . . Claim" means an Allowed Claim in the particular Class
described.
4. "Amended Certificate of Incorporation" means the Certificate of
Incorporation of the Reorganized Debtor, as restated as described in
Article V.D.1 of the Plan, the form of which shall be Filed on or before
the Confirmation Date.
5. "Amended Citibank Credit Agreement" means that certain Amended and
Restated Credit Agreement dated June 29, 1998 among the Corporation, the
Lenders designated therein, Citibank, N.A., as Issuing Bank, and Citicorp
North America, Inc., as Agent for the Issuing Bank and the Lenders,
together with all related notes, certificates, security agreements,
mortgages, pledges, indemnities, collateral assignments, undertakings,
guaranties, and other instruments and documents, as each may have been
amended or modified from time to time.
6. "Ballot Date" means the date stated in the Voting Instructions by
which all Ballots must be received.
7. "Ballots" mean the ballots accompanying the Disclosure Statement upon
which Holders of Impaired Claims shall indicate their acceptance or
rejection of the Plan in accordance with the Plan and the Voting
Instructions.
8. "Bank Lender Claims" means the Claims of the Bank Lender arising from
or relating to the Bank Loan.
9. "Bank Lender" means Credit Agricole Indosuez, Seoul Branch.
10. "Bank Loan" means the financial accommodations provided by the Bank
Lender to the Corporation, including, but not necessary limited to,
pursuant to that certain Loan Agreement dated December 31, 1997 by and
between the Corporation and Credit Agricole Indosuez, Seoul Branch.
11. "Bankruptcy Code" means title I of the Bankruptcy Reform Act of 1978,
as amended from time to time, as set forth in sections 101 et seq. of title
11 of the United States Code, and applicable portions of titles 18 and 28
of the United States Code.
12. "Bankruptcy Court" means the United States District Court having
jurisdiction over the Prepackaged Chapter 11 Case and, to the extent of any
reference made pursuant to section 157 of title 28 of the United States
Code and/or the General Order of such District Court pursuant to section
151 of title 28 of the United States Code, the bankruptcy unit of such
District Court.
13. "Bankruptcy Rules" means the Federal Rules of Bankruptcy Procedure,
as amended from time to time, as applicable to the Prepackaged Chapter 11
Case, promulgated under 28 U.S.C. (S) 2075 and the General, Local and
Chambers Rules of the Bankruptcy Court.
14. "Bar Date" means the Bar Date for Filing of proofs of claim with
respect to executory contracts and unexpired leases which are rejected
pursuant to this Plan or otherwise pursuant to section 365 of the
Bankruptcy Code.
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15. "Beneficial Holder" means the Person or Entity holding the beneficial
interest in a Claim or Equity Interest.
16. "Business Day" means any day, other than a Saturday, Sunday or "legal
holiday" (as defined in Bankruptcy Rule 9006(a)).
17. "By-Laws" mean the By-Laws of the Reorganized Debtor, the form of
which shall be Filed on or before the Confirmation Date.
18. "Cash" means cash and cash equivalents.
19. "Causes of Action" mean all actions, causes of action, suits, debts,
dues, sums of money, accounts, reckonings, bonds, bills, specialities,
covenants, contracts, controversies, agreements, promises, variances,
trespasses, damages or judgments.
20. "Citibank Secured Claims" means all Claims arising from or relating
to the Amended Citibank Credit Agreement.
21. "Claim" means a claim (as defined in section 101(5) of the Bankruptcy
Code) against the Debtor, including, but limited to: (a) any right to
payment from the Debtor whether or not such right is reduced to judgment,
liquidated, unliquidated, contingent, matured, unmatured, disputed,
undisputed, legal, equitable, secured or unsecured; or (b) any right to an
equitable remedy for breach of performance if such performance gives rise
to a right of payment from the Debtor, whether or not such right to an
equitable remedy is reduced to judgment, fixed, contingent, matured,
unmatured, disputed, undisputed, secured or unsecured.
22. "Claim Holder" or "Claimant" means the Holder of a Claim.
23. "Class" means a category of Holders of Claims or Equity Interests as
set forth in Article III of the Plan.
24. "Committee" or "Committees" means a statutory official committee (or
committees, if more than one) appointed in the Prepackaged Chapter 11 Case
pursuant to section 1102 of the Bankruptcy Code, if any.
25. "Common Stock" means the authorized common stock of the Corporation.
26. "Confirmation" means the entry of the Confirmation Order, subject to
all conditions specified in Article IX.A of the Plan having been (i)
satisfied or (ii) waived pursuant to Article IX.C.
27. "Confirmation Date" means the date upon which the Confirmation Order
is entered by the Bankruptcy Court in its docket, within the meaning of
Bankruptcy Rules 5003 and 9021.
28. "Confirmation Order" means the order of the Bankruptcy Court
confirming the Plan pursuant to section 1129 of the Bankruptcy Code.
29. "Consummation" means the occurrence of the Effective Date.
30. "Corporation" means Zenith Electronics Corporation, a Delaware
corporation.
31. "Creditor" means any Holder of a Claim.
32. "D&O Releasees" means all officers, directors, employees, attorneys,
financial advisors, accountants, investment bankers, agents and
representatives of the Debtor and its subsidiaries who served in such
capacity on or after January 1, 1998, in each case in their capacity as
such.
33. "Debtor" means the Corporation, as debtor in the Prepackaged Chapter
11 Case.
34. "Debtor in Possession" means the Corporation, as debtor in possession
in the Prepackaged Chapter 11 Case.
35. "Delaware General Corporation Law" means title 8 of the Delaware
Code, as now in effect or hereafter amended.
36. "Disclosure Statement" means the Disclosure Statement and Proxy
Statement-Prospectus for the Solicitation of Votes for the Prepackaged Plan
of the Corporation dated [ ], as amended, supplemented, or
modified from time to time, describing the Plan, that is prepared and
distributed in
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accordance with sections 1125, 1126(b) and/or 1145 of the Bankruptcy Code
and Bankruptcy Rule 3018 and/or other applicable law.
37. "Disputed" means, with respect to any Claim or Equity Interest, any
Claim or Equity Interest: (a) listed on the Schedules as unliquidated,
disputed or contingent; or (b) as to which the Debtor or any other party in
interest have interposed a timely objection or request for estimation in
accordance with the Bankruptcy Code and the Bankruptcy Rules or is
otherwise disputed by the Debtor in accordance with applicable law, which
objection, request for estimation or dispute has not been withdrawn or
determined by a Final Order.
38. "Distribution Record Date" means the close of business on the
Business Day immediately preceding the Effective Date.
39. "Effective Date" means the date selected by the Corporation which is
a Business Day after the Confirmation Date on which: (a) no stay of the
Confirmation Order is in effect, and (b) all conditions specified in both
Article IX.A and IX.B of the Plan have been (i) satisfied or (ii) waived
pursuant to Article IX.C.
40. "Entity" means an entity as defined in section 101(15) of the
Bankruptcy Code.
41. "Equity Interest" means any equity interest of the Corporation,
including, but not limited to, all issued, unissued, authorized or
outstanding shares or stock (including the Common Stock), together with any
warrants, options or contract rights to purchase or acquire such interests
at any time.
42. "Estate" means the estate of the Debtor created by section 541 of the
Bankruptcy Code upon the commencement of the Prepackaged Chapter 11 Case.
43. "File" or "Filed" means file or filed with the Bankruptcy Court in
the Prepackaged Chapter 11 Case.
44. "Final Decree" means the decree contemplated under Bankruptcy Rule
3022.
45. "Final Order" means an order or judgment of the Bankruptcy Court, or
other court of competent jurisdiction with respect to the subject matter,
which has not been reversed, stayed, modified or amended, and as to which
the time to appeal or seek certiorari has expired and no appeal or petition
for certiorari has been timely taken, or as to which any appeal that has
been taken or any petition for certiorari that has been or may be filed has
been resolved by the highest court to which the order or judgment was
appealed or from which certiorari was sought.
46. "General Unsecured Claim" means any Unsecured Claim that is not a
Bank Lender Claim, Old Subordinated Debenture Claim, LGE Tranche A Claim or
LGE Tranche B Claim. These claims include, but are not limited, to any
accrued but unpaid interest on the LGE Leveraged Lease Claims and the LGE
Reimbursement Claims.
47. "Holder" means a Person or Entity holding an Equity Interest or
Claim, and with respect to a vote on the Plan, means the Beneficial Holder
as of the Voting Record Date or any authorized signatory who has completed
and executed a Ballot or on whose behalf a Master Ballot has been completed
and executed in accordance with the Voting Instructions.
48. "Impaired Claim" means a Claim classified in an Impaired Class.
49. "Impaired Class" means each of Classes 4, 6, 7 and 8 as set forth in
Article III of the Plan.
50. "Investor Releasees" means LGE and LG Semicon Co., Ltd. and their
current and former parents, subsidiaries and affiliates and their
respective officers, directors, employees, attorneys, financial advisors,
accountants, investment bankers, agents and representatives, in each case
in their capacity as such.
51. "Leveraged Lease (Melrose Park)" means that certain Lease Agreement
dated as of March 26, 1997 by and among Fleet Bank as Owner Trustee for
Zenith Electronics Equipment Owner Trustee 1997-I, as Lessor, and the
Corporation, as Lessee, as supplemented by that certain Lease Supplement
dated April 2, 1997 by and between Fleet Bank, as Lessor, and the
Corporation, as Lessee, together with all related notes, certificates,
security agreements, mortgages, pledges, indemnities, collateral
assignments, undertakings, guaranties, and other instruments and documents,
as each may have been amended or modified from time to time, including, but
not limited to, that certain Participation Agreement dated as of March 26,
1997 by
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and among the Corporation, as Lessee, General Foods Credit Corporation, as
Owner Participant, Fleet Bank, as Owner Trustee, the Lenders designated
therein, and First Security Bank, National Association, as Indenture
Trustee.
52. "Leveraged Lease (Mexico)" means that certain Lease Agreement dated
as of March 26, 1997 by and among Fleet Bank as Owner Trustee for Zenith
Electronics Equipment Owner Trustee 1997-II, as Lessor, and Zenith
Electronics Corporation of Texas, as Lessee, as supplemented by that
certain Lease Supplement dated April 2, 1997 by and between Fleet Bank, as
Lessor, and Zenith Electronics Corporation of Texas, as Lessee, together
with all related notes, certificates, security agreements, mortgages,
pledges, indemnities, collateral assignments, undertakings, guaranties, and
other instruments and documents, as each may have been amended or modified
from time to time, including, but not limited to, that certain
Participation Agreement dated as of March 26, 1997 by and among Zenith
Electronics Corporation of Texas, as Lessee, General Foods Credit
Corporation, as Owner Participant, Fleet Bank, as Owner Trustee, the
Lenders designated therein, and First Security Bank, National Association,
as Indenture Trustee, and, that certain Parent Guaranty dated March 26,
1997 by and among the Debtor, the Owner Trustee, and Owner Participant, the
Indenture Trustee and the Lenders.
53. "Leveraged Leases" means the Leveraged Lease (Melrose Park) and the
Leveraged Lease (Mexico).
54. "LGE" means LG Electronics Inc., a corporation organized under the
laws of the Republic of Korea.
55. "LGE Bank Guarantee" means the guarantee from LGE to the Bank Lender
issued in connection with the Bank Loan.
56. "LGE Claims" means the LGE Tranche A Claims and the LGE Tranche B
Claims, to be restructured as provided in the Restructuring Agreement.
57. "LGE Demand Loan Claims" means any and all Claims of LGE against the
Debtor relating to that certain $45,000,000 Demand Note issued by the
Debtor to LGE on March 31, 1998, together with all related notes,
certificates, security agreements, mortgages, pledges, indemnities,
collateral assignments, undertakings, guaranties, and other instruments and
documents, as each may have been amended or modified from time to time.
58. "LGE Extended Payables Claims" means any and all Claims of LGE
against the Debtor arising under or relating to that certain vendor credit
line extended by LGE to the Debtor pursuant to that certain Financial
Support Agreement dated March 31, 1997 by and between the Debtor and LGE.
59. "LGE Guaranty Fee Claims" means any and all Claims of LGE against the
Debtor arising from or relating to any and all fees payable by the Debtor
to LGE on account of LGE issuing the LGE Bank Guarantee.
60. "LGE Leveraged Lease Claims" means any and all Claims of LGE against
the Debtor relating to the Leveraged Leases, including, but not limited to,
Claims relating to (a) that certain Guaranty dated as of March 26, 1997
from LGE to the parties designated therein, relating to the Leveraged Lease
(Melrose Park), (b) that certain Guaranty dated as of March 26, 1997 from
LGE to the parties designated therein, relating to the Leveraged Lease
(Mexico), (c) those certain Guaranty Payment Agreements each dated as of
July 17, 1998, by and between LGE, the Indenture Trustee, the Lenders, the
Owner Participant and the Owner Trustee, as acknowledged and agreed to by
the Debtor; but excluding any accrued but unpaid interest related thereto.
61. "LGE New Credit Support" means, at the option of LGE and Debtor,
either (a) a line of credit to be made available to the Debtor by LGE on or
after the Effective Date, (b) a guarantee or other credit support to be
provided by LGE to a third-party lender to support credit provided by such
lender to the Debtor on or after the Effective Date, or (c) a combination
of both (a) and (b), in all cases in an aggregate amount not to exceed
$60,000,000, to be provided to the Debtor, if at all, on the terms and
conditions of the Restructuring Agreement.
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62. "LGE Reimbursement Claims" means any and all claims of LGE against
the Debtor arising from or relating to the Reimbursement Agreement or the
LGE Bank Guarantee, other than the LGE Guaranty Fee Claims; but excluding
any accrued but unpaid interest related thereto.
63. "LGE New Restructured Senior Note" means that certain new secured
note in a principal amount equal to the aggregate amount of the LGE Tranche
A Claims minus $32,379,300, bearing interest at LIBOR plus 6.5%, and
maturing on November 1, 2008 to be issued to LGE on account of the LGE
Tranche A Claims in Class 7, as provided in the Restructuring Agreement,
the form of which shall be Filed on or before the Confirmation Date.
Interest on the LGE New Restructured Senior Note will be paid in cash only
to the extent that the Debtor's ratio of EBITDA to cash interest expense
for the immediately preceding four fiscal quarters exceeds 1.5; if such
test is not met, interest will be payable by the issuance of additional LGE
New Restructured Senior Notes.
64. "LGE Technical Services Fee Claims" means any and all Claims of LGE
against the Debtor relating to servicing fees resulting from LGE's
provision of certain technical and other related services to the Debtor in
connection with the Debtor's research and development activities.
65. "LGE Tranche A Claims" means those Claims against the Debtor held by
LGE arising from or relating to (a) the LGE Leveraged Lease Claims, (b) the
LGE Technical Services Fee Claims, and (c) that portion of the LGE
Reimbursement Claims and the LGE Demand Loan Claims not classified as LGE
Tranche B Claims.
66. "LGE Tranche B Claims" means Claims against the Debtor equal to
$200,000,000 held by LGE arising from or relating to (a) the LGE Extended
Payables Claims (but not to exceed $140,000,000), (b) the LGE Reimbursement
Claims (but not to exceed $50,000,000), (c) the LGE Guaranty Fee Claims,
and (d) the LGE Demand Loan Claims in an amount sufficient when aggregated
with the Claims described in items (a) through (c) to equal $200,000,000.
67. "Master Ballots" mean the master ballots accompanying the Disclosure
Statement upon which Holders of Impaired Claims shall indicate the
acceptance or rejection of the Plan in accordance with the Voting
Instructions.
68. "New Bank Lender Note" means that certain term note issued by the
Reorganized Debtor to be distributed to the Holder of Allowed Claims in
Class 4, with a maturity of one year from the Effective Date, the form of
which shall be Filed on or before the Confirmation Date.
69. "New Common Stock" means the 1000 shares of Common Stock of the
Reorganized Debtor, par value $0.01 per share, authorized pursuant to the
Amended Certificate of Incorporation.
70. "New Subordinated Debentures" means those certain $40,000,000 of new
6 1/4% Subordinated Debentures due 2010 issued by the Reorganized Debtor,
offered to the Holders of Allowed Claims in Class 6, the form of which
shall be Filed on or before the Confirmation Date.
71. "Nominee" means any Beneficial Holder whose securities were
registered or held of record in the name of his broker, dealer, commercial
bank, trust company, savings and loan or other nominee.
72. "Old Subordinated Debenture Claims" means all Claims arising from or
related to the Old Subordinated Debentures or the Old Subordinated
Debenture Indenture.
73. "Old Subordinated Debentures" mean the 6 1/4% Convertible
Subordinated Debentures due 2011, issued by the Corporation under the Old
Senior Subordinated Debenture Indenture.
74. "Old Subordinated Debenture Indenture" means the Indenture, dated as
of April 1, 1986 between the Corporation and State Street Bank & Trust
Company, as trustee, relating to the Old Subordinated Debentures.
75. "Other Priority Claims" mean any Claim accorded priority in right of
payment under section 507(a) of the Bankruptcy Code, other than a Priority
Tax Claim or an Administrative Claim.
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76. "Other Secured Claims" mean, collectively, all Secured Claims against
the Debtor held by any Person or Entity, other than Claims classified in
Class 2 or Class 7.
77. "Person" means a person as defined in section 101(41) of the
Bankruptcy Code.
78. "Petition Date" means the date on which the Debtor filed its petition
for relief commencing the Prepackaged Chapter 11 Case.
79. "Plan" or "Prepackaged Plan" means this Chapter 11 Prepackaged Plan
of Reorganization, either in its present form or as it may be altered,
amended, modified or supplemented from time to time in accordance with the
Plan, the Bankruptcy Code and the Bankruptcy Rules.
80. "Prepackaged Chapter 11 Case" means the case under chapter 11 of the
Bankruptcy Code, commenced by the Debtor in the Bankruptcy Court.
81. "Priority Tax Claim" means a Claim of a governmental unit of the kind
specified in section 507(a)(8) of the Bankruptcy Code.
82. "Pro Rata" means proportionately so that with respect to an Allowed
Claim, the ratio of (a) (i) the amount of property distributed on account
of a particular Allowed Claim to (ii) the amount of the Allowed Claim, is
the same as the ratio of (b) (i) the amount of property distributed on
account of all Allowed Claims of the Class in which the particular Allowed
Claim is included to (ii) the amount of all Allowed Claims in that Class.
83. "Professionals" means a Person or Entity (a) employed pursuant to a
Final Order in accordance with sections 327 and 1103 of the Bankruptcy Code
and to be compensated for services rendered prior to the Effective Date,
pursuant to sections 327, 328, 329, 330 and 331 of the Bankruptcy Code, or
(b) for which compensation and reimbursement has been allowed by the
Bankruptcy Court pursuant to section 503(b)(4) of the Bankruptcy Code.
84. "Reimbursement Agreement" means that certain Reimbursement Agreement
dated as of November 3, 1997 by and between the Debtor and LGE, together
with all related notes, certificates, security agreements, mortgages,
pledges, indemnities, collateral assignments, undertakings, guaranties, and
other instruments and documents, as each may have been amended or modified
from time to time, pursuant to which the Debtor agreed to reimburse LGE for
amounts paid pursuant to the LGE Bank Guarantees.
85. "Reorganized Debtor" means the Debtor and the Debtor in Possession,
or any successor thereto, by merger, consolidation, or otherwise, on and
after the Effective Date.
86. "Restructuring Agreement" means that certain Restructuring Agreement
dated as of August 7, 1998 by and between the Debtor and LGE (as amended on
November 16, 1998 and as thereafter amended and supplemented from time to
time), a copy of which is set forth as an exhibit to the Disclosure
Statement.
87. "Reynosa Assets" means that certain property, plant and equipment
owned by a subsidiary or subsidiaries of the Debtor located in Reynosa,
Tamaulipas, Mexico, as specifically set forth in the Restructuring
Agreement.
88. "Reynosa Purchase Agreement" means that certain agreement, dated the
Effective Date, among LGE, Zenith Electronics Corporation of Texas and
Partes de Television de Reynosa, pursuant to which the Reynosa Assets will
be transferred to LGE or its affiliate, as specifically set forth in the
Restructuring Agreement.
89. "Schedules" mean the schedules of assets and liabilities, schedules
of executory contracts, and the statement of financial affairs as the
Bankruptcy Court requires the Debtor to file pursuant to section 521 of the
Bankruptcy Code, the Official Bankruptcy Forms and the Bankruptcy Rules, as
they may be amended and supplemented from time to time.
90. "Secured Claim" means (a) a Claim that is secured by a lien on
property in which the Estate has an interest, which lien is valid,
perfected and enforceable under applicable law or by reason of a Final
Order, or that is subject to setoff under section 553 of the Bankruptcy
Code, to the extent of the value of the Claim Holder's interest in the
Estate's interest in such property or to the extent of the amount subject
to setoff, as
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applicable, as determined pursuant to section 506(a) of the Bankruptcy
Code, or (b) a Claim Allowed under this Plan as a Secured Claim.
91. "Securities Act" means the Securities Act of 1933, 15 U.S.C. sections
77a-77aa, as now in effect or hereafter amended.
92. "Unimpaired Claim" means an unimpaired Claim within the meaning of
section 1124 of the Bankruptcy Code.
93. "Unimpaired Class" means an unimpaired Class within the meaning of
section 1124 of the Bankruptcy Code.
94. "Unsecured Claim" means any Claim against the Debtor that is not a
Secured Claim, Administrative Claim, Priority Tax Claim or Other Priority
Claim.
95. "Voting 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.
96. "Voting Record Date" means [ ].
ARTICLE II.
ADMINISTRATIVE AND PRIORITY TAX CLAIMS
A. Administrative Claims
Subject to the provisions of section 330(a) and 331 of the Bankruptcy Code,
each Holder of an Allowed Administrative Claim will be paid the full unpaid
amount of such Allowed Administrative Claim in Cash on the Effective Date, or
upon such other terms as may be agreed upon by such Holder and the Reorganized
Debtor or otherwise upon order of the Bankruptcy Court; provided, however,
that Allowed Administrative Claims representing obligations incurred in the
ordinary course of business or otherwise assumed by the Debtor pursuant to the
Plan will be assumed on the Effective Date and paid or performed by the
Reorganized Debtor when due in accordance with the terms and conditions of the
particular agreements governing such obligations.
B. Priority Tax Claims
On the Effective Date, each Holder of a Priority Tax Claim due and payable
on or prior to the Effective Date shall be paid Cash in an amount equal to the
amount of such Allowed Claim, or shall be paid on account of its Allowed Claim
on such other terms as have been or may be agreed upon by such Holder and the
Debtor. The amount of any Priority Tax Claim that is not an Allowed Claim or
that is not otherwise due and payable on or prior to the Effective Date, and
the rights of the Holder of such Claim, if any, to payment in respect thereof
shall (i) be determined in the manner in which the amount of such Claim and
the rights of the Holder of such Claim would have been resolved or adjudicated
if the Prepackaged Chapter 11 Case had not been commenced, (ii) survive the
Effective Date and Consummation of the Plan as if the Prepackaged Chapter 11
Case had not been commenced, and (iii) not be discharged pursuant to section
1141 of the Bankruptcy Code. In accordance with section 1124 of the Bankruptcy
Code, the Plan shall leave unaltered the legal, equitable, and contractual
rights of each Holder of a Priority Tax Claim.
ARTICLE III.
CLASSIFICATION AND TREATMENT
OF CLASSIFIED CLAIMS AND EQUITY INTERESTS
A. Summary
The categories of Claims and Equity Interests listed below classify Claims
and Equity Interests for all purposes, including voting, confirmation and
distribution pursuant to the Plan and pursuant to sections 1122 and 1123(a)(1)
of the Bankruptcy Code. A Claim or Equity Interest shall be deemed classified
in a particular Class
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only to the extent that the Claim or Equity Interest qualifies within the
description of that Class and shall be deemed classified in a different Class
to the extent that any remainder of such Claim or Equity Interest qualifies
within the description of such different Class. A Claim or Equity Interest is
in a particular Class only to the extent that such Claim or Equity Interest is
Allowed in that Class and has not been paid or otherwise settled prior to the
Effective Date.
The classification of Claims and Equity Interests pursuant to this Plan is
as follows:
<TABLE>
<CAPTION>
Class Status Voting Rights
<S> <C> <C>
Class 1--Other Priority Claims Unimpaired --not entitled to vote
Class 2--Citibank Secured Claims Unimpaired --not entitled to vote
Class 3--Other Secured Claims Unimpaired --not entitled to vote
Class 4--Bank Lender Claims Impaired --entitled to vote
Class 5--General Unsecured Claims Unimpaired --not entitled to vote
Class 6--Old Subordinated Debenture Claims Impaired --entitled to vote
Class 7--LGE Claims: Impaired --entitled to vote
LGE Tranche A Claims
LGE Tranche B Claims
Class 8--Equity Interests Impaired --not entitled to vote
</TABLE>
B. Classification and Treatment
1. Class 1--Other Priority Claims
(a) Classification: Class 1 consists of all Other Priority Claims.
(b) Treatment: The legal, equitable and contractual rights of the Holders
of Class 1 Claims are unaltered by the Plan. Unless the Holder of such
Claim and the Debtor agree to a different treatment, each Holder of an
Allowed Class 1 Claim shall receive one of the following alternative
treatments, at the election of the Debtor:
(i) to the extent then due and owing on the Effective Date, such
Claim will be paid in full in Cash by the Reorganized Debtor;
(ii) to the extent not due and owing on the Effective Date, such
Claim (A) will be paid in full in Cash by the Reorganized Debtor, or
(B) will be paid in full in Cash by the Reorganized Debtor when and as
such Claim becomes due and owing in the ordinary course of business; or
(iii) such Claim will be otherwise treated in any other manner so
that such Claims shall otherwise be rendered unimpaired pursuant to
section 1124 of the Bankruptcy Code.
Any default with respect to any Class 1 Claim that existed immediately
prior to the filing of the Prepackaged Chapter 11 Case shall be deemed
cured upon the Effective Date.
(c) Voting: Class 1 is not impaired and the Holders of Class 1 Claims are
conclusively deemed to have accepted the Plan pursuant to section 1126(f)
of the Bankruptcy Code. Therefore, the Holders of Claims in Class 1 are not
entitled to vote to accept or reject the Plan.
2. Class 2--Citibank Secured Claims
(a) Classification: Class 2 consists of the Citibank Secured Claims.
(b) Treatment: The legal, equitable and contractual rights of the Holders
of Class 2 Claims are unaltered by the Plan. On the Effective Date, unless
the Holder of such Claim and the Debtor agree to a different treatment, at
the election of the Debtor, the Allowed Class 2 Claims (i) will be paid in
full in Cash by the Reorganized Debtor or (ii) will be otherwise treated in
any other manner so that such Claims shall otherwise be rendered unimpaired
pursuant to section 1124 of the Bankruptcy Code.
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(c) Voting: Class 2 is not impaired and the Holders of Class 2 Claims are
conclusively deemed to have accepted the Plan pursuant to section 1126(f)
of the Bankruptcy Code. Therefore, the Holders of Claims in Class 2 are not
entitled to vote to accept or reject the Plan.
3. Class 3--Other Secured Claims
(a) Classification: Class 3 consists of the Other Secured Claims.
(b) Treatment: The legal, equitable and contractual rights of the Holders
of Class 3 Claims are unaltered by the Plan. Unless the Holder of such
Claim and the Debtor agree to a different treatment, each Holder of an
Allowed Class 3 Claim shall receive one of the following alternative
treatments, at the election of the Debtor:
(i) the legal, equitable and contractual rights to which such Claim
entitles the Holder thereof shall be unaltered by the Plan;
(ii) the Debtor shall surrender all collateral securing such Claim to
the Holder thereof, without representation or warranty by or recourse
against the Debtor or the Reorganized Debtor; or
(iii) such Claim will be otherwise treated in any other manner so
that such Claims shall otherwise be rendered unimpaired pursuant to
section 1124 of the Bankruptcy Code.
Any default with respect to any Class 3 Claim that existed immediately
prior to the filing of the Prepackaged Chapter 11 Case shall be deemed
cured upon the Effective Date.
(c) Voting: Class 3 is not impaired and the Holders of Class 3 Claims are
conclusively deemed to have accepted the Plan pursuant to section 1126(f)
of the Bankruptcy Code. Therefore, the Holders of Claims in Class 3 are not
entitled to vote to accept or reject the Plan.
4. Class 4--Bank Lender Claims
(a) Classification: Class 4 consists of the Claims of the Holder of Bank
Lender Claims.
(b) Treatment: On the Effective Date, unless the Holder of such Claims
and the Debtor agree to a different treatment, the Holder of the Bank
Lender Claims shall receive the New Bank Lender Note in full satisfaction
of its Claims.
(c) Voting: Class 4 is impaired and the Holder of Allowed Class 4 Claims
is entitled to vote to accept or reject the Plan.
5. Class 5--General Unsecured Claims
(a) Classification: Class 5 consists of the Claims of Holders of General
Unsecured Claims.
(b) Treatment: The legal, equitable and contractual rights of the Holders
of Class 5 Claims are unaltered by the Plan. Unless the Holder of such
Claim and the Debtor agree to a different treatment, each Holder of an
Allowed Class 5 Claim shall receive one of the following alternative
treatments, at the election of the Debtor:
(i) to the extent then due and owing on the Effective Date, such
Claim will be paid in full in Cash by the Reorganized Debtor;
(ii) to the extent not due and owing on the Effective Date, such
Claim (A) will be paid in full in Cash by the Reorganized Debtor, or
(B) will be paid in full in Cash by the Reorganized Debtor when and as
such Claim becomes due and owing in the ordinary course of business; or
(iii) such Claim will be otherwise treated in any other manner so
that such Claims shall otherwise be rendered unimpaired pursuant to
section 1124 of the Bankruptcy Code.
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Any default with respect to any Class 5 Claim that existed immediately
prior to the filing of the Prepackaged Chapter 11 Case shall be deemed
cured upon the Effective Date.
(c) Voting: Class 5 is not impaired and the Holders of Class 5 Claims are
conclusively deemed to have accepted the Plan pursuant to section 1126(f)
of the Bankruptcy Code. Therefore, the Holders of Claims in Class 5 are not
entitled to vote to accept or reject the Plan.
6. Class 6--Old Subordinated Debenture Claims
(a) Classification: Class 6 consists of the Claims of Holders of Old
Subordinated Debentures.
(b) Treatment: If Class 6 accepts the Plan, on or as soon as practicable
after the Effective Date, each Holder of an Allowed Old Subordinated
Debenture Claim shall receive, in full and final satisfaction of such
Claim, a pro rata distribution of the New Subordinated Debentures;
provided, however, if Class 6 rejects the Plan, the Holders of Old
Subordinated Debentures will not receive or retain any property on account
of their Old Subordinated Debentures.
(c) Voting: Class 6 is impaired and the Holders of Allowed Class 6 Claims
are entitled to vote to accept or reject the Plan.
7. Class 7--LGE Claims
(a) Classification: Class 7 consists of the LGE Claims (but excluding any
other Claim or any Equity Interests held by LGE).
(b) Treatment:
(i) LGE Tranche A Claims--On the Effective Date, or as soon
thereafter as practicable, LGE shall receive (A) the LGE New
Restructured Senior Note, and (B) the Reynosa Assets, in full and
complete satisfaction of the Allowed LGE Tranche A Claims. In
connection with the delivery of the Reynosa Assets, on or before the
Effective Date, the Reorganized Debtor shall cause its subsidiaries,
Zenith Electronics Corporation of Texas and Partes de Television de
Reynosa, to enter into the Reynosa Purchase Agreement.
(ii) LGE Tranche B Claims-On the Effective Date, or as soon
thereafter as practicable, LGE shall receive 100% of the New Common
Stock, in full and complete satisfaction of the Allowed LGE Tranche B
Claims.
(c) Voting: Class 7 is impaired and the Holder of the Allowed Class 7
Claims is entitled to vote to accept or reject the Plan.
8. Class 8--Equity Interests
(a) Classification: Class 8 consists of all Equity Interests.
(b) Treatment: On the Effective Date, the Holders of Equity Interests
shall neither receive any distributions nor retain any property under the
Plan. All Common Stock issued before the Petition Date will be canceled.
(c) Voting: Class 8 is impaired, but because no distributions will be
made to Holders of Class 8 Equity Interests nor will such Holders retain
any property, such Holders are deemed to reject the Plan pursuant to
section 1126(g) of the Bankruptcy Code. Class 8 is not entitled to vote to
accept or reject the Plan.
C. Special Provision Governing Unimpaired Claims
Except as otherwise provided in the Plan, including as provided in Article
X, nothing under the Plan shall affect the Debtor's or the Reorganized
Debtor's rights in respect of any Unimpaired Claims, including, but not
limited to, all rights in respect of legal and equitable defenses to or
setoffs or recoupments against such Unimpaired Claims.
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ARTICLE IV.
ACCEPTANCE OR REJECTION OF THE PLAN
A. Voting Classes
Each Holder of an Allowed Claim in Classes 4, 6, and 7 shall be entitled to
vote to accept or reject the Plan.
B. Acceptance by Impaired Classes
An Impaired Class of Claims shall have accepted the Plan if (a) the Holders
(other than any Holder designated under section 1126(e) of the Bankruptcy
Code) of at least two-thirds in amount of the Allowed Claims actually voting
in such Class have voted to accept the Plan and (b) the Holders (other than
any Holder designated under section 1126(e) of the Bankruptcy Code) of more
than one-half in number of the Allowed Claims actually voting in such Class
have voted to accept the Plan.
C. Presumed Acceptance of Plan
Classes 1, 2, 3, and 5 are unimpaired under the Plan, and, therefore,
conclusively are presumed to have accepted the Plan pursuant to section
1126(f) of the Bankruptcy Code.
D. Presumed Rejection of Plan
Class 8 is impaired and shall receive no distributions, and, therefore, is
presumed to have rejected the Plan pursuant to section 1126(g) of the
Bankruptcy Code.
E. Non-Consensual Confirmation
The Debtor will seek Confirmation of the Plan under section 1129(b) of the
Bankruptcy Code, to the extent applicable, in view of the deemed rejection by
Class 8. In the event that any Impaired Class of Claims shall fail to accept
the Plan in accordance with section 1129(a)(8) of the Bankruptcy Code, the
Debtor reserves the right (a) to request that the Bankruptcy Court confirm the
Plan in accordance with section 1129(b) of the Bankruptcy Code and/or (b) to
modify the Plan in accordance with Article XII.D of the Plan. In addition, as
set forth in Article III.B.6(b), if Class 6 rejects the Plan, the Holders of
Old Subordinated Debentures will not receive or retain any property on account
of their Old Subordinated Debentures.
ARTICLE V.
MEANS FOR IMPLEMENTATION OF THE PLAN
A. Continued Corporate Existence and Vesting of Assets in the Reorganized
Debtor
The Debtor shall, as a Reorganized Debtor, continue to exist after the
Effective Date as a separate corporate entity, with all the powers of a
corporation under the laws of the State of Delaware and without prejudice to
any right to alter or terminate such existence (whether by merger or
otherwise) under such applicable state law. Except as otherwise provided in
the Plan, the Restructuring Agreement, the LGE New Restructured Senior Note,
the New Subordinated Debentures, or any agreement, instrument or indenture
relating thereto, on or after the Effective Date, all property of the Estate,
and any property acquired by the Debtor or the Reorganized Debtor under the
Plan, shall vest in the Reorganized Debtor, free and clear of all Claims,
liens, charges, or other encumbrances and Equity Interests. On and after the
Effective Date, the Reorganized Debtor may operate its business and may use,
acquire or dispose of property and compromise or settle any Claims or Equity
Interests, without supervision or approval by the Bankruptcy Court and free of
any restrictions of the Bankruptcy Code or Bankruptcy Rules, other than those
restrictions expressly imposed by the Plan and the Confirmation Order. In
accordance with section 1109(b) of the Bankruptcy Code, nothing in this
Article V shall preclude any party in interest from appearing and being heard
on any issue in the Prepackaged Chapter 11 Case.
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B. Cancellation of Notes, Instruments, Debentures, Common Stock and Stock
Options
On the Effective Date, except to the extent provided otherwise in the Plan,
(i) all notes, instruments, certificates, and other documents evidencing the
Citibank Secured Claims, LGE Claims, Other Secured Claims, and Bank Lender
Claims, (ii) the Old Subordinated Debentures, and (iii) all Equity Interests,
including all Common Stock, shall be canceled and deemed terminated. On the
Effective Date, except to the extent provided otherwise in the Plan, any
indenture relating to any of the foregoing, including, without limitation, the
Old Subordinated Debenture Indenture, shall be deemed to be canceled, as
permitted by section 1123(a)(5)(F) of the Bankruptcy Code.
C. Issuance of New Securities; Execution of Related Documents
On the Effective Date, the Reorganized Debtor shall issue all securities,
notes instruments, certificates, and other documents required to be issued
pursuant to the Plan, including, without limitation, the LGE New Restructured
Senior Note, the New Bank Lender Note, the New Subordinated Debentures, and
the New Common Stock, each of which shall be distributed as provided in the
Plan. The Reorganized Debtor shall execute and deliver such other agreements,
documents and instruments as are required to be executed pursuant to the terms
of the Plan or the Restructuring Agreement.
D. Corporate Governance, Directors and Officers, and Corporate Action
1. Amended Certificate of Incorporation
On the Effective Date, the Reorganized Debtor will file its Amended
Certificate of Incorporation with the Secretary of the State of Delaware in
accordance with sections 102 and 103 of the Delaware General Corporation Law.
The Amended Certificate of Incorporation will, among other things, prohibit
the issuance of nonvoting equity securities to the extent required by section
1123(a) of the Bankruptcy Code, change the number of authorized shares of New
Common Stock to 1,000, change the par value of the New Common Stock to $0.01
and eliminate the authorization of preferred stock. After the Effective Date,
the Reorganized Debtor may amend and restate its Amended Certificate of
Incorporation and other constituent documents as permitted by the Delaware
General Corporation Law.
2. Directors and Officers of the Reorganized Debtor
Subject to any requirement of Bankruptcy Court approval pursuant to section
1129(a)(5) of the Bankruptcy Code, as of the Effective Date, the initial
officers of the Reorganized Debtor shall be the officers of the Debtor
immediately prior to the Effective Date. On the Effective Date, LGE will be
the sole shareholder of the Reorganized Debtor, and will have the right to
determine the composition of the board of directors of the Reorganized Debtor.
Pursuant to section 1129(a)(5), the Debtor will disclose, on or prior to the
Confirmation Date, identity and affiliations of any Person proposed to serve
on the initial board of directors of the Reorganized Debtor, and, to the
extent such Person is an Insider, the nature of any compensation for such
Person. The classification and composition of the board of directors shall be
consistent with the Amended Certificate of Incorporation. Each such director
and officer shall serve from and after the Effective Date pursuant to the
terms of the Amended Certificate of Incorporation, other constituent documents
and the Delaware General Corporation Law.
3. Corporate Action
On the Effective Date, the adoption of the Amended Certificate of
Incorporation or similar constituent documents, the amendment of the By-laws,
the selection of directors and officers for the Reorganized Debtor, and all
actions contemplated by the Plan and the Restructuring Agreement shall be
authorized and approved in all respects (subject to the provisions of the
Plan). All matters provided for in the Plan and the Restructuring Agreement
involving the corporate structure of the Debtor or the Reorganized Debtor, and
any corporate action required by the Debtor or the Reorganized Debtor in
connection with the Plan, shall be deemed to have occurred
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and shall be in effect, without any requirement of further action by the
security holders or directors of the Debtor or the Reorganized Debtor. On the
Effective Date, the appropriate officers of the Reorganized Debtor and members
of the board of directors of the Reorganized Debtor are authorized and
directed to issue, execute and deliver the agreements, documents, securities
and instruments contemplated by the Plan in the name of and on behalf of the
Reorganized Debtor.
E. LGE New Credit Support
On or after the Effective Date, pursuant to the terms and conditions of the
Restructuring Agreement, LGE will provide the Debtor with the LGE New Credit
Support.
F. Sources of Cash for Plan Distribution
All Cash necessary for the Reorganized Debtor to make payments pursuant to
the Plan shall be obtained from existing Cash balances, the operations of the
Debtor or Reorganized Debtor, or post-confirmation borrowing under other
available facilities of the Debtor or Reorganized Debtor, including, without
limitation, to the extent available, the LGE New Credit Support. The
Reorganized Debtor may also make such payments using Cash received from its
subsidiaries through the Reorganized Debtor's consolidated cash management
system and from advances or dividends from such subsidiaries in the ordinary
course.
ARTICLE VI.
TREATMENT OF EXECUTORY CONTRACTS
AND UNEXPIRED LEASES
A. Assumption of Executory Contracts and Unexpired Leases
Immediately prior to the Effective Date, all executory contracts or
unexpired leases of the Reorganized Debtor will be deemed assumed in
accordance with the provisions and requirements of sections 365 and 1123 of
the Bankruptcy Code except those executory contracts and unexpired leases that
(1) have been rejected by order of the Bankruptcy Court, (2) are the subject
of a motion to reject pending on the Effective Date, (3) are identified on a
list to be filed with the Bankruptcy Court on or before the Confirmation Date,
as to be rejected, or (4) are rejected pursuant to the terms of the Plan.
Entry of the Confirmation Order by the Bankruptcy Court shall constitute
approval of such assumptions and rejections pursuant to sections 365(a) and
1123 of the Bankruptcy Code.
Notwithstanding anything to the contrary contained herein, on the Effective
Date, the Leveraged Leases shall be deemed rejected pursuant to section 365(a)
of the Bankruptcy Code. Any Claim arising from such rejection, including, but
not limited to, those Claims arising under section 502 of the Bankruptcy Code,
shall be part of and are included in the LGE Leveraged Lease Claims. Other
than on account of the LGE Leveraged Lease Claims, LGE shall not receive any
property or distribution arising from or related to such rejection. Except as
provided in the Restructuring Agreement, on the Effective Date, all property
that is the subject of the Leveraged Leases shall be vested in the Reorganized
Debtor free and clear of all liens, claims and encumbrances.
B. Claims Based on Rejection of Executory Contracts or Unexpired Leases
All proofs of claim with respect to Claims arising from the rejection of
executory contracts or unexpired leases, if any, must be Filed with the
Bankruptcy Court within sixty (60) days after the date of entry of an order of
the Bankruptcy Court approving such rejection. Any Claims arising from the
rejection of an executory contract or unexpired lease not Filed within such
times will be forever barred from assertion against the Debtor or Reorganized
Debtor, its estate and property unless otherwise ordered by the Bankruptcy
Court or provided in this Plan, all such Claims for which proofs of claim are
required to be Filed will be, and will be treated as, General Unsecured Claims
subject to the provisions of Article VIII hereof.
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C. Cure of Defaults for Executory Contracts and Unexpired Leases Assumed
Any monetary amounts by which each executory contract and unexpired lease to
be assumed pursuant to the Plan is in default shall be satisfied, pursuant to
section 365(b)(1) of the Bankruptcy Code, by payment of the default amount in
Cash on the Effective Date or on such other terms as the parties to such
executory contracts or unexpired leases may otherwise agree. In the event of a
dispute regarding: (1) the amount of any cure payments, (2) the ability of the
Reorganized Debtor or any assignee to provide "adequate assurance of future
performance" (within the meaning of section 365 of the Bankruptcy Code) under
the contract or lease to be assumed, or (3) any other matter pertaining to
assumption, the cure payments required by section 365(b)(1) of the Bankruptcy
Code shall be made following the entry of a Final Order resolving the dispute
and approving the assumption.
D. Indemnification of Directors, Officers and Employees
The obligations of the Debtor to indemnify any Person or Entity serving at
any time on or prior to the Effective Date as one of its directors, officers
or employees by reason of such Person's or Entity's service in such capacity,
or as a director, officer or employee of any other corporation or legal
entity, to the extent provided in the Debtor's constituent documents or by a
written agreement with the Debtor or the Delaware General Corporation Law,
shall be deemed and treated as executory contracts that are assumed by the
Debtor pursuant to the Plan and section 365 of the Bankruptcy Code as of the
Effective Date. Accordingly, such indemnification obligations shall be treated
as General Unsecured Claims, and shall survive unimpaired and unaffected by
entry of the Confirmation Order, irrespective of whether such indemnification
is owed for an act or event occurring before or after the Petition Date.
E. Compensation and Benefit Programs
Except as otherwise expressly provided hereunder, all employment and
severance policies, and all compensation and benefit plans, policies, and
programs of the Debtor applicable to its employees, retirees and non-employee
directors and the employees and retirees of its subsidiaries, including,
without limitation, all savings plans, retirement plans, health care plans,
disability plans, severance benefit plans, incentive plans, and life,
accidental death, and dismemberment insurance plans are treated as executory
contracts under the Plan and on the Effective Date will be assumed pursuant to
the provisions of sections 365 and 1123 of the Bankruptcy Code.
ARTICLE VII.
PROVISIONS GOVERNING DISTRIBUTIONS
A. Distributions for Claims Allowed as of the Effective Date
1. Except as otherwise provided in this Article VII or as may be ordered by
the Bankruptcy Court, distributions to be made on the Effective Date on
account of Claims that are allowed as of the Effective Date and are entitled
to receive distributions under the Plan shall be made on the Effective Date.
Distributions on account of Claims that become Allowed Claims after the
Effective Date shall be made pursuant to Articles VII.C and VIII.C below.
2. For purposes of determining the accrual of interest or rights in respect
of any other payment from and after the Effective Date, the LGE New
Restructured Senior Note, the New Bank Lender Note, the New Subordinated
Debentures, and the New Common Stock to be issued under the Plan shall be
deemed issued as of the Effective Date regardless of the date on which they
are actually dated, authenticated or distributed; provided, however, that the
Reorganized Debtor shall withhold any actual payment until such distribution
is made and no interest shall accrue or otherwise be payable on any such
withheld amounts.
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B. Distributions by the Reorganized Debtor; Distributions with Respect to Debt
Securities
The Reorganized Debtor shall make all distributions required under the Plan.
Notwithstanding the provisions of Article V.B above regarding the cancellation
of the Old Subordinated Debenture Indenture, the Old Subordinated Debenture
Indenture shall continue in effect to the extent necessary to allow the
Reorganized Debtor to receive and make distributions pursuant to the Plan on
account of the Old Subordinated Debentures. Each indenture trustee providing
services related to distributions to the Holders of Allowed Old Subordinated
Debenture Claims shall receive, from the Reorganized Debtor, with such
approval as the Bankruptcy Court may require, reasonable compensation for such
services and reimbursement of reasonable out-of-pocket expenses incurred in
connection with such services. These payments shall be made on terms agreed to
with the Reorganized Debtor.
C. Delivery and Distributions and Undeliverable or Unclaimed Distributions
1 Delivery of Distributions in General
Distributions to Holders of Allowed Claims shall be made at the address of
the Holder of such Claim as indicated on records of the Debtor. Except as
otherwise provided by the Plan or the Bankruptcy Code with respect to
undeliverable distributions, distributions to Holders of Citibank Secured
Claims, LGE Claims, Bank Lender Claims, and Old Subordinated Debenture Claims
shall be made in accordance with the provisions of the applicable indenture,
participation agreement, loan agreement or analogous instrument or agreement,
and distributions will be made to Holders of record as of the Distribution
Record Date.
2. Undeliverable Distributions
(a) Holding of Undeliverable Distributions. If any Allowed Claim Holder's
distribution is returned to Reorganized Debtor as undeliverable, no further
distributions shall be made to such Holder unless and until the Reorganized
Debtor is notified in writing of such Holder's then-current address.
Undeliverable distributions shall remain in the possession of the Reorganized
Debtor pursuant to this Article VII.C until such time as a distribution
becomes deliverable. Undeliverable cash (including interest and maturities on
the New Subordinated Debentures) shall not be entitled to any interest,
dividends or other accruals of any kind.
(b) After Distributions Become Deliverable. Within 20 days after the end of
each calendar quarter following the Effective Date, the Reorganized Debtor
shall make all distributions that become deliverable during the preceding
calendar quarter.
(c) Failure to Claim Undeliverable Distributions. 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 Subordinated Debentures held for
distribution on account of such Claims shall be canceled and of no further
force or effect. Nothing contained in the Plan shall require the Reorganized
Debtor to attempt to locate any Holder of an Allowed Claim.
(d) Compliance with Tax Requirements. In connection with the Plan, to the
extent applicable, the Reorganized Debtor shall comply with all tax
withholding and reporting requirements imposed on it by any governmental unit,
and all distributions pursuant to the Plan shall be subject to such
withholding and reporting requirements.
D. Distribution Record Date
As of the close of business on the Distribution Record Date, the transfer
register for the Old Subordinated Debentures as maintained by the Debtor, the
trustee of the Old Subordinated Debenture Indenture, or their
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respective agents, shall be closed and the transfer of Old Subordinated
Debentures, or any interest therein, will be prohibited. Moreover, the
Reorganized Debtor shall have no obligation to recognize the transfer of any
Old Subordinated Debentures occurring after the Distribution Record Date, and
shall be entitled for all purposes herein to recognize and deal only with
those Holders of record as of the close of business on the Distribution Record
Date.
E. Timing and Calculation of Amounts to be Distributed
On the Effective Date, each Holder of an Allowed Claim against the Debtor
shall receive the full amount of the distributions that the Plan provides for
Allowed Claims in the applicable Class. Beginning on the date that is 20
calendar days after the end of the calendar quarter following the Effective
Date and 20 calendar days after the end of each calendar quarter thereafter,
distributions shall also be made, pursuant to Article VIII.C below, to Holders
of Disputed Claims in any such Class whose Claims were allowed during the
preceding calendar quarter. Such quarterly distributions shall also be in the
full amount that the Plan provides for Allowed Claims in the applicable Class.
F. Minimum Distribution
The New Subordinated Debentures will be issued in denominations of $1,000
and integral multiples thereof. No New Subordinated Debenture will be issued
in a denomination of less than $1,000. In the event a Holder of an Allowed
Class 6 Claim is entitled to distribution of New Subordinated Debentures that
is not an integral multiple of $1,000, such distribution shall be aggregated
by the Company (or its agent), and as soon as practicable after the Effective
Date, such interests shall be sold by the Company (or its agent) in a
commercially reasonable manner and, upon the completion of such sale, the net
proceeds thereof shall be distributed (without interest) pro rata to the
Holders of Allowed Class 6 Claims based upon the fraction of New Subordinated
Debentures each such Holder would have been entitled to receive or deemed to
hold had the Company issued New Subordinated Debentures in integral multiples
smaller than $1,000, such distribution being in lieu of any other distribution
thereon.
G. Setoffs
The Reorganized Debtor may, pursuant to section 553 of the Bankruptcy Code
or applicable non-bankruptcy law, set off against any Allowed Claim and the
distributions to be made pursuant to the Plan on account of such Claim (before
any distribution is made on account of such Claim), the claims, rights and
causes of action of any nature that the Debtor or Reorganized Debtor may hold
against the Holder of such Allowed Claim; provided, however, that neither the
failure to effect such a setoff nor the allowance of any Claim hereunder shall
constitute a waiver or release by the Debtor or Reorganized Debtor of any such
claims, rights and causes of action that the Debtor or Reorganized Debtor may
possess against such Holder.
H. Surrender of Canceled Instruments or Securities
As a condition precedent to receiving any distribution pursuant to the Plan
on account of an Allowed Claim evidenced by the instruments, securities or
other documentation canceled pursuant to Article V.B above, the Holder of such
Claim shall tender the applicable instruments, securities or other
documentation evidencing such Claim to the Reorganized Debtor. Any New Bank
Lender Note, New Subordinated Debentures or New Common Stock to be distributed
pursuant to the Plan on account of any such Claim shall, pending such
surrender, be treated as an undeliverable distribution pursuant to Article
VII.C above.
1. Notes and Debentures
Each Holder of an Old Subordinated Debenture Claim shall tender its Old
Subordinated Debenture relating to such Claim to the Reorganized Debtor in
accordance with written instructions to be provided to such Holders by the
Reorganized Debtor as promptly as practicable following the Effective Date.
Such instructions shall
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specify that delivery of such Old Subordinated Debenture will be effected, and
risk of loss and title thereto will pass, only upon the proper delivery of
such Old Subordinated Debentures with a letter of transmittal in accordance
with such instructions. All surrendered Old Subordinated Debentures shall be
marked as canceled.
2. Failure to Surrender Canceled Instruments
Any Holder of Old Subordinated Debentures that fails to surrender or is
deemed to have failed to surrender the applicable Old Subordinated Debentures
required to be tendered hereunder within five years after the Effective Date
shall have its Claim for a distribution pursuant to the Plan on account of
such Old Subordinated Debenture discharged and shall be forever barred from
asserting any such Claim against the Reorganized Debtor or its respective
property. In such cases, any New Subordinated Debentures held for distribution
on account of such Claim shall be disposed of pursuant to the provisions set
forth above in Article VII.C.
I. Lost, Stolen, Mutilated or Destroyed Debt Securities
In addition to any requirements under the Old Subordinated Debenture
Indenture, or any related agreement, any Holder of a Claim evidenced by an Old
Subordinated Debenture that has been lost, stolen, mutilated or destroyed
shall, in lieu of surrendering such Old Subordinated Debenture, deliver to the
Reorganized Debtor: (1) evidence satisfactory to the Reorganized Debtor of the
loss, theft, mutilation or destruction; and (2) such security or indemnity as
may be required by the Reorganized Debtor to hold the Reorganized Debtor
harmless from any damages, liabilities or costs incurred in treating such
individual as a Holder of an Allowed Claim. Upon compliance with this Article
VII.I by a Holder of a Claim evidenced by an Old Subordinated Debenture, such
Holder shall, for all purposes under the Plan, be deemed to have surrendered
such note or debenture.
ARTICLE VIII.
PROCEDURES FOR RESOLVING DISPUTED CLAIMS
A. Prosecution of Objections to Claims
After the Confirmation Date, the Debtor and the Reorganized Debtor shall
have the exclusive authority to File objections, settle, compromise, withdraw
or litigate to judgment objections to Claims. From and after the Confirmation
Date, the Debtor and the Reorganized Debtor may settle or compromise any
Disputed Claim without approval of the Bankruptcy Court.
B. Estimation of Claims
The Debtor or the Reorganized Debtor may, at any time, request that the
Bankruptcy Court estimate any contingent or unliquidated Claim pursuant to
section 502(c) of the Bankruptcy Code regardless of whether the Debtor or the
Reorganized Debtor has previously objected to such Claim or whether the
Bankruptcy Court has ruled on any such objection, and the Bankruptcy Court
will retain jurisdiction to estimate any Claim at any time during litigation
concerning any objection to any Claim, including during the pendency of any
appeal relating to any such objection. In the event that the Bankruptcy Court
estimates any contingent or unliquidated Claim, that estimated amount will
constitute either the allowed amount of such Claim or a maximum limitation on
such Claim, as determined by the Bankruptcy Court. If the estimated amount
constitutes a maximum limitation on such Claim, the Debtor or Reorganized
Debtor may elect to pursue any supplemental proceedings to object to any
ultimate payment on such Claim. All of the aforementioned Claims objection,
estimation and resolution procedures are cumulative and not necessarily
exclusive of one another. Claims may be estimated and subsequently
compromised, settled, withdrawn or resolved by any mechanism approved by the
Bankruptcy Court.
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C. Payments and Distributions on Disputed Claims
Notwithstanding any provision in the Plan to the contrary, except as
otherwise agreed by the Reorganized Debtor in its sole discretion, no partial
payments and no partial distributions will be made with respect to a Disputed
Claim until the resolution of such disputes by settlement or Final Order.
Subject to the provisions of this Article VIII.C, as soon as practicable after
a Disputed Claim becomes an Allowed Claim, the Holder of such Allowed Claim
will receive all payments and distributions to which such Holder is then
entitled under the Plan. Notwithstanding the foregoing, any Person or Entity
who holds both an Allowed Claim(s) and a Disputed Claim(s) will receive the
appropriate payment or distribution on the Allowed Claim(s), although, except
as otherwise agreed by the Reorganized Debtor in its sole discretion, no
payment or distribution will be made on the Disputed Claim(s) until such
dispute is resolved by settlement or Final Order.
ARTICLE IX.
CONDITIONS PRECEDENT TO CONFIRMATION
AND CONSUMMATION OF THE PLAN
A. Condition Precedent to Confirmation
It shall be a condition to Confirmation of the Plan that the following
condition shall have been satisfied or waived pursuant to the provisions of
Article IX.C of the Plan: approval of all provisions, terms and conditions of
the Prepackaged Plan in the Confirmation Order.
B. Conditions Precedent to Consummation
It shall be a condition to Consummation of the Plan that the following
conditions shall have been satisfied or waived pursuant to the provisions of
Article IX.C of the Plan:
1. the Confirmation Order shall have been signed by the Bankruptcy Court
and duly entered on the docket for the Prepackaged Chapter 11 Case by the
Clerk of the Bankruptcy Court in form and substance acceptable to the
Debtor;
2. the Confirmation Order shall be a Final Order;
3. a revolving credit facility and letter of credit subfacility shall be
available to the Debtor in an amount not less than $100 million and on such
terms and conditions as set forth in the Restructuring Agreement; and
4. all conditions precedent to the "Closing," as defined in the
Restructuring Agreement, shall have been satisfied or waived pursuant to
the terms thereof.
C. Waiver of Conditions
Other than the condition precedent to Consummation set forth in Article
IX.B.4, which may not be waived without the consent of LGE, the Debtor, in its
sole discretion, may waive any of the conditions to Confirmation of the Plan
and/or to Consummation of the Plan set forth in Articles IX.A and IX.B of the
Plan at any time, without notice, without leave or order of the Bankruptcy
Court, and without any formal action other than proceeding to confirm and/or
consummate the Plan.
D. Effect of Non-occurrence of Conditions to Consummation
If the Confirmation Order is vacated, the Plan shall be null and void in all
respects and nothing contained in the Plan or the Disclosure Statement shall:
(1) constitute a waiver or release of any Claims by or against, or any Equity
Interests in, the Debtor; (2) prejudice in any manner the rights of the
Debtor, or (3) constitute an admission, acknowledgment, offer or undertaking
by the Debtor in any respects.
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ARTICLE X.
RELEASE, INJUNCTIVE AND RELATED PROVISIONS
A. Subordination
The classification and manner of satisfying all Claims and Equity Interests
and the respective distributions and treatments under the Plan take into
account and/or conform to the relative priority and rights of the Claims and
Equity Interests in each Class in connection with any contractual, legal and
equitable subordination rights relating thereto whether arising under general
principles of equitable subordination, section 510(b) of the Bankruptcy Code
or otherwise, and any and all such rights are settled, compromised and
released pursuant to the Plan. The Confirmation Order shall permanently
enjoin, effective as of the Effective Date, all Persons and Entities from
enforcing or attempting to enforce any such contractual, legal and equitable
subordination rights satisfied, compromised and settled pursuant to this
Article X.A.
B. Limited Releases by the Debtor
Except as otherwise specifically provided in the Plan, for good and valuable
consideration, including, but not limited to, the commitment and obligation of
the Investor Releasees to provide the financial support necessary for
consummation of the Plan, including the financial accommodations reflected in
the LGE New Credit Support, the obligations and undertakings of the Investor
Releasees set forth in the Restructuring Agreement, including LGE's agreement
to the treatment of its Claims and Equity Interests as provided in the Plan,
and the service of the D&O Releasees to facilitate the expeditious
reorganization of the Debtor and the implementation of the restructuring
contemplated by the Plan, on and after the Effective Date, the Investor
Releasees and the D&O Releasees are released by the Debtor and the Reorganized
Debtor and its subsidiaries from any and all claims (as defined in section
101(5) of the Bankruptcy Code), obligations, rights, suits, damages, causes of
action, remedies and liabilities whatsoever, whether known or unknown,
foreseen or unforeseen, existing or hereafter arising, in law, equity or
otherwise, that the Debtor or its subsidiaries would have been legally
entitled to assert in their own right (whether individually or collectively)
or on behalf of the Holder of any Claim or Equity Interest or other Person or
Entity, based in whole or in part upon any act or omission, transaction,
agreement, event or other occurrence taking place on or before the Effective
Date, except in the case of the D&O Releasees, for claims or liabilities (i)
in respect of any loan, advance or similar payment by the Debtor or its
subsidiaries to any such Person, or (ii) in respect of any contractual
obligation owed by such Person to the Debtor or its subsidiaries.
C. Limited Releases by Holder of Claims
On and after the Effective Date, each Holder of a Claim (i) who has accepted
the Plan, (ii) whose Claim is in a Class that has accepted or is deemed to
have accepted the Plan pursuant to section 1126 of the Bankruptcy Code, or
(iii) who is entitled to receive a distribution of property under the Plan,
shall be deemed to have unconditionally released the Investor Releasees and
the D&O Releasees from any and all claims (as defined in section 101(5) of the
Bankruptcy Code), obligations, rights, suits, damages, causes of action,
remedies and liabilities whatsoever, whether known or unknown, foreseen or
unforeseen, existing or hereafter arising, in law, equity or otherwise, that
such Person or Entity would have been legally entitled to assert (whether
individually or collectively), based in whole or in part upon any act or
omission, transaction, agreement, event or other occurrence taking place on or
before the Effective Date in any way relating or pertaining to (x) the Debtor
or the Reorganized Debtor, (y) the Debtor's Prepackaged Chapter 11 Case, or
(z) the negotiation, formulation and preparation of the Plan, the
Restructuring Agreement or any related agreements, instruments or other
documents.
D. Preservation of Rights of Action
Except as otherwise provided in the Plan or in any contract, instrument,
release, indenture or other agreement entered into in connection with the
Plan, in accordance with section 1123(b) of the Bankruptcy Code, the
Reorganized Debtor shall retain and may exclusively enforce any claims, rights
and Causes of Action that the Debtor or Estate may hold against any Person or
Entity. The Reorganized Debtor may pursue such retained
A-23
<PAGE>
claims, rights or causes of action, as appropriate, in accordance with the
best interests of the Reorganized Debtor. On the Effective Date, the
Reorganized Debtor shall be deemed to waive and release any claims, rights or
Causes of Action arising under sections 544, 547, 548, 549 and 550 of the
Bankruptcy Code held by the Reorganized Debtor against any Person or Entity.
E. Exculpation
The Debtor, the Reorganized Debtor, the Investor Releasees, the D&O
Releasees, and the Committee(s) and its members and Professionals (acting in
such capacity) shall neither have nor incur any liability to any Person or
Entity for any act taken or omitted to be taken in connection with or related
to the formulation, preparation, dissemination, implementation,
administration, Confirmation or Consummation of the Plan, the Disclosure
Statement or any contract, instrument, release or other agreement or document
created or entered into in connection with the Plan, including the
Restructuring Agreement, or any other act taken or omitted to be taken in
connection with the Debtor's Prepackaged Chapter 11 Case; provided, however,
that the foregoing provisions of this Article X.E shall have no effect on the
liability of any Person or Entity that results from any such act or omission
that is determined in a Final Order to have constituted gross negligence or
willful misconduct.
F. Injunction
From and after the Effective Date, all Persons and Entities are permanently
enjoined from commencing or continuing in any manner, any suit, action or
other proceeding, on account of or respecting any claim, obligation, debt,
right, Cause of Action, remedy or liability released or to be released
pursuant to this Article X.
ARTICLE XI.
RETENTION OF JURISDICTION
Notwithstanding the entry of the Confirmation Order and the occurrence of
the Effective Date, the Bankruptcy Court shall retain such jurisdiction over
the Prepackaged Chapter 11 Case after the Effective Date as legally
permissible, including jurisdiction to:
A. Allow, disallow, determine, liquidate, classify, estimate or establish
the priority or secured or unsecured status of any Claim, including the
resolution of any request for payment of any Administrative Claim and the
resolution of any and all objections to the allowance or priority of
Claims;
B. Grant or deny any applications for allowance of compensation or
reimbursement of expenses authorized pursuant to the Bankruptcy Code or the
Plan, for periods ending on or before the Effective Date;
C. Resolve any matters related to the assumption, assumption and
assignment or rejection of any executory contract or unexpired lease to
which the Debtor is a party or with respect to which the Debtor may be
liable and to hear, determine and, if necessary, liquidate, any Claims
arising therefrom, including those matters related to the amendment after
the Effective Date pursuant to Article VI above to add any executory
contracts or unexpired leases to the list of executory contracts and
unexpired leases to be rejected;
D. Ensure that distributions to Holders of Allowed Claims are
accomplished pursuant to the provisions of the Plan, including ruling on
any motion Filed pursuant to Article VII;
E. Decide or resolve any motions, adversary proceedings, contested or
litigated matters and any other matters and grant or deny any applications
involving the Debtor that may be pending on the Effective Date;
F. Enter such orders as may be necessary or appropriate to implement or
consummate the provisions of the Plan and all contracts, instruments,
releases, indentures and other agreements or documents created in
connection with the Plan or the Disclosure Statement;
G. Resolve any cases, controversies, suits or disputes that may arise in
connection with the Consummation, interpretation or enforcement of the Plan
or any Person's or Entity's obligations incurred in connection with the
Plan;
A-24
<PAGE>
H. Issue injunctions, enter and implement other orders or take such other
actions as may be necessary or appropriate to restrain interference by any
Person or Entity with Consummation or enforcement of the Plan, except as
otherwise provided herein;
I. Resolve any cases, controversies, suits or disputes with respect to
the releases, injunction and other provisions contained in Article X and
enter such orders as may be necessary or appropriate to implement such
releases, injunction and other provisions;
J. Enter and implement such orders as are necessary or appropriate if the
Confirmation Order is for any reason modified, stayed, reversed, revoked or
vacated;
K. Determine any other matters that may arise in connection with or
relate to the Plan, the Disclosure Statement, the Confirmation Order or any
contract, instrument, release, indenture or other agreement or document
created in connection with the Plan or the Disclosure Statement; and
L. Enter an order and/or final decree concluding the Prepackaged Chapter
11 Case.
ARTICLE XII.
MISCELLANEOUS PROVISIONS
A. Dissolution of Committee(s)
On the Effective Date, the Committee(s) shall dissolve and members shall be
released and discharged from all rights and duties arising from, or related
to, the Prepackaged Chapter 11 Case.
B. Payment of Statutory Fees
All fees payable pursuant to section 1930 of title 28 of the United States
Code, as determined by the Bankruptcy Court at the hearing pursuant to section
1128 of the Bankruptcy Code, shall be paid on or before the Effective Date.
C. Discharge of Debtor
Except as otherwise provided herein or in the LGE New Restructured Senior
Note, the New Bank Lender Note or the New Subordinated Debentures, (1) the
rights afforded in the Plan and the treatment of all Claims and Equity
Interests therein, shall be in exchange for and in complete satisfaction,
discharge and release of Claims and Equity Interests of any nature whatsoever,
including any interest accrued on such Claims from and after the Petition
Date, against the Debtor and the Debtor in Possession, or any of its assets or
properties, (2) on the Effective Date, all such Claims against, and Equity
Interests in the Debtor shall be satisfied, discharged and released in full
and (3) all Persons and Entities shall be precluded from asserting against the
Reorganized Debtor, its successors or its assets or properties any other or
further Claims or Equity Interests based upon any act or omission, transaction
or other activity of any kind or nature that occurred prior to the
Confirmation Date.
D. Modification of Plan
Subject to the limitations contained herein, (1) the Debtor reserves the
right, in accordance with the Bankruptcy Code and the Bankruptcy Rules, to
amend or modify the Plan prior to the entry of the Confirmation Order and (2)
after the entry of the Confirmation Order, the Debtor or the Reorganized
Debtor, as the case may be, may, upon order of the Bankruptcy Court, amend or
modify the Plan, in accordance with section 1127(b) of the Bankruptcy Code, or
remedy any defect or omission or reconcile any inconsistency in the Plan in
such manner as may be necessary to carry out the purpose and intent of the
Plan.
E. Revocation of Plan
The Debtor reserves the right, at any time prior to the entry of the
Confirmation Order, to revoke and withdraw the Plan.
A-25
<PAGE>
F. Successors and Assigns
The rights, benefits and obligations of any Person or Entity named or
referred to in the Plan shall be binding on, and shall inure to the benefit of
any heir, executor, administrator, successor or assign of such Person or
Entity.
G. Reservation of Rights
Except as expressly set forth herein, this Plan shall have no force or
effect unless the Bankruptcy Court shall enter the Confirmation Order. None of
the filing of this Plan, any statement or provision contained herein, or the
taking of any action by the Debtor with respect to this Plan shall be or shall
be deemed to be an admission or waiver of any rights of the Debtor with
respect to the Holders of Claims or Equity Interests prior to the Effective
Date.
H. Section 1146 Exemption
Pursuant to section 1146(c) of the Bankruptcy Code, the issuance, transfer,
or exchange of any security under the Plan, or the making or delivery of an
instrument of transfer under this Plan, may not be taxed under any law
imposing a stamp tax or similar tax.
I. Further Assurances
The Debtor, the Reorganized Debtor, LGE and all Holders of Claims receiving
distributions under the Plan and all other parties in interest shall, from
time to time, prepare, execute and deliver any agreements or documents and
take any other actions as may be necessary or advisable to effectuate the
provisions and intent of this Plan.
J. Service of Documents
Any pleading, notice or other document required by the Plan to be served on
or delivered to the Reorganized Debtor shall be sent by first class U.S. mail,
postage prepaid to:
Zenith Electronics Corporation
1000 Milwaukee Avenue
Glenview, Illinois 60025-2493
Attn: General Counsel
with copies to:
Kirkland & Ellis
200 E. Randolph Drive
Chicago, Illinois 60601
Attn: James H.M. Sprayregen, Esq.
K. Filing of Additional Documents
On or before the Effective Date, the Debtor may file with the Bankruptcy
Court such agreements and other documents as may be necessary or appropriate
to effectuate and further evidence the terms and conditions of the Plan.
Respectfully Submitted,
Zenith Electronics Corporation
By: _________________________________
Name:
Title:
A-26
<PAGE>
ANNEX B--REPORTS OF PETER J. SOLOMON COMPANY LIMITED
PROJECT ELECTRO
Special Committee Presentation
November 16, 1998
Peter J. Solomon Company
B-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.
B-2
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- --------------------------------------------------------------------------------
Table of Contents
<TABLE>
<CAPTION>
Tab
---
<C> <S> <C>
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.................................................
</TABLE>
B-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
<TABLE>
<CAPTION>
July 22 November 16
Presentation Presentation
Valuation at Valuation at
1/1/99 (a) 1/1/99 (b)
------------ ------------
<S> <C> <C>
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)
</TABLE>
- --------------------------------------------------------------------------------
(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.
B-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)
<TABLE>
<CAPTION>
Projected Fiscal Year Ended December
31, Normalized
------------------------------------------- Terminal
1999 2000 2001 2002 2003 Cash Flow
------ ------ ------ ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
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>
<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>
<TABLE>
<CAPTION>
Projected Fiscal Year Ended
December 31,
--------------------------------- Net Present Value
1999 2000 2001 2002 2003 of Tuner Patent @
----- ----- ----- ----- ----- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
B-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 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
Royalty
Income.........
VSB Associated (2.7) (2.7)
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)
--- --- --- ---- ----- ---- ---- ---- ---- ---- ---- ----- ----- ----- ----- ------
Net Royalty 100.2
Income......... 0.0 0.0 0.0 (5.8) (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 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 98.2
Income......... 0.0 0.0 0.0 (5.8) (1.9) 6.1 18.2 26.9 37.5 52.8 74.4 95.9 109.5 118.2 110.9
International Adopted
Aggregate 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
Royalty
Income.........
VSB Associated 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)
Costs(a).......
Withholding(c) 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)
11.0%..........
--- --- --- ---- ----- ---- ---- ---- ---- ---- ---- ----- ----- ----- ----- ------
Net Royalty 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
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(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 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
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 (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)
Costs(a).......
Withholding(c) 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)
11.0%..........
--- --- --- ---- ----- ---- ---- ---- ---- ---- ---- ----- ----- ----- ----- ------
Net Royalty 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
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 78.0 105.8 130.9 162.5
Earnings.......
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 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
Income.........
</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.
B-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
1998 Net Income........... ($283.4)
Cancellation of Debt
Income(c)................ 265.0
-------
1998 NOL.................. ($ 18.4)
1998 Net Income...........
Cancellation of Debt
Income(c)................
1998 NOL..................
<CAPTION>
Net Income Adjusted for 1998 1999 2000 2001 2002 2003
VSB ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <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
<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 @ 9.5%...........
Business Plan Net
Income...................
New Net Income (Excl.
VSB).....................
<CAPTION>
Calculation of NOL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <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
<CAPTION>
Calculation of NOL
<S> <C> <C>
New Net Income (Excl.
VSB).....................
Net VSB royalty before
AMT
(Int'l and Domestic).....
Total Net Income..........
NOL
(Generated)/Utilized.....
</TABLE>
Total
Present
Value of
<TABLE>
<CAPTION>
Net Present Value of
Domestic VSB Technology @
-------------------------------
VSB
Technology
$130.6(d)
25.0% 30.0% 35.0% 40.0%
------- ------- ------- -------
<S> <C> <C> <C>
$94.0 $67.2 $48.9 $36.1
<CAPTION>
Net Present Value of
Int'l (Adopted) VSB Technology
@
-------------------------------
35.0% 40.0% 45.0% 50.0%
------- ------- ------- -------
<S> <C> <C> <C>
$33.6 $26.1 $20.6 $16.5
<CAPTION>
Net Present Value of
Int'l (Likely to Adopt) VSB
Technology @
-------------------------------
45% 50% 55% 60%
------- ------- ------- -------
<S> <C> <C> <C>
$18.3 $13.8 $10.5 $8.1
</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) 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.
B-7
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- --------------------------------------------------------------------------------
II. Business Plan Comparison
(Dollars in Millions)
<TABLE>
<CAPTION>
FY Ended December 31,
Budget Projected
------ ------------------------
Business Plan Date 1998 1999 2000 2001 2002 2003
------------------ ------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Items
</TABLE>
<TABLE>
<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.
B-8
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- --------------------------------------------------------------------------------
II. Business Plan Comparison
(Dollars in Millions)
<TABLE>
<CAPTION>
FY Ended December 31,
Budget Projected
------ ------------------------
Business Plan Date 1998 1999 2000 2001 2002 2003
------------------ ------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
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
======= ====== ====== ====== ====== =====
</TABLE>
- --------------------------------------------------------------------------------
(a) Free cash flow defined as EBIT plus all cash flow items.
B-9
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- --------------------------------------------------------------------------------
III. One-Time Adjustments
<TABLE>
<CAPTION>
Value Adjustment
----------------
<C> <S>
*** ***
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.
</TABLE>
B-10
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- --------------------------------------------------------------------------------
IV. Domestic VSB Value Adjustments (a)
<TABLE>
<C> <S>
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.
</TABLE>
(a) All adjustments to Domestic VSB Valuation per Forrester Research, Inc.
B-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> <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.
B-12
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- --------------------------------------------------------------------------------
VI. Liquidation Analysis
- --------------------------------------------------------------------------------
(Dollars in Millions)
<TABLE>
<CAPTION>
Estimated Estimated
Value at Estimated Asset Recovery
1/99 (a) % Recovery From Liquidation
--------- ---------- ----------------
<S> <C> <C> <C>
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
======
</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 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.
B-13
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- --------------------------------------------------------------------------------
VI. Liquidation Analysis
- --------------------------------------------------------------------------------
(Dollars in Millions)
<TABLE>
<S> <C> <C> <C>
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
<CAPTION>
Claim % Recovery
------ ----------
<S> <C> <C> <C>
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
</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 $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.
B-14
<PAGE>
ZENITH ELECTRONICS CORPORATION
IMPORTANT
Any Holder of Old Subordinated Debentures, Bank Lender Claims or LGE Claims
who wishes to vote with respect to the Prepackaged Plan should complete and
sign the applicable Ballot or Master Ballot in accordance with the
instructions set forth in this Disclosure Statement and return such Ballot or
Master Ballot in accordance with the instructions set forth thereon. See
"SOLICITATION; VOTING PROCEDURES."
The Solicitation Agent:
GEORGESON & COMPANY INC.
By Hand Delivery or Overnight Courier: By Mail:
Georgeson & Company Inc. Georgeson & Company Inc.
Wall Street Plaza Wall Street Plaza
New York, NY 10005 New York, NY 10005
Facsimile Transmission:
(212) 440-9009
Confirm by Telephone:
(800) 223-2064
ADDITIONAL COPIES
Requests for additional copies of this Disclosure Statement should be
directed to the Solicitation Agent. You may also contact your broker, dealer,
commercial bank or trust company for assistance concerning the Solicitation.
<PAGE>
PART II: INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20: Indemnification of Directors and Officers.
The Company is incorporated under the laws of the State of Delaware. Section
145 of the General Corporation Law of the State of Delaware provides that a
Delaware corporation may indemnify any persons who are, or are threatened to
be made, parties to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of such corporation), by reason of the fact
that such person is or was an officer, director, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding, provided such person acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the corporation's best interests and, with respect to any criminal action
or proceeding, had no reasonable cause to believe that his conduct was
illegal. A Delaware corporation may indemnify any persons who are, or are
threatened to be made, a party to any threatened, pending or completed action
or suit by or in the right of the corporation by reason of the fact that such
person was a director, officer, employee or agent of such corporation, or is
or was serving at the request of such corporation as a director, officer,
employee or agent of another corporation or enterprise. The indemnity may
include expenses (including attorneys' fees) actually and reasonably incurred
by such person in connection with the defense or settlement of such action or
suit, provided such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the corporation's best interests except
that no indemnification is permitted without judicial approval if the officer
or director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses
which such officer or director has actually and reasonably incurred.
Article VI of the Certificate of Incorporation, as amended and restated, of
the Company provides that no director of the corporation shall be liable to
the corporation or its stockholders for monetary damages arising from a breach
of fiduciary duty owed to the corporation or its stockholders to the fullest
extent permitted by the Delaware General Corporation Law. However, unless and
except permitted by applicable law, such provisions of Article VI shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the General Corporation
Law of Delaware, (iv) for any transaction from which the director derived an
improper personal benefit, or (v) for any act or omission occurring prior to
the date Article VI became effective.
Article VII of the Certificate of Incorporation, as amended and restated,
further provides that the Company shall indemnify and hold harmless, to the
fullest extent authorized by the Delaware General Corporation Law, as the same
exists or may hereafter be amended (but in the case of any such amendment,
only to the extent that such amendment permits the corporation to provide
broader indemnification rights than said law permitted the corporation to
provide prior to such amendment), each person who was or is made a party or is
threatened to be made a party to or is otherwise involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the corporation, is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust or
other enterprise, including service with respect to an employee benefit plan,
whether the basis of such proceeding is alleged action in an official capacity
as a director, officer, employee or agent or in any other capacity while
serving as a director, officer, employee or agent against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid in settlement) reasonably incurred or
suffered by such indemnitee in connection therewith and such indemnification
shall continue as to an indemnitee who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the indemnitee's heirs,
executors and administrators; provided, however, that, except as provided
below with respect to proceedings to enforce rights to indemnification, the
corporation shall indemnify any such indemnitee in connection with a
proceeding (or part
II-1
<PAGE>
thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized by the Board. The right to indemnification is a
contract right and includes the right to be paid by the corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition (advancement of expenses); provided, however, that, if and to the
extent that the Delaware General Corporation Law requires, an advancement of
expenses incurred by an indemnitee in his or her capacity as a director or
officer (and not in any other capacity in which service was or is rendered by
such indemnitee, including, without limitation, service to an employee benefit
plan) shall be made only upon delivery to the corporation of an undertaking by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined that such indemnitee is not entitled to be
indemnified for such expenses. The corporation may, by action of its Board,
provide indemnification to employees and agents of the corporation with the
same scope and effect as the foregoing indemnification of directors and
officers.
Article VII of the Certificate of Incorporation, as amended and restated,
further provides that if a Claim is not paid in full by the corporation within
thirty days after a written Claim has been received by the corporation, the
claimant may at any time thereafter bring suit against the corporation to
recover the unpaid amount of the Claim and, if successful in whole or in part,
the claimant shall be entitled to be paid also the expense of prosecuting such
Claim. It shall be a defense to any such action (other than an action brought
to enforce a Claim for expenses incurred in defending any proceeding in
advance of its final disposition where the required undertaking, if any is
required, has been tendered to the corporation) that the claimant has not met
the standards of conduct which make it permissible under the General
Corporation Law of Delaware for the corporation to indemnify the claimant for
the amount claimed, but the burden of proving such defense shall be on the
corporation. Neither the failure of the corporation (including its Board,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant
is proper in the circumstances because he or she has met the applicable
standard of conduct set forth in the General Corporation Law of Delaware, nor
an actual determination by the corporation (including its Board, independent
legal counsel, or its stockholders) that the claimant has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that the claimant has not met the applicable standard of conduct.
The right to indemnification and the payment of expenses incurred in defending
a proceeding in advance of its final disposition conferred in Article VII
shall not be exclusive of any other right which any person may have or
hereafter acquire under any statute, provision of the Restated Certificate of
Incorporation, by-law, agreement, vote of stockholders or disinterested
directors or otherwise.
Article VII of the Certificate of Incorporation, as amended and restated,
further provides that the corporation may maintain insurance, at its own
expense, to protect itself and any director, officer, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such
expenses, liability or loss under the Delaware General Corporation Law.
All of the directors and officers of the Company are covered by insurance
policies maintained and held in effect by such corporation against certain
liabilities for actions taken in such capacities, including liabilities under
the Securities Act of 1933.
Item 21. Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
+(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 Subordinated Debentures
++(4f) Form of LGE Secured Notes
++(4g) Form of LGE New Restructured Senior Note
++5(a) Opinion of Kirkland & Ellis
++8(a) Opinion of Kirkland & Ellis as to Tax Matters
*(10a) 1987 Zenith Stock Incentive Plan (as amended) (incorporated by
reference to Exhibit A of the Company's definitive Proxy
Statement dated March 13, 1992)
*(10b) Form of Indemnification Agreement with Officers and Directors
(incorporated by reference to Exhibit 8 of the Company's Report
on Form 10-K for the year ended December 31, 1989)
*(10c) Form of Directors 1989 Stock Units Compensation Agreement with
T. Kimball Brooker (1,000 units) (incorporated by reference to
Exhibit 9 of the Company's Report on Form 10-K for the year
ended December 31, 1989)
*(10d) Form of Directors 1990 Stock Units Compensation Agreement with
T. Kimball Brooker, Andrew McNally IV and Peter S. Willmott
(1000 units each) (incorporated by reference to Exhibit 6 of the
Company's Report on Form 10-K for the year ended December 31,
1990)
*(10e) Form of Directors 1991 Stock Units Compensation Agreement with
T. Kimball Brooker, Andrew McNally IV and Peter S. Willmott
(1,000 units each) (incorporated by reference to Exhibit 10d of
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 29, 1991)
*(10f) Form of Amendment, dated as of July 24, 1991, to Directors Stock
Units Compensation Agreements for 1990 and 1991 (incorporated by
reference to Exhibit 10e of the Company's Quarterly Report on
Form 10-Q for the quarter ended June 29,1991)
*(10g) Directors Retirement Plan and form of Agreement (incorporated by
reference to Exhibit 10 of the Company's Report on Form 10-K for
the year ended December 31, 1989)
*(10h) Form of Amendment, dated as of July 24, 1991, to Directors
Retirement Plan and form of Agreement (incorporated by reference
to Exhibit 10f of the Company's Quarterly Report on Form 10-Q
for the quarter ended June 29, 1991)
*(10i) Supplemental Executive Retirement Income Plan effective as of
January 1, 1994 (incorporated by reference to Exhibit 10ab to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1994)
*(10j) Restated and Amended Zenith Salaried Retirement Savings Plan
(incorporated by reference to Exhibit (10j) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997)
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
*(10k) Long-Term Equity Compensation Plan (incorporated by reference on
Form S-8 filed June 6, 1997)
*(10l) Form of Employee Stock Option Agreement (incorporated by
reference to Exhibit 10e of the Company's Quarterly Report on
Form 10-Q for the quarter ended April 1, 1995)
*(10m) Form of Employee Stock Option Agreement, Long-Term Equity
Compensation Plan (incorporated by reference to Exhibit (10m) to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997)
(10n) Stock Purchase Agreement dated July 17, 1995, between Zenith
Electronics Corporation and LG Electronics, Inc. (incorporated
by reference to Exhibit 2 of the Company's Report on Form 8-K
dated July 17, 1995)
*(10o) Employment Agreement, dated January 1, 1997, between Roger A.
Cregg and Zenith Electronics Corporation (incorporated by
reference to Exhibit 10p to the Company's Annual Report on Form
10-K for the year ended December 31, 1996)
*(10p) Employment Agreement, dated January 1, 1997, between Richard F.
Vitkus and Zenith Electronics Corporation (incorporated by
reference to Exhibit 10q to the Company's Annual Report on Form
10-K for the year ended December 31, 1996)
*(10q) Employment Agreement, dated January 1, 1997, between Peter S.
Willmott and Zenith Electronics Corporation (incorporated by
reference to Exhibit 10r to the Company's Annual Report on Form
10-K for the year ended December 31, 1996)
*(10r) Employment Agreement, dated January 1, 1997, between Dennis R.
Winkleman and Zenith Electronics Corporation (incorporated by
reference to Exhibit 10s to the Company's Annual Report on Form
10-K for the year ended December 31,1996)
(10s) Agreement between Jay Alix & Associates and Zenith Electronics
Corporation, as amended (incorporated by reference to Exhibit
(10s) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997)
(10t) Receivables Purchase Agreement dated as of March 31, 1997, among
Zenith Electronics Corporation and Zenith Finance Corporation
(incorporated by reference to Exhibit 10a to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 29,
1997)
(10u) Letter amendment, dated October 15, 1997, to Receivables
Purchase Agreement dated as of March 31, 1997, among Zenith
Electronics Corporation and Zenith Finance Corporation and to
Zenith Trade Receivable Master Trust Pooling and Servicing
Agreement dated as of March 31, 1997, among Zenith Finance
Corporation, Zenith Electronics Corporation and Bankers Trust
Company (incorporated by reference to Exhibit (10u) to the
Company's Annual Report on Form 10-K for the year ended December
31, 1997)
(10v) Receivables Purchase Agreement dated as of March 31, 1997, among
Zenith Microcircuits Corporation and Zenith Finance Corporation
(incorporated by reference to Exhibit 10b to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 29,
1997)
(10w) Zenith Trade Receivable Master Trust Pooling and Servicing
Agreement dated as of March 31, 1997, among Zenith Finance
Corporation, Zenith Electronics Corporation and Bankers Trust
Company (incorporated by reference to Exhibit 10c to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 29, 1997)
(10x) Lease Agreement dated as of March 26, 1997, by and among Fleet
National Bank and Zenith Electronics Corporation (incorporated
by reference to Exhibit 10d to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 29, 1997)
(10y) Lease Agreement dated as of March 26, 1997, by and among Fleet
National Bank and Zenith Electronics Corporation of Texas
(incorporated by reference to Exhibit 10e to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 29,
1997)
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
(10z) Participation Agreement dated as of March 26, 1997, by and among
Zenith Electronics Corporation, General Foods Credit
Corporation, Fleet National Bank and other lenders named, and
First Security Bank, National Association (incorporated by
reference to Exhibit 10f to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 29, 1997)
(10aa) Participation Agreement dated as of March 26, 1997, by and among
Zenith Electronics Corporation of Texas, General Foods Credit
Corporation, Fleet National Bank and other lenders named, and
First Security Bank, National Association (incorporated by
reference to Exhibit 10g to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 29, 1997)
(10ab) Financial Support Agreement as of March 31, 1997, between LG
Electronics Inc. and Zenith Electronics Corporation
(incorporated by reference to Exhibit 10h to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 29,
1997)
(10ac) Subordination Agreement, dated as of November 3, 1997, among
Zenith Electronics Corporation, Citicorp North America, Inc. and
LG Electronics Inc., (incorporated by reference to Exhibit 10 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 27, 1997)
*(10ad) Performance Optimization Plan Agreement, dated April 7, 1997,
between Richard F. Vitkus and Zenith Electronics Corporation
(incorporated by reference to Exhibit (10ad) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997)
*(10ae) Employment Agreement, dated January 12, 1998, between Jeffrey P.
Gannon and Zenith Electronics Corporation (incorporated by
reference to Exhibit (10) to the Company's Quarterly Report on
Form 10-Q for the period ended March 27, 1998)
*(10af) Stock Option Agreement, Dated January 12, 1998, between Jeffrey
P. Gannon and Zenith Electronics Corporation (incorporated by
reference to Exhibit (10a) to the Company's Quarterly Report on
Form 10-Q for the period ended March 27, 1998)
*(10ag) Restricted Stock Award Agreement, Dated January 12, 1998,
between Jeffrey P. Gannon and Zenith Electronics Corporation
(incorporated by reference to Exhibit (10b) to the Company's
Quarterly Report on Form 10-Q for the period ended March 27,
1998)
+(10ah) Restructuring Agreement, dated August 7, 1998, between Zenith
Electronics Corporation and LG Electronics, Inc.
+*(10ai) Amended and Restated Employment Agreement, dated October 2,
1998, between Zenith Electronics Corporation and Richard F.
Vitkus
+*(10aj) Amendment dated August 7, 1998 to Employment Agreement between
Zenith Electronics Corporation and Jeffrey P. Gannon
+(10ak) Reimbursement Agreement dated November 3, 1997, between LG
Electronics Inc. and Zenith Electronics Corporation
+(10al) First Amendment to Reimbursement Agreement, dated January 27,
1998, between LG Electronics Inc. and Zenith Electronics
Corporation
+(10am) Amendment No. 1 and Waiver to the Restructuring Agreement, dated
November 16, 1998, between Zenith Electronics Corporation and LG
Electronics, Inc.
(10an) Guaranty Payment Agreement (Mexico), dated July 17, 1998 by and
between LG Electronics, Inc., First Security Bank, National
Association, not in its individual capacity but solely as
indenture trustee, the listed lenders, General Foods Credit
Corporation, and Fleet National Bank
(10ad) Guaranty Payment Agreement (Melrose Park), dated as of July 17,
1998 by and between LG Electronics Inc., First Security Bank,
National Association, not in its individual capacity but solely
as indenture trustee, the listed lenders, General Foods Credit
Corporation, and Fleet National Bank
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
(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)
</TABLE>
<TABLE>
<C> <S>
+(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 nine months ended September 26,
1998
+(27b) Financial Data Schedule for the twelve months ended December 31,
1997
+(99a) Valuation Report, dated May 21, 1998, prepared by Peter J.
Solomon Company, Ltd.
+(99b) Valuation Report, dated July 22, 1998, prepared by Peter J.
Solomon Company, Ltd. (Confidential Treatment Requested)
+(99c) Complete Appraisal of Real Property, Partes Television de
Reynosa, S.A. de C.V., dated May 28, 1998, prepared by Cushman &
Wakefield of Arizona, Inc.
+(99d) Property Summary and Value Estimates, Mexico Owned Facilities,
dated February, 1998, prepared by Bermudez-Binswanger
+(99e) Appraisal, Zenith Electronics Corporation, Reynosa Mexico, dated
April 1, 1998, prepared by Greenwich Industrial Services, LLC.
+(99f) Valuation Report, dated November 16, 1998, prepared by Peter J.
Solomon Company, Ltd. (Confidential Treatment Requested)
+(99g) Forms of Ballots
+(99h) Form of Master Ballot
+(99i) International VSB Market Forecast prepared by Gartner
Consulting, including addendums thereto. (Confidential Treatment
Requested)
(99j) Form of letter to Securityholders
</TABLE>
- --------
* Represents a management contract, compensation plan or arrangement.
+Previously filed.
++To be filed by amendment.
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
II-6
<PAGE>
(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-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company duly
caused this Amendment No. 2 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 29th day of January, 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. 2 to the Registration Statement has been signed below by the
following persons in the capacities indicated on the 29th day of January,
1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Jeffrey P. Gannon President and Chief Executive Officer
___________________________________________ (Principal Executive Officer)
Jeffrey P. Gannon
/s/ Edward J. McNulty Chief Financial Officer
___________________________________________ (Principal Financial Officer)
Edward J. McNulty
/s/ Lawrence D. Panozzo Director of Corporate Accounting and
___________________________________________ Planning
Lawrence D. Panozzo (Principal Accounting Officer)
* Chairman of the Board
___________________________________________
Hun Jo Lee
** Director
___________________________________________
T. Kimball Brooker
* Director
___________________________________________
Ki-Song Cho
** Director
___________________________________________
Eugene B. Connolly
/s/ Robert A. Helman Director
___________________________________________
Robert A. Helman
* Director
___________________________________________
Cha Hong (John) Koo
* Director
___________________________________________
Seung Pyeong Koo
</TABLE>
II-8
<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 Vitkus
**By_________________________________
Attorney-in-fact
II-9
<PAGE>
Guaranty Payment Agreement -- Mexico
GUARANTY PAYMENT AGREEMENT
--------------------------
This Guaranty Payment Agreement ("Agreement") is made this 17th day of
July 1998, by and between (i) LG Electronics Inc., as Guarantor (the
"Guarantor"), (ii) First Security Bank, National Association, not in its
individual capacity but solely as indenture trustee (the "Indenture Trustee"),
(iii) the institutions listed on the signature pages hereto as the Lenders (the
"Lenders"), (iv) General Foods Credit Corporation, as owner participant (the
"Owner Participant"), and (v) Fleet National Bank, not in its individual
capacity but solely as owner trustee (the "Owner Trustee"), as acknowledged and
agreed to by Zenith Electronics Corporation of Texas, as lessee (the "Lessee")
and Zenith Electronics Corporation, as the parent guarantor (the "Parent
Guarantor").
RECITALS
WHEREAS, reference is made to (a) that certain Participation
Agreement, dated as of March 26, 1997 (the "Participation Agreement"), by and
among (i) Lessee, as lessee, (ii) Owner Participant, as owner participant, (iii)
Owner Trustee, as owner trustee, (iv) the Lenders, as lenders, and (v) the
Indenture Trustee, as indenture trustee; (b) that certain Lease Agreement, dated
as of March 26, 1997 (the "Lease Agreement"), by and among (i) the Owner
Trustee, as lessor, and (ii) Lessee, as lessee; (c) that certain Trust Indenture
and Security Agreement (1997-B), dated as of March 26, 1997 (the "Indenture"),
by and among (i) Owner Trustee and (ii) the Indenture Trustee; (d) that certain
Guaranty, dated as of March 26, 1997 (the "Guaranty"), from Guarantor in favor
of the Owner Trustee, the Owner Participant, the Lenders and the Indenture
Trustee, and (e) that certain Parent Guaranty, dated as of March 26, 1997 (the
"Parent Guaranty"), from Parent Guarantor in favor of the Owner Trustee, the
Owner Participant, the Lenders and the Indenture Trustee. Capitalized terms not
otherwise defined herein shall have the meanings ascribed to such terms in the
Participation Agreement or, if not defined therein, in the Indenture.
WHEREAS, the Lessee, the Parent Guarantor and the Guarantor hereby
acknowledge that certain Events of Default under the Lease have occurred and are
continuing, which also constitute Events of Default under the Indenture.
WHEREAS, the Lessee, the Parent Guarantor, and the Guarantor hereby
acknowledge that the Indenture Trustee and the Owner Trustee are entitled to
demand payment of the Obligations (as defined in the Guaranty)).
WHEREAS, the parties hereto have agreed that, in light of the
foregoing, to effect the repayment of the obligations owing to the Indenture
Trustee, the Lenders, the Owner Participant and the Owner Trustee under the
Operative Documents, that the Guarantor will satisfy the Obligations (as defined
in the Guaranty) under the Guaranty by making the payments specified herein.
<PAGE>
Guaranty Payment Agreement -- Mexico
NOW, THEREFORE, in consideration of the foregoing and the obligations and
undertakings set forth below, the parties hereto agree as follows:
SECTION 1. Definitions.
The following terms shall have the following meanings when used herein (all
terms defined in this section 1 or in other provisions of this Agreement in the
singular shall have the same meaning in the plural and vice versa):
Adjusted Make-Whole Premium Amount: The Make-Whole Premium Amount due to
each Lender under the Equipment Notes held by each such Lender as calculated by
(a) setting the prepayment date referred to in the definition of "Make-Whole
Premium Amount" as the Demand Date and (b) replacing the 50 basis point spread
above the U.S. Treasury securities as set forth in the definition of "Make-Whole
Premium Amount" with the Spread.
Demand Date: July 17, 1998.
Discount Termination Date: The earlier to occur of:
(a) October 20, 1998 or
(b) the date on which any Discount Termination Event shall have
occurred;
or such other later date as determined unanimously by all of the Lenders, in
their sole discretion, upon giving Guarantor notice (in the manner set forth in
Section 8 hereof) of a different date.
Discount Termination Event: The occurrence of one or more of the following:
(a) The Lessee, the Parent Guarantor, or the Guarantor: (1) files, or
consents by answer or otherwise to the filing against it of a
petition for relief or reorganization or arrangement or any other
petition in bankruptcy, for liquidation or to take advantage of
any bankruptcy or insolvency law of any jurisdiction, (2) makes
an assignment for the benefit of its creditors, (3) consents to
the appointment of a custodian, receiver, trustee or other
officer with similar powers of itself or of any substantial part
of its property, (4) takes corporate or comparable action for the
purpose of any of the foregoing;
(b) a court or Governmental Authority of competent jurisdiction shall
enter an order appointing a custodian, receiver, trustee or other
officer with similar powers with respect to the Lessee, the
Parent
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Guaranty Payment Agreement -- Mexico
Guarantor or the Guarantor, or with respect to any substantial
part of its property, or constituting an order for relief or
approving a petition for relief or reorganization or any other
petition in bankruptcy or for liquidation or to take advantage of
any bankruptcy or insolvency law of any jurisdiction, or ordering
the dissolution, winding-up or liquidation of the Lessee, the
Parent Guarantor or the Guarantor, or if any petition for any
such relief shall be filed against the Lessee, the Parent
Guarantor or the Guarantor;
(c) the occurrence of an Event of Default under Section 13.1(a) of
the Lease; or
(d) the Guarantor fails to make any payment of any Guaranty Payment
Amount pursuant to the terms hereof within ten (10) Business Days
after the Demand Date.
Effective Date: The date upon which all of the following shall have been
completed:
(a) The execution of this Agreement by each party hereto and, with
respect to the Lessee and the Parent Guarantor, the
acknowledgement and agreement of the Lessee and the Parent
Guarantor, and the delivery of counterparts reflecting the same
to each of counsel for the Lenders, the Owner Participant, the
Lessee, the Parent Guarantor and the Guarantor.
(b) The delivery by the Indenture Trustee and the Owner Trustee to
the Guarantor of the Guaranty Payment Demand;
(c) The payment by Guarantor to the Indenture Trustee for the account
of the Lenders of the Lender Guaranty Payment Amount for each
such respective Lender by wire transfer in accordance with the
wire transfer instructions set forth on Schedule A hereto;
(d) The payment by Guarantor to the Indenture Trustee for the account
of the Lenders' Counsel of the Lenders' Counsel Guaranty Payment
Amount by wire transfer in accordance with the wire transfer
instructions set forth on Schedule A hereto; and
(e) The payment by Guarantor to the Indenture Trustee of the
Indenture Trustee Guaranty Payment Amount by wire transfer in
accordance with the wire transfer instructions set forth on
Schedule A hereto;
(f) The payment by Guarantor to the Owner Trustee for the account of
the Owner Participant of the Owner Participant Guaranty Payment
Amount by wire transfer in accordance with the wire transfer
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Guaranty Payment Agreement -- Mexico
instructions set forth on Schedule A hereto
(g) The payment by Guarantor to the Owner Trustee of the Owner
Trustee Guaranty Payment Amount by wire transfer in accordance
with the wire transfer instructions set forth on Schedule A
hereto;
(h) The payment by Guarantor to the Owner Trustee for the account of
the Owner Participant's Counsel of the Owner Participant's
Counsel Guaranty Payment Amount by wire transfer in accordance
with the wire transfer instructions set forth on Schedule A
hereto; and
(i) The date on which each of the items set forth in clauses (a),
(b), (c), (d), (e), (f), (g), and (h) in the definition of the
Effective Date in the Melrose Park Guaranty Payment Agreement has
been satisfied.
Equity Transfer Agreement: An agreement to be executed by the Owner
Participant and the Guarantor or an affiliate of the Guarantor in substantially
the form as annexed hereto as Exhibit A.
Guaranty Payment Amount: Each of the Lender Guarantee Payment Amounts,
the Indenture Trustee Guarantee Payment Amount, the Lenders' Counsel Guarantee
Payment Amount, the Owner Participant Guarantee Payment Amounts, the Owner
Participant's Counsel Guarantee Payment Amount; and the Owner Trustee Guarantee
Payment Amount and collectively, the "Guaranty Payment Amounts".
Guaranty Payment Demand: A written demand of payment under the Guaranty by
the Indenture Trustee and the Owner Trustee in substantially the form as annexed
hereto as Exhibit B.
Indenture Trustee Guaranty Payment Amount: With respect to the Indenture
Trustee, the amount as set forth on Schedule B hereto to be paid by Guarantor to
the Indenture Trustee pursuant to the Guaranty, which amount will satisfy the
obligations payable to the Indenture Trustee under the Operative Documents
(including the Guaranty).
Lender Guaranty Payment Amount: With respect to any Lender, an amount
equal to the sum of: (a) the outstanding unpaid principal amounts owed to such
Lender as of the Demand Date under the Equipment Notes held by such Lender, (b)
all accrued but unpaid interest due to such Lender as of the Demand Date on the
outstanding principal amount of the Equipment Notes held by such Lender, (c) the
Adjusted Make-Whole Premium Amount under the Equipment Notes held by such
Lender, (d) all other amounts due to such Lender (other than principal, interest
and the Make-Whole Premium Amount) as of the Demand Date under the Operative
Documents. The Lender Guaranty Payment Amounts are the amounts to be paid by
Guarantor to the Indenture Trustee for the account of the Lenders pursuant to
the Guaranty, which amounts will satisfy the above-
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Guaranty Payment Agreement -- Mexico
referenced obligations payable to the Lenders under the Operative Documents
(including the Guaranty). The aggregate of all of the Lender Guaranty Payment
Amounts is set forth on the schedules to the Guaranty Payment Demand.
Lenders' Counsel: Milbank, Tweed, Hadley & McCloy, counsel to the
Lenders in connection with discussions, negotiations and review of any
restructuring and repayment proposal (including the Repayment Transaction)
relating to the Equipment Notes.
Lenders' Counsel Guaranty Payment Amount: The amount as set forth on
Schedule B hereto to be paid by Guarantor to Lenders' Counsel pursuant to the
Guaranty, which amount will satisfy the obligations payable to the Lenders'
Counsel under the Operative Documents (including the Guaranty).
Melrose Park Guaranty Payment Agreement: That certain Guaranty Payment
Agreement, dated as of the date hereof, by and between (i) LG Electronics Inc.,
as the guarantor, (ii) First Security Bank, National Association, as the
indenture trustee, and (iii) the institutions listed on the signature pages
thereto as the lenders, (iv) General Foods Credit Corporation, as owner
participant, and (v) Fleet National Bank, as owner trustee, as acknowledged and
agreed to by Zenith Electronics Corporation, as lessee.
Owner Participant Guaranty Payment Amount: With respect to the Owner
Participant, the amount as set forth on Schedule B hereto to be paid by
Guarantor to the Owner Participant pursuant to the Guaranty, which amount will
satisfy the obligations payable to the Owner Participant under the Operative
Documents (including the Guaranty).
Owner Participant's Counsel: Davis Polk & Wardwell.
Owner Participant's Counsel Guaranty Payment Amount: The amount as set
forth on Schedule B hereto to be paid by Guarantor to Owner Participant's
Counsel pursuant to the Guaranty, which amount will satisfy the obligations
payable to the Owner Participant's Counsel under the Operative Documents
(including the Guaranty).
Owner Trustee Guaranty Payment Amount: With respect to the Owner
Trustee, the amount as set forth on Schedule B hereto to be paid by Guarantor to
the Owner Trustee pursuant to the Guaranty, which amount will satisfy the
obligations payable to the Owner Trustee under the Operative Documents
(including the Guaranty).
Repayment Transaction: The transactions to be effected pursuant to the
terms of this Agreement.
Requisite Consents: All consents, waivers, notices, filings, approvals or
authorizations that are required to be made to or with any Person, entity or
Governmental Authority for the consummation of the transactions contemplated by
this Agreement.
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<PAGE>
Guaranty Payment Agreement -- Mexico
Spread: A number of basis points as determined by the date on which the
Demand Date occurs in accordance with the following chart:
If the Demand
Date Occurs on or Before: Then the Spread Shall Be:
------------------------ ------------------------
July 17, 1998 160 basis points
July 21, 1998 150 basis points
July 28, 1998 140 basis points
August 4, 1998 130 basis points
August 11, 1998 120 basis points
August 18, 1998 112 basis points
August 25, 1998 104 basis points
September 1, 1998 96 basis points
September 8, 1998 88 basis points
September 15, 1998 80 basis points
September 22, 1998 72 basis points
September 29, 1998 64 basis points
October 6, 1998 58 basis points
October 13, 1998 50 basis points.
Notwithstanding the foregoing, if a Discount Termination Date occurs
on or before the Effective Date, then the Spread shall be 50 basis
points.
As used in the formula set forth in the definition of Adjusted Make-
Whole Premium Amount for any Equipment Note, the Spread is added above
the yield for U.S. Treasury securities having a maturity approximating
the remaining average life of such Equipment Note.
Termination Statements: UCC-3 termination statements and such other
instruments, all in the form as supplied by the Guarantor, which forms are
reasonably acceptable to the Lenders, that are necessary to terminate and
satisfy the Lien under the Indenture.
SECTION 2. Payment.
(A) On or before the third (3/rd/) Business Day following the Demand Date,
Guarantor shall pay, by wire transfer, in accordance with the wire transfer
instructions for each of the respective Persons set forth below as set forth on
Schedule A hereto, each of the following payments:
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<PAGE>
Guaranty Payment Agreement - Mexico
(1) To the Indenture Trustee (for the account of the Lenders), the Lender
Guarantee Payment Amounts for all of the Lenders;
(2) To the Indenture Trustee, the Indenture Trustee Guarantee Payment
Amount;
(3) To the Indenture Trustee (for the account of the Lenders' Counsel),
the Lenders' Counsel Guarantee Payment Amount;
(4) To the Owner Trustee (for the account of the Owner Participant), the
Owner Participant Guarantee Payment Amount;
(5) To the Owner Trustee (for the account of the Owner Participant's
Counsel), the Owner Participant's Counsel Guarantee Payment Amount;
and
(6) To the Owner Trustee, the Owner Trustee Guarantee Payment Amount.
(B) On the Effective Date:
(1) Each Lender shall deliver the Equipment Notes or and affidavit of loss
with respect thereto to the Guarantor in form and substance reasonably
satisfactory to the Guarantor;
(2) The Indenture Trustee shall deliver the Termination Statements, duly
executed by the Indenture Trustee on behalf of the Lenders, to the
Guarantor; and
(3) The Owner Participant shall deliver the Equity Transfer Agreement,
duly executed by the Owner Participant, to the Guarantor.
SECTION 3. Intentionally Omitted.
SECTION 4. Representations and Warranties.
(A) Each of the Guarantor, the Parent Guarantor and the Lessee hereby
represents and warrants as to itself only that:
(1) it is duly organized, validly existing and in good standing under the
laws of its state of organization;
7
<PAGE>
(2) the execution, delivery and performance of this Agreement have been
duly and validly authorized by all requisite corporate action, and
will not violate its charter, by-laws or other organizational
documents or any indenture, agreement or instrument to which it is a
party or by which it or its property may be bound or affected;
(3) all consents, waivers, notices, filings, approvals or authorizations
that are required to be made to or with any Person, entity or
Governmental Authority for the execution, delivery, performance and
consummation of this Agreement and the transactions contemplated by
this Agreement have been obtained;
(4) this Agreement is the legal, valid and binding obligation of such
party enforceable against such party in accordance with its terms;
(5) an Event of Default under the Lease has occurred and is continuing;
and
(6) the Lenders, the Indenture Trustee, the Owner Participant, and the
Owner Trustee are entitled to demand payment of the Obligations (as
defined in the Guaranty) under the Guaranty, including, but not
limited to, the payment of the Guaranty Payment Amounts.
(G) Each of the Lenders, the Owner Participant, the Indenture Trustee and the
Owner Trustee hereby represents and warrants as to itself only that:
(1) it is duly organized, validly existing and in good standing under the
laws of its state of organization;
(2) the execution, delivery and performance of this Agreement have been
duly and validly authorized by all requisite corporate action, and
will not violate its charter, by-laws or other organizational
documents or any indenture, agreement or instrument to which it is a
party or by which it or its property may be bound or affected; and
(3) this Agreement is the legal, valid and binding obligation of such
party enforceable against such party in accordance with its terms.
SECTION 5. Intentionally Omitted.
SECTION 6. Certain Acknowledgements.
------------------------
Each of the Guarantor, Parent Guarantor and the Lessee hereby
expressly acknowledges and agrees that as of July 17, 1998, the aggregate
outstanding amount owed
8
<PAGE>
to the Lenders and the Indenture Trustee under the Operative Documents is an
amount not less than $16,516,642.03, as summarized in schedule C hereto,
representing $14,123,970.12 of unpaid principal, $387,070.33 of accrued and
unpaid interest, $1,981,601.58 for the Make-Whole Premium Amount, and $24,000 in
other amounts (such as various costs, expenses and fees) due to the Lenders and
the Indenture Trustee under the Operative Documents. Each of the Guarantor,
Parent Guarantor and the Lessee hereby expressly acknowledges and agrees that
unless the Effective Date occurs, nothing in this Agreement or in any document
or instrument executed in connection with or pursuant to this Agreement shall
constitute a satisfaction of or a novation as to all or any portion of the
obligations owed to the Lenders, the Indenture Trustee, the Owner Trustee and
Owner Participant under the Operative Documents or otherwise. Subject to
adjustment in accordance with the terms hereof upon the occurrence of the
Effective Date, each of the Guarantor, Parent Guarantor and the Lessee hereby
reconfirms its obligation to pay in full the indebtedness and other obligations
owed to the Lenders and the Indenture trustee arising under the Operative
Documents. The Guarantor hereby further acknowledges and agrees that it has no
defenses to the enforcement of such obligations (or any portion thereof) nor any
counter-claims or claims of offset whatsoever and that neither this Agreement
nor the consummation of the transactions contemplated herein will give rise to
any such defenses, counter-claims or claims of offset, except as provided for
herein.
SECTION 7. Expenses.
--------
Each of the Guarantor, the Parent Guarantor and the Lessee shall bear
its own legal fees and expenses in connection with the preparation, negotiation
and execution of this Agreement. The Guarantor shall be responsible for the
payment of all of the Lenders' out of pocket fees and expenses (including the
reasonable fees and expenses of each of the Lenders', the Owner Participant's
and Owner Trustee's outside counsel) in connection with discussions,
negotiations and review of any restructuring proposal (including the Repayment
Transaction) relating to the Equipment Notes. The amounts of the Guarantor's
obligations under this Section 7 are included in the amounts set forth on
Schedule B hereto.
SECTION 8. Notices.
-------
All communications between the parties hereto or notices or other
information sent in connection herewith must be in writing and sent by (a)
personal delivery, (b) reputable overnight courier service, freight prepaid, (c)
certified mail, return receipt requested, postage prepaid, or (d) telecopy or
other facsimile transmission (provided that if sent by telecopy or other
facsimile transmission, such must also sent by express mail or courier (for next
business day delivery)), addressed as follows:
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<PAGE>
Guaranty Payment Agreement -- Mexico
If to the Lenders:
At the address for each Lender set forth on Schedule A hereto;
with a copy to:
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
Attention: Elihu F. Robertson, Esq.
Telephone No.: 212-530-5000
Facsimile No.: 212-530-5219
If to the Indenture Trustee:
First Security Bank, National Association
79 S. Main Street
Salt Lake City, Utah 84111
Attention: Corporate Trust Services
Telephone No.: 801-246-5300
Facsimile No.: 801-246-5053
If to the Parent Guarantor and/or the Lessee:
Zenith Electronics Corporation
1000 Milwaukee Avenue
Glenview, IL 60025
Attention: Chief Financial Officer
Telephone No.: 847-391-7000
Facsimile No.: 847-391-8584
with a copy to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 80601
Attention: James H.M. Sprayregen, Esq.
Telephone No.: 312-861-2481
Facsimile No.: 312-861-2200
If to the Guarantor:
LG Electronics Inc.
20, Yoido-Dong
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<PAGE>
Guaranty Payment Agreement -- Mexico
Youngdungo-Ku, Seoul 150-721
Korea
Attention: Director of Finance
Telephone No.: 82-2-3777-3049
Facsimile No.: 82-2-3777-5303
With a copy to:
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Attention: Richard F. Hahn, Esq.
Telephone No.: 212-909-6000
Facsimile No.: 212-909-6836
If to the Owner Participant:
General Foods Credit Corporation
200 First Stamford Place
Suite 400
Stamford, CT 06902-6745
Attention: Vice President -- Leasing
Telephone No.: 914-335-8170
Facsimile No.: 914-335-8297
And
General Foods Credit Corporation
200 First Stamford Place
Suite 400
Stamford, CT 06902-6745
Attention: General Counsel
Telephone No.: 914-335-8347
Facsimile No.: 914-335-8256
With a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Robert Heckart, Esq.
Telephone No.: 212-450-4000
Facsimile No.: 212-450-5672
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<PAGE>
If to the Owner Trustee:
Fleet National Bank
c/o State Street Bank and Trust Company
Goodwin Square
225 Asylum Street, 23/rd/ Floor
Hartford, CT 06103
Attention: Corporate Trust Administration
Telephone No.: 860-244-1844
Facsimile No.: 860-244-1884
The parties may designate another addressee or change its address for notices
and other communications hereunder by a notice given to the other parties in the
manner provided in this paragraph. A notice or other communication sent in
compliance with the provisions of this paragraph shall be deemed good and
sufficient service regardless of whether the parties actually receive such
notice.
SECTION 9. Governing Law; Dispute Resolution; Specific Performance.
-------------------------------------------------------
(A) This Agreement shall be construed and the obligations of the parties
hereunder shall be determined in accordance with the internal laws of the State
of New York (without regard to any conflict of laws provisions thereof).
(B) Each of parties hereto expressly submits to and accepts the non-
exclusive jurisdiction of any United States federal court sitting in the
Southern District of New York or any other court of appropriate jurisdiction
sitting in the County of New York, City of New York with respect to any action,
suit or proceeding for breach of this Agreement and waives any objection such
party may have to the laying of venue in any such court or that such court is an
inconvenient forum or does not have personal jurisdiction over such party. Each
of the parties hereto agrees that service of process in any such action, suit or
proceeding may be validly made upon such party by certified or registered U.S.
Mail, postage prepaid, to the address set forth in Section 8 hereof. EACH OF
THE PARTIES HERETO WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO TRIAL BY JURY IN ANY
PROCEEDING ARISING OUT OF THIS AGREEMENT. Notwithstanding the foregoing, this
provision may not be utilized by any person other than the parties hereto to
obtain jurisdiction over any of the parties hereto. Guarantor hereby appoints
for matters relating to this Agreement the Process Agent (as defined in the
Guaranty) as its designee and agent to receive, for and on behalf of Guarantor,
service of process in the manner as set forth in section 10 of the Guaranty.
(C) The Guarantor hereby acknowledges that the damages that the Lenders,
the Indenture Trustee, the Owner Participant and the Owner Trustee would sustain
in the
12
<PAGE>
event of any violation of the provisions of this Agreement are difficult
or impossible to ascertain. Accordingly, the Guarantor hereby acknowledges that
the Lenders, the Indenture Trustee, the Owner Participant and/or the Owner
Trustee, as the case may be, shall be entitled, in addition to any other remedy
or damages available to it or them (as the case may be) in the event of any such
violation, to injunctive relief to restrain such violation by, or enforce the
provisions of this Agreement against, the Guarantor.
SECTION 10. Miscellaneous.
-------------
(A) Survival. All representations, warranties, covenants and other
provisions made by the parties hereto in this Agreement shall be considered to
have been relied upon by the parties hereto and shall survive the execution,
performance and delivery of this Agreement.
(B) Successors and Assigns. This Agreement (i) shall inure to the benefit
of and be enforceable by the parties hereto and their respective successors and
permitted assigns, and (ii) shall be binding upon and enforceable against the
parties hereto and their respective successors and assigns.
(C) Further Assurances. Each of the parties hereto agrees to execute and
deliver, or to cause to be executed and delivered, all such instruments, and to
take all such action, as the other party may reasonably request in order to
consummate the transactions and transfers contemplated hereunder and to
effectuate the intent and purposes of this Agreement.
(D) Counterpart Execution; Facsimiles. This Agreement may be executed in
any number of counterparts, each of which when so executed shall be an original,
but all such counterparts shall together constitute one and the same agreement
binding all of the parties hereto. The parties hereto may execute this
Agreement and any other documents in connection herewith and exchange their
signatures thereto by telecopier; provided, however, that the parties shall
endeavor to deliver original counterpart signatures to the other party as soon
thereafter as practicable.
(E) Amendments; Waivers. (i) No amendment of any provision of this
Agreement shall be effective unless it is in writing and signed by each of the
parties hereto and no waiver of any provision of this Agreement, nor consent to
any departure by any party hereto, shall be effective unless it is in writing
and signed by the party affected thereby, and then such waiver or consent shall
be effective only in the specific instance and for the specific purpose for
which given.
(ii) No failure on the part of any party to exercise, and no delay in
exercising, any right hereunder shall operate as a waiver thereof by such party,
nor shall any single or partial exercise of any right hereunder preclude any
other or further exercise thereof or the
13
<PAGE>
exercise of any other right. The rights and remedies of each party provided
herein (x) are cumulative and are in addition to, and not exclusive of, any
rights or remedies provided by law and/or any of the Operative Documents (except
as otherwise expressly set forth herein) and (y) are not conditional or
contingent on any attempt by such party to exercise any of its/his rights under
any other related document against the other party or any other entity.
(iii) Except as set forth herein, the delivery of the Guaranty
Payment Demand is without prejudice to any other rights or remedies of the
Guaranteed Parties (as defined in the Guaranty Payment Demand) under the
Operative Documents, this Agreement or otherwise. Except as set forth herein,
the Guaranteed Parties expressly reserve any and all of their rights and
remedies, including under the Operative Documents, this Agreement and otherwise,
waiving none of their rights by the presentment of the Guaranty Payment Demand.
Except as set forth herein, the failure by any of the Guaranteed Parties to
exercise any right under any of the Operative Documents, this Agreement or
otherwise shall not operate as a waiver thereof or preclude any other or further
exercise thereof.
(F) Intentionally Omitted.
(G) Severability. Any provision of this Agreement that is invalid or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining provisions of this Agreement or affecting the
validity or enforceability of any provisions of this Agreement in any other
jurisdiction.
(H) Effect of Occurrence of Effective Date. Upon the occurrence of the
Effective Date and subject to Section 10(P) of this Agreement, (i) except as
otherwise provided herein, the obligations of the Guarantor under the Guaranty
and the Owner Trustee under the Equipment Notes shall be deemed to have been
satisfied in full and the Guaranty and the Equipment Notes shall be deemed to be
extinguished and (ii) neither the Indenture Trustee nor any Lender shall have
any further interest in, or rights with respect to, the Trust Indenture Estate;
notwithstanding the foregoing, nothing in this Agreement shall affect any rights
or interests of any of the Lenders, the Indenture Trustee, the Owner Participant
or the Owner Trustee under the Operative Documents (including the Guaranty and
the Parent Guaranty) to the extent that the provisions under the Operative
Documents or any obligation therein covered by the Guaranty or the Parent
Guaranty expressly survive termination of the Trust Indenture Estate, all of
which shall remain fully enforceable and intact. Except as otherwise provided
under this Agreement, the failure by the Indenture Trustee, the Lenders, the
Owner Participant or the Owner Trustee to exercise any right under the Operative
Documents or otherwise shall not operate as a waiver thereof or preclude any
other or further exercise thereof. Prior to the occurrence of the Effective
Date, (1) the Operative Documents shall remain in full force and effect and (2)
nothing herein shall affect the terms of the Operative Documents and the
respective rights and interests of the parties thereunder and otherwise (other
than the forbearance as provided in Section 10(L) of this Agreement).
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<PAGE>
(I) Costs and Expense of Enforcement. This Agreement is and may be pleaded
as a full and complete defense against, and is and may be used as the basis for,
an injunction against prosecution of any claim which seeks recovery or relief
contrary to the terms of this Agreement. Should any party hereto retain counsel
for the purpose of restraining, enjoining, or otherwise preventing the breach
of, or enforcing, this Agreement, including without limitation the commencement
of any action or proceeding to enforce any provision of this Agreement or to
obtain (a) damages by reason of any alleged breach of any provision hereof, (b)
a declaration of the rights or obligations of the other parties hereto, or (c)
any other judicial remedy in connection therewith, the prevailing party shall be
entitled, in addition to such other relief as may be granted in such action or
proceeding, whether at trial or an appeal, to be reimbursed by the other party
for all costs and expenses incurred as a result thereof, including without
limitation reasonable attorneys' fees.
(J) Representation by Counsel. Each of the parties hereto acknowledges
that it has been represented in the negotiation of this Agreement by (an)
attorney(s) of its own choosing and that no party has relied upon any
representations from the other parties except as specifically provided in this
Agreement.
(K) Benefits of Agreement. Other than to the parties hereto (or their
respective successors or permitted assigns), nothing in this Agreement, express
or implied, shall give to any other person or entity any benefit or any legal or
equitable right, remedy or claim.
(L) Forbearance. Unless and until the earlier to occur of (i) a Discount
Termination Event or (ii) an Event of Default under sections 4.02(b) - (j) of
the Indenture, each Lender, the Indenture Trustee, the Owner Participant and the
Owner Trustee agree to forbear from (x) enforcing their rights under the
Operative Documents to seek payment of (1) the outstanding unpaid principal
amounts owed to such Lender under the Equipment Notes, (2) all accrued but
unpaid interest on the outstanding principal amount of the Equipment Notes, (3)
the Make-Whole Premium Amount, and (y) exercising any rights and/or remedies
that arise out of the Events of Default that are in existence as of the date
hereof. Notwithstanding the foregoing, nothing herein shall limit or prejudice
the rights of the Lenders, the Indenture Trustee, the Owner Trustee and the
Owner Participant to enforce this Agreement.
(M) Subrogation. Upon making full payment of the amounts due to the
parties hereunder in accordance with the terms hereof, the Guarantor shall be
subrogated to the rights of such parties as of and after the Effective Date.
(N) Waiver of Notice Periods & Prohibitions Set Forth in Operative
Documents. Except as otherwise set forth herein, the parties hereby expressly
waive any and all notice and demand requirements and other prohibitions to the
effectuation of the transactions set forth in this Agreement as may be contained
in the Operative Documents, including, but not limited to, (i) the notice period
for any existing events that would constitute Events of Default under the Lease
and the other Operative Documents but for the expiration of such
15
<PAGE>
period, (ii) the five day written demand requirement set forth in section 1 of
the Guaranty, and (iii) until the occurrence of a Discount Termination Event,
the equity cure rights under the Operative Documents, provided that the parties
hereby acknowledge and agree that the execution and performance of this
Agreement shall not constitute either notice of an intent to foreclose or the
commencement of foreclosure proceedings by the Indenture Trustee for purposes of
the equity cure rights and/or purchase election rights under the Operative
Documents (including, but not limited to, Section 2.13 of the Indenture).
(O) Interest: If Guarantor fails to pay any cash or cash equivalent to
any Lender, the Indenture Trustee, the Lenders' Counsel, the Owner Trustee, the
Owner Participant or the Owner Participants' Counsel in accordance with the
terms hereof within six Business Days of the Demand Date, Guarantor shall pay
interest on the amount of such payment to the other party for the period
thereafter to but excluding the date on which payment is made at the Overdue
Rate.
(P) Reinstatement. The respective obligations, guarantees, liens, charges
and other encumbrances of Lessee, Parent Guarantor and the Guarantor under the
Operative Documents (including, but not limited to the Guarantee and the Parent
Guarantee) shall be automatically reinstated in full (and without regard to any
waiver or compromise by any Lender, Owner Trustee, Owner Participant or
Indenture Trustee contemplated hereby) if for any reason the payment by the
Guarantor hereunder is rescinded or must otherwise be restored, in whole or in
part, by any Lender, the Indenture Trustee, the Owner Participant and/or the
Owner Trustee, whether as a result of any proceedings in bankruptcy or
reorganization or otherwise, and the Guarantor shall indemnify each Lender, the
Indenture Trustee, the Owner Participant and the Owner Trustee on demand for all
reasonable costs and expenses (including fees of counsel) incurred by the
Lenders in connection with such rescission or restoration, including any such
costs and expenses incurred in defending against any claims alleging that such
payment constituted a fraudulent transfer, preference or similar payment under
any bankruptcy, insolvency or similar law.
(Q) Transfers By Indenture Trustee upon receipt of Payments under Section
2(a) of this Guaranty Payment Agreement. Within one (1) Business Day of the
Indenture Trustee's receipt of the Lender Guaranty Payment Amount for each
Lender, the Indenture Trustee shall pay to each Lender the Lender Guarantee
Payment Amount for each such lender by wire transfer, in accordance with the
wire transfer instructions for each such Lender as set forth on Schedule A
hereto. Within one (1) Business Day of the Indenture Trustee's receipt of the
Lenders' Counsel Guaranty Payment Amount, the Indenture Trustee shall pay to the
Lenders' Counsel the Lenders' Counsel Guarantee Payment Amount by wire transfer,
in accordance with the wire transfer instructions for the Lenders' Counsel as
set forth on Schedule A hereto.
(R) Transfers By Owner Trustee upon receipt of Payments under Section
2(a) of this Guaranty Payment Agreement. Within one (1) Business Day of the
Owner Trustee's receipt of the Owner Participant Guaranty Payment Amount, the
Owner Trustee shall pay
16
<PAGE>
to the Owner Participant the Owner Participant Guarantee Payment Amount by wire
transfer, in accordance with the wire transfer instructions for the Owner
Participant as set forth on Schedule A hereto. Within one (1) Business Day of
the Owner Trustee's receipt of the Owner Participant's Counsel Guaranty Payment
Amount, the Owner Trustee shall pay to the Owner Participant's Counsel the Owner
Participant's Counsel Guarantee Payment Amount by wire transfer, in accordance
with the wire transfer instructions for the Owner Participant's Counsel as set
forth on Schedule A hereto.
(S) Direction to Indenture Trustee: Each Lender, by its execution of this
Agreement, hereby directs the Indenture Trustee to execute this Agreement and
become a party hereto.
(T) Direction to Owner Trustee: The Owner Participant, by its execution
of this Agreement, hereby directs the Owner Trustee to execute this Agreement
and become a party hereto.
(U) Indemnification Regarding Transfer of Equity Interest: Guarantor
agrees to indemnify and hold harmless the Owner Participant and the Owner
Participant Guarantor from any liability incurred by the Owner Participant or
the Owner Participant Guarantor to the Owner Trustee after the Effective Date
based upon either (i) the transfer of the Equity Interest by the Owner
Participant to the Guarantor or (ii) circumstances not existing immediately
prior to such transfer or (iii) events occurring after such transfer.
LG ELECTRONICS INC.
By:______________________________
Name:
Title:
FIRST SECURITY BANK, NATIONAL
ASSOCIATION, not in its individual capacity,
but solely as Indenture Trustee
By:______________________________
Name:
Title:
COVA FINANCIAL SERVICES LIFE
INSURANCE COMPANY, as a Lender
17
<PAGE>
By: Conning Asset Management Company
By:______________________________
Name:
Title:
PENINSULAR LIFE INSURANCE CO., as a
Lender
By: Conning Asset Management Company
By:______________________________
Name:
Title:
OCCIDENTAL LIFE INSURANCE
COMPANY OF NORTH CAROLINA, as a Lender
By: Conning Asset Management Company
By:______________________________
Name:
Title:
EXECUTIVE RISK INDEMNITY INC., as a
Lender
By: Conning Asset Management Company
By:______________________________
Name:
Title:
WHITING & CO., as a Lender
By: Morgan Guaranty Trust Company of
New York as trustee under Declaration of
trust dated
18
<PAGE>
December 9, 1960, as Amended, for the
Commingled Pension Trust Fund (Fixed
Income-Corporate Private Placement Fund)
By:______________________________
Name:
Title:
HOW & COMPANY., as a Lender
By: J.P. Morgan Investment Management
Inc., as Investment Manager for an
institutional investor
By:______________________________
Name:
Title:
HOW & COMPANY., as a Lender
By: J.P. Morgan Investment Management
Inc., as Investment Manager for an
institutional investor
By:______________________________
Name:
Title:
MELLON BANK, N.A., solely in its capacity
as Trustee for the Long-Term Investment
Trust (as directed by J.P. Morgan
Investment Management Inc.), and not in
its individual capacity, as a Lender.
By:______________________________
Name:
Title:
19
<PAGE>
WHEELMOTOR & CO., as a Lender
By: Morgan Guaranty Trust Company of New
York as Investment Manager
By:______________________________
Name:
Title:
JOHN HANCOCK MUTUAL LIFE INSURANCE
COMPANY, as a Lender
By:______________________________
Name:
Title:
JOHN HANCOCK VARIABLE LIFE INSURANCE
COMPANY, as a Lender
By:______________________________
Name:
Title:
GENERAL FOODS CREDIT CORPORATION,
as Owner Participant,
By:____________________________
Name:
Title
FLEET NATIONAL BANK, not in its
individual capacity, but solely as Owner
Trustee,
By:____________________________
Name:
Title:
20
<PAGE>
ACKNOWLEDGED AND AGREED TO BY (and
the undersigned hereby confirms the representations,
warranties and acknowledgements expressed to be made
by it as set forth in this Agreement):
ZENITH ELECTRONICS CORPORATION, as Parent Guarantor
By:______________________________
Name:
Title:
ZENITH ELECTRONICS CORPORATION OF TEXAS, as lessee
By:______________________________
Name:
Title:
21
<PAGE>
Schedule A
----------
A. LENDERS
1. COVA Financial Services Life Insurance Company
Note B-4
Wire Transfer Instructions:
----------------------------
NORTHERN CHGO/Trust
ABA #07100052
Credit Wire account #5186041000
Account 26-02281/COVA Financial
Services Life Insurance Company
Notices Regarding Payments
--------------------------
General American Life Insurance Company
Attn: Investment Accounting
P.O. Box 418
St. Louis, MO 63166
Telephone No.:
Facsimile No.:
and
COVA Financial Services Life Insurance Co.
C/o The Northern Trust Company
P.O. Box 92996
Chicago, IL 60675
Telephone No.:
Facsimile No.:
All Other Notices:
------------------
General American Life Insurance Company
Attn: Securities Division
P.O. Box 396
St. Louis, MO 63166
Telephone No.:
Facsimile No.:
and
1
<PAGE>
COVA Financial Life Insurance Co.
C/O The Northern Trust Company
P.O. Box 92996
Chicago, IL 60675
Telephone No.:
Facsimile No.:
2
<PAGE>
2. Peninsular Life Insurance Co.
Note B-5
Wire Transfer Instructions:
----------------------------
The Bank of New York
ABA #0201008018
P & I Department, Account GLA IOC566
FFC: Peninsular Life Insurance Co.
Custody Account 934446
All Notices should be sent to:
------------------------------
Arthur Evans
PennCorp Financial
745 5/th/ Avenue, Suite 500
New York, NY 10151
Telephone No.:
Facsimile No.:
and
Brenda Epps
The Bank of New York
One Wall Street
New York, NY 10286
Telephone No.:
Facsimile No.:
and
Conning Asset Management
Attention: Securities
P.O. Box 396
St. Louis, MO 63166
Telephone No.:
Facsimile No.:
and
Ron Graver
Southwestern Life Insurance Co.
500 N. Akard Street
Dallas, TX 75201
Telephone No.:
Facsimile No.:
3
<PAGE>
3, Occidental Life Insurance Company of North Carolina
Note: B-6
Wire Transfer Instructions
--------------------------
The Bank of New York
ABA 021000018
P & I Department, Account GLA IOC 566
FFC: Occidental Life Insurance
Custody Account 933440
All Notices should be sent to:
------------------------------
Arthur Evans
PennCorp Financial
745 5/th/ Avenue, Suite 500
New York, NY 10151
Telephone No.:
Facsimile No.:
and
Brenda Epps
The Bank of New York
One Wall Street
New York, NY 10286
Telephone No.:
Facsimile No.:
and
Conning Asset Management
Attention: Securities
P.O. Box 396
St. Louis, MO 63166
Telephone No.:
Facsimile No.:
and
Ron Graver
Southwestern Life Insurance Co.
500 N. Akard Street
Dallas, TX 75201
Telephone No.:
Facsimile No.:
4
<PAGE>
4. Executive Risk Indemnity
Note: B-7
Wire Transfer Information:
--------------------------
Chase Manhattan Bank
ABA 021000021
For account of Executive Risk Indemnity Inc.
Account G04211
All Notices should be sent to:
------------------------------
Doll Balbadar
Chase Manhattan Bank
4 Chase Metro Tech Center, 6/th/ Floor
Brooklyn, NY 11245
Telephone No.:
Facsimile No.:
And
Executive Risk
Bob Palmberg
Investment Department
82 Hop Meadow Street
Simsbury, CT 06070
Telephone No.:
Facsimile No.:
And
Conning Asset Management
Attention: Securities
P.O. Box 396
St. Louis, MO 63166
Telephone No.:
Facsimile No.:
5
<PAGE>
5. Whiting & Co.
Note B-8
Wire transfer Instructions:
---------------------------
Bk of NYC/CTR/BBK
IOC 566 Custody
JPMIM Incoming Wire Account
ABA 021000018
Acct. No. 188967
Re: L G Elec
All Notices should be sent to:
------------------------------
J.P. Morgan Investment Management Inc.
522 Fifth Avenue
New York, NY 10036
Attn: Securities Administration
Telephone No.: 212-837-9396
Facsimile No.: 212-837-9046
6. How & Company
Note B-9
Wire transfer Instructions:
---------------------------
Northern Trust Co.
Northern Chgo/Tr
ABA #071-000-152
Wire A/C #5186041000
A/C #17-66833 Annuity Board
All Notices should be sent to:
------------------------------
Northern Trust Co.
801 S. Canal Street, CIN
Chicago, IL 60607
Attn: Denise Teresinki
Telephone No.: 312-630-1532
Facsimile No.: 312-444-4599
6
<PAGE>
7. Mellon Bank, N.A., solely in its capacity as trustee for the Long-Term
Investment Trust (as directed by J.P. Morgan Investment Management Inc.),
and not in its individual capacity.
Note B-10
Wire Transfer Instructions:
----------------------------
Ttee for Long-Term Investment Trust
Federal Reserve Bank of Boston
ABA #011-001-234/BOS SAFE DEP
DDA #125261 A/C
Ref A/C ATTF1791352
Re: L G Electronics
All Notices should be sent to:
------------------------------
Mellon Bank NA
One Mellon Bank Center
Room 151-1310
Pittsburgh, PA 15258
Attn: Jennifer Gomez
Telephone No.: 617-382-9251
Facsimile No.: 617-382-4881
7
<PAGE>
8. Wheelmotor & Co.
Note B-11
Wire transfer Instructions:
---------------------------
State Street Bank & Trust Co. - Boston MA
ABA 011-000-028
Acct #EF4A
Acct Name: Global
Strategic Income (Corporate Portfolio)
All Notices should be sent to:
------------------------------
State Street Bank & Trust Co.
One Heritage Drive
North Quincy, MA 02171
Attn: Phil Cummings, Palmer 5 South
Telephone No.: 617-985-5306
Facsimile No.: 617-985-8848
8
<PAGE>
9. John Hancock Mutual Life Insurance Company
Note No. B-14
1. Wire Transfer Instructions:
---------------------------
The First National Bank of Boston
ABA No. 011000390
Boston, Massachusetts 02110
Account of: John Hancock Mutual Life Insurance Company
Private Placement Collection Account
Account Number: 541-55417
On Order of: Fleet National Bank Cusip: 33903*DG1
2. Contemporaneous with the above wire transfer, advice setting forth:
(1) the full name, interest rate and maturity date of the Notes or other
obligations;
(2) allocation of payment between principal and interest and any special
payment; and
(3) name and address of Bank (or Trustee) from which wire transfer was
sent
should be delivered or mailed to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.: (617) 572-0628
3. All Notices should be sent to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.: (617) 572-0628
and
9
<PAGE>
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Bond and Corporate Finance Dept. T-57
Telephone No.:
Facsimile No.:
10
<PAGE>
Guaranty Payment Agreement -- Mexico
4. John Hancock Mutual Life Insurance Company
Note: B-13
1. Wire transfer Instructions:
--------------------------
The First National Bank of Boston
ABA No. 011000390
Boston, Massachusetts 02110
Account of: John Hancock Mutual Life Insurance Company
Private Placement Collection Account
Account Number: 541-55417
On Order of: Fleet National Bank Cusip: 33903*DG1
2. Contemporaneous with the above wire transfer, advice setting forth:
(1) the full name, interest rate and maturity date of the Notes or
other obligations;
(2) allocation of payment between principal and interest and any
special payment and
(3) name and address of Bank (or Trustee) from which wire transfer
was sent
should be delivered or mailed to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.: 617-572-0628
3. All notices should be sent to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.: (617) 572-0628
And
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Bond and Corporate Finance Dept. T-57
Telephone No.:
11
<PAGE>
Guaranty Payment Agreement -- Mexico
Facsimile No.:
12
<PAGE>
Guaranty Payment Agreement -- Mexico
4. John Hancock Variable Life Insurance Company
Note: B-12
1. Wire Transfer Instructions:
---------------------------
The First National Bank of Boston
ABA No. 01100390
Boston, Massachusetts 02110
Account: John Hancock Mutual Life Insurance Company
Private Placement Collection Account
Account Number: 541-55417
On Order of: Fleet National Bank Cusip: 33903*DG1
2. Contemporaneous with the above wire transfer, advice setting forth:
(1) the full name, interest rate and maturity date of the Notes are
other obligations
(2) allocation of payment between and interest and any special
payment; and
(3) name and address of Bank (or Trustee) from which wire transfer
was sent
should be delivered or mailed to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.: (617) 572-0628
and
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Bond and Corporate Finance Group T-57
Telephone No.:
Facsimile No.:
13
<PAGE>
Guaranty Payment Agreement -- Mexico
3. All notices should be sent to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.: (617) 572-0628
And
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Bond and Corporate Finance Dept. T-57
Telephone No.:
Facsimile No.:
14
<PAGE>
Guaranty Payment Agreement -- Mexico
4. John Hancock Mutual Life Insurance Company
Note No. B-1
1. Wire transfer Instructions:
--------------------------
Investors Bank & Trust Company
Boston, Massachusetts 02117
ABA No. 011001438
Account Number: 79650-9107
for further credit to General Motors 76-1, Account 99099
On Order of: Fleet National Bank Cusip: 33903*DG1
2. Contemporaneous with the above wire transfer, advice setting forth:
(1) the full name, interest rate and maturity date of the Notes or
other obligations;
(2) allocation of payment between principal and interest and any
special payment and
(3) name and address of Bank (or Trustee) from which wire transfer
was sent
should be delivered or mailed to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.: (617) 572-0628
3. All notices should be sent to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.: (617) 572-0628
and
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Bond and Corporate Finance Dept. T-57
15
<PAGE>
Telephone No.:
Facsimile No.:
4. John Hancock Mutual Life Insurance Company
Note. B-2
1. Wire transfer Instructions
- -- --------------------------
Investors Bank & Trust Company
Boston, Massachusetts 02117
ABA No. 011001438
Account Number: 79650-9107
for further credit to General Motors 77-1, Account 99100
On Order of: Fleet National Bank Cusip: 33903*DG1
2. Contemporaneous with the above wire transfer, advice setting forth:
(1) the full name, interest rate and maturity date of the Notes or other
obligations;
(2) allocation of payment between principal and interest and any special
payment and
(3) name and address of Bank (or Trustee) from which were transfer was
sent
should be delivered or mailed to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.: 617-572-0628
3. All notices should be sent to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.: (617) 572-0628
and
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
16
<PAGE>
Attention: Bond and Corporate Finance Dept. T-57
Telephone No.:
Facsimile No.:
4. John Hancock Mutual Life Insurance Company
Note No. B-3
1. Wire transfer Instructions:
- -- --------------------------
Investors Bank & Trust Company
Boston, Massachusetts 02117
ABA No. 011001438
Account Number: 79650-9107
for further credit to General Motors B6-1, Account 99237
On Order of: Fleet National Bank Cusip: 33903*DF#
2. Contemporaneous with the above wire transfer, advice setting forth:
(1) the full name, interest rate and maturity date of the Notes or
other obligations;
(2) allocation of payment between principal and interest and any
special payment and
(3) name and address of Bank (or Trustee) from which were transfer
was sent
should be delivered or mailed to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.: (617) 572-0628
3. All notices should be sent to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.: (617) 572-0628
and
John Hancock Mutual Life Insurance Company
John Hancock Place
17
<PAGE>
200 Clarendon Street
Boston, MA 02117
Attention: Bond and Corporate Finance Dept. T-57
Telephone No.:
Facsimile No.:
B. INDENTURE TRUSTEE
-----------------
Wire Transfer Instructions:
---------------------------
First Security Bank, National Association
Acct: 051-0922115
ABA: 124-000-012
Ref: Zenith
Attn: Corporate Trust
Telephone No.:
Facsimile No.:
All Notices should be sent to:
------------------------------
First Security Ban, National Association
79 S. Main Street
Salt Lake City, UT 84111
Telephone No.: (801) 246-5300
Fax: (801) 246-5053
Attn: Corporate Trust Services
C. LENDERS' COUNSEL
Wire Transfer Instructions:
---------------------------
The Chase Manhattan Bank, N.A.
ABA No. 021-000-021
1 Chase Manhattan Plaza Branch
New York, New York 10081
Milbank, Tweed, Hadley & McCloy
Account No. 910-1-073923
Reference: LGE/Zenith
All Notices should be sent to:
------------------------------
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, NY 10005
Attention: Elihu F. Robertson, Esq.
Telephone No.: 212-530-5000:
18
<PAGE>
Facsimile No.: 212-530-5219
D. OWNER PARTICIPANT
Wire Transfer Instructions:
---------------------------
All Notices should be sent to:
------------------------------
General Foods Credit Corporation
200 First Stamford Place
Suite 400
Stamford, CT 06902-6745
Attention: Vice President -- Leasing
Telephone No.: 914-335-8170
Facsimile No.: 914-335-8297
And
General Foods Credit Corporation
200 First Stamford Place
Suite 400
Stamford, CT 06902-6745
Attention: General Counsel
Telephone No.: 914-335-8347
Facsimile No.: 914-335-8256
E. OWNER TRUSTEE
Wire Transfer Instructions:
---------------------------
State Street Bank and Trust Company (for Fleet National Bank)
225 Asylum Street
Hartford, CT 06103
Acct. No.: 9903-991-9
ABA No.: 011-00-0028
Attention: Steve Cimalore
Ref.: Zenith Electronics/PMCC
All Notices should be sent to:
------------------------------
Fleet National Bank
c/o State Street Bank and Trust Company
Goodwin Square
19
<PAGE>
225 Asylum Street, 23/rd/ Floor
Hartford, CT 06103
Attention: Corporate Trust Administration
Telephone No.: 860-244-1844
Facsimile No.: 860-244-1884
F. OWNER PARTICIPANT'S COUNSEL
Wire Transfer Instructions:
---------------------------
All Notices should be sent to:
------------------------------
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Robert Heckart, Esq.
Telephone No.: 212-450-4000
Facsimile No.: 212-450-5672
20
<PAGE>
SCHEDULE B
Aggregate Of All Of The Lenders'
Lender Guaranty Payment Amounts (assuming
payment within 3 Business Days of Demand Date): $ 15,757,351.85
Indenture Trustee Guaranty Payment Amount: $ 500.00
Lenders' Counsel Guaranty Payment Amount: $ 23,500.00
Owner Participant Guaranty Payment Amount: $ 5,676,757.00
Owner Participant's Counsel Guaranty Payment Amount: $ 23,500.00
Owner Trustee Guaranty Payment Amount: $ 1,767.50
1
<PAGE>
SCHEDULE C
As of July 17, 1998, the aggregate outstanding amount owed to the Lenders
under the Operative Documents for unpaid principal, unpaid interest, the Make-
Whole Premium Amount (determined solely for purposes hereof assuming July 17,
1998 to be the prepayment date), and under the Guaranty Payment Agreement for
the Adjusted Make-Whole Premium Amount (determined by assuming that the Demand
Date is July 17, 1998) is as follows:/1/
<TABLE>
<CAPTION>
NAME OF UNPAID ACCRUED, MAKE-WHOLE ADJUSTED TOTAL OWED (Total LENDER
OBLIGEE; (NOTE) PRINCIPAL UNPAID PREMIUM MAKE- of unpaid principal, GUARANTY
AMOUNT INTEREST AMOUNT WHOLE accrued interest and PAYMENT
PREMIUM Make-Whole Premium AMOUNT UNDER
AMOUNT Amount) EACH
EQUIPMENT
NOTE (Total of
unpaid principal,
accrued interest and
Adjusted Make-Whole
Premium Amount
(assuming payment
within 3 Business Days
of Demand Date))
=============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
COVA Financial $ 1,240,619.00 $ 32,891.91 $164,419.24 $109,571.47 $ 1,437,930.15 $ 1,383,082.38
Services Life
Insurance Company
(Note B-4)
- -----------------------------------------------------------------------------------------------------------------------------
Peninsular Life $ 238,580.58 $ 6,325.37 $31,619.08 $21,071.44 $ 276,525.03 $ 265,977.39
Insurance Co.
(Note B-5)
- -----------------------------------------------------------------------------------------------------------------------------
Occidental Life $ 620,309.49 $ 16,445.96 $82,209.62 $54,785.73 $ 718,965.07 $ 691,541.18
Insurance
Company of
North Carolina
</TABLE>
- -------------
/1/ These amounts exclude all other amounts (such as various costs, expenses
and fees) due to the Lenders and the Indenture Trustee under the Operative
Documents.
1
<PAGE>
<TABLE>
<CAPTION>
NAME OF UNPAID ACCRUED, MAKE-WHOLE ADJUSTED TOTAL OWED (Total LENDER
OBLIGEE; (NOTE) PRINCIPAL UNPAID PREMIUM MAKE- of unpaid principal, GUARANTY
AMOUNT INTEREST AMOUNT WHOLE accrued interest and PAYMENT
PREMIUM Make-Whole Premium AMOUNT UNDER
AMOUNT Amount) EACH
EQUIPMENT
NOTE (Total of
unpaid principal,
accrued interest and
Adjusted Make-Whole
Premium Amount
(assuming payment
within 3 Business Days
of Demand Date))
=============================================================================================================================
(Note: B-6)
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
Executive Risk $ 858,890.07 $ 22,771.32 $113,828.70 $75,857.17 $ 995,490.09 $ 957,518.56
Indemnity (Note
B-7)
- -----------------------------------------------------------------------------------------------------------------------------
Whiting & Co. (Note $ 4,342,166.49 $119,507.28 $618,888.99 $383,500.14 $ 5,080,562.76 $ 4,845,173.91
B-8)
- -----------------------------------------------------------------------------------------------------------------------------
How & Company $ 477,161.15 $ 13,132.67 $68,009.78 $42,142.87 $ 558,303.60 $ 532,436.69
(Note B-9)
- -----------------------------------------------------------------------------------------------------------------------------
Mellon Bank, N.A. $ 954,322.30 $ 26,265.34 $136,019.56 $84,285.75 $ 1,116,607.20 $ 1,064,873.39
(Note B-10)
- -----------------------------------------------------------------------------------------------------------------------------
Wheelmotor & Co. $ 119,290.29 $ 3,283.17 $17,002.45 $10,535.72 $ 139,575.91 $ 133,109.18
(Note B-11)
- -----------------------------------------------------------------------------------------------------------------------------
John Hancock Mutual $ 1,216,760.94 $ 33,795.53 $172,985.58 $107,206.41 $ 1,423,542.05 $ 1,357,762.88
Life Insurance
Company (Note No.
B-14)
- -----------------------------------------------------------------------------------------------------------------------------
John Hancock Mutual $ 2,862,967.47 $ 79,518.92 $407,024.96 $252,250.43 $ 3,349,511.35 $ 3,194,736.82
Life Insurance
Company (Note: B-
13)
- -----------------------------------------------------------------------------------------------------------------------------
John Hancock $ 715,741.59 $ 19,879.72 $101,756.20 $63,062.58 $ 837,377.51 $ 798,683.89
Variable Life
Insurance
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME OF UNPAID ACCRUED, MAKE-WHOLE ADJUSTED TOTAL OWED (Total LENDER
OBLIGEE; (NOTE) PRINCIPAL UNPAID PREMIUM MAKE- of unpaid principal, GUARANTY
AMOUNT INTEREST AMOUNT WHOLE accrued interest and PAYMENT
PREMIUM Make-Whole Premium AMOUNT UNDER
AMOUNT Amount) EACH
EQUIPMENT
NOTE (Total of
unpaid principal,
accrued interest and
Adjusted Make-Whole
Premium Amount
(assuming payment
within 3 Business Days
of Demand Date))
============================================================================================================================
Company
(Note: B-12)
<S> <C> <C> <C> <C> <C> <C>
John Hancock Mutual $ 238,580.85 $ 6,626.58 $33,918.78 $21,020.89 $ 279,126.21 $ 266,228.32
Life Insurance
Company (Note No.
B-1)
John Hancock Mutual $ 119,289.95 $ 3,313.28 $16,959.32 $10,510.40 $ 139,562.55 $ 133,113.63
Life Insurance
Company (Note. B-2)
John Hancock Mutual $ 119,289.95 $ 3,313.28 $16,959.32 $10,510.40 $ 139,562.55 $ 133,113.63
Life Insurance
Company (Note
No. B-3)
TOTALS $14,123,970.
12 $387,070.33 $1,981,601. $1,246,311. $16,492,642.03 $15,757,351.85
58 40
=============================================================================================================================
</TABLE>
<PAGE>
Guaranty Payment Agreement - Melrose Park
GUARANTY PAYMENT AGREEMENT
--------------------------
This Guaranty Payment Agreement ("Agreement") is made this 17th day of
July 1998, by and between (i) LG Electronics Inc., as Guarantor (the
"Guarantor"), (ii) First Security Bank, National Association, not in its
individual capacity but solely as indenture trustee (the "Indenture Trustee"),
(iii) the institutions listed on the signature pages hereto as the Lenders (the
"Lenders"), (iv) General Foods Credit Corporation, as owner participant (the
"Owner Participant"), and (v) Fleet National Bank, not in its individual
capacity but solely as owner trustee (the "Owner Trustee"), as acknowledged and
agreed to by Zenith Electronics Corporation, as lessee (the "Lessee").
RECITALS
WHEREAS, reference is made to (a) that certain Participation
Agreement, dated as of March 26, 1997 (the "Participation Agreement"), by and
among (i) Lessee, as lessee, (ii) Owner Participant, as owner participant, (iii)
Owner Trustee, as owner trustee, (iv) the Lenders, as lenders, and (v) the
Indenture Trustee, as indenture trustee; (b) that certain Lease Agreement, dated
as of March 26, 1997 (the "Lease Agreement"), by and among (i) the Owner
Trustee, as lessor, and (ii) Lessee, as lessee; (c) that certain Trust Indenture
and Security Agreement (1997-A), dated as of March 26, 1997 (the "Indenture"),
by and among (i) Owner Trustee and (ii) the Indenture Trustee; and (d) that
certain Guaranty, dated as of March 26, 1997 (the "Guaranty"), from Guarantor in
favor of the Owner Trustee, the Owner Participant, the Lenders and the Indenture
Trustee. Capitalized terms not otherwise defined herein shall have the meanings
ascribed to such terms in the Participation Agreement or, if not defined
therein, in the Indenture.
WHEREAS, the Lessee and the Guarantor hereby acknowledge that certain
Events of Default under the Lease have occurred and are continuing, which also
constitute Events of Default under the Indenture.
WHEREAS, the Lessee and the Guarantor hereby acknowledge that the
Indenture Trustee and the Owner Trustee are entitled to demand payment of the
Obligations (as defined in the Guaranty)).
WHEREAS, the parties hereto have agreed that, in light of the
foregoing, to effect the repayment of the obligations owing to the Indenture
Trustee, the Lenders, the Owner Participant and the Owner Trustee under the
Operative Documents, that the Guarantor will satisfy the Obligations (as defined
in the Guaranty) under the Guaranty by making the payments specified herein.
NOW, THEREFORE, in consideration of the foregoing and the obligations and
undertakings set forth below, the parties hereto agree as follows:
<PAGE>
Guaranty Payment Agreement - Melrose Park
SECTION 1. Definitions.
The following terms shall have the following meanings when used herein (all
terms defined in this section 1 or in other provisions of this Agreement in the
singular shall have the same meaning in the plural and vice versa):
Adjusted Make-Whole Premium Amount: The Make-Whole Premium Amount due to
each Lender under the Equipment Notes held by each such Lender as calculated by
(a) setting the prepayment date referred to in the definition of "Make-Whole
Premium Amount" as the Demand Date and (b) replacing the 50 basis point spread
above the U.S. Treasury securities as set forth in the definition of "Make-Whole
Premium Amount" with the Spread.
Demand Date: July 17, 1998.
Discount Termination Date: The earlier to occur of:
(a) October 20, 1998 or
(b) the date on which any Discount Termination Event shall have
occurred;
or such other later date as determined unanimously by all of the Lenders, in
their sole discretion, upon giving Guarantor notice (in the manner set forth in
Section 8 hereof) of a different date.
Discount Termination Event: The occurrence of one or more of the
following:
(a) Lessee or Guarantor: (1) files, or consents by answer or
otherwise to the filing against it of a petition for relief or
reorganization or arrangement or any other petition in
bankruptcy, for liquidation or to take advantage of any
bankruptcy or insolvency law of any jurisdiction, (2) makes an
assignment for the benefit of its creditors, (3) consents to the
appointment of a custodian, receiver, trustee or other officer
with similar powers of itself or of any substantial part of its
property, (4) takes corporate or comparable action for the
purpose of any of the foregoing;
(b) a court or Governmental Authority of competent jurisdiction shall
enter an order appointing a custodian, receiver, trustee or other
officer with similar powers with respect to Lessee or Guarantor,
or with respect to any substantial part of its property, or
constituting an order for relief or approving a petition for
relief or reorganization or any other petition in bankruptcy or
for liquidation or to take
2
<PAGE>
Guaranty Payment Agreement - Melrose Park
advantage of any bankruptcy or insolvency law of any
jurisdiction, or ordering the dissolution, winding-up or
liquidation of Lessee or Guarantor, or if any petition for any
such relief shall be filed against Lessee or Guarantor;
(c) the occurrence of an Event of Default under Section 13.1(a) of
the Lease; or
(d) the Guarantor fails to make any payment of any Guaranty Payment
Amount pursuant to the terms hereof within ten (10) Business Days
after the Demand Date.
Effective Date: The date upon which all of the following shall have been
completed:
(a) The execution of this Agreement by each party hereto and, with
respect to the Lessee, the acknowledgement and agreement of the
Lessee, and the delivery of counterparts reflecting the same to
each of counsel for the Lenders, the Owner Participant, the
Lessee and the Guarantor.
(b) The delivery by the Indenture Trustee and the Owner Trustee to
the Guarantor of the Guaranty Payment Demand;
(c) The payment by Guarantor to the Indenture Trustee for the account
of the Lenders of the Lender Guaranty Payment Amount for each
such respective Lender by wire transfer in accordance with the
wire transfer instructions set forth on Schedule A hereto;
(d) The payment by Guarantor to the Indenture Trustee for the account
of the Lenders' Counsel of the Lenders' Counsel Guaranty Payment
Amount by wire transfer in accordance with the wire transfer
instructions set forth on Schedule A hereto; and
(e) The payment by Guarantor to the Indenture Trustee of the
Indenture Trustee Guaranty Payment Amount by wire transfer in
accordance with the wire transfer instructions set forth on
Schedule A hereto;
(f) The payment by Guarantor to the Owner Trustee for the account of
the Owner Participant of the Owner Participant Guaranty Payment
Amount by wire transfer in accordance with the wire transfer
instructions set forth on Schedule A hereto
(g) The payment by Guarantor to the Owner Trustee of the Owner
Trustee Guaranty Payment Amount by wire transfer in accordance
with the wire transfer instructions set forth on Schedule A
hereto;
3
<PAGE>
Guaranty Payment Agreement - Melrose Park
(h) The payment by Guarantor to the Owner Trustee for the account of
the Owner Participant's Counsel of the Owner Participant's
Counsel Guaranty Payment Amount by wire transfer in accordance
with the wire transfer instructions set forth on Schedule A
hereto; and
(i) The date on which each of the items set forth in clauses (a),
(b), (c), (d), (e), (f), (g), and (h) in the definition of the
Effective Date in the Mexican Guaranty Payment Agreement has been
satisfied.
Equity Transfer Agreement: An agreement to be executed by the Owner
Participant and the Guarantor or an affiliate of the Guarantor in substantially
the form as annexed hereto as Exhibit A.
Guaranty Payment Amount: Each of the Lender Guarantee Payment Amounts, the
Indenture Trustee Guarantee Payment Amount, the Lenders' Counsel Guarantee
Payment Amount, the Owner Participant Guarantee Payment Amounts, the Owner
Participant's Counsel Guarantee Payment Amount; and the Owner Trustee Guarantee
Payment Amount and collectively, the "Guaranty Payment Amounts".
Guaranty Payment Demand: A written demand of payment under the Guaranty by
the Indenture Trustee and the Owner Trustee in substantially the form as annexed
hereto as Exhibit B.
Indenture Trustee Guaranty Payment Amount: With respect to the Indenture
Trustee, the amount as set forth on Schedule B hereto to be paid by Guarantor to
the Indenture Trustee pursuant to the Guaranty, which amount will satisfy the
obligations payable to the Indenture Trustee under the Operative Documents
(including the Guaranty).
Lender Guaranty Payment Amount: With respect to any Lender, an amount
equal to the sum of: (a) the outstanding unpaid principal amounts owed to such
Lender as of the Demand Date under the Equipment Notes held by such Lender, (b)
all accrued but unpaid interest due to such Lender as of the Demand Date on the
outstanding principal amount of the Equipment Notes held by such Lender, (c) the
Adjusted Make-Whole Premium Amount under the Equipment Notes held by such
Lender, (d) all other amounts due to such Lender (other than principal, interest
and the Make-Whole Premium Amount) as of the Demand Date under the Operative
Documents. The Lender Guaranty Payment Amounts are the amounts to be paid by
Guarantor to the Indenture Trustee for the account of the Lenders pursuant to
the Guaranty, which amounts will satisfy the above-referenced obligations
payable to the Lenders under the Operative Documents (including the Guaranty).
The aggregate of all of the Lender Guaranty Payment Amounts is set forth on the
schedules to the Guaranty Payment Demand.
Lenders' Counsel: Milbank, Tweed, Hadley & McCloy, counsel to the
Lenders in
4
<PAGE>
Guaranty Payment Agreement - Melrose Park
connection with discussions, negotiations and review of any restructuring and
repayment proposal (including the Repayment Transaction) relating to the
Equipment Notes.
Lenders' Counsel Guaranty Payment Amount: The amount as set forth on
Schedule B hereto to be paid by Guarantor to Lenders' Counsel pursuant to the
Guaranty, which amount will satisfy the obligations payable to the Lenders'
Counsel under the Operative Documents (including the Guaranty).
Mexican Guaranty Payment Agreement: That certain Guaranty Payment
Agreement, dated as of the date hereof, by and between (i) LG Electronics Inc.,
as the guarantor, (ii) First Security Bank, National Association, as the
indenture trustee, and (iii) the institutions listed on the signature pages
thereto as the lenders, (iv) General Foods Credit Corporation, as owner
participant, and (v) Fleet National Bank, as owner trustee, as acknowledged and
agreed to by both Zenith Electronics Corporation of Texas, as lessee, and Zenith
Electronics Corporation, as the parent guarantor.
Owner Participant Guaranty Payment Amount: With respect to the Owner
Participant, the amount as set forth on Schedule B hereto to be paid by
Guarantor to the Owner Participant pursuant to the Guaranty, which amount will
satisfy the obligations payable to the Owner Participant under the Operative
Documents (including the Guaranty).
Owner Participant's Counsel: Davis Polk & Wardwell.
Owner Participant's Counsel Guaranty Payment Amount: The amount as set
forth on Schedule B hereto to be paid by Guarantor to Owner Participant's
Counsel pursuant to the Guaranty, which amount will satisfy the obligations
payable to the Owner Participant's Counsel under the Operative Documents
(including the Guaranty).
Owner Trustee Guaranty Payment Amount: With respect to the Owner Trustee,
the amount as set forth on Schedule B hereto to be paid by Guarantor to the
Owner Trustee pursuant to the Guaranty, which amount will satisfy the
obligations payable to the Owner Trustee under the Operative Documents
(including the Guaranty).
Repayment Transaction: The transactions to be effected pursuant to the
terms of this Agreement.
Requisite Consents: All consents, waivers, notices, filings, approvals or
authorizations that are required to be made to or with any Person, entity or
Governmental Authority for the consummation of the transactions contemplated by
this Agreement.
Spread: A number of basis points as determined by the date on which the
Demand Date occurs in accordance with the following chart:
If the Demand
5
<PAGE>
Guaranty Payment Agreement - Melrose Park
Date Occurs on or Before: Then the Spread Shall Be:
------------------------ -------------------------
July 17, 1998 160 basis points
July 21, 1998 150 basis points
July 28, 1998 140 basis points
August 4, 1998 130 basis points
August 11, 1998 120 basis points
August 18, 1998 112 basis points
August 25, 1998 104 basis points
September 1, 1998 96 basis points
September 8, 1998 88 basis points
September 15, 1998 80 basis points
September 22, 1998 72 basis points
September 29, 1998 64 basis points
October 6, 1998 58 basis points
October 13, 1998 50 basis points.
Notwithstanding the foregoing, if a Discount Termination Date
occurs on or before the Effective Date, then the Spread shall be
50 basis points.
As used in the formula set forth in the definition of Adjusted
Make-Whole Premium Amount for any Equipment Note, the Spread is
added above the yield for U.S. Treasury securities having a
maturity approximating the remaining average life of such
Equipment Note.
Termination Statements: UCC-3 termination statements and such other
instruments, all in the form as supplied by the Guarantor, which forms are
reasonably acceptable to the Lenders, that are necessary to terminate and
satisfy the Lien under the Indenture.
SECTION 2. Payment.
(A) On or before the third (3/rd/) Business Day following the Demand Date,
Guarantor shall pay, by wire transfer, in accordance with the wire transfer
instructions for each of the respective Persons set forth below as set forth on
Schedule A hereto, each of the following payments:
(1) To the Indenture Trustee (for the account of the Lenders), the
Lender Guarantee Payment Amounts for all of the Lenders;
(2) To the Indenture Trustee, the Indenture Trustee Guarantee Payment
Amount;
6
<PAGE>
Guaranty Payment Agreement - Melrose Park
(3) To the Indenture Trustee (for the account of the Lenders'
Counsel), the Lenders' Counsel Guarantee Payment Amount;
(4) To the Owner Trustee (for the account of the Owner Participant),
the Owner Participant Guarantee Payment Amount;.
(5) To the Owner Trustee (for the account of the Owner Participant's
Counsel), the Owner Participant's Counsel Guarantee Payment
Amount; and
(6) To the Owner Trustee, the Owner Trustee Guarantee Payment Amount.
(B) On the Effective Date:
(1) Each Lender shall deliver the Equipment Notes or and affidavit of
loss with respect thereto to the Guarantor in form and substance
reasonably satisfactory to the Guarantor;
(2) The Indenture Trustee shall deliver the Termination Statements,
duly executed by the Indenture Trustee on behalf of the Lenders,
to the Guarantor; and
(3) The Owner Participant shall deliver the Equity Transfer
Agreement, duly executed by the Owner Participant, to the
Guarantor.
SECTION 3. Intentionally Omitted.
SECTION 4. Representations and Warranties.
(A) Each of the Guarantor and the Lessee hereby represents and warrants as
to itself only that:
(1) it is duly organized, validly existing and in good standing under
the laws of its state of organization;
(2) the execution, delivery and performance of this Agreement have
been duly and validly authorized by all requisite corporate
action, and will not violate its charter, by-laws or other
organizational documents or any indenture, agreement or
instrument to which it is a party or by which it or its property
may be bound or affected;
7
<PAGE>
(3) all consents, waivers, notices, filings, approvals or
authorizations that are required to be made to or with any
Person, entity or Governmental Authority for the execution,
delivery, performance and consummation of this Agreement and the
transactions contemplated by this Agreement have been obtained;
(4) this Agreement is the legal, valid and binding obligation of such
party enforceable against such party in accordance with its
terms;
(5) an Event of Default under the Lease has occurred and is
continuing; and
(6) the Lenders, the Indenture Trustee, the Owner Participant, and
the Owner Trustee are entitled to demand payment of the
Obligations (as defined in the Guaranty) under the Guaranty,
including, but not limited to, the payment of the Guaranty
Payment Amounts.
(G) Each of the Lenders, the Owner Participant, the Indenture Trustee and
the Owner Trustee hereby represents and warrants as to itself only
that:
(1) it is duly organized, validly existing and in good standing under
the laws of its state of organization;
(2) the execution, delivery and performance of this Agreement have
been duly and validly authorized by all requisite corporate
action, and will not violate its charter, by-laws or other
organizational documents or any indenture, agreement or
instrument to which it is a party or by which it or its property
may be bound or affected; and
(3) this Agreement is the legal, valid and binding obligation of such
party enforceable against such party in accordance with its
terms.
SECTION 5. Intentionally Omitted.
SECTION 6. Certain Acknowledgements.
Each of the Guarantor and the Lessee hereby expressly acknowledges and
agrees that as of July 17, 1998, the aggregate outstanding amount owed to the
Lenders and the Indenture Trustee under the Operative Documents is an amount not
less than $50,657,904.74 as summarized in schedule C hereto, representing
$43,654,913.60 of unpaid principal, $1,192,423.52 of accrued and unpaid
interest, $5,786,567.62 for the Make-Whole Premium Amount, and $24,000 in other
amounts (such as various costs, expenses and fees) due to the Lenders and the
Indenture Trustee under the Operative Documents. Each of the
8
<PAGE>
Guaranty Payment Agreement - Melrose Park
Guarantor and the Lessee hereby expressly acknowledges and agrees that unless
the Effective Date occurs, nothing in this Agreement or in any document or
instrument executed in connection with or pursuant to this Agreement shall
constitute a satisfaction of or a novation as to all or any portion of the
obligations owed to the Lenders, the Indenture Trustee, the Owner Trustee and
Owner Participant under the Operative Documents or otherwise. Subject to
adjustment in accordance with the terms hereof upon the occurrence of the
Effective Date, each of the Guarantor and the Lessee hereby reconfirms its
obligation to pay in full the indebtedness and other obligations owed to the
Lenders and the Indenture trustee arising under the Operative Documents. The
Guarantor hereby further acknowledges and agrees that it has no defenses to the
enforcement of such obligations (or any portion thereof) nor any counter-claims
or claims of offset whatsoever and that neither this Agreement nor the
consummation of the transactions contemplated herein will give rise to any such
defenses, counter-claims or claims of offset, except as provided for herein.
SECTION 7. Expenses.
Each of the Guarantor and the Lessee shall bear its own legal fees and
expenses in connection with the preparation, negotiation and execution of this
Agreement. The Guarantor shall be responsible for the payment of all of the
Lenders' out of pocket fees and expenses (including the reasonable fees and
expenses of each of the Lenders', the Owner Participant's and Owner Trustee's
outside counsel) in connection with discussions, negotiations and review of any
restructuring proposal (including the Repayment Transaction) relating to the
Equipment Notes. The amounts of the Guarantor's obligations under this Section
7 are included in the amounts set forth on Schedule B hereto.
SECTION 8. Notices.
All communications between the parties hereto or notices or other
information sent in connection herewith must be in writing and sent by (a)
personal delivery, (b) reputable overnight courier service, freight prepaid, (c)
certified mail, return receipt requested, postage prepaid, or (d) telecopy or
other facsimile transmission (provided that if sent by telecopy or other
facsimile transmission, such must also sent by express mail or courier (for next
business day delivery)), addressed as follows:
If to the Lenders:
At the address for each Lender set forth on Schedule A hereto;
9
<PAGE>
Guaranty Payment Agreement - Melrose Park
with a copy to:
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
Attention: Elihu F. Robertson, Esq.
Telephone No.: 212-530-5000
Facsimile No.: 212-530-5219
If to the Indenture Trustee:
First Security Bank, National Association
79 S. Main Street
Salt Lake City, Utah 84111
Attention: Corporate Trust Services
Telephone No.: 801-246-5300
Facsimile No.: 801-246-5053
If to the Lessee:
Zenith Electronics Corporation
1000 Milwaukee Avenue
Glenview, IL 60025
Attention: Chief Financial Officer
Telephone No.: 847-391-7000
Facsimile No.: 847-391-8584
with a copy to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 80601
Attention: James H.M. Sprayregen, Esq.
Telephone No.: 312-861-2481
Facsimile No.: 312-861-2200
If to the Guarantor:
LG Electronics Inc.
20, Yoido-Dong
Youngdungo-Ku, Seoul 150-721
Korea
Attention: Director of Finance
10
<PAGE>
Guaranty Payment Agreement - Melrose Park
Telephone No.: 82-2-3777-3049
Facsimile No.: 82-2-3777-5303
With a copy to:
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Attention: Richard F. Hahn, Esq.
Telephone No.: 212-909-6000
Facsimile No.: 212-909-6836
If to the Owner Participant:
General Foods Credit Corporation
200 First Stamford Place
Suite 400
Stamford, CT 06902-6745
Attention: Vice President -- Leasing
Telephone No.: 914-335-8170
Facsimile No.: 914-335-8297
And
General Foods Credit Corporation
200 First Stamford Place
Suite 400
Stamford, CT 06902-6745
Attention: General Counsel
Telephone No.: 914-335-8347
Facsimile No.: 914-335-8256
With a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Robert Heckart, Esq.
Telephone No.: 212-450-4000
Facsimile No.: 212-450-5672
If to the Owner Trustee:
11
<PAGE>
Guaranty Payment Agreement - Melrose Park
Fleet National Bank
c/o State Street Bank and Trust Company
Goodwin Square
225 Asylum Street, 23/rd/ Floor
Hartford, CT 06103
Attention: Corporate Trust Administration
Telephone No.: 860-244-1844
Facsimile No.: 860-244-1884
The parties may designate another addressee or change its address for notices
and other communications hereunder by a notice given to the other parties in the
manner provided in this paragraph. A notice or other communication sent in
compliance with the provisions of this paragraph shall be deemed good and
sufficient service regardless of whether the parties actually receive such
notice.
SECTION 9. Governing Law; Dispute Resolution; Specific Performance.
(A) This Agreement shall be construed and the obligations of the parties
hereunder shall be determined in accordance with the internal laws of the State
of New York (without regard to any conflict of laws provisions thereof).
(B) Each of parties hereto expressly submits to and accepts the non-
exclusive jurisdiction of any United States federal court sitting in the
Southern District of New York or any other court of appropriate jurisdiction
sitting in the County of New York, City of New York with respect to any action,
suit or proceeding for breach of this Agreement and waives any objection such
party may have to the laying of venue in any such court or that such court is an
inconvenient forum or does not have personal jurisdiction over such party. Each
of the parties hereto agrees that service of process in any such action, suit or
proceeding may be validly made upon such party by certified or registered U.S.
Mail, postage prepaid, to the address set forth in Section 8 hereof. EACH OF
THE PARTIES HERETO WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO TRIAL BY JURY IN ANY
PROCEEDING ARISING OUT OF THIS AGREEMENT. Notwithstanding the foregoing, this
provision may not be utilized by any person other than the parties hereto to
obtain jurisdiction over any of the parties hereto. Guarantor hereby appoints
for matters relating to this Agreement the Process Agent (as defined in the
Guaranty) as its designee and agent to receive, for and on behalf of Guarantor,
service of process in the manner as set forth in section 10 of the Guaranty.
(C) The Guarantor hereby acknowledges that the damages that the Lenders,
the Indenture Trustee, the Owner Participant and the Owner Trustee would sustain
in the event of any violation of the provisions of this Agreement are difficult
or impossible to ascertain. Accordingly, the Guarantor hereby acknowledges that
the Lenders, the
12
<PAGE>
Guaranty Payment Agreement - Melrose Park
Indenture Trustee, the Owner Participant and/or the Owner Trustee, as the case
may be, shall be entitled, in addition to any other remedy or damages available
to it or them (as the case may be) in the event of any such violation, to
injunctive relief to restrain such violation by, or enforce the provisions of
this Agreement against, the Guarantor.
SECTION 10. Miscellaneous.
(A) Survival. All representations, warranties, covenants and other
provisions made by the parties hereto in this Agreement shall be considered to
have been relied upon by the parties hereto and shall survive the execution,
performance and delivery of this Agreement.
(B) Successors and Assigns. This Agreement (i) shall inure to the benefit
of and be enforceable by the parties hereto and their respective successors and
permitted assigns, and (ii) shall be binding upon and enforceable against the
parties hereto and their respective successors and assigns.
(C) Further Assurances. Each of the parties hereto agrees to execute and
deliver, or to cause to be executed and delivered, all such instruments, and to
take all such action, as the other party may reasonably request in order to
consummate the transactions and transfers contemplated hereunder and to
effectuate the intent and purposes of this Agreement.
(D) Counterpart Execution; Facsimiles. This Agreement may be executed in
any number of counterparts, each of which when so executed shall be an original,
but all such counterparts shall together constitute one and the same agreement
binding all of the parties hereto. The parties hereto may execute this
Agreement and any other documents in connection herewith and exchange their
signatures thereto by telecopier; provided, however, that the parties shall
endeavor to deliver original counterpart signatures to the other party as soon
thereafter as practicable.
(E) Amendments; Waivers. (i) No amendment of any provision of this
Agreement shall be effective unless it is in writing and signed by each of the
parties hereto and no waiver of any provision of this Agreement, nor consent to
any departure by any party hereto, shall be effective unless it is in writing
and signed by the party affected thereby, and then such waiver or consent shall
be effective only in the specific instance and for the specific purpose for
which given.
(ii) No failure on the part of any party to exercise, and no delay in
exercising, any right hereunder shall operate as a waiver thereof by such party,
nor shall any single or partial exercise of any right hereunder preclude any
other or further exercise thereof or the exercise of any other right. The
rights and remedies of each party provided herein (x) are cumulative and are in
addition to, and not exclusive of, any rights or remedies provided by
13
<PAGE>
Guaranty Payment Agreement - Melrose Park
law and/or any of the Operative Documents (except as otherwise expressly set
forth herein) and (y) are not conditional or contingent on any attempt by such
party to exercise any of its/his rights under any other related document against
the other party or any other entity.
(iii) Except as set forth herein, the delivery of the Guaranty
Payment Demand is without prejudice to any other rights or remedies of the
Guaranteed Parties (as defined in the Guaranty Payment Demand) under the
Operative Documents, this Agreement or otherwise. Except as set forth herein,
the Guaranteed Parties expressly reserve any and all of their rights and
remedies, including under the Operative Documents, this Agreement and otherwise,
waiving none of their rights by the presentment of the Guaranty Payment Demand.
Except as set forth herein, the failure by any of the Guaranteed Parties to
exercise any right under any of the Operative Documents, this Agreement or
otherwise shall not operate as a waiver thereof or preclude any other or further
exercise thereof.
(F) Intentionally Omitted.
(G) Severability. Any provision of this Agreement that is invalid or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining provisions of this Agreement or affecting the
validity or enforceability of any provisions of this Agreement in any other
jurisdiction.
(H) Effect of Occurrence of Effective Date. Upon the occurrence of the
Effective Date and subject to Section 10(P) of this Agreement, (i) except as
otherwise provided herein, the obligations of the Guarantor under the Guaranty
and the Owner Trustee under the Equipment Notes shall be deemed to have been
satisfied in full and the Guaranty and the Equipment Notes shall be deemed to be
extinguished and (ii) neither the Indenture Trustee nor any Lender shall have
any further interest in, or rights with respect to, the Trust Indenture Estate;
notwithstanding the foregoing, nothing in this Agreement shall affect any rights
or interests of any of the Lenders, the Indenture Trustee, the Owner Participant
or the Owner Trustee under the Operative Documents (including the Guaranty) to
the extent that the provisions under the Operative Documents or any obligation
therein covered by the Guaranty expressly survive termination of the Trust
Indenture Estate, all of which shall remain fully enforceable and intact.
Except as otherwise provided under this Agreement, the failure by the Indenture
Trustee, the Lenders, the Owner Participant or the Owner Trustee to exercise any
right under the Operative Documents or otherwise shall not operate as a waiver
thereof or preclude any other or further exercise thereof. Prior to the
occurrence of the Effective Date, (1) the Operative Documents shall remain in
full force and effect and (2) nothing herein shall affect the terms of the
Operative Documents and the respective rights and interests of the parties
thereunder and otherwise (other than the forbearance as provided in Section
10(L) of this Agreement).
(I) Costs and Expense of Enforcement. This Agreement is and may be pleaded
14
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Guaranty Payment Agreement - Melrose Park
as a full and complete defense against, and is and may be used as the basis for,
an injunction against prosecution of any claim which seeks recovery or relief
contrary to the terms of this Agreement. Should any party hereto retain counsel
for the purpose of restraining, enjoining, or otherwise preventing the breach
of, or enforcing, this Agreement, including without limitation the commencement
of any action or proceeding to enforce any provision of this Agreement or to
obtain (a) damages by reason of any alleged breach of any provision hereof, (b)
a declaration of the rights or obligations of the other parties hereto, or (c)
any other judicial remedy in connection therewith, the prevailing party shall be
entitled, in addition to such other relief as may be granted in such action or
proceeding, whether at trial or an appeal, to be reimbursed by the other party
for all costs and expenses incurred as a result thereof, including without
limitation reasonable attorneys' fees.
(J) Representation by Counsel. Each of the parties hereto acknowledges
that it has been represented in the negotiation of this Agreement by (an)
attorney(s) of its own choosing and that no party has relied upon any
representations from the other parties except as specifically provided in this
Agreement.
(K) Benefits of Agreement. Other than to the parties hereto (or their
respective successors or permitted assigns), nothing in this Agreement, express
or implied, shall give to any other person or entity any benefit or any legal or
equitable right, remedy or claim.
(L) Forbearance. Unless and until the earlier to occur of (i) a Discount
Termination Event or (ii) an Event of Default under sections 4.02(b) - (j) of
the Indenture, each Lender, the Indenture Trustee, the Owner Participant and the
Owner Trustee agree to forbear from (x) enforcing their rights under the
Operative Documents to seek payment of (1) the outstanding unpaid principal
amounts owed to such Lender under the Equipment Notes, (2) all accrued but
unpaid interest on the outstanding principal amount of the Equipment Notes, (3)
the Make-Whole Premium Amount, and (y) exercising any rights and/or remedies
that arise out of the Events of Default that are in existence as of the date
hereof. Notwithstanding the foregoing, nothing herein shall limit or prejudice
the rights of the Lenders, the Indenture Trustee, the Owner Trustee and the
Owner Participant to enforce this Agreement.
(M) Subrogation. Upon making full payment of the amounts due to the
parties hereunder in accordance with the terms hereof, the Guarantor shall be
subrogated to the rights of such parties as of and after the Effective Date.
(N) Waiver of Notice Periods & Prohibitions Set Forth in Operative
Documents. Except as otherwise set forth herein, the parties hereby expressly
waive any and all notice and demand requirements and other prohibitions to the
effectuation of the transactions set forth in this Agreement as may be contained
in the Operative Documents, including, but not limited to, (i) the notice period
for any existing events that would constitute Events of Default under the Lease
and the other Operative Documents but for the expiration of such period, (ii)
the five day written demand requirement set forth in section 1 of the Guaranty,
and (iii) until the occurrence of a Discount Termination Event, the equity cure
rights under
15
<PAGE>
Guaranty Payment Agreement - Melrose Park
the Operative Documents, provided that the parties hereby acknowledge and agree
that the execution and performance of this Agreement shall not constitute either
notice of an intent to foreclose or the commencement of foreclosure proceedings
by the Indenture Trustee for purposes of the equity cure rights and/or purchase
election rights under the Operative Documents (including, but not limited to,
Section 2.13 of the Indenture).
(O) Interest: If Guarantor fails to pay any cash or cash equivalent to
any Lender, the Indenture Trustee, the Lenders' Counsel, the Owner Trustee, the
Owner Participant or the Owner Participants' Counsel in accordance with the
terms hereof within six Business Days of the Demand Date, Guarantor shall pay
interest on the amount of such payment to the other party for the period
thereafter to but excluding the date on which payment is made at the Overdue
Rate.
(P) Reinstatement. The respective obligations, guarantees, liens, charges
and other encumbrances of Lessee and the Guarantor under the Operative Documents
(including, but not limited to the Guarantee) shall be automatically reinstated
in full (and without regard to any waiver or compromise by any Lender, Owner
Trustee, Owner Participant or Indenture Trustee contemplated hereby) if for any
reason the payment by the Guarantor hereunder is rescinded or must otherwise be
restored, in whole or in part, by any Lender, the Indenture Trustee, the Owner
Participant and/or the Owner Trustee, whether as a result of any proceedings in
bankruptcy or reorganization or otherwise, and the Guarantor shall indemnify
each Lender, the Indenture Trustee, the Owner Participant and the Owner Trustee
on demand for all reasonable costs and expenses (including fees of counsel)
incurred by the Lenders in connection with such rescission or restoration,
including any such costs and expenses incurred in defending against any claims
alleging that such payment constituted a fraudulent transfer, preference or
similar payment under any bankruptcy, insolvency or similar law.
(Q) Transfers By Indenture Trustee upon receipt of Payments under Section
2(a) of this Guaranty Payment Agreement. Within one (1) Business Day of the
Indenture Trustee's receipt of the Lender Guaranty Payment Amount for each
Lender, the Indenture Trustee shall pay to each Lender the Lender Guarantee
Payment Amount for each such lender by wire transfer, in accordance with the
wire transfer instructions for each such Lender as set forth on Schedule A
hereto. Within one (1) Business Day of the Indenture Trustee's receipt of the
Lenders' Counsel Guaranty Payment Amount, the Indenture Trustee shall pay to the
Lenders' Counsel the Lenders' Counsel Guarantee Payment Amount by wire transfer,
in accordance with the wire transfer instructions for the Lenders' Counsel as
set forth on Schedule A hereto.
(R) Transfers By Owner Trustee upon receipt of Payments under Section 2(a)
of this Guaranty Payment Agreement. Within one (1) Business Day of the Owner
Trustee's receipt of the Owner Participant Guaranty Payment Amount, the Owner
Trustee shall pay to the Owner Participant the Owner Participant Guarantee
Payment Amount by wire transfer, in accordance with the wire transfer
instructions for the Owner Participant as set forth on Schedule A hereto. Within
one (1) Business Day of the Owner Trustee's receipt of
16
<PAGE>
Guaranty Payment Agreement - Melrose Park
the Owner Participant's Counsel Guaranty Payment Amount, the Owner Trustee shall
pay to the Owner Participant's Counsel the Owner Participant's Counsel Guarantee
Payment Amount by wire transfer, in accordance with the wire transfer
instructions for the Owner Participant's Counsel as set forth on Schedule A
hereto.
(S) Direction to Indenture Trustee: Each Lender, by its execution of this
Agreement, hereby directs the Indenture Trustee to execute this Agreement and
become a party hereto.
(T) Direction to Owner Trustee: The Owner Participant, by its execution
of this Agreement, hereby directs the Owner Trustee to execute this Agreement
and become a party hereto.
(U) Indemnification Regarding Transfer of Equity Interest: Guarantor
agrees to indemnify and hold harmless the Owner Participant and the Owner
Participant Guarantor from any liability incurred by the Owner Participant or
the Owner Participant Guarantor to the Owner Trustee after the Effective Date
based upon either (i) the transfer of the Equity Interest by the Owner
Participant to the Guarantor or (ii) circumstances not existing immediately
prior to such transfer or (iii) events occurring after such transfer.
LG ELECTRONICS INC.
By:
----------------------------------------
Name:
Title:
FIRST SECURITY BANK, NATIONAL
ASSOCIATION, not in its individual capacity
but solely as Indenture Trustee
By:
----------------------------------------
Name:
Title:
COVA FINANCIAL SERVICES LIFE
INSURANCE COMPANY, as a Lender
By: Conning Asset Management Company
17
<PAGE>
By:______________________________
Name:
Title:
PENINSULAR LIFE INSURANCE CO., as a
Lender
By: Conning Asset Management Company
By:______________________________
Name:
Title:
OCCIDENTAL LIFE INSURANCE
COMPANY OF NORTH CAROLINA, as a Lender
By: Conning Asset Management Company
By:______________________________
Name:
Title:
EXECUTIVE RISK INDEMNITY INC., as a
Lender
By: Conning Asset Management Company
By:______________________________
Name:
Title:
18
<PAGE>
Guaranty Payment Agreement - Melrose Park
WHITING & CO., as a Lender
By: Morgan Guaranty Trust Company of New
York as trustee under Declaration of
trust dated December 9, 1960, as Amended,
for the Commingled Pension Trust Fund
(Fixed Income-Corporate Private Placement
Fund)
By:______________________________
Name:
Title:
HOW & COMPANY., as a Lender
By: J.P. Morgan Investment Management
Inc., as Investment Manager for an
institutional investor
By:______________________________
Name:
Title:
HOW & COMPANY., as a Lender
By: J.P. Morgan Investment Management
Inc., as Investment Manager for an
institutional investor
By:______________________________
Name:
Title:
19
<PAGE>
Guaranty Payment Agreement - Melrose Park
MELLON BANK, N.A., solely in its capacity as Trustee for the Long-
Term Investment Trust (as directed by J.P. Morgan Investment
Management Inc.), and not in its individual capacity, as a Lender.
By:______________________________
Name:
Title:
WHEELMOTOR & CO., as a Lender
By: Morgan Guaranty Trust Company of New York as Investment
Manager
By:______________________________
Name:
Title:
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, as a Lender
By:______________________________
Name:
Title:
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY, as a Lender
By:______________________________
Name:
Title:
20
<PAGE>
Guaranty Payment Agreement - Melrose Park
GENERAL FOODS CREDIT CORPORATION,
as Owner Participant,
By:____________________________
Name:
Title
FLEET NATIONAL BANK, not in its individual
capacity but solely as Owner Trustee,
By:____________________________
Name:
Title:
ACKNOWLEDGED AND AGREED TO BY (and
the undersigned hereby confirms the representations,
warranties and acknowledgements expressed to be made
by it as set forth in this Agreement):
ZENITH ELECTRONICS CORPORATION, as Lessee
By:______________________________
Name:
Title:
21
<PAGE>
Guaranty Payment Agreement - Melrose Park
Schedule A
----------
A. LENDERS
1. COVA Financial Services Life Insurance Company
Note A-4
Wire Transfer Instructions:
----------------------------
NORTHERN CHGO/Trust
ABA #07100052
Credit Wire account #5186041000
Account 26-02281/COVA Financial
Services Life Insurance Company
Notices Regarding Payments
--------------------------
General American Life Insurance Company
Attn: Investment Accounting
P.O. Box 418
St. Louis, MO 63166
Telephone No.:
Facsimile No.:
and
COVA Financial Services Life Insurance Co.
C/O The Northern Trust Company
P.O. Box 92996
Chicago, IL 60675
Telephone No.:
Facsimile No.:
All Other Notices:
------------------
General American Life Insurance Company
Attn: Securities Division
P.O. Box 396
St. Louis, MO 63166
Telephone No.:
Facsimile No.:
and
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<PAGE>
Guaranty Payment Agreement - Melrose Park
COVA Financial Life Insurance Co.
C/O The Northern Trust Company
P.O. Box 92996
Chicago, IL 60675
Telephone No.:
Facsimile No.:
2
<PAGE>
Guaranty Payment Agreement - Melrose Park
2. Peninsular Life Insurance Co.
Note A-5
Wire Transfer Instructions:
----------------------------
The Bank of New York
ABA #0201008018
P & I Department, Account GLA IOC566
FFC: Peninsular Life Insurance Co.
Custody Account 934446
All Notices should be sent to:
------------------------------
Arthur Evans
PennCorp Financial
745 5/th/ Avenue, Suite 500
New York, NY 10151
Telephone No.:
Facsimile No.:
and
Brenda Epps
The Bank of New York
One Wall Street
New York, NY 10286
Telephone No.:
Facsimile No.:
and
Conning Asset Management
Attention: Securities
P.O. Box 396
St. Louis, MO 63166
Telephone No.:
Facsimile No.:
and
Ron Graver
Southwestern Life Insurance Co.
500 N. Akard Street
Dallas, TX 75201
Telephone No.:
Facsimile No.:
3
<PAGE>
Guaranty Payment Agreement - Melrose Park
3. Occidental Life Insurance Company of North Carolina
Note: A-6
Wire Transfer Instructions
--------------------------
The Bank of New York
ABA 021000018
P & I Department, Account GLA IOC 566
FFC: Occidental Life Insurance
Custody Account 933440
All Notices should be sent to:
------------------------------
Arthur Evans
PennCorp Financial
745 5/th/ Avenue, Suite 500
New York, NY 10151
Telephone No.:
Facsimile No.:
and
Brenda Epps
The Bank of New York
One Wall Street
New York, NY 10286
Telephone No.:
Facsimile No.:
and
Conning Asset Management
Attention: Securities
P.O. Box 396
St. Louis, MO 63166
Telephone No.:
Facsimile No.:
and
Ron Graver
Southwestern Life Insurance Co.
500 N. Akard Street
Dallas, TX 75201
Telephone No.:
Facsimile No.:
4
<PAGE>
Guaranty Payment Agreement - Melrose Park
4. Executive Risk Indemnity
Note: A-7
Wire Transfer Information:
- --------------------------
Chase Manhattan Bank
ABA 021000021
For account of Executive Risk Indemnity Inc.
Account G04211
All Notices should be sent to:
- ------------------------------
Doll Balbadar
Chase Manhattan Bank
4 Chase Metro Tech Center, 6/th/ Floor
Brooklyn, NY 11245
Telephone No.:
Facsimile No.:
And
Executive Risk
Bob Palmberg
Investment Department
82 Hop Meadow Street
Simsbury, CT 06070
Telephone No.:
Facsimile No.:
And
Conning Asset Management
Attention: Securities
P.O. Box 396
St. Louis, MO 63166
Telephone No.:
Facsimile No.:
5
<PAGE>
Guaranty Payment Agreement - Melrose Park
5. Whiting & Co.
Note A-8
Wire transfer Instructions:
---------------------------
Bk of NYC/CTR/BBK
IOC 566 Custody
JPMIM Incoming Wire Account
ABA 021000018
Acct. No. 188967
Re: L G Elec
All Notices should be sent to:
------------------------------
J.P. Morgan Investment Management Inc.
522 Fifth Avenue
New York, NY 10036
Attn: Securities Administration
Telephone No.: 212-837-9396
Facsimile No.: 212-837-9046
6. How & Company
Note A-9
Wire transfer Instructions:
---------------------------
Northern Trust Co.
Northern Chgo/Tr
ABA #071-000-152
Wire A/C #5186041000
A/C #17-66833 Annuity Board
All Notices should be sent to:
------------------------------
Northern Trust Co.
801 S. Canal Street, CIN
Chicago, IL 60607
Attn: Denise Teresinki
Telephone No.: 312-630-1532
Facsimile No.: 312-444-4599
6
<PAGE>
Guaranty Payment Agreement - Melrose Park
7. Mellon Bank, N.A., solely in its capacity as trustee for the Long-Term
Investment Trust (as directed by J.P. Morgan Investment Management Inc.),
and not in its individual capacity.
Note A-10
Wire Transfer Instructions:
----------------------------
Ttee for Long-Term Investment Trust
Federal Reserve Bank of Boston
ABA #011-001-234/BOS SAFE DEP
DDA #125261 A/C
Ref A/C ATTF1791352
Re: L G Electronics
All Notices should be sent to:
------------------------------
Mellon Bank NA
One Mellon Bank Center
Room 151-1310
Pittsburgh, PA 15258
Attn: Jennifer Gomez
Telephone No.: 617-382-9251
Facsimile No.: 617-382-4881
7
<PAGE>
Guaranty Payment Agreement - Melrose Park
8. Wheelmotor & Co.
Note A-11
Wire transfer Instructions:
---------------------------
State Street Bank & Trust Co. - Boston MA
ABA 011-000-028
Acct #EF4A
Acct Name: Global
Strategic Income (Corporate Portfolio)
All Notices should be sent to:
------------------------------
State Street Bank & Trust Co.
One Heritage Drive
North Quincy, MA 02171
Attn: Phil Cummings, Palmer 5 South
Telephone No.: 617-985-5306
Facsimile No.: 617-985-8848
8
<PAGE>
Guaranty Payment Agreement - Melrose Park
9. John Hancock Mutual Life Insurance Company
Note No. A-2
1. Wire Transfer Instructions:
---------------------------
The First National Bank of Boston
ABA No. 011000390
Boston, Massachusetts 02110
Account of: John Hancock Mutual Life Insurance Company
Private Placement Collection Account
Account Number: 541-55417
On Order of: Fleet National Bank Cusip: 33903*DF3
2. Contemporaneous with the above wire transfer, advice setting forth:
(1) the full name, interest rate and maturity date of the Notes or other
obligations;
(2) allocation of payment between principal and interest and any special
payment; and
(3) name and address of Bank (or Trustee) from which wire transfer was
sent
should be delivered or mailed to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.: (617) 572-0628
3. All Notices should be sent to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.:
and
9
<PAGE>
Guaranty Payment Agreement - Melrose Park
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Bond and Corporate Finance Dept. T-57
Telephone No.:
Facsimile No.:
10
<PAGE>
Guaranty Payment Agreement - Melrose Park
4. John Hancock Mutual Life Insurance Company
Note: A-1
1. Wire transfer Instructions:
--------------------------
The First National Bank of Boston
ABA No. 011000390
Boston, Massachusetts 02110
Account of: John Hancock Mutual Life Insurance Company
Private Placement Collection Account
Account Number: 541-55417
On Order of: Fleet National Bank Cusip: 33903*DF3
2. Contemporaneous with the above wire transfer, advice setting forth:
(1) the full name, interest rate and maturity date of the Notes or
other obligations;
(2) allocation of payment between principal and interest and any
special payment and
(3) name and address of Bank (or Trustee) from which wire transfer
was sent
should be delivered or mailed to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.: (617) 572-0628
3. All notices should be sent to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.:
And
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Bond and Corporate Finance Dept. T-57
Telephone No.:
11
<PAGE>
Guaranty Payment Agreement - Melrose Park
Facsimile No.:
12
<PAGE>
Guaranty Payment Agreement - Melrose Park
4. John Hancock Variable Life Insurance Company
Note: A-12
1. Wire Transfer Instructions:
---------------------------
The First National Bank of Boston
ABA No. 01100390
Boston, Massachusetts 02110
Account: John Hancock Mutual Life Insurance Company
Private Placement Collection Account
Account Number: 541-55417
On Order of: Fleet National Bank Cusip: 33903*DF3
2. Contemporaneous with the above wire transfer, advice setting forth:
(1) the full name, interest rate and maturity date of the Notes are
other obligations
(2) allocation of payment between and interest and any special
payment; and
(3) name and address of Bank (or Trustee) from which wire transfer
was sent
should be delivered or mailed to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.: (617) 572-0628
and
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Bond and Corporate Finance Group T-57
Telephone No.:
Facsimile No.:
13
<PAGE>
Guaranty Payment Agreement - Melrose Park
3.. All notices should be sent to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.: (617) 572-0628
And
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Bond and Corporate Finance Dept. T-57
Telephone No.:
Facsimile No.:
14
<PAGE>
Guaranty Payment Agreement - Melrose Park
4. John Hancock Mutual Life Insurance Company
Note No. A-3
1. Wire transfer Instructions:
--------------------------
Investors Bank & Trust Company
Boston, Massachusetts 02117
ABA No. 011001438
Account Number: 79650-9107
for further credit to General Motors 76-1, Account 99099
On Order of: Fleet National Bank Cusip: 33903*DF3
2. Contemporaneous with the above wire transfer, advice setting forth:
(1) the full name, interest rate and maturity date of the Notes or
other obligations;
(2) allocation of payment between principal and interest and any
special payment and
(3) name and address of Bank (or Trustee) from which wire transfer
was sent
should be delivered or mailed to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.: (617) 572-0628
3. All notices should be sent to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.: (617) 572-0628
and
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Bond and Corporate Finance Dept. T-57
15
<PAGE>
Guaranty Payment Agreement - Melrose Park
Telephone No.:
Facsimile No.:
4. John Hancock Mutual Life Insurance Company
Note. A-13
1. Wire transfer Instructions
- -- --------------------------
Investors Bank & Trust Company
Boston, Massachusetts 02117
ABA No. 011001438
Account Number: 79650-9107
for further credit to General Motors 77-1, Account 99100
On Order of: Fleet National Bank Cusip: 33903*DF3
2. Contemporaneous with the above wire transfer, advice setting forth:
(1) the full name, interest rate and maturity date of the Notes or
other obligations;
(2) allocation of payment between principal and interest and any
special payment and
(3) name and address of Bank (or Trustee) from which wire transfer
was sent
should be delivered or mailed to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.: (617) 572-0628
3. All notices should be sent to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.: (617) 572-0628
and
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
16
<PAGE>
Guaranty Payment Agreement - Melrose Park
Attention: Bond and Corporate Finance Dept. T-57
Telephone No.:
Facsimile No.:
4. John Hancock Mutual Life Insurance Company
Note No. A-14
1. Wire transfer Instructions:
- -- --------------------------
Investors Bank & Trust Company
Boston, Massachusetts 02117
ABA No. 011001438
Account Number: 79650-9107
for further credit to General Motors B6-1, Account 99237
On Order of: Fleet National Bank Cusip: 33903*DF#
2. Contemporaneous with the above wire transfer, advice setting forth:
(1) the full name, interest rate and maturity date of the Notes or
other obligations;
(2) allocation of payment between principal and interest and any
special payment and
(3) name and address of Bank (or Trustee) from which were transfer
was sent
should be delivered or mailed to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.: (617) 572-0628
3. All notices should be sent to:
John Hancock Mutual Life Insurance Company
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Attention: Manager, Investment Accounting Division, B-3
Telephone No.:
Facsimile No.:
and
John Hancock Mutual Life Insurance Company
John Hancock Place
17
<PAGE>
Guaranty Payment Agreement - Melrose Park
200 Clarendon Street
Boston, MA 02117
Attention: Bond and Corporate Finance Dept. T-57
Telephone No.:
Facsimile No.: (617) 572-0628
B. INDENTURE TRUSTEE
-----------------
Wire Transfer Instructions:
---------------------------
First Security Bank, National Association
Acct: 051-0922115
ABA: 124-000-012
Ref: Zenith
Attn: Corporate Trust
Telephone No.:
Facsimile No.:
All Notices should be sent to:
------------------------------
First Security Ban, National Association
79 S. Main Street
Salt Lake City, UT 84111
Telephone No.: (801) 246-5300
Fax: (801) 246-5053
Attn: Corporate Trust Services
C. LENDERS' COUNSEL
Wire Transfer Instructions:
-----------------------------
The Chase Manhattan Bank, N.A.
ABA No. 021-000-021
1 Chase Manhattan Plaza Branch
New York, New York 10081
Milbank, Tweed, Hadley & McCloy
Account No. 910-1-073923
Reference: LGE/Zenith
All Notices should be sent to:
------------------------------
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, NY 10005
Attention: Elihu F. Robertson, Esq.
Telephone No.: 212-530-5000:
18
<PAGE>
Guaranty Payment Agreement - Melrose Park
Facsimile No.: 212-530-5219
D. OWNER PARTICIPANT
Wire Transfer Instructions:
-----------------------------
All Notices should be sent to:
------------------------------
General Foods Credit Corporation
200 First Stamford Place
Suite 400
Stamford, CT 06902-6745
Attention: Vice President -- Leasing
Telephone No.: 914-335-8170
Facsimile No.: 914-335-8297
And
General Foods Credit Corporation
200 First Stamford Place
Suite 400
Stamford, CT 06902-6745
Attention: General Counsel
Telephone No.: 914-335-8347
Facsimile No.: 914-335-8256
19
<PAGE>
Guaranty Payment Agreement - Melrose Park
E. OWNER TRUSTEE
Wire Transfer Instructions:
----------------------------
State Street Bank and Trust Company (for Fleet National Bank)
225 Asylum Street
Hartford, CT 06103
Acct. No.: 9903-991-9
ABA No.: 011-00-0028
Attention: Steve Cimalore
Ref.: Zenith Electronics/PMCC
All Notices should be sent to:
------------------------------
Fleet National Bank
c/o State Street Bank and Trust Company
Goodwin Square
225 Asylum Street, 23/rd/ Floor
Hartford, CT 06103
Attention: Corporate Trust Administration
Telephone No.: 860-244-1844
Facsimile No.: 860-244-1884
F. OWNER PARTICIPANT'S COUNSEL
Wire Transfer Instructions:
---------------------------
All Notices should be sent to:
------------------------------
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Robert Heckart, Esq.
Telephone No.: 212-450-4000
Facsimile No.: 212-450-5672
20
<PAGE>
Guaranty Payment Agreement - Melrose Park
SCHEDULE B
Aggregate Of All Of The Lenders'
Lender Guaranty Payment Amounts (assuming
payment within 3 Business Days of Demand Date):
$48,417,344.23
Indenture Trustee Guaranty Payment Amount: $ 500.00
Lenders' Counsel Guaranty Payment Amount: $ 23,500.00
Owner Participant Guaranty Payment Amount: $20,136,665.00
Owner Participant's Counsel Guaranty Payment Amount: $ 23,500.00
Owner Trustee Guaranty Payment Amount: $ 1,767.50
1
<PAGE>
Guaranty Payment Agreement - Melrose Park
SCHEDULE C
As of July 17, 1998, the aggregate outstanding amount owed to the
Lenders under the Operative Documents for unpaid principal, unpaid interest, the
Make-Whole Premium Amount (determined solely for purposes hereof assuming July
17, 1998 to be the prepayment date), and under the Guaranty Payment Agreement
for the Adjusted Make-Whole Premium Amount (determined by assuming that the
Demand Date is July 17, 1998) is as follows:/1/
<TABLE>
<CAPTION>
NAME OF OBLIGEE; (NOTE) UNPAID PRINCIPAL ACCRUED, MAKE-WHOLE ADJUSTED TOTAL OWED (Total LENDER GUARANTY
AMOUNT UNPAID PREMIUM MAKE-WHOLE of unpaid PAYMENT AMOUNT
INTEREST AMOUNT PREMIUM principal, accrued UNDER EACH
AMOUNT interest and EQUIPMENT NOTE
Make-Whole Premium (Total of unpaid
Amount) principal,
accrued interest
and Adjusted
Make-Whole
Premium Amount
(assuming payment
within 3 Business
Days of Demand
Date)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
COVA Financial Services $ 3,834,553.18 $ 101,328.07 $ 508,806.86 $ 313,896.52 $ 4,444,688.11 $ 4,249,777.77
Life Insurance Company
(Note A-4)
Peninsular Life Insurance $ 737,414.07 $ 19,486.17 $ 97,847.47 $ 60,364.72 $ 854,747.71 $ 817,264.96
Co. (Note A-5)
Occidental Life Insurance $ 1,917,276.60 $ 50,664.03 $ 254,403.43 $ 156,948.26 $ 2,222,344.06 $ 2,124,888.89
Company of
</TABLE>
- ---------------
/1/ These amounts exclude all other amounts (such as various costs, expenses
and fees) due to the Lenders and the Indenture Trustee under the Operative
Documents.
1
<PAGE>
Guaranty Payment Agreement - Melrose Park
<TABLE>
<CAPTION>
================================================================================================================================
NAME OF UNPAID ACCRUED, MAKE-WHOLE ADJUSTED TOTAL OWED (Total LENDER
OBLIGEE; (NOTE) PRINCIPAL UNPAID PREMIUM MAKE-WHOLE of unpaid principal, GUARANTY
AMOUNT INTEREST AMOUNT PREMIUM accrued interest and PAYMENT
AMOUNT Make-Whole Premium AMOUNT UNDER
Amount) EACH
EQUIPMENT
NOTE (Total of
unpaid principal,
accrued interest and
Adjusted Make-Whole
Premium Amount
(assuming payment
within 3 Business Days
of Demand Date)
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
North Carolina
(Note: A-6)
- ----------------------------------------------------------------------------------------------------------------------------------
Executive Risk $ 2,654,690.67 $ 70,150.20 $ 352,250.91 $ 217,312.98 $ 3,077,091.78 $ 2,942,153.85
Indemnity
(Note A-7)
- ----------------------------------------------------------------------------------------------------------------------------------
Whiting & Co. $13,420,936.14 $ 368,158.65 $1,780,824.02 $1,098,637.83 $15,569,918.81 $14,887,732.62
(Note A-8)
- ----------------------------------------------------------------------------------------------------------------------------------
How & Company $ 1,474,828.15 $ 40,456.99 $ 195,694.95 $ 120,729.43 $ 1,710,980.09 $ 1,636,014.57
(Note A-9)
- ----------------------------------------------------------------------------------------------------------------------------------
Mellon Bank, N.A. $ 2,949,656.30 $ 80,913.99 $ 391,389.89 $ 241,458.86 $ 3,421,960.18 $ 3,272,029.15
(Note A-10)
- ----------------------------------------------------------------------------------------------------------------------------------
Wheelmotor & Co. $ 368,707.04 $ 10,114.25 $ 48,923.74 $ 30,182.36 $ 427,745.03 $ 409,003.65
(Note A-11)
- ----------------------------------------------------------------------------------------------------------------------------------
John Hancock Mutual $ 3,760,811.86 $ 104,111.81 $ 497,636.85 $ 307,032.96 $ 4,362,560.52 $ 4,171,956.63
Life Insurance
Company (Note
No. A-2)
- ----------------------------------------------------------------------------------------------------------------------------------
John Hancock Mutual $ 8,848,970.81 $ 244,969.01 $1,170,910.46 $ 722,430.63 $10,264,850.28 $ 9,816,370.45
Life Insurance
Company (Note:
A-1)
- ----------------------------------------------------------------------------------------------------------------------------------
John Hancock $ 2,212,241.85 $ 61,242.23 $ 292,727.50 $ 180,607.59 $ 2,566,211.58 $ 2,454,091.67
Variable Life
</TABLE>
2
<PAGE>
Guaranty Payment Agreement - Melrose Park
<TABLE>
<CAPTION>
====================================================================================================================================
NAME OF OBLIGEE; (NOTE) UNPAID PRINCIPAL ACCRUED, MAKE-WHOLE ADJUSTED TOTAL OWED (Total LENDER GUARANTY
AMOUNT UNPAID PREMIUM MAKE-WHOLE of unpaid PAYMENT AMOUNT
INTEREST AMOUNT PREMIUM principal, accrued UNDER EACH
AMOUNT interest and EQUIPMENT NOTE
Make-Whole Premium (Total of unpaid
Amount) principal,
accrued interest
and Adjusted
Make-Whole
Premium Amount
(assuming payment
within 3 Business
Days of Demand
Date)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Insurance Company (Note:
A-12)
- ------------------------------------------------------------------------------------------------------------------------------------
John Hancock Mutual Life $ 737,414.93 $ 20,414.10 $ 97,575.96 $ 60,202.61 $ 855,404.99 $ 818,031.64
Insurance Company (Note
No. A-3)
- ------------------------------------------------------------------------------------------------------------------------------------
John Hancock Mutual Life $ 368,706.00 $ 10,207.01 $ 48,787.79 $ 30,101.18 $ 427,700.80 $ 409,014.19
Insurance Company (Note.
A-13)
- ------------------------------------------------------------------------------------------------------------------------------------
John Hancock Mutual Life $ 368,706.00 $ 10,207.01 $ 48,787.79 $ 30,101.18 $ 427,700.80 $ 409,014.19
Insurance Company (Note
No. A-14)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTALS $43,654,913.60 $1,192,423.52 $5,786,567.62 $3,570,007.11 $50,633,904.74 $48,417,344.23
====================================================================================================================================
</TABLE>
3
<PAGE>
EXHIBIT (12)
ZENITH ELECTRONICS CORPORATION
EXHIBIT 12 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Nine months
ended
September 26, Year ended December 31,
------------- ----------------------------------------------
1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Earnings
- --------
Pre-Tax Income/(Loss) from continuing operations $(187.8) $(300.2) $(177.6) $(98.5) $(14.8) $(93.2)
adjustment: Fixed Charges (42.2 (34.9) (18.0) (25.9) (21.7) (19.2)
less: Capitalized Interest - 4.1 2.3 - - -
------- ------- ------- ------ ------ ------
Earnings - for ratio purposes $(145.6) $(269.4) $(162.1) $(72.6) $ 6.9 $(74.0)
Fixed Charges
- -------------
Interest Expense $ 33.2 $ 25.5 $ 15.1 $ 19.9 $ 15.9 $ 15.5
Interest Capitalized - (4.1) (2.3) - - -
Est'd interest equivalent in Rent expense 6.6 7.8 3.8 4.6 4.1 2.7
Est'd Amortization of debt expenses 2.4 5.7 1.4 1.4 1.7 1.0
------- ------- ------- ------ ------ ------
Total $ 42.2 34.9 18.0 25.9 21.7 19.2
Ratio
- -----
Deficiency of earnings to cover fixed charges $ 187.8 $ 300.2 $ 177.8 $ 98.5 $ 14.8 $ 93.2
</TABLE>
<PAGE>
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and all references to our firm) included in or made a part of Zenith
Electronics Corporation's Amendment No. 2 to the Registration Statement on Form
S-4, Registration No. 333-61057, filed in January 1999.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
January 28, 1999
<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 financial restructuring. If
the financial restructuring is completed:
. holders of our 6 1/4% Subordinated Debentures will receive
approximately $386 of principal amount of new 6 1/4% debentures due
2010 for each $1,000 principal amount of old 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.
I 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
1998 cash flows will not be sufficient to meet all of our working capital
requirements, scheduled cash debt service obligations and anticipated capital
expenses.
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, which, together with an
affiliate, currently own approximately 56.5% of the Company's Common Stock.
Despite these measures and the significant financial support provided by LG
Electronics, we have not been able to generate sufficient revenues to support
our continued business operations in the absence of a significant operational
and financial 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, and we will discontinue substantially all of our
manufacturing operations and will outsource substantially all components and
products.
<PAGE>
We concluded that we cannot 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. During 1998, we negotiated the terms of the restructuring
with LG Electronics. The result of those negotiations is the transaction
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 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 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 is a member of the Special Committee. Since 1985, LGE has had
the ability to elect all of the members of the Board of Directors by virtue of
the ownership by LGE and its affiliate of over 50% of our common stock.
How to Vote on the Restructuring
As described in the enclosed documents, we are asking holders of our
subordinated debt to accept the restructuring.
To vote on the restructuring, each holder of subordinated debt should:
(i) fill in the enclosed Ballot;
(ii) check the box entitled "Accepts the Prepackaged Plan" or "Rejects the
Prepackaged Plan;"
(iii) sign the Ballot; and
(iv) return the Ballot to the Solicitation Agent as directed in the
enclosed disclosure statement.
If you hold subordinated 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 do not file a Ballot.
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 of the
numbers of holders of subordinated debt vote to accept the restructuring, and
they hold 66 2/3% of the dollar amount of subordinated debt voted, each holder
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. If the Bankruptcy Court grants our request, holders of subordinated
debt will receive no distribution and retain no property under the
restructuring. While we believe that this treatment is permissible under the
Bankruptcy Code, we recognize that arguments exist that certain caselaw would
permit the Bankruptcy Court to reach a contrary conclusion.
<PAGE>
Alternatives to Restructuring
If we do not receive the vote necessary to finalize the restructuring or
the Bankruptcy Court does not permit us to carry out the restructuring, we will
be forced to consider some unattractive alternatives, including a liquidation of
our assets or development of an alternative restructuring plan. We believe that
the current restructuring will minimize the disruption to our business and
ultimately results in a larger distribution for creditors than would occur under
our other alternatives.
In Conclusion
Again, we urge you to read all the enclosed documents carefully and to
follow the instructions for participating in the restructuring before the
expiration date on _________________.
We believe the restructuring provides the best alternative for creating a
capital structure that is appropriate given our operational capabilities. We
are nearing the end of a very lengthy process that is the most likely of the
alternatives to result in a stronger and well-positioned Company with manageable
debt obligations. As we work toward completing the restructuring, we thank you
for your continued support.
Sincerely,
Jeffrey P. Gannon
President and Chief Executive Officer
