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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM 10-Q
----------------
(Mark
One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
Commission File No. 1-4115
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ZENITH ELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-1996520
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
1000 Milwaukee Avenue, Glenview, 60025-2493
Illinois (Zip Code)
(Address of principal executive
offices)
(847) 391-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(D) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(D) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [_]
The registrant is a wholly-owned subsidiary of LG Electronics Inc., a
corporation organized under the laws of the Republic of Korea.
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZENITH ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
In Millions
<TABLE>
<CAPTION>
Three Months
Ended Nine Months Ended
----------------- -----------------
Sept. 30, Oct. 2, Sept. 30, Oct. 2,
2000 1999 2000 1999
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Net sales.................................. $144.7 $209.5 $399.2 $520.5
------ ------ ------ ------
Costs, Expenses and Other:
Cost of products sold.................... 137.0 189.0 374.4 474.7
Selling, general and administrative...... 17.7 22.6 56.8 70.0
Engineering and research................. 2.7 5.1 8.4 15.8
Other operating income, net (Note Five).. (13.3) (8.1) (29.5) (23.7)
Restructuring charges (Note Four)........ 1.8 2.5 7.6 9.4
------ ------ ------ ------
Operating loss............................. (1.2) (1.6) (18.5) (25.7)
Gain on asset sales, net................... -- (2.9) -- (2.9)
Interest expense........................... 3.2 2.0 7.9 5.9
Interest expense--related party............ 3.6 7.1 11.7 27.4
Interest income............................ (0.2) (0.3) (1.2) (0.9)
------ ------ ------ ------
Loss before reorganization items and income
taxes from continuing operations.......... (7.8) (7.5) (36.9) (55.2)
Reorganization items (Note Four):
Professional fees........................ -- 0.8 -- 0.8
Write off deferred debt issuance costs... -- 1.3 -- 1.3
------ ------ ------ ------
Loss before income taxes from continuing
operations................................ (7.8) (9.6) (36.9) (57.3)
Income taxes............................... -- 0.2 0.6 1.7
------ ------ ------ ------
Net loss from continuing operations........ $ (7.8) $ (9.8) $(37.5) $(59.0)
Net (income) loss from discontinued Network
Systems Division (provision for income
taxes zero in all periods) (Note Two)..... 0.9 3.2 (0.5) --
Gain on disposal of Network Systems
Division (provision for income taxes zero)
(Note Two)................................ (5.9) -- (5.9) --
------ ------ ------ ------
Net loss................................... $ (2.8) $(13.0) $(31.1) $(59.0)
====== ====== ====== ======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
ZENITH ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
In Millions
<TABLE>
<CAPTION>
Sept. 30, Dec. 31, Oct. 2,
2000 1999 1999
--------- -------- -------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash............................................. $ -- $ -- $ --
Receivables, net of allowance for doubtful
accounts of $27.8, $23.5 and $23.2,
respectively.................................... 101.5 99.9 125.6
Receivable from related party (Note Nine)........ 3.6 12.4 11.4
Inventories (Note Six)........................... 103.1 78.7 121.1
Other............................................ 27.7 30.7 25.4
------- ------- -------
Total current assets........................... 235.9 221.7 283.5
Property, plant and equipment, net................. 10.1 7.8 41.3
Property held for disposal (Note Eleven)........... -- 43.1 1.6
Receivable from related party (Note Eight)......... -- -- 11.8
Other non-current assets........................... 5.3 6.4 8.3
------- ------- -------
Total assets................................... $ 251.3 $ 279.0 $ 346.5
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt (Note Eight)..................... $ 37.4 $ 41.0 $ 78.1
Short-term debt with related party (Note Eight).. -- -- 132.0
Accounts payable................................. 42.4 56.8 60.0
Accounts payable with related party (Note Nine).. 40.1 41.1 1.1
Income taxes payable............................. 5.8 5.1 5.4
Accrued expenses................................. 85.2 129.7 157.3
------- ------- -------
Total current liabilities...................... 210.9 273.7 433.9
Long-term liabilities.............................. -- -- 6.3
Long-term liabilities with related party........... -- -- 10.9
Long-term debt (Note Eight)........................ 39.6 39.1 --
Long-term debt with related party (Note Eight)..... 190.3 124.6 --
------- ------- -------
Total liabilities not subject to compromise.... 440.8 437.4 451.1
Liabilities subject to compromise (Note Seven)..... -- -- 318.9
Stockholders' equity:
Preferred stock.................................. -- -- --
Common stock..................................... -- -- 67.6
Additional paid-in capital....................... 772.7 772.7 506.8
Retained earnings (deficit)...................... (962.2) (931.1) (996.2)
Treasury stock................................... -- -- (1.7)
------- ------- -------
Total stockholders' equity..................... (189.5) (158.4) (423.5)
------- ------- -------
Total liabilities and stockholders' equity..... $ 251.3 $ 279.0 $ 346.5
======= ======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
3
<PAGE>
ZENITH ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
In Millions
<TABLE>
<CAPTION>
Increase (Decrease)
in Cash
Nine Months Ended
-----------------------
Sept. 30, Oct. 2,
2000 1999
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss, including reorganization items............... $ (31.1) $ (59.0)
Adjustments to reconcile net loss to net cash used by
operations:
Depreciation......................................... 2.9 12.1
Other................................................ -- (5.4)
Gain on asset sales, net............................. (6.0) (2.9)
Changes in assets and liabilities:
Current accounts................................... (21.7) (58.3)
Other assets....................................... 1.1 6.2
Other liabilities.................................. -- 2.4
--------- ----------
Net cash used by operating activities.................. (54.8) (104.9)
--------- ----------
Cash Flows from Investing Activities:
Capital additions.................................... (1.4) (2.5)
Proceeds from asset sales............................ 5.4 49.0
--------- ----------
Net cash provided by investing activities.............. 4.0 46.5
--------- ----------
Cash Flows from Financing Activities:
Short-term borrowings, net........................... (3.6) 58.4
Proceeds from long-term borrowings................... 60.0 --
Principle payments on long-term debt................. (5.6) --
--------- ----------
Net cash provided by financing activities.............. 50.8 58.4
--------- ----------
Increase in cash....................................... -- --
Cash at beginning of period............................ -- --
--------- ----------
Cash at end of period.................................. $ -- $ --
========= ==========
Increase (decrease) in cash attributable to changes in
current accounts:
Receivables, net..................................... $ (3.8) $ (1.5)
Income taxes......................................... 0.7 1.2
Inventories.......................................... (40.6) (36.9)
Other current assets................................. 2.3 (14.6)
Accounts payable and accrued expenses................ 19.7 (6.5)
--------- ----------
Net change in current accounts......................... $ (21.7) $ (58.3)
========= ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................. $ 6.6 $ 14.3
Income taxes......................................... -- 0.5
Non-cash activity:
Transfer of Reynosa facilities and other Reynosa
assets, net to an affiliate of LGE to settle account
payable with related party.......................... $ 67.0 $ --
Interest added to principle of LGE Senior Note,
including $2.3 million accrued in 1999.............. 11.8 --
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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, 1999.
Note Two--Sale of Network Systems Division
On August 8, 2000, the company sold substantially all of the assets of its
Network Systems Division to a subsidiary of Motorola, Inc. for $14.9 million.
This discontinued segment has been segregated and the accompanying condensed
consolidated statements of operations and related footnotes have been
restated. However, because the sale involved primarily the Division's
inventory and property, plant and equipment, the condensed consolidated
balance sheets and condensed consolidated statements of cash flows have not
been restated.
Net sales for the Network Systems Division were $8.1 million and $47.5
million in the period from July 1, 2000 through August 7, 2000 and the period
from January 1, 2000 through August 7, 2000, respectively, and $18.5 million
and $75.3 million in the three and nine-month periods ended October 2, 1999,
respectively. The inventory and property, plant and equipment sold were $5.0
million and $1.7 million, respectively, as of the date of sale, and $7.6
million and $1.4 million, respectively, as of December 31, 1999. A gain of
$5.9 million was recorded on the sale of the Network Systems Division.
Note Three--Liquidity and Financial Condition
The company has incurred net losses before extraordinary item of $64.1
million, $275.5 million and $299.4 million for the years ended December 31,
1999, 1998 and 1997, respectively, and incurred a net loss of $31.1 million in
the nine months ended September 30, 2000. In addition, the company had a
negative working capital position of $52.0 million as of December 31, 1999,
and the $25.0 million positive working capital position as of September 30,
2000, resulted from borrowing $60.0 million from LG Electronics Inc. ("LGE")
under the LGE credit support agreement discussed in Note Eight. The company
believes that, giving effect to (i) the Citicorp three-year senior credit
facility and the LGE credit support and (ii) the company's projected cash flow
from operations, the estimated levels of liquidity available to the company
will be sufficient to permit the company to satisfy its working capital, debt
service, capital expenditure and other requirements. However, such belief is
based upon various assumptions, including those underlying its current
business operations as a digital sales, marketing and research and development
company which relies on outsourced products. The company's access to available
funds from the Citicorp three-year senior credit facility and the LGE credit
support is conditioned upon continued compliance with certain financial
covenants in fiscal year 2000. In addition to its $60.0 million credit
support, LGE is committed to provide its best efforts to improve the company's
performance and to maintain the company's borrowings under the Citicorp credit
facility.
Note Four--Restructuring Charges and Reorganization Items
During the three and nine months ended September 30, 2000, the company
recorded $1.8 million and $7.6 million, respectively, of restructuring
charges, primarily related to (i) additional severance incurred in connection
with the closure and transfer of the company's Mexican manufacturing
facilities, (ii) additional exit costs accrued for the closure of Mexican
subsidiaries and (iii) professional fees relating to disposal of assets in
connection with the company's conversion from a manufacturer to a digital
sales, marketing and research and development
5
<PAGE>
company, the appeal of the confirmation of the company's prepackaged plan of
reorganization and post-closing matters for assets sold in prior periods.
During the three and nine months ended October 2, 1999, the company
recorded $2.5 million and $9.4 million, respectively, of restructuring
charges, primarily related to costs associated with work performed by outside
consulting and law firms to support the development of the operational and
financial restructuring plans and the prepackaged plan of reorganization. In
addition, for the period from the filing of the petition for relief on August
23, 1999 to October 2, 1999, the company incurred $0.8 million of professional
fees for purposes discussed above which was included in reorganization items.
Deferred debt issuance costs ($1.3 million) related to debt restructured
pursuant to the prepackaged plan of reorganization were also written off and
included in reorganization items.
A summary of the restructuring charges recorded for the first nine months
of 2000 is as follows (in millions):
<TABLE>
<CAPTION>
Nine Months Ended
Sept. 30, 2000
Restructuring ---------------------- Restructuring
Reserve at Restructuring Cash Reserve at
Dec. 31, 1999 Charges Payments Sept. 30, 2000
------------- ------------- -------- --------------
<S> <C> <C> <C> <C>
Severance and other
employee costs......... $ 6.0 $4.4 $ (6.7) $3.7
Plant closure and
business exit costs.... 6.7 0.7 (3.0) 4.4
Professional fees....... 5.4 2.5 (7.2) 0.7
Other................... 0.3 -- (0.3) --
----- ---- ------ ----
Total restructuring. $18.4 $7.6 $(17.2) $8.8
===== ==== ====== ====
</TABLE>
The $8.8 million reserve appears, at this time, to be adequate to cover the
remaining costs of the restructuring activity identified at September 30,
2000.
In addition, as of September 30, 2000 and December 31, 1999, the company
has reserves for asset impairment of $50.7 million and $86.1 million,
respectively, which were provided for in 1997 and 1998 and are included in
fixed assets.
Note Five--Other Operating Expense (Income)
Other operating expense (income) consisted of the following (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
Sept. 30, 2000 Oct. 2, 1999 Sept. 30, 2000 Oct. 2, 1999
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Royalty income--tuner
system patents........ $ (8.7) $(7.7) $(22.6) $(21.0)
Royalty income--VCR
direct ship........... -- (0.4) -- (1.5)
Royalty income--other.. (0.6) (0.4) (1.8) (2.3)
Bank fees.............. 0.3 0.6 2.3 1.5
Engineering and
research services
provided to LGE....... (1.4) -- (4.3) --
Other.................. (2.9) (0.2) (3.1) (0.4)
------ ----- ------ ------
Total other
operating income,
net............... $(13.3) $(8.1) $(29.5) $(23.7)
====== ===== ====== ======
</TABLE>
Note Six--Inventories
Inventories consisted of the following (in millions):
<TABLE>
<CAPTION>
Sept. 30, 2000 Dec. 31, 1999 Oct. 2, 1999
-------------- ------------- ------------
<S> <C> <C> <C>
Raw materials and work-in-
process......................... $ 7.6 $26.0 $ 25.5
Finished goods................... 95.5 52.7 95.6
------ ----- ------
Total inventories............ $103.1 $78.7 $121.1
====== ===== ======
</TABLE>
6
<PAGE>
Note Seven--Impact of Filing Plan of Reorganization on 1999 Financial
Statements
In August 1999, the company filed a voluntary petition for relief under
Chapter 11 of Title 11 of the U.S. Code in the U.S. Bankruptcy Court for the
District of Delaware.
The 6 1/4 percent subordinated debentures due 2011 ($103.5 million) and
unsecured and partially secured debt payable to LGE are shown in the October
2, 1999 balance sheet as "Liabilities subject to compromise". The debt payable
to LGE subject to compromise includes the extended-term payables ($127.1
million) and the debt related to LGE's payment under the guarantees of the
leveraged leases ($88.3 million).
Interest expense was $9.1 million and $33.3 million in the three and nine-
month periods ended October 2, 1999, respectively. Contractual interest was
$11.9 million and $36.1 million in these same periods. The $2.8 million
difference reflects the suspension of contractual interest on the company's 6
1/4 percent subordinated debentures and unsecured and partially secured debt
with LGE as a result of the Chapter 11 filing and, in accordance with SOP 90-
7, suspension of interest expense accruals.
Note Eight--Short-term Debt and Credit Arrangements; Long-term Debt
Between November 1997 and February 1998, the company obtained a total of
$110.0 million in unsecured and uncommitted credit facilities through four
lines of credit with various lenders. The credit lines were guaranteed by LGE,
and during the second and third quarter of 1998, LGE made payments under
demands against guarantees on $72.0 million of the facilities; during the
second quarter of 1999, LGE made payment under demands against a guarantee on
$30.0 million. The company's obligation to LGE for all these payments was
settled as part of the company's prepackaged plan of reorganization.
In March 1998, the company entered into a secured credit facility with LGE,
which provided for borrowings of up to $45.0 million. The interest rate was
LIBOR plus 6.5 percent per annum. The first and only borrowing of $30.0
million occurred in May 1998, and was settled as part of the prepackaged plan
of reorganization.
In April 1997, the company entered into an $86.6 million 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 were fully guaranteed by LGE.
Following negotiations with the lessor and its lenders, in July 1998, LGE made
a settlement payment of $90.1 million under its guarantee of the company's
obligation.
The company was obligated for the repayment of this settlement amount to
LGE. As a result, as discussed above, the company's October 2, 1999 financial
statements reflected $88.3 million in "Liabilities subject to compromise"
($90.1 million less $1.8 million reduction from proceeds of sales of equipment
previously included in the sale-leaseback transaction), which was settled as
part of the prepackaged plan of reorganization.
The company's October 2, 1999 financial statements also reflected an $11.8
million receivable from LGE, which represented the appraised fair value of the
sale-leaseback manufacturing equipment receivable from LGE initially recorded
at $21.3 million, reduced by $9.5 million as the company purchased equipment
prior to its selling the equipment to third parties. The company's December
31, 1999 financial statements did not reflect a receivable from LGE for the
manufacturing equipment because this receivable was reclassified as follows:
(i) $3.8 million to machinery and equipment and (ii) $8.0 million to property
held for disposal, pending the transfer of the Reynosa facilities to an
affiliate of LGE on January 1, 2000, in accordance with the prepackaged plan
of reorganization.
On November 9, 1999, on the company's exit from bankruptcy proceedings,
Citicorp terminated the debtor-in-possession financing facility, which it had
provided. Also, on November 9, 1999, the company entered into a senior bank
credit agreement with Citicorp North America, Inc. that provided for a three-
year $150.0 million senior credit facility subject to borrowing base
restrictions. The facility is secured by substantially all of the company's
assets and is subject to other terms and conditions. Borrowings bear interest
based on specified
7
<PAGE>
margins in a range of 1.5 percent to 3.0 percent above LIBOR or the prime rate
depending on the company's compliance with certain financial covenants. The
Citicorp senior credit facility 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 and
engage in transactions with affiliates. As of July 5, 2000, the company had
reduced the commitment available under the senior credit facility to $130.0
million as a result of its projected borrowing base and cash flow
requirements.
The Citicorp three-year senior credit facility and the LGE restructured
senior note discussed below are in addition to the $60.0 million post-
restructuring credit support provided by LGE to the company pursuant to the
terms of the restructuring agreement between the parties. As of September 30,
2000, $60.0 million is outstanding under this facility. This LGE facility
contains covenants, which mirror those in the Citicorp three-year facility.
The LGE $60.0 million facility originally provided for interest on borrowings
at LIBOR plus 6.5 percent per annum and is secured by a first lien on the
company's VSB technology. In June 2000, the LGE facility was amended to reduce
the interest rate on borrowing to LIBOR plus 3.0 percent per annum.
In accordance with the prepackaged plan of reorganization, the company's
$103.5 million of 6 1/4 percent convertible subordinated debentures due 2011
and related accrued interest were exchanged for $50.0 million of 8.19 percent
senior debentures maturing in November 2009, which were recorded at fair value
of $39.1 million. The $10.9 million discount is being amortized over the life
of the new senior debentures using the effective interest rate method with
$0.5 million amortized as of September 30, 2000. The debentures can be
redeemed at par in whole or in part at any time and rank equally with all
senior debt of the company.
As part of the company's prepackaged plan of reorganization, LGE received
the $126.2 million LGE restructured senior note as settlement of certain LGE
claims. This note originally provided for interest to be accrued at LIBOR plus
6.5 percent per annum, with interest added to the principle amount of the note
if certain financial ratios are not met. As of August 1, 2000, the LGE
restructured senior note was amended to reduce the interest rate on borrowing
to LIBOR plus 3.0 percent per annum, more closely reflecting the interest rate
paid on the Citibank debt discussed above. Further, the terms determining cash
payment of the interest accrued were amended to once per year versus
quarterly.
As of September 30, 2000, the balance of this note outstanding is $130.3
million. The note, which matures on November 1, 2009, is secured by a first
lien on all assets leased to the company and its subsidiaries pursuant to the
leveraged leases and transferred to the company pursuant to the restructuring
agreement. The note is guaranteed by each of the company's subsidiaries and is
subject to other terms and conditions.
The company remains in compliance with all financial covenants of all
outstanding debt issues as of September 30, 2000.
Note Nine--Related Party
In November 1995, LGE and an affiliate of LGE purchased a majority of the
shares of the company pursuant to a combined tender offer and purchase of
newly issued shares of common stock from the company. As a result of the
approval of the prepackaged plan of reorganization in November 1999, LGE owns
100 percent of the common stock 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 significant transactions between the company and LGE
during the three and nine-month periods ended September 30, 2000 and October
2, 1999.
8
<PAGE>
Product purchases: In the ordinary course of business, the company
purchases televisions, VCRs, television-VCR combinations and components from
LGE and its affiliates. Effective January 1, 2000, the company transferred its
Reynosa, Mexico manufacturing facilities to an affiliate of LGE as part of the
company's operational restructuring and prepackaged plan of reorganization,
resulting in significantly increased purchases from LGE. The company purchased
$159.3 million and $353.6 million of these items during the three and nine-
month periods ended September 30, 2000, respectively, and $15.6 million and
$35.2 million of these items during the three and nine-month periods ended
October 2, 1999, respectively. In addition, in the three and nine-month
periods ended September 30, 2000, the company purchased $3.0 million and $7.5
million, respectively, of parts from LGE.
In 1998, the company and LGE entered into a direct shipment arrangement
pursuant to which LGE sold and shipped VCRs directly to the company's two
largest customers and paid the company a license fee for the use of the
company's brand names on such products and the inclusion of the company's
patented tuner technology in such products. During the three and nine-month
periods ended October 2, 1999, the company accrued approximately $0.4 million
and $1.5 million, respectively, in royalties for the use of the company's
brand names pursuant to this direct shipment program. Effective January 1,
2000, the company sells directly to its two largest customers and no royalties
are accrued. An arrangement was entered into in April 1997, in Canada where
LGE's Canadian affiliate sold Zenith branded VCRs under a license from the
company. Pursuant to that arrangement, the company accrued approximately $0.4
million in the nine-month period ended October 2, 1999. No accrual was
recorded in the third quarter of 1999 or in the three and nine-month periods
ended September 30, 2000.
Product and other sales: The company sold televisions, and prior to 2000,
picture tubes, yokes and other manufactured subassemblies to LGE and its
affiliates. Sales by the company to LGE and its affiliates were $1.1 million
and $2.0 million during the three and nine-month periods ended September 30,
2000, respectively, and $11.1 million and $24.2 million during the three and
nine-month periods ended October 2, 1999, respectively. The lower sales in
2000 were the result of cessation of sales to LGE in Mexico as a result of the
transfer of the Reynosa, Mexico facilities to an affiliate of LGE, as
discussed above, and the company's closing of its other manufacturing
operations in 1999.
In June 2000, the company and LGE entered into an agreement whereby the
company would provide engineering and research services on certain projects
for LGE. These services are billed quarterly to LGE at a rate fully covering
the company's direct and indirect costs. The amounts billed for the three and
nine-month periods ended September 30, 2000 were $1.4 million and $4.3
million, respectively, and is included in other operating income.
In December 1996, the company entered into a distributor agreement with an
LGE subsidiary whereby LGE became the Canadian distributor for the company.
During 1997, the company entered into a similar agreement with an LGE
subsidiary in Mexico to sell the company's products in Mexico. During the
three months and nine months ended September 30, 2000, the company's sales to
the LGE Canadian subsidiary were $1.1 million and $2.0 million, respectively.
During the three months and nine months ended October 2, 1999, the company's
sales to the LGE Canadian subsidiary were $5.5 million and $9.4 million,
respectively, and the company's sales to the LGE Mexican subsidiary were $5.6
million and $14.8 million, respectively. These amounts are included in the
sales by the company to LGE and its affiliates discussed above.
Other Items: Accounts payable with related party included $40.1 million and
$1.1 million to LGE and its affiliates as of September 30, 2000 and October 2,
1999, respectively. As discussed above, effective January 1, 2000, the company
transferred its Reynosa, Mexico manufacturing facilities to an affiliate of
LGE. As a result, LGE is now a major supplier to the company and the accounts
payable balance as of September 30, 2000, is part of normal transactions with
LGE. In April 1997, the company and LGE entered into an arrangement whereby
LGE provided a vendor credit line to the company to finance the company's
purchases of certain goods from LGE in the ordinary course of business. Prior
to April 1997, the company's accounts payable arising in the ordinary course
of business to LGE were extended for certain periods of time, but no formal
arrangement was in
9
<PAGE>
place. The amount of extended-term payables was $127.1 million as of October
2, 1999. The company was charged interest for the extended period at rates
reflecting then-current market conditions in Korea. The extended-term payables
were settled in cash and the remainder as part of the prepackaged plan of
reorganization.
Receivable from related party as of September 30, 2000, includes $2.2
million from sales in the normal course of business with LGE and $1.4 million
for engineering and research services provided to LGE as discussed above.
Effective May 1, 2000, the company is paying an affiliate of LGE for
salaries and related costs for providing repair services and parts for
warranty work for the company's products. Such payments were $1.6 million and
$2.9 million for the three and nine-month periods ended September 30, 2000,
respectively.
See Note Eight for discussion of the credit support provided by LGE and the
treatment of obligations to LGE in the prepackaged plan of reorganization.
The company believes that the transactions between the company and LGE have
been conducted on terms no less favorable to the company than could have been
obtained with unrelated third parties.
Note Ten--Segment and Geographic Data
The company's core business--the development and distribution of a broad
range of products for the delivery of video entertainment--was composed of two
major product segments--Consumer Electronics, which includes the design,
development and marketing of video products along with parts and accessories
for such products, and Network Systems, which designs, develops and markets
digital set-top boxes, which are sold primarily to satellite systems
operators, telecommunications companies and other commercial users. See Note
Two--Sale of Network Systems Division.
Note Eleven--Property Held for Disposal
Pursuant to the operational restructuring, the company became a digital
sales, marketing and research and development company by discontinuing
substantially all of its manufacturing operations and outsourcing
substantially all products and components. During the first nine months of
2000, the decrease in property held for disposal resulted from the transfer of
the Reynosa assets to an affiliate of LGE as part of the company's operational
restructuring and prepackaged plan of reorganization and the sale of the
Network Systems Division discussed above.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The company's third quarter net loss from continuing operations, excluding
restructuring charges and reorganization items, was $6.0 million in 2000
compared to $5.2 million in 1999. Including $1.8 million of restructuring
charges, the company reported a 2000 third quarter net loss from continuing
operations of $7.8 million. In the 1999 third quarter, the company reported a
net loss from continuing operations of $9.8 million, including $4.6 million of
restructuring charges and reorganization items.
The third quarter of 2000 restructuring charges included (i) additional
severance incurred in connection with the closure and transfer of the
company's Mexican manufacturing facilities, (ii) additional exit costs accrued
for the closure of Mexican subsidiaries and (iii) professional fees relating
to disposal of assets in connection with the company's conversion from a
manufacturer to a digital sales, marketing and research and development
company, the appeal of the confirmation of the company's prepackaged plan of
reorganization and post-closing matters for assets sold in prior periods.
During the three months ended October 2, 1999, the restructuring charges
related primarily to costs associated with work performed by outside
consulting and law firms to support the development of the operational and
financial restructuring plans and the prepackaged plan of reorganization. In
addition, for the period from the filing of the petition for relief on August
23, 1999 to October 2, 1999, the company incurred $0.8 million of professional
fees for purposes discussed above, which were shown as reorganization items.
Deferred debt issuance costs ($1.3 million) related to debt restructured
pursuant to the prepackaged plan of reorganization were also written off and
included in reorganization items.
The company's core business--the development and distribution of a broad
range of products for the delivery of video entertainment--was composed of two
major product segments--Consumer Electronics, which includes the design,
development and marketing of video products along with parts and accessories
for such products, and Network Systems, which designs, develops and markets
digital set-top boxes, which are sold primarily to satellite systems
operators, telecommunications companies and other commercial users. On August
8, 2000, the company sold substantially all of the assets of its Network
Systems Division to a subsidiary of Motorola, Inc. The discontinued segment
has been segregated and the condensed consolidated statements of operations
have been restated. The following discussion of results of operations covers
only the continuing operations of the company.
Total third quarter sales were $144.7 million in 2000, compared with $209.5
million in 1999. Sales decreased $64.8 million (or 31 percent) in the third
quarter of 2000 compared to the same period a year ago due to: (i) the
company's strategy of exiting product, customer and channel business which are
not providing acceptable profit margins and (ii) the elimination of certain
international and OEM sales following the company's cessation of manufacturing
activity as a part of its reorganization.
The company's third quarter 2000 gross margin was $7.7 million compared to
$20.4 million in the prior year. The most significant cause for this decrease
in margin dollars was the large revenue decrease discussed above. On a
percentage basis also, the third quarter 2000 margin of 5.3 percent of sales
was lower than the 1999 margin rate of 9.8 percent. This decrease is
attributable to changes in product mix and competitive pressures in National
accounts and Accessories businesses, and to unfavorable 2000 inventory reserve
adjustments reflecting changing product and customer strategies, partially
offset by merchandising and overhead cost reductions.
Selling, general and administrative expenses were $17.7 million in the
third quarter of 2000 (12.2 percent of net sales), compared with $22.6 million
(10.8 percent of net sales) in the previous year. Expenses for 2000
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benefited from the company's continuing efforts to downsize staffing.
Engineering and research expenses were reduced to $2.7 million in the third
quarter of 2000 from $5.1 million in the third quarter of 1999 due to
reductions in corporate staff and the transfer/closure of manufacturing
facilities.
Other operating (income) was $(13.3) million for the third quarter of 2000
and ($8.1) million for the third quarter of 1999. Other operating income in
the third quarter of 2000 and 1999 includes ($8.7) million and ($7.7) million,
respectively, of accrued royalty income from manufacturers of television sets
and VCRs who have taken licenses under some of the company's U.S. tuner system
patents. The third quarter of 2000 also includes other income of ($1.4)
million for engineering and research services provided to LGE.
Interest expense was $6.8 million in the third quarter of 2000, compared
with $9.1 million in the comparable period of the previous year. The change
resulted primarily from less interest-bearing obligations in 2000 due to LGE
converting $200.0 million of the company's debt and extended-term payables
with LGE into 100 percent of the company's new common stock in connection with
the prepackaged plan of reorganization. Interest expense was reduced by $2.8
million in 1999 reflecting the suspension of contractual interest on the 6 1/4
percent subordinated debentures and certain unsecured debt with LGE as a
result of the Chapter 11 filing from the date of filing of the prepackaged
plan and, in accordance with SOP 90-7, suspension of interest expense
accruals.
For the first nine months of 2000, the company reported a net loss from
continuing operations, excluding restructuring charges and reorganization
items, of $29.9 million compared to $47.5 million in the same period of 1999.
Including a $7.6 million restructuring charge, the company reported a 2000
nine-month net loss from continuing operations of $37.5 million. In the first
nine months of 1999, including $11.5 million restructuring charges and
reorganization items, the company reported a net loss from continuing
operations of $59.0 million. Nine-month sales were $399.2 million in 2000 and
$520.5 million in 1999.
Results of Discontinued Operations
Net sales for the Network Systems Division were $8.1 million and $47.5
million in the period from July 1, 2000 through August 7, 2000 and the period
from January 1, 2000 through August 7, 2000, respectively, and $18.5 million
and $75.3 million in the three and nine-month periods ended October 2, 1999,
respectively. The decrease in the current year periods resulted from the
completion during 1999 of a multi-year contract and the phase-out of analog
set-top boxes and cable modems since the third quarter of 1998.
Pretax and net (income) loss for the Network Systems Division were $0.9
million and $(0.5) million for the third quarter and first nine months of
2000, respectively, and $3.2 million and $0.0 million, respectively, for the
same periods in 1999. In addition, the gain on disposal of the Division in the
third quarter of 2000 was $5.9 million.
Liquidity and Capital Resources
Because the Network Systems Division's net assets sold were primarily
inventory and property, plant and equipment, the condensed consolidated
balance sheets and condensed consolidated statements of cash flows have not
been restated. The following discussion of liquidity and capital resources
includes the Network Systems Division.
During the nine months ended September 30, 2000, $54.8 million of cash was
used by operating activities as a result of $34.2 million of net loss from
operations (excluding depreciation and gain on asset sales, net) and $21.7
million of cash used by the change in current accounts. The latter was
principally composed of a $40.6 million increase in inventories partially
offset by a $19.7 million increase in accounts payable and accrued expenses.
The increase in inventories and accounts payable and accrued expenses resulted
primarily from the seasonal build-up of inventories; however, inventories were
$18.0 million lower than the amount at October 2, 1999, due to the decreased
manufacturing activities.
During the nine months ended September 30, 2000, proceeds from asset sales
exceeded capital additions by $4.0 million.
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During the nine months ended September 30, 2000, financing activities
provided $50.8 million of cash. This was composed of $60.0 million of
borrowings under the LGE credit support agreement, partially offset by $3.6
million of repayments under the three-year Citicorp senior credit facility and
$5.6 million of repayments under the LGE restructured senior note. (The $11.8
million of interest added to principle of the LGE restructured senior note in
2000 was a non-cash transaction.)
As of September 30, 2000, the company had $277.7 million of interest-
bearing obligations which consisted of: (i) $37.4 million borrowed from
Citicorp under the three-year $150.0 million senior credit facility, (ii)
$50.0 million of 8.19 percent senior debentures due 2009 ($39.6 million at
amortized amount) (iii) $130.3 million outstanding under the LGE restructured
senior note; and (iv) $60.0 million borrowed from LGE under the credit support
agreement.
On November 9, 1999, on the company's exit from bankruptcy proceedings,
Citicorp terminated the debtor-in-possession financing facility, which it had
provided. Also, on November 9, 1999, the company entered into a senior bank
credit agreement with Citicorp North America, Inc. that provided for a three-
year $150.0 million senior credit facility subject to borrowing base
restrictions. The facility is secured by substantially all of the company's
assets and is subject to other terms and conditions. Borrowings bear interest
based on specified margins in a range of 1.5 percent to 3.0 percent above
LIBOR or the prime rate depending on the company's compliance with certain
financial covenants. The Citicorp senior credit facility 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 and engage in transactions with affiliates. As of July 5, 2000,
the company had reduced the commitment available under the Citicorp senior
credit facility to $130.0 million as a result of its projected borrowing base
and cash flow requirements.
In accordance with the prepackaged plan of reorganization, the company's
$103.5 million of 6 1/4 percent convertible subordinated debentures due 2011
and related accrued interest were exchanged for $50.0 million of 8.19 percent
senior debentures maturing in November 2009, which were recorded at fair value
of $39.1 million. The $10.9 million discount is being amortized over the life
of the new senior debentures using the effective interest rate method with
$0.5 million amortized as of September 30, 2000. The debentures can be
redeemed at par in whole or in part at any time and rank equally with all
senior debt of the company.
As part of the company's prepackaged plan of reorganization, LGE received
the $126.2 million LGE restructured senior note as settlement of certain LGE
claims. This note originally provided for interest to be accrued at LIBOR plus
6.5 percent per annum, with interest added to the principle amount of the note
if certain financial ratios are not met. As of August 1, 2000, the LGE
restructured senior note was amended to reduce the interest rate on borrowing
to LIBOR plus 3.0 percent per annum, more closely reflecting the interest rate
paid on the Citibank debt discussed above. Further, the terms determining cash
payment of interest accrued were amended to once per year versus quarterly.
The note, which matures on November 1, 2009, is secured by a first lien on all
assets leased to the company and its subsidiaries pursuant to the leveraged
leases and transferred to the company pursuant to the restructuring agreement.
The note is guaranteed by each of the company's subsidiaries and is subject to
other terms and conditions.
The Citicorp three-year senior credit facility and the LGE restructured
senior note are in addition to the $60.0 million post-restructuring credit
support provided by LGE to the company pursuant to the terms of the
restructuring agreement between the parties. This LGE facility contains
covenants, which mirror those in the Citicorp three-year facility. The LGE
$60.0 million facility originally provided for interest on borrowings at LIBOR
plus 6.5 percent per annum and is secured by a first lien on the company's VSB
technology. In June 2000, the LGE facility was amended to reduce the interest
rate on borrowing to LIBOR plus 3.0 percent per annum.
The company remains in compliance with all financial covenants of all
outstanding debt issues as of September 30, 2000.
The company believes that, giving effect to the Citicorp three-year senior
credit facility, together with its LGE credit support and the company's
projected cash generated by operations, the estimated levels of liquidity
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available to the company will be sufficient to permit the company to satisfy
its working capital, debt service, capital expenditure and other requirements.
However, such belief is based upon various assumptions, including those
underlying its current business operations as a digital sales, marketing and
research and development company which relies on outsourced products. The
company is highly dependent on the continued financial support of LGE. In
addition to its $60.0 million credit support, LGE is committed to provide its
best efforts to improve the company's performance and to maintain the
company's borrowings under the Citicorp credit line.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
Certain statements in this Quarterly Report on Form 10-Q, such as those
regarding the company's strategies, plans, objectives and expectations are
forward-looking statements that involve known and unknown risks, uncertainties
and other factors which may cause the actual results of the company or of its
efforts to successfully implement the operational restructuring and achieve
the business plan projections and financial results of the company to be
materially different from any future results expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions, both in the United States and other
countries in which the company sells its products and from which the company
obtains supplies; the effect of competition in the markets served by the
company; LGE's ability to obtain required approvals of the Republic of Korea
for additional financing, if any, that LGE may desire to extend to the
company; restructuring charges and the other costs and expenses of its new
business plan. Given these uncertainties, debtholders are cautioned not to
place undue reliance on any forward-looking statements contained herein. The
company disclaims any obligation to update such factors or forward-looking
statements or to publicly announce the result of any revisions to any of the
forward-looking statements contained or referred to herein or to reflect
future events or developments.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the company due to
adverse changes in financial rates. The company is exposed to market risk in
the area of interest rates. This exposure is directly related to its senior
secured notes and working capital facilities with Citibank and LGE. The
company does not currently maintain any interest rate hedging arrangements.
The company is continuously evaluating this risk and will implement interest
rate hedging arrangements when deemed appropriate.
Because the company purchases substantially all products in U.S. dollars,
prices are not directly impacted by the value of the dollar in relation to
other foreign currencies, including the Japanese yen and Korean won.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 20, 2000, the United States District Court for the District of
Delaware rejected the appeal filed by Nordhoff Investments, Inc. and the
Official Committee of Equity Holders and upheld the approval of the company's
prepackaged plan of reorganization. The Official Committee of Equity Holders
has appealed the District Court's decision.
Item 2. Changes in Securities
(b) None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On October 11, 2000, Ian G. Woods resigned as President and Chief Executive
Officer of the company and also resigned from the company's Board of
Directors. Tokjoo Lee, a career LGE executive, was appointed as the new
President and Chief Executive Officer as of that date and was appointed to the
company's Board of Directors.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10(o) Employment Separation Agreement and General Release dated as of
August 12, 2000 by and between Ian G. Woods and Zenith Electronics
Corporation
(27) Financial Data Schedule for the nine months ended September 30, 2000
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Zenith Electronics Corporation
(Registrant)
/s/ Hyon Ick Jo
By: _________________________________
Hyon Ick Jo
Chief Financial Officer
(Principal Financial Officer)
/s/ Lawrence D. Panozzo
By: _________________________________
Lawrence D. Panozzo
Corporate Controller
(Principal Accounting Officer)
Date: November 14, 2000
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