<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM 10-Q
----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended June 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
----------------
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 Six Months
Ended Ended
--------------- ---------------
July July
June 30, 3, June 30, 3,
2000 1999 2000 1999
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Net sales.................................... $136.9 $191.9 $254.5 $311.0
------ ------ ------ ------
Costs, Expenses and Other:
Cost of products sold...................... 124.5 175.0 237.4 285.7
Selling, general and administrative........ 17.6 23.3 39.1 47.4
Engineering and research................... 2.7 4.7 5.7 10.7
Other operating income, net (Note Five).... (10.1) (7.9) (16.2) (15.6)
Restructuring charges (Note Four).......... 3.2 4.1 5.8 6.9
------ ------ ------ ------
Operating loss............................... (1.0) (7.3) (17.3) (24.1)
Gain on asset sales, net..................... -- (0.3) -- --
Interest expense............................. 2.5 1.7 4.7 3.9
Interest expense--related party.............. 4.2 11.1 8.1 20.3
Interest income.............................. (0.8) (0.4) (1.0) (0.6)
------ ------ ------ ------
Loss before income taxes from continuing
operations.................................. (6.9) (19.4) (29.1) (47.7)
Income taxes................................. 0.5 1.5 0.6 1.5
------ ------ ------ ------
Net loss from continuing operations.......... $ (7.4) $(20.9) $(29.7) $(49.2)
Net income (loss) from discontinued Network
Systems Division (provision for income taxes
zero in all periods)........................ (0.1) -- 1.4 3.2
------ ------ ------ ------
Net loss..................................... $ (7.5) $(20.9) $(28.3) $(46.0)
====== ====== ====== ======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
ZENITH ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
In Millions
<TABLE>
<CAPTION>
June Dec.
30, 31, July 3,
2000 1999 1999
------- ------- -------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash.............................................. $ -- $ -- $ 2.8
Receivables, net of allowance for doubtful
accounts of $26.9, $23.5 and $21.5, respectively. 101.1 99.9 114.5
Receivable from related party (Note Eight)........ 6.8 12.4 6.8
Inventories (Note Six)............................ 87.5 78.7 105.3
Other............................................. 24.4 30.7 18.6
------- ------- -------
Total current assets............................ 219.8 221.7 248.0
Property, plant and equipment, net.................. 10.7 7.8 42.9
Property held for disposal (Note Ten)............... 1.5 43.1 3.7
Receivable from related party....................... -- -- 12.1
Other non-current assets............................ 5.9 6.4 10.8
------- ------- -------
Total assets.................................... $ 237.9 $ 279.0 $ 317.5
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt (Note Seven)...................... $ 24.2 $ 41.0 $ 6.6
Short-term debt with related party (Note Seven)... -- -- 220.3
Current portion of long-term debt................. -- -- 11.5
Accounts payable.................................. 50.9 56.8 84.6
Accounts payable with related party (Note Eight).. 24.9 41.1 141.4
Income taxes payable.............................. 5.8 5.1 5.2
Accrued expenses.................................. 88.4 129.7 150.1
------- ------- -------
Total current liabilities....................... 194.2 273.7 619.7
Long-term liabilities............................... -- -- 5.4
Long-term liabilities with related party............ -- -- 10.9
Long-term debt (Note Seven)......................... 39.4 39.1 92.0
Long-term debt with related party (Note Seven)...... 191.0 124.6 --
Stockholders' equity:
Preferred stock................................... -- -- --
Common stock...................................... -- -- 67.6
Additional paid-in capital........................ 772.7 772.7 506.8
Retained earnings (deficit)....................... (959.4) (931.1) (983.2)
Treasury stock.................................... -- -- (1.7)
------- ------- -------
Total stockholders' equity...................... (186.7) (158.4) (410.5)
------- ------- -------
Total liabilities and stockholders' equity...... $ 237.9 $ 279.0 $ 317.5
======= ======= =======
</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 Six Months
Ended
---------------------
June 30, July 3,
2000 1999
----------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss................................................ $ (28.3) $ (46.0)
Adjustments to reconcile net loss to net cash used by
operations:
Depreciation.......................................... 2.0 8.6
Other................................................. -- 3.1
Gain on asset sales, net.............................. (0.1) --
Changes in assets and liabilities:
Current accounts.................................... (16.5) 10.4
Other assets........................................ 0.5 3.4
Other liabilities................................... -- 1.5
--------- ---------
Net cash used by operating activities................... (42.4) (19.0)
--------- ---------
Cash Flows from Investing Activities:
Capital additions..................................... (1.0) (1.4)
Proceeds from asset sales............................. 3.9 36.3
--------- ---------
Net cash provided by investing activities............... 2.9 34.9
--------- ---------
Cash Flows from Financing Activities:
Short-term borrowings, net............................ (16.8) (13.1)
Proceeds from long-term borrowings.................... 60.0 --
Principle payments on long-term debt.................. (3.7) --
--------- ---------
Net cash provided (used) by financing activities........ 39.5 (13.1)
--------- ---------
Increase in cash........................................ -- 2.8
Cash at beginning of period............................. -- --
--------- ---------
Cash at end of period................................... $ -- $ 2.8
========= =========
Increase (decrease) in cash attributable to changes in
current accounts:
Receivables, net...................................... $ (6.6) $ 14.2
Income taxes.......................................... 0.7 1.0
Inventories........................................... (25.0) (21.1)
Other current assets.................................. 5.6 (7.8)
Accounts payable and accrued expenses................. 8.8 24.1
--------- ---------
Net change in current accounts.......................... $ (16.5) $ 10.4
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.............................................. $ 4.8 $ 9.4
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............... 10.4 --
</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--Subsequent Event
On August 8, 2000, the company sold substantially all of the assets of its
Network Systems Division to a subsidiary of Motorola, Inc. The company had
originally targeted the sale of Network Systems to occur in the fourth quarter
of 1999. The financial terms of the sale do not differ materially from the
company's prior business plan projections. 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,
net, the condensed consolidated balance sheets and condensed consolidated
statements of cash flows have not been restated.
Net sales for the Network Systems Division were $16.6 million and $39.4
million in the three and six-month periods ended June 30, 2000, respectively,
and $25.3 million and $56.8 million in the three and six-month periods ended
July 3, 1999, respectively. The value of the inventory and property, plant and
equipment, net to be sold was $2.9 million and $1.5 million, respectively, as
of June 30, 2000, and $7.6 million and $1.4 million, respectively as of
December 31, 1999. A gain was recorded on the sale of the Network Systems
Division in August 2000.
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 $28.3 million in
the six months ended June 30, 2000. In addition, the company had a negative
working capital position of $52.0 million as of December 31, 1999, and the
$25.6 million positive working capital position as of June 30, 2000, resulted
from borrowing $60.0 million from LG Electronics Inc. ("LGE") under the LGE
credit support agreement discussed in Note Seven. 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 conversion from a manufacturing
and distributing company to a 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
During the three and six months ended June 30, 2000, the company recorded
$3.2 million and $5.8 million, respectively, of restructuring charges,
primarily related to (i) additional severance and other costs incurred in
connection with the closure and transfer of the company's Mexican
manufacturing facilities, (ii) additional severance incurred due to reduction
in Engineering staff and Corporate Office personnel and (iii) professional
5
<PAGE>
fees relating to disposal of assets in connection with the company's
conversion from a manufacturer to a 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 and six months ended July 3, 1999, the company recorded
$4.1 million and $6.9 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.
A summary of the restructuring charges recorded for the first six months of
2000 is as follows (in millions):
<TABLE>
<CAPTION>
Six Months Ended
June 30, 2000
Restructuring ---------------------- Restructuring
Reserve at Restructuring Cash Reserve at
Dec. 31, 1999 Charges Payments June 30, 2000
------------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Severance and other
employee costs.......... $ 6.0 $3.4 $ (5.6) $3.8
Plant closure and
business exit costs..... 6.7 -- (2.1) 4.6
Professional fees........ 5.4 2.4 (7.1) 0.7
Other.................... 0.3 -- (0.3) --
----- ---- ------ ----
Total restructuring.. $18.4 $5.8 $(15.1) $9.1
===== ==== ====== ====
</TABLE>
The $9.1 million reserve appears, at this time, to be adequate to cover the
remaining costs of the restructuring activity identified at June 30, 2000.
In addition, as of June 30, 2000 and December 31, 1999, the company has
reserves for asset impairment of $56.4 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 Six Months
Ended Ended
---------------- ---------------
July
June 30, July 3, June 30, 3,
2000 1999 2000 1999
-------- ------- -------- ------
<S> <C> <C> <C> <C>
Royalty income--tuner system patents...... $ (8.4) $(7.1) $(13.9) $(13.3)
Royalty income--VCR direct ship........... -- (0.5) -- (1.1)
Royalty income--other..................... (0.5) (0.6) (1.2) (1.9)
Bank fees................................. 1.2 0.6 2.0 0.9
Engineering and research services provided
to LGE................................... (2.9) -- (2.9) --
Other..................................... 0.5 (0.3) (0.2) (0.2)
------ ----- ------ ------
Total other operating income, net..... $(10.1) $(7.9) $(16.2) $(15.6)
====== ===== ====== ======
</TABLE>
Note Six--Inventories
Inventories consisted of the following (in millions):
<TABLE>
<CAPTION>
July
June 30, Dec. 31, 3,
2000 1999 1999
-------- -------- ------
<S> <C> <C> <C>
Raw materials and work-in-process.................. $ 7.1 $26.0 $ 41.5
Finished goods..................................... 80.4 52.7 63.8
----- ----- ------
Total inventories.............................. $87.5 $78.7 $105.3
===== ===== ======
</TABLE>
6
<PAGE>
Note Seven--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, the company's July 3, 1999 financial statements reflected an
$88.3 million short-term debt with LGE ($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 July 3, 1999 financial statements also reflected a $12.1
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 $9.2 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 further reduced to $11.8
million, which was then 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 provides for a three-
year $150.0 million senior credit facility subject to borrowing base
restrictions. The new 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 new 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.
The new Citicorp three-year senior credit facility and the LGE new
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 June 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 new 8.19
percent senior debentures maturing in November 2009, which were recorded at
fair value of $39.1
7
<PAGE>
million. The $10.9 million discount is being amortized over the life of the
debentures using the effective interest rate method with $0.3 million
amortized as of June 30, 2000. The new 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 new restructured senior note as settlement of certain
LGE claims. This note provides 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 June 30, 2000, the balance of this
note outstanding is $131.0 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 June 30, 2000.
Note Eight--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 owned
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 the significant transactions between the company and LGE
during the three and six-month periods ended June 30, 2000 and July 3, 1999.
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
$118.0 million and $194.3 million of these items during the three and six-
month periods ended June 30, 2000, respectively, and $16.8 million and $19.6
million of these items during the three and six-month periods ended July 3,
1999, respectively. In addition, in the second quarter of 2000, the company
purchased $4.5 million of parts from LGE. 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 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. The license fee payable by LGE was
comparable to licensing rates charged by the company to unrelated parties.
During the three and six-month periods ended July 3, 1999, the company accrued
approximately $0.5 million and $1.1 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 $0.2 million and $0.4 million in the three and six-month
periods ended July 3, 1999, respectively. No accrual was recorded in the three
and six-month periods ended June 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. These sales were at prices that equated to amounts charged by the
company to its major customers. Sales by the company to LGE and its affiliates
were $0.5 million and
8
<PAGE>
$1.4 million during the three and six-month periods ended June 30, 2000,
respectively, and $7.9 million and $13.1 million during the three and six-
month periods ended July 3, 1999, respectively. The lower sales in 2000 were
the result of decreased 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 amount billed for the first six
months of 2000 was $2.9 million.
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 six months ended June 30, 2000, the company's sales to the
LGE Canadian subsidiary were $0.5 million and $0.9 million, respectively, and
the company's sales to the LGE Mexican subsidiary were zero and $0.5 million,
respectively. During the three months and six months ended July 3, 1999, the
company's sales to the LGE Canadian subsidiary were $3.1 million and $3.9
million, respectively, and the company's sales to the LGE Mexican subsidiary
were $4.8 million and $9.2 million, respectively. These amounts are included
in the sales by the company to LGE and its affiliates discussed above.
Other Items: Total accounts payable with related party included $24.9
million and $141.4 million to LGE and its affiliates as of June 30, 2000 and
July 3, 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 June 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 place. The amount of
extended-term payables was $141.1 million as of July 3, 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 June 30, 2000, includes $3.9 million
from sales in the normal course of business with LGE and $2.9 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 $1.3 million for
the two months ended June 30, 2000.
See Note Seven 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 Nine--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--has been 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--Subsequent Event.
9
<PAGE>
Financial information, summarized by segment, is as follows (in millions):
<TABLE>
<CAPTION>
Consumer Network Corporate
Electronics Systems and Other Consolidated
----------- ------- --------- ------------
<S> <C> <C> <C> <C>
Six months ended June 30, 2000
Net sales................... $254.5 $39.4 $ -- $293.9
Income (loss) before income
taxes...................... (7.9) 1.4 (21.2) (27.7)
Six months ended July 3, 1999
Net sales................... $311.0 $56.8 $ -- $367.8
Income (loss) before income
taxes...................... (5.9) 3.2 (41.8) (44.5)
</TABLE>
It should be noted that in the information presented, certain costs such as
interest and administrative costs are not allocated to the Consumer
Electronics or Network Systems segments. These unallocated costs are reported
above in the Corporate and Other column.
Note Ten--Property Held for Disposal
Pursuant to the operational restructuring, the company became a 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 six 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.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The company's second quarter net loss from continuing operations, excluding
restructuring charges, was $4.2 million in 2000 compared to $16.8 million in
1999. Including $3.2 million of restructuring charges, the company reported a
2000 second quarter net loss from continuing operations of $7.4 million. In
the 1999 second quarter, the company reported a net loss from continuing
operations of $20.9 million, including $4.1 million of restructuring charges.
The second quarter of 2000 restructuring charges included (i) additional
severance and other costs incurred in connection with the closure and transfer
of the company's Mexican manufacturing facilities, (ii) additional severance
incurred due to reduction in Engineering Staff and Corporate Office personnel
and (iii) professional fees relating to disposal of assets in connection with
the company's conversion from a manufacturer to a 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 July 3, 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.
The company's core business--the development and distribution of a broad
range of products for the delivery of video entertainment--has been 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 company had
originally projected the sale of Network Systems to occur in the fourth
quarter of 1999. The financial terms of the sale do not differ materially from
the company's prior business plan projections. 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 second quarter sales were $136.9 million in 2000, compared with
$191.9 million in 1999. Sales decreased $55.0 million (or 29 percent) in the
second quarter of 2000 compared to the same period a year ago (i) in National
accounts and Regional channels due to dropping lower profit products,
customers and channels and delays in product availability and (ii) due to the
elimination of certain international and OEM sales after the company's
reorganization and exit from manufacturing. These revenue decreases were
partially offset by increases, as planned, in the company's higher margin
commercial and accessories business.
Second quarter gross margin of 9.1 percent in 2000 was slightly better than
the 1999 rate of 8.8 percent of net sales. The increase is attributable to
lower purchase costs, merchandising and overhead reduction and dropping lower
margin business, offset by a changing product mix with lower service revenue
and by favorable 1999 inventory adjustments.
The company's 2000 second quarter dollar gross margin was $12.4 million
compared to $16.9 million in the prior year. The decrease in gross margin was
primarily the result of (i) lower overall sales revenue as discussed above,
(ii) lower revenues from the company's high-margin repair and service business
caused by a shift in the market place toward replacing lower priced consumer
electronic items instead of repairing them and (iii) favorable non-recurring
inventory-related costs in 1999.
Selling, general and administrative expenses were $17.6 million in the
second quarter of 2000 (13 percent of net sales), compared with $23.3 million
(12 percent of net sales) in the previous year. Expenses for 2000 benefited
from the company's continuing efforts to downsize staffing. Engineering and
research expenses were reduced to $2.7 million in the second quarter of 2000
from $4.7 million in the second quarter of 1999 due to reductions in Corporate
staff and the transfer/closure of manufacturing facilities.
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Other operating (income) was $(10.1) million for the second quarter of 2000
and ($7.9) million for the second quarter of 1999. Other operating income in
the second quarter of 2000 and 1999 includes ($8.4) million and ($7.1)
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 second quarter of 2000 also includes other
income of ($2.9) million for engineering and research services provided to
LGE.
Interest expense was $6.7 million in the second quarter of 2000, compared
with $12.8 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.
For the first six months of 2000, the company reported a net loss from
continuing operations, excluding restructuring charges, of $23.9 million
compared to $42.3 million in the same period of 1999. Including a $5.8 million
restructuring charge, the company reported a 2000 six-month net loss from
continuing operations of $29.7 million. In the first six months of 1999,
including a $6.9 million restructuring charge, the company reported a net loss
from continuing operations of $49.2 million. First-half sales were $254.5
million in 2000 and $311.0 million in 1999.
Net sales for the Network Systems Division were $16.6 million and $39.4
million in the three and six-month periods ended June 30, 2000, respectively,
and $25.3 million and $56.8 million in the three and six-month periods ended
July 3, 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 $(0.1)
million and $1.4 million for the second quarter and first six months of 2000,
respectively, and $0.0 million and $3.2 million for the same periods in 1999.
The lower pretax and net income in the first six months of 2000 was related to
the significantly lower revenue and a less favorable product mix.
Liquidity and Capital Resources
Because the Network Systems Division's net assets to be sold are primarily
inventory and property, plant and equipment, net, 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 six months ended June 30, 2000, $42.4 million of cash was used
by operating activities as a result of $26.3 million of net loss from
operations (excluding depreciation) and $16.5 million of cash used by the
change in current accounts. The latter was principally composed of a $25.0
million increase in inventories partially offset by an $8.8 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 $17.8 million lower than
the amount at July 3, 1999, due to the decreased manufacturing activities.
During the six months ended June 30, 2000, proceeds from asset sales
exceeded capital additions by $2.9 million.
During the six months ended June 30, 2000, financing activities provided
$39.5 million of cash. This was composed of $60.0 million of borrowings under
the LGE credit support agreement, partially offset by $16.8 million of
repayments under the three-year Citicorp senior credit facility and $3.7
million of repayments under the LGE new restructured senior note. (The $10.4
million of interest added to principle of the LGE new restructured senior note
in 2000 was a non-cash transaction.)
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As of June 30, 2000, the company had $265.2 million of interest-bearing
obligations which consisted of: (i) $24.2 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 ($39.4 million at amortized amount)
(iii) $131.0 million outstanding under the LGE new 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 provides for a three-
year $150.0 million senior credit facility subject to borrowing base
restrictions. The new 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 new 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.
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 new 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 debentures using the effective interest rate method with
$0.3 million amortized as of June 30, 2000. The new 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 new restructured senior note as settlement of certain
LGE claims. This note provides 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. 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 new Citicorp three-year senior credit facility and the LGE new
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. As of June 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 borrowings to LIBOR plus 3.0 percent per annum.
The company remains in compliance with all financial covenants of all
outstanding debt issues as of June 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
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 conversion from a manufacturing and distributing company to a
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.
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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
In April 2000, the company amended its By-laws to provide for three
additional directors, bringing to six the total number of directors of the
company. As a result of this amendment, the directors elected Woo-Hyun Paik,
Ph.D., President of LG Electronics Inc.'s U.S. operations and Chief Technology
Officer, Mr. B. C. Jung, President and Chief Financial Officer of LG
Electronics Inc., and Mr. Ian Woods, President and Chief Executive Officer of
the company, to its Board of Directors. In July 2000, Dr. Paik resigned his
position on the company's Board and no successor has been appointed to fill
the vacancy.
Item 6. Exhibits and Reports on Form 8-K
(3c) Amended and Restated By-laws of the company adopted April 17, 2000.
(27) Financial Data Schedule for the six months ended June 30, 2000.
(b) Reports on Form 8-K:
On July 27, 2000, a Form 8-K was filed covering the resignation of Woo-
Hyun Paik, Ph.D. from the company's Board of Directors for personal
reasons, effective July 21, 2000. The Board of Directors has not appointed
a successor to fill the vacancy left by Dr. Paik's resignation.
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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: August 14, 2000
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