<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31, 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 of (IRS Employer Identification Number)
incorporation or organization)
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
---------------
Apr.
Mar. 31, 3,
2000 1999
-------- ------
<S> <C> <C>
Net sales..................................................... $140.4 $150.6
------ ------
Costs, Expenses and Other:
Cost of products sold....................................... 134.0 134.7
Selling, general and administrative......................... 22.9 25.9
Engineering and research.................................... 5.3 8.0
Other operating expense (income), net (Note Four)........... (9.6) (7.7)
Restructuring charges (Note Three).......................... 2.6 3.3
------ ------
Operating loss................................................ (14.8) (13.6)
Loss on asset sales, net...................................... -- 0.3
Interest expense.............................................. 2.2 2.2
Interest expense--related party............................... 3.9 9.2
Interest income............................................... (0.2) (0.2)
------ ------
Loss before income taxes...................................... (20.7) (25.1)
Income taxes.................................................. 0.1 --
------ ------
Net loss...................................................... $(20.8) $(25.1)
====== ======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
ZENITH ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
In Millions
<TABLE>
<CAPTION>
Mar. Dec.
31, 31, Apr. 3,
2000 1999 1999
------- ------- -------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash.............................................. $ -- $ -- $ 5.2
Receivables, net of allowance for doubtful
accounts of $24.4, $23.5 and $18.9, respectively. 74.4 99.9 77.5
Receivable from related party..................... 2.3 12.4 7.9
Inventories (Note Five)........................... 77.1 78.7 73.9
Other............................................. 27.9 30.7 26.7
------- ------- -------
Total current assets............................ 181.7 221.7 191.2
Property, plant and equipment, net.................. 9.5 7.8 48.1
Property held for disposal (Note Nine).............. 1.4 43.1 27.0
Receivable from related party....................... -- -- 13.8
Other non-current assets............................ 6.2 6.4 10.4
------- ------- -------
Total assets.................................... $ 198.8 $ 279.0 $ 290.5
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt (Note Six)........................ $ 48.4 $ 41.0 $ 30.0
Short-term debt with related party (Note Six)..... -- -- 191.3
Current portion of long-term debt (Note Six)...... -- -- 11.5
Accounts payable.................................. 26.6 56.8 51.9
Accounts payable with related party (Note Seven).. 31.2 41.1 130.8
Income taxes payable.............................. 5.2 5.1 4.2
Accrued expenses.................................. 102.8 129.7 153.0
------- ------- -------
Total current liabilities....................... 214.2 273.7 572.7
Long-term liabilities............................... -- -- 4.5
Long-term liabilities with related party............ -- -- 10.9
Long-term debt (Note Six)........................... 39.3 39.1 92.0
Long-term debt with related party (Note Six)........ 124.5 124.6 --
Stockholders' equity:
Preferred stock................................... -- -- --
Common stock...................................... -- -- 67.6
Additional paid-in capital........................ 772.7 772.7 506.8
Retained earnings (deficit)....................... (951.9) (931.1) (962.3)
Treasury stock.................................... -- -- (1.7)
------- ------- -------
Total stockholders' equity...................... (179.2) (158.4) (389.6)
------- ------- -------
Total liabilities and stockholders' equity...... $ 198.8 $ 279.0 $ 290.5
======= ======= =======
</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>
Three Months Ended
--------------------
Apr.
Mar. 31, 3,
2000 1999
-------- ------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss.................................................. $(20.8) $(25.1)
Adjustments to reconcile net loss to net cash provided
(used) by operations:
Depreciation............................................ 1.0 4.6
Other................................................... -- (0.4)
Loss on asset sales, net................................ -- 0.3
Changes in assets and liabilities:
Current accounts...................................... 12.2 39.4
Other assets.......................................... 0.2 (1.0)
Other liabilities..................................... -- 0.6
------ ------
Net cash provided (used) by operating activities.......... (7.4) 18.4
------ ------
Cash Flows from Investing Activities:
Capital additions....................................... (0.7) (0.4)
Proceeds from asset sales............................... 0.6 5.8
------ ------
Net cash provided (used) by investing activities.......... (0.1) 5.4
------ ------
Cash Flows from Financing Activities
Short-term borrowings, net.............................. 7.4 (18.6)
Proceeds from issuance of long-term debt................ 0.1 --
------ ------
Net cash provided (used) by financing activities.......... 7.5 (18.6)
------ ------
Increase in cash.......................................... -- 5.2
Cash at beginning of period............................... -- --
------ ------
Cash at end of period..................................... $ -- $ 5.2
====== ======
Increase (decrease) in cash attributable to changes in
current accounts:
Receivables, net........................................ $ 24.6 $ 51.1
Income taxes............................................ 0.1 --
Inventories............................................. (14.6) 10.3
Other current assets.................................... 2.1 (3.1)
Accounts payable and accrued expenses................... -- (18.9)
------ ------
Net change in current accounts............................ $ 12.2 $ 39.4
====== ======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 2.0 $ 4.5
Income taxes............................................ -- --
Non-cash activity:
Transfer of Reynosa facilities to an affiliate of LGE to
settle account payable with related party.............. $ 67.0 $ --
</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--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 $20.8 million in
the three months ended March 31, 2000. In addition, the company had a negative
working capital position of $32.5 million and $52.0 million as of March 31,
2000 and December 31, 1999, respectively. The company believes that, giving
effect to (i) the Citicorp three-year senior credit facility and the LG
Electronics Inc. ("LGE") credit support discussed in Note Six and (ii) the
company's 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 Three--Restructuring Charges
During the three months ended March 31, 2000, the company recorded $2.6
million of restructuring charges, (i) $2.1 million for 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 and
(ii) $0.5 million of which related to severance payments in connection with
the transfer of the company's manufacturing facilities in Reynosa, Mexico to
an affiliate of LGE as of January 1, 2000, as part of the prepackaged plan of
reorganization.
During the first three months of 1999, the company recorded $3.3 million of
restructuring charges related to costs associated with work performed by
outside consulting and law firms to support the development of the operational
and financial restructuring plans and the prepackaged plan of reorganization.
A summary of the restructuring charges recorded for the first three months
of 2000 is as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended
March 31, 2000
Restructuring ---------------------- Restructuring
Reserve at Restructuring Cash Reserve at
Dec. 31, 1999 Charges Payments Mar. 31, 2000
------------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Severance and other
employee costs.......... $ 6.0 $0.5 $ (2.9) $3.6
Plant closure and
business exit costs..... 6.7 -- (1.6) 5.1
Professional fees........ 5.4 2.1 (7.0) 0.5
Other.................... 0.3 -- (0.3) --
----- ---- ------ ----
Total restructuring.. $18.4 $2.6 $(11.8) $9.2
===== ==== ====== ====
</TABLE>
5
<PAGE>
The $9.2 million reserve appears, at this time, to be adequate to cover the
remaining costs of the restructuring activity identified at March 31, 2000.
In addition, as of March 31, 2000 and December 31, 1999, the company has
reserves for asset impairment of $59.3 million and $86.1 million,
respectively, which were provided for in 1997 and 1998 and are included in
fixed assets.
Note Four--Other Operating Expense (Income)
Other operating expense (income) consisted of the following (in millions):
<TABLE>
<CAPTION>
Three Months
Ended
----------------
Mar. 31, Apr. 3,
2000 1999
-------- -------
<S> <C> <C>
Royalty income--tuner system patents.................... $(5.5) $(6.2)
Royalty income--VCR direct ship......................... -- (0.6)
Royalty income--other................................... (0.7) (1.3)
Americast payment....................................... (3.0) --
Bank fees............................................... 0.8 0.3
Other................................................... (1.2) 0.1
----- -----
Total other operating income, net................... $(9.6) $(7.7)
===== =====
</TABLE>
Note Five--Inventories
Inventories consisted of the following (in millions):
<TABLE>
<CAPTION>
Mar. 31, Dec. 31, Apr. 3,
2000 1999 1999
-------- -------- -------
<S> <C> <C> <C>
Raw materials and work-in-process.................. $12.7 $26.0 $32.6
Finished goods..................................... 64.4 52.7 41.3
----- ----- -----
Total inventories.............................. $77.1 $78.7 $73.9
===== ===== =====
</TABLE>
Note Six--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 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 such 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.
6
<PAGE>
The company was obligated for the repayment of this settlement amount to
LGE. As a result, the company's April 3, 1999 financial statements reflected
an $89.3 million short-term debt with LGE ($90.1 million less $0.8 million
reduction from proceeds of sales of equipment previously included in the sale-
leaseback transaction). This company debt to LGE was later reduced to $88.3
million, which was settled as part of the prepackaged plan of reorganization.
The company's April 3, 1999 financial statements also reflected a $13.8
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 $7.5 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 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 to be provided by LGE to the company
pursuant to the terms of the restructuring agreement between the parties. As
of March 31, 2000, this LGE $60.0 million facility had not been utilized. The
LGE $60.0 million facility contains covenants which mirror those in the
Citicorp three-year facility. The LGE $60.0 million facility provides 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 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. 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.
Note Seven--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.
7
<PAGE>
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-month periods ended March 31, 2000 and April 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
$76.3 million and $2.9 million of these items during the three-month periods
ended March 31, 2000 and April 3, 1999, respectively. The purchase prices were
the result of negotiations between the parties and were consistent with third
party bids.
In 1998, the company and LGE entered into a direct shipment arrangement
pursuant to which LGE sells and ships VCRs directly to the company's two
largest customers and pays the company a license fee for the use of the
company's brand names on such products and the inclusion of the company's
patented tuner technology in such products. The license fee payable by LGE is
comparable to licensing rates charged by the company to unrelated parties.
During the three-month period ended April 3, 1999, the company accrued
approximately $0.6 million 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. A similar arrangement was entered into in April 1997, in Canada where
LGE's Canadian affiliate sells Zenith branded VCRs under a license from the
company. Pursuant to that arrangement, the company accrued approximately $0.2
million in the three-month period ended April 3, 1999. No accrual was recorded
in the three months ended March 31, 2000.
Product and other sales: Prior to 2000, the company sold televisions,
picture tubes, yokes and other manufactured subassemblies to LGE and its
affiliates at prices that equate to amounts charged by the company to its
major customers. Sales by the company to LGE and its affiliates were $0.9
million and $5.2 million during the three-month periods ended March 31, 2000
and April 3, 1999, respectively. The lower sales in the first quarter of 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 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 ended March 31, 2000, the company's sales to the LGE Canadian and
Mexican subsidiaries were $0.4 million and $0.5 million, respectively. During
the three months ended April 3, 1999, the company's sales to the LGE Canadian
and Mexican subsidiaries were $0.8 million and $4.4 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 $31.2
million and $130.8 million to LGE and its affiliates as of March 31, 2000 and
April 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 significantly larger accounts payable balance as of March 31, 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 $130.1 million as of April 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.
8
<PAGE>
See Note Six 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 Eight--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--is 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.
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>
Three months ended March 31, 2000
Net sales...................... $117.6 $22.8 $ -- $140.4
Income (loss) before income
taxes......................... (9.9) 1.6 (12.4) (20.7)
Three months ended April 3, 1999
Net sales...................... $119.1 $31.5 $ -- $150.6
Income (loss) before income
taxes......................... (8.9) 3.1 (19.3) (25.1)
</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 Nine--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 three 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.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The company's first quarter net loss, excluding restructuring charges, was
$18.2 million in 2000 compared to $21.8 million in 1999. Including $2.6
million of restructuring charges, the company reported a 2000 first quarter
net loss of $20.8 million. In the 1999 first quarter, including $3.3 million
of restructuring charges, the company reported a net loss of $25.1 million.
The first quarter of 2000 restructuring charges included (i) 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 ($2.1 million) and (ii) severance payments in connection with
the transfer of the company's manufacturing facilities in Reynosa, Mexico to
an affiliate of LGE as of January 1, 2000, as part of the prepackaged plan of
reorganization ($0.5 million). During the three months ended April 3, 1999,
the company recorded $3.3 million of restructuring charges related to costs
associated with work performed by outside consulting and law firms to support
the development of the operational and financial restructuring plans and the
prepackaged plan of reorganization.
The company's core business--the development and distribution of a broad
range of products for the delivery of video entertainment--is composed of two
major product segments--Consumer Electronics, which includes the design,
development 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.
Total first quarter sales were $140.4 million in 2000, compared with $150.6
million in 1999. Consumer electronics sales were nearly the same in the 2000
quarter as in the same period in 1999 with television volume increases offset
by the elimination of certain OEM sales after the company's exit from
manufacturing. Sales of Network Systems products decreased $8.7 million (or 28
percent) in the first quarter of 2000 compared with a year ago. The decrease
reflected lower sales due to the phase-out of analog set-top boxes and cable
modems since the third quarter of 1998.
The company's 2000 first quarter gross margin was $6.4 million compared to
$15.9 million in the prior year. The decrease in gross margin was primarily
the result of (i) the decrease in volume and favorable pricing in Network
Systems set-top boxes from the long-term contract levels experienced in early
1999, phased out by mid-1999, (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, (iii) decreased revenues due to delays in product availability and (iv)
favorable one-time inventory costs included in 1999's first quarter.
Selling, general and administrative expenses were $22.9 million in the
first quarter of 2000 (16 percent of net sales), compared with $25.9 million
(17 percent of net sales) in the previous year. Expenses for 2000 benefited
from the company's continuing efforts to reduce costs and downsize staffing.
Engineering and research expenses were reduced to $5.3 million in the first
quarter of 2000 from $8.0 million in the first quarter of 1999.
Other operating expense (income) was $(9.6) million for the first quarter
of 2000 and ($7.7) million for the first quarter of 1999. Other operating
income in the first quarter of 2000 and 1999 includes ($5.4) million and
($6.2) 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 first quarter of 2000 also includes other
income of ($3.0) million, representing the release of funds from an escrow
account.
During 1996, the company signed a multi-year agreement with the Americast
programming venture ("Americast") to provide digital set-top boxes to that
consortium of telecommunications companies, primarily Bell South and GTE
Corporation. In late 1998, the agreement was renegotiated, and among other
things, called
10
<PAGE>
for Americast to escrow $7.5 million that would revert to the company after
its successful emergence from bankruptcy. As the company's plan of
reorganization was confirmed by the U.S. Bankruptcy Court for the District of
Delaware on November 5, 1999, the company anticipated collecting the escrow
and recording it in other income in 2000; $3.0 million was received in the
first quarter of 2000.
Interest expense was $6.1 million in the first quarter of 2000, compared
with $11.4 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.
Liquidity and Capital Resources
During the three months ended March 31, 2000, $7.4 million of cash was used
by operating activities as a result of $19.8 million of net loss from
operations (excluding depreciation) partially offset by $12.2 million of cash
provided by the change in current accounts. The latter was principally
composed of a $24.6 million decrease in receivables partially offset by a
$14.6 million increase in inventories. The decrease in receivables was related
to significantly lower net sales in the first quarter of 2000 when compared to
the fourth quarter of 1999. The increase in inventories resulted primarily
from failure to reduce inventories after the seasonal build-up due to lower
sales in the first quarter of 2000.
During the three months ended March 31, 2000, capital additions were nearly
offset by proceeds from asset sales.
During the three months ended March 31, 2000, $7.5 million of cash was
provided by financing activities. This was composed of $7.4 million of
borrowings under the three-year Citicorp senior credit facility and $0.1
million of borrowings under the LGE restructured senior note.
As of March 31, 2000, the company had $222.9 million of interest-bearing
obligations which consisted of: (i) $48.4 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 ($39.3 million at fair value) and
(iii) $124.5 million outstanding under the LGE new restructured senior note.
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. 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
11
<PAGE>
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.
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 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 such borrowing of $30.0 million
occurred in May 1998, such amount being 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 April 3, 1999 financial statements reflected
an $89.3 million short-term debt with LGE ($90.1 million less $0.8 million
reduction from proceeds of sales of equipment previously included in the sale-
leaseback transaction). The company's debt to LGE was further reduced to $88.3
million, which was settled as part of the prepackaged plan of reorganization.
The company's April 3, 1999 financial statements also reflected a $13.8
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 $7.5 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 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.
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 to be provided by LGE to the company pursuant to
the terms of the restructuring agreement between the parties. As of March 31,
2000, this LGE $60.0 million facility had not been utilized. The LGE $60.0
million facility contains covenants which mirror those in the Citicorp three-
year facility. The LGE $60.0 million facility provides 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.
The company believes that, giving effect to the Citicorp three-year senior
credit facility, together with its LGE credit support and the company's 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.
12
<PAGE>
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 he dollar in relation to
other foreign currencies, including the Japanese yen and Korean won.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
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
None.
Item 6. Exhibits and Reports on Form 8-K
(27) Financial Data Schedule for the three months ended March 31, 2000.
(b) Reports on Form 8-K:
None
14
<PAGE>
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)
Date: May 15, 2000
/s/ Hyon Ick Jo
By: _________________________________
Hyon Ick Jo
Chief Financial Officer
(Principal Financial Officer)
/s/ Lawrence D. Panozzo
By: _________________________________
Lawrence D. Panozzo
Director of Corporate Accounting
and Planning (Principal Accounting
Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q PERIOD ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 101
<ALLOWANCES> 24
<INVENTORY> 77
<CURRENT-ASSETS> 182
<PP&E> 345
<DEPRECIATION> 334
<TOTAL-ASSETS> 199
<CURRENT-LIABILITIES> 214
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (179)
<TOTAL-LIABILITY-AND-EQUITY> 199
<SALES> 140
<TOTAL-REVENUES> 140
<CGS> 134
<TOTAL-COSTS> 134
<OTHER-EXPENSES> 21
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> (21)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
