Zenith Electronics Corporation

FOUNDED: 1918

Contact Information:

HEADQUARTERS: 1000 Milwaukee Ave.
Glenview, IL 60025-2493
PHONE: (847)391-7000
FAX: (847)391-7253
URL: http://www.zenith.com/

OVERVIEW

Zenith has developed and manufactured electronic products for nearly 80 years. In recent years the company has been struggling financially and, in May 1998, announced it was initiating a prepackaged reorganization plan under Chapter 11 of the Bankruptcy Code.

Although Zenith's roots are in radio, it produces many varieties of television sets, which are the backbone of its product line. It became a leader by marketing products with innovative features. In fact, some of its television sets have a feature that tells what is on a channel for up to one week ahead of time, and some television sets and VCRs can be programmed with a single button.

Zenith also is a leader in providing network systems. In addition, the company develops cable modems, advanced analog and digital set-boxes, and wireless cable systems. The modems allow computer users to access the Internet at faster speeds than conventional telephone-based modems. To remain a leader in the electronics field, the company released the first sensible television set that allows Internet browsing, called "NetVision," which was a new idea in interactive television in 1996.

COMPANY FINANCES

In May 1998, Zenith announced that it planned to initiate a prepackaged reorganization proceeding under Chapter 11. At about the same time, the New York Stock Exchange suspended trading of the company's shares and delisted it from the exchange. The company's stock is traded on the NASDAQ market.

Through 1997, Zenith Electronics had incurred losses in all but one (1988) of the years since 1985. The company pointed to frequent and significant price decreases on television equipment in the 1980s and 1990s as a reason for its predicament. Sales in 1997 totaled __BODY__.17 billion, a 9.3-percent drop from 1996 sales of __BODY__.29 billion. Zenith recorded a 1997 net loss of $271 million, down from a $178 million loss in 1996 and a $91 million loss in 1995. As a result of its poor performance, the company reported a loss per common share of $4.49 in 1997; in previous years, the loss was $2.73 (1996) and __BODY__.85 (1995).

There were many causes for the striking declines. Lower than expected demand for Zenith's direct-view color television sets and lower VCR sales affected its consumer electronics area. Sales also were affected by a dispute with a Brazilian distributor and seller of the company's products. After the distributor failed to pay a large portion of Zenith's billed amount, Zenith accepted a settlement for far less than the full payment.

Since 1995, Zenith Electronics has been owned by LG Electronics, Inc, a Korean company. That parent company enabled Zenith to continue operating, either by infusing it with much-needed cash or by providing credit guarantees, enabling the company to seek financing from other banks. As of March 1998, Zenith, with the guarantee of LGE, had secured lending agreements for credit lines of more than $100 million, all of which had been used.

The skies grew darker for Zenith in May 1998 when the company reported another huge first-quarter loss. LGE indicated that it was likely to try to sell the assets of Zenith to end the constant flow of red ink. That announcement caused the stock to fall 27 percent, to $2.50 per share.

In its first-quarter results for 1998, Zenith recorded a loss of $37.8 million and acknowledged a need to restructure. The struggling company lost $.55 a share in the first quarter. In 1996, Zenith lost $25.2 million in the first quarter, or $.38 a share. Sales slipped to $220.7 million from $259.1 million. By mid-1998 Zenith was filing for Chapter 11 bankruptcy.

ANALYSTS' OPINIONS

Analysts were unimpressed by some of the company's early attempts at restructuring and downsizing, pointing out that as recently as the first quarter of 1998 Zenith had yet to show a profit. Throughout 1997 and into early 1998, Zenith had seen some upticks for its stock, usually on the introduction of new products, most of which were reversed soon after the initial news.

In April 1998, analysts grew alarmed when the company's auditors attached a "going concern" qualification to its fourth-quarter financial results. The qualification meant that the continued poor earnings and working capital performance prompted serious doubts about Zenith's ability to continue its current operations.

That concern was evident in April 1998, when Standard & Poor's lowered its corporate credit rating on Zenith Electronics Corp.'s various contracts to carry and repay debt. Although LGE guaranteed a new $45-million secured facility for Zenith, enough to fund the company's operations through at least June 30, 1998, Zenith remained in a poor financial position. That position grew more dire on May 22, 1998, when the New York Stock Exchange (NYSE) suspended trading of Zenith shares and said that it will apply to the Securities and Exchange Commission to delist the company; the NYSE claimed that Zenith had fallen below the exchange's requirements. The day before that action, Zenith announced that it planned to file for Bankruptcy Court protection and to become a closely held unit of LGE. In late June, Zenith entered into a $125-million secured credit agreement with a banking group led by Citicorp. The agreement amended the company's existing Citicorp facilities and provided increased borrowing capacity to help fund Zenith's working capital requirements through year-end 1998. The increased availability under the amended Citicorp credit agreement supplements $45 million of financing provided earlier in 1998 by LGE.

A prime reason for Zenith's disappointing financial performance can be traced to the ownership of one of its chief competitors, the RCA-GE television brand. As Zenith struggled to compete with ever-declining television prices, RCA-GE continued to cut prices even in the face of its own huge losses. It could do so because it was owned by the nation of France, which, as one analyst noted, "doesn't know the concept of profit." Although it may be little consolation to Zenith, the analyst stated that few companies could have survived as long as Zenith has when confronted with an avalanche of cheap products.

Zenith's resurrection may have been based on its hopes for the high-definition television market. But, in addition to the technology's high cost to the consumer, broadcasters had not yet begun producing programming for the new format. As one analyst said, Zenith may be ahead of the competition in high-definition television, but it must first make money on its existing products and not bank on a future that it lacked the cash flow to reach.

HISTORY

Zenith was launched in 1918 by Ralph Mathews and Karl Hassel, two wireless-radio enthusiasts. Using a kitchen table as their makeshift factory in Chicago, they supplied equipment for other amateur radio buffs. In the early 1920s they sold radios under the name "Z-Nith"—a name taken from their radio station, 9ZN. Their small business was later discovered by entrepreneur Eugene F. McDonald Jr., who helped Mathews and Hassel build the company into Zenith Radio Corporation in 1923. Zenith produced the first portable radio in 1924, the first receiver to operate on household current in 1926, and the first automatic push-button radio tuner in 1927. In 1927 they also came out with the slogan, "The Quality Goes In Before The Name Goes On." Soon after, they were listed on the New York Stock Exchange.

Zenith had many other successes, including the first pay-per-view television system in 1947. The company came out with their first line of black-and-white televisions in 1948 and changed television viewing in 1956 by producing the first wireless remote control. Five years later Zenith introduced its first line of color televisions. Zenith then remodeled the industry by doubling the brightness of color television, thus establishing the company's place in the color television market. Zenith branched out further by manufacturing cable television products.

Zenith made its last radio in 1982 and changed its name to Zenith Electronics Corporation. In the late 1980s it bought a computer company, Heath Co., made it into a billion-dollar business, and then sold it in 1989 to centralize its strength in television. Although it has remained a leader in its field with sales of __BODY__.2 billion in 1997, Zenith has reported financial losses since 1988.

A corporate change of control occurred for Zenith in November 1995, when a Korean company, LG Electronics, Inc., acquired 55 percent of Zenith Electronics. The parent provided operating capital and loan guarantees for Zenith, but the company's red ink continued to flow through at least the first quarter of 1998. In that year, restructuring continued, with the resignations in January 1998 of president and CEO Peter S. Willmott and CFO Roger A. Cregg. Finally, LGE was forced to consider selling off Zenith's assets.

STRATEGY

Zenith's success emerged from its ability to translate new ideas into products, as it did in the digital field. To continue with its history of being first, the company capitalized on technology. While the company started with radios as its principal product, Zenith knew when to move into other related fields, such as television; however, it still maintained its same high standards. Zenith influenced already established markets by coming out with new ways to produce items, such as the push-button radio, bringing FM radio broadcast to the Midwest, 21-inch television sets, and the modular television chassis.

In the late 1990s, Zenith's strategy has been to implement an ongoing restructuring plan. The massive plan was designed to exploit the company's significant brand name, reduce costs, and get the company on a firm financial footing. It was estimated by Zenith that at least $225 million would be required to fully fund its restructuring. LGE indicated a willingness to pay only a small portion of those costs. In the company's 1997 annual report, it indicated the possibility that Zenith might be compelled to file for bankruptcy. In fact, in May 1998, Zenith announced it was initiating a prepackaged reorganization proceeding under Chapter 11 of the Bankruptcy Code.

INFLUENCES

Zenith has long been recognized as a pioneer in television development, beginning broadcasts as early as 1939. Later, in 1984, the company developed, among other things, the multichannel television sound (MTS) transmission system, allowing stereo television broadcasts; Zenith received an Emmy Award in 1986 for its work with MTS.

Zenith research and development in various areas has led the market and had an influence on other companies in the field as well. The company's focus on high definition television has produced a remarkable product but one that has yet to be marketed broadly. And Zenith's focus on providing access to the Internet via cable systems in partnership with modem maker U.S. Robotics provided a brief surge in its stock price in 1996. But neither strategy was enough to reverse the company's flood of red ink.

When the company started to report annual financial losses in 1988, it began reorganizing operations by reengineering processes and retooling plants. In 1996 Zenith reported losses of $167 million. In that year, Peter Willmott became the company's new president and CEO. His new restructuring plan was aimed at lowering the fixed costs of the company. He accomplished this in 1997 by reducing the budgets for salaried and hourly work forces by $20 million. Willmott called these cuts "a necessary step in the company's turnaround process." But it appeared that the cuts were not enough to keep the company afloat. In fact, Willmott himself left the company in January 1998, along with CFO Roger A. Cregg. Clearly, a major turnaround was anticipated by LGE.

CURRENT TRENDS

Because of price reductions in color television sets in the 1980s and 1990s, Zenith experienced a lengthy string of losses. Some of the earlier losses also reflected recession conditions in the United States. In order to make Zenith more competitive in the television market, the company invested large amounts in engineering and research, sold off most of its noncore businesses, or discontinued products.

In 1995 Zenith braved a new market by designing computer modems. Instead of connecting to telephone lines, the modems connected to cable television networks. The company also stepped up production in its Chihuahua, Mexico, plant, and produced a variety of cable products including cable modems. The company expected these changes in its marketing plan and the release of "NetVision" to set it on the road to recovery. "NetVision" was a product that provided Internet access through the television.

PRODUCTS

Zenith traditionally has focused on new products to keep abreast of competition. In 1996 it signed a __BODY__-billion deal with Americast to provide 3 million digital settop boxes. In 1996 and early 1997, Zenith worked with U.S. Robotics to form a telco-return cable modem. The company also collaborated with Microsoft and Cisco Systems to form an end-to-end solution for high-speed Internet access over cable systems. Zenith worked with FOCUS Enhancements to design integrated computer scan conversions for television sets that were designed for professional audio and visual and educational markets.

Zenith also introduced high-definition multiscan front-projection products that are capable of displaying standard television, high-definition television (HDTV), and SVGA graphics. A variation on NetVision was introduced in April 1996, when Zenith brought out its new "43 Series" products, computer-to-television color television sets designed for use in the classroom or educational and training settings.

GLOBAL PRESENCE

Most of Zenith's production in 1997 was based in the United States. Illinois had four plants; Texas had two plants; and California had one plant. Outside of the United States production was based in four plants in Mexico. While it sold globally, the biggest part of its business was in the United States. In 1997, U.S. net sales totaled __BODY__.1 billion, while those outside the United States amounted to only $28 million.

SOURCES OF INFORMATION

Bibliography

"Business Browser." Arizona Republic, 23 May 1998.

"Company Profile: Zenith Electronics Corp.," 17 February 1997. Available at http://www.infoseek.com/content?arn=107D4Y&qt=Zenith&sv=N3&col=CT.

Haber, Carol, and Chad Fasca. "One Last Rescue for Zenith." Electronic News, 16 February 1998. Available at http://www.electronicnews.com/enews/feat/fin021698.html.

"LG in Zenith Reorganization Talks." Reuters, 18 May 1998. Available at http://biz.yahoo.com/finance/980518/lg_64010_ k_1.html.

Norris, Floyd. "Say Internet and Watch Zenith Soar." New York Times, 7 May 1996. Available at http://www.conceptone.com/netnews/nn1466.htm.

Standard & Poor's Credit Rating Agency. "S&P Cuts Zenith Electronics Sub Debs to 'C,' Outlook Negative," 2 April 1998. Available at http://biz.yahoo.com/bw/980402/s_p_4.html.

Techstocks, 2 March 1997. Available at http://www.techstocks.com/profiles/ZE.html.

Zenith Electronics Corporation Home Page, March 1998. Available at http://www.zenith.com.

"Zenith Plans to Introduce NetVision." Reuters Online, 8 January 1997. Available at http://www.companylink.com/item.cfm?id=1083149.

"Zenith Posts Another Loss, Sees Restructuring Need." Reuters, 12 May 1998. Available at http://biz.yahoo.com/finance/980512/earns_zeni_2.html.

"Zenith Stock Falls." Motley Fool Evening News, 1 April 1998. Available at http://fnews.yahoo.com/fool/98/04/01/dna/p15.html.

For an annual report:

on the Internet at: http://www.zenith.com/ or write: Zenith Electronics Corporation, 1000 Milwaukee Ave., Glenview, IL 60025

For additional industry research:

Investigate companies by their Standard Industrial Classification Codes, also known as SICs. Zenith's primary SICs are:

3651 Household Audio and Video Equipment

3671 Electron Tubes

5064 Electrical Appliances, Television and Radio Sets

5065 Electronic Parts and Equipment, NEC