Evidence of Alleged Corruption Against Zenith's Minority Shareholders

1. Since the date when LGE assumed majority control of Zenith, the majority of Zenith's directors did not qualify as "disinterested"directors.

They were employees and officers of the majority owner and had no allegiance to the welfare of Zenith as an independent US corporation. Upon assuming majority control of Zenith’s stock, LG replaced the entire Zenith Board of Directors, with the exception of three executives. The new directors included six LG employees and officers and one executive who put his own company through a prepackaged Chapter 11 (Eugene Connolly) and one corporate attorney whose law firm remains on a LG retainer (Robert Helman).

Willmott, Connolly and Helman, three of the original five Board members who were selected by LG to serve on the "special committee" to approve LG's restructuring (bankruptcy) of Zenith appear to have conflicts of interest tying them to the best interests of LG versus Zenith. Willmott was a former Zenith CEO under LGE control. Connolly was appointed as a Zenith director by LG and Helman is a partner in a law firm which services LG. The remaining Directors of the Special Committee, McNally and Brooker (along with Willmott) were largely responsible for allowing LG to assume majority control of Zenith. They formed an oversight committee, in 1993, to review CEO Jerry Pearlman's operations, on a weekly basis. The three approved Pearlman's golden parachute of approximately $4 million, Albin Moschener's $4.2 million golden parachute and recommended the approval of LG's purchase of majority control of Zenith.

Replaced Directors after LG control	Age	Years as Zenith Director	Background
Harry Beckner	69	1973-1995
David Cohen	59	1989-1995	Provost NW University, VP for Research
Ilene Gordon	44	1994-1995	VP of Operations, Tenneco Inc.
Charles Marshall	68	1994-1995	Vice Chairman, AT&T 1985-87
Gerald M. McCarthy	56	1992-1995	Zenith Executive VP Sales and Marketing since 1983
Albin Moschener	45	1992-1995	CEO of Zenith, (replaced in 1996)

 

LG employees/ Directors of Zenith	Age	Since	Background
H.J. Lee	66	1995	Chairman, Zenith Electronics, LG Director
John Koo	52	1995	Vice Chairman, Zenith, LG Electronics, President and CEO
K.S. Cho	49	1995	LG Electronics Managing Director
Yong Nam	50	1995	Executive VP of LG
Nam Woo	50	1997	President of North American Operations of LG Electronics
Seung Pyeong Koo	56	1997	Director, Executive Vice President of LG, President Display

 

Directors continuing to serve on Zenith's Board after LG control	Age	Since	Background
T. Kimball Brooker	58	1989	President of Barbara Oil Company; Chicago
Andrew McNally, IV	59	1990	former Chairman and CEO of Rand McNally & Co.
Peter S. Willmott	61	1990	former CEO of Zenith 1996-1997
LG Appointed "Independent" Directors
Eugene B. Connolly	67	1995	former CEO of USG Corporation. Vero Beach, FL. USG was in serious financial problems when Connolly was released by USG as CEO, in 1995. In 1993, he put USSG through a prepackaged bankruptcy
Robert A. Helman	65	1997	Partner, Mayer, Brown & Platt. 773-324-8989, Chicago. Was named a Zenith director after LG took control of Zenith. Mayer, Brown & Platt has provided and may continue to provide, legal services to Zenith and its subsidiaries and also provides legal services to LG.

• Pepper, 308 U.S. at 306-7., the Supreme Court defined the fiduciary obligations of officers, directors, and dominant stockholders to stockholders and creditors as follows: Their powers are powers in trust. . . . Their dealings with the corporation are subjected to rigorous scrutiny and where any of their contracts or engagements with the corporation is challenged the burden is on the director or stockholder not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein. . . . The essence of the test is whether or not under all the circumstances the transaction carries the earmarks of an arms' length bargain. If it does not, equity will set it aside.
• Kahn v. Tremont Corp., 694 A.2d 422 (Del. 1997) - Stockholder derivative action challenging Tremont's purchase of a block of stock in another corporation, NL Industries, from Tremont's controlling shareholder, Valhi. In an extended opinion following trial, the Court of Chancery determined that the entire fairness test was applicable but concluded the use of a special committee shifted the burden on the fairness issue to plaintiff.

The Delaware Supreme Court held that the special committee did not operate in an independent or informed manner and that the Court of Chancery erred in shifting the burden of persuasion to plaintiff. The Supreme Court remanded the action for a new fairness determination with the burden of proof upon defendants. The Supreme Court found the special committee ineffective for three reasons: (1) the special committee was not independent; (2) the special committee's chair, who was closely connected to Simmons (Valhi's controlling stockholder) and Tremont's management, dominated the negotiating process; and (3) the passiveness of the other committee members led to their uninformed approval of the stock purchase.

The Supreme Court criticized the composition of the special committee, even though the three committee members were "independent" in the sense that they had no personal interest in the stock purchase. All three members had significant prior business relationships with Simmons or companies he controlled. Moreover, the Supreme Court questioned the special committee's selection of a financial advisor -- a bank that had previously worked for Simmons' companies and was the parent of the company that employed the special committee chairman. The legal advisor to the special committee was recommended by Tremont's general counsel. The Supreme Court also condemned the special committee's process. The chair, whose independence was most suspect, dominated the negotiating process. The two remaining committee members failed to participate in negotiations and failed to attend critical meetings. One committee member voted to approve the stock purchase before receiving a report that he had specifically requested.

 

2. It is alleged that LGE unfairly dictated that Zenith, from 1996-1998, purchase from LGE approximately $40 million of CRT production equipment, that the equipment was never used as originally intended and was fraudulently disposed of at "fire" sale prices. Also, it is alleged that LGE fraudulently ordered Zenith to purchase approximately $200 million of additional production equipment from other suppliers in order to obtain these assets, at not cost to LGE, in US bankruptcy court. In the absence of fairness, these transactions need to be voided and LGE should be required to compensate Zenith for all capital expenditures made by Zenith from 1996 through the present.

(A) On Dec. 15, 1995, Zenith announced plans to produce high-resolution color picture tubes for computer monitors but was not allowed by LG to produce the monitors, further weakening Zenith.

Zenith press release: " In a $45.6 million program approved by the Executive Committee of Zenith's Board of Directors (Board then controlled by LG) the company plans to install a new production line for the high-margin tubes at Zenith's color picture tube plant in Melrose Park, Ill. The new line, with a production capacity of more than 1 million 17-inch display tubes annually, is expected to begin production in the second quarter of 1997. One of the major customers for the new display tubes is expected to be South Korea's (LG)."

Subsequently, no 17-inch display tubes were ever manufactured at Melrose, at great loss to Zenith. LG also discontinued Zenith’s Flat Tension Mask monitor implementation set for mid-1997. This technology was developed by Zenith’s engineers at the expense of well over $50 million and an additional $50 million plus in machinery/production equipment.

(B) 1997 10K: "INVESTING ACTIVITIES. The principal recurring investing activity is the addition of property, plant and equipment. These expenditures are primarily for equipment and tooling related to product improvements, more efficient production methods and replacement for normal wear. In 1996, investing activities used $125 million of cash, which consisted of capital additions of $129 million offset by $4 million of proceeds from asset sales. In 1995, investing activities used $49 million of cash, which consisted of capital additions of $52 million offset by $3 million of proceeds from asset sales. The level of capital additions in 1996 was significantly higher than the additions in 1995 primarily to support the expansion and modernization of the company's Melrose Park, Ill., picture tube plant, and its Chihuahua, Mexico, plant for digital set-top boxes. The company expects these capital projects, scheduled for completion in the first half of 1997, to yield significant productivity improvements. The level of capital additions in 1995 was consistent with the additions in 1994. Capital additions in 1995 included a new production line for projection TV picture tubes in the company's Juarez, Mexico, plant and new industrial robotics to perform labor-intensive production processes in the Melrose Park plant. The company is planning significant capital investment projects during 1997, primarily in the color picture tube area, which include the expansion of production capacity for color TV picture tubes, new automated production processes and the completion of new production lines for computer display tubes.

(C) Disclosure statement: Equipment purchases: The company purchased approximately $0.3 million, $13.0 million and $24.0 million of production machinery and equipment from LGE during 1998, 1997 and 1996, respectively. The machinery and equipment related primarily to new production lines in the company's picture tube plant for the manufacture of computer display tubes.

 

3. It is alleged that LGE ordered Zenith to barter much of Zenith's equipment in Melrose Park on the eve of bankruptcy at great disadvantage to the interests of Zenith. The barter greatly lowers the value of Zenith's TV manufacturing facility in Melrose Park, provides Zenith with no immediate cash and does nothing to increase the long-term profits of the Zenith entity.

(A) The Melrose Park plant was ordered closed by LG in late 1998 and some equipment was bartered to Philips, shortly thereafter. However, the Melrose Park plant facility and real estate have not been sold, as of August 22, 1999.

In the Disclosure statement, Zenith has bartered some production equipment to Philips in exchange for a picture tube purchase credit of up to $23.9 million, expiring in November 2001. Nowhere is this amount included in Zenith's assets on the Disclosure statement.

LG failed to disclose whether or not its recent contract with Philips to sell 50% interest in LG's LCD operations in Korea for $1.5 billion also included undisclosed Zenith assets such as those in Melrose Park and other Zenith assets in Mexico.

(B) Based on the content of the letter recently received (below), we believe, under normal circumstances, that Zenith would have filed a lawsuit against LG for faulty equipment delivered, inadequate training and the failure to install the $50 million worth of FTM production equipment. This would result in a likely return of the vast majority of Zenith's payments to LG.

Letter from former Zenith employee, Robert Bettinardi, of Zenith's Network Systems: "According to a book I read (Defining Vision) on the Grand Alliance, Zenith had a deal to sell the CE group in the early '90s, but George Bush stepped in and threatened the buyer. That's why they had to sell the computer division to Group Bull for $400M and Zenith hunkered down and waited for their HDTV investment to pay off. I always wondered why there was no Chrysler-type bailout then.

At the time LG offered $350M to buy an additional 46% and become the majority owner, the picture tube plant could not produce 32" and 35" tubes. (Zenith was buying tubes from Toshiba.) I sensed a conspiracy after the picture tube plant retooled (under orders of LG) and the yield was down from 20,000 to 2000 tubes/day.

My internal contacts (union personnel at Melrose Park and a yoke designer) had told me at that time that LG, who sold the new equipment to Zenith for $35 million and installed it, did not properly train the employees on the operation. They held vital information secret. Also, the new equipment was made of aluminum, even though it was fashioned after a working plant in Korea which was made of cast iron or steel. The tubes were warping and the engineers could not resolve the problem. Ever! This cost the company everything and LG was able to scoop it up for a song. I always found it fishy that LG demanded payment for the equipment immediately, from the proceeds of the investment."

Certain kinds of transfers to defeat provisions of the Bankruptcy Code or to give a creditor advantages in consideration of promises in connection with a bankruptcy case are crimes. See 18 U.S.C. § 152 & 157; see also United States v. Ballard, 779 F.2d 287 (5th Cir.), cert. denied, 106 S.Ct. 1519 (1986) (attorney required to testify about transfers not disclosed on bankruptcy schedules based on "crime/fraud" exception to attorney client privilege); United States v. Rogers,722 F.2d 557 (9th Cir. 1983), cert. denied, 105 S.Ct. 129 (1984) (transfer of assets on eve of bankruptcy violation of 18 U.S.C. § 152).

4. It is alleged that LGE has failed to disclose the value of Zenith's Network Systems (NWS) and has attempted to lower the value of NWS by selling its only production company, on the eve of entering bankruptcy court. This transaction is alleged to be unfair to Zenith, did not involve Zenith's directors in the decision and is collusive in that LGE never intended to sell NWS, as stated in the Disclosure. It is also alleged that LGE has unfairly tied the sale of the Chihuahua facility to SMTC for price concessions and the possible requirement for SMTC to open a manufacturing plant for LGE in Shanghai, China.

(A) LG was aware that the industry forecast for huge profits for digital TV, digital cable modems and, especially, digital set-top boxes would not begin until late 1998 and that the transition from analog to digital consumer electronics would involve a substantial investment of capital resources by Zenith, prior to late 1998. In late August, after the Disclosure statement had been mailed to Zenith's debenture owners and shareholders, Zenith sold its manufacturing facility in Chihuahua, Mexico to SMTC and has engaged in "a long-term" production agreement with SMTC.

(B) BusinessWeek (July 1995): "WILL LUCKY GOLDSTAR REACH ITS PEAK WITH ZENITH? "I used to wish I could wave a magic wand to lift our U.S. market share,'' recalls Executive VP Kim Young-Jun. ``There's no doubt that the multimedia battle will be staged in America, '' says LG Electronics President John Koo, who is fluent in English.

Zenith CEO Albin F. Moschner called John Koo on May 16 to inform him about the talks (with mystery company). That revved up LG Electronics executives, particularly Chairman Lee Hun-Jo, a 27-year manager who was promoted to the top position earlier this year.

The real gems at Zenith, Lee believed, were the company's digital HDTV and multimedia technologies, among the world's best. Overall, the Koreans reckoned that personal computers and cable television will ultimately merge in the form of set-top boxes, which will provide multimedia products to consumers. By June 27, a written offer was submitted to Zenith, and the deal was closed on July 17, unprecedented speed for a takeover by a Korean company.

LG Electronics, which is Korea's largest consumer- electronics manufacturer, with 1994 sales of $6.4 billion, will provide its production technology to Zenith, while the American company will bring its HDTV and multimedia technology to the table. ``We see HDTV as a global thing,'' says Koo. ``What happens in the U.S. has a lot of implications for the rest of of the world.''

The deal is particularly sweet for LG because it steals a march on Samsung Electronics. Although a huge power in dynamic random-access memory (DRAM) chips and liquid-crystal displays, Samsung hasn't yet been able to obtain the same sorts of HDTV technologies. It does have a 40% stake in personal computer maker AST Research Inc., based in Irvine, Calif., but that isn't as technologically hot as Zenith. ``By making this purchase, LG has definitely moved ahead and is closer to being a major player in the set-top-box market,'' says David Andrews, chief executive officer of Interlingua in Redondo Beach, Calif.

Together the Korean companies may have taken a lead over Japanese rivals, preoccupied with the home market and their analog HDTV technology. ``I really believe that the Koreans are potentially setting themselves up to take control of the set-top-box market,'' says Andrews. For top LG executives, it's suddenly a dramatically different company from the one they inherited."

C. Consumer Electronics, Sep 15, 1997. ...Zenith will start production of digital wireless MMDS box for BellSouth in 4th quarter, with wired version due for Ameritech, GTE and SBC in spring, Luehrs said. BellSouth is expected to test product in Atlanta. Volume production had been slated for 2nd quarter (TVD Feb 24 p8). Although Americast recently cut some jobs to eliminate overlap, Luehrs said partners remain "dedicated to concept of rolling out digital video services." Zenith has 5-year, $1-billion, contract with Americast to build 3 million digital set-top boxes at Mexican plant (TVD Aug 26/96 p5). "We have the flexibility to use either dedicated lines [for Americast and Sky products] or mix and match them on a single line," Luehrs said."

(D.) From LG web site News Archives (97/10/22) "Zenith Corp. made a contract with "LA Sky B(1)" to supply satellite broadcasting receiver set-top boxes starting 1998. *LA Sky B* is a joint venture project between Media Mogul Murdoch’s News Corporation and Central and South American countries* broadcasting companies. The venture was formed to provide satellite-broadcasting services to that region. This contract enables Zenith to supply satellite broadcasting receiver set-top boxes to the burgeoning Central and South American market in addition to existing suppliers such as Pace and Philips.

The contract calls for at least 500,000 units (150 million dollars) to be supplied and the total market size of the region amounts to 2.5 to 3 million units. The products will be supplied to Central and South American countries, which include Mexico and Brazil. They will be manufactured at Zenith’s Chihuahua factory that is located in Mexico. The products will be allocated through local LG Electronics* distribution channels.

"LA Sky B" project has been in operation in Mexico and Brazil since 1996 and will be in operation in other countries of the region by 1998. Along with this contract, Zenith plans to take part in a venture that provides package solution services to each country’s digital broadcasting service. For this purpose, the company has made a partnership with NDS, a subsidiary of News Corp and a leading manufacturer of broadcasting equipment. This new partnership with NDS will provide a package solution service to each country’s digital broadcasting companies that are not included in News Corp’s "Sky Network by Sphere." Zenith expects to supply an additional 300,000 units (total market size 1 million units) by the year 2000. The set-top boxes Zenith provides are perfectly compatible with NDS* software and Conditional Access System *(3), which is NDS* core technology and suitable for most digital broadcasting.

(E) "Zenith Signs 'STAR TV' Agreement for Digital Set-Top Boxes in Asia"GLENVIEW, Ill., Nov. 20 /PRNewswire/ -- Zenith Electronics Corporation has signed an agreement to supply digital set-top boxes to News Corp.'s ''STAR TV'' programming venture in Asia. Terms were not disclosed. Under an agreement with Satellite Television Asian Region (STAR) Limited, Zenith plans to begin shipments of its ''World Box'' digital set top boxes in the first quarter of1999. ''Our alliance with Zenith supports STAR TV's vision of continuing to extend the distribution of our programming throughout the region,'' said David Haslingden, executive vice president, STAR TV.

Charles J. Sindelar, vice president, Zenith Network Systems, said the STAR TV agreement ''reaffirms News Corp.'s strong support for Zenith digital technology'' targeted to world markets. ''As one of the largest and fastest growing digital programming services in Asia, STAR TV represents significant new opportunities for Zenith's World Box,'' Sindelar said. Marking the first planned deployment of the Zenith World Box in Asia, the STAR TV agreement follows other Zenith agreements for the delivery of the boxes for the SKY Latin America satellite programming ventures in Mexico and Brazil, and for SKY Network Television of New Zealand.

The World Box is an advanced hardware and software system architecture developed in close cooperation with NDS Ltd., a News Corp. subsidiary that is providing the conditional access and operating system software. The set top boxes being deployed by STAR TV is part of the Zenith family of World Box products that support direct broadcast satellite (DBS) systems and can also accommodate alternative transmission methods, including digital cable, terrestrial and MMDS.

The Zenith/NDS system uses industry-standard MPEG-2 (Moving Picture Experts Group) and DVB (Digital Video Broadcast) architectures in direct-to- home DBS applications. The World Box incorporates NDS Video Guard™ conditional access. STAR TV is a subsidiary of the News Corporation Limited. The STAR TV network offers both subscription and free-to-air television services, reaching more than 300 million people across Asia, India and the Middle East.

 

5. It is alleged that LG has expropriated all of Zenith's patented HDTV technology without due compensation to Zenith and has not allowed Zenith to manufacture HDTVs. Also, LGE has recently been granted patents for HDTV by the US Patent Office. We allege that the technological basis of these patents is based on proprietary technology developed by Zenith engineers and unfairly expropriated by LG.

Korean Herald 8/30/99 LG Electronics markets digital projection TVs

"Digital-ready projection TVs will hit the market starting today. LG Electronics is to sell 60-inch and 43-inch digital ready projection TVs named 'Platon Projection TV' starting today. The 52-inch model will be launched at the end of next month. The digital ready projection TV set allows viewers to view existing analogy programming as well as digital programming by installing a set-top box. The 60-inch model is expected to be marketed at about seven million won, according to the company.

LG Electronics announced earlier that it received orders for 30 64-inch digital TV sets during a road show of its digital products, July 12 to Aug. 2. The digital TV sets cost 16.9 million won, about the price of a luxury car.

Digital broadcasting will commence sometime in 2001 in Seoul, and expanded to the entire metropolitan area, encompassing Seoul and Kyonggi Province."

 

6. LG, allegedly, took control of the Zenith FTM technology (and over $50 million worth of Zenith paid tools, machinery and FTM equipment) without due compensation to Zenith and has the ability to license this DOD partially funded technology to nations such as China and Russia. Recent insider reports are that LG has purchased Zenith’s FTM technology at a unfavorable price to Zenith and Sony and Hitachi are making use of this patented technology.

A. 1991 Annual Report. .Zenith’s large screen FTM development program was bolstered in 1992 when Zenith signed a $5 million contract with DOD for defense applications.

B. ZENITH WATCHING: 1986 March 18 (NB) -- "Zenith's recent win of the IRS and Air Force contracts has made the company an investor's darling as of late, and to further perfume it, analysts at L.F. Rothschild, Unterberg, Towbin Inc. is saying a new computer monitor, scheduled for introduction in 1987 by Zenith Electronics, will account for up to $200 million in sales. Called the "flat tension mask", the picture tube is reportedly brighter, has better resolution, and better color than current PC monitors equipped with the finest color cards..."

C. Zenith News Release: LAS VEGAS (November 18, 1996) -- "The bright lights of Las Vegas glowed a little brighter today when LG Electronics U.S.A., Inc. took the wraps off its new Studioworks 78FT monitor. This latest innovation from LG's Information Systems Products division offers an advanced design to complement the patented Flat Tension Mask (FTM) picture tube technology licensed from Zenith Electronics Corporation. The 17-inch (16" VIS), high-resolution color monitor boasts the brightest, sharpest, easiest-to-view display on the market today. The Studioworks 78FT significantly reduces user eyestrain, making it ideal for such graphics-intensive applications as desktop publishing and design.

"The Studioworks 78FT represents the first collaboration by LG and Zenith in the computer monitor market," said Bennett Norell, Brand Manager for LG U.S.A., Inc. -- Information System Products division. "We are proud to unveil this new Studioworks model and know that it will set new standards for the monitor industry." The Studioworks 78FT monitor features a crisp .24mm stripe pitch and auto synchronous VGA through 1600x1280 non-interlaced resolution. Thirty-two video memories, including 24 user-definable ones, recall screen adjustments for different applications and operating systems. On-screen digital display of mode and adjustment, and on-screen controls for color adjustment, tilt, zoom and geometry are also included. The GoldStar Studioworks 78FT is Windows 95 plug and play compatible and complies with MPR-II emissions standards. Availability: Commercial quantities of the Studioworks 78FT monitor are scheduled to ship in July 1997.

D. Zenith Share Owner visit of Melrose Park posted on Yahoo BB: Message 698 of 1701 Melrose Park bill4017 Apr 20 1998: " I visited Melrose Park last Sept. A nice lady named Sandi Scott gave me a short tour, saying some areas are off limits. She showed me one room that "cost 50 mil. We had to dig out the room to get this automated equipment in there" I recall a Pizza Parlor in my area, that installed a bigger and better oven and now business is better than ever. Isn't this the same thing happening at Melrose. I'm surprised they’re running at 50% of the old capacity.

Sandi told me "No stockholder had ever visited before". While I was waiting in the lobby ( When they were figuring out what to do with a shareowner) Two men came in and told the Guard, "We're from Techni glass" Of course, I thought, The off limits section is working on the F.T.M. They were getting their tubes from Korea at the time and having them finished at LG in Mexico. "Some day it will all be done here" said Sandi. (No FTM tubes were ever manufactured at Zenith's plant.)

After 8 years of developing the Flat Tension Mask monitor, all mention of it stopped. The waitress at the coffee shop across the street from the plant said "they're hiring, but low paying production jobs only. One 25-year vet just let go this week. I tried to talk with one of the many Koreans smoke breaking in front of the plant, but they didn't speak English. One day, when the final screw is turned, Old Melrose will hum again and not the day before. So, Does anyone know Techniglass and is there any chance that the FTM lives?"

Footnote: According to a recent report from a Zenith employee and news releases, Zenith’s FTM production equipment has been shipped to an unknown "American" location and to Britain where LG is in full production of FTM CRTs with a capacity of one million CRTs a year.

E. 03-25-99 Korean Herald. LG set to preempt global flat-screen monitor market

LG Electronics is set to take the high road in the global flat-screen monitor market. One of the first companies to master flat-screen technology, LG is already receiving export deals from foreign retailers and PC assemblers. Recently, the company received orders worth $20 million from European buyers, including Dixon of Britain, during CeBIT '99, the world's largest annual exhibition for information and communications products held in Hanover, Germany. A company official said exports to Europe alone will reach $50 million this year, accounting for a quarter of its expected shipments total of $200 million.

The company has already signed a contract with an American original equipment manufacturer to supply 200,000 units worth $60 million, with shipments slated to begin next month. The official said the company is also promoting exports to China and Southeast Asian countries. Flat-screen monitors began to be introduced last year so the market is still in its formative stages. LG introduced its first model last May, following Matsushita of Japan. But it was the first company to start volume production of flat monitors. Flat monitors have several merits compared with conventional products with round-shaped screens, including eye fatigue protection, eliminates image distortion and a wider viewing angle. Experts say flat screens minimize external light reflection which is hazardous to PC users.

Based on these strengths, flat monitors are expected to rapidly replace conventional ones. According to the LG official, the global demand for flat monitors is expected to surge from just 50,000 units last year to around two million units. LG plans to produce a total of 600,000 units this year. According to the official, flat monitors sell with a high premium because the number of suppliers are limited. Currently, just a few Korean and Japanese monitor vendors are capable of mass producing them. In the domestic market, LG has established a firm lead over its formidable rival, Samsung Electronics. Last year, it supplied 9,000 units, accounting for 90 percent of the total 10,000 or so units sold. This year, the company has sold about 12,000 units a month on average, much more than it expected.

F. In the January 19, 1999 edition of PC Magazine, page 89, John Dvorak noted that Sony's flat display monitors "are stunning and use an improved version of that old Zenith flat tension mask technology that was developed years ago, then dropped because early implementations could get only as large as 15 inches and were power hogs. Evidently, Sony got hold of the patents and developed these hot new tubes. Very nice."

 

7. In November 1998, this shareholder and his wife investigated Zenith's network systems plant in Chihuahua, Mexico and were told that LGE had ordered Zenith to hold up its shipments of digital "World Boxes" (see below) to SKY until sometime in December 1998. This indicates that LG had direct control of the Chihuahua plant, also, and may have committed fraud to delay the shipments of set-top boxes.

 

8. It is alleged that LGE failed to adequately compensate Zenith for taking over Zenith’s sales and distribution networks in Mexico, Canada and Brazil and for replacing Zenith branding with LG branding. There is no evidence to support that this transaction was carried out by independent valuators nor the fact that it greatly favored the economic interests of LG over Zenith. These transactions need to be voided by the court in the interest of fairness.

Similarly, it is alleged that LGE took over direct distribution of VCRs and other CE products from Zenith to Zenith's two largest US customers, Circuit City and Sears. This action was contrary to the best interests of Zenith and not a reasonable business decision. The court needs to appoint independent examiners to review these cross transactions.

Zenith had one of the most recognized brand names and a sound distribution system within Canada and Mexico when LG took control of Zenith. Shortly thereafter, LG ordered Zenith to relinquish its entire distribution system within these countries to LG and to substitute new LG branding for Zenith-manufactured products.

Zenith and LG have never issued an announcement of this distribution and branding changes. There is nothing to indicate the need for the changes in distribution and branding and that Zenith received fair compensation.

LG manufactured and directly sold to retailers, such as Circuit City and Sears, Zenith-branded Divx units, DVDs, and VCRs and other CE products within the US, Mexico, Canada and elsewhere. Zenith was not allowed to seek other suppliers (OEMs) of these products and received only $1.5 million as a "royalty fee" from LG instead of the many tens of millions of dollars it would earn as the branded distributor/wholesaler.

 

Disclosure statement 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. (Court needs to verify this assertion from independent source) During the three-month periods ended April 3, 1999 and March 28, 1998, the company accrued approximately $0.6 million and $0.2 million, respectively, in royalties for the use of the company's brand names pursuant to this direct shipment program.

In December 1996, the company closed its wholly-owned Canadian distributor and sold the remaining inventory to LGE at book value. The company entered into a distributor agreement with an LGE subsidiary whereby such subsidiary became the Canadian distributor for the company. During 1997, the company entered into a similar agreement with an LGE subsidiary in Mexico to sell the company's products in Mexico. During 1998, the company's sales to the LGE Canadian and Mexican subsidiaries were $27.3 million and $19.6 million, respectively. During 1997, the company's sales to the LGE Canadian and Mexican subsidiaries were $25.5 million and $16.8 million, respectively. These amounts are included in the sales figures discussed above. The company did not have any sales to these LGE subsidiaries in 1996.

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 months ended April 3, 1999. No amount was accrued in the three months ended March 28, 1998.

Other Items: In March 1998, the company entered into a secured credit facility with LGE which provides for borrowings of up to $45.0 million. The interest rate is LIBOR plus 6.5 percent per annum. The term of the facility (as amended) is one year from the date of the first borrowing, subject to LGE's right to demand repayment at anytime after April 30, 1999. Repayment is due in full at the end of the term. The first such borrowing occurred in May 1998, and as of April 3, 1999, $30.0 million was outstanding under the facility. The facility is secured by a second lien on certain of the company's assets, including its VSB technology and is subject to certain terms and conditions.

Accounts payable with related party included $130.8 million and $134.0 million to LGE and its affiliates as of April 3, 1999 and March 28, 1998, respectively. In April 1997, the company and LGE entered into an arrangement whereby LGE provided a vendor credit line to the company to finance the company's purchases of certain goods from LGE in the ordinary course of business. Prior to April 1997, the company's accounts 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 payables was $130.1 million and $133.7 million as of April 3, 1999 and March 28, 1998, respectively. The company is charged interest on the extended period at rates reflecting then-current market conditions in Korea. ( LGE and Zenith directors need to disclose why Zenith didn't obtain other than LGE financing such as drawing upon the Citibank loan, thereby paying much lower interest costs. This action indicates unfair business dealings between related third parties.)

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. (This assertion requires verification from independent sources )

 

9. It is alleged that LGE directed, exorbitant SG&A expenses in 1996 and 1997 indicate fraud against Zenith where LG spent Zenith funds for travel, entertainment, communications, consultants and other expenses not directly related to Zenith or primarily benefiting LG. LG needs to compensate Zenith for all expenses that did not directly benefit Zenith or were not attributed to actual Zenith SG&A expenses.

Year	1991	1992	1993	1994	1995	1996	1997
Sales	1321	1243	1228	1469	1287	1288	1173
SG&A	101	94	92	117	117	168	178
Total assets	687	579	599	654	700	765	528
Long-term debt	149	149	170	182	169	153	133
Equity	309	210	152	228	317	162	-89

According to Zenith CEO, Jeffery Gannon, in a statement made on July 7, 1998 to Zenith employees, SG&A expenses had dropped to one million a week. This indicates that Zenith lowered SG&A expenses to approximately $52 million a year once it was free from LG's direct influence.

 

10. It is alleged that LGE has fraudulently claimed the Zenith is indebted to LGE for LGE providing support for the securitizations, the sale-leaseback transaction and the extended-term payable arrangement other than providing LGE with 3.9 million shares of Zenith.

According to the arrangements described below, LGE has been fully compensated for its guarantee of Zenith’s leases and accounts payable thus has no valid claim as a DIP in bankruptcy court:

Evidence: 1997 10-K: "Additionally on April 2, 1997, the company and LG entered into an arrangement whereby certain of the company's accounts payable arising in the ordinary course of business with LG will be extended for certain periods with interest being charged on the amounts extended. In return for LG providing support for the securitizations and the sale-leaseback transaction and the extended-term payable arrangement, the company will grant options to LG to purchase approximately 3.9 million common shares of the company at an exercise price of $0.01 per share, exercisable over time. The accounting for these stock options will be based upon their fair value with that fair value being amortized straight-line over the term of the associated commitments."

 

11. It is alleged that LGE|fraudulently covered up a statement by an LGE spokesman who projected bullish earnings for Zenith in 1998. LGE ordered that statement be retracted in the Korean Herald, within a few days of its publication.

Evidence: Korean Herald : 03-18-98 Despite Sell-Off Rumors, LG Maintains Zenith at Center of Restructuring Drive. By Yoo Cheong-mo, Staff reporter ".....Group executives have so far denied that they have any plans to sell off Zenith, a company of which the group owns a controlling 54.9-percent equity, purchased through LG Electronics in July 1995. "LG is determined to develop Zenith into a specialized research and development company,'' said Chon Myong-woo, a spokesman for LG Electronics. "Unlike in the recent past, Zenith aims to register about $60 million in operating profits this year. That enormous growth potential stems from its patents in the state-of-the-art digital TV technology."

 

12. It is alleged that in order to justify the need for bankruptcy as the last remaining option for Zenith, LGE and Zenith's directors and officers fraudulently failed to perform proper marketing of Zenith prior to ordering Zenith into bankruptcy.

It is alleged that if LG intended to sell Zenith in its entirety or in piece meal, LG would have employed the services of an experienced investment banker, placing Zenith on the open market. Such was not the case indicating that LG breached its fiduciary responsibilities to its bondholders and shareholders.

Evidence: Note that only three of twelve corporations, according to PJSC, voiced no interest in investing or partnering with Zenith. LGE must fully disclose the existing and pending contractual agreements with all of Zenith’s "pending" and "potential" companies, including those listed below to determine fairness to Zenith. Upon proper disclosure, these agreements will provide a more complete picture as to the actual value of Zenith.

Company Contact Interest
Philips Zenith, PJSC Certain potential asset transactions and sourcing contracts
Thomson Zenith, PJSC Certain potential asset transactions and sourcing contracts
Hitachi Zenith Potential sourcing contract
Microsoft Zenith Potential technology cooperation
Texas Instruments Zenith, PJSC None
Sony Zenith None
Oracle Zenith None
Sun Microsystems Zenith, PJSC Potential technology
Matsushita Zenith NWS Pending
Intel LG Pending
Sanyo LG Pending
Mitsubishi LG Sourcing contract

 

13. It is alleged that there have been fraudulent transactions orchestrated by unknown Zenith directors, officers and/or LGE insiders for the selling short of Zenith stock and the purchasing of Zenith bonds.

We request that the Court request the SEC to review all purchases of Zenith convertible debentures and sales of Zenith common stock during the period September 1997 though May 21, 1998 to determine if a pattern of fraud exists.

There is no public information to account for the rapid and extreme run-up of Zenith stock, from less than $6 to $26, within a one-week period in May 1996 and for the huge short volume of the stock from September 1997 though May 1998. It is alleged that insiders were trading on privileged information, having prior knowledge of LG’s intent to put Zenith into bankruptcy.

A. It was stated by a participant on the Yahoo BB, in March 1998, that Goldman Sachs received insider information, in the late Fall of 1997, to short Zenith and to purchase the convertible debentures, "to put the debentures in friendly hands". This assertion has been recently confirmed to us by a securities broker.

B. Information sent to us by a Zenith debenture owner:

Subj: Zenith Convertible Debentures Date:98-06-28 " I don't own the stock, but have held the 6.5% debentures of 2011 for many years. I have no documentation, but can tell of a strange (to me) event that occurred last fall. I had a phone call from someone, he gave a name I don't recall, and he told me over the phone he had been "authorized by the company" to offer me "two dollars more than current trading price" of these debentures.

Subj: Re: Zenith Convertible Debentures Date:98-06-29. CC: Rick.Stine@cor.dowjones.com "Believe it or not, I had a phone call today from the same person who called me last fall. He still wants to buy my debentures (he calls them bonds, for some reason but no matter). However, today he is only offering 28. He says that they are really going to be worth a lot less than this when everything get sorted out. This time I got a name. Joseph Evancich, of the Pennsylvania Merchant Group...He says he is offering me more than the street value for the debentures because he is representing a group who are short the stock, and they are concerned about a squeeze. Back in the fall; he now says, he was representing "the sinker".

Anyhow, I told him to "write me a letter" and I would consider his offer. I am still very dubious about people who call me on the phone and offer me a really good deal. I think the conversion is about 15 shares per debenture, so if you buy the debenture at 28 and and convert it to stock you would be paying maybe $1.80 per share, and you can get the stock a lot cheaper on the open market. The real reason he wants it must have something to do with whatever rights the debenture holders have with respect to agree with the LG Electronics. I have not been able to find out anything about that, but I bet Joe knows more than I do. I am sending a copy of this letter to a man at the WSJ who I have written to before about the Zenith matter. He did not know much about the convertible debenture settlement process either."

Subject: Stockholder defense fund Date: Fri, 21 Aug 1998 " .re that all debenture holders are properly informed of what is going on....

LG is an "insider" and won't be voting. But I am concerned about the shares that the Pennsylvania Merchant Group has been collecting. Recall that Joe Evancich called me last year, when the stock and debentures were still trading on the NYSE and offered me a small premium over the published prices for my debentures. At that time he said he represented "the sinker." When he called me this year, he said he was representing a "group of shorts." This tactic suggests to me some sort of inside knowledge, and I question if they should be allowed to vote the debentures they have accumulated.

The third thing that annoyed me in the S-4 was the tactic of telling the debenture holders that they could accept the LG offer or they would "cram down" to zero. While I am not a legal expert, I doubt that they can really go to zero. I did a brief amount of research on this, and I found where in a case in Texas in 1997, the U.S. Supreme Court held that in a "cram down" the bankruptcy court had to consider the "replacement value" of the asset to the creditor.I confess I am a little worried about this. Suppose only a few activists like me actually vote, we don't accept the LG offer. LG "crams down" to zero and the court allows it. All the little old ladies who have Zenith debentures left by their late husbands will lose all the money in them and maybe not have clue as to what happened. So this cram down possibility needs a careful legal review.

C. CNBC made several announcements prior to May 21, 1998 that Zenith would file for bankruptcy indicating that this was common knowledge among Street insiders.

D. Zenith announced it will not make principal and interest payments due on April 1, 1999, under the outstanding 6-1/4 percent Convertible Sub-ordinated Debentures due 2011 (the bonds). There was prior knowledge of this fact according to the above quoted bondholder. In late March 1999, he reported to us that he was contacted by an unknown party and was told that unless he sold his bonds by April 1, 1999 they would be worthless. The unknown party wanted to covert the bondholders bonds into Zenith stock.

 

14. It is alleged that LGE fraudulently decimated Zenith’s distribution system and sales department within the US and overseas in order to weaken Zenith.

Insufficient Zenith sales personnel and distribution channels directly resulted in major sales decreases in all areas during LG’s management control. LG directed Zenith to eliminate its entire international distribution channels and cut the sales department by more than 70%.

This failure to adequately staff the sales department, we believe, is an unsound business judgement made by intertested parties, thus, not protected by General Corporate law.

A. Yahoo BB Retailers: Message 862 of 1701. Apr 29 1998 (Zenith employee) : "Zenith wants to upgrade their image, but while Bill Sims is sales president, it will not happen. By the way, Zenith sales and losses were improving up to 2 years ago when McCarthy hired Sims. Now, he has caused the company to go to hell. He is doing to the stockholders what he is doing to the employees." (McCarthy was terminated by LG-controlled Zenith, in 1996.)

B. Yahoo BB. Message 1004 of 1704 May 7 1998 (Zenith employee) "When switch to one step was pulled in '95, all logistical problems were known. Obviously the wrong moves were made in attempting to pull off true dealer direct distribution. Sims must be pissing everyone off within and without. Not exactly a respected figure in the business. Quite a leap from JVC Camcorder Product Manager to McCarthy's old post….

 

15. It is alleged that LGE and Zenith's directors and officers caused massive shortages of large-screen, picture tubes, weakening Zenith’s ability to survive as an independent corporation, due to the failure to allocate Zenith resources to the planned construction of a large-screen, picture-tube plant in Woodbridge, Illinois.

A. In March 1995, Zenith’s CEO stated, "The strategic relationship with LG also has given us the financial flexibility to pursue our plan to build, rather than purchase, 32- and 35-inch picture tubes and wide-screen tubes for future HDTV sets. Large-screen sets represent the fastest growing segment of the US TV market, and this strategic move will take on added importance as the home theater category continues to expand and as wide-screen TV enters the market over the next two years."

The plans were put on hold and subsequently canceled in August 1997. Reason given by CEO, "Tube prices have been declining making it more attractive to purchase large-screen tubes from others." Zenith, subsequently, claimed that the majority of its losses in 1997 were due to the unavailability of large-screen tubes. LG fraudulently directed the limited capital resources of Zenith for its own benefit at the expense of Zenith’s shareowners.

B. Kevin Brindley, former Zenith Treasurer, stated that Zenith receives 75% of its TV profits from tube production and that Zenith loses money on every small TV produced. This further indicates that LG made a calculated decision to weaken Zenith’s financial base to put Zenith into Chapter 11. According to 1998 news releases, Zenith was unable to obtain large screen sourcing due to high consumer demand and a lack of available supply.

 

16. In December 1997, it is alleged that LGE ordered Zenith to call in over $24 million of bonds and paid 104% of the principal when they could have bought many, if not all, of the bonds at a much lower price on the open market or waited until November 2000 to pay the principal. Poor business judgement can not be an excuse for fraudulent financial activities that weakened the financial position of Zenith.

Form: 10-Q Filing Date: 11/12/97 As a result of this new financing, the company has called for redemption on December 5, 1997, its 8.5 percent Senior Subordinated Convertible Debentures due November 2000. There is currently $23.8 million principal amount of such debentures outstanding and the redemption price of such debentures will be 104 percent of such principal amount plus accrued interest through the redemption date. The company also plans to call for redemption in January 1998 its 8.5 percent Senior Subordinated Convertible Debentures due January 2001. There is currently $0.5 million principal amount of such debentures outstanding."

 

17. It is alleged that LGE and Zenith's directors and officers failed to implement Zenith’s HDTV plans and VSB royalty assessments to fraudently weaken Zenith in the pre-bankruptcy period. This can not be construed as a matter of a reasonable business decision since Zenith was the first to introduce a production model HDTV and had the most to gain from early and widespread sales of HDTVs, capitalizing on its 8-VSB patent royalties.

It is also alleged that LGE has fraudently sold or bartered Zenith HDTV and FTM technology to Samsung, Sony and other CE manufacturers without compensation to Zenith.

A. At the 1998 Consumer Electronics Show in Las Vegas, Zenith spokesmen informed attendees that Zenith would begin production of its 64w HDTV projection sets in August of 1998. LG also published the same announcement. Now, LGE has ordered that Zenith wait until late 1999 to begin production. We believe these actions were fraudulently based in order to weaken Zenith’s financial position prior to bankruptcy court.

B. September 10, 1998. CONSUMER MULTIMEDIA REPORT: "Zenith might miss Nov. 1 launch of HDTV broadcasts and postpone sale of 64W rear-projection HDTV set to spring, but sources say Sony is on target for broadcast debut and revealed details of company's hardware plans. Samsung HDTV set also will hit retail in Nov., despite production slip...

Zenith will supply demonstrator HDTVs to retailers to coincide with broadcasters' fall launch, but has postponed delivery of salable 64W rear-projection DTVs to 1999, spokesman confirmed. Dealers told us they had been informed that postponement was result of Zenith's tentative sourcing agreement with Hitachi, but spokesman declined further comment.

Zenith had planned late summer (1998) rollout of 64W at $10,000, but it since has announced plans to file prepackaged bankruptcy reorganization by year-end that would have it emerge as subsidiary of majority Share Owner LG Electronics. As part of reorganization plan, Zenith has said it will close or sell off most manufacturing facilities as it switches to sales and marketing organization. Hitachi, which is developing HDTV set jointly with Thomson, is among those said to be in running to supply Zenith with projection tubes, including 9" currently being produced at its Greenville, S.C., plant. Zenith also has said it would deliver HD downconvertor set-top box in 1999.

Samsung remains on target to deliver 55W rear projection HDTV by early Nov.(1998), although start-up of production at Tijuana plant has slipped week to mid-Oct, said Mark Knox, senior mgr.-digital products mktg. DTVs will be assembled on new production line that also can handle other digital products, he said. New 55W --Samsung's first projection set for U.S. market -- will have $7,999 suggested retail price, $6,999 street price. It will upconvert all sources to 1080i HD format. At dealer costs listed, margins on 34W and set-top are generous compared with analog TV business -- and comparable with those of Panasonic and other HDTV vendors. Margin on Panasonic DTV-ready set is in 30% range, according to retail sources."

 

18. It is alleged that LGE and Zenith's directors and officers have decimated the human infrastructure of Zenith prior to going to bankruptcy court and may has provided unfair inducements to key Zenith officers and employees.

A. LGE has eliminated over 90% of Zenith’s US personnel since taking control of Zenith. Many of Zenith's top engineers recently have departed and are not being replaced.(Source: S-4)

B. LGE has guaranteed the "special" compensation of 300% termination bonuses for 17 key officers and employees due in several years. We a;lledge this to be a fraudulent act to assure that these Zenith employees continue to follow the orders of LGE, even those that act to destroy Zenith's value, and to make certain that these employees prior to and in bankruptcy court proceedings do not disclose material unfavorable to LGE's attempt to obtain 100% of Zenith's assets.

 

19. It is alleged that there is a pattern of unfair product/OEM transactions between LG and Zenith at a less-than-arms distance and without independent oversight exercised by Zenith’s "independent" directors and outside accountants. It is alleged that all of the LG/Zenith product/OEM cross transactions favor LGE at the expense of Zenith (the prices LGE charges to Zenith are more than amounts charged by LGE to its major customers and the amounts paid by LGE for Zenith products are less than amounts charged by Zenith to its major customers).

When a company is both the seller and buyer, certainly, there are built in conflicts of interest. Zenith has sold and purchased many hundreds of million dollars of products to/from LG during the past three years of LG control of Zenith. These, primarily, include VCRs, smaller TVs, DVDs and Divx units. Each one of these transactions needs to be examined by independent sources to determine "fairness" to Zenith.

 

Disclosure statement: Product and other sales: The company sells televisions, picture tubes, yokes and other manufactured subassemblies to LGE and its affiliates at prices consistent with amounts charged by the company to its major customers respectively.

 

20. One rational employed by LG for the 100% takeover of Zenith is to preserve Zenith’s NOLS. This is a false statement that has not been included in the disclosure statement.

Zenith will lose over 50% of its NOLS with a LG takeover and will also be subject to higher minimum US taxes since Zenith would become a subsidiary of a foreign corporation under the LGE plan.

At the end of 1999, Zenith will have more than $1 billion in NOLS as an independent U.S. corporation, the status quo.

From the S-4: "As of December 31, 1997, the company had $835.6 million of total net operating loss carryforwards (NOLs) available for federal income tax purposes (which expire from 2004 through 2011) and unused tax credits of $3.9 million (which expire from 2000 through 2002)." In addition, Zenith obtained more than $200 additional NOLS from 1998 operations.

 

21. It is alleged that Zenith's directors and officers, under the orders of LGE, fraudulently replaced LGE products for Zenith products in Brazil and elsewhere at the great detriment of Zenith. Independent investigators need to determine whether LGE and Zenith's directors and officers broke the Zenith/Barley Group contract by substituting LG-branded TVs and VCRs for Zenith-branded TVs and VCRs at considerable harm to Zenith.

Dispute with the Barley Group, Zenith’s primary Brazilian customer, over substituting existing contracts for Zenith-labeled TVs and VCRs with LG branded models resulted in adverse impact to Zenith by this fraudulent behavior by LG. (1997 10-K, page 1) Bad debt charge of $21 million taken in 1997 to this Brazilian customer. No mention, in the disclosure, however, that $11 million was to be repaid to Zenith.

Disclosure statement: In November 1995, the company entered into a contract with a customer in Brazil to purchase televisions and television kits and to assemble and distribute Zenith brand televisions in that country. In early 1997, this customer discontinued timely payments of its obligations, and sought to renegotiate both the timing and the amount of the obligations to the company.

While the company and this customer continued to negotiate in an attempt to reach a business solution, litigation was commenced by both parties in Brazil. The company had also initiated litigation against this customer in the United States. In late 1997, this matter was settled. The agreement provided that the company would make certain parts and components available to this customer, and would receive an $11.0 million settlement payable in installments over eleven months. As a result of the above problems, the company recorded a $21.3 million bad debt charge during 1997 related to this customer, which reflected the company's estimated loss as of December 31, 1997. This bad debt charge increased the transferor certificate valuation allowance.

22. It is alleged that LGE fraudulently granted itself liens of the capital stock of Zenith’s domestic subsidiaries and it’s intellectual property (all patents other than its tuner patents) in return for guaranteeing $110 million in bank loans and received additional liens (non-stated) for its $45 million loan in March 1998. These lien agreements were approved by Zenith's directors even though they are detrimental to the interests of Zenith shareowners and are further examples of how LG demanded and obtained preferential shareowner treatment. (1997 10-K)

 

23. Contrary to the misleading statements of LG, Zenith is not in need of bankruptcy protection.

Zenith continues to receive a $150 million line of credit from a Citicorp led group and will receive an additional $150 million in credit, has sufficient cash to meet present needs and has completed its restructuring (elimination of US production workers).

Zenith has put on an additional line in its Chihuahua, Mexico plant to service its STB production contract with Americast and its STB/IRD contracts with subsidiaries of news Corp. "We are way ahead of our Network System projection", said Jeff Gannon, on July 7, "Its Fantastic!".

Zenith, at the direction and sole benefit of LG spent tens of millions of dollars on attorneys, accountants, and other professionals and devoted untold hours of employee time on the bankruptcy legal process.

According to the July 7 meeting of Zenith’s employees, Gannon stated that "Zenith is 10% ahead of our plan" and indicated no need for bankruptcy protection. He also stated, "Lenders want our business."

Paraphrased (from audio recording) remarks of Jeff Gannon, CEO Zenith, to Zenith employees at July 7, 1998 "Town Hall" indicating the strength of Zenith:

Financing: Citicorp and LG have provided new financing. There will be some sort of new structuring to be announced. Funding for year going forward.

Sales: 1998 plan ahead of plan, fully budgeted. We have confidence in our plans. We already are ahead of plans more than $10 million. Terrific results from sales team. Much better mix. Higher prices. Less merchandising funds from coop, quality is up. Network Systems has accelerated orders, far exceeds original budget. Accelerated Americast order. Trend is up. Americast considerable upside. We are adding capacity to meet demand.

Inventory: $100 million more in inventory right now than last year-fantastic progress to improve cash position

Facilities: We may sell Melrose plant (has not been sold, as of September 3, 1999) . We will take another look at Melrose to see how well they perform. May not sell if it breaks even. Melrose Park product loyalty is improving. Oakridge will be sold this summer. Site was to be where large tubes to be produced. We will receive more than $20 million for the Glenview (headquarters) building. We have several offers. Free up cash. We will consolidate to possible 6 or 3 floors.

Restructuring S-4: History document. 30-60 days for SEC review. Negotiate with bondholders. Pre approved prepack in October and out of bankruptcy in December. SEC positive, normal dialogue. "Thank God...Customers said we thought we weren’t going to do anything".

Network Systems: Network Systems might be in separate location. Seeking strategic partners for Network Systems. 9-12 companies are interested. Narrow to 2 or 3. Appears to be a lot of interest.

Zenith Service: department goes to Huntsville (AL) to work at LG.

Engineer shortage: We need engineering talent. Group of engineers to work in several programs versus just one program.

Sourcing: We will outside source for rear-projection TVs, counsels and smurf TVs less than 19 inches. LG will manufacture our DTVs and above 20" TVs and VCRs and DVDs. We are adding more production to Mimosa (Glenview) plant .Sourcing remote controls from overseas. Can make 2 to 1, considerable income from remote controls. Tom Sorenson, formerly of CNBC, will resource Zenith patents in a significant way, particularly our valuable VSB patents.

STBs and HDTVs: Competitors are struggling. Cost in front is where we want to be. We are committed to the 64w model but it may be delayed. Build on leadership. What the customer wants is going to be our flagship. Best solution in that area.

According to FORTUNE Magazine (February 16, 1998), for the third consecutive year, consumers have voted Zenith tops in consumer electronics for customer satisfaction, according to the 1998 American Customer Satisfaction Index (ACSI).

 

24. It is alleged that LGE and Zenith's directors and officers have failed to announce numerous offers to purchase Zenith Network Systems division and that these omissions are fraudulently designed to hide the true value of Zenith.

On July 7, Jeff Gannon stated that there were approximately 10-12 suitors of NWS and Zenith would narrow them down to two or three. "Lots of interest", according to Gannon. Subsequently, Zenith did not sell Zenith Network Systems division but did sell its manufacturing plant located in Chihuahua, Mexico.

 

25. It is alleged that LG Electronics fraudulently replaced all but three of Zenith's directors in late 1995 by claiming that it owned the majority of Zenith stock. As a minority shareholder, LGE should have submitted its nominees to all Zenith shareholders for proper election of directors.

LGE did not disclose that it owned only approximately 18% of Zenith common stock in 1995 and that LG Semicon was the actual largest owner of Zenith common stock with 38%. This was first disclosed in Zenith's 1997 10-K. Only in May of 1999 did LG Electronics purchase LG Semicon's shares of Zenith.

Therefore, it is alleged that all decisions made by Zenith's directors were illegal prior to May 1999, when LGE assumed majority control of Zenith common stock.

Evidence: 1996, 1997, 1998 10-Ks and 2nd Quarter 1999 10-Q.

26. It is alleged that Loomis Sayles & Company, Mariner Investment Group and Caspian Capital Partners were given inside information by LGE and or Zenith insiders and worked with the Pennsylvania Merchant Group and Goldman Sachs to purchase Zenith's subordinated debentures and short Zenith common stock during the period May 1996 through May 1998.

Evidence: See #13

 

ALTERNATIVES TO PLAN METHODOLOGY

1. Zenith restructuring options that were not presented to the directors for consideration:

* Follow the restructuring/partnership strategy adopted by both Thomson and General Instruments. Both companies brought in additional high-tech partners as equity investors, in 1998. Thomson sold 30% interest to Microsoft, Alcatel, NEC and DirecTV while GI sold 4.8% interest to Sony. Zenith could issue a secondary stock offering of 50 million shares and sell 30 million in blocks of 10 million to one, two or three high-tech companies wanting to enter the DTV era and could issue the remaining 20 million to LG in return for capital contributions.

* Place Zenith on the open market in part or in its entirety either inside or outside of bankruptcy court. There is a strong market for excellent/leading companies in the digital set-top box and digital CE areas:

SkyREPORT.COM E-News 12/16/98. GI In Talks with Phillips, Lucent, Cisco and Motorola General Instrument is rumored to be in serious negotiations with at least four companies interested in buying all or part of the company. The companies rumored- Philips Electronics, Lucent, Cisco Systems and Motorola. All of the companies have the financial backing to buy GI. Analysts say the interest in GI comes from the widespread rollout of digital set-top boxes. The company has reported strong sales of the devices and stands to play a large role as TV becomes more integrated with the Internet. GI signed a deal with Sony to create digital set-top boxes that will include Sony's home entertainment network technology. In turn, Sony bought a 4.5 percent stake in GI for $187.5 million.

General Instruments has a market valuation of more than 11.5 billion and Scientific Atlanta at more than $2.5 billion. Neither have better technology, more contracts on the books, lower labor costs nor better manufacturing equipment than has Zenith. Recently, it was announced that Motorola will purchase general Instruments at a sales price equivalent to $11.5 billion.

Also similar to Zenith’s ownership of proprietary DTV technology is Gemstar International. Gemstar has 178 employees, FY 1998 sales of $126.6 million and a market value of over $3 billion.

* Operate as is. Zenith has completed its organizational restructuring and is in no need of financial restructuring. Banks are lining up to lend Zenith short-term financing and LG projects bullish earnings reports for Zenith. All but approximately 800 U.S. employees of Zenith have been eliminated by LG including vital engineering talent.

More than 20,000 Zenith investors and employees have waited patiently for Zenith to enter the new golden era of digital consumer electronics. They have invested their savings and retirement funds/pension plans to support Zenith through its transitional stage, waiting for the arrival of the digital age to reward their patience.

 

  VALUATION ISSUES

We allege that LGE has undervalued Zenith (increased liabilities and decreased asset valuations) to create the false impression that Zenith has a negative net worth, requiring bankruptcy protection.

According to Deloitte & Touche, "to establish a fair market value, "hard" figures, such as assets, liabilities, and historical earnings and cash flow are used as well as subjective figures, such as projected earnings, future cash flow, and the value of intangibles (e.g., patents, know-how, the quality of management, and leases at below-market rates). Soft figures also include such considerations as current market conditions, industry popularity, and, most important, the objectives of the seller or buyer. With all this subjectivity, fair market value can be, at best, only a range of estimates.

The final selling price can be either higher or lower than the estimated range of values for the company, depending on the eagerness of the buyer to buy and the seller to sell. In fact, the selling price of a company sometimes does not seem to have much relation to its estimated value. Valuation methods-- and therefore values -- vary depending on the reason for the valuation. Different techniques can be used to arrive at different values, and each of the values may be correct for a specific situation.

The valuation method selected determines the objectives for the valuation. Book value does not reflect the fair market value of assets and liabilities; it expresses historical value only and is significantly affected by the company's accounting practices. It may not record, or may significantly undervalue, intangible assets such as patents and trademarks. Lastly, book value ignores earnings potential."

One of the most significant typical balance sheet adjustments is the adjustment of the value of a company's intangible assets. This is also one of the most difficult. What is the value of an "ongoing" business? When a company has patents, trademarks, copyrights, how much are they worth? What is the value of a company's existing customer base, long-term contracts and exclusive license agreements? If you started a similar company tomorrow, how many months of losses would you have to incur before sales would reach profitable levels? Such questions make balance sheet methods a less effective measurement of business values for ongoing companies.

LG commonly selects the valuation methods best fitting LG’s objectives, not the objectives of an independent Zenith or a competitor such as Hyundai.

February 25, Korea Times: `Final Verdict' on Hyundai-LG Semiconductor Swap Due Today' By Nho Joon-hun

"It has been a few months coming but the "final verdict" on the acquisition of 100 percent of LG Semicon ((largest owner of Zenith Electronics Corporation)) by Hyundai Electronics Industries now appears imminent. According to officials close to the deal, a six-man committee put together by LG and Hyundai is expected to submit what it feels is the proper price at which Hyundai should take over LG Semicon's shares. The committee, comprising representatives from three Korean credit-evaluation companies and Merrill Lynch and Goldman Sachs, have heard arguments from both companies early this week.

Hyundai and LG handed their final proposals, reportedly with the blessing of the chairman of LG and Hyundai, but they remained too far apart to engage in any further negotiations, the sources said.

``LG has slashed its proposed price (from 5.5 trillion won to 4.5 trillion won) in an apparent bid to hammer out a compromise but it is still considerably higher than what Hyundai feels is a fair price for LG Semicon,'' one industry analyst said.

The respective proposals could not be confirmed but Hyundai is reportedly not willing to go any higher than 1.2 trillion won while LG is still insisting on a compensation in the upwards of 4.5 trillion won. The main reason why the two companies are so far apart on price is that their methods of putting a value on LG Semicon is rather different with Hyundai utilizing the discounted cash flow technique."

On the other hand, LG is using a combination of comparable market price (CMP) formats, comparing its value to that of Micron Technology, an American memory device maker company with one of the highest profit indices and discounted cash flow, DCF."

Note that the separate valuations of LG Semicon by LG and Hyundai are approximately $3 billion apart. Following the LG recommended methods of corporate valuation, comparable market price and discounted cash flow, we have arrived at a market valuation of Zenith exceeding $3 billion.

A. COMPARABLE MARKET PRICE

CMP determines a company's value by comparing the company with a similar public company or with recently sold similar businesses. Zenith has four independent but related enterprises. Each could operate on a stand-alone basis. There may be more value however, retaining Zenith as an independent and single entity, due to synergy of branding, technology, service and marketing and the ability to make full use of its more than $1 billion of NOLs. Estimates and assumptions of the value of Zenith’s four enterprises are based on projections from public information and sources listed in the exhibits. Due diligence is required to substantiate these estimates and assumptions.

Enterprise Location Value Estimate

I. Network Systems Division.	Glenview, IL		$500 million to $1 billion in enterprise value (A)
II. Intellectual Property Rights	Glenview, IL		$2-4 billion tuner, VSB and 800 other active patents(B)
II. Research and Development Engineering	Glenview, IL		$100 million future patent royalties (non tuner/non VSB) and product development (C)
III. TV Manufacturing/Distribution:
Customer Service Division	LG , Huntsville, AL		N/A (D)
Cabinet Mill and Final Assembly	Reynosa, Tamaulipas and Juarez Mexico		$250 million in enterprise value (E)
Tuners and Electron Guns	Matamoros and Tamaulipas, Mexico		$50 million in enterprise value (E)
Distribution Operations	Fort Worth and El Paso TX, Ontario, CA		$5 million
Domestic Sales	Glenview , IL		$50 million
International Sales	LG		N/A (D)
Commercial Sales	Glenview, IL		$50 million
IV. Branding Operations	Glenview, IL		$250 million (F)
V. Flat Tension Mask Monitors	LG assumed control of this Zenith technology		N/A (D)
Range of Total Value of Enterprises			$3 billion to $5.5 billion
Real Estate Mexican		$100 million estimate (D)
Furniture, Fixtures, Equipment Domestic		$100 million estimate
Furniture, Fixtures, Equipment Mexican		$100 million estimate (D)

Approximately $1 billion of NOLs

$380 million (G)

Comparable Market Price Footnotes:

(A) $500 million to $1 billion valuation of Zenith’s Network Systems Division (NWS).

Valuation estimate based on estimates of profit margins of approximately $100 per box with the sale of 500,000 to one million boxes per year, during the next decade. Zenith has announced numerous contracts representing billions of dollars of STB, IRD and cable modem contracts. Major customers include News Corp subsidiaries, Bell South and GTE.

On November 11, 1998, we traveled to Chihuahua, Mexico to inspect the NWS plant. In our investigation of the plant, we observed millions of dollars of state-of-the art circuit board and other production equipment capable of manufacturing approximately 500,000 to one million set-top boxes, IRDs and digital cable modems, per year.

Due to the large demand, Zenith has added another line in the plant (7/24 operation) to service its STB production contract with Americast and its IRD contracts with subsidiaries of News Corp. Additional lines could be added to double production to, approximately, 2 million boxes a year.

We learned that Zenith’s NWS labor force is highly trained, with Zenith entering Chihuahua in 1954 and that the bulk of the labor force including the many inspectors are being paid bare-subsistence wages.

"We are way ahead of our Network System projection", reported Jeff Gannon, on July 7, 1998 to a meeting of Zenith employees. "Its Fantastic! Network Systems might be in separate location. Seeking strategic partners for Network Systems. 9-12 companies are interested; narrow to two or three. Appears to be a lot of interest. Network Systems has accelerated orders, far exceeds original budget. Accelerated Americast order. Trend is up. Americast considerable upside. We are adding capacity to meet demand."

In addition to STBs and IRDs, Zenith’s cable modem technology is state-of -art and its partnerships with industry leaders are second to none. Zenith continues to be a "best of breed" partner with 3Com and C-Cube. Zenith and Intel, allegedly, have a number of contractual agreements that haven't been publicly disclosed, in any detail. Zenith also has a technological advantage over many of its competitors by providing solutions to deliver HDTV/SDTV via cable. Present Zenith cable modem customers include 21st Century, GTE and Cable Am.

The two company’s most similar to Zenith’s Network Systems Division are General Instruments and Scientific Atlanta. General Instruments has a market valuation of more than $4.5 billion and Scientific Atlanta at more than $1.5 billion. Neither has better technology, more contracts on the books, lower labor costs nor better manufacturing equipment than has Zenith.

SkyREPORT.COM E-News 12/16/98. GI In Talks with Phillips, Lucent, Cisco and Motorola General Instrument is rumored to be in serious negotiations with at least four companies interested in buying all or part of the company. The companies rumored: Philips Electronics, Lucent, Cisco Systems and Motorola. All of the companies have the financial backing to buy GI. Analysts say the interest in GI comes from the widespread rollout of digital set-top boxes. The company has reported strong sales of the devices and stands to play a large role as TV becomes more integrated with the Internet. GI signed a deal with Sony to create digital set-top boxes that will include Sony's home entertainment network technology. In turn, Sony bought a 4.5 percent stake in GI for $187.5 million.

Recently, Zenith sold many of its Mexican plants including its Chihuahua facility. Need to examine the terms of the contract to determine if Zenith received a fair sales price and whether or not LG received direct or indirect inducements from purchaser (STBC).

(B) $2 to $4 billion estimate of value of Zenith’s patents

Zenith’s vestigial side band (VSB) patents represent the majority of Zenith’s value and, under the harshest assumptions, have an estimated minimum value of $2 billion. There remain many uncertainties, at this early stage of VSB implementation, precluding a more definitive valuation. The chief uncertainties include:

• rate of domestic DTV implementation in the United States. What is a given fact is that all US broadcasters will be required to return their NTSC station's non-digital bandwidth to the FCC in 2006. Therefore, all new TV's sold in 2006, in the US, will be VSB compliant digital TVs as well as STBs, VCRs and recordable DVDs.
• rate of DTV implementation in Canada, South Korea, Taiwan and Argentina. With the exception of South Korea (see article below) we estimate that these nations will be approximately three years behind the US in percentage of implementation.

Exhibit: Korea Herald, 08/23/1999 by Byun Eun-mi Staff reporter "The government's announcement last month that digital television programs will begin being broadcast in Seoul in 2001 has prepared the way for movie-quality television images to be seen in Korea's living rooms....Under the government plan, Korea will begin offering digital television in 2001 in Seoul and then expand it to the entire metropolitan area, encompassing Seoul and Kyonggi Province, by 2002 when Korea hosts the World Cup Soccer finals with Japan. Depending on the success of the service in these areas, it is expected to be expanded throughout the nation by 2005....

According to industrial analysts, the world's digital television market is expected to demand 450 million sets worth $683.7 billion by 2010. The government hopes that Korean television makers will take up about 30 percent of the market... To watch digital broadcasting on conventional television sets, consumers will have to have a set-top box, which is now prohibitively expensive. LG Electronics, the nation's leading digital television maker, plans to unveil a digital television which incorporates the set-top box early next year..."

• percentage of nations that have not committed to a DTV transmission standard who will select VSB. We estimate that this could range from 25% to 75% of the total DTV standard, uncommitted market.
• the lack of knowledge concerning the royalty rates Zenith will charge on all VSB-related units including televisions, personal computers, set-top box converters, cable converters, DVDs, telephones and other products which use VSB for transmission. Zenith, according to a trade journal, has begun charging $5 per HDTV, SDTV and STB receiver. We expect the fee to rise to $10 per unit beginning by 2002 due to inflation and other market factors.

The estimates provided below are based on reasonable possibilities given the above listed uncertainties. They have been made by this writer who is an active member of the ATSC. The assumptions of these estimates are provided in the Valuation Exhibits section of this report.

The most similar company to Zenith in terms of proprietary TV technology is Gemstar International. This company with less than 200 employees has a market valuation in excess of $5 billion.

Estimated Worldwide VSB Sales and Royalties to Zenith through 2010

Televisions (Income in millions)

	1999	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010
Market size	100	100	100	100	100	125	125	125	125	150	150	150
% VSB	1	3	7.5	10	15	20	25	30	35	40	50	50
Total VSB	1	3	7.5	10	15	25	31	37	44	60	70	75
$ Royalty Fee	5	5	5	10	10	10	10	10	10	10	10	10
$ Income	5	15	37.5	100	150	250	310	370	440	600	700	750

TVs Total: More than $3 billion

Personal Computers

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Market size	90	100	110	120	130	140	150	165	180	195	210	230
% VSB	0	1	5	10	20	25	30	35	35	35	35	35
Total VSB	0	1	5.5	12	26	35	45	60	65	70	75	85
$ Royalty Fee	5	5	5	5	5	5	5	5	5	5	5	5
$ Income	0	5	27	60	130	175	225	300	325	350	375	425

PCs Total: Approximately $2.4 billion

Video Recorders/DVD-R

	1999	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010
Market size	45	45	45	50	50	50	60	60	60	70	70	70
% VSB	0	1	2	5	10	15	20	25	30	35	35	35
Total VSB	0	.45	.9	2.5	5	7.5	12	15	18	24	24	24
$ Royalty Fee	0	5	5	5	5	5	5	5	5	5	5	5
$ Income	0	2	4.5	12.5	25	37.5	60	75	80	120	120	120

 

Video Recorders/DVD-R Total: $577 million

Other:

• STB Converters Total: $600 million
• IRD Satellite Boxes Total: $110 million
• Cable Box QAM Total: $300 million
• Total Other: $810 million
• Projected Total Zenith’s VSB royalties through 2010: in excess of $6 billion
• Flat Tension Mask Patents

Zenith’s flat tension mask patents remain in force for at least 11 more years and are currently being used by LG Electronics and Samsung, and, according to John Dvorak of PC Magazine, by Sony. No value has been assigned since LG has assumed control of Zenith’s FTM technology and pays Zenith less than $2 million per year for these patents based on a "less-than-arms-length" agreement.

Tuner Patents

Zenith will earn in excess of $120 million from its tuner patents. The tuner patents earn approximately $30 million a year, expiring in 2004.

 

Encryption Patents

No estimation of value of Zenith’s encryption patents due to lack of publicized information. Zenith, owns substantial intellectual rights to ensure that digital TV transmissions will be copyright protected. The system involves the addition of a "smart card" to any STB, IRD, HDTV, SDTV and any other device to decode specific digital transmissions, including HDTV, similar to what Zenith is delivering to SKY in its huge order of IRDs and to Bell South and GTE in the Americast $1 billion order with Zenith for STBs. SKY has taken over the majority of the Latin America and Asian DBS markets and Zenith is its prime IRD OEM. This could be as big, if not bigger, for Zenith than its VSB patents, since, this proprietary encryption technology cuts across all DTV standards.

 

Recent Patents

Zenith has hundreds of active patents most existing for 15 or more years. All of these need to be valued by an independent valuator. Zenith’s four new patents granted in the last month:

PATENT No. DESCRIPTION

5,956,325 Adaptive random access protocol for CATV networks

5,949,834 VSB symbol sync recovery system

5,949,768 Two tier adaptive random access protocol

5,949,493 Television receiver with external access

 

Future Patents

It takes almost two years for the US Patent Office to approve a patent application. Thus, available information, at this time, requires due diligence to determine the possible value of, possibly, hundreds of other patent applications Zenith has pending in the US Patent Office.

Similar to Zenith’s ownership of proprietary DTV technology is Gemstar International. Gemstar has 178 employees, FY 1998 sales of $126.6 million and a market value of over $3 billion. Major manufacturers pay to incorporate Gemstar technology into their products and publishers pay for the right to print the codes.

 

(C.) $100 million valuation estimate of value of Zenith's engineering talent including the value of pending patents.

Zenith’s engineering talent continues to develop proprietary DTV products for use in Zenith products and for future royalty income. On July 7, 1998, Jeff Gannon announced: "We have an engineering shortage. We need engineering talent. Group of engineers to work in several programs versus just one program." As Zenith returns to profitability and the threat of bankruptcy is ended, the engineering shortage should cease.

 

(D) Unknown missing value of assets of Zenith acquired by LG without due compensation to Zenith and subject to return to Zenith.

Beginning with LG control of Zenith in November 1995 until the present, LG has transferred many of Zenith’s assets to LG, allegedly, without due compensation or proper "at-arms-distance" transactions. The most egregious acts were the LG assumptions of Zenith’s product branding and distribution in Mexico and Canada and other overseas markets such as Brazil and of Zenith’s Flat Tension Mask-display (FTM) technology, production equipment and patents. These and other lost assets may require court-ordered action in order for Zenith to reclaim them from LG.

 

(E) $500 million valuation estimate of the enterprise value of Zenith’s TV manufacturing and distribution operations. (Exhibits 27-29)

At the July 7 employee meeting, Gannon announced, "1998 sales ahead of plan ahead of plan, fully budgeted. We have confidence in our plans. We already are ahead of plans more than $10 million. Terrific results from sales team. We have much better product mix with higher prices. Less merchandising funds from coop. Quality is up. Competitors are struggling in HDTV implementation. Cost in front is where we want to be. We are committed to the 64w model but it may be delayed. Build on leadership. What the customer wants is going to be our flagship. Best solution in that area."

Zenith continues to manufacture 25 and 27 inch table model TVs and 50 inch and larger projection TVs in its various Mexican plants. Valuation includes enterprise value of trained Mexican management and work force and ability to compete in the marketplace. With the closing of the Melrose Park facility, Zenith has rid itself of its only cost loser.

We visited Zenith’s display tube manufacturing plant in Juarez, Mexico and learned that display manufacturing had been moved from Zenith’s Melrose plant to Juarez. Zenith’s Juarez plant has state-of-art manufacturing equipment and among the world’s lowest paid and most highly skilled manufacturing workers. Zenith’s TV manufacturing, Mexican plants are second to none in terms of productivity and cost containment.

Zenith’s distribution of consumer electronics in the US remains very strong via Circuit City, Sears and thousands of other retailers. However, Zenith’s Sales Division requires a complete restructuring in order to regain lost market share.

There are no similar US corporations to compare Zenith’s TV Manufacturing Division since Zenith is the last remaining US manufacturer of TVs and DTVs.

 

(F.) $250 million value of Zenith’s Branding Operations (Exhibits 22-25)

Zenith is greatly expanding its branding operations. At the July 7, 1998 Zenith employee meeting", Jeff Gannon announced the formation of a new accessory branding division within Zenith and forecast annual sales to quickly reach $200 million (in addition to the branding of TVs, VCRs, DVDs, Divx DVDs and other CE products manufactured by LG). Gannon’s comments: "We will outside source for rear-projection TVs, counsels and smurf TVs less than 19 inches. LG will manufacture our DTVs and above 20" TVs and VCRs and DVDs. Sourcing remote controls from overseas. Can make 2 to 1, considerable income from remote controls. Tom Sorenson, formerly of CNBC, will resource Zenith patents in a significant way, particularly our valuable VSB patents."

The new accessories line - the largest in the company's history - features ergonomic product designs as well as colorful new packaging and point-of-purchase display materials. To support its expanded strategy, Zenith has joined forces with Woods Industries in an alliance that leverages combined sourcing, marketing and product development resources. This alliance capitalizes on each company's complementary strengths and will result in the delivery of more than 400 products to the retail market beginning in the first quarter of 1999.

 

(G.) $380 million valuation of Zenith’s NOLs.

Zenith will have more than $1 billion in NOLS if maintained as an independent company. From the S-4: "As of December 31, 1997, the company had $835.6 million of total net operating loss carryforwards (NOLs) available for federal income tax purposes (which expire from 2004 through 2011) and unused tax credits of $3.9 million (which expire from 2000 through 2002)." More than $200 million of NOLS will be added for FY 1998. NOLs, considerably, will be reduced if company changes ownership status.

 

B. Discounted Future Earnings and Cash Flow Valuation

 

(all figures in millions)

	1999	2000	2001	2002	2003	2004	2005
Sales (A)	900	1000	1200	1400	1700	2000	2300
Royalties (A*)	50	120	230	380	430	500	600
Gross (B)	$150	200	250	500	700	825	900
SG&A ©	60	75	85	100	125	150	175
R&D (D)	20	25	30	40	50	60	70
Oper. Income	70	100	135	360	525	615	655
Asset sales	24	50	0	0	0	0	0
Interest	-23	-25	-27	-27	-24	-10	0
Taxes	-3	0	0	0	0	205	255
Earnings/Cash Flow	$71	125	108	343	521	400	400

 

Year	Present Value factor (G)	Present Value of After-Tax Earnings (H)
1999	.870	62
2000	.756	94.5
2001	.657	71
2002	.572	196
2003	.497	258
2004	.423	169
2005	.377	63
2005 residual value		3,000
Total		$3,913 million

 

Assumptions:

A. Zenith retains control of NWS and TV Manufacturing Divisions. VSB royalties, NWS, DTV and accessory sales/deliveries accelerate.

B. 20 percent margins attainable, beginning in 1999, due to increased VSB, tuner and other royalties, increased sales of STBs and IRDs, addition of new accessory/branding division, beginning of higher-margin DTV sales and the elimination of Melrose plant and most analog-product sales.

C. SG&A projected by Jeff Gannon, on statement of July 7, 1998, to be "one million dollars a week." SG&A decline as a percentage of sales due to VSB royalties becoming a larger proportion of total sales and not requiring substantial SG&A to manage the patent collections.

D. Even though the acts of LG have decimated Zenith’s engineering ranks, as an independent corporation from direct-chaebol control, Zenith grows rapidly, returns to profitability and is able to attract additional engineering talent.

E. Interest is eliminated in later years as Zenith builds cash reserves.

F. All income sheltered through 2003 by more than $1 billion of Zenith NOLs and tax credits (as of 12/31/98)

G. Assuming desired rate of return on investment is 15%.

H. After tax earnings and cash flow are assumed to be approximately the same.

 

VALUATION EXHIBITS

A. INTELLECTUAL PROPERTY

The most important variables of the value of the VSB patents are: timing of implementation, actual royalty charges per unit and worldwide demand projections.

1. In the S-4 document delivered to the SEC in August 1998, Peter J. Solomon estimated that Zenith would earn $1,551,600,000 from domestic VSB royalties, for the years 1999-2011. For international VSB royalties, PJS estimated $1,355,000,000. Among factors not considered by PJS were that many of Zenith’s VSB royalties will extend well beyond 2011 and that, according to Gartner, China will be the largest VSB customer. Also, most of the PJS demand and pricing assumptions and data were obtained from sources not independent from LG and were at the worst cases/lower-end-ranges.

2. At the 1999 CES in Las Vegas, a Zenith engineer informed us that Zenith and Dolby are the only two ATSC members entitled to earn royalties from the new ATSC digital standard. Thus, Zenith has great flexibility in what royalty rates may be set and is only restricted by the FCC doctrines of "fairness" and "equality".

3. Also at the 1999 CES, Stanley Hubbard, President of USSB stated, "Within a maximum of three years, every TV sold in the US will have a digital (VSB) tuner included". If Hubbard is correct and Zenith adopts a three- percent of MSRP royalty rate, Zenith will earn over $500 million a year from VSB patent royalties, alone, by the year 2003.

4. CEMA projects more than 10 million HDTV sets will be sold over the next five years, as "buyers are taken with the sheer beauty of the picture".

5. Forrester Research projects SDTVs to be in 4 million households by 2003 and forecasts that SDTV will capture more than 80 percent of the TV market by 2008. Note: Zenith earns the same royalty whether the unit is an ATSC compliant HDTV or SDTV .

6. Analysts Annie Erner and Lisa Hirsch, of Warburg Dillon Read, in the December 1998 report titled ''Countdown to Digital'', predict the sale of 250 million digital TV sets over the next decade at prices that will drop by more than 50 percent. "Just as lucrative will be the replacement of associated analog video products such as VCRs, DVD players, camcorders and DSS equipment. Product improvements also will stimulate sales."

7. Based on Forrester’s estimates of 10 million SDTV sets, CEMA’s estimates of 4 million HDTV sets sold by 2003, and Warburg’s estimate of 250 million DTV sets by 2008, Zenith will earn a minimum $70 million by 2003 and $750 million by 2008 only from VSB domestic DTV royalties (based on a $5 royalty fee per DTV).

8. Zenith has not published its VSB royalty-fee schedule. Zenith could charge 3% of the retail cost of all VSB-related producers that could increase Zenith’s VSB royalties by more than 500% in the early years. Need to receive royalty schedule.

9. Valuation needs to consider the projected international royalties from countries already adopting the ATSC standard: Argentina, Canada, Korea and Taiwan; value of royalties from countries expecting to adopt the ATSC standard: Mexico, South America, Central America and Caribbean and value of projected royalties from other countries which may or may not accept the ATSC standard (China, India, Malaysia, Vietnam, Indonesia), who have not yet selected a DTV standard.

10. Project out beyond 2011 to when the last of Zenith's DTV patents expires, estimated to be at least until the year 22018 due to new VSB patents.

11. All of the approximately 250 million TVs in the US will need to be updated or a converter added by as early as 2006 when the FCC has mandated that each broadcaster return its analog band provided 85% of its viewers have upgraded to digital.

12. According to industry estimates, there will be, virtually, no price differential between present NTSC TVs and ATSC DTVs by the year 2005. Thus, shift will be as dramatic as AM only radios to AM/FM radios.

13. Korean consumer electronics manufacturers, as in other markets such as DRAMs, will mount very aggressive production and pricing campaigns to capture significant market share and thus drive sales much higher than presently projected. Korean choebels require immediate cash infusions to pay off huge short-term debt obligations and see DTV as their best alternative. Also, according to industry reports, China is expected to adopt the ATSC standard and to manufacture HDTV for export to the US market. Kanko is planning to export $2,000 to $3,000 HDTVs to the US in late 1999.

14. Other products such as digital cellular phones need to be included in VSB valuations.. Broadcasters are considering offering digital phone services to make us of their bandwidth during non-prime-time hours when they do not need to offer full HDTV programming.

15. Need to project VSB royalties to be paid to Zenith by the nations more than 1,600 broadcasters.

16. The newest VSB patents owned by Zenith indicate that Zenith will receive VSB royalties for, at least, the next 20 years:

VSB Patent Date Granted Title
US05844626 12/01/1998 HDTV compatible vertical sync separator
US05844552 12/01/1998 Communication of character data in a web television
US05841820 11/24/1998 Data comparison AGC system for VSB receiver
US05828404 10/27/1998 VSB mode detection system with comb filter
US05825778 10/20/1998 VSB modulator input interface using simple standard
US05764701 06/09/1998 VSB modulator
US05764309 06/09/1998 Sync compensated AGC system for VSB receiver
US05745528 04/28/1998 VSB mode selection system
US05602595 02/11/1997 ATV/MPEG sync system
US05563884 10/08/1996 Reducing multiplex jitter in an ATM/MPEG system
US05508748 04/16/1996 Data level selection for multilevel VSB transmission
US05087975 02/11/1992 VSB HDTV transmission, reduced NTSC co-channel interference
US05821988 10/13/1998 NTSC co-channel interference reduction system
US05452009 09/19/1995 Digital transmission system w data rate optimized for noise in transmission medium

Excerpts from Final Report Prepared for: Zenith Electronics Corporation International VSB Market Forecast by Gartner Consulting.

August 19, 1998
The products that will generate the largest volumes for VSB technology will be digital television sets, digital terrestrial set top boxes and digital satellite receivers. Other applications that will generate large volumes will be digital cable boxes, DVD players and personal computers.

Outside of the United States, the key country that will drive growth of VSB technology will be China. China's rapidly developing economy combined with its burgeoning consumer electronics market will continue to generate demand for VSB-enabled products. China could emerge as the largest or second largest market (after the United States) for VSB technology. Other key countries for VSB growth include Mexico, which currently is experiencing healthy economic growth and increased levels of consumer spending, a trend that is likely to continue in the future. Mexico is likely to be the world's third largest market for VSB technology (after the United States and China).

VSB Adopting Countries

For these countries, sales are expected to begin slowly and ramp up as broadcast coverage increases and digital television set prices begin to decline. Digital terrestrial set top box sales are expected to trail sales of digital terrestrial televisions through 2003, but will begin to increase as more programming is available in a digital format.

(1) Canada Dataquest is estimating Canada will begin some digital terrestrial broadcasts in 1999. In Canada, digital terrestrial television growth rates relative to overall television sales will be similar to other ATSC adopting countries. VSB in digital satellite set top boxes will be very popular due to wide acceptance of satellite television among Canadian consumers. Canada is expected to be the second largest market for equipment with VSB demodulation capability through 2003 (after the U.S.) This is due to Canada's relatively early adoption of the technology, combined with the high penetration of televisions, the strong influence of American technology and American programming and the nation's high per capita income. Patent protection levels in Canada are considered high.

(2) Mexico Dataquest is estimating Mexico will begin some digital terrestrial broadcasts in 1999. In Mexico, digital terrestrial television growth rates relative to overall television sales will be similar to other ATSC adopting countries. Mexico is expected to have the third largest market for equipment with VSB demodulation through 2003. This is due to of Mexico's relatively early adoption of the technology and relatively strong expected growth. Key applications for Mexico will be digital television sets and digital terrestrial set top boxes. The next largest application for VSB technology in Mexico will be cable set top boxes, due to the high penetration of cable in the country relative to satellite and other delivery media. Patent protection levels in Mexico are considered high.

3) South Korea Dataquest is estimating South Korea will begin some digital terrestrial broadcasts in 2001. In South Korea, digital terrestrial television growth rates relative to overall television sales will be will be lower than other countries due to economic uncertainty in the region. The highest volume applications for South Korea will be digital television sets and digital terrestrial set top boxes. Satellite boxes with VSB will be popular in South Korea due to the relatively high penetration of satellite service in the country. Patent protection levels in South Korea are considered to be high. Korean companies are accustomed to paying royalty and license fees.

(4) Taiwan Dataquest is estimating Taiwan will begin some digital terrestrial broadcasts in 2001. In Taiwan, digital terrestrial television growth rates relative to overall television sales will be similar to other ATSC adopting countries. The highest volume applications for Taiwan will be digital television sets and digital terrestrial set top boxes. Patent protection in Taiwan may not be as rigorously enforced as in the other VSB adopting countries. However, patent protection levels are likely to be higher than for the China market.

(5) Argentina (ATSC adopter but not covered)

Likely VSB Adopting Countries:

(1) China Dataquest believes that is China is more likely to adopt the ATSC standard and VSB modulation technology than it is to adopt DVB and COFDM. China is likely to adopt the standard in order to position itself for export of digital televisions to the United States and other major ATSC countries. There is a possibility that more than one standard may coexist within China for at least a limited period of time. China also may choose to adopt a modified form of the ATSC standard, as it has done with other technologies. However, Dataquest has no reason to believe that China would modify the modulation format for ATSC DTV.

Dataquest is estimating China will begin some digital terrestrial broadcasts in 2001. In China, digital terrestrial television growth rates relative to overall television sales will be similar to other ATSC adopting countries through 2003. Sales will begin slowly and ramp up as broadcast coverage increases and digital television set prices begin to decline. Digital terrestrial set top box sales will trail sales of digital terrestrial televisions, but will begin to increase as more programming becomes available in a digital format.

In the China forecast, Dataquest has included a forecast for China VideoDisk (CVD). CVD is a special standard developed for the Chinese market by the Chinese government in cooperation with a group of foreign and domestic companies. This is a technology that is similar to DVD, but is less expensive. This is expected to replace videodisk players rather than DVD. Dataquest forecasts that VSB technology will appear in CVD players, albeit at a lower rate (less than five percent over the forecast period) than it will in DVD players worldwide because CVD is not a recordable medium.

China is expected to be the fourth largest market for equipment with VSB demodulation through 2003. However, beyond 2003, China stands a strong chance of become in the world's largest or second largest market for VSB equipment. This is due to a fast growing television market, combined with rapid economic expansion. Patent law is new to China. The ability to enforce patents and copyrights is limited in a country of its size and with its weak legal system.

Other:
India, Indonesia, Thailand, Vietnam. Dataquest believes that India, Indonesia, Thailand, Vietnam will follow the trend in the region, which likely will be ATSC. China (including Hong Kong) and Singapore have a major influence on the technology direction taken by other countries in that region. Dataquest believes these countries will adopt ATSC. These countries produce significant quantities of digital electronics products and will wish to serve the growing market for ATSC compatible equipment in North America and China. By adopting the ATSC standard, these countries will encourage a domestic market for compliant equipment to develop, which can be leveraged into export of products. In these countries, digital terrestrial television growth rates relative to overall television sales will be similar to other ATSC adopting countries, albeit the market will begin at a later year than some earlier adopters.

Caribbean, rest of Latin America, Africa, CIS, Malaysia and Middle East not covered by Gartner.

(Countries considering adoption of the ATSC (Zenith VSB) standard.

November 18 ATSC Meeting. The following countries are considering the implementation of the ATSC standard: Uruguay, Paraguay, Brazil, Chile, Mexico, Singapore, Hong Kong, China, India, Philippines and Russia

"30 million DTV sets will be sold in US in year 2006 and $500 billion market by 2010"

LG ELECTRONICS web site: Date : 98.01.10 Reference : 699 "Zenith Corp. of U.S. will exhibit Digital HDTV at Winter Consumer Electronics Show. Zenith of USA will be introducing its product line of the world's first [Digital HD(High Definition) TV] and [HD Set Top Box. Zenith will display its 64-inch projection type digital HDTV, HD Set Top Box, and other related products at this year’s Winter CES (Consumer Electronics Show), which will be held at Las Vegas on the 9th (U.S. date -8th). Zenith has taken steps towards its quest of becoming a leader in the digital TV industry with the development of the VSB transmission method, a standard for digital TV's in the U.S. A special feature of this year’s Winter CES is that all manufacturers of digital TVs will be introducing their prototype models as the industry braces itself for the start of digital TV broadcasting . The CEMA (Consumer Electronics Manufacturers* Association) will be preparing a special exhibition hall to trigger what it hopes will be the start of a digital TV boom.

The 64-inch projection digital HDTV will not be the only innovative product being featured by Zenith at the CEMA exhibition booth, as the HD Set Top Box and HD beam projector will also be displayed. Unlike other manufacturers, Zenith will be displaying actual product models instead of prototype ones, as the world will witness its unsurpassed technology, and see why Zenith has what it takes to dominate the digital TV market in the near future.

Zenith will release the digital HD Set Top Box and digital HDTV in March and August (1998), respectively in the U.S. market. LG Electronics and Zenith have designated this digital TV project as their next-generation top priority, one that will require the effective concentration of all strategic resources. Production technologies of core components like IC sets will be further enhanced and various multimedia application technologies will be combined in what will amount to the development of a standard to follow in the digital TV and multimedia industries. Our two products, [60 inch projection] & [Beam projector], are expected to dominate the digital TV market in the near future. The [Set Top Box], which is also in the HD class, allows you to receive digital TV broadcasting by connecting to an existing analog type TV, and will also be exhibited at the booth. All these products use IC sets that LG Electronics developed for the first time in the world on October of last year. LG has been investing over 100 billion won and 600 research engineers since 1990 to successfully develop this core component for digital TV’s. (Zenith)

The biggest significance of displaying the world's first product model is that product developing technology and production technology of LG & Zenith will be tested and approved as it strives to become a leader in the world digital TV market, which will amount to US$500 billion by 2010.

The North American market will be the first to start digital broadcasting and is expected to be the largest market, accounting for 35% of the world market. It is estimated that 1 million sets (U$2.5 billion worth) will be purchased in '99, another 15 million sets (U$28 billion) by 2002 and should peak at 30 million sets (U$45 billion) by 2006. LG’s primary objective is to capture 25% of the North American market with boosts coming from key technologies obtained from last year's successful development of IC sets along with Zenith unveiling of world's first product models this year.

"FCC accepts Zenith’s VSB standard"

Zenith Press Release: GLENVIEW, Ill., Dec. 26, 1996 -- Zenith Electronics Corporation praised today's Federal Communications Commission (FCC) adoption of the digital television (DTV) standard, which includes the digital high-definition television (HDTV) transmission technology developed by the company. Pete Willmott, CEO, "We're particularly proud that the FCC has adopted Zenith's digital transmission system as part of the standard. The company holds a series of key DTV system patents and plans to license its technology to television receiver and broadcast equipment manufacturers when the transition to DTV broadcasts begins.

"Zenith and Intel develop DTV demodulator cards for future PCs" (indicating strong PC demand for VSB)

Las Vegas, Jan. 8, 1998 -- "Capitalizing on its patented digital television (DTV) technology, Zenith Electronics Corporation is working with Intel Corporation to develop demodulator cards that will allow personal computers (PCs) to receive DTV broadcasts. Today's announcement - at the 1998 International Consumer Electronics Show - is expected to enhance the multimedia experience of digital TV broadcasts and reflects the important role that PCs will play in receiving DTV broadcasts, including datacasting services. "We view this relationship as important to supporting the commercial launch of DTV broadcasts and to promoting wide-spread use of Zenith VSB technology in a variety of products and applications," said Tom Sorensen, Zenith's director of new technologies and business development.

Intel has integrated the VSB technology into a prototype PCI board design for cost-effective PC implementation, while Zenith is providing its expertise in digital demodulation and its VSB technology. Zenith invented the VSB (vestigial sideband) digital transmission system adopted by the Federal Communications Commission as part of the ATSC (Advanced Television Systems Committee) DTV broadcast standard. Any consumer product that receives an ATSC DTV signal will use Zenith's patented VSB technology. In addition to licensing its VSB technology to manufacturers of digital high-definition television (HDTV) receivers, digital set-top boxes and broadcast equipment, Zenith plans to license its DTV technology to the PC industry. Licensing terms were not disclosed."

 

"Rich on Royalties"

Electronic News: February 16, 1998 Issue. One Last Rescue For Zenith. By Carol Haber and Chad Fasca... "Although the new management has yet to publicize its strategies--they are due at the time of the quarterly report sometime near March-- one thing is sure. High on the agenda will be HDTV and leading edge cable products. Zenith's products are an element in the HDTV standard and royalties promise to be rich...."

 

"New Study: 250 million digital TVs by 2008"

Electronic Media Nov 2 1998: Steep prices for the first wave of high-definition and digital TV equipment will not deter what is expected to be robust demand for new high-tech hardware that will boost the consumer electronics industry. But, compelling product-such as video on demand, Electronic-commerce and sourcing important online information-will be the ultimate drivers. That is the conclusion of at least one Wall Street investment banking firm that is predicting the sale of 250 million digital TV sets over the next decade at prices that will drop by more than 50 percent. Just as lucrative will be the replacement of associated analog video products such as VCRs, DVD players, camcorders and DSS equipment. Product improvements also will stimulate sales, according to the report titled ''Countdown to Digital'' by Warburg Dillon Read.

Some of the early and proposed versions of HDTV are interactive TV and data broadcasting, which can be viewed on an assortment of appliances including current and future TV sets, hybrid PC/TVs, TV set-top boxes, broadcast-enabled computers and hand-held TV-enabled devices. ''Other proposed HDTV formats, on the other hand, would be incompatible with many of these consumer and business applications of digital television,'' the report states. ''Ultimately, the market will decide whether one or more types of digital television will eventually emerge.'' But, just how long it takes for high definition and, more importantly, digital technology to take hold in the homes is up for grabs. The federal government's mandated target for complete digital conversion is 2006.

Warburg analysts Annie Erner and Lisa Hirsch warn against underestimating the entertainment power of television even as it is transformed into more of an interactive, high-definition monitor that mimics a computer. ''As evidenced by the success of large-screen television sets and home theater systems, DVD players . . . the American public has shown that it places a great value on the entertainment experience,'' the report states. With half of all PC users considering their systems more as entertainment products than as work tools, ''combining the entertainment aspects of the television and the computer into one appliance should be appealing. ''For those households that do not yet have a PC, a consumer Electronics investment that will allow them to upgrade the quality of their television and perform computer functions may be very worthwhile,'' the report continues.

But how quickly the gap closes between the 40 percent of U.S. households with personal computers and the 98 percent with TVs will partly depend on price. Initial price tags of $5,500 for high-definition and digital television sets and $300 to $400 for set-top digital converter boxes (that convert digital TV broadcast signals so they can be accepted by analog television sets) will rapidly decline as consumer demand rises for the latest digital gadget. ''More frequent model transitions will help to drive down prices quickly and propel consumers to upgrade to digital television,'' the report says. It's happened before. For example, DVD players introduced in March 1997 for $1,500 can be purchased today for $400.

Consumer Electronics prices declined 36 percent between 1989 and 1996, while the consumer price index rose 22 percent. Television set sales declined 3.7 percent in 1996, while sales of computers and communication products increased 14.8 percent… Digital most likely will succeed as it leverages off of Americans' love affair with TV. One out of every four families in the United States buys a television set every year. The average adult watches 20 hours of TV every week. Consumers spend $2.4 billion annually on color TVs priced upward of $1,300. U.S. consumers purchase $25 billion annually on consumer Electronics products priced at an average $750.

 

"The Forrester Results are Wrong."

ARLINGTON, VA.--(BUSINESS WIRE) Responding to a survey released today by Forrester Research, "HDTV Dreams, SDTV Realities, " Gary Shapiro, president of the Consumer Electronics Manufacturers Association December 8, 1998 "The Forrester research results are wrong. Forrester makes predictions in its report about what consumers want without talking to consumers. Our HDTV research is based on consumer opinion surveys and consumer focus groups that included HDTV demonstrations. The results of our research are clear: consumers want high definition TV (HDTV) and, in demonstration after demonstration, they express a strong preference for HDTV over standard definition TV (SDTV).

"HDTV is like ice cream. You can read about ice cream. But until you taste it, you don't know how good it is. Our research tells us that when consumers see HDTV, they are excited about the technology and willing to pay for it. "The entire history of our industry demonstrates that Americans want the best picture and sound quality technology has to offer. And 20 million households have already invested $2000 or more on their television. Even at introductory prices, HDTV is a success with consumers. As prices come down - and they will - HDTV sales will go up, making this technology the next generation of television."

CEMA estimates digital television sales of 150,000 sets by the end of 1999, and sales of 600,000 in the year 2000. CEMA projects that the first 10 million sets will be sold by 2003, the next 10 million in 2004 and 2005, and 10.8 million to be sold in 2006. Note: no projections given for SDTV sales.

 

"$2,000 DTVs by Sanyo in 1999"

Nikkei English News, Nihon Keizai Shimbun, Inc. 12-07-98. Sanyo will lay siege with low-priced products. In the U.S., the company plans to sell 32- to 36-inch TVs with cathode-ray tubes that can convert the 1,080 horizontal lines of high-definition TV pictures into the 480 of standard TV. The sets are to sell for 2,000 dollars to 3,000 dollars, compared with more than 8,000 dollars on existing models offered by competitors.

 

"Low-priced DTVs to be introduced by LG"

Korean Herald: 11-02-98 LG to Ship Digital TVs to UK and U.S. "LG Electronics Inc. said it will start exporting satellite digital TVs to Britain beginning this month. LG said it has recently agreed to supply 1,000 sets per month of 28-inch DTVs to major British distributors, including Dixons, Comet and Granada. The first shipment will leave by mid-November. The company also said it is in the final stage of negotiations with other British Electronics retailers to ship 20,000 DTV sets in the first half of next year….For the U.S., LG plans to supply its 64-inch projection-type DTVs first and introduce low-priced 50-inch systems later. (NIS)"

 

"Konka to export $2,000 DTVs"

February 1, 1999 XINHUA – A Chinese TV set maker's effort to tap the U.S. market became a leading news item in the U.S. newspaper Investor's Business Daily Saturday. Shenzhen-based Konka Group Co. hopes for a "great reception" in the U.S., the daily said. The Chinese TV set maker started shipping TVs to the U.S. last October. Later this year, Konka plans to enter the emerging high-definition digital TV market with a set priced around 3,000 U.S. dollars, about half of what others are charging.

The daily quoted Konka's president Wei Rong Chen as saying, "If you want to conquer the global market, you have to conquer the U.S. market." In the past three months, Konka has shipped 25,000 analog color TVs to the U.S. By 2001, the company hopes to ship 1 million analog and digital sets to U.S. retailers. And it plans to start selling digital videodisc players later this year. "The moves are part of a global push by Konka," the newspaper said.

 

Encryption Patents:

Patent Issued Title
US05018197 05/21/1991 Secure video decoder system
US04944006 07/24/1990 Secure data packet transmission system and method
US04876718 10/24/1989 Secure data packet transmission system and method
US05680457 10/21/1997 System for updating an authorization memory
US05461674 10/24/1995 Method and apparatus for controlling playback of recorded HDTV signals
US05052047 09/24/1991 Modulator-remodulator with common local oscillator
US04995080 02/19/1991 Television signal scrambling system and method
US04817144 03/28/1989 Secure TV scrambling system using framing code switching
US04771458 09/13/1988 Secure data packet transmission system and method
US04667232 05/19/1987 Synchronizing pulse restoration circuit
US04514761 04/30/1985 Data encryption technique for subscription television system
US04866770 09/12/1989 Method and apparatus for communication of video, audio, teletext, and data to groups of decoders in a communication system

 

XCA

ELECTRONIC ENGINEERING TIMES December 8, 1998 (excerpts) Zenith and Thomson are promoting a smart-card-based renewable encryption scheme called Extended Conditional Access, or, which the partners have submitted to a Consumer Electronics Manufacturers Association (CEMA) panel reviewing copy-protection schemes. The encryption-enabled digital interface is a pivotal piece of technology that would link digital cable or satellite set-tops, VCRs, DVD players and PCs to digital TV sets. The interface would prevent unauthorized copying of digital programming…

Thomson and Zenith insist that nothing is settled in the digital copy-protection debate. "The 5C copy-protection scheme may give the impression that it has gone several steps ahead of our XCA proposal," Paul Snopko, director of electronic systems R&D at Zenith (Glenview, Ill.), said here last week. "But in reality, no digital-consumer products exist on the market yet" with either competing encryption scheme. "In that sense, we are still at the same starting line," Snopko said.

Howard Mirowitz, vice president of Mitsubishi Electric America (Sunnyvale, Calif.), agreed that different industry groups are offering alternatives to the five-company copy-protection scheme. Matsushita is believed to be looking for a copy-protection plan for an analog-component interface, and a separate group is promoting a different copy-generation management-system approach, Mirowitz said. The Thomson-Zenith scheme is designed for both one- and two-way digital interfaces, and uses a renewable security system. Specifically, XCA could be used with a one-way digital interface like the EIA-762 RF remodulator standard as well as the IEEE1394 interface.

By contrast, DTCP has been specifically designed for 1394. The DTCP-enabled 1394 link may be "a good solution for an $8,000 digital TV, but would you want the same expensive 1394-based digital interface for a kitchen TV?" Snopko asked. Thomson and Zenith described their approach as "a simple, elegant and cost-effective solution designed for a range of different digital consumer products." Snopko and others stressed that a number of satellite decoders and cable set-top boxes are already equipped with a smart-card slot (SKY and Bell South using Zenith’s IRDs and STBs), even though they may not be widely used yet in the United States. Smart cards will likely be paid for by service providers tied to specific encrypted services, proponents said.

Thomson and Zenith believe they are building momentum for their proposal by working with CableLabs, the cable industry's research arm, and by submitting it to a CEMA engineering panel called Working Group 2. The group was formed to evaluate the impact of different architectures for protecting copyrighted digital content on consumer-electronic devices. A spokeswoman for CEMA (Arlington, Va.) said the group will continue seeking industry proposals for copy protection until the end of December while soliciting a list of requirements from MPAA and other video, audio and software providers on the types of protection features they want in digital consumer products. The spokeswoman said multiple solutions are possible, and that CEMA will likely let the market decide which is best. Working Group 2 is scheduled to complete a report on the copy-protection issue by the end of January. By Junko Yoshida and George Leopold ELECTRONIC ENGINEERING TIMES --12-07-98.

 

Flat Tension Mask Patents

Patent Issued Title
US05270612 12/14/1993 Inlaid support for an FTM mask support structure
US05114494 05/19/1992 Mask washing system and method
US05015818 05/14/1991 Magnetic collector for FTM laser weld debris and method
US05013275 05/07/1991 Continuous laser beam FTM mounting for CRT
US04929864 05/29/1990 NI-based FTM shadow masks having a nickel phosphide black layer
US04904218 02/27/1990 Blackening of non-iron-based flat tensioned foil shadow masks

 

Recent Zenith Patents:

Patent Issued Title
US05867058 02/02/99 Method and system for enhancing a digitally sampled voltage input waveform
US05847933 12/08/98 Solderless focus module
US05847750 12/08/98 Method of accessing a repetitively transmitted video program
US05847585 12/08/98 Method and apparatus for developing a close frequency tolerance output signal
from an input signal of lesser frequency tolerance
US05844634 12/01/98 Finger-controllable remote control unit
US5,844,626 12/01/98 HDTV compatible vertical sync separator
US5,844,552 12/01/98 Communication of character data in a web television
US5,841,820 11/24/98 Data comparison AGC system for VSB receiver
US5,834,988 11/10/98 Frequency compensated PIN diode attenuator
US5,832,790 10/27/98 Self cleaning wire stripper and method

B. TV Manufacturing

"Zenith postpones HDTV Introduction"

September 10, 1998. CONSUMER MULTIMEDIA REPORT:
"Zenith might miss Nov. 1 launch of HDTV broadcasts and postpone sale of 64W rear-projection HDTV set to spring, but sources say Sony is on target for broadcast debut and revealed details of company's hardware plans. Samsung HDTV set also will hit retail in Nov., despite production slip...

Zenith will supply demonstrator HDTVs to retailers to coincide with broadcasters' fall launch, but has postponed delivery of saleable 64W rear-projection DTVs to 1999, spokesman confirmed. Dealers told us they had been informed that postponement was result of Zenith's tentative sourcing agreement with Hitachi, but spokesman declined further comment.

Zenith had planned late summer rollout of 64W at $10,000, but it since has announced plans to file prepackaged bankruptcy reorganization by year-end that would have it emerge as subsidiary of majority shareholder LG Electronics. As part of reorganization plan, Zenith has said it will close or sell off most manufacturing facilities as it switches to sales and marketing organization. Hitachi, which is developing HDTV set jointly with Thomson, is among those said to be in running to supply Zenith with projection tubes, including 9" currently being produced at its Greenville, SC plant. Zenith also has said it would deliver HD downconvertor set-top box in 1999. At dealer costs listed, margins on 34W and set-top are generous compared with analog TV business -- and comparable with those of Panasonic and other HDTV vendors. Margin on Panasonic DTV-ready set is in 30% range, according to retail sources."

 

"LG to Sell Zenith’s HDTV and STB Products" (Indicating that LG plans to use Zenith for branding its DTV and STB manufacturing)

Source: LGE. LG Electronics is going to introduce set-top box for HDTV to the U.S. market in August (1998). Set-top box for HD TV is a market with high growth potential because the price is 1/3 of the HD TV set and large demand is anticipated. Already developed 64 inch HD TV set will also be introduced to the U.S. market from the fourth quarter of 1998. Digital TV is a huge market with sales expected to reach over US$ 500 billion by the year 2010 and as such has becoming the next target for world electronics makers. With strengthened organization, the LG Electronics plans to confirm digital TV as one of its strategic businesses for the next generation and take a leading position in the market along side Japanese counterparts."

 

"Philips Consumer Electronics Predicts Strong Growth for Digital Products"

ATLANTA--(BUSINESS WIRE)--Dec. 17, 1998--World's Third Largest CE Manufacturer Sets Vision for Digital Evolution; Showcases Flagship HDTV Receiver, other Key Digital Products. Philips Consumer Electronics (NYSE: PHG) expects the industry-wide net value of digital video products to nearly double to $22 billion by the Year 2000 as consumers migrate from analog to digital technologies.
The projection was discussed at today's 1999 Editorial Briefing hosted by Atlanta-based Philips Consumer Electronics North America, sales and marketing organization of the $39 billion global electronics leader Royal Philips Electronics. The briefing gave local print and electronic journalists their first opportunity to meet top Philips executives since Philips Consumer Electronics North America established operations here last year. It also gave journalists an advance look at new Philips product offerings that will be shown at the Consumer Electronics Show (CES) in Las Vegas next month.

Philips projections indicate that the market for digital products, such as DVD-Video and Digital Television, will grow steadily in the coming years. Today, Philips estimates that digital products account for 10 percent of total net value of the Consumer Electronics industry, and by the turn of century, this figure is expected to grow to 20 percent of the industry total. By 2002, Philips expects the Digital Video category to comprise 30 percent of the industry net value. At the same time, the market for analog products is expected to remain strong and will still represent 50 percent of the industry total in the year 2002.

"Digital TVs will account for 40% of all sets sold in the U.S. in 2000"

March 1, 1999 Nikkei English News : TOKYO (Nikkei)—Japanese home-appliance makers are looking forward to new opportunities in the digital television market.

Demand for digital TVs is expected to grow rapidly with the expansion of digital broadcasting. According to sources from Toshiba Corp. digital TVs will account for 40% of all sets sold in the U.S. in 2000.
Matsushita President Yoichi Morishita announced in January that his company will place high priority on the development of network products. Partnerships with U.S. firms ((Zenith?))will be essential in acquiring network knowledge.

Zenith Accessory and other Branding: "Zenith And Woods Industries Join Forces To Offer New Expansive Line Of Consumer Electronics Accessories Alliance Will Result in More Than 400 Product Offerings"

Zenith News Release: Leveraging combined sourcing, marketing and product development resources, Zenith Electronics Corporation and Woods Industries today announced a unique alliance that will result in the introduction of a complete line of high-performance consumer electronics accessories.
The Woods and Zenith relationship will result in the delivery of more than 400 products to the retail market beginning in the first quarter of 1999. This alliance between Zenith and Woods is the latest step in each companies' long-term plans to offer a wider variety of high quality accessories products to the consumer electronics marketplace -- by building on both companies' accessories merchandising and marketing initiatives. In addition, this alliance creates a seamless sales effort that gives both companies' sales forces full access to all accessory product lines in their respective distribution channels. For Woods, this is its latest initiative to join forces with companies that have respected and well-known brand names. For Zenith, the deal enhances the company's already-strong brand name and reinforces its commitment to the accessories market.

"Consumer electronics accessories have been an important segment for Zenith for many years. Now, with the growing convergence of television and audio systems - and with new high-end products such as DVD and others in the market - the demand for these types of accessories will only increase," said Bill Sims, president of the Zenith Sales Company. "We chose to enter into this alliance because of Woods' attention to quality and its expertise in sourcing and distribution that meets Zenith's high standards." According to Len Coakley, vice president, accessories, Zenith Sales Company, capitalizing on the sales, marketing and distribution expertise of Woods and Zenith increases the prominence and availability of Zenith's accessories across all markets. "Woods enjoys an excellent relationship with the mass market, home center hardware, computer and small office/home office industries, which are key targets for Zenith moving forward. Zenith complements those ties by bringing strong relationships and expertise to Woods in the power retailer, buying group and TV/Appliance channels. The partnership will greatly expand both companies' reach within all sectors of the consumer electronics industry. "The Woods/Zenith alliance enables both companies to offer superior performance consumer electronics accessories, including: Audio/Video accessories.

"LG to Ship Digital TVs to UK and US"
Korean Herald 11-02-98 "LG Electronics Inc. said it will start exporting satellite digital TVs to Britain beginning this month. LG said it has recently agreed to supply 1,000 sets per month of 28-inch DTVs to major British distributors, including Dixons, Comet and Granada. The first shipment will leave by mid-November. The company also said it is in the final stage of negotiations with other British Electronics retailers to ship 20,000 DTV sets in the first half of next year….For the U.S., LG plans to supply its 64-inch projection-type DTVs first and introduce low-priced 50-inch systems later. (NIS)" Note: we recently talked with representatives of Zenith’s plant in Juarez and were told that the 50" DTVs would be manufactured there.

 

In November 1998, we investigated the Juarez plant of Zenith and found that LG, apparently, had assumed total control of the plant. There were three Korean managers at the plant and no Zenith employees from the US were evidenced.

 

Zenith's Juarez plant VIP parking lot with only Korean names in evidence (November 1998)

On April 1, 1999, Zenith reported that the Juarez plant had been "shut down". Was the plant shut down to avoid a very likely antitrust suit?

Also in November 1998, we investigated Zenith's network systems plant in Chihuahua, Mexico and were told that LG had ordered Zenith to hold up its shipments of digital "World Boxes" (see below) to SKY until sometime in December 1998. This indicates that LG had direct control of the Chihuahua plant, also, and may have committed fraud to delay the shipments of set-top boxes.