<PAGE> 1
Exhibit 99.3
UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
IN RE: : JOINTLY ADMINISTERED
LOEWEN GROUP INTERNATIONAL, INC., : CASE NO. 99-1244 (PJW)
A DELAWARE CORPORATION, ET AL., : CHAPTER 11
DEBTORS. :
_____________________________________ :
:
DISCLOSURE STATEMENT PURSUANT TO SECTION 1125 OF THE BANKRUPTCY CODE
FOR THE JOINT PLAN OF REORGANIZATION OF LOEWEN GROUP INTERNATIONAL, INC.,
ITS PARENT CORPORATION AND THEIR DEBTOR SUBSIDIARIES
WILLIAM H. SUDELL, JR. (DE 463)
MORRIS, NICHOLS, ARSHT & TUNNELL
1201 North Market Street
Wilmington, Delaware 19899-1347
(302) 658-9200
- and -
RICHARD M. CIERI (OH 0032464)
LYLE G. GANSKE (OH 0031493)
JONES, DAY, REAVIS & POGUE
North Point
901 Lakeside Avenue
Cleveland, Ohio 44114
(216) 586-3939
HENRY L. GOMPF (TX 08116400)
GREGORY M. GORDON (TX 08435300)
TROY B. LEWIS (TX 12308650)
MICHAEL O. WEINBERG (TX 21084700)
JONES, DAY, REAVIS & POGUE
2727 North Harwood Street
Dallas, Texas 75201
(214) 220-3939
ATTORNEYS FOR DEBTORS AND
November 14, 2000 DEBTORS IN POSSESSION
<PAGE> 2
DISCLOSURE STATEMENT, DATED NOVEMBER 14, 2000
SOLICITATION OF VOTES
WITH RESPECT TO THE
JOINT PLAN OF REORGANIZATION
OF
LOEWEN GROUP INTERNATIONAL, INC., ITS PARENT CORPORATION
AND THEIR DEBTOR SUBSIDIARIES
------------------------
THE BOARDS OF DIRECTORS OF LOEWEN GROUP INTERNATIONAL, INC. ("LGII"),
ITS PARENT CORPORATION, THE LOEWEN GROUP INC. ("TLGI"), AND EACH OF THEIR DEBTOR
SUBSIDIARIES LISTED ON EXHIBIT I (THE "LOEWEN SUBSIDIARY DEBTORS," AND
COLLECTIVELY WITH LGII AND TLGI, THE "DEBTORS") BELIEVE THAT THE JOINT PLAN OF
REORGANIZATION OF LOEWEN GROUP INTERNATIONAL, INC., ITS PARENT CORPORATION AND
THEIR DEBTOR SUBSIDIARIES, DATED NOVEMBER 14, 2000 AND ATTACHED AS EXHIBIT II
(THE "PLAN"), IS IN THE BEST INTERESTS OF CREDITORS. ALL CREDITORS ENTITLED TO
VOTE THEREON ARE URGED TO VOTE IN FAVOR OF THE PLAN. A SUMMARY OF THE VOTING
INSTRUCTIONS IS SET FORTH BEGINNING ON PAGE 112 OF THIS DISCLOSURE STATEMENT.
MORE DETAILED INSTRUCTIONS ARE CONTAINED ON THE BALLOTS DISTRIBUTED TO CREDITORS
ENTITLED TO VOTE ON THE PLAN. TO BE COUNTED, YOUR BALLOT MUST BE DULY COMPLETED,
EXECUTED AND RECEIVED BY 5:00 P.M., EASTERN TIME, ON , 2001 OR SUCH OTHER DATE
IDENTIFIED ON YOUR BALLOT (THE "VOTING DEADLINE"), UNLESS EXTENDED.
------------------------
THE CONFIRMATION AND EFFECTIVENESS OF THE PROPOSED PLAN ARE SUBJECT TO
MATERIAL CONDITIONS PRECEDENT, SOME OF WHICH MAY NOT BE SATISFIED. SEE "OVERVIEW
OF THE PLAN -- CONDITIONS TO CONFIRMATION AND THE EFFECTIVE DATE OF THE PLAN"
AND "VOTING AND CONFIRMATION OF THE PLAN -- ACCEPTANCE OR CRAMDOWN." THERE IS NO
ASSURANCE THAT THESE CONDITIONS WILL BE SATISFIED OR WAIVED.
No person is authorized by any of the Debtors in connection with the
Plan or the solicitation of acceptances of the Plan to give any information or
to make any representation other than as contained in this Disclosure Statement
and the exhibits and schedules attached hereto or incorporated by reference or
referred to herein, and, if given or made, such information or representation
may not be relied upon as having been authorized by any of the Debtors. Although
the Debtors will make available to creditors entitled to vote on acceptance of
the Plan such additional information as may be required by applicable law prior
to the Voting Deadline, the delivery of this Disclosure Statement will not under
any circumstances imply that the information herein is correct as of any time
subsequent to the date hereof.
------------------------
ALL CREDITORS ARE ENCOURAGED TO READ AND CAREFULLY CONSIDER THIS ENTIRE
DISCLOSURE STATEMENT, INCLUDING THE PLAN ATTACHED AS EXHIBIT II AND THE MATTERS
DESCRIBED UNDER "RISK FACTORS," PRIOR TO SUBMITTING BALLOTS PURSUANT TO THIS
SOLICITATION.
------------------------
<PAGE> 3
The summaries of the Plan and the other documents contained in this
Disclosure Statement are qualified by reference to the Plan itself, the exhibits
thereto and documents described therein as being Filed prior to approval of the
Disclosure Statement.
The information contained in this Disclosure Statement, including the
information regarding the history, businesses and operations of the Debtors, the
historical, projected and budgeted financial information regarding the Debtors
and the liquidation analyses relating to the Debtors, is included for purposes
of soliciting acceptances of the Plan, but, as to contested matters and
adversary proceedings, is not to be construed as admissions or stipulations but
rather as statements made in settlement negotiations.
------------------------
FORWARD-LOOKING STATEMENTS: THIS DISCLOSURE STATEMENT INCLUDES
FORWARD-LOOKING STATEMENTS BASED LARGELY ON THE CURRENT EXPECTATION OF THE
DEBTORS AND PROJECTIONS ABOUT FUTURE EVENTS AND FINANCIAL TRENDS AFFECTING THE
FINANCIAL CONDITION OF THE DEBTORS' OR THE REORGANIZED DEBTORS' BUSINESSES. THE
WORDS "BELIEVE," "MAY," "WILL," "ESTIMATE," "CONTINUE," "ANTICIPATE," "INTEND,"
"EXPECT" AND SIMILAR EXPRESSIONS IDENTIFY THESE FORWARD-LOOKING STATEMENTS.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A NUMBER OF RISKS, UNCERTAINTIES
AND ASSUMPTIONS, INCLUDING THOSE DESCRIBED BELOW UNDER THE CAPTION "RISK
FACTORS." IN LIGHT OF THESE RISKS AND UNCERTAINTIES, THE FORWARD-LOOKING EVENTS
AND CIRCUMSTANCES DISCUSSED IN THIS DISCLOSURE STATEMENT MAY NOT OCCUR AND
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE
FORWARD-LOOKING STATEMENTS. NEITHER THE DEBTORS NOR THE REORGANIZED DEBTORS
UNDERTAKE ANY OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
U.S. SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), ANY CANADIAN SECURITIES
ADMINISTRATOR ("CSA") OR ANY STOCK EXCHANGE, NOR HAS THE SEC, ANY CSA OR ANY
STOCK EXCHANGE PASSED UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED
HEREIN.
------------------------
ALL CAPITALIZED TERMS IN THIS DISCLOSURE STATEMENT NOT OTHERWISE
DEFINED HEREIN HAVE THE MEANINGS GIVEN TO THEM IN THE PLAN.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
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INTRODUCTION................................................................................................ 1
OVERVIEW OF THE PLAN........................................................................................ 2
Introduction........................................................................................... 2
Changes to Corporate Structure......................................................................... 2
General Information Concerning Treatment of Claims and Interests....................................... 2
Summary of Classes and Treatment of Claims and Interests............................................... 3
Sources and Uses of Cash............................................................................... 11
Additional Information Regarding Assertion and Treatment of Administrative Claims and Priority Tax
Claims............................................................................................. 12
Administrative Claims.............................................................................. 12
Priority Tax Claims................................................................................ 15
Special Provisions Regarding the Treatment of Allowed Secondary Liability Claims....................... 15
Summary of Terms of Certain Securities To Be Issued Pursuant to the Plan and Other
Post-Reorganization Indebtedness................................................................... 15
Conditions to Confirmation and the Effective Date of the Plan.......................................... 17
Conditions to Confirmation......................................................................... 17
Conditions to the Effective Date................................................................... 17
Waiver of Conditions to Confirmation or the Effective Date......................................... 18
Effect of Nonoccurrence of Conditions to the Effective Date........................................ 18
Exit Financing Revolving Credit Facility............................................................... 19
The CCAA Order......................................................................................... 19
Modification or Revocation of the Plan................................................................. 20
CERTAIN EVENTS PRECEDING THE DEBTORS' CHAPTER 11 FILINGS.................................................... 20
Historical Acquisition Strategy........................................................................ 20
Mississippi Litigation................................................................................. 20
Collateral Trust Agreement............................................................................. 21
Prepetition Financial Results and Overleverage......................................................... 21
Securities Class Actions............................................................................... 21
Management Changes, Restructuring Efforts and Asset Sales.............................................. 22
OPERATIONS DURING THE REORGANIZATION CASES.................................................................. 24
First Day Relief....................................................................................... 24
Introduction....................................................................................... 24
Employee Wages and Benefits........................................................................ 24
Workers' Compensation.............................................................................. 24
Trust Fund Taxes................................................................................... 25
Customer, Vendor, Service Provider and Contractor Claims........................................... 25
The Protocol Motion................................................................................ 25
The Regulatory Motion.............................................................................. 26
Debtor-in-Possession Financing......................................................................... 27
Key Employee Retention Program......................................................................... 28
Appointment of the Creditors' Committee................................................................ 28
Claims Process and Bar Dates........................................................................... 30
Executory Contracts and Unexpired Leases............................................................... 30
Blackstone Transactions................................................................................ 32
Prime Succession................................................................................... 32
Rose Hills......................................................................................... 33
Blackstone Settlement.............................................................................. 34
Michigan Cemeteries.................................................................................... 35
</TABLE>
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<TABLE>
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West Texas............................................................................................. 36
Post-Petition Asset Disposition Program................................................................ 37
The CCAA Proceedings................................................................................... 38
Exclusivity............................................................................................ 38
COLLATERAL TRUST AGREEMENT ISSUES; RECOVERY ACTIONS; AND OTHER LEGAL PROCEEDINGS............................ 39
Collateral Trust Agreement Issues...................................................................... 39
Background......................................................................................... 39
Factual Investigation.............................................................................. 42
Creditor Settlement Negotiations................................................................... 43
Recovery Actions....................................................................................... 44
Introduction....................................................................................... 44
Preference Claims.................................................................................. 45
Fraudulent Conveyance Actions...................................................................... 46
Other Legal Proceedings................................................................................ 48
NAFTA Claims....................................................................................... 48
Northeast Disposition Sale Dispute................................................................. 48
Osiris Declaratory Judgment........................................................................ 49
Other Claims Related to the Collateral Trust Agreement................................................. 49
REORGANIZED LGII............................................................................................ 50
Restructuring Transactions............................................................................. 50
Business of Reorganized LGII........................................................................... 51
Business Plan.......................................................................................... 52
Liquidity and Capital Resources........................................................................ 52
Selected Historical Financial Information.............................................................. 53
Projected Financial Information........................................................................ 54
Introduction....................................................................................... 54
Principal Assumptions for the Projections.......................................................... 55
Projections........................................................................................ 60
Management and Board of Directors...................................................................... 74
Reorganized LGII Board of Directors................................................................ 74
Classification of the Board........................................................................ 74
Board Committees................................................................................... 74
Director Nomination Procedures..................................................................... 75
Director Compensation.............................................................................. 75
Reorganized LGII Executive Officers................................................................ 76
Executive Compensation............................................................................. 77
Summary Compensation Table......................................................................... 77
Existing Benefit Plans and Agreements.............................................................. 78
New Benefit Plans and Agreements................................................................... 80
Certain Corporate Governance Matters................................................................... 81
Introduction....................................................................................... 81
Classified Board of Directors, Removal of Directors and Filling Vacancies in Directorships......... 81
Stockholder Action and Special Meetings of Stockholders............................................ 82
Advance Notice Requirements for Stockholder Proposals and Directors Nominations.................... 82
Authorized But Unissued Shares..................................................................... 82
Supermajority Vote Requirements.................................................................... 83
Share Purchase Rights Agreement.................................................................... 83
Delaware Section 203............................................................................... 84
Limitation of Liability; Indemnity Arrangements.................................................... 85
SECURITIES TO BE ISSUED PURSUANT TO THE PLAN AND OTHER POST-REORGANIZATION INDEBTEDNESS..................... 86
Reorganization Value................................................................................... 86
</TABLE>
ii
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<TABLE>
<S> <C>
New Common Stock....................................................................................... 87
New Five-Year Secured Notes............................................................................ 88
General............................................................................................ 88
Ranking and Collateral............................................................................. 88
Optional Redemption; Mandatory Offer to Repurchase upon a Change of Control........................ 88
Events of Default.................................................................................. 89
Affirmative Covenants.............................................................................. 89
Negative Covenants................................................................................. 89
Amendment, Waiver or Modification of Indenture..................................................... 90
Remedies upon Default.............................................................................. 90
Trustee Duties and Indemnification................................................................. 90
New Two-Year Unsecured Notes........................................................................... 91
General............................................................................................ 91
Ranking............................................................................................ 91
Optional and Mandatory Redemption; Mandatory Offer to Repurchase upon a Change of Control.......... 91
Events of Default.................................................................................. 91
Affirmative Covenants.............................................................................. 92
Negative Covenants................................................................................. 92
Amendment, Waiver or Modification of Indenture..................................................... 92
Remedies upon Default.............................................................................. 93
Trustee Duties and Indemnification................................................................. 93
New Seven-Year Unsecured Notes......................................................................... 93
General............................................................................................ 93
Ranking............................................................................................ 93
Optional Redemption; Mandatory Offer to Repurchase upon a Change of Control........................ 94
Events of Default.................................................................................. 94
Affirmative Covenants.............................................................................. 94
Negative Covenants................................................................................. 95
Amendment, Waiver or Modification of Indenture..................................................... 95
Remedies upon Default.............................................................................. 95
Trustee Duties and Indemnification................................................................. 96
New Unsecured Subordinated Notes....................................................................... 96
Exit Financing......................................................................................... 96
Exit Financing Revolving Credit Facility........................................................... 96
Exit Financing Term Loan........................................................................... 97
Rose Hills Indebtedness................................................................................ 97
Other Indebtedness..................................................................................... 97
RISK FACTORS................................................................................................ 97
Projections............................................................................................ 98
Substantial Leverage................................................................................... 98
Security Interests..................................................................................... 98
The Security for the New Five-Year Secured Notes May Not Be Sufficient To Make Payments on Such
Notes.............................................................................................. 98
The New Senior Notes Will Be Effectively Subordinated to Obligations of the Subsidiaries of
Reorganized LGII................................................................................... 99
Dividend Policies; Restrictions on Payment of Dividends................................................ 99
Lack of Established Market for New Common Stock and New Senior Notes; Possible Volatility.............. 99
Noncomparability of Historical Financial Information................................................... 100
Treatment of Claims; Dilution.......................................................................... 100
NAFTA Claims........................................................................................... 100
Revenues from Preneed Sales Is Dependent upon an Adequate Salesforce................................... 101
Revenue from Trust and Finance Income Is Subject to Market Conditions.................................. 101
Federal, State and Local Regulations May Change to the Detriment of Reorganized LGII................... 101
The Death Rate May Decrease............................................................................ 101
The Rate of Cremation Is Increasing.................................................................... 101
</TABLE>
iii
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<TABLE>
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Certain Anti-Takeover Effects.......................................................................... 102
GENERAL INFORMATION CONCERNING THE PLAN..................................................................... 102
Discharge of Claims and Termination of Interests; Related Injunction................................... 102
Preservation of Rights of Action Held by the Debtors or the Reorganized Debtors........................ 103
Releases and Related Injunction........................................................................ 103
Executory Contracts and Unexpired Leases............................................................... 104
DISTRIBUTIONS UNDER THE PLAN................................................................................ 106
General................................................................................................ 106
Methods of Distributions............................................................................... 106
Distributions to Holders of Allowed Claims and Interests........................................... 106
Compensation and Reimbursement for Services Related to Distributions............................... 106
Delivery of Distributions in General............................................................... 106
Special Provisions for Distributions to Holders of Public Note Claims.............................. 107
Undeliverable or Unclaimed Distributions............................................................... 107
Distribution Record Date............................................................................... 108
Means of Cash Payments................................................................................. 108
Timing and Calculation of Amounts To Be Distributed.................................................... 108
Distributions of New Common Stock.................................................................. 109
De Minimis Distributions........................................................................... 109
Compliance with Tax Requirements................................................................... 109
Surrender of Canceled Securities or Other Instruments.................................................. 109
Setoffs................................................................................................ 110
Disputed Claims; Reserves and Estimations.............................................................. 110
Funding of Unsecured Claims Reserves............................................................... 111
Distributions on Account of Disputed Claims Once They Are Allowed.................................. 111
Payment of Post-Effective Date Interest from Cash Investment Yield..................................... 111
Objections to Claims or Interests and Authority to Prosecute Objections................................ 111
Dissolution of the Creditors' Committees............................................................... 112
VOTING AND CONFIRMATION OF THE PLAN......................................................................... 112
General................................................................................................ 112
Voting Procedures and Requirements..................................................................... 112
Confirmation Hearing................................................................................... 113
Confirmation........................................................................................... 114
Acceptance or Cramdown................................................................................. 114
Substantive Consolidation.............................................................................. 115
Best Interests Test; Liquidation Analysis.............................................................. 115
Feasibility............................................................................................ 116
Compliance with Applicable Provisions of the Bankruptcy Code........................................... 116
Alternatives to Confirmation and Consummation of the Plan.............................................. 116
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF CONSUMMATION OF THE PLAN.................................... 117
General................................................................................................ 117
Consequences to the Debtors............................................................................ 117
Consequences to Holders of Claims...................................................................... 118
Definition of Securities........................................................................... 118
Holders of Claims Constituting Tax Securities...................................................... 118
Holders of Claims Not Constituting Tax Securities.................................................. 119
Dividend and Interest Income Earned by the Unsecured Claims Reserve................................ 119
Certain Other Tax Considerations for Holders of Claims................................................. 120
Receipt of Pre-Effective Date Interest............................................................. 120
Receipt of Dividend and Interest Income Earned by the Unsecured Claims Reserve..................... 120
Reinstatement of Claims............................................................................ 120
Bad Debt Deduction................................................................................. 120
</TABLE>
iv
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<TABLE>
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Information Reporting and Withholding.............................................................. 121
CERTAIN CANADIAN FEDERAL INCOME TAX CONSEQUENCES OF CONSUMMATION OF THE PLAN............................... 121
General................................................................................................ 121
Settlement of Debt..................................................................................... 121
Transfer of Assets to Canadian Holding Companies....................................................... 122
Transfer of Assets to LGII............................................................................. 122
Cancellation of LGII Shares............................................................................ 122
Acquisition of Control................................................................................. 122
APPLICABILITY OF CERTAIN U.S. FEDERAL AND STATE SECURITIES LAWS............................................. 123
General................................................................................................ 123
Bankruptcy Code Exemptions from Registration Requirements.............................................. 123
Initial Offer and Sale of Securities............................................................... 123
Subsequent Transfers of Securities................................................................. 123
Certain Transactions by Stockbrokers................................................................... 125
Registration Rights Agreement.......................................................................... 125
APPLICABILITY OF CERTAIN CANADIAN SECURITIES LAWS........................................................... 126
ADDITIONAL INFORMATION...................................................................................... 126
RECOMMENDATION AND CONCLUSION............................................................................... 127
</TABLE>
v
<PAGE> 9
TABLE OF EXHIBITS
Exhibit I - TLGI, LGII and Loewen Subsidiary Debtors, including the
applicable Division to which each has been assigned for
purposes of Class 9 of the Plan, an identification of Pledgors
and an identification of Non-Ownership Regulated Debtors for
purposes of Class 15 of the Plan
Exhibit II - Joint Plan of Reorganization of Loewen Group International,
Inc., Its Parent Corporation and Their Debtor Subsidiaries
Exhibit III - The Loewen Group Inc. Form 10-K Annual Report for the year
ended December 31, 1999, and Form 10-Q Quarterly Report for the
quarter ended September 30, 2000
Exhibit IV - Liquidation Analysis
Exhibit V - Memorandum entitled "The Status of the Series 3 and 4 Notes,
the Series 6 and 7 Notes, and the PATS under the Collateral
Trust Agreement (Amended and Restated)" dated as of September
19, 2000
vi
<PAGE> 10
INTRODUCTION
The Debtors are seeking approval of the Plan, a copy of which is
attached as Exhibit II. This Disclosure Statement is submitted by the Debtors in
connection with the solicitation of acceptances of the Plan.
The confirmation of a plan of reorganization, which is the vehicle for
satisfying the rights of holders of claims against and equity interests in a
debtor, is the overriding goal of a chapter 11 case. The primary objectives of
the Plan are to: (a) alter the Debtors' debt and capital structures to permit
them to emerge from their chapter 11 cases with viable capital structures; (b)
maximize the value of the ultimate recoveries to all creditor groups on a fair
and equitable basis; and (c) settle, compromise or otherwise dispose of certain
claims and interests on terms that the Debtors believe to be fair and reasonable
and in the best interests of their respective Estates, creditors and equity
holders. The Plan provides for, among other things: (a) transactions that will
result in the ultimate parent company in the corporate structure being
Reorganized LGII, a Delaware corporation; (b) the cancellation of stock in
Non-Ownership Regulated Debtors other than stock owned by a Loewen Company; (c)
the cancellation of the MIPS, the MIPS Junior Subordinated Debentures and
related MIPS Guaranty; (d) the cancellation of the CTA Note Claims in exchange
for a combination of cash, New Five-Year Secured Notes, if issued, New Two-Year
Unsecured Notes, if issued, New Seven-Year Unsecured Notes and New Common Stock;
(e) the cancellation of certain other indebtedness in exchange for cash or New
Common Stock; (f) the Reinstatement of certain prepetition Intercompany Claims
of the Loewen Companies against the Debtors and the discharge of certain other
Intercompany Claims; (g) the assumption, assumption and assignment or rejection
of Executory Contracts and Unexpired Leases to which any Debtor is a party; (h)
the selection of boards of directors of the Reorganized Debtors; and (i) the
corporate restructuring of the Loewen Subsidiary Debtors to simplify the
Debtors' corporate structure. In addition, (a) a similar restructuring of
certain of the Canadian subsidiaries of TLGI and certain other transactions
resulting in the transfer of substantially all of TLGI's assets to Reorganized
LGII will be effected pursuant to the CCAA Order and (b) certain transactions
resulting in Reorganized LGII becoming the owner of all or substantially all of
the outstanding capital stock of Rose Hills Holding Corp. in exchange for the
issuance of the New Unsecured Subordinated Note are expected to be effected
pursuant to the Blackstone Settlement Documents. Reorganized LGII will be the
issuer of the New Five-Year Secured Notes, if issued, the New Two-Year Unsecured
Notes, if issued, the New Seven-Year Unsecured Notes and the New Common Stock to
be issued to various creditors as of the Effective Date as described below. See
"Overview of the Plan -- Summary of Classes and Treatment of Claims and
Interests."
By an order of the Bankruptcy Court dated , 2000,
this Disclosure Statement has been approved as containing "adequate information"
for creditors and equity security holders of the Debtors in accordance with
section 1125 of the Bankruptcy Code. The Bankruptcy Code defines "adequate
information" as "information of a kind, and in sufficient detail, as far as is
reasonably practicable in light of the nature and the history of the debtor and
the condition of the debtor's books and records, that would enable a
hypothetical reasonable investor typical of holders of claims or interests of
the relevant class to make an informed judgment about the plan . . . ." 11
U.S.C.Section 1125(a)(1).
THE DEBTORS' BOARDS OF DIRECTORS BELIEVE THAT THE PLAN IS IN THE BEST
INTERESTS OF CREDITORS AND EQUITY HOLDERS. ALL CREDITORS ENTITLED TO VOTE ARE
URGED TO VOTE IN FAVOR OF THE PLAN BY NO LATER THAN 5:00 P.M., EASTERN TIME, ON
THE VOTING DEADLINE.
The requirements for Confirmation, including the vote of creditors to
accept the Plan and certain of the statutory findings that must be made by the
Bankruptcy Court, are set forth in "Voting and Confirmation of the Plan."
Confirmation of the Plan and the occurrence of the Effective Date are subject to
a number of significant conditions, which are summarized in "Overview of the
Plan -- Conditions to Confirmation and the Effective Date of the Plan." There is
no assurance that these conditions will be satisfied or waived.
<PAGE> 11
OVERVIEW OF THE PLAN
INTRODUCTION
The following is a brief overview of certain material provisions of the
Plan. This overview is qualified in its entirety by reference to the provisions
of the Plan, a copy of which is attached as Exhibit II, and the exhibits
thereto, as amended from time to time, which are or will be available for
inspection at the Document Reviewing Centers. See "Additional Information." For
a description of certain other significant terms and provisions of the Plan, see
"General Information Concerning the Plan" and "Distributions Under the Plan."
CHANGES TO CORPORATE STRUCTURE
TLGI was organized under the laws of British Columbia, Canada, and
conducts its business through more than 1,000 subsidiaries, including, among
others, LGII, the Loewen Subsidiary Debtors and the CCAA Debtors. Certain
changes in the corporate structure of TLGI and its subsidiaries will be effected
pursuant to or in connection with the Plan or CCAA Order, including: (a) the
cancellation of each share of LGII Old Stock, the transfer of substantially all
of the assets of TLGI to LGII and the effectuation of certain transactions
relating to the NAFTA Claims (the "Reinvestment Transactions"); and (b) in each
state in which the Debtors conduct business, the restructuring of the Loewen
Subsidiary Debtors organized under the laws of such state so as to reduce the
number of Loewen Companies organized in such state to the maximum extent
permissible and determined by the Debtors to be appropriate, taking into account
applicable regulatory requirements and other pertinent considerations (the
"Subsidiary Restructuring Transactions," and, collectively with the Reinvestment
Transactions, the "Restructuring Transactions"). In addition, (a) a similar
restructuring of certain of the Canadian subsidiaries of TLGI will be effected
pursuant to the CCAA Order and (b) certain transactions resulting in Reorganized
LGII becoming the owner of all or substantially all of the outstanding capital
stock of Rose Hills Holding Corp. are expected to be effected pursuant to the
Blackstone Settlement Documents. As a result of the foregoing transactions, the
ultimate parent company in the corporate structure will be Reorganized LGII, a
Delaware corporation, and Reorganized LGII will have substantially fewer
subsidiaries than TLGI has currently. See "Reorganized LGII -- Restructuring
Transactions." See also "Collateral Trust Agreement Issues; Recovery Actions;
and Other Legal Proceedings -- Other Legal Proceedings -- NAFTA Claims" for a
description of the transactions relating to the NAFTA Claims.
GENERAL INFORMATION CONCERNING TREATMENT OF CLAIMS AND INTERESTS
The Plan provides that holders of Allowed Claims in certain Classes
will be entitled to distributions of: (a) cash; (b) New Five-Year Secured Notes,
if issued; (c) New Two-Year Unsecured Notes, if issued; (d) New Seven-Year
Unsecured Notes; or (e) New Common Stock in respect of their Claims. See
"Securities To Be Issued Pursuant to the Plan and Other Post-Reorganization
Indebtedness" for a description of the New Five-Year Secured Notes, New Two-Year
Unsecured Notes, New Seven-Year Unsecured Notes and New Common Stock to be
issued pursuant to the Plan. The Plan also provides that the holders of Allowed
Secured Claims (other than the CTA Note Claims) will have their Claims paid in
full or Reinstated or will receive the collateral securing such Claims, at the
option of the Debtors. Shares of LGII Old Stock and the MIPS will be canceled
and holders of such Interests will receive no distributions under the Plan.
Shares of Old Stock in Non-Ownership Regulated Debtors (other than stock owned
by a Loewen Company) will be canceled and holders of such Interests will receive
no distributions under the Plan unless the Bankruptcy Court determines that the
applicable Debtor is solvent, in which event such holder will receive New Common
Stock equal to the value of the canceled shares as determined by the Bankruptcy
Court. Non-Ownership Regulated Debtors are identified on Exhibit I to this
Disclosure Statement. See " -- Summary of Classes and Treatment of Claims and
Interests."
The determination of the relative distributions to be received under
the Plan by the holders of Claims in certain Classes was based upon, among other
factors, estimates of the amounts of Allowed Claims in such Classes and the
relative priorities of such Allowed Claims. Class 9, which consists of general,
non-priority Unsecured Claims against the Debtors, has been subdivided into
eight Divisions, each of which, for purposes of section 1129 of the Bankruptcy
Code, will be treated as a separate class of Claims for each relevant Debtor.
For purposes of
2
<PAGE> 12
determining which Debtors would be included in any particular Division, the
Debtors have estimated the percentage recovery to which holders of general
Unsecured Claims against each Debtor are entitled and have grouped Debtors with
the same or similar recoveries in the same Division. TLGI and LGII are in
Divisions A and B, respectively. The Division in which each other Debtor has
been grouped is set forth on Exhibit I to this Disclosure Statement. The
estimates of the amounts of Allowed Claims in each Class and, in the case of
Class 9, each Division are set forth in " -- Summary of Classes and Treatment of
Claims and Interests." The distributions to be received by creditors in any
Division of Class 9 could differ from these estimates if the estimates prove to
be inaccurate.
For purposes of computations of Claim amounts, administrative and other
expenses and for similar computational purposes, the Effective Date is assumed
to occur on March 31, 2001. There is no assurance, however, as to if or when the
Effective Date will actually occur. Procedures for the distribution of cash and
securities pursuant to the Plan, including matters that are expected to affect
the timing of the receipt of distributions by holders of Claims in certain
Classes and that could affect the amount of distributions ultimately received by
such holders, are described in "Distributions Under the Plan."
The Plan constitutes a separate plan of reorganization for each Debtor.
The "cramdown" provisions of section 1129(b) of the Bankruptcy Code permit
confirmation of a chapter 11 plan of reorganization in certain circumstances
even if the plan is not accepted by all impaired classes of claims and interests
of a debtor. See "Voting and Confirmation of the Plan -- Acceptance or
Cramdown." The Debtors will seek "cramdown" of the Plan in respect to (a) each
Class of Claims or Interests that will not receive or retain anything under the
Plan and (b) Class 4 Claims as to which the applicable Debtor elects Option C
treatment. Further, the Debtors have reserved the right to request Confirmation
pursuant to the cramdown provisions of the Bankruptcy Code and to amend the Plan
if any Class or Division of Claims of any Debtor fails to accept the Plan. If
such request were granted by the Bankruptcy Court, the dissenting Classes or
Divisions could, in certain cases, receive alternative treatment under the Plan.
For purposes of this Disclosure Statement, however, it has been assumed that,
except as described above, the Debtors will not be required to seek Confirmation
under the cramdown provisions of the Bankruptcy Code. Although the Debtors
believe that, if necessary, the Plan could be confirmed under the cramdown
provisions of the Bankruptcy Code, there is no assurance that the requirements
of such provisions would be satisfied.
SUMMARY OF CLASSES AND TREATMENT OF CLAIMS AND INTERESTS
The classification of Claims and Interests, the estimated aggregate
amount of Claims in each Class, and, in the case of Class 9, each Division, and
the amount and nature of distributions to holders of Claims or Interests in each
Class and, in the case of Class 9, each Division, are summarized in the table
below. In accordance with section 1123(a)(1) of the Bankruptcy Code,
Administrative Claims and Priority Tax Claims have not been classified. For a
discussion of certain additional matters related to Administrative Claims and
Priority Tax Claims, see " -- Additional Information Regarding Assertion and
Treatment of Administrative Claims and Priority Tax Claims."
The information set forth in the table below with respect to each Class
of Claims, and, in the case of Class 9, each Division, is presented on a
combined basis for all of the Debtors in that Class or Division to which such
information is applicable. The estimated aggregate amounts of Claims are based
on the Debtors' estimates of the aggregate amounts of such Claims that the
Debtors believe will be asserted upon resolution of all such Claims that the
Debtors believe will be Disputed Claims. Certain of these Disputed Claims are
likely to be material, and the total amount of all such Claims, including
Disputed Claims, may be materially in excess of the total amount of Allowed
Claims assumed in the development of the Plan. Moreover, because the Claims
reconciliation process is ongoing (see "Operations During the Reorganization
Cases -- Claims Process and Bar Dates"), in estimating the amount of Claims in
each Class of Claims and, in the case of Class 9, each Division, the Debtors
have included certain reserve amounts (the "Reserves") to account for: (a)
potential unfavorable variations between the Debtors' current estimates of
Allowed Claims and the amounts that ultimately will be allowed; and (b) Claims
that may be filed in the future, including rejection damage claims, where the
applicable Bar Date has not yet expired or been established. The ultimate amount
of Allowed Claims may be in excess of the Debtors' current estimates plus the
Reserves and, thus, the ultimate amount of Allowed Claims may be in excess of
that assumed in the development of the Plan.
3
<PAGE> 13
THE AMOUNTS SHOWN IN THE TABLE BELOW AS "ESTIMATED AGGREGATE CLAIMS
AMOUNTS" ARE BASED UPON THE DEBTORS' REVIEW OF CLAIMS FILED BY THE BAR DATE AND
THE DEBTORS' BOOKS AND RECORDS AND MAY BE SUBSTANTIALLY REVISED IN THE COURSE OF
THE ONGOING CLAIMS RECONCILIATION PROCESS. SEE "OPERATIONS DURING THE
REORGANIZATION CASES -- CLAIMS PROCESS AND BAR DATES." FURTHER, THE AMOUNT OF
ANY DISPUTED CLAIM THAT ULTIMATELY IS ALLOWED BY THE BANKRUPTCY COURT MAY BE
SIGNIFICANTLY MORE OR LESS THAN THE ESTIMATED AMOUNT OF SUCH CLAIM. AS A
CONSEQUENCE, THE ACTUAL ULTIMATE AGGREGATE AMOUNT OF ALLOWED UNSECURED CLAIMS IN
A DIVISION OF CLASS 9 MAY DIFFER SIGNIFICANTLY FROM THE ESTIMATE SET FORTH
BELOW. ACCORDINGLY, THE AMOUNT OF THE PRO RATA DISTRIBUTIONS OF NEW COMMON STOCK
THAT ULTIMATELY WILL BE RECEIVED BY A HOLDER OF AN ALLOWED UNSECURED CLAIM IN A
PARTICULAR DIVISION OF CLASS 9 MAY BE ADVERSELY OR FAVORABLY AFFECTED BY THE
AGGREGATE AMOUNT OF CLAIMS ULTIMATELY ALLOWED IN SUCH DIVISION. SEE "RISK
FACTORS -- TREATMENT OF CLAIMS; DILUTION." DISTRIBUTIONS OF NEW COMMON STOCK TO
HOLDERS OF ALLOWED UNSECURED CLAIMS IN EACH DIVISION OF CLASS 9 WILL BE MADE ON
AN INCREMENTAL BASIS UNTIL ALL DISPUTED CLAIMS IN SUCH DIVISION HAVE BEEN
RESOLVED. SEE "DISTRIBUTIONS UNDER THE PLAN -- TIMING AND CALCULATION OF AMOUNTS
TO BE DISTRIBUTED -- DISTRIBUTIONS OF NEW COMMON STOCK" AND "DISTRIBUTIONS UNDER
THE PLAN -- DISPUTED CLAIMS; RESERVE AND ESTIMATIONS."
Each amount designated in the table below as "Estimated Percentage
Recovery" for each Class and, in the case of Class 9, each Division is the
quotient of the cash or the assumed value of the New Five-Year Secured Notes,
New Two-Year Unsecured Notes, New Seven-Year Unsecured Notes or New Common Stock
to be distributed to all holders of Allowed Claims in such Class or Division,
divided by the estimated aggregate amount of Allowed Claims in such Class or
Division. For purposes of this calculation, it is assumed that the New Five-Year
Secured Notes, if issued, the New Two-Year Unsecured Notes, if issued, and the
New Seven-Year Unsecured Notes, as well as the New Unsecured Subordinated Note,
will each have a value equal to the principal amount thereof and that the New
Common Stock to be distributed to holders of Claims under the Plan will have an
estimated aggregate value of approximately $683.5 million, or $17.09 per share,
as of the Effective Date, based on the midpoint of the assumed reorganization
equity value of Reorganized LGII. See "Securities To Be Issued Pursuant to the
Plan and Other Post-Reorganization Indebtedness -- Reorganization Value" for a
description of the manner in which the shares of New Common Stock were valued
for purposes of the Plan, the assumptions used in connection with the foregoing
and the limitations thereon, and "Risk Factors" for a discussion of various
other factors that could materially affect the value of the New Five-Year
Secured Notes, if issued, the New Two-Year Unsecured Notes, if issued, the New
Seven-Year Unsecured Notes and the New Common Stock to be distributed pursuant
to the Plan.
Although the Debtors' management believes that these valuation
assumptions are reasonable, there is no assurance that the New Five-Year Secured
Notes, if issued, the New Two-Year Unsecured Notes, if issued, the New
Seven-Year Unsecured Notes or the New Common Stock will have the value assumed
herein. See "Risk Factors -- Projections." The foregoing valuation assumptions
are not a prediction or reflection of post-Effective Date trading prices of the
New Five-Year Secured Notes, if issued, the New Two-Year Unsecured Notes, if
issued, the New Seven-Year Unsecured Notes or the New Common Stock. The New
Five-Year Secured Notes, if issued, the New Two-Year Unsecured Notes, if issued,
the New Seven-Year Unsecured Notes and the New Common Stock may trade at
substantially higher or lower prices because of a number of other factors,
including those discussed in "Risk Factors -- Lack of Estimated Market for New
Common Stock and New Senior Notes; Possible Volatility." The trading price of
equity securities and debt securities, such as the New Five-Year Secured Notes,
the New Two-Year Unsecured Notes, the New Seven-Year Unsecured Notes and the New
Common Stock, issued under a plan of reorganization is subject to many
unforeseeable circumstances and therefore cannot be predicted. Moreover, as
discussed above, there is no assurance that the actual amounts of Allowed
Unsecured Claims in certain Divisions of Class 9 will not materially exceed the
estimated aggregate amounts shown in the table below. Accordingly, no
representation can be or is being made with respect to whether the percentage
recoveries shown in the table below actually will be realized by a holder of an
Allowed Unsecured Claim in any Division of Class 9.
4
<PAGE> 14
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
DESCRIPTION AND AMOUNT
OF CLAIMS OR INTERESTS TREATMENT
-------------------------------------------------------------------------------------------------------------------
<S> <C>
- Class 1 (Unsecured Priority Claims): Unimpaired; on the Effective Date, each holder of an
Allowed Claim in Class 1 will receive cash equal to the
Priority Claims against any Debtor that are amount of such Claim.
entitled to priority under section 507(a)(3),
507(a)(4) or 507(a)(6) of the Bankruptcy Code. Estimated Percentage Recovery: 100%
Estimated Aggregate Claims Amount: $0.1 million
-------------------------------------------------------------------------------------------------------------------
- Class 2 (Loewen Subsidiary Debtor Convenience Impaired; on the Effective Date, each holder of an
Claims): Allowed Claim in Class 2 against any Loewen Subsidiary
Debtor will receive cash equal to the amount of such
Unsecured Claims against any Loewen Subsidiary Claim against such Debtor (as reduced, if applicable,
Debtor that otherwise would be included in pursuant to an election by the holder thereof in
Class 9, but with respect to each such Claim, accordance with Section II.B.1 of the Plan).
the applicable Claim either (a) is equal to or
less than $10,000 or (b) is reduced to $10,000 Estimated Percentage Recovery: 100%
pursuant to an election by such holder made on
the Ballot provided for voting on the Plan by
the Voting Deadline. For purposes of treatment
under Class 2, multiple Claims of a holder
against a particular Debtor arising in a series
of similar or related transactions between such
Debtor and the original holder of such Claims
will be treated as a single Claim and no
splitting of Claims will be recognized for
purposes of distribution.
Estimated Aggregate Claims Amount:
$10.0 million
-------------------------------------------------------------------------------------------------------------------
- Class 3 (TLGI and LGII Convenience Claims): Impaired; on the Effective Date, each holder of an
Allowed Claim in Class 3 against TLGI or LGII will
Unsecured Claims against TLGI or LGII that receive cash equal to the amount of such Claim against
otherwise would be included in Class 9, but such Debtor (as reduced, if applicable, pursuant to an
with respect to each such Claim, the applicable election by the holder thereof in accordance with
Claim either (a) is equal to or less than Section II.B.2 of the Plan).
$1,000 or (b) is reduced to $1,000 pursuant to
an election by such holder made on the Ballot Estimated Percentage Recovery: 100%
provided for voting on the Plan by the Voting
Deadline. For purposes of treatment under
Class 3, multiple Claims of a holder against a
particular Debtor arising in a series of
similar or related transactions between such
Debtor and the original holder of such Claims
will be treated as a single Claim and no
splitting of Claims will be recognized for
purposes of distribution.
Estimated Aggregate Claims Amount:
$0.4 million
-------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 15
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
DESCRIPTION AND AMOUNT
OF CLAIMS OR INTERESTS TREATMENT
-------------------------------------------------------------------------------------------------------------------
<S> <C>
- Class 4 (Secured Claims Other than CTA Note Unimpaired (except for Claims as to which the applicable
Claims): Debtor elects Option C treatment); on the Effective Date,
unless otherwise agreed by a Claim holder and the
Secured Claims against any Debtor that are not applicable Debtor or Reorganized Debtor, each holder of
classified in Class 5. an Allowed Claim in Class 4 will receive treatment on
account of such Allowed Claim in the manner set forth in
Estimated Aggregate Claims Amount: Option A, B or C below, at the election of the applicable
$43.8 million Debtor. The applicable Debtor will be deemed to have
elected Option B, except with respect to any Allowed
Claim as to which the applicable Debtor elects Option A
or Option C in a certification Filed prior to the
conclusion of the Confirmation Hearing.
Option A: Each holder of an Allowed Claim in Class 4
with respect to which the applicable Debtor elects
Option A will receive cash in the full amount of such
Allowed Claim.
Option B: Each Allowed Claim in Class 4 with respect to
which the applicable Debtor elects or is deemed to have
elected Option B will be Reinstated.
Option C: Impaired; each holder of an Allowed Claim in
Class 4 with respect to which the applicable Debtor
elects Option C will be entitled to receive, and the
applicable Debtor or Reorganized Debtor shall release and
transfer to such holder, the collateral securing such
Allowed Claim.
Estimated Percentage Recovery: 100%
-------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 16
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
DESCRIPTION AND AMOUNT
OF CLAIMS OR INTERESTS TREATMENT
-------------------------------------------------------------------------------------------------------------------
<S> <C>
- Class 5 (CTA Note Claims): Impaired; on the Effective Date, each holder of an
Allowed Claim in Class 5 will receive in full
Secured and Unsecured Claims against the satisfaction of all of its CTA Note Claims: (a) a
Debtors that are CTA Note Claims. Pro Rata share of cash in an amount equal to the sum of
(i) the New Secured Debt Principal Amount (i.e., $250
Estimated Aggregate Claims Amount: million), if the Exit Financing Term Loan Closing occurs,
$2.0384 billion (ii) the Realized Asset Disposition Proceeds Amount and
(iii) the Excess Cash Distribution Amount; (b) a Pro Rata
share of New Five-Year Secured Notes in an original
principal amount equal to the New Secured Debt Principal
Amount, unless the Exit Financing Term Loan Closing
occurs; (c) a Pro Rata share of New Two-Year Unsecured
Notes in an original principal amount equal to the
Unrealized Asset Disposition Proceeds Amount (i.e., an
amount equal to $165 million minus the Realized Asset
Disposition Proceeds Amount); (d) a Pro Rata share of New
Seven-Year Unsecured Notes in an original principal
amount equal to the New Seven-Year Unsecured Notes
Principal Amount (i.e., $325 million); and (e) a Pro Rata
share of 36,616,300 shares of New Common Stock. Except
as provided in Section IV.F.3 of the Plan, the foregoing
distributions shall be without prejudice to the rights
and claims of any Indenture Trustee or holder of a CTA
Note Claim against Tolling Parties or other third parties
relating to the CTA.
Estimated Percentage Recovery: 69%
-------------------------------------------------------------------------------------------------------------------
- Class 6 (O'Keefe Note Claims): Impaired; on the Effective Date, each holder of an
Allowed Claim in Class 6 will receive in satisfaction of
Unsecured Claims against LGII, Reimann all of its Class 6 Claims against all Debtors a Pro Rata
Holdings, Inc., Wright & Ferguson Funeral Home share of 620,200 shares of New Common Stock.
and TLGI in respect of the O'Keefe Note
Claims.
Estimated Percentage Recovery: 32%
Estimated Aggregate Claims Amount:
$33.1 million
-------------------------------------------------------------------------------------------------------------------
- Class 7 (MIPS Debenture and Guaranty Claims): Impaired; no property will be distributed to or retained
by the holder of Allowed Claims in Class 7.
Unsecured Claims (a) against TLGI and LGII
under or in respect of the MIPS Junior Estimated Percentage Recovery: 0%
Subordinated Debenture and the MIPS Guaranty
and (b) against LGII as general partner of
Loewen Group Capital, L.P. ("LGCLP").
Estimated Aggregate Claims Amount:
$76.8 million
-------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 17
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
DESCRIPTION AND AMOUNT
OF CLAIMS OR INTERESTS TREATMENT
-------------------------------------------------------------------------------------------------------------------
<S> <C>
- Class 8 (Intercompany Claims): Impaired in part; except as provided below, all Claims in
Class 8 will be Reinstated. Notwithstanding the
Claims of any Loewen Company against any Debtor foregoing: (a) on the Effective Date, each holder of an
that are not classified in Class 7 and are not Allowed Claim in respect of the MEIPs Debentures will
Administrative Claims. receive its Pro Rata share of $10,000 in complete
discharge of any such Claim; and (b) no property will be
Estimated Aggregate Claims Amount: distributed to or retained by a Loewen Company on account
$6.2 billion of any Claim in Class 8 with respect to which,
immediately prior to the Effective Date, the obligor is
LGII or a direct or indirect wholly owned subsidiary of
LGII and the holder is a non-United States, wholly owned,
direct or indirect subsidiary of TLGI (but not TLGI); any
such Claims, after being offset by any amounts owed by
the holder thereof to the particular Debtor obligor, will
be discharged on the Effective Date. Notwithstanding
this treatment of Class 8 Claims, each of the Loewen
Companies holding an Allowed Claim in Class 8 will be
deemed to have accepted the Plan.
Estimated Percentage Recovery: 0-100%
-------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 18
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
DESCRIPTION AND AMOUNT
OF CLAIMS OR INTERESTS TREATMENT
-------------------------------------------------------------------------------------------------------------------
<S> <C>
- Class 9 (Unsecured Nonpriority Claims): Impaired; on the Effective Date, each holder of an
Allowed Claim in Class 9 of any particular Debtor will
Unsecured Claims against any Debtor (including receive, based upon the principal amount of such holder's
the unsecured portion of any Claim that if Allowed Claim, its Pro Rata share of shares of New Common
fully secured would have been classified in Stock reserved in respect of the Division in which such
Class 4 and including any claims in respect to Debtor is classified. The Division in which each Debtor
the BMO Letter of Credit Facility and the UBS has been classified is set forth on Exhibit I.
Option Contract) that are not otherwise
classified in Class 1, 2, 3, 5, 6, 7, 8, 10 or Reserved Shares by Division:
11.
Division A Debtors: 215,000 shares of New Common Stock
Estimated Aggregate Class 9 Claims:
$895.8 million
Division B Debtors: 265,100 shares of New Common Stock
Estimated Aggregate Claims Amount by Division:
Division C Debtors: 1,214,100 shares of New Common Stock
Division A Debtors: $367.4 million
Division D Debtors: 302,200 shares of New Common Stock
Division B Debtors: $453.0 million
Division E Debtors: 196,700 shares of New Common Stock
Division C Debtors: $20.7 million
Division F Debtors: 268,900 shares of New Common Stock
Division D Debtors: $6.5 million
Division G Debtors: 239,400 shares of New Common Stock
Division E Debtors: $5.6 million
Division H Debtors: 62,100 shares of New Common Stock
Division F Debtors: $11.5 million
Estimated Percentage Recovery by Division:
Division G Debtors: $20.5 million
Division A Debtors: 1%
Division H Debtors: $10.6 million
Division B Debtors: 1%
Division C Debtors: 100%
Division D Debtors: 80%
Division E Debtors: 60%
Division F Debtors: 40%
Division G Debtors: 20%
Division H Debtors: 10%
-------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 19
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
DESCRIPTION AND AMOUNT
OF CLAIMS OR INTERESTS TREATMENT
-------------------------------------------------------------------------------------------------------------------
<S> <C>
- Class 10 (MIPS Securities Litigation Claims): Impaired; no property will be distributed to or retained
by the holders of Allowed Claims in Class 10.
Unsecured Claims, including the Securities
Litigation Claims, against TLGI, LGII or LGCLP Estimated Percentage Recovery: 0%
arising: (a) from rescission of a purchase or
sale of the MIPS; (b) for damages arising from
the purchase or sale of the MIPS, including
Claims for damages for fraud or
misrepresentation or otherwise subject to
section 510(b) of the Bankruptcy Code; or
(c) for reimbursement or contribution allowed
under section 502 of the Bankruptcy Code on
account of such Claims.
Estimated Aggregate Claims Amount: unknown
-------------------------------------------------------------------------------------------------------------------
- Class 11 (Other Securities Litigation Claims): Impaired; no property will be distributed to or retained
by the holders of Allowed Claims in Class 11.
Unsecured Claims, including the Securities
Litigation Claims, against any Debtor arising: Estimated Percentage Recovery: 0%
(a) from rescission of a purchase or sale of
TLGI Old Preferred Stock, TLGI Old Common Stock
or any other equity security of any Debtor
(other than the MIPS); (b) for damages arising
from the purchase or sale of any such security,
including Claims for damages for fraud or
misrepresentation or otherwise subject to
section 510(b) of the Bankruptcy Code; or
(c) for reimbursement or contribution allowed
under section 502 of the Bankruptcy Code on
account of such Claims.
Estimated Aggregate Claims Amount: unknown
-------------------------------------------------------------------------------------------------------------------
- Class 12 (TLGI Old Preferred Stock): Impaired; no property will be distributed to the holders
of Allowed Interests in Class 12.
Interests in TLGI on account of the TLGI Old
Preferred Stock. Estimated Percentage Recovery: 0%
-------------------------------------------------------------------------------------------------------------------
- Class 13 (TLGI Old Common Stock): Impaired; no property will be distributed to the holders
of Allowed Interests in Class 13.
Interests in TLGI on account of the TLGI Old
Common Stock. Estimated Percentage Recovery: 0%
-------------------------------------------------------------------------------------------------------------------
- Class 14 (LGII Old Stock): Impaired; no property will be distributed to or retained
by the holders of Allowed Interests in Class 14 and such
Interests in LGII on account of the LGII Old Interests will be canceled on the Effective Date as part
Stock. of the Reinvestment Transactions.
Estimated Percentage Recovery: 0%
-------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 20
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
DESCRIPTION AND AMOUNT
OF CLAIMS OR INTERESTS TREATMENT
-------------------------------------------------------------------------------------------------------------------
<S> <C>
- Class 15 (Third Party Owned Old Stock in Impaired; no property will be distributed to or retained
Non-Ownership Regulated Debtors): by the holders of Allowed Interests in Class 15 and such
Interests will be canceled on the Effective Date;
Interests in any Non-Ownership Regulated Debtor provided however, that with respect to any Non-Ownership
held by any person or entity other than a Regulated Debtor that is determined by the Bankruptcy
Loewen Company. A "Non-Ownership Regulated Court to be solvent (as defined under the Bankruptcy
Debtor" is any Debtor in which a minority stock Code) as of the Confirmation Date, a holder of an Allowed
interest is owned by a person or entity other Interest in Class 15 in such Debtor will receive, on the
than a Loewen Company and which minority Effective Date, New Common Stock with an aggregate value,
interest is not required for state regulatory based on the reorganization value per share of $17.09,
purposes. Non-Ownership Regulated Debtors are equal to the value of such holder's interest in such
identified on Exhibit I. Debtor as determined by the Bankruptcy Court.
Estimated Percentage Recovery: 0%
-------------------------------------------------------------------------------------------------------------------
- Class 16 (Loewen Company Owned Old Stock in Unimpaired; on the Effective Date, subject to the
Non-Ownership Regulated Debtors): Subsidiary Restructuring Transactions, Allowed Interests
in Class 16 will be Reinstated.
Interests in any Non-Ownership Regulated Debtor
held by any Loewen Company. Non-Ownership Estimated Percentage Recovery: 100%
Regulated Debtors are identified on Exhibit I
to this Disclosure Statement.
-------------------------------------------------------------------------------------------------------------------
- Class 17 (LGCLP Partnership Interests): Impaired; consistent with the treatment of holders of
Allowed Claims in Class 7, no property will be
Interests in LGCLP on account of the MIPS and distributed to or retained by the holders of Allowed
the partnership interests in LGCLP. Interests in Class 17 and such interests will be canceled
on the Effective Date.
Estimated Percentage Recovery: 0%
-------------------------------------------------------------------------------------------------------------------
- Class 18 (Other Equity Interests): Unimpaired; on the Effective Date, subject to the
Subsidiary Restructuring Transactions, Allowed Interests
Interests in any Debtor other than Interests in in Class 18 will be Reinstated.
Classes 12, 13, 14, 15, 16 or 17.
Estimated Percentage Recovery: 100%
-------------------------------------------------------------------------------------------------------------------
</TABLE>
TLGI's transfer of assets to LGII as part of the Reinvestment Transactions will
occur before the cancellation of the LGII Old Stock and the issuance of the New
Common Stock.
SOURCES AND USES OF CASH
The following table sets forth a summary of the principal sources and
uses of cash expected to be available to the Reorganized Debtors on the
Effective Date (assuming (a) the Exit Financing Term Loan Closing does not occur
and the New Five-Year Secured Notes are issued pursuant to the Plan and (b) no
New Two-Year Unsecured Notes are issued pursuant to the Plan). All amounts shown
are estimates. There can be no assurances that there will not be material
variances between such estimates and the actual amounts of cash required to
consummate the Plan.
11
<PAGE> 21
(Dollars in Millions)
<TABLE>
<S> <C>
Sources of Cash
Cash generated from operations ..................... $145
Cash generated from asset dispositions ............. 165
----
Total Sources ................................... $310
====
Uses of Cash
Cash distributions in respect of Class 5 ........... $200
Cash distributions in respect of Class 4 ........... 15
Cash distributions in respect of Classes 2 and 3
(i.e., convenience Claims) ....................... 10
Cure payments for assumptions of Executory Contracts
and Unexpired Leases ............................. 5
Administrative Claims, financing fees and
other reorganization expenses .................... 34
Cash available for working capital ................. 46
----
Total Uses ....................................... $310
====
</TABLE>
In addition, it is anticipated that on the Effective Date an additional
$100 million will be available to the Reorganized Debtors pursuant to the Exit
Financing Revolving Credit Facility. See "Overview of the Plan -- Exit Financing
Revolving Credit Facility."
ADDITIONAL INFORMATION REGARDING ASSERTION AND TREATMENT OF ADMINISTRATIVE
CLAIMS AND PRIORITY TAX CLAIMS
ADMINISTRATIVE CLAIMS
General. Unless otherwise agreed by the holder of an Administrative
Claim and the applicable Debtor or Reorganized Debtor, each holder of an Allowed
Administrative Claim will receive from Reorganized LGII or the applicable
Reorganized Debtor, in full satisfaction of its Administrative Claim, cash equal
to the allowed amount of such Administrative Claim either: (a) on the Effective
Date; or (b) if the Administrative Claim is not allowed as of the Effective
Date, 30 days after the date on which an order allowing such Administrative
Claim becomes a Final Order or a Stipulation of Amount and Nature of Claim is
executed by Reorganized LGII or the applicable Reorganized Debtor and the holder
of the Administrative Claim. Administrative Claims include Claims (other than
the Substantial Contribution Claims described below) for costs and expenses of
administration allowed under section 503(b), 507(b) or 1114(e)(2) of the
Bankruptcy Code, including: (a) the actual and necessary costs and expenses
incurred after the Petition Date of preserving the respective Estates and
operating the businesses of the Debtors (such as wages, salaries, commissions
for services and payments for services, inventories, leased equipment and
premises), including Claims under the DIP Financing Facility; (b) compensation
for legal, financial advisory, accounting and other services and reimbursement
of expenses awarded or allowed under section 330(a) or 331 of the Bankruptcy
Code, including Fee Claims; (c) all fees and charges assessed against the
Estates under chapter 123 of title 28, U.S. Code, 28 U.S.C. Sections
1911-1930; (d) Claims for reclamation allowed in accordance with section
546(c)(2) of the Bankruptcy Code and section 2-702 of the Uniform Commercial
Code; and (e) all Intercompany Claims accorded priority pursuant to section
364(c)(1) of the Bankruptcy Code or the Cash Management Order. In addition to
the types of Administrative Claims described above, section 503(b) of the
Bankruptcy Code provides for payment of compensation or reimbursement of
expenses to creditors and other entities making a "substantial contribution" to
a chapter 11 case and to attorneys for and other professional advisors to such
entities. The amounts, if any, that such entities will seek or may seek for such
compensation or reimbursement are not known by the Debtors at this time.
Requests for such compensation or reimbursement must be approved by the
Bankruptcy Court after notice and a hearing at which the Debtors or Reorganized
Debtors and other parties in interest may participate and, if appropriate,
object to the allowance of any such compensation or
12
<PAGE> 22
reimbursement. The Debtors estimate that the Administrative Claims will
aggregate approximately $30 million as of the Effective Date, excluding
post-petition accounts payable and other accrued liabilities as of the Effective
Date and any "substantial contribution" Claims.
Except as otherwise provided below, unless previously Filed, requests
for payment of Administrative Claims must be Filed and served on the Reorganized
Debtors, pursuant to the procedures specified in the Confirmation Order and the
notice of entry of the Confirmation Order, no later than 30 days after the
Effective Date. Holders of Administrative Claims that are required to File and
serve a request for payment of such Administrative Claims and that do not File
and serve such a request by such date will be forever barred from asserting such
Administrative Claims against the Debtors, the Reorganized Debtors or their
respective property, and such Administrative Claims will be deemed discharged as
of the Effective Date. Objections to such requests must be Filed and served on
the Reorganized Debtors and the requesting party by the later of (a) 90 days
after the Effective Date or (b) 60 days after the Filing of the applicable
request for payment of Administrative Claims.
Professionals or other entities asserting a Fee Claim (other than the
Substantial Contribution Claims described below) for services rendered before
the Effective Date must File and serve on the Reorganized Debtors and such other
entities who are designated by the Bankruptcy Rules, the Confirmation Order, the
Fee Order or other order of the Bankruptcy Court an application for final
allowance of such Fee Claim no later than 60 days after the Effective Date;
provided, however, that any professional who may receive compensation or
reimbursement of expenses pursuant to the Ordinary Course Professionals Order
may continue to receive such compensation and reimbursement of expenses for
services rendered before the Effective Date, without further Bankruptcy Court
review or approval, pursuant to the Ordinary Course Professionals Order.
Objections to any Fee Claim must be Filed and served on the Reorganized Debtors
and the requesting party by the later of (a) 90 days after the Effective Date or
(b) 30 days after the Filing of the applicable request for payment of the Fee
Claim. To the extent necessary, the Confirmation Order will amend and supersede
any previously entered order of the Bankruptcy Court, including the Fee Order,
regarding the payment of Fee Claims.
The Debtors have agreed to support a Fee Claim by counsel to William R.
Eldridge, a member of the Creditors' Committee, in an amount not to exceed
$50,000 for reasonable fees and expenses incurred by such counsel in connection
with its representation of Mr. Eldridge on a subcommittee formed by the
Creditors' Committee with respect to the plan of reorganization process in the
Debtors' Reorganization Cases. Any such Fee Claim will be subject to the
requirements and procedures set forth in the preceding paragraph.
The following holders will not be required to File or serve any request
for payment of such Administrative Claims: (a) holders of Allowed Administrative
Claims based on liabilities incurred by a Debtor in the ordinary course of its
business (including Administrative Trade Claims, Administrative Claims of
governmental units for Taxes, including Tax audit Claims arising after the
Petition Date, and Allowed Administrative Claims arising from or under those
contracts and leases entered into or assumed after the Petition Date); and (b)
holders of Administrative Claims under the DIP Financing Facility.
Indenture Trustees' Claims. In full satisfaction of each Indenture
Trustee's fee and expense Claims for services under the respective Prepetition
Indenture and the fee and expense Claims of the CTA Trustee for services under
the CTA, including such Claims secured by the Indenture Trustee's charging lien
under the Prepetition Indentures and such Claims secured by the CTA Trustee's
charging lien under the CTA, each Indenture Trustee and the CTA Trustee will
receive from Reorganized LGII cash equal to the amount of such Claims in
accordance with the procedures described in Section III.E of the Plan, and any
charging lien held by such Indenture Trustee or the CTA Trustee will be released
on the Effective Date. Distributions received by holders of Allowed Claims in
respect of Class 5 pursuant to the Plan will not be reduced on account of the
payment of the Indenture Trustees' Claims or the CTA Trustee's Claims.
Within 60 days after the Effective Date, each Indenture Trustee and the
CTA Trustee will submit to Reorganized LGII appropriate documentation in support
of such fees and expenses incurred by such Indenture Trustee or CTA Trustee
through the Effective Date, whether incurred prior to or subsequent to the
Petition Date.
No later than 60 days after the Effective Date, the respective
Indenture Trustee or the CTA Trustee will: (a) File a motion seeking approval of
its fees and expenses for services incurred through the Effective Date under the
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terms of the respective Prepetition Indenture or CTA and (b) serve such motion
on (i) Reorganized LGII and the Reorganized Debtors and (ii) the United States
Trustee. Any Indenture Trustee that does not File such motion by such date will
be forever barred from asserting such Claims against the Debtors, the
Reorganized Debtors or their respective property and such Claims will be deemed
discharged as of the Effective Date. Similarly, if the CTA Trustee does not File
such motion by such date, the CTA Trustee will be forever barred from asserting
such Claims against the Debtors, the Reorganized Debtors or their respective
property and such Claims will be deemed discharged as of the Effective Date. The
Bankruptcy Court will approve such fees and expenses requested in such motion to
the extent that such amounts are reasonable and appropriate under the terms of
such Prepetition Indenture or CTA, which, notwithstanding the cancellation of
such Prepetition Indenture and CTA pursuant to Section IV.I of the Plan, will
govern this determination. An Indenture Trustee's or CTA Trustee's request for
approval of such fees and expenses will not be subject to the additional
standards contained in section 503(b) of the Bankruptcy Code. Promptly upon
approval by the Bankruptcy Court, an Indenture Trustee's or the CTA Trustee's
approved fees and expenses for the period prior to the Effective Date will be
treated as Allowed Claims and will be paid by Reorganized LGII.
Any Claims of an Indenture Trustee or the CTA Trustee for fees and
expenses (a) incurred in connection with the issues surrounding the status of
certain CTA Note Claims under the CTA or (b) otherwise not incurred for services
rendered in the ordinary course under the respective Prepetition Indenture or
the CTA will not be subject to the provisions of Section III.E.1 through 3 of
the Plan, but rather shall be subject to the other applicable provisions of the
Plan and, if applicable, section 503(b) of the Bankruptcy Code.
Substantial Contribution Claims. In full satisfaction of Claims of (a)
any of the Principal CTA Creditors, Bank of Montreal, Morgens, Waterfall,
Vintiadis & Company, Inc. and Wachovia Bank, N.A., to the extent that such
entity votes to accept the Plan, for fees and expenses incurred by such entity
in connection with the issues surrounding the status of certain CTA Note Claims
under the CTA (see "Collateral Trust Agreement Issues; Recovery Actions; Other
Legal Proceedings -- Collateral Trust Agreement Issues") in an amount, which, in
the aggregate, will not exceed the Substantial Contribution Claims Amount (i.e.,
$2 million) and (b) counsel for the Creditors' Committee for services rendered
by such counsel prior to the formation of the Creditors' Committee in an amount
not to exceed $60,000 (collectively, the "Substantial Contribution Claims"),
each holder of a Substantial Contribution Claim will receive from Reorganized
LGII cash equal to the amount of such Substantial Contribution Claim in
accordance with the procedures described in Section III.F of the Plan. To the
extent that the aggregate amount of Claims set forth in Section III.F.1.a of the
Plan exceeds the Substantial Contribution Claims Amount, the holders of such
Claims will receive their Pro Rata share of the Substantial Contribution Claims
Amount in full satisfaction of such Claims. Distributions received by holders of
Allowed Claims in respect of Class 5 pursuant to the Plan will not be reduced on
account of the payment of the Substantial Contribution Claims.
Within 60 days after the Effective Date, each holder of a Substantial
Contribution Claim will submit to Reorganized LGII appropriate documentation in
support of their respective Substantial Contribution Claims for the period
subsequent to the Petition Date and prior to the date on which the Debtors Filed
the Plan and Disclosure Statement.
No later than 60 days after the Effective Date, each holder of a
Substantial Contribution Claim will: (a) File a motion seeking approval of its
Substantial Contribution Claim for the period subsequent to the Petition Date
and prior to the date on which the Debtors Filed the Plan and Disclosure
Statement and (b) serve such motion on (i) Reorganized LGII and the Reorganized
Debtors and (ii) the United States Trustee. Any holder of a Substantial
Contribution Claim that does not File such motion by such date will be forever
barred from asserting such Substantial Contribution Claim against the Debtors,
the Reorganized Debtors or their respective property and such Substantial
Contribution Claim will be deemed discharged as of the Effective Date. The
Bankruptcy Court will approve such fees and expenses requested in such motion to
the extent that such amounts are reasonable and appropriate. The request of a
holder of a Substantial Contribution Claim for approval of its Substantial
Contribution Claim will not be subject to the additional standards contained in
section 503(b) of the Bankruptcy Code. Promptly upon approval by the Bankruptcy
Court, the approved Substantial Contribution Claims for the period subsequent to
the Petition Date and prior to the Effective Date will be paid by Reorganized
LGII.
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PRIORITY TAX CLAIMS
Pursuant to section 1129(a)(9)(C) of the Bankruptcy Code, unless
otherwise agreed by the holder thereof and the applicable Debtor or Reorganized
Debtor, each holder of an Allowed Priority Tax Claim will receive, in full
satisfaction of its Priority Tax Claim, deferred cash payments over a period not
exceeding six years from the date of assessment of such Priority Tax Claim.
Payments will be made in equal annual installments of principal, plus simple
interest accruing from the Effective Date at 7% per annum on the unpaid portion
of each Allowed Priority Tax Claim (or upon such other terms determined by the
Bankruptcy Court to provide the holders of Priority Tax Claims with deferred
cash payments having a value, as of the Effective Date, equal to the allowed
amount of such Priority Tax Claims). Unless otherwise agreed by the holder of a
Priority Tax Claim and the applicable Debtor or Reorganized Debtor, the first
payment on account of an Allowed Priority Tax Claim will be payable one year
after the Effective Date or, if the Priority Tax Claim is not allowed within one
year after the Effective Date, the first Quarterly Distribution Date after the
date on which (a) an order allowing such Priority Tax Claim becomes a Final
Order or (b) a Stipulation of Amount and Nature of Claim is executed by the
applicable Reorganized Debtor and the holder of the Priority Tax Claim;
provided, however, that the Reorganized Debtors will have the right to pay any
Allowed Priority Tax Claim, or any remaining balance of such Priority Tax Claim,
in full at any time on or after the Effective Date, without premium or penalty.
The Debtors do not presently anticipate that any material payment will be made
to the Internal Revenue Service on account of any Priority Tax Claim.
Notwithstanding the foregoing, a holder of an Allowed Priority Tax
Claim will not be entitled to receive any payment on account of any penalty
arising with respect to or in connection with the Allowed Priority Tax Claim.
Any such Claim or demand for any such penalty (a) will be subject to treatment
in Class 9 and (b) the holder of an Allowed Priority Tax Claim will not be
entitled to assess or attempt to collect such penalty from the Reorganized
Debtors or their property.
SPECIAL PROVISIONS REGARDING THE TREATMENT OF ALLOWED SECONDARY LIABILITY CLAIMS
The classification and treatment of Allowed Claims under the Plan take
into consideration all Allowed Secondary Liability Claims. On the Effective
Date, Allowed Secondary Liability Claims will be treated as follows: (a) the
Allowed Secondary Liability Claims arising from or related to any Debtor's joint
or several liability for the obligations under any (i) Allowed Claim that is
being Reinstated under the Plan or (ii) Executory Contract or Unexpired Lease
that is being assumed or deemed assumed by another Debtor or under any Executory
Contract or Unexpired Lease that is being assumed by and assigned to another
Debtor or any other entity will be Reinstated; and (b) holders of all other
Allowed Secondary Liability Claims will be entitled to only one distribution
from the primary obligor in respect of such underlying Allowed Claim. No
multiple recovery on account of any Allowed Secondary Liability Claim will be
provided or permitted.
SUMMARY OF TERMS OF CERTAIN SECURITIES TO BE ISSUED PURSUANT TO THE PLAN AND
OTHER POST-REORGANIZATION INDEBTEDNESS
The Plan provides that, as of the Effective Date, Reorganized LGII will
be authorized to issue 100,000,000 shares of New Common Stock, par value $0.01
per share. Reorganized LGII will issue an aggregate of 40,000,000 shares of New
Common Stock to holders of Allowed Claims in Classes 5, 6 and 9, plus, if
applicable, an as yet undetermined number of shares of New Common Stock to
certain holders of Allowed Interests in Class 15. The Debtors believe that the
number of shares that may be issued in respect of Class 15 will not be material.
In addition, as of the Effective Date, 4,500,000 shares of New Common Stock will
be reserved for issuance under the Equity Incentive Plan, including 2,475,000
shares underlying options expected to be granted as of the Effective Date. The
options expected to be granted as of the Effective Date will have a per share
exercise price equal to the average of the daily closing sales price per share
of the New Common Stock as reported on The Nasdaq Stock Market for the 30
consecutive trading days immediately following the Effective Date and will
become exercisable in cumulative installments with respect to 25% of the shares
on the first and second anniversaries of the date of grant and with respect to
the remaining 50% of the shares on the third anniversary of the date of grant.
See "Reorganized LGII -- Management -- New Benefit Plans and Agreements."
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Holders of New Common Stock will be entitled to receive ratably such
dividends as declared by Reorganized LGII's Board of Directors and will have no
preemptive, subscription, redemption or conversion rights. The declaration of
dividends and other payments on the New Common Stock will be restricted pursuant
to certain provisions of the respective indentures governing the New Five-Year
Secured Notes, if issued, the New Two-Year Unsecured Notes, if issued, and the
New Seven-Year Unsecured Notes (collectively, the "New Senior Notes") and the
documents governing the Exit Financing Revolving Credit Facility and the Exit
Financing Term Loan (collectively, the "Exit Financing"). See "Securities To Be
Issued Pursuant to the Plan and Other Post-Reorganization Indebtedness -- New
Two-Year Unsecured Notes," "Securities To Be Issued Pursuant to the Plan and
Other Post-Reorganization Indebtedness -- New Five-Year Secured Notes,"
"Securities To Be Issued Pursuant to the Plan and Other Post-Reorganization
Indebtedness -- New Seven-Year Unsecured Notes" and "Securities To Be Issued
Pursuant to the Plan and Other Post-Reorganization Indebtedness -- Exit
Financing." Reorganized LGII is not expected to pay any dividends on the New
Common Stock in the foreseeable future. Subject to the terms and conditions set
forth in Reorganized LGII's Share Purchase Rights Agreement, each share of New
Common Stock issued pursuant to the Plan will be accompanied by a Share Purchase
Right.
In addition to the New Common Stock issued pursuant to the Plan,
Reorganized LGII's Board of Directors will have the authority to issue shares of
preferred stock, par value $0.01 per share, of Reorganized LGII ("New Preferred
Stock") from time to time in one or more classes or series and to determine the
various rights and privileges thereof. Reorganized LGII also will be authorized
to issue additional shares of New Common Stock from time to time following the
Effective Date under the provisions of the Certificate of Incorporation of
Reorganized LGII and applicable law. See "Reorganized LGII -- Certain Corporate
Governance Matters -- Authorized But Unissued Shares."
On the Effective Date, in addition to New Common Stock and certain cash
payments, holders of Allowed CTA Note Claims in Class 5 will receive: (a) New
Five-Year Secured Notes, if applicable; (b) New Two-Year Unsecured Notes, if
applicable; and (c) New Seven-Year Unsecured Notes.
New Five-Year Secured Notes. The aggregate principal amount of
New Five-Year Secured Notes to be issued by Reorganized LGII will be
$250 million. The New Five-Year Secured Notes will bear interest at the
London Interbank market rate of interest plus 2% per annum, payable
semiannually in arrears, will be secured by the capital stock of
certain wholly owned subsidiaries of Reorganized LGII and will mature
on the fifth anniversary of the Effective Date. The New Five-Year
Secured Notes will be issued pursuant to a trust indenture with an
indenture trustee to be selected by Reorganized LGII (the "New
Five-Year Secured Notes Indenture"). No New Five-Year Secured Notes
will be issued pursuant to the Plan if the Exit Financing Term Loan
Closing occurs. See "Securities To Be Issued Pursuant to the Plan and
Other Post-Reorganization Indebtedness -- New Five-Year Secured Notes."
New Two-Year Unsecured Notes. The aggregate principal amount
of New Two-Year Unsecured Notes to be issued by Reorganized LGII will
be in an amount equal to $165 million less the Realized Asset
Disposition Proceeds Amount. The New Two-Year Unsecured Notes will bear
interest at 12 1/4% per annum, payable semiannually in arrears and
will mature on the second anniversary of the Effective Date. The New
Two-Year Unsecured Notes will be issued pursuant to a trust indenture
with an indenture trustee to be selected by Reorganized LGII (the "New
Two-Year Unsecured Notes Indenture"). Reorganized LGII will be required
to apply Net Proceeds received by the Reorganized Debtors following the
Effective Date in respect of the sale of any Disposition Properties to
the redemption of the New Two-Year Unsecured Notes. No New Two-Year
Unsecured Notes will be issued pursuant to the Plan if the Realized
Asset Disposition Proceeds Amount exceeds $165 million. See "Securities
To Be Issued Pursuant to the Plan and Other Post-Reorganization
Indebtedness -- New Two-Year Unsecured Notes."
New Seven-Year Unsecured Notes. The aggregate principal amount
of New Seven-Year Unsecured Notes to be issued by Reorganized LGII will
be $325 million. The New Seven-Year Unsecured Notes will bear interest
at 12 1/4% per annum, payable semiannually in arrears, and will mature
on the seventh anniversary of the Effective Date. The New Seven-Year
Unsecured Notes will be issued pursuant to a trust indenture with an
indenture trustee to be selected by Reorganized LGII (the "New
Seven-Year Unsecured Notes Indenture"). See "Securities To Be Issued
Pursuant to the Plan and Other Post-Reorganization Indebtedness -- New
Seven-Year Unsecured Notes."
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It is a condition to the Effective Date that, as of the Effective Date,
Reorganized LGII and the Exit Financing Facility Agent Bank shall have entered
into the Exit Financing Revolving Credit Facility. In addition, the Debtors will
seek to obtain from the Exit Financing Facility Agent Bank the Exit Financing
Term Loan as of the Effective Date. See "Securities To Be Issued Pursuant to the
Plan and Other Post-Reorganization Indebtedness -- Exit Financing."
It is also anticipated that, as of the Effective Date, the Blackstone
Settlement Documents will have been executed and delivered by the parties
thereto. Pursuant to the Blackstone Settlement Documents, on the Effective Date,
Reorganized LGII will become the owner of all or substantially all of the
outstanding capital stock of Rose Hills Holding Corp. in exchange for the
issuance of the New Unsecured Subordinated Note. See "Securities To Be Issued
Pursuant to the Plan and Other Post-Reorganization Indebtedness -- New Unsecured
Subordinated Note." For a description of certain indebtedness of Rose Hills
Holding Corp., see "Securities To Be Issued Pursuant to the Plan and Other
Post-Reorganization Indebtedness -- Rose Hills Indebtedness."
See "Securities To Be Issued Pursuant to the Plan and Other
Post-Reorganization Indebtedness -- Other Indebtedness" for a description of
certain secured indebtedness of the Debtors to be paid in full or reinstated on
the Effective Date.
This summary is qualified by reference to the description of such
securities under "Securities To Be Issued Pursuant to the Plan and Other
Post-Reorganization Indebtedness."
CONDITIONS TO CONFIRMATION AND THE EFFECTIVE DATE OF THE PLAN
There are several conditions precedent to Confirmation and the
occurrence of the Effective Date. Subject to applicable legal requirements, the
Debtors may waive any of these conditions upon the terms and subject to the
conditions set forth in Section IX.C of the Plan.
CONDITIONS TO CONFIRMATION
The Bankruptcy Court will not enter the Confirmation Order unless and
until the following conditions have been satisfied or duly waived pursuant to
Section IX.C of the Plan:
(a) The Confirmation Order shall be reasonably acceptable in form and
substance to the Debtors.
(b) The Debtors shall have received a commitment for the Exit
Financing Revolving Credit Facility from the Exit Financing
Facility Agent Bank on terms and conditions satisfactory to the
Debtors.
(c) The Plan shall not have been amended, altered or modified from the
Plan as Filed on November 14, 2000, unless such amendment,
alteration or modification is in form and substance reasonably
satisfactory to the Debtors.
(d) All Exhibits to the Plan shall be in form and substance reasonably
satisfactory to the Debtors and the Principal CTA Creditors.
In addition to the foregoing conditions to Confirmation, there are a
number of substantial confirmation requirements under the Bankruptcy Code that
must be satisfied for the Plan to be confirmed. See "Voting and Confirmation of
the Plan -- Confirmation."
CONDITIONS TO THE EFFECTIVE DATE
The Effective Date will not occur and the Plan will not be consummated
unless and until each of the following conditions has been satisfied or duly
waived pursuant to Section IX.C of the Plan:
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(a) The documents effectuating the Exit Financing Revolving Credit
Facility shall have been executed and delivered by Reorganized
LGII and the Exit Financing Facility Agent Bank.
(b) The Plan shall not have been amended, altered or modified from the
Plan as Filed on November 14, 2000, unless such amendment,
alteration or modification is, and all Exhibits to the Plan are,
in form and substance reasonably satisfactory to the Debtors.
(c) Each of the New Five-Year Secured Notes Indenture (if any New
Five-Year Secured Notes will be issued pursuant to the Plan), the
New Two-Year Unsecured Notes Indenture (if any New Two-Year
Unsecured Notes will be issued pursuant to the Plan) and the New
Seven-Year Unsecured Notes Indenture shall have been qualified
under the Trust Indenture Act of 1939, as amended.
(d) The New Common Stock shall have been registered under the Exchange
Act pursuant to either a Form 8-A Registration Statement or a Form
10 Registration Statement that has become effective under the
Exchange Act.
(e) The shares of New Common Stock to be issued pursuant to the Plan
shall have been designated as Nasdaq National Market securities by
The Nasdaq Stock Market, Inc. or authorized for listing on or
accepted for quotation through a National Securities Exchange
subject to official notice of issuance.
(f) The Bankruptcy Court shall have entered an order (contemplated to
be part of the Confirmation Order) approving and authorizing the
Debtors and the Reorganized Debtors to take all actions necessary
or appropriate to implement the Plan in form and substance
acceptable to the Debtors, including completion of the
Restructuring Transactions and the other transactions contemplated
by the Plan and the implementation and consummation of the
contracts, instruments, releases and other agreements or documents
entered into or delivered in connection with the Plan.
(g) The CCAA Order shall be reasonably acceptable in form and
substance to the Debtors and shall have been entered and become a
Final Order.
WAIVER OF CONDITIONS TO CONFIRMATION OR THE EFFECTIVE DATE
The conditions to Confirmation and the conditions to the Effective Date
may be waived in whole or part by the Debtors at any time without an order of
the Bankruptcy Court.
EFFECT OF NONOCCURRENCE OF CONDITIONS TO THE EFFECTIVE DATE
If each condition to the Effective Date provided in the Plan is not
satisfied or duly waived in accordance with Section IX.C of the Plan, then upon
motion by the Debtors made before the time that each of such conditions has been
satisfied or duly waived and upon notice to such parties in interest as the
Bankruptcy Court may direct, the Confirmation Order will be vacated by the
Bankruptcy Court; provided, however, that, notwithstanding the Filing of such
motion, the Confirmation Order may not be vacated if each of the conditions to
the Effective Date is either satisfied or duly waived before the Bankruptcy
Court enters an order granting such motion. If the Confirmation Order is vacated
pursuant to Section IX.D of the Plan: (a) the Plan will be null and void in all
respects, including with respect to (i) the discharge of Claims and termination
of Interests pursuant to section 1141 of the Bankruptcy Code and (ii) the
assumptions, assignments or rejections of Executory Contracts and Unexpired
Leases pursuant to Sections V.A and V.C of the Plan; and (b) nothing contained
in the Plan will (i) constitute a waiver or release of any claims by or against,
or any Interest in, the Debtors or (ii) prejudice in any manner the rights of
the Debtors or any other party in interest.
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EXIT FINANCING REVOLVING CREDIT FACILITY
The commitment of the Exit Financing Facility Agent Bank to provide the
Exit Financing Revolving Credit Facility on terms satisfactory to the Debtors is
a condition to Confirmation, and the execution and delivery of the documents
effectuating the Exit Financing Revolving Credit Facility by Reorganized LGII
and the Exit Financing Facility Agent Bank are conditions to the Effective Date.
The Debtors currently contemplate that such Exit Financing Revolving Credit
Facility will be a secured $100 million revolving credit facility, $30 million
of which will also be available in the form of letters of credit. See
"Securities To Be Issued Pursuant to the Plan and Other Post-Reorganization
Indebtedness -- Exit Financing."
THE CCAA ORDER
Concurrently with the commencement of the Reorganization Cases by the
Debtors, TLGI and 117 of its direct or indirect Canadian incorporated
subsidiaries (the "CCAA Debtors") commenced proceedings (the "CCAA Proceeding")
under the Companies' Creditors Arrangement Act (the "CCAA"). It is a condition
to the Effective Date that the Ontario Superior Court of Justice (the "Canadian
Court") shall have entered an order (the "CCAA Order"), which order shall be
reasonably acceptable in form and substance to the Debtors, providing that:
(a) a plan of arrangement pursuant to the terms of the Business
Corporations Act (Ontario) to effect the transactions described on
Exhibit I.A.28 to the Plan (the "CCAA Debtor Restructuring
Transactions") is approved;
(b) in consideration for LGII making the distributions to TLGI's
creditors as set forth in Article III of the Plan, TLGI will
assign, transfer and deliver (or, in the case of NAFTA Claims
arising under Article 1117 of NAFTA, will cause its wholly owned
subsidiary, a Delaware limited liability company created as
contemplated by Section IV.B.2 of the Plan, to assign, transfer
and deliver), free and clear of all liens, claims and
encumbrances, including all Claims:
(i) to LGII, all of TLGI's right, title and interest to and
under all rights, properties and assets of every kind,
character and description, wherever located and whether
tangible or intangible, real or personal or fixed or
contingent then owned, held, used, licensed, conceived,
developed or offered for sale with a license by TLGI in
connection with or otherwise arising out of the conduct of
its business other than (A) its rights in the NAFTA Claims
and (B) its membership interests in the wholly owned
Delaware limited liability company referred to above and
(ii) to a Nova Scotia entity designated by LGII, which will be
an unlimited liability company wholly owned by LGII, all
right, title and interest in and to all proceeds of the
NAFTA Claims arising under Article 1116 of NAFTA and to
LGII all right, title and interest in and to all proceeds
of the NAFTA Claims arising under Article 1117 of NAFTA;
and in respect thereof, TLGI will irrevocably delegate to
such unlimited liability company all powers and
responsibilities of TLGI in respect of the pursuit and
prosecution of the NAFTA Claims, all in accordance with the
terms of Exhibit I.A.29 to the Plan;
such consideration having a value equal to the fair market value
of such rights, property and assets, all without the need for any
further action by TLGI's directors or shareholders, but subject to
such other terms and conditions as may be imposed by the Canadian
Court; and
(c) on the Effective Date, no holder of a CTA Note Claim will have any
further claim against any of the CCAA Debtors.
Descriptions of the CCAA Debtor Restructuring Transactions and the arrangements
to be implemented in respect of the NAFTA Claims have been filed as Exhibits
I.A.28 and I.A.29, respectively, to the Plan and are available for review in the
Document Review Centers. See "Collateral Trust Agreement Issues; Recovery
Actions; and Other Legal Proceedings -- Other Legal Proceedings -- NAFTA
Claims."
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TLGI and the other CCAA Debtors may seek additional orders of the
Canadian Court in connection with the implementation of the Plan in Canada. TLGI
and the other CCAA Debtors do not expect to file a separate plan of
reorganization under the CCAA because there should be no significant claims
against TLGI or the CCAA Debtors other than those that will be settled or
satisfied as provided in the Plan and the CCAA Order.
MODIFICATION OR REVOCATION OF THE PLAN
Subject to the restrictions on modifications set forth in section 1127
of the Bankruptcy Code, the Debtors or the Reorganized Debtors, as applicable,
reserve the right to alter, amend or modify the Plan before its substantial
consummation. The Debtors also reserve the right to revoke or withdraw the Plan
as to any or all of the Debtors prior to the Confirmation Date. If the Debtors
revoke or withdraw the Plan as to any or all of the Debtors, or if Confirmation
as to any or all of the Debtors does not occur, then, with respect to such
Debtors, the Plan will be null and void in all respects, and nothing contained
in the Plan will: (a) constitute a waiver or release of any claims by or
against, or any Interests in, such Debtors; or (b) prejudice in any manner the
rights of any Debtors or any other party.
CERTAIN EVENTS PRECEDING THE DEBTORS' CHAPTER 11 FILINGS
HISTORICAL ACQUISITION STRATEGY
From TLGI's inception in 1985 until the last half of 1998, its business
philosophy centered on a growth strategy in the funeral home and cemetery
businesses. TLGI's primary growth philosophy was to act as a consolidator and,
as such, to respond to opportunities offered by independent operators seeking to
complete their own ownership "succession planning" by selling their businesses
to a larger organization. By far the greatest number of acquisitions made by
TLGI involved small- and medium-sized businesses; these businesses, many with
annual revenues of less than $1 million, comprise the vast majority of TLGI's
operating locations. Most acquisitions made by TLGI were funded by debt either
(a) issued to the seller, (b) borrowed from large financial institutions or (c)
raised in the public debt markets.
Beginning in about 1996, TLGI's strategic growth plan began to increase
its focus on acquisitions of cemeteries, as distinguished from the earlier
emphasis on acquisitions of funeral homes. During the three years preceding the
Petition Date, TLGI acquired approximately 138 funeral homes, 171 cemeteries and
one insurance company, for aggregate consideration of approximately $546
million. In 1998 alone, TLGI acquired 89 funeral homes and 65 cemeteries, for
aggregate consideration of approximately $278 million.
Beginning in the second half of 1998, in light of negative cash flow
from its businesses and increasing difficulties in meeting its debt service
obligations, TLGI virtually ceased its acquisition program. During the first
quarter of 1999, TLGI acquired one small cemetery.
During the last quarter of 1998, TLGI began attempting to sell various
operations. On March 31, 1999, TLGI sold the capital stock of subsidiaries
owning 124 cemeteries and three funeral homes in a transaction valued at
approximately $193 million. See "Operations During the Reorganization Cases --
Post-Petition Asset Disposition Program" for a discussion of the sale of certain
operations subsequent to the Petition Date.
MISSISSIPPI LITIGATION
In November 1995, an extraordinary jury award of $500 million
(consisting of $100 million in compensatory damages and $400 million in punitive
damages) was entered against certain of the Debtors in a state court lawsuit in
Hinds County, Mississippi, captioned O'Keefe v. The Loewen Group Inc. This
judgment arose from a dispute involving the purchase and sale of businesses
having a total value of approximately $6 million. The Debtors involved were
unable to secure the necessary bond under Mississippi law to stay the
enforcement of the judgment pending appeal to the Supreme Court of Mississippi
and, facing extreme financial pressure to resolve the lawsuit consensually,
entered into a settlement of the lawsuit. The settlement, which provided for
consideration
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valued in the aggregate at approximately $175 million, involved an immediate
payment of cash and the issuance of shares of TLGI Old Common Stock and the
O'Keefe Notes. The Debtors believe that the O'Keefe litigation had a lasting,
damaging effect on their acquisition program and their overall financial health
and was a significant cause of the commencement of the Reorganization Cases.
COLLATERAL TRUST AGREEMENT
The senior indebtedness of TLGI and LGII was restructured in 1996 and,
in connection therewith, TLGI, LGII and the CTA Trustee entered into a
collateral trust agreement (the "CTA") pursuant to which the senior lenders and
future senior lenders of TLGI and LGII, which are holders of the CTA Note
Claims, would share certain collateral granted to the CTA Trustee and guaranties
on a pari passu basis. See "Collateral Trust Agreement Issues; Recovery Actions;
and Other Legal Proceedings -- Collateral Trust Agreement Issues" for
discussions of: (a) certain issues that were identified after the Petition Date
concerning whether certain of this debt is entitled to the benefits of the CTA
(the "CTA Issue"); (b) certain potential claims of the Debtors in respect of the
CTA and payments made to certain holders of CTA Note Claims; and (c) certain
issues relating to whether the CTA constituted a fraudulent conveyance. The
collateral security under the CTA consists generally of: (a) all of LGII's
right, title and interest in and to all rights to receive payment under or in
respect of accounts, contracts, contractual rights, chattel paper, documents,
instruments and general intangibles; (b) a pledge of the shares of capital stock
and other equity interests of substantially all of the subsidiaries in which
TLGI directly or indirectly holds more than a 50% voting or economic interest;
and (c) a guaranty by each "pledgor subsidiary" pledging stock or other equity
interests under the CTA (generally, all subsidiaries of TLGI that own an equity
interest in one or more other Canadian or U.S. subsidiaries). As of the Petition
Date, the indebtedness owed to holders of CTA Note Claims aggregated
approximately $2.04 billion.
PREPETITION FINANCIAL RESULTS AND OVERLEVERAGE
Between January 1, 1998 and the Petition Date, TLGI experienced
disappointing financial results. TLGI reported a loss from operations in 1998 of
$264 million after recording a charge for asset impairment of $333.9 million.
TLGI's acquisition, integration and operation of cemeteries over the three years
preceding the Petition Date required significant cash resources on account of
preneed sales of cemetery interment rights, products and services and related
interest costs on debt incurred. Cemetery preneed sales typically were
structured with low initial cash payments by the customers that did not offset
the cash costs of establishing and supporting a growing preneed sales program,
including the payment of sales commissions.
TLGI believes that its financial difficulties primarily stemmed from a
highly burdensome debt load, much of which was incurred in connection with its
historical acquisition program, and the poor cash flow characteristics
associated with TLGI's then existing cemetery preneed sales strategy. As of
March 31, 1999, TLGI's consolidated balance sheet reflected approximately $2.1
billion of long-term debt (of which approximately $742.2 million was due
currently) and approximately $48.8 million of other current debt.
SECURITIES CLASS ACTIONS
Since December 1998, TLGI has been served with various related lawsuits
filed in the United States District Courts for the Eastern District of
Pennsylvania and for the Eastern District of New York. Raymond L. Loewen, the
former Chairman and Chief Executive Officer, and certain current and former
officers and directors have been named as defendants in some of the suits. All
but one of these lawsuits were filed as purported class actions on behalf of
persons or entities that purchased Old Stock of TLGI during five different time
periods ranging from November 3, 1996 through January 14, 1999. LGII and LGCLP
are named as defendants in two suits. The plaintiffs in these two lawsuits
purport to sue on behalf of a class of purchasers of MIPS from March 5, 1997
through January 14, 1999. The complaints generally make allegations concerning,
among other things, TGLI's internal controls, accounting practices, financial
disclosures and acquisition practices.
The Judicial Panel on Multidistrict Litigation (the "MDL Panel")
granted the defendants' motion to consolidate all of the actions for pre-trial
coordination in the United States District Court for the Eastern District of
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Pennsylvania. On April 15, 1999, Judge Thomas O'Neill of the District Court for
the Eastern District of Pennsylvania entered an order consolidating in the
Eastern District of Pennsylvania, all of the cases then filed, as well as any
related cases thereafter transferred to that District (the "April 15 Order").
The April 15 Order appointed the City of Philadelphia Board of Pensions and
Retirement as lead plaintiff. Subsequent to the Debtors' bankruptcy Filings,
Judge O'Neill entered an order staying all of the cases and placing them on the
suspense docket.
MANAGEMENT CHANGES, RESTRUCTURING EFFORTS AND ASSET SALES
To address their disappointing financial results and overleverage
problems, TLGI, as noted above, curtailed its acquisition program. TLGI also
replaced virtually its entire senior management team. In October 1998, TLGI's
Board of Directors (the "TLGI Board") appointed a new President and Chief
Executive Officer, Robert B. Lundgren (who was succeeded by Paul A. Houston in
December 1999). In January 1999, the TLGI Board elected a newly appointed
director, John S. Lacey, as Chairman. In March 1999, TLGI appointed Alan Thomas
as Acting Chief Financial Officer (who was succeeded by Michael A. Cornelissen
in July 1999). On November 6, 2000, Kenneth A. Sloan joined TLGI as Chief
Financial Officer (succeeding Mr. Cornelissen).
In addition, TLGI undertook a number of additional steps to assess
alternatives for maximizing stakeholder value and improving profitability and
cash flow from operations, including the following:
- Consolidation of Administrative Functions. In June 1998, TLGI
began the consolidation of many operational and administrative
functions then conducted in its Trevose, Pennsylvania office into
its Burnaby, British Columbia office. In January 1999, TLGI
announced the further consolidation of most of the remaining
functions, including cemetery accounting, trust administration and
information systems, leaving only the receivables collection
function remaining in the Trevose office. This consolidation was
expected to reduce costs and improve information and control to
support management decisionmaking. Subsequently, on September 6,
2000, TLGI announced the consolidation of its eight existing U.S.
and Canadian administrative and corporate offices into three
offices in Toronto, Ontario, Cincinnati, Ohio and Vancouver,
British Columbia. As part of this consolidation: (a) Cincinnati,
Ohio will become one of TLGI's two administrative support centers;
(b) all Greater Vancouver, British Columbia area administrative
functions will be consolidated in the existing administrative
support center in nearby Metrotown (Burnaby), British Columbia;
(c) TLGI's executive offices will be relocated from Burnaby,
British Columbia to Toronto, Ontario and the existing executive
office facility in Burnaby will be closed and sold; and (d) TLGI's
U.S. operations offices in Conroe, Texas, its credit and
collections offices in Philadelphia, Pennsylvania and smaller
offices in Atlanta, Georgia and Whittier, California will be
closed.
- Engagement of Professional Advisors. In July 1998, the TLGI Board
engaged the services of financial advisors and investment bankers
and announced its intention to consider all available options to
maximize value, including such opportunities as strategic
partnerships, combinations, dispositions and capital investments.
- Reorganization of Board Membership. In addition to the management
changes described above, the TLGI Board's membership was
reconstituted to provide for a smaller and more focused board. In
September 1998, the TLGI Board created a special committee of
independent directors to oversee and supervise TLGI's efforts to
maximize value. In December 1998, three new directors recommended
by significant shareholders were appointed to the TLGI Board. As
noted above, in January 1999, John S. Lacey was elected as
Chairman of the TLGI Board. Finally, through actions taken on
March 30, 1999 and April 12, 1999, the TLGI Board was reduced from
14 to seven members (although the TLGI Board subsequently was
increased to eight members and two new directors recommended by
the Creditors' Committee were appointed in February 2000).
- Reorganization of Operational Management. TLGI reorganized its
operational management in an effort to enhance funeral and
cemetery operations, reduce regional management overhead and
achieve greater accountability for cemetery profitability and cash
flow.
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- Adjustments to Cemetery Preneed Sales Strategy. Management
reviewed its cemetery preneed sales strategy and, in an effort to
improve cash flow, in May 1999 began implementing changes to the
terms and conditions of cemetery preneed sales. These changes
included (a) setting minimum contract terms, (b) adjusting sales
force compensation for sales with certain terms and (c)
eliminating certain types of contracts with poor cash flow
characteristics.
- New Information Systems. TLGI began implementing several new
information systems, principally in cemeteries, in an effort to
improve information availability for monitoring and evaluating key
financial and operational variables.
Due to severe liquidity constraints and the need to generate cash, in
late 1998, TLGI identified certain properties that it would consider selling at
their fair value. On March 31, 1999, TLGI sold 124 cemeteries and three funeral
homes, primarily located in the northeastern U.S. (the "Northeast Disposition"),
for gross proceeds of $193 million, of which $126.5 million was used to reduce
indebtedness. See "Collateral Trust Agreement Issues; Recovery Actions; and
Other Legal Proceedings -- Other Legal Proceedings -- Northeast Disposition Sale
Dispute" for a discussion of certain proceedings relating to this transaction.
In connection with the closing of the Northeast Disposition, TLGI completed
negotiations with the lenders under certain of its debt instruments, resulting
in revised lending agreements, effective March 31, 1999. Those revised lending
agreements included waivers of certain financial covenants as of December 31,
1998 and:
- provided for no further borrowings and reduced availability under
the bank revolving credit agreement, including letters of credit,
from $600 million to $293.7 million after application of a portion
of the net proceeds of the Northeast Disposition;
- increased effective interest rates or applicable margins;
- amended certain existing financial covenants and added other
financial covenants;
- required refinancing of the PATS Notes on terms satisfactory to
the lenders by September 15, 1999;
- required the appointment of a financial advisor on behalf of the
lenders and increased reporting and monitoring;
- required the suspension of all dividend payments on TLGI Old
Common Stock, TLGI Old Preferred Stock and the MIPS;
- restricted further acquisitions and equity repurchases;
- limited capital expenditures and expenditures for development of
cemetery land to $60 million for 1999; and
- permitted additional sales of the TLGI's businesses, subject to
certain terms and conditions.
See "Collateral Trust Agreement Issues; Recovery Actions; and Other Legal
Proceedings -- Recovery Actions -- Preference Claims -- The Northeast
Disposition" with respect to certain claims arising from the paydown of $126.5
million of certain indebtedness in connection with the Northeast Disposition.
Subsequent to the Northeast Disposition, TLGI continued to suffer
severe liquidity constraints and a shortage of cash. The management and
operational improvements described above were in the process of being
implemented fully, and first quarter 1999 results began to show positive results
from those improvements. Time was needed, however, for the results to be
reflected in significantly improved financial results. Moreover, TLGI was unable
to consummate any additional significant sales of businesses for fair value, in
part, because business valuations in the funeral home and cemetery industries
had been depressed. On or about June 1, 1999, TLGI faced additional significant
debt service obligations, including a semiannual interest payment totaling
approximately
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$17 million under the Public Notes. On October 1, 1999, the PATS Notes, having
an aggregate outstanding principal amount of $300 million, were scheduled to
become redeemable at the election of the holders. Given this combination of
circumstances, on May 31, 1999, the TLGI Board and the Boards of Directors of
the other Debtors determined that the filing of the Reorganization Cases would
be the best alternative to preserve value for stakeholders and therefore
authorized commencement of the Reorganization Cases and the CCAA Proceedings. On
June 1, 1999, the Debtors commenced the Reorganization Cases. On the same date,
TLGI, together with the CCAA Debtors, commenced the CCAA Proceedings.
OPERATIONS DURING THE REORGANIZATION CASES
FIRST DAY RELIEF
INTRODUCTION
On the Petition Date, the Debtors Filed a number of motions (the "First
Day Motions"), certain of the more significant of which are described briefly
below. The First Day Motions were designed to meet the Debtors' goals of: (a)
continuing their operations in chapter 11 with as little disruption and loss of
productivity as possible; (b) maintaining the confidence and support of the
Debtors' customers, employees, vendors, suppliers, contractors and other key
groups; (c) maintaining good relations in the communities served by the Debtors'
businesses; and (d) continuing to comply with the state, provincial and
territorial regulations that govern the Debtors' funeral home, cemetery and
related businesses.
The First Day Motions included: (a) motions relating to case
administration; (b) motions relating to the Debtors' retention of counsel and
other professionals; (c) motions relating to payment of prepetition wages and
other benefits to the Debtors' employees; (d) motions relating to honoring
prepetition obligations to customers and payment of certain creditors that were
vital to the Debtors' uninterrupted operations; (e) a motion seeking approval of
a cross-border protocol with the Canadian Court; (f) a motion relating to
certain activities to permit the Debtors to continue to remain in compliance
with state, provincial and territorial funeral and cemetery regulations; and (g)
a motion relating to the continued use of the Debtors' existing cash management
system, bank accounts, business forms and investment and deposit guidelines. All
of the Debtors' First Day Motions were ultimately granted and certain of such
motions are described below.
EMPLOYEE WAGES AND BENEFITS
The Debtors filed a motion seeking authorization to: (a) pay certain
prepetition employee wages, salaries, contractual compensation, sales and
performance incentives, sick pay, vacation pay (including "personal days"),
holiday pay, commissions and other accrued compensation; (b) reimburse
prepetition employee business expenses (including travel, lodging, moving,
closing costs and other relocation expenses); (c) make payments for which
employee payroll deductions were made; (d) make prepetition contributions and
pay benefits under employee benefits plans; and (e) pay all costs and expenses
incident to the foregoing payments and contributions (including payroll-related
taxes and processing costs).
WORKERS' COMPENSATION
The Debtors sought authorization to continue their existing workers'
compensation programs in all states and provinces in which they have employees
and to pay prepetition premiums (the "Funded Premiums") to the six states
(Nevada, North Dakota, Ohio, Washington, West Virginia and Wyoming) and Puerto
Rico (collectively, the "Funded States") and the six provinces (Alberta, British
Columbia, Manitoba, Prince Edward Island, Quebec and Saskatchewan)
(collectively, the "Funded Provinces") in which the Debtors participate in the
"monopolistic" workers' compensation programs (the "Funded Programs") funded
through, and administered by, the respective Funded States and Funded Provinces.
The Funded Premiums generally are based on the Debtors' adjusted payroll for
their employees in the Funded States and Funded Provinces during the coverage
period and are adjusted
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retrospectively based on a final audit of the Debtors' payroll. In the majority,
if not all, of the Funded States and Funded Provinces, the Debtors are required
by applicable state or provincial law to participate in the Funded Programs or,
alternatively, to obtain authority to operate as a self-insured employer in the
state or province.
Since January 1, 1995, the Debtors have maintained high-deductible
workers' compensation and employers' liability insurance programs (collectively,
the "Insured Program") with CNA Insurance Company and certain of its affiliates
(collectively, "CNA") that cover the Debtors' employees in all states other than
the six states with Funded Programs. Under the Insured Program: (a) insurance
coverage is provided for all losses up to $1 million per claim under
$250,000-deductible insurance policies; and (b) the Debtors are obligated to (i)
pay annual premiums that are adjustable retroactively based on the Debtors'
final audited payroll for the coverage period (the "Insured Premiums") and (ii)
reimburse CNA for the loss payments that CNA makes in respect of claims asserted
under the Insured Program.
To secure the Debtors' obligations under the current and former
workers' compensation and employers' liability insurance policies, as well as
various other liability insurance policies issued to the Debtors by CNA
(collectively, the "CNA Policies"), prior to the Petition Date, CNA required the
Debtors to post collateral for such liabilities. The aggregate amount of
collateral that the Debtors posted in this regard was approximately $22.2
million, consisting primarily of letters of credit in the aggregate amount of
approximately $17 million (the "Letters of Credit") and cash collateral in the
amount of approximately $5.2 million.
TRUST FUND TAXES
In the ordinary course of their businesses, the Debtors collect certain
trust fund taxes (collectively, the "Trust Fund Taxes") from their employees or
customers, as applicable, and hold them for a period of time before remitting
them to the appropriate taxing authorities (collectively, the "Taxing
Authorities"). The Debtors collect sales and use taxes from customers for
remittance to the appropriate state, provincial or local Taxing Authority. In
addition, the Debtors withhold certain taxes (such as income, FICA and Medicare
taxes) from their employees' paychecks, which amounts are then remitted
periodically to the appropriate federal, state or provincial Taxing Authorities.
The Debtors sought entry of an order authorizing them to pay the Trust Fund
Taxes collected prior to the commencement of their chapter 11 cases, but not yet
remitted by the Debtors to the applicable Taxing Authority.
CUSTOMER, VENDOR, SERVICE PROVIDER AND CONTRACTOR CLAIMS
The Debtors sought authority to honor or pay any prepetition
obligations incurred for or on behalf of customers. As of the Petition Date, the
Debtors' funeral homes were in the midst of providing funeral and burial
services for a number of customers. As part of these services, the Debtors'
funeral homes typically agree to make all of the necessary arrangements on
behalf of the deceased and his or her family, such as purchasing cemetery plots,
caskets, vaults, flowers, obituary notices, death certificates and
acknowledgment cards, as well as making the necessary arrangements with the
deceased's place of worship, clergy and musicians. The Debtors sought limited
authority to pay the prepetition claims of (a) vendors and service providers in
an amount not to exceed $1,000 per individual claim and (b) contractors who held
perfected or potential lien rights against the Debtors' property in the ordinary
course of their businesses. The Debtors also sought authority to pay certain
independent contractors who perform various essential services relating to,
among other things, the improvement and maintenance of the Debtors' information
and accounting systems.
THE PROTOCOL MOTION
Given the complex, transnational nature of the Reorganization Cases and
the CCAA Proceedings, the Debtors sought approval of a procedural protocol
between the Bankruptcy Court and the Canadian Court (collectively, the "Courts")
to address the myriad administrative issues anticipated to arise in coordinating
the insolvency proceedings and to ensure that: (a) the Reorganization Cases and
the CCAA Proceedings were coordinated to avoid inconsistent, conflicting or
duplicative activities; (b) all parties were adequately informed of key issues
in both countries' proceedings; (c) the substantive rights of all parties were
protected; and (d) the
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jurisdictional integrity of each of the Courts was preserved. Among other
things, the protocol that was adopted provided for:
- communications between the Courts with or without counsel present;
- joint hearings with video or telephone links before the Courts;
- matters relating to the retention and compensation of
Professionals;
- the right of interested parties to be heard by either Court;
- the service of motions and other pleadings; and
- the joint recognition of stays of proceedings under the Bankruptcy
Code and the CCAA.
On March 27, 2000, pursuant to the provisions of the protocol, the
Bankruptcy Court and the Canadian Court convened a joint video status conference
in the Reorganization Cases and the CCAA Proceedings. At the joint video status
conference, John S. Lacey (Chairman of the TLGI Board), Paul Houston (President
and Chief Executive Officer of TLGI) and Bradley D. Stam (Senior Vice President,
Legal and Asset Management of TLGI) made presentations to the Bankruptcy Court
and the Canadian Court regarding the history of TLGI, the events leading up to
the commencement of the Reorganization Cases and the CCAA Proceedings, TLGI's
restructuring efforts up to the date of the status conference, the elements of,
and the process for implementing, TLGI's long-term strategic business plan and
the major challenges faced by TLGI in achieving a successful reorganization.
THE REGULATORY MOTION
The Debtors' funeral home and cemetery businesses are heavily regulated
by state, provincial and territorial governments that impose licensing
requirements on funeral homes and cemeteries and, in addition, complex
requirements with respect to certain products sold by the Debtors. In their
motion to address regulatory issues (the "Regulatory Motion"), the Debtors
sought relief to ensure their continued compliance with those licensing and
other regulatory requirements.
A key aspect of the Debtors' funeral home and cemetery businesses is
the sale to customers of contracts for packages of funeral and burial services
on a preneed basis ("Preneed Contracts"). Consistent with industry practices,
the Debtors offer two payment options for a customer purchasing a Preneed
Contract. The customer may either (a) pay for the entire cost of the Preneed
Contract at or near the time of entry into the contract or (b) finance the cost
though a multi-payment or installment plan (in either instance, such payments
being referred to as the "Customer Funds"). As described more fully below, the
Debtors' use of the Customer Funds is subject to complex state, provincial and
territorial Regulations. Accordingly, by the Regulatory Motion, the Debtors
sought authority (a) to continue to comply with all state, provincial and
territorial regulations applicable to the Preneed Contracts and (b) to continue
to perform under each of the Preneed Contracts on an interim basis for the
one-year period following the Petition Date (the "Interim Period"), as though
each such contract had been assumed pursuant to section 365 of the Bankruptcy
Code. This Interim Period was subsequently extended until the date of
confirmation of a plan or plans of reorganization in the Reorganization Cases.
Regulations cover a wide range of the Debtors' business activities,
including the sale of Preneed Contracts, the use of Customer Funds and other
trusting matters. Regulations that govern the Debtors' sale of, and performance
under, the Preneed Contracts impose a number of obligations upon the Debtors,
including detailed recordkeeping and reporting requirements with respect to
Customer Funds received under the Preneed Contracts. Regulations also restrict
the Debtors' ability to collect and use the Customer Funds. Although regulations
vary from jurisdiction to jurisdiction, they generally require the Debtors to
deposit all, or a certain percentage, of the Customer Funds into trust fund
accounts specified by the Debtors (the "Trust Accounts") within five to 60 days
(depending upon the applicable Regulation) after the Debtors receive the funds
(funds held by the Debtors prior to their deposit into a Trust Account being
referred to as "Interim Funds"). The Debtors currently maintain approximately
3,000 Trust
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Accounts. These Trust Accounts generally fall into one of the four following
categories: (a) perpetual care trusts, which hold funds for permanent trusts
established to fund the maintenance of the Debtors' cemeteries; (b) merchandise
trusts, which hold funds paid by customers for funeral home and cemetery
merchandise; (c) preconstruction trusts, which hold funds paid by customers for
the construction of mausoleums and similar cemetery inventory; and (d) funeral
service trusts, which hold funds paid by customers for the provision of funeral
and burial services. Subject to certain exceptions, the Debtors generally are
entitled to withdraw the principal and interest of amounts deposited with
respect to a particular Preneed Contract from merchandise, preconstruction and
funeral service trusts when, as applicable, the construction project is
completed or the contractual obligations are fulfilled. In light of the serious
adverse consequences that could result from the Debtors' failure to comply with
any applicable regulations, the Debtors sought authority, pursuant to sections
105(a) and 363 of the Bankruptcy Code, to take any and all actions necessary to
continue their compliance with such regulations, including the following
specific requirements imposed thereby: (a) preparing and filing any required
reports regarding the Debtors' operations, the Preneed Contracts or the Trust
Accounts; (b) paying periodic fees to the state, provincial and territorial
agencies responsible for monitoring regulatory compliance (collectively, the
"Agencies"), including those that, as of the Petition Date, were due and owing
to any of the Agencies (the "Fees"); (c) transferring any Interim Funds held by
the Debtors or their respective banking institutions to the appropriate Trust
Accounts; (d) to the extent permitted by applicable regulations, entering into
new Trust Account agreements and terminating existing ones; (e) to the extent
required by applicable regulations, funding any deficiencies in the Trust
Accounts; and (f) depositing Customer Funds into the Trust Accounts, and
withdrawing funds from the Trust Accounts, as required or permitted by
applicable regulations. In addition, the Debtors sought authority to take any
and all actions necessary to comply with the reasonable requests of any Agency
in connection with any ongoing review (a "Review") by the Agency of the Debtors'
regulatory compliance in the Agency's jurisdiction.
In addition, certain of the Debtors brought a preliminary injunction
and declaratory judgment action in the Bankruptcy Court against the Comptroller
of the State of Illinois seeking to determine the rights and obligations of the
parties in relation to a notice provision specifically added by the Illinois
legislature to the Illinois Funeral or Burial Funds Act and the Illinois Preneed
Cemetery Sales Act shortly before the Debtors Filed the Reorganization Cases and
with knowledge of the intended Filings. The notice provision would have required
that notice of the Filings be given to each purchaser of a Preneed Contract in
Illinois by a Debtor within 30 days after the Filing or the Debtors would risk
losing their license to operate in Illinois. The Bankruptcy Court heard the case
in August 1999, but has not yet ruled on the case. The notice provision has been
suspended pending the outcome of the case.
DEBTOR-IN-POSSESSION FINANCING
In connection with their preparations for the Filing of the
Reorganization Cases, the Debtors determined that they would need to obtain
debtor-in-possession financing to ensure sufficient liquidity to meet their
ongoing operating needs. On the Petition Date, the Debtors Filed a motion for
entry of interim and final orders to obtain debtor-in-possession financing in an
aggregate amount of $200 million. On July 16, 1999, the Bankruptcy Court entered
a final order approving such financing (the "First DIP Financing Facility"). The
First DIP Financing Facility had a term of two years and was secured by a
perfected security interest in substantially all of the existing and future
assets of LGII and the Loewen Subsidiary Debtors (subject only to valid and
perfected pre-Petition Date liens). The lenders under the First DIP Financing
Facility also had the benefit of a superpriority administrative expense claim in
LGII's bankruptcy proceedings. The First DIP Financing Facility was intended to
be used primarily to fund LGII's working capital needs during the course of the
bankruptcy proceedings. Use of the First DIP Financing Facility for letters of
credit was limited to a maximum of $50 million.
On April 25, 2000, the Debtors Filed a motion to authorize a new
debtor-in-possession financing (the "DIP Financing Facility") to replace the
First DIP Financing Facility. The term of the DIP Financing Facility expires on
June 30, 2001. The maximum borrowing availability under the DIP Financing
Facility was reduced to $100 million, with a sublimit of $50 million for standby
and commercial letters of credit. The aggregate principal amount of the loans
under the DIP Financing Facility cannot increase by more than $20 million in any
30-day period. Financial covenants under the DIP Financing Facility include
covenants regarding minimum funeral home gross margin and minimum interest
coverage ratios determined on a quarterly basis. Subject to certain limits and
conditions, the borrowers under the DIP Financing Facility may choose to obtain
funds under the facility as either Floating Rate Loans or Eurodollar Loans.
"Floating Rate Loans" bear interest at a floating Alternate Base Rate plus 1.25%
per
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annum. The "Alternate Base Rate" is the greater of the Federal Funds rate for
that day plus .50% per annum or the floating rate per annum most recently
announced by the agent bank as the reference rate of interest for loans in the
U.S. "Eurodollar Loans" bear interest at a reserve-adjusted Eurodollar Rate plus
2.75%. Interest as applicable to Eurodollar Loans is payable at the end of the
applicable period (one, two or three months) and is calculated for actual days
elapsed on the basis of a 360-day year. Interest as applicable to Floating Rate
Loans is payable quarterly in arrears. Amounts drawn under letters of credit
bear interest at the same rate as Floating Rate Loans. The borrowers also pay a
commitment fee of .50% per annum on the average daily unused portion of the DIP
Financing Facility, payable monthly in arrears. The borrowers pay letter of
credit fees (a) to the agent under the DIP Financing Facility equal to 2.75% per
annum on the daily sum of the aggregate outstanding amount of undrawn letters of
credit, the obligation to be paid monthly in arrears, and (b) to the issuing
bank equal to .25% of the amount available to be drawn. Obligations under the
DIP Financing Facility, like the First DIP Financing Facility, are secured by a
first priority lien on substantially all of the assets of LGII and the Loewen
Subsidiary Debtors not subject to a perfected security interest on the Petition
Date and a junior lien on the assets of LGII and the Loewen Subsidiary Debtors
already subject to a perfected lien on those dates. Subject to carveouts for
fees and expenses of estate professionals in the amount of $10 million and fees
payable to the U.S. Trustee under 28 U.S.C. Section 1930, the obligations of the
Debtors under the DIP Financing Facility constitute allowed superpriority
administrative expense claims under section 364(c)(1) of the Bankruptcy Code.
The amounts advanced under the DIP Financing Facility are permitted to be used
to (a) repay the obligations under the First DIP Financing Facility, (b) pay or
otherwise secure prepetition obligations in an aggregate amount not to exceed $5
million and (c) fund working capital and other general corporate purposes of the
Debtors. Any Asset Sales (as defined in the documentation of the DIP Financing
Facility) result in a mandatory prepayment obligation that would not reduce the
aggregate commitments under the facility. The Bankruptcy Court approved the DIP
Financing Facility on May 9, 2000.
As of November 1, 2000, there were no borrowings under the DIP
Financing Facility, and approximately $13.4 million of letters of credit were
outstanding thereunder.
KEY EMPLOYEE RETENTION PROGRAM
To stabilize employee relations, the Debtors developed a Key Employee
Retention Program (the "KERP"), which was approved by the Bankruptcy Court on
September 21, 1999. The KERP was designed, among other things, to ensure that
the employees critical to the Debtors' reorganization efforts are provided with
sufficient economic incentives and protections to remain with the Debtors and
fulfill their responsibilities through the successful conclusion of the
Reorganization Cases. For details concerning the KERP, see "Reorganized LGII --
Management -- Existing Benefit Plans and Agreements -- Key Employee Retention
Program."
APPOINTMENT OF THE CREDITORS' COMMITTEE
On June 11, 1999, the Office of the U.S. Trustee appointed the
Creditors' Committee. The current members of, and advisors to, the Creditors'
Committee are:
Committee Members:
-----------------
CalPERS
Lincoln Plaza
400 P Street
Suite 3492
Sacramento, California 95814
Wells Fargo Bank Minnesota, N.A.
South & Marquette, M.S. 0069
Minneapolis, Minnesota 55479-0069
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State Street Bank & Trust Company
2 Avenue de Lafayette
6th Floor
Boston, Massachusetts 02111-1724
TIAA-CREF
730 Third Avenue
New York, New York 10017-3206
UBS, AG
677 Washington Boulevard
Stamford, Connecticut 06901
Wachovia Bank, N.A.
U.S. Corporate Finance
191 Peachtree Street, N.E.
Atlanta, Georgia 30303
William R. Eldridge
2710 South Rochester Road
Rochester Hill, Michigan 48037
Counsel:
-------
U.S. counsel to the Creditors' Committee:
Bingham Dana LLP
One State Street
Hartford, Connecticut 06103-3178
Delaware counsel to the Creditors' Committee:
Young, Conaway, Stargatt & Taylor, LLP
Rodney Square North
11th Floor
P.O. Box 391
Wilmington, Delaware 19899-0391
Canadian counsel to the Creditors' Committee:
Fasken Campbell Godfrey LLC
Toronto Dominion Bank Tower
Box 20, Suite 4200
Toronto-Dominion Centre
Toronto, Ontario M5K 1N6
Canada
Financial Advisors:
------------------
Houlihan Lokey Howard & Zukin
601 Second Avenue South
Suite 4950
Minneapolis, Minnesota 55402-4304
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Accountants:
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PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
CLAIMS PROCESS AND BAR DATES
On October 8, 1999, the Debtors Filed their Schedules, identifying the
assets and liabilities of their respective Estates. These Schedules have been
amended from time to time subsequent to this initial Filing. In addition,
pursuant to an order dated October 21, 1999 (the "Bar Date Order"), a general
Bar Date of December 15, 1999 (the "General Bar Date") was established for all
Claims in the Reorganization Cases, other than Claims arising out of the
rejection of Executory Contracts and Unexpired Leases ("Rejection Damage
Claims") approved after the entry of the Bar Date Order, Claims in response to
amendments to the Schedules ("Schedule Amendments") and certain other Claims. If
a rejection of an Executory Contract or Unexpired Lease occurs after the entry
of the Bar Date Order, the Bar Date for a Rejection Damage Claim relating to
such Executory Contract or Unexpired Lease will be the later of (a) the General
Bar Date and (b) 30 days after the date of an order rejecting such Executory
Contract or Unexpired Lease. In the case of a Schedule Amendment, the Bar Date
for a claimant to File a proof of Claim or to amend any previously Filed proof
of Claim in respect of the amended scheduled Claim, the Bar Date is the later of
(a) the General Bar Date and (b) 30 days after the date that a notice of an
amendment to the Schedules is served on such claimant. No Bar Date has been
established for certain other Claims.
More than 16,000 Claims were originally scheduled by the Debtors or
Filed against the Debtors on or before the General Bar Date. In March 2000, the
Debtors completed their initial review and reconciliation of the proofs of Claim
Filed against the Debtors. The Debtors are in the process of resolving proofs of
Claim that differ in nature, classification or amount from the Debtors' records
through several means, including negotiations with the affected claimants, the
Filing and prosecution of objections and, where appropriate, the referral of the
Claims to the alternative dispute resolution procedures (the "ADR Procedures")
approved by the Bankruptcy Court on February 23, 2000.
The Debtors proposed the ADR Procedures in the belief that an
alternative dispute resolution process would greatly expedite the resolution of
claims and thus facilitate the Debtors' successful reorganization. Under the
Bankruptcy Court's order approving the ADR Procedures, the Debtors are
authorized to submit to the ADR Procedures all proofs of Claim that the Debtors,
in their sole discretion, believe should be liquidated pursuant to the
procedures. The ADR Procedures with respect to any particular proof of Claim
include the following stages:
- The first stage of the ADR Procedures consists of exchange
procedures, providing the parties with an opportunity to exchange
settlement offers and, if possible, resolve the Claim on a
consensual basis without any further action by the parties.
- If the Claim remains unresolved after completion of the offer
exchange procedures, the Claim is submitted to binding or
nonbinding arbitration (depending on the election of the claimant)
governed by the rules of the American Arbitration Association.
- If a party is dissatisfied with a nonbinding arbitration award,
the party may File a notice of intent to litigate within ten days
after service of the nonbinding arbitration award.
To date, the Debtors have submitted approximately 600 proofs of Claim
to the ADR Procedures.
EXECUTORY CONTRACTS AND UNEXPIRED LEASES
Since the Petition Date, the Debtors have devoted significant time and
effort to the process of reviewing each of their executory contracts and
unexpired leases. The Debtors' review of their executory contracts and unexpired
leases is a particularly difficult task in these cases because of the number of
Debtors, the number of
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locations at which they operate, the Debtors' historical acquisition program and
other industry factors. In all, as of the Petition Date, one or more of the
Debtors were parties to more than 10,000 executory contracts and unexpired
leases. To assist in their review of this large volume of executory contracts
and unexpired leases, the Debtors obtained authority from the Bankruptcy Court
to retain and employ Yantek Enterprises, effective as of February 15, 2000, as
their executory contract consultant.
The prepetition executory contracts and unexpired leases to which one
or more of the Debtors were parties include approximately 300 prepetition
unexpired leases of nonresidential real property. As debtors in possession, the
Debtors have the right under section 365 of the Bankruptcy Code, subject to the
approval of the Bankruptcy Court, to assume or reject executory contracts and
unexpired leases, including real property leases. Section 365 of the Bankruptcy
Code provides generally that a debtor is given until 60 days after the date of
commencement of its bankruptcy to decide whether to assume, assume and assign or
reject an unexpired lease of nonresidential real property. This period may be
extended for "cause."
By order of the Bankruptcy Court dated August 24, 1999, the Debtors
obtained an extension of the period within which to assume or reject
nonresidential real property leases through and including the date of
confirmation of a plan or plans of reorganization in the Reorganization Cases,
except for leases of four objecting landlords (the "Objection Leases"). With
respect to the Objection Leases, the Debtors originally obtained a 180-day
extension of the period, and have subsequently received two further 180-day
extensions, of the period within which the Debtors may elect to assume or reject
the remaining Objection Leases. From time to time during the pendency of the
Reorganization Cases, the Debtors, in the exercise of their business judgment,
have sought and obtained authority from the Bankruptcy Court to reject
individual or small groups of unexpired leases of nonresidential real property
in instances where continued performance under the leases would not be in the
interests of the Debtors' respective estates and creditors.
In June 1999, the Debtors filed a motion with the Bankruptcy Court
seeking authority to reject approximately 200 prepetition noncompetition
agreements to which one or more of the Debtors were parties (the "June Rejection
Noncompetition Agreements"). The Debtors estimated that ongoing payment
obligations under the June Rejection Noncompetition Agreements, were they to
continue to perform thereunder, would aggregate approximately $7.2 million per
year. In August 1999, the Bankruptcy Court denied without prejudice the Debtors'
motion to reject the June Rejection Noncompetition Agreements. The Bankruptcy
Court indicated, based on its review of contracts tendered to the Court, that
irrespective of whether the agreements were or could be rejected, the result
would likely be the same, i.e., the third parties to the June Rejection
Noncompetition Agreements would be entitled only to a prepetition unsecured
claim. In view of the Bankruptcy Court's ruling, the Debtors subsequently
provided notice to the non-Debtor parties under the June Rejection
Noncompetition Agreements that the Debtors were suspending payments under the
June Rejection Noncompetition Agreements and did not intend to enforce the
noncompetition covenants set forth therein.
In August 2000, the Debtors filed a second motion to reject
approximately 32 prepetition noncompetition agreements (the "August Rejection
Noncompetition Agreements"). At the same time, the Debtors also filed a motion
to reject approximately 56 consulting agreements (the "Rejection Consulting
Agreements"). In addition, the Debtors notified approximately 36 other
non-Debtor parties to August Rejection Noncompetition Agreements which the
Debtors determined to be non-executory that the Debtors were suspending payments
under such agreements and did not intend to enforce the noncompetition covenants
set forth therein. The Debtors estimate that ongoing obligations under all the
August Rejection Noncompetition Agreements and the Rejection Consulting
Agreements to be rejected or terminated, were they to continue to perform
thereunder, would aggregate approximately $4.3 million per year. In September
2000, the Bankruptcy Court denied the Debtors' rejection motions without
prejudice and directed the Debtors to File separate motions to reject each of
the August Rejection Noncompetition Agreements and the Rejection Consulting
Agreements individually or in small groups. Later in September 2000, the Debtors
Filed motions for this purpose, and, on October 12, 2000, the Bankruptcy Court
approved the rejection of approximately 24 of the August Rejection
Noncompetition Agreements and approximately 41 of the Rejection Consulting
Agreements.
Under the Debtors' historical acquisition program, LGII in some
instances purchased a majority, but less than a 100%, interest in the businesses
being acquired. In most of those instances, LGII entered into "regional
partnership" shareholder agreements with the parties holding the remaining
minority interests in the businesses
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involved. Pursuant to these agreements, LGII and the minority shareholders
agreed to certain terms and conditions for the financing, operations and
governance of the companies in which the parties held shares. Many of these
agreements also provided the minority shareholders the right to "put" their
stock to LGII under certain terms and conditions for a minimum specified price.
As of the Petition Date, 12 of these shareholder agreements remained in force.
Since the Petition Date, LGII has filed motions in the Bankruptcy Court to
reject all of these remaining shareholder agreements. As of November 3, 2000,
the Bankruptcy Court had approved the rejection of seven of these agreements,
LGII's motion to reject an eighth agreement had been resolved consensually, and
LGII's request to reject the remaining four agreements remained pending before
the Bankruptcy Court.
BLACKSTONE TRANSACTIONS
PRIME SUCCESSION
4103 Investments Ltd., a CCAA Debtor ("4103 Investments"), all of the
stock of which is owned by LGII and TLGI (collectively, the "Prime Parents"),
owns 21.8% of the common stock of Prime Succession Holdings, Inc. ("Prime") and
100% of Prime's non-voting preferred stock. Blackstone Capital Partners II
Merchant Banking Fund L.P. and certain of its affiliates (together,
"Blackstone") own the remaining 78.2% of Prime's common stock.
Prime holds all of the outstanding common shares of Prime Succession,
Inc., an operator of funeral homes and cemeteries in the U.S. Prime Succession,
Inc. was purchased on August 26, 1996 for approximately $320,000,000, of which
$52,000,000 was funded by Blackstone, $78,000,000 was funded by the Prime
Parents and $190,000,000 was financed through bank borrowings and the issuance
of senior subordinated notes. These bank borrowings and notes are not
obligations of the Prime Parents. In 1999, due to the performance of Prime, the
Prime Parents wrote off all of their investment in Prime.
Under a Put/Call Agreement entered into with Blackstone in August 1996
(the "Prime Put/Call Agreement"), Blackstone has the option to sell its Prime
common stock to the Prime Parents commencing on August 26, 2002, and for a
period of two years thereafter, at a price determined pursuant to the Prime
Put/Call Agreement (the "Prime Put"). The price for the Prime Put is based on a
formula that calculates the equity value attributable to Blackstone's common
stock interest. The calculated equity value is determined at the Prime Put date
based on a multiple of approximately 12x earnings before interest, taxes,
depreciation and amortization ("EBITDA") for the previous year, after deduction
of certain liabilities.
On July 12, 2000, Prime and 37 of its affiliated companies commenced
chapter 11 cases under the Bankruptcy Code in the United States Bankruptcy Court
for the District of Delaware (the "Prime Bankruptcy Proceedings"). On July 17,
2000, Prime and its affiliated debtors filed a proposed plan of reorganization
and related disclosure statement (the "Prime Plan"). Under the Prime Plan, all
of the existing common stock of Prime will be canceled and the holders thereof,
including the Prime Parents, will receive no distributions in respect thereof.
With respect to the non-voting preferred stock of Prime, all of which is owned
by the Prime Parents, the Prime Plan provides that each holder thereof will
receive its pro rata share of five-year warrants to purchase 500,000 shares of
common stock of reorganized Prime ("New Prime Common Stock") at an exercise
price of $16.76 per share. The Prime Plan also provides that 5,000,000 shares of
New Prime Common Stock will be issued to certain creditors of Prime. Prime has
estimated that the midpoint reorganization value of the shares of New Prime
Common Stock is $2.76 per share. The Prime Parents did not vote to accept or
reject the Prime Plan in respect of their holding of non-voting preferred stock
of Prime and have not taken any other action with respect to the Prime Plan. A
hearing on confirmation of the Prime Plan was held on November 8, 2000, and the
Prime Plan was confirmed by the court. The Prime Parents are unable at this time
to predict what value they may ultimately realize in respect to their equity
interests in Prime.
Blackstone has filed proofs of Claim against LGII and TLGI in respect
of the Prime Put, in which Blackstone calculates a Prime Put price of $183.4
million. The Debtors reserve the right to object to the Claims asserted by
Blackstone if the Debtors and Blackstone cannot reach agreement on the
definitive terms of the Blackstone Settlement. Similarly, Blackstone has advised
the Debtors that it reserves the right to oppose various aspects of the Plan if
the Debtors and Blackstone cannot reach agreement on the definitive terms of the
Blackstone Settlement.
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ROSE HILLS
4103 Investments and LGII (collectively, the "Rose Hills Parents") own
20.45% of the common stock of Rose Hills Holdings Corp. ("Rose Hills") and 100%
of Rose Hills non-voting preferred stock, with a 10% cumulative annual
payment-in-kind dividend. Blackstone owns the remaining 79.55% shares of the
Rose Hills common stock.
Rose Hills holds all of the outstanding common stock of Rose Hills
Company and the cemetery related assets of Rose Hills Memorial Park Association,
representing the largest single location cemetery in the U.S. These companies
were purchased on November 19, 1996 for approximately $285 million, of which $35
million was funded by Blackstone, $95 million was funded by the Rose Hills
Parents and $155 million was financed through bank borrowings and the issuance
of senior subordinated notes. These bank borrowings and notes are not
obligations of the Rose Hills Parents. After certain writedowns, at December 31,
1999, the carrying value of Rose Hills Parents investment in Rose Hills was
approximately $44 million.
Under a Put/Call Agreement entered into with Blackstone in November
1996 (the "Rose Hills Put/Call Agreement"), the Rose Hills Parents have the
option to acquire Blackstone's Rose Hills common stock commencing on November
19, 2000, and for a period of two years thereafter, at a price determined
pursuant to the Rose Hills Put/Call Agreement (the "Rose Hills Call").
Blackstone has the option to sell its Rose Hills common stock to the Rose Hills
Parents commencing on November 19, 2002, and for a period of two years
thereafter, at a price determined pursuant to the Rose Hills Put/Call Agreement
(the "Rose Hills Put").
The prices for the Rose Hills Call and the Rose Hills Put are based on
a formula that calculates the equity value attributable to Blackstone's common
share interest. The calculated equity value is determined at the Rose Hills Put
or Rose Hills Call date based on a multiple of approximately 14x EBITDA for the
previous year, after deduction of certain liabilities.
Prior to March 1, 2000, LGII had provided various management and
administrative services to Rose Hills and its subsidiaries under an
Administrative Services Agreement (the "Rose Hills Services Agreement") for an
annual fee of $250,000. On or about July 6, 1999, Rose Hills filed a motion for
relief from the automatic stay imposed by section 362 to terminate the Rose
Hills Services Agreement. (Prime originally was a joint movant on this motion
with respect to a similar Administrative Services Agreement to which it is party
with certain of the Debtors, but Prime subsequently dismissed the motion as to
its agreement without prejudice.) The Bankruptcy Court denied Rose Hills' motion
for relief from the automatic stay and directed Rose Hills to file a motion to
compel the Debtors to assume or reject the Rose Hills Services Agreement. On or
about February 4, 2000, Rose Hills filed such a motion (the "Motion to Compel").
At the Bankruptcy Court's hearing on the Motion to Compel, counsel to
the Debtors proposed on the record to resolve the motion on terms that the
Bankruptcy Court agreed were reasonable. In light of this direction from the
Bankruptcy Court, LGII and Rose Hills agreed to amend the Rose Hills Services
Agreement, effective March 1, 2000, to provide that, until such time as the Rose
Hills Parents make an election to reject or assume the Rose Hills Services
Agreement under section 365 of the Bankruptcy Code, the annual fee payable by
Rose Hills under the Rose Hills Services Agreement will be waived and the Rose
Hills Parents will no longer be required to provide any services to Rose Hills
under the Rose Hills Services Agreement. That annual fee is subject to
renegotiation in the event that Rose Hills requests further services from the
Rose Hills Parents. If the Rose Hills Services Agreement were to become subject
to termination by Blackstone due to LGII's material breach thereof or other
failure to comply in any material respect, the price payable to Blackstone upon
a Rose Hills Put of its interests would, under the terms of the Rose Hills
Put/Call Agreement, be no less than an amount equal to its original investment
plus a 25% compound return per annum thereon, which increases to 27.5% in the
event of a change in control of the Rose Hills Parents regardless of the
calculated equity value.
In October 2000, LGII and Rose Hills entered into a settlement
agreement (the "Rose Hills Settlement Agreement") that, subject to Bankruptcy
Court approval, resolves LGII's claims arising under the Rose Hills Services
Agreement prior to the date of the settlement agreement and certain other
disputes between the parties. Pursuant to the Rose Hills Settlement Agreement,
LGII will be paid $512,000 on account of its existing claims arising under the
Rose Hills Settlement Agreement from the proceeds of the sale of certain
property located in Van
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Nuys, California (totaling approximately $1 million) to which LGII held legal
title but to which Rose Hills asserted equitable title. Rose Hills will be paid
the remaining proceeds of the sale, which currently are being held in escrow.
The Rose Hills Settlement Agreement contemplates that, notwithstanding the
settlement, the Rose Hills Services Agreement, as amended pursuant to the
parties' agreement described above, will remain in force and effect. A hearing
by the Bankruptcy Court on approval of the Rose Hills Settlement Agreement has
been scheduled to be held on November 14, 2000.
Blackstone has filed proofs of Claim against LGII and TLGI in respect
of the Rose Hills Put, in which Blackstone calculates a put price of $158.8
million. The Debtors reserve the right to object to the Claims asserted by
Blackstone if the Debtors and Blackstone cannot reach agreement on the
definitive terms of the Blackstone Settlement. Similarly, Blackstone has advised
the Debtors that it reserves the right to oppose various aspects of the Plan if
the Debtors and Blackstone cannot reach agreement on the definitive terms of the
Blackstone Settlement. See "-- Blackstone Transactions -- Blackstone
Settlement."
BLACKSTONE SETTLEMENT
It is currently contemplated that Blackstone and the Debtors will enter
into a settlement and resolution of any and all claims, issues and disputes
between such parties relating to or involving Prime, Rose Hills or the
Reorganization Cases on substantially the following terms (the "Blackstone
Settlement"):
(a) In full satisfaction of its asserted Claims against TLGI and LGII,
Blackstone will receive distributions of New Common Stock under
Division A (TLGI) and Division B (LGII) of Class 9 in accordance
with the terms of the Plan having an estimated aggregate value of
$6.6 million as of the Effective Date. Blackstone will assert no
other Claims against the Debtors.
(b) On or prior to the Effective Date, LGII or Reorganized LGII and
Blackstone will enter into a purchase agreement (the "Blackstone
Purchase Agreement") pursuant to which, on the Effective Date,
LGII or Reorganized LGII will purchase from Blackstone, and
Blackstone will sell to LGII or Reorganized LGII, all common stock
of Rose Hills owned by Blackstone, in exchange for the issuance to
Blackstone of the New Unsecured Subordinated Note in an original
principal amount of $25 million.
(c) On the Effective Date, Reorganized LGII and certain of its
affiliates, on the one hand, and Blackstone, on the other hand,
will execute and deliver a mutual release (the "Blackstone
Release") pursuant to which each will, as of the Effective Date,
forever release, waive and discharge the other and affiliates
thereof from any claims, demands, rights or causes of action under
or in respect of the Prime Put/Call Agreement and the Rose Hills
Put/Call Agreement or otherwise relating to or involving Prime or
Rose Hills.
For a description of the anticipated terms of the New Unsecured Subordinated
Note, see "Securities To Be Issued Pursuant to the Plan and Other
Post-Reorganization Indebtedness -- New Unsecured Subordinated Note." Also,
for a description of certain indebtedness of Rose Hills, see "Securities To Be
Issued Pursuant to the Plan and Other Post-Reorganization Indebtedness -- Rose
Hills Indebtedness."
The Debtors have analyzed Blackstone's proofs of Claim and all other
potential issues between the parties relating to Prime and Rose Hills and have
determined that full and protracted litigation of the factual and legal issues
inherent in resolving these matters would be costly and could impair a prompt,
efficient and economic reorganization of the Debtors. Moreover, the ultimate
outcome of such litigation is uncertain, and there could be no assurance that
the Debtors would obtain any significant benefit from the pursuit of such
litigation. Accordingly, the Debtors believe that the resolution of these
claims, issues and disputes pursuant to the Blackstone Settlement is in the best
interests of their respective estates and creditors.
The terms of the Blackstone Settlement are subject to ongoing
discussions between the Debtors and Blackstone, and accordingly, such terms
remain subject to change, as well as execution and delivery of the definitive
Blackstone Settlement Documents.
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MICHIGAN CEMETERIES
Prior to the Petition Date, the Debtors transferred legal title to
approximately 28 cemeteries located in the State of Michigan (the "Michigan
Cemeteries") to three Michigan limited liability companies (the "LLCs") that, at
the time of the sale transactions, were owned and controlled by Hudson A. Mead
and since January 1998 have been owned and controlled by Craig R. Bush ("Bush"),
a former officer of LGII. Each of these cemetery purchase and sale transactions
was structured in the following general form:
- Pursuant to an asset purchase agreement, a subsidiary of LGII (the
"Seller") transferred legal title to its cemetery and other
related assets to one of the LLCs.
- Under the asset purchase agreement, the purchase price was payable
to the Seller as follows: (a) at least 10% in cash; and (b) the
remainder in the form of a 10-year subordinated promissory note
under which the payment of principal and interest is subordinated
and junior in right of payment to the prior payment in full of
secured loans made by Comerica Bank (the "Comerica Loans") to the
applicable LLC to finance amounts paid in connection with the
purchase and sale of the Michigan Cemeteries. The Comerica Loans
are secured by security interests in, among other things,
substantially all of the personal property assets of the LLCs.
- With respect to each cemetery purchase and sale transaction, the
parties entered into a sales agreement ("Sales Agreement") that
obligates the Seller to perform sales functions for the applicable
cemetery and make monthly payments to the LLC to cover payroll,
insurance and other costs, and to provide a specified rate of
return to the LLC.
- Under the Sales Agreement, all receipts from the cemetery
operations are to be deposited in operating bank accounts (the
"Operating Accounts") of the Sellers on a daily basis and then to
use such deposits to pay the applicable LLC certain amounts on a
monthly basis.
- The parties also entered into a separate right of first refusal
and option agreement, and LGII entered into a guaranty of all of
the Seller's obligations under the transaction documents.
- Pursuant to an "amending agreement," the LLCs and the selling
Loewen entities agreed that the benefits and burdens of operation
of the properties were for the account of the selling Loewen
entities and that the parties did not intend the transfer to
constitute a sale for tax purposes. Additionally, the parties
agreed that, to the extent that the Sales Agreement remains in
place with respect to a cemetery, the LLC is not required to make
any principal or interest payments on the relevant promissory
note.
Notwithstanding the provisions of the documents described above, the
Operating Accounts for the Michigan Cemeteries were opened in the names of the
LLCs, rather than in the names of the respective Sellers. Prior to the Petition
Date, the LLCs periodically paid net sales receipts, after deducting the
expenses and payments to which they were entitled under the documents, from the
Operating Accounts to the Debtors. After the Petition Date, however, the LLCs
stopped the transfer of funds from the Operating Accounts to the Debtors. The
Debtors were advised by the LLCs that they took this action to ensure that
sufficient funds were available to satisfy certain obligations, including trust
obligations under Michigan law, for which the LLCs would be liable if the
Debtors failed to pay such obligations. In addition, the LLCs and Bush expressed
concerns regarding certain disputes involving third parties with respect to
which the LLCs or Bush were seeking indemnification.
In February 2000, to address these and certain other matters relating
to the continued operation of the Michigan Cemeteries, the Debtors, the LLCs and
Bush agreed to a compromise and settlement (the "Michigan Settlement"), subject
to the approval of the Bankruptcy Court. The Michigan Settlement was approved by
the Bankruptcy Court on March 23, 2000 and is in the process of being
implemented by the parties. The primary terms of the Michigan Settlement are as
follows:
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- Upon the effectiveness of the Michigan Settlement, the LLCs were
to cause the entire balances in the current Operating Accounts to
be transferred to bank accounts ("New Operating Accounts")
established in the applicable Debtors' names. Thereafter, all
collections, cash, checks and other monies derived from the sale
of death care services and merchandise are to be deposited in the
New Operating Accounts. Funds deposited in the New Operating
Accounts are to be transferred by the Debtors to a central account
(the "New Central Account") at Comerica Bank. The Operating
Account balances were to be transferred free and clear of liens,
except that the Debtors granted the LLCs an automatically
perfected first priority lien in the New Operating Accounts and
the New Central Account solely to secure the Debtors' monthly
payment obligations to the LLCs under the Sales Agreements. Upon
the effectiveness of the Michigan Settlement, that lien was deemed
assigned by the LLCs to Comerica Bank.
- Upon the effectiveness of the Michigan Settlement, the LLCs were
to pay to the Debtors a cash amount equal to all amounts to which
the Debtors were entitled under the Michigan Cemeteries
transaction documents for the period from the Petition Date
through the date on which the operating account balances were
transferred to the New Operating Accounts, net of (a) all payables
paid by the LLCs to or on behalf of the Debtors and (b) the
monthly payments due to the LLCs for the period. The Debtors and
the LLCs agreed that the cash amount to be paid upon the
effectiveness of the Michigan Settlement would be $2,573,581.25,
which amount was subject to adjustment pursuant to reconciliation
procedures set forth in the settlement documentation.
- Provided that the LLCs have fully satisfied their obligations with
respect to the Operating Accounts and payment of cash amounts, as
described above, the Debtors agreed to indemnify Bush or the LLCs,
including their respective officers, directors, employees,
stockholders, affiliates and agents, with respect to the following
matters: (a) claims arising under certain construction contracts
with Pumford Construction Company; (b) the action captioned
Letherer v. Alger Group, L.L.C., Case No. 99-29046-CK (Cir. Ct.
Saginaw Cty., Mich.); (c) claims that may be asserted by William
R. Eldridge under a covenant not to compete and a note entered
into by the Debtors; and (d) certain other claims and potential
claims identified by Bush to the Debtors. In addition, pending the
assumption or rejection of the Sales Agreements, the Debtors
agreed to perform their contractual indemnification obligations
under those agreements.
The Debtors believe that, based on the Michigan Cemeteries transaction
documents, the Sellers are the equitable owners of the Michigan Cemeteries. The
Debtors have concluded that a sale of the Michigan Cemeteries to a third party
is in the best interests of their estates and, to this end, the Debtors have
attempted to initiate discussions with Bush to effectuate a return of bare legal
title to these assets to the Debtors. Bush has not satisfactorily responded to
the Debtors' efforts consensually to reunite legal title to the properties with
the equitable title thereto; accordingly, in September 2000, the Debtors
commenced an adversary providing against the LLCs seeking a judgment: (a)
declaring that the Sellers are the equitable owners of the Michigan Cemeteries;
(b) directing the LLCs to turn over legal title to the Michigan Cemeteries to
the Sellers by transferring legal title into a trust or escrow for the Sellers'
benefit or, in the alternative, avoiding the Cemetery Transactions as fraudulent
conveyances; and (c) requiring the LLCs to furnish an accounting of the costs
and expenses for which they were reimbursed by the Sellers and to refund to the
Sellers the amount of any overpayment on such costs and expenses.
The LLCs have filed a motion to dismiss the Sellers' complaint. The
Debtors have not yet responded to this motion. Notwithstanding the commencement
of this adversary proceeding, the Debtors have continued to pursue discussions
with Bush in an effort to resolve any differences between the Debtors and Bush
on a consensual basis. At this time, the Debtors are unable to predict the
outcome of the litigation or any discussions with Bush.
WEST TEXAS
LGII owns 85% of DSP General Partner, Inc. and Directors Succession
Planning, Inc. (collectively, the "West Texas Entities"). The remaining 15%
interest in each of the West Texas Entities is owned by Directors Investment
Group, Inc. (the "West Texas Partner"), an entity in which no Debtor has a
direct or indirect ownership
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interest. The West Texas Entities own, directly or indirectly, approximately 52
funeral homes and five cemeteries, together with certain related assets
(collectively, the "West Texas Businesses").
Pursuant to the documents and agreements presently governing the West
Texas Entities, LGII is entitled to nominate three of the five directors of the
West Texas Entities and the West Texas Partner is entitled to nominate and elect
two of the five directors thereof. Certain actions, including acquisitions and
dispositions of funeral home and cemetery entities, issuances of equity and
other fundamental actions, cannot be taken without a four-fifths vote of the
directors. Consequently, as presently constituted, the West Texas Partner may
have a veto right with respect to certain fundamental matters relating to the
West Texas Businesses. In addition, an affiliate of the West Texas Partner,
pursuant to a management agreement, dated as of September 1, 1995, manages the
funeral homes included in the West Texas Businesses in exchange for a management
fee of between 8% and 9% of income before interest on long-term debt,
depreciation, income taxes, management fees and administrative fees paid to
LGII. The management agreement can be terminated without cause on one year
written notice.
In addition to the foregoing, LGII and the West Texas Partner are
parties to a shareholder agreement, dated as of March 1, 1993 (the "West Texas
Shareholder Agreement"), governing their relationship with respect to the West
Texas Entities. Under the West Texas Shareholder Agreement, the West Texas
Partner has an option to require LGII to purchase the interests of the West
Texas Partner in the West Texas Entities for a formula price (but not less than
the capital contribution of the West Texas Partner) approximating 15% of the
result determined by subtracting the long-term debt of the West Texas Entities
from the product of 5.26 times earnings before interest, depreciation,
amortization, income taxes, extraordinary and unusual items, certain capital
gains and losses and certain management fees. The West Texas Partner also has
(a) a right to buy LGII's interest in the West Texas Entities at a formula price
if LGII or the West Texas Entities are acquired by Service Corporation
International and (b) a right of first refusal with respect to the sale of any
funeral home included in the West Texas Businesses. Finally, an entity
affiliated with the West Texas Partner has been given a long-term right to sell
preneed insurance to the West Texas Businesses and to funeral homes of LGII in
Texas and certain other areas.
The Debtors have initiated discussions with the West Texas Partner with
respect to a possible restructuring of the relationships between them. To date,
no agreement has resulted from these discussions. The Debtors anticipate that,
at the time of the Filing of this Disclosure Statement or shortly thereafter,
they will have Filed a motion to reject, pursuant to section 365 of the
Bankruptcy Code, the West Texas Shareholder Agreement and the contract granting
the entity affiliated with the West Texas Partner the right to sell preneed
insurance to the Debtors' businesses.
POST-PETITION ASSET DISPOSITION PROGRAM
As of April 30, 1999, TLGI operated approximately 1,116 funeral homes
and 429 cemeteries in North America. The Debtors' management, in connection with
the development of the Debtors' business plan, identified approximately 200
funeral homes and 170 cemeteries (collectively, the "Disposition Properties")
that did not satisfy the criteria for ongoing business operations under its
business plan. In late 1999, as part of the development of their business plan,
the Debtors conducted a review of each of their operating locations to determine
the best use of each location on a going-forward basis. In identifying the
Disposition Properties, the Debtors considered, among other things, whether the
optimal value of each location would be achieved by having the Debtors continue
to operate the business or by having the Debtors market the location to bidders
who may be better suited to operate the particular business based on geographic
location and other similar factors. The Debtors and their financial advisors
divided the Disposition Properties into 28 groups of funeral homes and
cemeteries by geographic location to attempt to market the properties so as to
receive the highest and best bids for all of the Disposition Properties.
These marketing efforts have been conducted under the Bankruptcy
Court's Order (A) Approving Global Bid Procedures Program and (B) Authorizing
Debtors to Grant Pre-Approved Bid Protections to Prospective Purchasers dated
January 21, 2000 (the "Bid Procedures Order"). The Bid Procedures Order
approved: (a) the procedures governing the disposition program (including
submission of information packages to potential bidders, due diligence,
selection of bidders, negotiation and execution of asset purchase agreements,
"good faith" deposits, treatment of executory agreements, filing of sales
motions and closing of the transactions); (b) bidding procedures designed to
obtain the highest price for Disposition Properties; (c) economic protections
for certain initial bidders
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(including breakup fees and reimbursement of expenses); and (d) an auction
process for Disposition Properties being sold pursuant to a sales motion.
As of November 13, 2000, the Bankruptcy Court had approved the sale of
the assets of 149 Disposition Properties involving aggregate sales proceeds of
approximately $48 million and were engaged in active negotiations for the sale
of the assets of 102 Disposition Properties for anticipated aggregate sales
proceeds of approximately $56 million.
In addition, the Debtors have sold certain other locations, or selected
assets of certain locations, to buyers who offered to purchase the assets of
"nonessential" locations on an "as is, where is" basis for a price that the
Debtors believed to be reasonable pursuant to the Bankruptcy Court's Order
Establishing Procedures for Transactions Involving Certain Miscellaneous Assets
dated August 25, 1999 (the "Miscellaneous Assets Order"). As of November 13,
2000, the Debtors had sold the assets of ten funeral home properties, three of
which were sold on a going concern basis, in a total of eight transactions under
the Miscellaneous Assets Order, for aggregate sales proceeds of approximately $5
million.
THE CCAA PROCEEDINGS
On June 1, 1999, TLGI together with the CCAA Debtors filed for, and
were granted, protection under the CCAA. On June 1, 1999, the Canadian Court
granted an order (the "Initial Order"), which, among other things: (a) stayed
all proceedings against TLGI and the CCAA Debtors; (b) approved a procedural
protocol for the coordination of the CCAA Proceedings and the Reorganization
Cases (see "Operations During The Reorganization Cases -- First Day Relief --
The Protocol Motion"); and (c) authorized the CCAA Debtors to pay all their
pre-Petition Date indebtedness to a maximum aggregate amount of Cdn. $12
million.
The CCAA Debtors have concluded a claims process in the CCAA
Proceedings. As a result of the fact that the CCAA Debtors were authorized by
the Initial Order to pay pre-Petition Date indebtedness, a relatively small
number of proof of claims were filed against them. With the exception of the
guaranty obligations related to the CTA, all material prepetition claims against
the CCAA Debtors have been settled or satisfied. The debt under the CTA is
guaranteed by approximately 35 of the CCAA Debtors, and the outstanding capital
stock of the remaining CCAA Debtors has been pledged as security under the CTA.
The CTA Note Claims will be satisfied and discharged by distributions provided
for in the Plan and, as a result of such distributions in respect of the CTA
Note Claims, the guaranty obligations related to the CTA will be fully settled
or satisfied as provided in the CCAA Order (See "Overview of the Plan -- The
CCAA Order").
A separate Canadian claims process was commenced in the CCAA
Proceedings to identify those Canadian claims against TLGI, if any, which are
not addressed or resolved in the chapter 11 cases or which should more properly
be dealt with by the Canadian Court. A deadline of October 13, 2000 was
established for entities to file any such claims against TLGI in the CCAA
Proceedings. Only five claims were filed against TLGI by the deadline. TLGI
filed notices of disallowance in respect of four of these claims on the basis
that, among other things, the claims are more properly adjudicated in the United
States. Only one Creditor has disputed a notice of disallowance.
TLGI and the CCAA Debtors do not expect to file a separate plan of
reorganization under the CCAA because there should be no significant claims
against TLGI or the CCAA Debtors other than those that will be settled or
satisfied as provided in the Plan and CCAA Order.
EXCLUSIVITY
Under section 1121 of the Bankruptcy Code, a debtor has the exclusive
right to (a) file a plan of reorganization during the first 120 days of its
chapter 11 case and (b) solicit acceptances of such a plan during the first 180
days of the case. These periods (the "Exclusive Periods") may be extended for
"cause." In June 2000, the Debtors, having previously obtained extensions of the
Exclusive Periods through June 30, 2000 and August 31, 2000, respectively, Filed
a motion (the "Exclusivity Motion") seeking further six-month extensions of the
Exclusive Periods through December 31, 2000 and February 28, 2001, respectively.
Although the Creditors'
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Committee supported the Exclusivity Motion, one party, Blackstone, objected to
the motion. After conducting an evidentiary hearing on the Exclusivity Motion on
June 20, 2000, the Bankruptcy Court overruled Blackstone's objection to the
motion and extended the Exclusive Periods through December 31, 2000 and February
28, 2001, respectively.
COLLATERAL TRUST AGREEMENT ISSUES;
RECOVERY ACTIONS; AND OTHER LEGAL PROCEEDINGS
COLLATERAL TRUST AGREEMENT ISSUES
BACKGROUND
Five years before executing the CTA, TLGI and LGII executed a trust
deed dated October 1, 1991 (the "1991 Trust Deed"). The 1991 Trust Deed provided
collateral security for certain notes (the "Prior Notes") and for an October 1,
1991 revolving credit facility of up to $100 million (the "1991 Revolver"),
executed among TLGI and LGII, as borrowers, and a syndicate of U.S. and Canadian
banks, as lenders. Under the 1991 Trust Deed, the Prior Notes and the 1991
Revolver were secured equally and ratably by a common security package that was
comprised primarily of a security interest in all of TLGI's assets, LGII's
accounts receivable, the rights of LGII under voting trusts and share option
arrangements with respect to certain U.S. subsidiaries and a pledge of the stock
held by TLGI, LGII and TLGI's U.S. subsidiaries (with certain exceptions) and
certain other subsidiaries. The 1991 Trust Deed provided that the trustee would
concurrently release the security on behalf of the lenders under the 1991
Revolver and the holders of the Prior Notes if all of the lenders under the 1991
Revolver agreed to release the security or upon notice that the 1991 Revolver
had been paid in full. Following the issuance of the Series D Notes in an
original principal amount of $60 million in September 1993, the 1991 Trust Deed
was amended to secure those notes.
On February 16, 1994, TLGI and LGII repaid the 1991 Revolver in full
with the proceeds of a $400 million revolving credit loan from a bank group led
by First Chicago Bank (the "First Chicago Bank Group"), and the collateral was
released under the 1991 Trust Deed. After the 1994 refinancing with the First
Chicago Bank Group, TLGI had virtually no secured debt. Thereafter, in February
1994, the Series E Notes in the original principal amount of $50 million were
issued.
As indicated above, in November 1995, certain of the Debtors sustained
an adverse judgment of $500 million in the O'Keefe litigation. See "Certain
Events Preceding the Debtors' Chapter 11 Filings -- Mississippi Litigation."
TLGI and LGII had a number of unsecured debt instruments outstanding at this
time. The holders of the outstanding debt instruments took the position that the
O'Keefe judgment constituted a default event. As a result, waivers were sought
and obtained under these outstanding debt instruments. The waivers granted in
connection with the First Chicago Bank Group $400 million revolving credit
facility and the MEIP Credit Facility required TLGI to provide collateral by May
31, 1996. The other outstanding debt instruments contained "negative pledge" and
"equal and ratable lien" clauses that required that, if TLGI or LGII granted
collateral security to any existing or future creditor, liens likewise had to be
granted to those holders of outstanding debt placing such debt on a pari passu
basis with the other secured debt. As a result, following the O'Keefe judgment
and later settlement of that litigation, TLGI and LGII could not obtain
additional financing without retiring or securing all of these outstanding debt
instruments. See "Certain Events Preceding the Debtors' Chapter 11 Filings."
On March 20, 1996, LGII issued $250 million of the Series 1 Notes and
$125 million of the Series 2 Notes. These Notes were guaranteed by TLGI and were
issued with the stated condition that, if TLGI or LGII granted collateral
security to any institutional lender, then the Series 1 Notes and the Series 2
Notes must be collateralized on a pari passu basis.
The proceeds from the Series 1 Notes and the Series 2 Notes were not
sufficient to fund TLGI's business plan. As a result, in May 1996, TLGI and LGII
obtained a $750 million credit facility from a syndicate of banks led by the
Bank of Montreal (the "BMO Revolving Credit Facility"). Certain of the proceeds
of the BMO Revolving
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Credit Facility were used to pay off the First Chicago Bank Group $400 million
revolving credit facility. The lenders under the BMO Revolving Credit Facility
required that such facility be secured by:
- all of LGII's right, title and interest in and to all rights to
receive payment under or in respect of accounts, contracts,
contractual rights, chattel paper, documents, instruments and
general intangibles;
- a pledge of the shares of capital stock of substantially all of
the subsidiaries in which TLGI directly or indirectly held more
than 50% voting or economic interest; and
- a guarantee by each subsidiary that pledged stock.
The CTA was established as the mechanism to secure the BMO Revolving
Credit Facility and the outstanding indebtedness, present and future, that was
entitled to share equally and ratably in that security. The CTA designated
indebtedness secured under it as Class A, B, C or D Secured Indebtedness. When
the CTA went into effect, "Class A Secured Indebtedness" consisted of the BMO
Revolving Credit Facility, the MEIP Credit Facility and certain other
subsequently retired credit facilities. "Class B Secured Indebtedness" consisted
of the Prior Notes, the Series D Notes and the Series E Notes. "Class C Secured
Indebtedness" consisted of the Series 1 and 2 Notes issued in March 1996. "Class
D Secured Indebtedness" consisted of certain intercompany indebtedness; the lien
securing the Class D Secured Indebtedness was junior and subordinate to the lien
securing the other classes of Secured Indebtedness.
The CTA contemplates that the benefits of pledges and guaranties made
thereunder could inure not only to the holders of indebtedness existing on the
date of the CTA, but also to holders of subsequently issued indebtedness. In
this regard, the CTA refers to certain registration procedures for later-issued
indebtedness that involve the execution and delivery of "Additional Secured
Indebtedness Registration Statements" to the CTA Trustee, acceptance of those
statements by the CTA Trustee and registration of the statements in a "Secured
Indebtedness Register."
After the date of the CTA, TLGI and LGII issued six additional series
of indebtedness in four separate transactions: (a) the Series 3 and 4 Notes,
issued October 1, 1996; (b) the Series 5 Notes, issued September 26, 1997; (c)
the Series 6 and 7 Notes, issued May 28, 1998; and (d) the PATS Notes, issued
September 30, 1997.
TLGI and LGII and the other parties involved in these transactions
intended each additional series to be entitled to the benefits of the CTA. Each
of the disclosure documents used in connection with the marketing and sale of
the Series 3 and 4 Notes, the Series 6 and 7 Notes and the PATS Notes states
that such securities will be secured under the CTA. The cover page of each such
disclosure document contains similar language regarding collateral. As an
example, the disclosure document for the Series 3 and 4 Notes states:
The Senior Notes and the Guarantees will be senior obligations of
LGII and [TLGI], respectively, and will rank pari passu in right
of payment with all other senior indebtedness of LGII and [TLGI],
respectively. Because other senior indebtedness is secured, the
Senior Notes, when issued, will be secured as defined herein.
This intention to secure these securities is reiterated other times in each of
the disclosure documents. In addition, the Boards of Directors of TLGI and LGII
adopted resolutions authorizing each series of indebtedness and designating each
series as secured indebtedness under the CTA. Further, each of TLGI and LGII,
together with the Indenture Trustee for each series, executed Additional Secured
Indebtedness Registration Statements for each series. These fully executed
Additional Secured Indebtedness Registration Statements were in place at the
closings of the sale of the Series 3 and 4 Notes and the PATS Notes and, in the
case of the Series 6 and 7 Notes, were delivered to the underwriter's counsel
the day after closing of the sale of such notes. Copies of the executed
Additional Secured Indebtedness Registration Statements are included in each of
the relevant sets of closing documents. After the issuance of each series of
indebtedness intended to be secured under the CTA, TLGI consistently referred to
the
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notes as secured under the CTA in each of its public securities filings. As an
example, in its Form 10-K for the fiscal year ended December 31, 1998, TLGI
stated:
In 1996, [TLGI], LGII and their senior lenders entered into a
collateral trust agreement pursuant to which the senior lenders
share certain collateral and guarantees on a pari passu basis (the
"Collateral Trust Agreement"). . . . The security is held by the
trustee for the equal and ratable benefit of the senior lending
group. This senior lending group consists principally of the
lenders under [the Series 1 through 7 Notes, the Series D and E
Notes, the BMO Revolving Credit Agreement, the MEIP Credit
Facility and the PATS Notes], as well as holders of certain
letters of credit. . . . At December 31, 1998, the indebtedness
owed to the senior lending group subject to the Collateral Trust
Agreement, including holders of certain letters of credit,
aggregated approximately $2.1 billion.
The prospectus, dated May 29, 1997, prepared and disseminated in connection with
TLGI's offering of 12,000,000 common shares, similarly reported that senior
obligations, including at that time the Series 3 and 4 Notes, were secured under
the CTA.
The MEIP Credit Facility and the BMO Revolving Credit Facility
(together, the "Credit Agreements") explicitly acknowledged and allowed for
additional secured debt under the CTA. The relevant covenants in the Credit
Agreements are identical and indicate that the parties contemplated that
additional debt would be secured and guaranteed under the CTA. For example, the
Credit Agreements defined "Secured Parties" as the lenders, the persons
specified on Schedule 3 of the Credit Agreements, and "all other Persons [as
designated by the Borrowers] who from time to time hold Senior Obligations which
are secured pursuant to the [CTA]" and the definition of "Senior Obligations"
recognized that debt, other than the indebtedness described on Schedule 3, was
not secured except as provided in the CTA.
Moreover, later amendments to the Credit Agreements expressly
acknowledge the senior secured status of the Series 3 and 4 Notes and the PATS
Notes. On March 27, 1998, the BMO Revolving Credit Facility was amended to
reduce the maximum aggregate outstanding principal amount of the commitments and
for other reasons. The Series 3 and 4 Notes and the PATS Notes were specifically
listed as "Senior Obligations" (with the Series 6 and 7 Notes having not yet
been issued) and the amendment expressly acknowledges that the collateral
pledged in respect of the BMO Revolving Credit Facility would also secure these
notes. Similarly, the MEIP Credit Facility was amended on May 1, 1998 and the
amendment likewise acknowledges that the collateral for the MEIP obligation
would also secure the Series 3 and 4 Notes and the PATS Notes (again with the
Series 6 and 7 Notes having not, as of that time, been issued).
In addition to the covenants, both Credit Agreements contained
reporting requirements that put the lenders on notice of all outstanding debt,
including the debt in question. The Credit Agreements required TLGI and LGII to
deliver to the lenders annual audited reports and quarterly unaudited reports,
as well as all other reports and documents filed with the SEC, the Ontario
Securities Commission, The Toronto Stock Exchange and the British Columbia
Securities Commission. The Debtors believe TLGI and LGII complied with the
Credit Agreements' reporting requirements throughout the period preceding the
Petition Date.
The holders of the Series 1 and 2 Notes were also informed that, if
collateral was provided to secure such notes (because it was provided in respect
of the BMO Revolving Credit Facility), the notes would share that collateral
pari passu with other senior indebtedness, which could include additional
indebtedness. This information was disclosed in the disclosure documents used in
connection with the marketing and sale of the Series 1 and 2 Notes.
Additionally, State Street Bank and Trust Company, formerly Fleet National Bank
("State Street"), was the Indenture Trustee for the Series 1 and 2 Notes, as
well as the Series 3 and 4 Notes, the Series 6 and 7 Notes and the PATS Notes.
State Street's representative acted on State Street's behalf in all four
securities transactions, and State Street was represented by the same law firm
in each case. State Street has also filed proofs of Claims in the Debtors'
Reorganization Cases on behalf of the Series 1 and 2 Notes, the Series 3 and 4
Notes, the Series 6 and 7 Notes and the PATS Notes. The disclosure documents
used in connection with the marketing and sale of the Series 5 Notes
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similarly disclosed that the Series 5 Notes would be secured on a pari passu
basis with other senior debt and that such other secured debt included the
Series 3 and 4 Notes and could include additional debt.
The original proof of Claim filed by the CTA Trustee in LGII's
Reorganization Case, which purported to attach all of the Additional Secured
Indebtedness Registration Statements that were delivered to the CTA Trustee,
included no registration statements for the Series 6 and 7 Notes or the PATS
Notes, and included the registration statement with the incorrect outstanding
principal balance for the Series 3 and 4 Notes. The CTA Trustee has since Filed
a motion to amend its proof of claim to include the correct registration
statement for the Series 3 and 4 Notes and the registration statements for the
Series 6 and 7 Notes and the PATS Notes. This motion has not been served on
creditors and is not being pursued by the CTA Trustee at the present time.
Thereafter, in April 2000, TLGI and LGII announced that there was
uncertainty as to whether the holders of Claims under the Series 3 and 4 Notes,
the Series 6 and 7 Notes and the PATS Notes (collectively, the "Subject Debt")
were entitled to the benefits of the CTA, including the benefit of secured
status under the CTA and the guaranties granted by the Pledgors thereunder.
On September 27, 2000, the CTA Trustee commenced an adversary
proceeding in Bankruptcy Court (the "CTA Proceeding") against various Debtors,
the Indenture Trustees, the Creditors' Committee, certain holders of CTA Note
Claims and certain as yet unnamed individuals who may be affected or have an
interest in resolution of the CTA matters. Pursuant to the CTA Proceeding, the
CTA Trustee seeks a declaratory judgment that the Subject Debt constitutes
additional secured indebtedness subject to a valid and perfected security
interest under the CTA.
On or about October 18, 2000, HSBC Bank USA, the successor Indenture
Trustee for the Series 1 and 2 Notes, filed a motion to intervene in the CTA
Proceeding and for an extension of time to answer the CTA Trustee's complaint.
On or about October 20, 2000, Bank of Montreal, as agent under the BMO Revolving
Credit Facility, filed an answer, and on or about October 26, 2000, Wachovia
Bank, N.A., as agent under the MEIP Credit Agreement, filed an answer,
crossclaims and counterclaim. Each of Bank of Montreal and Wachovia Bank, N.A.
denies that the Subject Debt is entitled to the benefits of the CTA, and
Wachovia Bank, N.A. seeks the entry of a judgment declaring that the Subject
Debt is not entitled to share in the benefits of the collateral under the CTA.
On or about October 30, 2000, the Creditors' Committee filed an answer,
counterclaim and crossclaim and a motion to join Trust Company of Bank of
Montreal, Indenture Trustee for the Series 5 Notes, as an additional crossclaim
defendant. The Creditors' Committee denies that the Subject Debt is entitled to
the benefits of the CTA and seeks declarations that: (a) the Subject Debt is not
entitled to participate in the benefits of the CTA Trustee's security interest;
(b) the designation of the Series 5 Notes as additional secured indebtedness
under the CTA and the execution by TLGI and LGII of the Additional Secured
Indebtedness Registration Statement relating to the Series 5 Notes are subject
to rescission and TLGI and LGII will be in breach of their fiduciary duties if
they fail to seek rescission; (c) the Subject Debt is not guaranteed by the
Pledgors; and (d) if the designation of the Series 5 Notes as additional secured
indebtedness and the execution of the Additional Secured Indebtedness
Registration Statements relating to the Series 5 Notes are rescinded, the Series
5 Notes are not guaranteed by the Pledgors.
On or about November 2, 2000, the CTA Trustee filed a motion to stay
the CTA Proceeding pending Confirmation of the Plan. The Debtors and certain
noteholders filed joinders in the motion. The stay motion is scheduled for
hearing on November 14, 2000. At this time, the Debtors are unable to predict
the outcome of this litigation or its potential effect on the Plan.
FACTUAL INVESTIGATION
The Debtors' bankruptcy counsel, Jones, Day, Reavis & Pogue ("Jones
Day"), investigated the circumstances underlying the absence from the CTA
Trustee's files of any Additional Secured Indebtedness Registration Statements
for the Series 6 and 7 Notes and the PATS Notes and the misstatement of the
outstanding principal amount on the Additional Secured Indebtedness Registration
Statement for the Series 3 and 4 Notes. A memorandum discussing that
investigation is attached as Exhibit V to this Disclosure Statement. The
investigation included informal interviews with the following:
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- counsel for TLGI and LGII who participated in the drafting of the
CTA;
- counsel for TLGI and LGII who represented TLGI and LGII in the
issuance of the Subject Debt;
- the Indenture Trustee for the Subject Debt;
- counsel for the underwriters on the Series 3 and 4 Notes and the
Series 6 and 7 Notes; and
- counsel for the underwriters on the PATS Notes.
Some of those interviewed also informally provided Jones Day with copies of
various documents involved in the transactions. These documents included drafts
of the CTA, correspondence related to the transactions and closing materials.
Jones Day also took testimony from three representatives of the CTA
Trustee in a Bankruptcy Rule 2004 examination. Pursuant to the court order
authorizing the 2004 examination, Jones Day received from the CTA Trustee and
its counsel documents responsive to a formal document request.
The factual investigation has revealed that for the Series 6 and 7
Notes and for the PATS Notes, no party recalls actually having delivered (and no
party claims to have delivered) the executed Additional Secured Indebtedness
Registration Statements or any drafts thereof to the CTA Trustee or its counsel.
For the Series 3 and 4 Notes, the factual investigation revealed that a draft of
the Additional Secured Indebtedness Registration Statement that correctly stated
the original principal amount to be $350 million but incorrectly listed an
outstanding principal amount of $0 was provided to the CTA Trustee prior to the
closing of that transaction. Revised drafts of the Additional Secured
Indebtedness Registration Statement reflecting the correct outstanding principal
balance were subsequently delivered to counsel for the CTA Trustee prior to the
closing. Although an Additional Secured Indebtedness Registration Statement
reflecting the correct outstanding principal balance is contained in the book of
closing documents, it did not make its way into the CTA Trustee's retained
files.
The factual investigation further revealed that, although the CTA
requires the CTA Trustee to enter the information from Additional Secured
Indebtedness Registration Statements into a Secured Indebtedness Register, the
CTA Trustee instead kept copies of those Additional Secured Indebtedness
Registration Statements received by it and did not keep an independent
Additional Secured Indebtedness Register. In addition, while any representative
of a secured party had the right under the CTA to examine the Secured
Indebtedness Register, no party did so before June 1, 1999, the date the Debtors
Filed for bankruptcy protection.
CREDITOR SETTLEMENT NEGOTIATIONS
The uncertainty surrounding the rights of the holders of the Subject
Debt (the "Subject Debt Holders") under the CTA threatened to delay the plan of
reorganization process in the Reorganization Cases. The primary source of this
potential delay was disagreement among the entities potentially entitled to the
benefits of the CTA regarding the treatment of the Subject Debt under any plan
or plans of reorganization proposed by the Debtors. In particular, certain of
the Subject Debt Holders asserted that they were entitled to treatment as
secured creditors on account of the CTA, and certain of the participants in the
BMO Revolving Credit Facility and the other debt instruments subject to the CTA
(collectively, the "Other CTA Debt Holders") strongly opposed that position.
To avoid a stalemate between the parties and keep the Debtors' plan
efforts moving forward, the Debtors, together with the Creditors' Committee,
initiated discussions with counsel to the Subject Debt Holders, on the one hand,
and counsel to the Other CTA Debt Holders, on the other hand, in July 2000. The
purpose of these discussions was two-fold. First, the Debtors wanted to provide
the parties (after the execution of appropriate confidentiality agreements) with
certain information, including non-public information regarding the CTA,
valuations of the Debtors as reorganized, related business plan information,
valuation and capitalization analyses and projections and claims recovery
analyses, to assist the parties in evaluating the Subject Debt and the Debtors'
business operations. Second, the Debtors wanted to involve the parties in the
negotiation of a consensual plan or plans of reorganization that would, among
other things, resolve the issues surrounding the Subject Debt.
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The participants in these initial discussions included counsel to
Angelo Gordon & Co.; Cerberus Capital Management; Franklin Mutual Advisers, LLP;
GSCP Recovery, Inc.; Murray Capital Corp.; Oaktree Capital Management LLC; and
U.S. Bank National Association (an Indenture Trustee) of the Subject Debt
Holders and counsel to Bank of Montreal; Morgens, Waterfall, Vintiadis &
Company, Inc.; Teachers Insurance and Annuity Association of America; Trust
Company of Bank of Montreal (an Indenture Trustee); and Wachovia Bank, N.A. of
the Other CTA Debt Holders. As part of these initial discussions: (a)
Wasserstein Perella & Co., Inc., ("Wasserstein") the Debtors' investment banker,
made a presentation regarding the Reorganized Debtors' valuation and proposed
capitalization (the "Capitalization Evaluation"); (b) Zolfo Cooper, LLC, the
Debtors' restructuring accountants, made a presentation regarding the results of
its claims recovery analysis for each of the Debtors (the "Claims Analysis");
and (c) Jones Day made a presentation regarding an advocate's assessment of the
issues surrounding the Subject Debt (the "CTA Issues Analysis").
After these initial discussions with counsel, it became apparent that
the principals of the Subject Debt Holders and the Other CTA Debt Holders needed
to be involved directly in the discussions. Accordingly, certain of the Subject
Debt Holders and the Other CTA Debt Holders agreed to become restricted (i.e.,
subject to trade restrictions with respect to their respective interests in the
Debtors) for a limited time period and executed confidentiality agreements with
the Debtors in September 2000. To encourage a full and open discussion of the
issues among the parties, the Debtors provided substantial information to all
constituencies. In particular, the Debtors provided these parties with updated
versions of the Capitalization Evaluation and the Claims Analysis and with a
whitepaper prepared by Jones Day, which is attached as Exhibit V, that
substantially expanded the CTA Issues Analysis. The Debtors also assisted the
Subject Debt Holders and the Other CTA Debt Holders in performing significant
due diligence with respect to all of these issues.
Simultaneously with their discussions with the Subject Debt Holders and
the Other CTA Debt Holders, the Debtors commenced discussions with Blackstone,
allegedly the Debtors' largest unsecured creditor, regarding plan-related issues
including the Subject Debt. The Debtors provided Blackstone with, among other
things, the Capitalization Evaluation, the Claims Analysis and the whitepaper
regarding the CTA Issues Analysis. As indicated above, it is currently
contemplated that the Debtors and Blackstone will enter into the Blackstone
Settlement. See "Operations During the Reorganization Cases -- Blackstone
Transactions -- Blackstone Settlement."
Having provided all constituencies with the relevant information, the
Debtors commenced negotiations with the Subject Debt Holders, the Other CTA Debt
Holders and the Creditors' Committee regarding a restructuring agreement,
including a settlement of the issues surrounding the Subject Debt and a
resolution of other outstanding business and Claim issues. As part of these
discussions, the Debtors and the Creditors' Committee made their Professionals
available to address issues raised by the Subject Debt Holders and the Other CTA
Debt Holders relating to, among other things, the Debtors' reorganization
efforts, the Capitalization Evaluation and the Claims Analysis. The Debtors also
facilitated and participated in several meetings with the Subject Debt Holders,
the Other CTA Debt Holders and the Creditors' Committee regarding the terms of
any plan or plans of reorganization filed by the Debtors. As of the date of this
Disclosure Statement, although a consensus has been reached on some of the
issues relevant to the Plan, the various constituencies have been unable to
reach a consensual resolution of all of the issues.
Despite the constituencies' inability to structure a global settlement
of the issues, the Debtors agreed with certain of the Subject Debt Holders
regarding the treatment of the Subject Debt under, and certain other terms of,
any plan or plans of reorganization filed by the Debtors. The Plan treats the
Subject Debt as covered by the CTA, pari passu with all other CTA Note Claims,
because the Debtors believe that, absent a settlement, this is the most likely
outcome of the dispute regarding the CTA Issues.
RECOVERY ACTIONS
INTRODUCTION
A number of transactions occurred prior to the Petition Date that the
Debtors believe may have given rise to claims (collectively, "Recovery
Actions"), including preference actions, fraudulent conveyance actions, rights
of
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setoff and other claims or causes of action under sections 510, 544, 547, 548,
549, 550 and 553 of the Bankruptcy Code and other applicable bankruptcy or
non-bankruptcy law.
PREFERENCE CLAIMS
Overview. Under sections 547 and 550 of the Bankruptcy Code, a debtor
may seek to avoid and recover certain prepetition payments and other transfers
made by the debtor to or for the benefit of a creditor in respect of an
antecedent debt, if such transfer (a) was made when the debtor was insolvent and
(b) enabled the creditor to receive more than it would receive in a hypothetical
liquidation of the debtor in a chapter 7 where the transfer had not been made.
Transfers made to a creditor that was not an "insider" of the debtor are subject
to these provisions generally only if the payment was made within 90 days prior
to the debtor's filing of a petition under chapter 11. Under section 547,
certain defenses, in addition to the solvency of the debtor at the time of the
transfer and the lack of preferential effect of the transfer, are available to a
creditor from which a preference recovery is sought. Among other defenses, a
debtor may not recover a payment to the extent such creditor subsequently gave
new value to the debtor on account of which the debtor did not, among other
things, make an otherwise unavoidable transfer to or for the benefit of the
creditor (the "New Value Defense"). A debtor may not recover a payment to the
extent such payment was part of a substantially contemporaneous exchange between
the debtor and the creditor for new value given to the debtor (the
"Contemporaneous Exchange Defense"). Further, a debtor may not recover a payment
if such payment was made, and the related obligation was incurred, in the
ordinary course of business of both the debtor and the creditor (the "Ordinary
Course Defense"). The debtor has the initial burden of proof in demonstrating
the existence of all the elements of a preference, including its insolvency, at
the time of the payment. The creditor has the initial burden of proof as to the
aforementioned defenses.
The Northeast Disposition. As described in "Certain Events Preceding
The Debtors' Chapter 11 Filings -- Management Changes, Restructuring Efforts and
Asset Sales," on March 31, 1999, less than 90 days prior to the Petition Date,
the Debtors consummated the Northeast Disposition, pursuant to which they sold
124 cemeteries and three funeral homes for a gross amount of approximately $193
million. In connection with the Northeast Disposition, certain holders of CTA
Note Claims received partial principal payments (MEIP Credit Facility - $14.39
million; BMO Revolving Credit Facility - $76.99 million; Series D Notes - $6.34
million; and Series E Notes - $5.28 million) on account of such claims from
approximately $126.5 million in proceeds of the Northeast Disposition. No
principal payments were made in respect to the Series 1 through 7 Notes or the
PATS Notes. Those holders of CTA Note Claims also received various fee
reimbursements and amendment or waiver fees from such proceeds. In addition,
Teachers Insurance and Annuity Association of America ("TIAA"), as a holder of
an O'Keefe Note Claim (which are not secured by the CTA or any other
collateral), received a $2.0 million payment from the Debtors' general funds on
account of such claims as part of the Northeast Disposition and a $103,278
"waiver fee." At the time of the Northeast Disposition, the Debtors were in
breach of certain financial covenants in respect to TIAA's O'Keefe Note Claims
and each of the series of CTA Note Claims that received payments of principal
from the proceeds of the Northeast Disposition. As a result, the consent of TIAA
and the holders of each such series was required to consummate the Northeast
Disposition.
As a result, proceeds of the Northeast Disposition used to reduce
indebtedness secured by the CTA were not paid pro rata to all of the holders of
CTA Note Claims secured by the CTA. Pursuant to the CTA, the CTA Trustee was not
required to make pro rata payments to each holder of a CTA Note Claim prior to
the occurrence of an "Enforcement Event" (as defined in the CTA). As of the time
of consummation of the Northeast Disposition, an Enforcement Event under the CTA
had not occurred.
The Northeast Disposition gives rise to at least two types of potential
preference claims. First, holders of CTA Note Claims that received more than
their pro rata share of the proceeds of the Northeast Disposition may have
received a preference under section 547(b) of the Bankruptcy Code since the
non-pro rata portion of such payments may have permitted the holders of such
Claims to receive more than they would receive in a hypothetical liquidation of
the Debtors had the payments not been made. Nonetheless, the fact that the
non-pro rata portion of such payments constituted collateral for other CTA Note
Claims may either (a) render such payments not preferential since the payments
may not have depleted the Debtors' bankruptcy Estates or (b) make any recovery
of such payments available only to other holders of CTA Note Claims, thereby
precluding the Debtors' unsecured creditors from benefiting from such recovery.
Any preference claims against such holders of CTA Note Claims in respect of
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<PAGE> 55
such payments will be retained by the Reorganized Debtors under the Plan as
Retained Claims, and the Debtors and Reorganized Debtors reserve the right to
pursue recovery of such claims.
In addition, TIAA received payments on account of its unsecured O'Keefe
Note Claims as part of the Northeast Disposition from the Debtors' general
funds. Such payments, other than potentially the $103,278 "waiver fee," may be
argued to have constituted preferences, although TIAA may assert the
Contemporaneous Exchange Defense to such preference liability since, in
connection with the Northeast Disposition, TIAA released certain of its
collateral to the Debtors, which secured CTA Note Claims held by TIAA. Any
preference claims against TIAA in respect of such payments will be retained by
the Reorganized Debtors under the Plan as Retained Claims, and the Debtors
reserve the right to pursue recovery of such claims.
Other Preference Claims. As described above on March 31, 1999, less
than 90 days prior to the Petition Date, the Loewen Companies completed the
Northeast Disposition. Cornerstone Family Services, Inc., then known as Newco
Cemetery, Inc. ("Cornerstone"), was the Purchaser. The principals backing
Cornerstone were Lawrence Miller and William R. Shane, two former executives
employed in connection with the TLGI's cemetery businesses ("Miller and Shane"),
and McCown, De Leeuw & Co., Inc. ("MCD"). It is believed that each of Miller and
Shane and various funds affiliated with MCD were to provide capital to
Cornerstone to allow it to obtain the financing to pay the purchase price in
connection with the Northeast Disposition. It is further believed that Miller
and Shane anticipated obtaining all or a portion of their capital contributions
from approximately $13.9 million of payments to be made by LGII (the "Osiris
Payments") under a Share Purchase Agreement, dated March 17, 1995, among LGII,
Miller and Shane and certain other parties (the "Osiris Purchase Agreement") in
an unrelated transaction.
As the Northeast Disposition was being negotiated, LGII, on March 15,
1999, paid Miller and Shane a total of $6.8 million of the Osiris Payments when
due. In addition, it was agreed that rather than LGII making the remaining
Osiris Payments to Miller and Shane who would then contribute those monies to
Cornerstone to be used to pay part of the purchase price in respect to the
Northeast Disposition, the obligations of LGII under the Osiris Purchase
Agreement instead would be assigned to one of the entities to be purchased by
Cornerstone in the Northeast Disposition and the purchase price in respect of
the Northeast Disposition would be correspondingly reduced by $6.7 million (an
amount agreed to be the net present value of the remaining Osiris Payments). The
Debtors believe that this transaction may have constituted preferences. The
claims in respect thereof against Miller and Shane are Retained Claims under the
Plan, and the Debtors reserve the right to pursue recovery of such claims.
FRAUDULENT CONVEYANCE ACTIONS
Overview. Generally, a conveyance or transfer is fraudulent if: (a) it
was made with the actual intent to hinder, delay or defraud a creditor (i.e., an
intentional fraudulent conveyance); or (b)(i) reasonably equivalent value was
not received by the transferee in exchange for the transfer and (ii) the debtor
was insolvent at the time of the transfer, was rendered insolvent as a result of
the transfer or was left with insufficient capitalization as a result of the
transfer (i.e., a constructive fraudulent conveyance). Two primary sources of
fraudulent conveyance law exist in a chapter 11 case.
The first is section 548 of the Bankruptcy Code, under which a debtor
in possession or bankruptcy trustee may avoid fraudulent transfers that were
made or incurred on or within one year before the date that a bankruptcy case is
filed.
The second source is section 544 of the Bankruptcy Code -- the
so-called "strong-arm provision" -- under which the debtor in possession (or
creditors with bankruptcy court permission) may look to state law to avoid
transfers as fraudulent. State fraudulent conveyance laws generally have
statutes of limitations longer than one year and are applicable in a bankruptcy
proceeding pursuant to section 544 of the Bankruptcy Code if the statute of
limitations with respect to a transfer has not expired prior to the filing of
the bankruptcy case. If such statute of limitation has not expired, the debtor
in possession (or creditors with bankruptcy court permission) may bring the
fraudulent conveyance claim within the time period permitted by section 546 of
the Bankruptcy Code notwithstanding whether the state limitations period expires
prior thereto. Generally, section 546 of the Bankruptcy Code permits a state
fraudulent conveyance action to be brought within the later of (a) two years
after the
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commencement of the bankruptcy proceeding or (b) one year after the appointment
or election of a trustee for the debtor if such appointment or election occurs
within such two-year period.
The primary sources of applicable state fraudulent conveyance law are
state enactments of the Uniform Fraudulent Conveyance Act ("UFCA") and the
Uniform Fraudulent Transfer Act ("UFTA"). As of June 2000, enactments of the
UFCA were effective in four states, and enactments of the UFTA were effective in
39 states and the District of Columbia. Other states, including certain states
whose fraudulent conveyance law could be applicable to fraudulent conveyance
claims described below, have enacted neither the UFCA or UFTA, but instead
operate under either a derivation of the English Statute of Elizabeth or some
other fraudulent conveyance statute. Like section 548 of the Bankruptcy Code,
under both the UFCA and the UFTA a conveyance or transfer is generally
fraudulent if: (a) it was made with the actual intent to hinder, delay or
defraud a creditor (i.e., an intentional fraudulent conveyance); or (b)(i)
reasonably equivalent value was not received by the transferee in exchange for
the transfer and (ii) the debtor was insolvent at the time of the transfer, was
rendered insolvent as a result of the transfer or was left with insufficient
capitalization as a result of the transfer (i.e., a constructive fraudulent
conveyance).
The Collateral Trust Agreement. Although the Debtors have not performed
a detailed factual and legal analysis of potential fraudulent conveyance claims
related to the CTA, the Debtors have considered whether certain transactions
associated with the CTA could be deemed to be fraudulent conveyances. In
particular, the Debtors have considered: (a) whether since the CTA was executed
soon after the O'Keefe judgment and constituted a pledge of a substantial
portion of the Debtors' assets, the CTA could be deemed an intentional
fraudulent conveyance; (b) whether the TLGI or LGII subsidiaries that, pursuant
to the CTA, guaranteed debt of TLGI and LGII existing at the time of the
execution of the CTA and pledged assets to secure such debt could be deemed to
have made fraudulent transfers; and (c) whether such subsidiaries who, pursuant
to the CTA, guaranteed debt of TLGI and LGII arising at the time of or after the
execution of the CTA and who pledged assets to secure such debt could be deemed
to have made fraudulent transfers to the extent that such subsidiaries did not,
directly or indirectly, receive the proceeds of such debt.
A detailed factual and legal analysis of potential fraudulent
conveyance claims related to the CTA would be time consuming and costly because,
among other things, the issues raised by such an investigation and by the CTA
are quite complex. For instance, given the extent of the Debtors' operations
throughout the U.S. and Canada, the particular state fraudulent conveyance law
applicable to any transfer associated with the CTA would be the subject of
significant dispute. In addition, the extent to which any of the numerous Debtor
subsidiaries subject to the CTA (a) received, directly or indirectly, the
benefit of the proceeds of any debt issued pursuant to the CTA or (b) was
solvent or was reasonably capitalized at any relevant time is a complicated,
multifaceted factual and legal issue which would require a substantial amount of
due diligence, investigation, research and analysis to resolve. Moreover,
resolution of potential other fraudulent conveyance claims associated with the
CTA, such as whether certain amendment or similar fees paid in connection with
the Northeast Disposition could be deemed fraudulent, would likewise likely be
factually and legally complicated and contentious.
The need for such an investigation of potential fraudulent conveyance
claims related to the CTA is mitigated by limitations on the extent of
guaranties issued under the CTA by subsidiaries of TLGI and LGII. Pursuant to
the CTA, any such guaranties, and any pledge of collateral to secure such
guaranties, are limited to an amount that is $1.00 less than the maximum amount
for which such subsidiary may be liable without rendering its guaranty
obligations void or invalid. As a result, it would appear unlikely that
guaranties given by subsidiaries of TLGI or LGII under the CTA could be deemed
fraudulent conveyances.
In light of the foregoing, including the complexity of the factual and
legal issues involved and the limitation on subsidiary guaranties under the CTA,
the Plan also constitutes a settlement of any CTA related fraudulent conveyance
claims as part of the Plan's treatment of CTA Note Claims. This settlement will
result in such claims being released as part of the Plan.
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<PAGE> 57
OTHER LEGAL PROCEEDINGS
NAFTA CLAIMS
In October 1998, TLGI, on its own behalf and on behalf of LGII, and
Raymond L. Loewen filed claims against the United States of America under the
investment protection provisions of the North American Free Trade Agreement
("NAFTA") for injury to themselves and their investment in the U.S. (Such claim
by TLGI is referred to herein as the "NAFTA Claims.") The claimants contend that
they were damaged as a result of breaches by the U.S. of its obligations under
NAFTA in connection with certain litigation in the State of Mississippi entitled
O'Keefe v. The Loewen Group Inc. See "Certain Events Preceding the Debtors'
Chapter 11 Filing -- Mississippi Litigation." Specifically, the plaintiffs
allege that they were subjected to discrimination, denial of the minimum
standard of treatment guaranteed by NAFTA and uncompensated expropriation, all
in violation of NAFTA.
Prior to the Effective Date, TLGI will cause LGII to form (a) a wholly
owned Delaware limited liability company ("Delco") and (b) a wholly owned Nova
Scotia unlimited liability company ("Nafcanco"). On the Effective Date, LGII
will transfer its rights to receive any proceeds of the NAFTA Claims arising
under Article 1117 of NAFTA to Delco and will transfer the membership interests
in Delco to TLGI. Immediately thereafter, TLGI will transfer to Nafcanco all
right, title and interest to any proceeds of the NAFTA Claims arising under
Article 1116 of NAFTA and TLGI will cause Delco to transfer to LGII all right,
title, and interest to any proceeds of the NAFTA Claims arising under Article
1117 of NAFTA, and in respect thereof, TLGI will irrevocably delegate to
Nafcanco all powers and responsibilities of TLGI in respect of the pursuit and
prosecution of the NAFTA Claims, all in accordance with the terms of Exhibit
I.A.29 of the Plan. As of the Effective Date and as part of the Reinvestment
Transactions, TLGI will assign to Reorganized LGII, and Reorganized LGII will
assume, the contingency fee arrangements entered into by TLGI with respect to
the NAFTA Claims and approved by an order of the Bankruptcy Court entered on or
about October 12, 2000.
The Debtors do not believe that it is possible at this time to predict
the final outcome of this proceeding or to establish a reasonable estimate of
the damages, if any, that may be awarded to the plaintiffs or the proceeds, if
any, that may be received in respect of the NAFTA Claims. See "Overview of the
Plan -- The CCAA Order" and "Risk Factors -- NAFTA Claims." The NAFTA Claims are
Retained Claims under the Plan.
NORTHEAST DISPOSITION SALE DISPUTE
As indicated above, on March 31, 1999, pursuant to a Stock Purchase
Agreement dated as of February 28, 1999, as amended (the "Northeast Agreement"),
the Northeast Disposition was consummated and LGII sold to Cornerstone, all of
the issued and outstanding stock of approximately 100 companies owned by LGII.
The Northeast Agreement contains two post-closing adjustment mechanisms, one
relating to the working capital required to be transferred by LGII to
Cornerstone for the acquired companies and the other to the possible overfunding
or underfunding of trusts maintained by the acquired companies. The Northeast
Agreement also contains essentially two dispute resolution mechanisms. First,
the Northeast Agreement requires the parties thereto to designate an independent
accountant to resolve any disputes between them regarding post-closing
adjustments, including adjustments associated with working capital and with the
overfunding or underfunding of the trusts. Second, the Northeast Agreement
requires disputes concerning the Northeast Agreement, its effect, or the
transactions contemplated by it to be resolved through arbitration.
While LGII and Cornerstone have succeeded in reconciling some of their
differences regarding the post-closing working capital and trust funding
adjustments, certain disputes remain between them. Based on preliminary
calculations, LGII believes that as a result of the working capital adjustment
it has a claim against Cornerstone for approximately $4.5 million, while
Cornerstone argues for an adjustment of approximately $2.9 million in its favor.
Regarding the trust funding adjustment, LGII and Cornerstone differ in the
amount of approximately $6.5 million in their respective calculations of the
amounts properly subjected to trusting. Accordingly, LGII and Cornerstone have
initiated the contractually-mandated process to appoint an independent
accountant to resolve their disputes regarding the working capital and trust
funding adjustments. Carl W. Pergola of BDO Seidman, LLP has been jointly
appointed by the parties to serve as their independent accountant. LGII
anticipates that the independent process to be conducted by Mr. Pergola will
commence shortly.
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Cornerstone has informally asserted certain other claims against LGII
under the Northeast Agreement. LGII believes Cornerstone may attempt to secure a
determination of such claims by the independent accountant or, failing that, may
file a demand for arbitration. LGII preliminarily believes that Cornerstone may
seek approximately $2.6 million in respect of these claims. All of the claims of
LGII against Cornerstone are Retained Claims under the Plan and will not be
affected by consummation of the Plan. In early September 2000, certain entities
affiliated with Cornerstone filed a complaint for express trust, constructive
trust and declaratory judgment against LGII and TLGI alleging that LGII and TLGI
failed to deposit certain receipts into trust fund accounts maintained by or on
behalf of certain of the businesses acquired from them by Cornerstone. While
LGII and TLGI believe that Cornerstone's claims should be directed to the
independent accountant appointed by the parties pursuant to the Northeast
Agreement, LGII and TLGI have not yet fully formulated their position or
responded to the complaint.
LGII's claims in respect to these matters are Retained Claims under the
Plan.
OSIRIS DECLARATORY JUDGMENT
In early November 1999, funds totaling approximately $2.4 million were
withdrawn by Cornerstone from an account maintained in the name of Osiris
Holding Corp. ("Osiris") by First Union National Bank, as Trustee (under an
agreement dated June 4, 1993). Osiris was not part of the above-referenced stock
purchase transaction and funds that were maintained on behalf of that entity are
not the property of Cornerstone. LGII has demanded that Cornerstone return to
Osiris the funds wrongfully obtained by it, but, to date, Cornerstone has
refused to do so.
On or about January 31, 2000, Cornerstone filed a complaint for
declaratory judgment in the Bankruptcy Court against LGII and TLGI, seeking a
declaration of the Court that Cornerstone rightfully owns and possesses the
funds withdrawn from the Osiris account. On or about April 14, 2000, LGII and
TLGI answered the complaint and filed a counterclaim seeking return of the
Osiris funds wrongfully converted by Cornerstone. The Debtors' claims against
Cornerstone in respect to these matters are Retained Claims under the Plan and
will not be affected by consummation of the Plan. In August 2000, Cornerstone,
LGII and TLGI agreed in principle to the settlement of the Osiris dispute. Under
the settlement, LGII and TLGI will receive, after certain setoffs are
recognized, approximately $1,658,000 plus interest. The parties are currently in
the process of exchanging drafts of a settlement agreement.
OTHER CLAIMS RELATED TO THE COLLATERAL TRUST AGREEMENT
In connection with the issues surrounding the CTA Note Claims (see
"Collateral Trust Agreement Issues; Recovery Actions; and Other Legal
Proceedings -- Collateral Trust Agreement Issues"), certain holders of the CTA
Note Claims may hold claims, demands, rights and causes of action against
certain third parties. In September 2000, certain holders of the CTA Note Claims
entered into agreements to toll and suspend through April 1, 2001 the running of
any and all statutes of limitations, laches or any other time-based limitations
or defenses relating to such claims, demands, rights and causes of action with
the following entities: (a) Bankers Trust Company; (b) Davis, Polk & Wardwell;
(c) Kramer Levin Naftalis & Frankel LLP; (d) Reid & Reige, P.C.; (e) Russell &
DuMoulin; (f) Salomon Smith Barney, for itself and as successor to Smith Barney,
Inc.; (g) Skadden, Arps, Slate, Meagher & Flom LLP; (h) State Street Bank and
Trust Company; (i) Thelen Reid & Priest LLP; and (j) UBS Warburg LLC, for itself
and as successor to UBS Securities LLC (collectively, the "Tolling Parties").
Except as provided in Section IV.F.3 of the Plan, any claims, demands, rights
and causes of action that any Indenture Trustee or a holder of CTA Note Claim
may have against Tolling Parties or other third parties with respect to the CTA
are reserved and will not be affected by Confirmation or the occurrence of the
Effective Date.
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REORGANIZED LGII
RESTRUCTURING TRANSACTIONS
TLGI was organized under the laws of British Columbia, Canada, and
conducts its business through over 1,000 subsidiaries. TLGI, which has
operations in the U.S., Canada and the United Kingdom, conducts business
principally in North America.
In addition to the transactions relating to the NAFTA Claims (see
"Collateral Trust Agreement Issue; Recovery Actions; and Other Legal Proceedings
-- Other Legal Proceedings -- NAFTA Claims"), pursuant to the Reinvestment
Transactions, on the Effective Date following the completion of the CCAA Debtor
Restructuring Transactions, pursuant to the Confirmation Order, the CCAA Order
and the terms of the Plan, each share of LGII Old Stock issued and outstanding
or held in treasury will be canceled and TLGI will transfer substantially all of
its assets to LGII, which will become the ultimate parent entity in the
corporate structure of the Loewen Companies. The only shares of capital stock of
Reorganized LGII to be outstanding immediately following the Effective Date will
be the New Common Stock to be issued pursuant to the Plan.
In addition, pursuant to the Subsidiary Restructuring Transaction in
each state in which the Debtors conduct business, commencing immediately
following the Effective Date, the Loewen Subsidiary Debtors organized under the
laws of such state, will be restructured so as to reduce the number of Loewen
Companies organized in such state to the maximum extent permissible and
determined by the Debtors to be appropriate, taking into account applicable
regulatory requirements and other pertinent considerations. In addition, on the
Effective Date following the Reinvestment Transaction, LGII will transfer all of
its assets other than its ownership interests in the Loewen Companies to a newly
formed Delaware corporation that is wholly owned by LGII. Pursuant to the Plan,
the Debtors and Reorganized Debtors will take such actions as may be necessary
or appropriate to effect the Subsidiary Restructuring Transactions. It is
contemplated that the Subsidiary Restructuring Transactions will include one or
more mergers, consolidations, reorganizations, asset transfers or dissolutions
as may be determined by the Debtors to be necessary or appropriate. The actions
to effect the Subsidiary Restructuring Transactions may include: (a) the
execution and delivery of appropriate agreements or other documents of merger,
consolidation, reorganization or dissolution containing terms that are
consistent with the terms of the Plan and that satisfy any requirements of
applicable law and such other terms to which these entities may agree; (b) the
execution and delivery of appropriate instruments of transfer, assignment,
assumption or delegation of any asset, property, right, liability, duty or
obligation on terms consistent with the terms of the Plan and having such other
terms to which these entities may agree; (c) the filing of appropriate
certificates of merger, consolidation or dissolution or similar instruments with
the applicable governmental authorities; and (d) all other actions that such
entities determine to be necessary or appropriate, including making other
filings or recordings that may be required by applicable law in connection with
the Subsidiary Restructuring Transactions. A description of the Subsidiary
Restructuring Transactions has been filed as Exhibit IV.B.1 to the Plan and is
available for review in the Document Review Centers. Similar restructuring
transactions involving the CCAA Debtors will be effected immediately prior to
the Reinvestment Transactions pursuant to the CCAA Order. A description of the
CCAA Debtor Restructuring Transactions has been filed as Exhibit I.A.28 to the
Plan and is available for review in the Document Review Centers.
The consummation of the Restructuring Transactions, together with the
CCAA Debtor Restructuring Transactions, is an important part of the Plan, which
is intended to: (a) result in the ultimate parent company in the corporate
structure being Reorganized LGII, a Delaware corporation; (b) facilitate the
centralization of various operational, management and administrative activities
and functions; (c) streamline Reorganized LGII's overall capital structure; and
(d) permit Reorganized LGII greater access to the financial markets by the
creation of a more understandable, flexible and financeable corporate structure.
Immediately following the consummation of the Restructuring
Transactions, TLGI will have outstanding the same equity securities as were
outstanding immediately prior to the consummation of the Restructuring
Transactions, but will have: (a) no assets other than bare legal title to its
NAFTA Claims and title to the outstanding membership interests of Delco; (b) no
right to receive, directly or through Delco, proceeds of the NAFTA Claims; (c)
no directors, officers or employees; and (d) no relationship to Reorganized LGII
or any of its subsidiaries other than as a result of the transactions relating
to the NAFTA Claims.
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BUSINESS OF REORGANIZED LGII
Following the consummation of the Restructuring Transactions,
Reorganized LGII will continue to operate the existing businesses of TLGI, LGII
and their subsidiaries. A brief description of Reorganized LGII's business is
set forth below. Further information regarding the businesses and properties of,
and other matters relating to, TLGI, LGII and their subsidiaries, including
historical consolidated financial statements and other financial information,
are contained in Exhibit III to this Disclosure Statement. The information set
forth below is qualified in its entirety by reference to such other information.
It is anticipated that, as of the Effective Date, Reorganized LGII will
operate approximately 950 funeral homes and approximately 346 cemeteries
throughout North America and approximately 32 funeral homes in the United
Kingdom. In addition to providing funeral, cemetery and cremation services
at-need, Reorganized LGII will also make funeral, cemetery and cremation
arrangements on a preneed basis. As part of making funeral and cremation
arrangements on a preneed basis, Reorganized LGII will also operate an insurance
business in support of its funeral homes. Reorganized LGII will also operate an
insurance business primarily involved in the sale of preneed insurance products,
though alternatives involving the disposition of this business are currently
being explored.
Reorganized LGII will maintain a regional management structure that is
organized in several geographic regions in the U.S., Canada and United Kingdom.
Within each geographic region, markets have been identified that include both
funeral homes and cemeteries. A Market General Manager has responsibility for
all activities within a particular market (i.e., funeral, cemetery and
cremation) on both an at-need and preneed basis. The market-based management
structure has been put in place during the 2000 fiscal year. As part of the
implementation of this management structure, each market developed a market
plan, addressing key operating issues within the market, including market share,
pricing, operating costs and synergies. Each market plan also provided
strategies and tactics to address those operating issues.
Reorganized LGII will maintain its principal executive offices in
Toronto, Ontario and its North American administrative support centers in
Cincinnati, Ohio and Vancouver, British Columbia.
Reorganized LGII's funeral homes will offer a full range of funeral
services, including the collection of remains, registration of death,
professional embalming, use of funeral home facilities, sale of caskets and
other merchandise and transportation to a place of worship, funeral chapel,
cemetery or crematorium. Substantially all of Reorganized LGII's funeral homes
will have programs designed to provide a full range of merchandise and services
to families choosing cremation.
Reorganized LGII's cemetery operations will assist families in making
burial arrangements and will offer a complete line of cemetery products
(including a selection of burial spaces, burial vaults, lawn crypts, caskets,
memorials, niches and mausoleum crypts), the opening and closing of graves and
cremation services.
The following table sets forth, for each of the businesses operated by
TLGI, revenue earned from external sales, earnings (loss) from operations, total
assets and capital expenditures for and as of the end of each of TLGI's last
three fiscal years. Although TLGI has historically prepared its consolidated
financial statements in accordance with generally accepted accounting principles
in Canada ("Canadian GAAP") and included a note describing the material
differences from, and reconciling certain line items to, U.S. GAAP, Reorganized
LGII will prepare its consolidated financial statements in accordance with U.S.
GAAP. All historical amounts set forth in this Disclosure Statement are
presented on the basis of U.S. GAAP.
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<TABLE>
<CAPTION>
FUNERAL
AND
CEMETERY INSURANCE OTHER TOTAL
-------- --------- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Revenue earned from external sales:
1999 .......................... $ 936,272 $ 92,182 -- $ 1,028,454
1998 .......................... 1,039,718 83,742 -- 1,123,460
1997 .......................... 1,024,122 91,278 -- 1,115,400
Earnings (loss) from operations:
1999 .......................... (265,148) 14,318 $ (73,826) (324,656)
1998 .......................... (176,547) 20,518 (109,098) (265,127)
1997 .......................... 245,712 19,430 (115,106) 150,036
Total assets:
1999 .......................... 3,651,715 320,373 87,663 4,059,751
1998 .......................... 4,243,186 308,883 157,582 4,709,651
1997 .......................... 4,070,425 360,039 328,298 4,758,762
Capital Expenditures:
1999 .......................... 46,150 190 8,337 54,677
1998 .......................... 101,051 420 6,513 107,984
1997 .......................... 161,714 208 11,157 173,079
</TABLE>
TGLI's operations are primarily in the U.S. with over 90% of its
revenue and earnings (loss) from operations derived from its U.S. operations.
The foregoing historical financial information should be read in
conjunction with the audited historical consolidated financial statements of
TLGI, including the notes thereto, included in Exhibit III to this Disclosure
Statement. As noted above, such audited historical consolidated financial
statements were prepared in accordance with Canadian GAAP, and Note 20 thereto
includes a description of the material differences, and a reconciliation of
certain line items, between Canadian GAAP and U.S. GAAP. See "Risk Factors --
Noncomparability of Historical Financial Information."
BUSINESS PLAN
Following the Effective Date, management of Reorganized LGII intends to
aggressively pursue a business plan designed to provide a stable platform for
future growth. The key components of the business plan will be to increase
revenues, reduce operating costs, upgrade information systems, build marketing
and research capabilities and generate positive cash flow. Revenue increasing
initiatives will include increased funeral home volume, upgraded cremation
services, upgraded cremation merchandise, increased direct cremation business
and increased at-need cemetery business through cross-referrals. Operating cost
reduction initiatives will include restructured location management, increased
efficiency through reallocation of advertising and market dollars and
eliminating telemarketing expenditures and certain training costs.
LIQUIDITY AND CAPITAL RESOURCES
The consummation of the transactions contemplated by the Plan will
result in a net reduction of approximately $1.5 billion of total indebtedness.
Reorganized LGII will nonetheless continue to be substantially leveraged
following the Effective Date. See "Risk Factors -- Substantial Leverage."
However, management of the Debtors believes that, assuming consummation of the
Plan in accordance with its terms and achievement of the Debtors' business plan,
Reorganized LGII will have sufficient liquidity for the reasonably foreseeable
future to
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<PAGE> 62
service the post-reorganization indebtedness and conduct of its business as
contemplated by the Debtors' business plan. Based on the assumptions reflected
herein, as of the Effective Date Reorganized LGII would have cash of
approximately $46 million available for working capital. In addition, the
Effective Date is conditioned upon the Exit Financing Facility being in place.
It is currently contemplated that the Exit Financing Revolving Credit Facility
will consist of a secured $100 million revolving credit facility, $30 million of
which will also be available in the form of letters of credit. See "Securities
to be Issued Pursuant to the Plan and Other Post-Reorganization Indebtedness --
Exit Financing."
SELECTED HISTORICAL FINANCIAL INFORMATION
The following table sets forth selected consolidated financial
information for TLGI as of and for the nine months ended September 30, 2000 and
1999, and the fiscal years ended December 31, 1999, 1998 and 1997. Such selected
consolidated financial information is presented on the basis of U.S. GAAP. The
selected consolidated financial information set forth below should be read in
conjunction with the audited and unaudited historical consolidated financial
statements of TLGI, including the notes thereto, included in Exhibit III to this
Disclosure Statement. As noted above, such historical consolidated financial
statements were prepared in accordance with Canadian GAAP, and Note 10 to the
unaudited historical consolidated financial statements and Note 20 to the
audited historical consolidated financial statements include a description of
the material differences, and a reconciliation of certain line items, between
Canadian GAAP and U.S. GAAP. Reorganized LGII will prepare its consolidated
financial statements in accordance with U.S. GAAP. See "Risk Factors --
Noncomparability of Historical Financial Information."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 YEAR ENDED DECEMBER 31
-------------------------- -----------------------------------------
2000 1999 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Income Statement Information:
Revenue .............................. $ 681,677 $ 805,542 $ 1,028,454 $ 1,123,460 $ 1,115,400
Gross Margin ......................... 180,862 236,695 282,654 295,831 366,562
Earnings (loss) from operations ...... (6,161) (821) (324,656) (260,127) 153,038
Net earnings (loss) .................. (57,714) (98,736) (523,439) (594,257) 42,231
Balance Sheet Information:
Total assets ......................... 4,001,502 4,470,308 4,059,751 4,709,654 4,776,535
Total long-term debt (a) (b) ......... 74,708 73,473 91,204 2,268,014 1,793,934
Preferred securities of subsidiary (b) -- -- -- 75,000 75,000
Liabilities subject to compromise (b) 2,282,723 2,284,834 2,282,601 -- --
Shareholders' equity ................. 320,011 803,044 383,075 913,365 1,524,195
</TABLE>
-------------------
(a) Total long-term debt comprises long-term debt which is not subject to
compromise, including the current portion.
(b) Under-secured and unsecured debt obligations (including the MIPS, which
are identified as "Preferred securities of subsidiary") have been
reclassified to liabilities subject to compromise as a result of the
Filings of the Reorganization Cases.
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<PAGE> 63
PROJECTED FINANCIAL INFORMATION
INTRODUCTION
As a condition to confirmation of a plan of reorganization, the
Bankruptcy Code requires, among other things, that the bankruptcy court
determine that confirmation is not likely to be followed by the liquidation or
the need for further financial reorganization of the debtor. See "Voting and
Confirmation of the Plan -- Confirmation" and "Voting and Confirmation of the
Plan -- Feasibility." In connection with the development of the Plan, and for
purposes of determining whether the Plan satisfies this feasibility standard,
the Debtors' management analyzed the ability of the Reorganized Debtors to meet
their obligations under the Plan with sufficient liquidity and capital resources
to conduct their businesses. In that connection, the Debtors' management
developed and prepared certain projections (the "Projections") of the Debtors'
operating profit, free cash flow and certain other items for the fiscal years
2000 through 2003 (the "Projection Period").
THE DEBTORS DO NOT, AS A MATTER OF COURSE, PUBLISH THEIR BUSINESS
PLANS, BUDGETS OR STRATEGIES OR MAKE EXTERNAL PROJECTIONS OR FORECASTS OF THEIR
ANTICIPATED FINANCIAL POSITIONS OR RESULTS OF OPERATIONS. ACCORDINGLY, THE
DEBTORS (INCLUDING THE REORGANIZED DEBTORS) DO NOT ANTICIPATE THAT THEY WILL,
AND DISCLAIM ANY OBLIGATION TO, FURNISH UPDATED BUSINESS PLANS, BUDGETS OR
PROJECTIONS TO HOLDERS OF CLAIMS OR INTERESTS PRIOR TO THE EFFECTIVE DATE OR TO
STOCKHOLDERS OR DEBTHOLDERS AFTER THE EFFECTIVE DATE OR TO INCLUDE SUCH
INFORMATION IN DOCUMENTS REQUIRED TO BE FILED WITH THE SEC, ANY CSA OR ANY STOCK
EXCHANGE OR OTHERWISE MAKE SUCH INFORMATION PUBLICLY AVAILABLE.
The Projections should be read in conjunction with the assumptions,
qualifications and explanations set forth herein and the historical consolidated
financial information (including the notes and schedules thereto) included in
Exhibit III to this Disclosure Statement. Such historical consolidated financial
statements were prepared in accordance with Canadian GAAP, and Note 10 to the
unaudited historical consolidated financial statements and Note 20 to the
audited historical consolidated financial statements include a description of
the material differences, and a reconciliation of certain line items, between
Canadian GAAP and U.S. GAAP. Reorganized LGII will prepare its consolidated
financial statements in accordance with U.S. GAAP, and the Projections reflect
U.S. GAAP. See "Risk Factors -- Noncomparability of Historical Financial
Information."
In addition, in December 1999, the SEC issued Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), which sets
forth the SEC staff's views on the application of existing generally accepted
accounting principles to revenue recognition in financial statements. The
implementation date of SAB 101 applicable to TLGI has been deferred to December
31, 2000. As a result of SAB 101, the Debtors anticipate changing their preneed
revenue recognition policies primarily to:
- recognize sales of pre-arranged funerals and preneed cemetery
merchandise and services at time of delivery or performance of
services;
- recognize sales of preneed cemetery spaces when interment right
title is transferred; and
- expense selling expenses incurred in connection with sales of
pre-arranged funerals and preneed cemetery merchandise, services
and spaces immediately.
The audited consolidated financial statements for the year ended December 31,
2000 will adopt these revised accounting policies effective January 1, 2000.
This change in accounting policy will be applied prospectively only, and fiscal
years 1999 and earlier will not be restated. See "Risk Factors --
Noncomparability of Historical Financial Information."
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<PAGE> 64
PRINCIPAL ASSUMPTIONS FOR THE PROJECTIONS
The Projections are based on, and assume the successful implementation
of, the Debtors' business plan. Both the Debtors' business plan and the
Projections reflect numerous assumptions, including various assumptions
regarding the anticipated future performance of the Reorganized Debtors,
industry performance, general business and economic conditions and other
matters, most of which are beyond the control of the Debtors or the Reorganized
Debtors. Specific risks and uncertainties that may affect the accuracy of the
Projections include, among others, those relating to: (a) the successful
completion of the asset disposition program; (b) the ability of the Reorganized
Debtors to increase revenues and control costs of funeral and cemetery
operations through the implementation of the Debtors' business plan; (c) the
ability of the Reorganized Debtors to reduce general and administrative expenses
through the implementation of the Debtors' business plan; (d) the ability of the
Reorganized Debtors to build marketing and research capabilities; (e) the
ability of the Reorganized Debtors to generate positive cash flow through the
implementation of the Debtors' business plan; (f) the expected enhancements to
the ability of the Reorganized Debtors to attract and exploit business
opportunities; (g) the effect that the new Board of Directors of Reorganized
LGII will have on the implementation of the Debtors' business plan; (h) the
ability of the Reorganized Debtors to respond to any existing or new competition
within their markets; and (i) the effect of any new or amended legislation
applicable to the businesses of the Reorganized Debtors. Therefore, although the
Projections are necessarily presented with numerical specificity, the actual
results achieved during the Projection Period will vary from the Projections.
These variations may be material. Accordingly, no representation can be or is
being made with respect to the accuracy of the Projections or the ability of the
Reorganized Debtors to achieve the Projections. See "Risk Factors" for a
discussion of certain factors that may affect the future financial performance
of the Reorganized Debtors and of various risks associated with the Plan.
Although the Debtors believe that the assumptions underlying the
Projections, when considered on an overall basis, are reasonable in light of
current circumstances, no assurance can be or is given that the Projections will
be realized. In deciding whether to vote to accept or reject the Plan, holders
of Claims must make their own determinations as to the reasonableness of such
assumptions and the reliability of the Projections. See "Risk Factors."
The independent auditors for TLGI have not examined nor compiled the
Projections presented herein and, accordingly, assume no responsibility for
them. Moreover, the Projections have not been prepared to comply with guidelines
established with respect to projections by the SEC, any CSA, the American
Institute of Certified Public Accountants or the Canadian Institute of Chartered
Accountants.
Information relating to the principal assumptions used in preparing the
Projections is set forth below:
(a) Effective Date; Plan Terms. The Projections assume
Confirmation of the Plan and that all transactions contemplated by the
Plan to be consummated by the Effective Date will be consummated as of
March 31, 2001. The Projections also assume that:
- the total amount of each Class of Allowed Claims is the
estimated amount as set forth in "Overview of the Plan
-- Summary of Classes and Treatment of Claims and
Interests"; and
- the total amount of reorganization expenses in fiscal
years 2000 and 2001 is $41 million (including $0.3
million of non-cash charges) and $53 million,
respectively.
See "Overview of the Plan" for a brief summary of the principal
provisions of the Plan, including the classification and treatment of
Claims and Interests, the principal financial terms of certain
securities to be issued pursuant to the Plan and other
post-reorganization indebtedness and conditions to Confirmation and
consummation of the Plan.
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<PAGE> 65
(b) General Economic Conditions. The Projections were prepared
based on assumptions that economic conditions existing at the time the
Projections were prepared will last throughout the Projection Period
and that the general economic climate in the U.S. and Canada remains
relatively stable.
(c) Asset Disposition Program. The Projections assume the
completion of the asset disposition program by December 31, 2000 and
the receipt of aggregate net cash proceeds of $130 million in
connection therewith. See "Operations During the Reorganization Cases
-- Post-Petition Asset Disposition Program" for a brief description of
the asset disposition program.
(d) Potential Non-Strategic Insurance Company Sale. The
Projections assume a potential sale of a non-strategic insurance
company by December 31, 2000, from which $35 million will be available
for distribution to creditors after payment of taxes and the retention
of regulatory capital within the insurance group.
(e) Blackstone Settlement. The Projections assume that the
transactions contemplated by the Blackstone Settlement will be
consummated on the Effective Date and that, as a result, from and after
the Effective Date, Reorganized LGII will own all or substantially all
of the outstanding capital stock of Rose Hills. Accordingly, from and
after the Effective Date, the financial statements of Reorganized LGII
will reflect the financial condition and results of operation of Rose
Hills. The Projections take into account certain projected financial
information regarding Rose Hills available to the Debtors; however,
such information was not developed or prepared by the Debtors and,
accordingly, may not reflect adjustments for fresh-start accounting and
the implementation of SAB 101 that the Debtors would determine to be
appropriate if the Debtors had developed and prepared such information.
(f) Revenue from Funeral and Cemetery Operations. The Projections
assume that revenue from funeral and cemetery operations for the 2000
fiscal year will decrease approximately 12% compared to the 1999 fiscal
year due to (i) the performance of fewer funeral services, (ii) the
disposition of 124 cemetery properties at March 31, 1999 and (iii)
fewer preneed cemetery sales as a result of the implementation of
preneed sales contract term changes effected in the second quarter of
1999 and additional changes effected in the second quarter of 2000. See
"Certain Events Preceding the Debtors' Chapter 11 Filing -- Management
Changes, Restructuring Efforts and Asset Sales." The implementation of
the preneed sales contract term changes in the second quarter of 2000
resulted in a significant drop in sales, primarily due to a significant
reduction in the number of salespeople. The Debtors are reviewing and
implementing strategies to increase the number of salespeople and thus
increase the level of preneed sales. The Projections assume these
strategies will be effectively implemented. The Projections assume that
during the Projection Period, revenue from funeral and cemetery
operations will increase at an average annual rate of approximately 3%.
The assumed increases are based on the assumption that the market plans
developed during the 2000 fiscal year in connection with the
implementation of the Debtors' new market-based management structure,
as well as the Debtors' overall business plan, will be effectively
implemented. These market plans include strategies and tactics to
address, among other things, market share, pricing and preneed sales on
a market specific basis. The Debtors' overall business plan
contemplates several consumer initiatives that will be implemented
across all markets.
(g) Revenues from Insurance Operations. The Projections assume
that for 2001 through 2003, the Reorganized Debtors continue to sell
preneed funerals funded by insurance and that the percentage of
funerals funded by a subsidiary of Reorganized LGII continues to
increase. Investment income from insurance assets included in the
Projections is based on current yields applied to projected balances of
insurance assets.
(h) Costs and Expenses of Funeral and Cemetery Operations. The
Projections assume that costs and expenses of funeral and cemetery
operations for the 2000 fiscal year will decrease approximately 12%
compared to the 1999 fiscal year due to (i) the performance of fewer
funeral services, (ii) the disposition of 124 cemetery properties at
March 31, 1999 and (iii) fewer preneed cemetery sales as a result of
the implementation of preneed sales contract term changes effected in
the second quarter of 1999 and additional changes effected in the
second quarter of 2000. The Projections assume that during the
Projection Period, costs of funeral and cemetery operations will
increase at an average annual rate of
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<PAGE> 66
approximately 2%. The assumed increases are based on assumptions as to
the costs to be incurred in connection with the implementation of
regional marketing plans and the effect of inflation on wages and
merchandise costs. See "-- Business of Reorganized LGII."
(i) Costs and Expenses of Insurance Operations. The Projections
assume that the historical commission structure is applied to the
projected level of sales and that administrative costs will increase by
2%.
(j) Trust and Finance Income. Trust income from perpetual care and
merchandise trust funds included in the Projections is based on current
yields applied to projected balances of such trust funds. Trust fund
balances are based on cash receipts from cemetery preneed sales and the
required trusting on those cash receipts. Finance income included in
the Projections is based on assumed collections of existing and
projected cemetery preneed accounts receivable. Assumed collections of
preneed cemetery accounts receivable are based on historical experience
and the projected mix of contract terms for new sales.
(k) G & A Expenses. The Projections assume that general and
administrative expense for the 2000 through 2002 fiscal years will
decrease by approximately 8%, 17% and 15%, respectively, as compared to
each previous year. The Projections assume that initiatives to
implement new information systems, to reduce corporate overhead costs
and to reengineer administrative processes will be implemented through
2000 and 2001 resulting in decreases in expenses that will offset a 2%
increase in base expenses. The Projections assume that during the 2003
fiscal year, general and administrative expense will increase by
approximately 2%, based on the effect of inflation.
(l) Capital Expenditures. The Projections assume cash capital
expenditures of $49.6, $38.1, $36.8 and $38.5 million for the 2000,
2001, 2002 and 2003 fiscal years, respectively. These assumed capital
expenditures relate primarily to the ongoing replacement of fixed
assets, development costs of additional cemetery property to meet
projected sales and, to a limited extent, construction of new funeral
homes in markets where appropriate.
(m) Income Taxes. The Projections make the following assumptions
with respect to U.S. federal income taxes:
- For book purposes, tax expense (U.S. federal, state and
local and foreign) on LGII's 2001 pre-tax book income
for the Existing Accounting Policies case is estimated
to be $12 million. This is comprised of $10 million of
estimated cash taxes and $2 million of estimated
deferred taxes. Tax expense for this period exceeds the
expected statutory rate of 40% times pre-tax income,
because losses incurred in particular jurisdictions may
not reduce cash taxes in other jurisdictions, and
because of valuation allowances that must be
established under U.S. GAAP against certain of LGII's
tax assets. Tax expense for 2001 for the New Accounting
Policies case under SAB 101 is estimated to be $10
million (comprised entirely of cash taxes, equal to
cash taxes computed under the Existing Accounting
Policies case). This expense exceeds the expected
statutory rate of 40% times pre-tax income, because
payments made on preneed contracts entered into before
January 1, 2001 are generally included in income when
received for tax purposes, but not for book purposes
under SAB 101. For purposes of the New Accounting
Policies case, the benefit of any deferred tax assets
that may be created with respect to 2001 has not been
reflected in the financial statements.
- For book purposes in 2002 and 2003, the effective rate
of tax (U.S. federal, state and local and foreign) on
LGII's pre-tax book income for the Existing Accounting
Policies case is estimated to be 50%. This effective
rate exceeds the cash tax rate (estimated to be 40% of
Existing Accounting Policies case pre-tax book income)
because it reflects the book impact of reorganization
value in excess of identifiable
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<PAGE> 67
assets (which is amortizable for book but not for tax)
as well as valuation allowances that must be
established under U.S. GAAP against certain of LGII's
tax assets. For book purposes in 2002 and 2003, the
amount of tax on LGII's pre-tax book income for the New
Accounting Policies case under SAB 101 is estimated to
be equal to the amount of cash taxes computed under the
Existing Account Policies case. This amount exceeds the
statutory tax rate times pre-tax income for 2002 and
2003 principally because payments made on preneed
contracts entered into before January 1, 2001 are
generally included in income when received for tax
purposes but not for book purposes under SAB 101. For
purposes of the New Accounting Policies case, the
benefit of any deferred tax assets that may be created
with respect to the years in question has not been
reflected in the financial statements.
- The LGII affiliated group does not have a net
unrealized built-in loss (as that term is defined in
section 382(h)(3) of the Internal Revenue Code), and
therefore no 382 limitation will apply to limit any
recognized built-in loss deductions to be claimed on
post-Effective Date returns; and the LGII affiliated
group will not receive the benefit of any carryover
under section 163(j) of the Internal Revenue Code.
- Income earned by Reorganized LGII and its subsidiaries
post-Effective Date will be subject to tax in Canada
and the United States in relatively the same
proportions as income earned in the past.
(n) Post-Reorganization Debt. The Projections assume that (i) $250
million aggregate principal amount of New Five-Year Secured Notes will
be issued pursuant to the Plan, (ii) no New Two-Year Unsecured Notes
will be issued pursuant to the Plan and (iii) $325 million aggregate
principal amount of New Seven-Year Unsecured Notes will be issued
pursuant to the Plan. The Projections also assume that such New
Five-Year Secured Notes and New Seven-Year Unsecured Notes will have
the terms described in "Securities To Be Issued Pursuant to the Plan
and Other Post-Reorganization Indebtedness -- New Five-Year Secured
Notes" and "Securities To Be Issued Pursuant to the Plan and Other
Post-Reorganization Indebtedness -- New Seven-Year Unsecured Notes,"
respectively, and that no New Five-Year Secured Notes or New Seven-Year
Unsecured Notes will be redeemed during the Projection Period.
The Projections assume that the Exit Financing Term Loan
Closing does not occur and that no amounts will be drawn under the Exit
Financing Revolving Credit Facility as of the Effective Date or during
the Projection Period.
The Projections assume that (i) the New Unsecured Subordinated
Note in an original principal amount of $25 million will be issued
pursuant to the Blackstone Settlement, (ii) the New Unsecured
Subordinated Note will have the terms described in "Securities To Be
Issued Pursuant to the Plan and Other Post-Reorganization Indebtedness
-- New Unsecured Subordinated Note" and (iii) as discussed above, from
and after the Effective Date Reorganized LGII will own all or
substantially all of the outstanding capital stock of Rose Hills. See
"Securities To Be Issued Pursuant to the Plan and Other
Post-Reorganization Indebtedness -- Rose Hills Indebtedness" for a
description of certain indebtedness of Rose Hills. The Projections also
assume that the New Unsecured Subordinated Note will not be redeemed or
converted, in whole or in part, during the Projection Period.
The Projections assume that approximately $70 million of other
debt, secured promissory notes and capitalized leases will continue
post-reorganization. The Projections assume that this other debt will
be repaid at the estimated rate of $0.7 per month beginning with the
Effective Date.
(o) Fresh-Start Reporting. The American Institute of Certified
Public Accountants has issued a Statement of Position on Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code (the
"Reorganization SOP"). The Projections have been prepared in accordance
with the "fresh-start" reporting principles set forth in the
Reorganization SOP, giving effect thereto as of March 31, 2000. The
principal effects of the application of these fresh-start reporting
principles are summarized below:
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- Under the Reorganization SOP, Reorganized LGII will be
required to record as an intangible asset the excess,
if any, of its total reorganization value over the fair
value of its identifiable net assets ("Reorganization
Goodwill") as of the Effective Date, to be amortized
over a period which in accordance with the
Reorganization SOP, generally is to be substantially
less than 40 years. For the purposes of the
Projections, it has been assumed that the leveraged net
equity balance as of the Effective Date is
approximately $684 million. The Projections also assume
that the fair value of Reorganized LGII's fixed assets
and other non-current assets, other than cemetery
property, is equal to the projected net book value of
such assets as of the Effective Date. For the purposes
of the Projections, the fair value of cemetery property
is assumed to be based upon the discounted sales price
of available developed and undeveloped inventory and an
assumed normal profit margin before selling expenses.
Based on these assumptions, the assumed reorganization
value of Reorganized LGII as of the Effective Date
would exceed the assumed fair value of Reorganized
LGII's assets by approximately $133 million. For
purposes of the Projections, such amount or
Reorganization Goodwill is reflected as an intangible
asset to be amortized on a straight-line basis over an
assumed 20-year period.
- The foregoing assumptions and resulting computations
were made solely for purposes of preparing the
Projections. Reorganized LGII will be required to
determine the amount by which its reorganization value
as of the Effective Date exceeds, or is less than, the
fair value of its assets as of the Effective Date. Such
determination will be based upon the fair values as of
that time, which could be materially higher or lower
than the values assumed in the foregoing computations
and may be based on, among other things, a different
methodology with respect to the valuation of
Reorganized LGII's reorganization value. In all events,
such valuation, as well as the determination of the
fair value of Reorganized LGII's assets and the
determination of its actual liabilities, will be made
as of the Effective Date, and the changes between the
amounts of any or all of the foregoing items as assumed
in the Projections and the actual amounts thereof as of
the Effective Date may be material.
(p) SAB 101 Revenue Recognition Assumptions. The Projections that
have been restated to reflect the adoption of changes to accounting
policies in response to SAB 101 (i.e., the New Accounting Policies
case) assume that:
- The prearranged funeral and cemetery revenue recorded
on January 1, 2000, upon implementation of SAB 101, is
based on estimates of contracts for merchandise and
services not yet delivered or performed. TLGI is
implementing new cemetery accounting systems to capture
all unserviced contracts, which will assist in refining
the amount of deferred revenue to be recorded on
January 1, 2000.
- Under fresh-start reporting principles, the deferred
prearranged cemetery revenue as of the Effective Date
has been recorded at its estimated fair value, or the
current cost of any obligation.
- Deferred revenue related to space sales is recognized
based on the contract terms of existing accounts
receivable and projected sales after allowing for
certain levels of cancellations.
- Deferred revenue related to merchandise sales is
recognized based on the contract terms of existing
accounts receivable and projected sales after allowing
for certain levels of cancellations and delays in
ordering merchandise after contract payment is
complete.
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<PAGE> 69
- Deferred revenue related to cemetery services is
recognized based on expected performance of those
services.
- Costs related to deferred space and merchandise sales
are based on current margins and are recognized
concurrently with the revenue.
Such Projections reflect the accounting policies currently expected to
be implemented effective January 1, 2000. However, as a result of ongoing
discussions with the SEC regarding the application of SAB 101 to the Debtors,
the accounting policies ultimately adopted by the Debtors may differ from those
reflected in the Projections.
PROJECTIONS
The projected consolidated financial statements of Reorganized LGII set
forth below have been prepared based on the assumption that the Effective Date
is March 31, 2001. Although the Debtors presently intend to seek to cause the
Effective Date to occur as soon as practicable, there can be no assurance as to
when the Effective Date actually will occur.
The Reorganized LGII Projected Consolidated Balance Sheet as of March
31, 2001 (the "Effective Date Balance Sheet") set forth below presents: (a) the
projected consolidated financial position of TLGI prior to the assumed
Confirmation and the consummation of the transactions contemplated by the Plan
on March 31, 2001; (b) the projected adjustments to such projected consolidated
financial position required to reflect Confirmation and the consummation of the
transactions contemplated by the Plan (collectively, the "Balance Sheet
Adjustments"); and (c) the projected consolidated financial position of
Reorganized LGII, after giving effect to the Balance Sheet Adjustments, as of
March 31, 2001. The Balance Sheet Adjustments set forth in the columns captioned
"Debt Discharge" and "Fresh-Start" reflect the assumed effects of Confirmation
and the consummation of the transactions contemplated by the Plan, including the
settlement of various liabilities and related securities issuances and cash
payments. The various Balance Sheet Adjustments are described in greater detail
in the Notes to the Reorganized LGII Projected Balance Sheet.
The TLGI and Reorganized LGII Projected Consolidated Balance Sheets set
forth below present (a) the projected consolidated financial position of TLGI at
the end of 2000 and (b) the projected consolidated financial position of
Reorganized LGII, after giving effect to Confirmation and the consummation of
the transactions contemplated by the Plan, as of the end of each of 2001, 2002
and 2003.
The TLGI and Reorganized LGII Projected Consolidated Statements of
Operations set forth below present (a) the projected consolidated results of
operations of TLGI for the year ending December 31, 2000 and the period
commencing January 1, 2001 and ending March 31, 2001 and (b) the projected
consolidated results of operations of Reorganized LGII for the period commencing
April 1, 2001 and ending December 31, 2001 and for each of 2002 and 2003.
The TLGI and Reorganized LGII Projected Consolidated Statements of Cash
Flows set forth below present (a) the projected consolidated cash flows of TLGI
for the fiscal year ending December 31, 2000 and the period commencing January
1, 2001 and ending March 31, 2001 and (b) the projected cash flows of
Reorganized LGII for the period commencing April 1, 2001 and ending December 31,
2001 and for each of 2002 and 2003.
The Reorganized LGII Projected Consolidated Capitalization Table set
forth below presents the projected capitalization of Reorganized LGII, after
giving effect to the assumed Confirmation and the consummation of the
transactions contemplated by the Plan on March 31, 2001, as of the Effective
Date and the end of each of 2001, 2002 and 2003.
The Reorganized LGII Projected Consolidated Balance Sheet as of March
31, 2001, the TLGI and Reorganized LGII Projected Consolidated Balance Sheets,
the TLGI and Reorganized LGII Projected Consolidated Statements of Operations,
the TLGI and Reorganized LGII Projected Consolidated Statements of Cash Flows
and the Reorganized LGII Consolidated Capitalization Table are presented first
based on TLGI's existing accounting
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policies with respect to preneed revenue recognition (i.e., the Existing
Accounting Policies case). Such projected financial statements are thereafter
restated to reflect the adoption of changes to accounting policies with respect
to preneed revenue recognition in response to SAB 101 as currently expected to
be implemented effective January 1, 2000 (i.e., the New Accounting Policies
case). See "-- Introduction" and "-- Principal Assumptions for the
Projections."
61
<PAGE> 71
REORGANIZED LGII
PROJECTED CONSOLIDATED BALANCE SHEET
(EXISTING ACCOUNTING POLICIES)
MARCH 31, 2001
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
ADJUSTMENTS TO RECORD
CONFIRMATION OF PLAN
-----------------------------
PROJECTED FRESH START
PRECONFIRMATION DEBT AND OTHER REORGANIZED
BALANCE SHEET DISCHARGE ADJUSTMENTS BALANCE SHEET
--------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash ........................................ $ 310,050 $ (10,000)(a) $ 46,150
(53,900)(b)
(200,000)(c)
Receivables, net of allowances .............. 229,722 $ 11,753(d) 241,475
Inventories ................................. 27,231 1,116(d) 28,347
Prepaid expenses ............................ 10,374 3,914(d) 14,288
----------- ----------- ----------- -----------
577,377 (263,900) 16,783 330,260
Long-term receivables, net of allowances ......... 411,370 21,827(d) 433,197
Cemetery property ................................ 905,918 (668,159)(d) 237,759
Property and equipment ........................... 617,014 (28,443)(d) 588,571
Names and reputations ............................ 606,526 (606,526)(d) --
Reorganization value in excess of
Identifiable assets ....................... -- 132,525(e) 132,525
Insurance invested assets ........................ 109,972 -- 109,972
Deferred taxes ................................... 3,486 (3,486)(d) --
Pre-arranged funeral services .................... 406,735 10,442(d) 417,177
Other assets ..................................... 174,555 10,000(a) (147,446) 37,109
----------- ----------- ----------- -----------
$ 3,812,953 $ (253,900) $(1,272,483) $ 2,286,570
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 91,419 $ 9,027(d) $ 100,446
Long-term debt, current portion ......... 20,000 $ 10,000(c) 7,000(d) 37,000
----------- ----------- ----------- -----------
111,419 10,000 16,027 137,446
Long-term debt, net of current portion ...... 60,000 555,000(c) 168,000(d) 783,000
Other liabilities ........................... 439,007 (234,000)(c) 10,839(d) 215,846
Insurance policy liabilities ................ 60,043 60,043
Deferred taxes .............................. 146,528 (146,528)(d) --
Deferred pre-arranged revenue ............... 406,735 406,735
----------- ----------- ----------- -----------
1,223,733 331,000 48,338 1,603,070
Liabilities subject to compromise ........... 2,261,160 (2,261,160)(c) --
Stockholders' equity (deficit) .............. 328,061 1,730,160(c) (1,404,905)(d) 683,500
(53,900)(b) 84,084(e)
----------- ----------- ----------- -----------
$ 3,812,953 $ (253,900) $(1,272,483) $ 2,286,570
=========== =========== =========== ===========
</TABLE>
The Projections should be read only in conjunction with the assumptions,
qualifications and explanations under the caption "-- Projected Financial
Information" and the consolidated historical financial information, notes and
schedules contained in Exhibit III to this Disclosure Statement.
62
<PAGE> 72
NOTES TO REORGANIZED LGII PROJECTED CONSOLIDATED BALANCE SHEET
(EXISTING ACCOUNTING POLICIES)
(a) Reflects financing fees and expenses associated with the establishment
of the New Five-Year Secured Notes, the New Two-Year Notes, the New
Seven-Year Unsecured Notes, the Exit Financing Revolving Credit
Facility and the New Unsecured Subordinated Note.
(b) Reflects the payment of (i) Administrative Claims, (ii) Class 2 and 3
Claims and (iii) certain professional fees and other expenses related
to the Reorganization Cases and the CCAA Proceedings.
(c) Reflects settlement of liabilities subject to compromise and other
transactions in connection with the Plan.
(d) Reflects (i) the write-off of the excess of cost over the net assets
acquired in previous acquisitions and the write-down of identifiable
assets to fair value in accordance with fresh-start reporting and (ii)
consolidation of Rose Hills as a result of the Blackstone Settlement.
(e) Reflects the reorganization value in excess of amounts allocable to
identifiable assets in accordance with fresh-start reporting.
63
<PAGE> 73
TLGI AND REORGANIZED LGII
PROJECTED CONSOLIDATED BALANCE SHEETS
(EXISTING ACCOUNTING POLICIES)
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
TLGI REORGANIZED LGII
----------- -------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002 2003
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash .................................... $ 292,298 $ 76,464 $ 105,632 $ 89,033
Receivables, net of allowances .......... 234,561 234,206 227,199 229,707
Inventories ............................. 27,231 28,422 28,522 28,622
Prepaid expenses ........................ 10,374 14,213 14,113 14,013
----------- ----------- ----------- -----------
564,464 353,305 375,466 361,375
Long-term receivables, net of allowances ..... 410,695 446,418 466,642 476,504
Cemetery property ............................ 901,293 250,785 265,953 282,547
Property and equipment ....................... 626,173 563,142 531,301 498,507
Reorganization value in excess of identifiable
assets........................................ 609,236 126,056 109,786 93,013
Insurance invested assets .................... 109,972 109,972 110,472 111,672
Deferred taxes ............................... 3,486 -- -- --
Pre-arranged funeral services ................ 413,767 399,320 374,563 348,893
Other assets ................................. 173,263 49,428 64,571 76,178
----------- ----------- ----------- -----------
$ 3,812,348 $ 2,298,426 $ 2,298,754 $ 2,248,689
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 94,271 $ 101,197 $ 102,864 $ 104,756
Long-term debt, current portion ......... 20,000 37,000 86,000 124,000
----------- ----------- ----------- -----------
114,271 138,197 188,864 228,756
Long-term debt, net of current portion .. 61,534 771,300 693,426 576,826
Other liabilities ....................... 437,627 219,657 226,041 229,833
Insurance policy liabilities ............ 60,043 60,043 60,043 60,043
Deferred tax liabilities ................ 146,028 -- -- --
Deferred pre-arranged revenue ........... 413,767 387,071 360,004 332,124
----------- ----------- ----------- -----------
1,233,270 1,576,268 1,528,378 1,427,582
Liabilities subject to compromise ............ 2,277,360 -- -- --
Stockholders' equity
Common shares ........................... 1,276,414 683,500 683,500 683,500
Preferred shares ........................ 157,144 -- -- --
Retained earnings (deficit) ............. (1,131,840) 38,658 86,876 137,607
----------- ----------- ----------- -----------
301,718 722,158 770,376 821,107
----------- ----------- ----------- -----------
$ 3,812,348 $ 2,298,426 $ 2,298,754 $ 2,248,689
=========== =========== =========== ===========
</TABLE>
The Projections should be read only in conjunction with the assumptions,
qualifications and explanations under the caption "-- Projected Financial
Information" and the consolidated historical financial information, notes and
schedules contained in Exhibit III to this Disclosure Statement.
64
<PAGE> 74
TLGI AND REORGANIZED LGII
PROJECTED CONSOLIDATED STATEMENTS OF OPERATIONS
(EXISTING ACCOUNTING POLICIES)
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
REORGANIZED REORGANIZED
TLGI LGII LGII
---------------------------- ------------- --------------------------
FISCAL JAN. 1, 2001- APR. 1, 2001- FISCAL FISCAL FISCAL
2000 MAR. 31, 2001 DEC. 31, 2001 2001 2002 2003
----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Funeral and cemetery ................ $ 828,303 $ 191,944 $ 609,800 $ 801,744 $ 850,395 $ 881,724
Insurance ........................... 99,035 13,550 40,650 54,200 76,000 88,400
----------- ----------- ----------- ----------- ----------- -----------
927,338 205,494 650,450 855,944 926,395 970,124
Expenses
Funeral and cemetery ................ 590,293 122,638 395,401 518,039 549,208 575,957
Insurance ........................... 79,601 13,550 40,650 54,200 75,500 87,200
----------- ----------- ----------- ----------- ----------- -----------
669,894 136,188 436,051 572,239 624,708 663,157
----------- ----------- ----------- ----------- ----------- -----------
Gross Margin ........................... 257,444 69,306 214,399 283,705 301,687 306,967
Expenses
General and
administrative .................... 91,386 25,047 59,816 84,863 71,722 73,023
Depreciation and
amortization ...................... 65,771 16,711 31,548 48,259 39,871 40,692
Asset impairment .................... 92,031 --
----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) from
operations .......................... 8,256 27,548 123,035 150,583 190,094 193,252
Interest expense, net ............... 14,422 3,393 67,361 70,754 87,032 85,166
Amortization of reorganization value
in excess of amounts allocable to
identifiable assets .............. -- -- 4,970 4,970 6,626 6,626
Reorganization costs ................ 41,433 49,934 3,177 53,111 -- --
Loss (gain) on disposal
of assets ......................... 58,464 -- -- -- -- --
Fresh-start valuation
change ............................ -- 1,404,905 -- 1,404,905
----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) before income taxes
and extraordinary gain .............. (106,063) (1,430,684) 47,527 (1,383,157) 96,436 101,460
Income taxes ........................ 33,647 3,000 9,000 12,000 48,218 50,731
----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) before
extraordinary gain .................. (139,710) (1,433,684) 38,527 (1,395,157) 48,218 50,729
Extraordinary gain on
debt discharge ................... -- 1,730,160 -- 1,730,160
----------- ----------- ----------- ----------- ----------- -----------
Net earnings ........................... $ (139,710) $ 296,476 $ 38,527 $ 335,003 $ 48,218 $ 50,729
=========== =========== =========== =========== =========== ===========
</TABLE>
The Projections should be read only in conjunction with the assumptions,
qualifications and explanations under the caption " -- Projected Financial
Information" and the consolidated historical financial information, notes and
schedules contained in Exhibit III to this Disclosure Statement.
65
<PAGE> 75
TLGI AND REORGANIZED LGII
PROJECTED CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXISTING ACCOUNTING POLICIES)
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
REORGANIZED REORGANIZED
TLGI LGII LGII
---------------------------- ------------- ---------------------------
FISCAL JAN. 1, 2001- APR. 1, 2001- FISCAL FISCAL FISCAL
2000 MAR. 31, 2001 DEC. 31, 2001 2001 2002 2003
---------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
CASH PROVIDED BY (APPLIED TO)
Operations
Net earnings (loss) .............. $ (139,710) $ 296,476 $ 38,527 $ 335,003 $ 48,218 $ 50,729
Items not affecting cash
Depreciation and amortization .. 82,226 20,611 46,438 67,049 59,853 60,805
Amortization of reorganization
value in excess of identifiable
assets ........................ -- -- 4,970 4,970 6,626 6,626
Amortization of debt issue costs 2,977 847 212 1,059 282 282
Deferred tax expenses .......... -- 500 1,500 2,000 9,644 10,146
Gain on discharge of debt ...... -- (1,946,360) -- (1,946,360) -- --
Fresh-start valuation change ... -- 1,404,905 -- 1,404,905 -- --
Provision for impairment ....... 92,031 -- -- -- -- --
Gain/Loss on disposition ....... 58,464 -- -- -- -- --
Other non-cash ................. 34,562 603 (3,177) (2,574) (1,829) 2,369
Other, including net changes in
other non-cash balances ........ (20,305) (5,125) (24,892) (30,017) (36,776) (39,006)
---------- ----------- ----------- ----------- ----------- -----------
110,245 (227,543) 63,578 (163,965) 86,018 91,951
Investing
Insurance invested assets, net ... (47,623) -- -- -- (500) (1,200)
Capital expenditures ............. (25,131) (7,073) (21,375) (28,448) (28,500) (28,500)
Proceeds from asset sale ......... 214,642 -- -- -- -- --
---------- ----------- ----------- ----------- ----------- -----------
141,888 (7,073) (21,375) (28,448) (29,000) (29,700)
Financing
Increase (decrease) in debt ...... (14,216) (1,534) (11,887) (13,421) (27,850) (78,850)
Debt issue costs ................. (785) (10,000) -- (10,000) -- --
---------- ----------- ----------- ----------- ----------- -----------
(15,001) (11,534) (11,887) (23,421) (27,850) (78,850)
---------- ----------- ----------- ----------- ----------- -----------
Increase (decrease) in cash ......... 237,132 (246,150) 30,316 (215,834) 29,168 (16,599)
Cash, beginning of period ........... 55,166 292,298 46,148 292,298 76,464 105,632
---------- ----------- ----------- ----------- ----------- -----------
Cash, end of period ................. $ 292,298 $ 46,148 $ 76,464 $ 76,464 $ 105,632 $ 89,033
========== =========== =========== =========== =========== ===========
</TABLE>
The Projections should be read only in conjunction with the assumptions,
qualifications and explanations under the caption " -- Projected Financial
Information" and the consolidated historical financial information, notes and
schedules contained in Exhibit III to this Disclosure Statement.
66
<PAGE> 76
REORGANIZED LGII
PROJECTED CONSOLIDATED CAPITALIZATION TABLE
(EXISTING ACCOUNTING POLICIES)
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
REORGANIZED LGII
-----------------------------------------------------
MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2001 2002 2003
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Cash ............................................... $ 46,150 $ 76,464 $ 105,632 $ 89,033
Short-term debt
Long-term debt, current portion ............... 37,000 37,000 86,000 124,000
---------- ---------- ---------- ----------
Total short-term debt and current portion of
long-term debt ............................... 37,000 37,000 86,000 124,000
Long-term debt
New Five-Year Secured Notes ................... 240,000 240,000 220,000 190,000
Rose Hills Term Facility......................` 59,000 50,000
New Seven-Year Unsecured Notes ................ 325,000 325,000 325,000 325,000
Rose Hills Notes .............................. 80,000 80,000 80,000
New Unsecured Subordinated Note ............... 25,000 25,000 25,000 25,000
Secured promissory notes and capitalized leases 54,000 51,300 43,426 36,826
---------- ---------- ---------- ----------
Total long-term debt ........................ 783,000 771,300 693,426 576,826
---------- ---------- ---------- ----------
Total debt .................................. 820,000 808,300 779,426 700,826
Stockholders' equity
Common shares ................................. 683,500 683,500 683,500 683,500
Retained earnings (deficit) ................... -- 38,658 86,876 137,607
---------- ---------- ---------- ----------
Total stockholders' equity .................. 683,500 722,158 770,376 821,107
---------- ---------- ---------- ----------
Total capitalization .................... $1,503,500 $1,530,458 $1,549,802 $1,521,933
========== ========== ========== ==========
</TABLE>
The Projections should be read only in conjunction with the assumptions,
qualifications and explanations under the caption " -- Projected Financial
Information" and the consolidated historical financial information, notes and
schedules contained in Exhibit III to this Disclosure Statement.
67
<PAGE> 77
REORGANIZED LGII
PROJECTED CONSOLIDATED BALANCE SHEET
(NEW ACCOUNTING POLICIES)
MARCH 31, 2001
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
ADJUSTMENTS TO RECORD
CONFIRMATION OF PLAN
---------------------------------
PROJECTED FRESH START
PRECONFIRMATION DEBT AND OTHER REORGANIZED
BALANCE SHEET DISCHARGE ADJUSTMENTS BALANCE SHEET
--------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash ................................... $ 310,050 $ (10,000)(a) $ 46,150
(53,900)(b)
(200,000)(c)
Receivables, net of allowances ......... 229,722 $ 11,753(d) 241,475
Inventories ............................ 27,231 1,116(d) 28,347
Prepaid expenses ....................... 10,374 3,914(d) 14,288
----------- ----------- ----------- -----------
577,377 (263,900) 16,783 330,260
Long-term receivables, net of allowances .... 411,370 21,827(d) 433,197
Cemetery property ........................... 968,332 (640,469)(d) 327,863
Property and equipment ...................... 617,014 (28,443)(d) 588,571
Names and reputations ....................... 606,526 (606,526)(d) --
Reorganization value in excess of
Identifiable assets .................... -- 120,342(e) 120,342
Insurance invested assets ................... 109,972 -- 109,972
Deferred taxes .............................. 3,486 (3,486)(d) --
Pre-arranged funeral services ............... 405,698 10,442(d) 416,140
Other assets ................................ 62,764 10,000(a) (35,654)(d) 37,110
----------- ----------- ----------- -----------
$ 3,762,539 $ (253,900) $(1,145,184) $ 2,363,455
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 93,906 $ 9,027(d) $ 102,933
Long-term debt, current portion ........ 20,000 $ 10,000(c) 7,000(d) 37,000
----------- ----------- ----------- -----------
113,906 10,000 16,027 139,933
Long-term debt, net of current portion ...... 60,000 555,000(c) 168,000(d) 783,000
Other liabilities ........................... 283,273 (234,000)(c) 166,573(d) 215,846
Insurance policy liabilities ................ 60,043 60,043
Deferred taxes .............................. 146,028 (146,028)(d) --
Deferred pre-arranged revenue ............... 1,428,185 (947,052)(d) 481,133
----------- ----------- ----------- -----------
2,091,435 331,000 (742,480) 1,679,955
Liabilities subject to compromise ........... 2,261,160 (2,261,160)(c) --
Stockholders' equity (deficit) .............. (590,056) 1,730,160(c) (474,605)(d) 683,500
(53,900)(b) 71,901(e)
----------- ----------- ----------- -----------
$ 3,762,539 $ (253,900) $(1,145,184) $ 2,363,455
=========== =========== =========== ===========
</TABLE>
The Projections should be read only in conjunction with the assumptions,
qualifications and explanations under the caption " -- Projected Financial
Information" and the consolidated historical financial information, notes and
schedules contained in Exhibit III to this Disclosure Statement.
68
<PAGE> 78
NOTES TO REORGANIZED LGII PROJECTED CONSOLIDATED BALANCE SHEET
(NEW ACCOUNTING POLICIES)
(a) Reflects financing fees and expenses associated with the establishment
of the New Five-Year Secured Notes, the New Seven-Year Unsecured Notes,
the Exit Financing Revolving Credit Facility and the New Unsecured
Subordinated Note.
(b) Reflects the payment of (i) Administrative Claims, (ii) Class 2 and 3
Claims and (iii) certain professional fees and other expenses related
to the Reorganization Cases and the CCAA Proceedings.
(c) Reflects settlement of liabilities subject to compromise and other
transactions in connection with the Plan.
(d) Reflects (i) the write-off of the excess of cost over the net assets
acquired in previous acquisitions and the write-down of identifiable
assets to fair value in accordance with fresh-start reporting and (ii)
the consolidation of Rose Hills as a result of the Blackstone
Settlement.
(e) Reflects the reorganization value in excess of amounts allocable to
identifiable assets in accordance with fresh-start reporting.
69
<PAGE> 79
TLGI AND REORGANIZED LGII
RESTATED PROJECTED CONSOLIDATED BALANCE SHEETS
(NEW ACCOUNTING POLICIES)
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
TLGI REORGANIZED LGII
----------- -----------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002 2003
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash ........................................... $ 292,298 $ 76,464 $ 105,632 $ 89,033
Receivables, net of allowances ................. 234,561 234,206 227,199 229,707
Inventories .................................... 27,231 28,422 28,522 28,622
Prepaid expenses ............................... 10,374 14,213 14,113 14,013
----------- ----------- ----------- -----------
564,464 353,305 375,466 361,375
Long-term receivables, net of allowances ............ 410,695 446,418 466,642 476,504
Cemetery property ................................... 927,510 219,966 253,839 286,078
Property and equipment .............................. 626,173 563,142 531,301 498,507
Reorganization value in excess of identifiable assets 609,236 115,829 109,812 103,795
Insurance invested assets ........................... 109,972 109,972 110,472 111,672
Deferred taxes ...................................... 3,486 -- -- --
Pre-arranged funeral services ....................... 413,011 397,170 371,458 344,531
Other assets ........................................ 63,926 35,951 34,407 32,864
----------- ----------- ----------- -----------
$ 3,728,473 $ 2,241,753 $ 2,253,397 $ 2,215,326
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities .. $ 94,829 $ 101,947 $ 103,514 $ 105,488
Long-term debt, current portion ........... 20,000 37,000 86,000 124,000
----------- ----------- ----------- -----------
114,829 138,947 139,514 229,488
Long-term debt, net of current portion ......... 61,534 771,300 693,426 576,826
Other liabilities .............................. 256,152 219,657 226,041 229,833
Insurance policy liabilities ................... 60,043 60,043 60,043 60,043
Deferred Taxes ................................. 146,028 -- -- --
Deferred pre-arranged revenue .................. 1,452,569 365,007 380,186 371,252
----------- ----------- ----------- -----------
2,091,155 1,554,954 1,549,210 1,467,442
Liabilities subject to compromise .............. 2,277,360 -- -- --
Stockholders' equity
Common shares .................................. 1,276,414 683,500 683,500 683,500
Preferred shares ............................... 157,144 -- -- --
Retained earnings .............................. (2,073,600) 3,299 20,687 64,384
----------- ----------- ----------- -----------
(640,042) 686,799 704,187 747,884
----------- ----------- ----------- -----------
$ 3,728,473 $ 2,241,753 $ 2,253,397 $ 2,215,326
=========== =========== =========== ===========
</TABLE>
The Projections should be read only in conjunction with the assumptions,
qualifications and explanations under the caption " -- Projected Financial
Information" and the consolidated historical financial information, notes and
schedules contained in Exhibit III to this Disclosure Statement.
70
<PAGE> 80
TLGI AND REORGANIZED LGII
PROJECTED CONSOLIDATED STATEMENTS OF OPERATIONS
(NEW ACCOUNTING POLICIES)
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
REORGANIZED REORGANIZED
TLGI LGII LGII
------------------------------- ----------------- ---------------------------
FISCAL JANUARY 1, 2001- APRIL 1, 2001- FISCAL FISCAL FISCAL
2000 MARCH 31, 2001 DECEMBER 31, 2001 2001 2002 2003
----------- ---------------- ----------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Funeral and cemetery .. $ 945,274 $ 231,486 $ 593,226 $ 824,712 $ 833,604 $ 890,942
Insurance ............. 99,035 13,550 40,650 54,200 76,000 88,400
----------- ----------- ----------- ----------- ----------- -----------
1,044,309 245,036 633,876 878,912 909,604 979,342
Expenses
Funeral and cemetery .. 616,006 139,037 416,144 555,181 573,501 602,962
Insurance ............. 79,601 13,550 40,650 54,200 75,500 87,200
----------- ----------- ----------- ----------- ----------- -----------
695,607 152,587 456,794 609,381 649,001 690,162
----------- ----------- ----------- ----------- ----------- -----------
Gross Margin ............. 348,702 92,449 177,082 269,531 260,603 289,180
Expenses
General and
administrative ..... 91,386 25,047 59,816 84,863 71,722 73,023
Depreciation and
amortization ....... 65,771 16,711 31,548 48,259 39,870 40,692
Asset impairment ...... 92,031 -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) from
operations ............ 99,514 50,691 85,718 136,409 149,011 175,465
Interest expense, net . 14,663 3,393 67,361 70,754 87,032 85,166
Amortization of
reorganization value
in excess of amounts
allocable to
identifiable assets -- -- 4,513 4,513 6,017 6,017
Reorganization costs .. 41,433 49,934 3,177 53,111 -- --
Loss (gain) on disposal
of assets .......... 58,540 -- -- -- -- --
Fresh-start valuation
change ............. -- 474,606 -- 474,606
----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) before
income taxes and
extraordinary gain .... (15,121) (477,242) 10,667 (466,575) 55,962 84,282
Income tax expense .... 33,648 2,500 7,500 10,000 38,575 40,584
----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) before
extraordinary gain .... (48,769) (479,742) 3,167 (476,575) 17,387 43,698
Extraordinary gain on
debt discharge ..... -- 1,730,160 -- 1,730,160
----------- ----------- ----------- ----------- ----------- -----------
Net earnings ............. $ (48,769) $ 1,250,418 $ 3,167 $ 1,253,585 $ 17,387 $ 43,698
=========== =========== =========== =========== =========== ===========
</TABLE>
The Projections should be read only in conjunction with the assumptions,
qualifications and explanations under the caption " -- Projected Financial
Information" and the consolidated historical financial information, notes and
schedules contained in Exhibit III to this Disclosure Statement.
71
<PAGE> 81
TLGI AND REORGANIZED LGII
PROJECTED CONSOLIDATED STATEMENTS OF CASH FLOWS
(NEW ACCOUNTING POLICIES)
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
REORGANIZED REORGANIZED
TLGI LGII LGII
---------------------------- ----------------- ------------------------
FISCAL JANUARY 1, 2001- APRIL 1, 2001- FISCAL FISCAL FISCAL
2000 MARCH 31, 2001 DECEMBER 31, 2001 2001 2002 2003
--------- ---------------- ----------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
CASH PROVIDED BY (APPLIED TO)
Operations
Net earnings (loss) ............... $ (48,769) $ 1,250,418 $ 3,167 $ 1,253,585 $ 17,387 $ 43,698
Items not affecting cash
Deferred revenue ................ (115,883) (16,790) (94,233) (111,023) 44,462 21,963
Depreciation and amortization ... 82,226 20,611 46,438 67,049 59,852 60,805
Amortization of reorganization
value in excess of identifiable
assets ........................ -- -- 4,513 4,513 6,017 6,017
Amortization of debt issue costs 2,977 847 212 1,059 282 282
Deferred tax expenses ........... -- -- -- -- -- --
Gain on discharge of debt ....... -- (1,946,360) -- (1,946,360) -- --
Fresh-start valuation change .... -- 474,606 -- 474,606 -- --
Provision for impairment ........ 92,031 -- -- -- -- --
Gain/Loss on disposition ........ 58,464 -- -- -- -- --
Other non-cash .................. 28,726 6,293 21,180 27,473 5,451 (14,979)
Other, including net changes in
other non-cash balances ......... 10,473 (17,168) 82,301 65,133 (47,433) (25,835)
--------- ----------- ----------- ----------- ----------- ---------
110,245 (227,543) 63,578 (163,965) 86,018 91,951
Investing
Insurance invested assets, net .... (47,623) -- -- -- (500) (1,200)
Capital expenditures .............. (25,131) (7,073) (21,375) (28,448) (28,500) (28,500)
Proceeds from asset sale .......... 214,642 -- -- -- -- --
--------- ----------- ----------- ----------- ----------- ---------
141,888 (7,073) (21,375) (28,448) (29,000) (29,700)
Financing
Increase (decrease) in debt ....... (14,216) (1,534) (11,888) (13,422) (27,850) (78,850)
Debt issue costs .................. (785) (10,000) -- (10,000) -- --
--------- ----------- ----------- ----------- ----------- ---------
(15,001) (11,534) (11,888) (23,421) (27,850) (78,850)
--------- ----------- ----------- ----------- ----------- ---------
Increase (decrease) in cash ......... 237,132 (246,150) 30,316 (215,834) 29,168 (16,599)
Cash, beginning of period ........... 55,166 292,298 46,148 292,298 76,464 105,632
--------- ----------- ----------- ----------- ----------- ---------
Cash, end of period ................. $ 292,298 $ 46,148 $ 76,464 $ 76,464 $ 105,632 $ 89,033
========= =========== =========== =========== =========== =========
</TABLE>
The Projections should be read only in conjunction with the assumptions,
qualifications and explanations under the caption " -- Projected Financial
Information" and the consolidated historical financial information, notes and
schedules contained in Exhibit III to this Disclosure Statement.
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<PAGE> 82
REORGANIZED LGII
PROJECTED CONSOLIDATED CAPITALIZATION TABLE
(NEW ACCOUNTING POLICIES)
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
REORGANIZED LGII
--------------------------------------------------------------
MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2001 2002 2003
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash .............................................. $ 46,150 $ 76,464 $ 105,632 $ 89,033
Short-term debt
Long-term debt, current portion ............... 37,000 37,000 86,000 124,000
---------- ---------- ---------- ----------
Total short-term debt and current portion of
long-term debt .............................. 37,000 37,000 86,000 124,000
Long-term debt
New Five-Year Secured Notes ................... 240,000 240,000 220,000 190,000
Rose Hills Term Facility ...................... 59,000 50,000
New Seven-Year Unsecured Notes ................ 325,000 325,000 325,000 325,000
Rose Hills Notes .............................. 80,000 80,000 80,000
New Unsecured Subordinated Note ............... 25,000 25,000 25,000 25,000
Secured promissory notes and capitalized leases 54,000 51,300 43,426 36,826
---------- ---------- ---------- ----------
Total long-term debt ........................ 783,000 771,300 693,426 576,826
---------- ---------- ---------- ----------
Total debt .................................. 820,000 808,300 779,426 700,826
Stockholders' equity
Common shares ................................. 683,500 683,500 683,500 683,500
Retained earnings ............................. -- 3,299 20,687 64,384
---------- ---------- ---------- ----------
Total stockholders' equity .................. 683,500 686,799 704,187 747,884
---------- ---------- ---------- ----------
Total capitalization ........................ $1,503,500 $1,495,099 $1,483,613 $1,448,710
========== ========== ========== ==========
</TABLE>
The Projections should be read only in conjunction with the assumptions,
qualifications and explanations under the caption " -- Projected Financial
Information" and the consolidated historical financial information, notes and
schedules contained in Exhibit III to this Disclosure Statement.
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<PAGE> 83
MANAGEMENT AND BOARD OF DIRECTORS
REORGANIZED LGII BOARD OF DIRECTORS
The Bylaws of Reorganized LGII will provide that the business and
affairs of Reorganized LGII will be managed under the direction of Reorganized
LGII's Board of Directors. The Plan provides that the initial members of the
Reorganized LGII Board of Directors will include: (a) John S. Lacey (who is
presently the Chairman of TLGI); (b) Paul A. Houston (who is presently the
President and Chief Executive Officer of TLGI); and (c) seven additional persons
("Additional Directors"), who will be selected as described below.
Representatives of the Debtors, including Mr. Lacey, have consulted
with representatives of the Creditors' Committee with respect to the composition
of the Reorganized LGII Board of Directors. Based thereon, the Debtors intend to
seek the approval by the Bankruptcy Court of the retention of a nationally
recognized executive/director search firm to assist in identifying candidates
for possible election as Additional Directors. A four-member committee,
comprised of Mr. Lacey, Mr. William R. Riedl (who is presently a director of
TLGI) and two representatives of the Creditors' Committee (the "Nomination
Committee"), will assess the qualifications of Additional Director candidates
identified by such executive/director search firm or otherwise. Mr. Jeffrey
Altman of Franklin Mutual Advisers, LLP, a Subject Debt Holder, will act as an
ex officio member of the Nomination Committee. A five-member committee,
comprised of Mr. Lacey, two or three members of the Creditors' Committee and one
or two representatives of at-large creditors (one of such representatives of the
at-large creditors to be Mr. Altman) (the "Selection Committee"), will then
interview candidates based on the recommendations of the Nomination Committee,
and based thereon, the Selection Committee will make final recommendations with
respect thereto. In the event that issues arise during the process that cannot
be satisfactorily resolved by the Debtors and the participating creditor
representatives, the Debtors will have recourse to the Bankruptcy Court. There
can be no assurance that all Additional Directors will be identified prior to
the Effective Date.
CLASSIFICATION OF THE BOARD
Reorganized LGII's Certificate of Incorporation and Bylaws will provide
that the directors of Reorganized LGII will be classified into three classes,
with the directors of each class serving for three-year terms and until their
successors are elected, except that the initial terms of the initial directors
will expire at the 2002, 2003 and 2004 annual meeting of the stockholders of
Reorganized LGII, depending on the particular class in which each such director
is placed. At each annual meeting of stockholders of Reorganized LGII, the
successors of the directors in the class whose terms expire at that meeting
shall be elected by plurality vote of all votes cast at such meeting to hold
office for a term expiring at the annual meeting of stockholders held in the
third year following the year of their election. In accordance with Reorganized
LGII's Certificate of Incorporation, the number of directors in each class will
be as nearly equal in size as practicable.
The first annual meeting of the stockholders of Reorganized LGII
following the Effective Date will be held in 2002 following completion of
Reorganized LGII's 2001 fiscal year.
BOARD COMMITTEES
The Reorganized LGII Bylaws will provide that the Reorganized LGII
Board of Directors may establish such directorate committees as it may from time
to time determine. It is presently contemplated that the Reorganized LGII Board
of Directors will establish the following committees on or promptly after the
Effective Date: (a) the Audit Review Committee, (b) the Compensation Committee
and (c) the Nominating and Corporate Governance Committee. The composition of
such Committees has not been determined, but it is contemplated that the members
of the Audit Review Committee, the Nominating and Corporate Governance Committee
and the Compensation Committee will be non-employee directors.
The Audit Review Committee is expected to review: (a) the professional
services to be provided by Reorganized LGII's independent auditors; (b) the
independence of such firm from management of Reorganized
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<PAGE> 84
LGII; (c) the scope of the audit by Reorganized LGII's independent auditors; (d)
the annual financial statements of Reorganized LGII; (e) Reorganized LGII's
systems of internal accounting controls; and (f) such other matters with respect
to the accounting, auditing and financial reporting practices and procedures of
Reorganized LGII as it may find appropriate or as may be brought to its
attention. This Committee will also meet from time to time with members of
Reorganized LGII's internal audit staff.
The Compensation Committee will: (a) review executive salaries; (b)
administer the bonus, incentive compensation and stock option plans of
Reorganized LGII; and (c) approve the salaries and other benefits of the
executive officers of Reorganized LGII. See "-- New Benefit Plans and
Agreements." In addition, the Compensation Committee will advise and consult
with Reorganized LGII's management regarding pension and other benefit plans and
compensation policies and practices of Reorganized LGII.
The Nominating and Corporate Governance Committee will consider and
recommend criteria for the selection of nominees for election as directors and
from time to time may select for presentation to the full Board of Directors
recommended director candidates. Subject to the rights, if any, of the holder of
any New Preferred Stock which may in the future be outstanding, the full Board
of Directors may also from time to time select such candidates and in all events
will act in respect of the filling of any vacancies on the Board of Directors,
the recommendation of candidates for nomination for election by the stockholders
and the composition of all directorate committees. The Nominating and Corporate
Governance Committee will also review and report to the full Board of Directors
on a periodic basis with regard to matters of corporate governance.
DIRECTOR NOMINATION PROCEDURES
Reorganized LGII's Bylaws will provide that nominations for election of
directors by the stockholders will be made by Reorganized LGII's Board of
Directors as described above or by any stockholder entitled to vote in the
election of directors generally. Reorganized LGII's Bylaws will require that
stockholders intending to nominate candidates for election as directors provide
timely notice in writing. To be timely, a stockholder's notice must be delivered
to or mailed and received at Reorganized LGII's principal executive offices not
less than 60 calendar days nor more than 90 calendar days prior to the
anniversary date of the date on which Reorganized LGII first mailed proxy
materials for the prior year's annual meeting of stockholders, except that if
there was no annual meeting held during the prior year or if the annual meeting
is called for a date that is not within 30 calendar days before or after that
anniversary, notice by the stockholder in order to be timely must be received
not later than the close of business on the later of the 90th calendar day prior
to such annual meeting or the tenth calendar day following the date on which
public announcement was first made of the date of the annual meeting.
Reorganized LGII's Bylaws will also specify requirements as to the form and
content of a stockholder's notice. These provisions of the Reorganized LGII's
Bylaws may preclude stockholders from making nominations of directors.
DIRECTOR COMPENSATION
For the year in which the Effective Date occurs, each director of
Reorganized LGII who is not an employee of Reorganized LGII or any of its
subsidiaries will be paid an annual base retainer fee of $30,000, plus meeting
fees of $1,500 for attendance at each in-person meeting, and $250 for attendance
at each telephonic meeting, of the Reorganized LGII Board of Directors or a
committee thereof. The chairman of each committee will receive an additional
annual fee of $5,000. Each such director will have the option of receiving such
fees in cash, New Common Stock or a combination thereof. Members of the
Reorganized LGII Board of Directors who are also employees of Reorganized LGII
or any of its subsidiaries will receive no additional compensation for service
on the Reorganized LGII Board of Directors.
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<PAGE> 85
REORGANIZED LGII EXECUTIVE OFFICERS
The executive officers of Reorganized LGII following the Effective Date
are presently expected to include each of the individuals identified below:
<TABLE>
<CAPTION>
NAME AGE ANTICIPATED POSITION WITH REORGANIZED LGII
----------------------- --- ------------------------------------------
<S> <C> <C>
John S. Lacey 57 Chairman of the Board
Paul A. Houston 50 President and Chief Executive Officer
Michael G. Weedon 47 Senior Vice President, Trust and Insurance
Kenneth A. Sloan 51 Senior Vice President, Chief Financial Officer
Bradley D. Stam 53 Senior Vice President, Legal and Asset Management
Gordon Orlikow 40 Senior Vice President, People
James Arthurs 41 Senior Vice President, Chief Information Officer
</TABLE>
Certain biographical information relating to each of the individuals
who is presently expected to serve as an executive officer of Reorganized LGII
is set forth below.
JOHN S. LACEY became the Chairman of the Board of Directors of TLGI in
January 1999. He is not an employee of TLGI or any affiliated company, and
serves as a non-executive Chairman. In December 1998, Mr. Lacey became a
Director of TLGI. From 1998 to November 1998, Mr. Lacey was President and Chief
Executive Officer of The Oshawa Group Ltd. in Toronto, Ontario. From November
1996 to July 1998, Mr. Lacey was President and Chief Executive Officer of WIC
Western International Communications Inc. in Vancouver, British Columbia. From
March 1990 to November 1996, Mr. Lacey was President and Chief Executive Officer
of Scott's Hospitality Inc. in Toronto, Ontario.
PAUL A. HOUSTON became President and Chief Executive Officer of TLGI in
December 1999. In June 1999, Mr. Houston became a Director of TLGI. From August
1996 to October 1999, Mr. Houston was President and Chief Executive Officer of
Scott's Restaurants Inc. From April 1995 to August 1996, Mr. Houston was
President and Chief Operating Officer of Scott's Food Services. From December
1992 to April 1995, Mr. Houston was President of Black Photo Corporation.
MICHAEL G. WEEDON became Senior Vice President, Trust and Insurance of
TLGI in February 2000. In November 1997, Mr. Weedon served TLGI as Chief
Administrative Officer, from November 1997 to July 1998, as Executive Vice
President of Administration, from July 1998 to November 1998, as Executive Vice
President, Operations and Administration, from November 1998 to February 2000,
as Executive Vice President, Administration, Accounting and Control and Chief
Administrative Officer. From December 1996 to November 1997, Mr. Weedon was a
private business consultant and investor. From April 1993 to December 1996, Mr.
Weedon served as Executive Vice President and Chief Operating Officer of
Viridian Inc. (formerly Sherritt Inc.) in Fort Saskatchewan, Alberta. It is
currently anticipated that Mr. Weedon will continue to serve Reorganized LGII
until late 2001, at which time Mr. Weedon expects to leave Reorganized LGII to
pursue other opportunities.
KENNETH A. SLOAN became Senior Vice President, Chief Financial Officer
of TLGI in November 2000. From 1987 to November 2000, Mr. Sloan served as Senior
Executive Vice President Finance and Planning and Chief Financial Officer of
Shoppers Drug Mart Ltd.
BRADLEY D. STAM became Senior Vice President, Legal and Asset
Management of TLGI in February 2000. From March 1998 to February 2000, Mr. Stam
served as Senior Vice President, Law of TLGI. From January 1996 until September
1997, Mr. Stam was President, General Counsel and a director of Western Star
Trucks Holdings Ltd. From June 1995 to January 1996, Mr. Stam was Vice
President, General Counsel and Corporate Secretary of Western Star Trucks
Holdings Ltd. Prior to that time, Mr. Stam was a partner with the Seattle-based
law firm Culp, Dwyer, Guterson & Grader.
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<PAGE> 86
GORDON ORLIKOW became Senior Vice President, People of TLGI in February
2000. From November 1999 to February 2000, Mr. Orlikow served as Senior Vice
President, Human Resources of TLGI. From March 1999 to November 1999, Mr.
Orlikow was a consultant with PricewaterhouseCoopers. From April 1996 to March
1999, Mr. Orlikow was Director of Human Resources of BC Rail Ltd. Prior to that
time, Mr. Orlikow was Manager Employment, Training and Development of BC Rail
Ltd.
JAMES ARTHURS became Senior Vice President, Chief Information Officer
of TLGI in May 2000. Prior to joining TLGI, Mr. Arthurs held the position of
Vice President, Residential and Industrial Operations for the TrusJoist Division
of the Weyerhaeuser Company. Before that, he held a number of senior management
roles at MacMillan Bloedel Limited. Prior to joining MacMillan Bloedel, Mr.
Arthurs was with IBM for 16 years where he held a number of general management
roles.
EXECUTIVE COMPENSATION
The discussion of executive compensation contained in this Disclosure
Statement has been prepared based on the actual compensation paid and benefits
provided during the fiscal year ended December 31, 1999 by the Loewen Companies
to executive officers of TLGI who are expected to be executive officers of
Reorganized LGII as of the Effective Date. The existing employment, compensation
and benefit arrangements of the Loewen Companies that are presently expected to
be maintained by Reorganized LGII as of the Effective Date and certain new
arrangements and modifications to existing arrangements which are presently
expected to become effective as of the Effective Date are also described below.
Existing employment, compensation and benefit arrangements that are expected to
be terminated as of the Effective Date are not described below. See "Item 11 --
Executive Compensation" in Exhibit III to this Disclosure Statement for detailed
information regarding compensation paid and benefits provided by TLGI in the
fiscal year ended December 31, 1999.
Reorganized LGII's executive compensation program will be designed to:
- be competitive with companies of comparable size and complexity
across general North American industry;
- recognize the considerable progress made towards improving the
financial performance of the Loewen Companies through a long
period of instability in 1999 and 2000;
- reward and retain executives to remain in Reorganized LGII's
employ through the potentially turbulent period associated with
implementing the Plan; and
- align long-term incentive executive gains with the interests of
stockholders.
Taking all these factors into account, Reorganized LGII's compensation strategy
will be to benchmark total cash compensation to the 75th percentile of the
marketplace.
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid or payable by the
Loewen Companies during the fiscal year ended December 31, 1999 to the
individual expected to serve as President and Chief Executive Officer of
Reorganized LGII as of the Effective Date and the three other most highly
compensated executive officers of TLGI who are expected to serve as executive
officers of Reorganized LGII as of the Effective Date and whose compensation for
such fiscal year exceeded $100,000. See "-- Management -- Existing Benefit
Plans and Agreements -- Key Employee Retention Program."
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<PAGE> 87
<TABLE>
<CAPTION>
ANTICIPATED POSITION
NAME WITH REORGANIZED LGII SALARY BONUS OTHER COMPENSATION
----------------------- ----------------------- --------- ------- ------------------
<S> <C> <C> <C> <C>
John S. Lacey.......... Chairman of the Board $ 338,461 -- $ 56,770
Paul A. Houston (a).... President and Chief 32,719 -- --
Executive Officer
Michael G. Weedon...... Senior Vice President, 252,406 126,203 --
Trust and Insurance
Bradley D. Stam........ Senior Vice President, 238,232 120,149 --
Legal and Asset
Management
</TABLE>
(a) Paul Houston was named President and Chief Executive Officer of TLGI in
November 1999.
EXISTING BENEFIT PLANS AND AGREEMENTS
Information regarding the existing employment, compensation and benefit
arrangements of the Loewen Companies for executive officers of TLGI that are
presently expected to be maintained by Reorganized LGII as of the Effective Date
for its executive officers is set forth below.
Savings Plans. TLGI maintains a Registered Retirement Savings Plan for
Canadian employees, who may contribute 3% of compensation (subject to a
statutory maximum contribution) to the plan and receive an employer matching
contribution in an equal amount. LGII sponsors a 401(k) Retirement Plan for
United States employees of the Loewen Companies, who may make before-tax
contributions to the plan of up to 15% of compensation (subject to a statutory
maximum contribution) and receive an employer matching contribution of up to 2%
of compensation. These plans will continue to be maintained by Reorganized LGII
after the Effective Date.
Health and Welfare Benefits. Employees of the Debtors participate in
health and other welfare benefit plans providing life insurance, disability and
accidental death and dismemberment benefits. These plans do not provide retiree
medical or other retiree welfare benefits. These plans will continue to be
maintained after the Effective Date.
Key Employee Retention Program. The Debtors adopted the KERP in the
third quarter of 1999. The KERP was designed to attract, retain and provide
incentives to key employees during the financial and business restructuring. The
KERP has been essential to the Debtors' ability to meet these goals during the
Reorganization Cases. The Debtors believe that the KERP will continue to be
critical to the ability of Reorganized LGII to attract and retain key employees
following the Effective Date. The Debtors have obtained authority to continue
and implement the KERP. See "Operations During the Reorganization Cases -- Key
Employees Retention Program." The KERP, as modified, includes the following four
principal components:
1. Retention/Stay Bonuses. The KERP authorized the payment of
retention bonuses to approximately 267 key corporate and cemetery
division employees whose prior incentives were negated as a result
of, among other things, the Filing of the Reorganization Cases.
Retention bonus payments of approximately $2.3 million were made.
2. Annual Incentive Payments. The KERP revised the financial
forecasts and targets of TLGI's annual incentive program for 1999.
Approximately 625 employees were eligible for annual incentive
payments in 1999. As revised, employees were eligible for target
incentive payments depending on the attainment of specified
revised company and individual goals. The aggregate amount of
payments under the KERP for 1999, which were paid in the first
quarter of 2000, was approximately $2.2 million. For subsequent
years, performance goals will be set by the Compensation
Committee, in consultation with the Creditors' Committee until the
Plan is approved.
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<PAGE> 88
3. Emergence Bonus. Under the KERP, approximately 100 key employees
in senior management positions other than Mr. Lacey and Mr.
Houston (see "-- Certain Employment Agreements") are eligible to
receive emergence bonuses based primarily upon the successful
reorganization. The approximately 100 members of senior management
will be paid a bonus upon the Effective Date equal to a percentage
of each employee's salary. Such percentages range from 10% of an
employee's salary up to 50% of an employee's salary, depending on
position. In the discretion of the Compensation Committee of the
TLGI Board, such bonuses may be paid in a combination of cash and
New Common Stock, with the cash portion at least sufficient to
satisfy income tax obligations. One-third of the bonus will be
paid within 15 days of the Effective Date and two-thirds will be
paid within 15 days of the date that is six months after the
Effective Date. The Loewen Companies estimate that, if all of
these employees earn and receive their emergence payments, the
aggregate amount of such payments would be valued at approximately
$8 million.
4. Severance Pay Plan. TLGI adopted a severance pay plan for all of
its employees. The severance pay plan was designed to attract,
retain and provide incentives to employees during TLGI's financial
and business restructuring. The severance pay plan will continue
to be critical to the ability of Reorganized LGII to attract and
retain employees following the Effective Date. The severance pay
plan covers all employees of TLGI and Reorganized LGII. Under the
severance pay plan, employees who are involuntarily terminated
without cause receive an amount equal to a percentage of the
employee's salary, based on the employee's position or years of
service. In general, severance pay will range from an amount equal
to one week's pay up to two years of pay. The Debtors paid
approximately $2.5 million in severance pay to 227 individuals for
the period from March 1999 through December 31, 1999. These
payments were not associated with the KERP, but were made with the
approval of the Bankruptcy Court. The Debtors have obtained
authority to continue the severance pay plan and to pay severance
benefits under the severance pay plan to all employees terminated
from the Petition Date and up to one year after the Effective
Date. See "Operations During the Reorganization Cases -- Key
Employee Retention Program."
An eligible employee's right to participate in the KERP is contingent
upon the employee's executing a release and waiver agreement, under which the
employee waives any rights or claims that he or she may have at law or under
prepetition employment or consulting agreements or company programs with respect
to retention or performance incentive payments or severance or similar benefits.
Certain Employment Agreements. TLGI has entered into employment
agreements with John S. Lacey, its Chairman, and Paul A. Houston, its President
and Chief Executive Officer. Each employment agreement is for a fixed term
ending August 1, 2004, or, if earlier, the date on which the officer terminates
employment. Under their respective employment agreements, Mr. Lacey will receive
an annual base salary of $500,000, and Mr. Houston will receive an annual base
salary of: (a) $425,000 through December 31, 2000; (b) $500,000 for the period
between January 1, 2001 and the earlier of June 1, 2001 or the Effective Date;
and (c) $600,000 thereafter. Base salary is subject to periodic review, and both
officers will have an annual bonus opportunity of up to 100% of base salary
based on the achievement of financial performance goals. In addition, Mr. Lacey
will receive a reorganization bonus of $3 million, and Mr. Houston a
reorganization bonus of $1.5 million, both payable within 15 days of the
Effective Date. Each employment agreement also provides for customary executive
benefits.
Under the employment agreements, Mr. Lacey and Mr. Houston each are
entitled to receive a grant of stock options under the Equity Incentive Plan, as
of the Effective Date, exercisable to purchase 450,000 shares of New Common
Stock. Pursuant to the Plan, TLGI is seeking to modify its employment agreements
with Mr. Lacey and Mr. Houston to provide that each will receive a grant of
stock options under the Equity Incentive Plan, as of the Effective Date,
exercisable to purchase 495,000 shares of New Common Stock. The options will
have a per share exercise price of the average of the daily closing sales price
per share of the New Common Stock as reported on the Nasdaq Stock Market for the
30 consecutive trading days immediately following the Effective Date and will
become exercisable in cumulative installments with respect to 25% of the option
shares on the first and second anniversaries of the date of grant and with
respect to the remaining 50% of the option shares on the third anniversary of
the date of grant.
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<PAGE> 89
If either officer is terminated by TLGI without cause (as defined in
their respective employment agreements), all stock options will become
immediately exercisable, and the officer will be entitled to severance benefits
in the amount of 24 months base salary paid in a lump sum, benefit coverage for
the remaining term of the employment agreement and a prorated bonus for the year
of termination determined without regard to financial performance. In the event
of a change in control (as defined in the employment agreement), the officer
will be entitled to the same severance benefits if, within two years after the
change in control, he is terminated by TLGI without cause or if he resigns
because of certain adverse changes in his compensation, benefits or position. In
addition, if TLGI enters into an agreement that would result in a change in
control, each officer may submit his resignation for any reason prior to, but
effective upon, the date of the change in control, and receive the severance
benefits described above. The employment agreements also provide for tax
gross-up payments if the severance benefits are subject to the excise tax
imposed under the Internal Revenue Code on so-called excess parachute payments.
Mr. Lacey will become the Chairman of Reorganized LGII, and Mr. Houston
the President and Chief Executive Officer of Reorganized LGII, as of the
Effective Date. Reorganized LGII will assume and perform the obligations of TLGI
under these employment agreements as of such date.
In addition to the employment agreements with Mr. Lacey and Mr.
Houston, it is anticipated that Reorganized LGII will enter into employment
agreements with: (a) Kenneth A. Sloan, Senior Vice President, Chief Financial
Officer; (b) Bradley D. Stam, Senior Vice President, Legal and Asset Management;
(c) Gordon Orlikow, Senior Vice President, People; and (d) James Arthurs, Senior
Vice President, Chief Information Officer. The annual base salary for each of
these individuals immediately following the Effective Date is anticipated to be
as follows: Mr. Sloan - $235,000; Mr. Stam - $300,000; Mr. Orlikow - $160,000;
and Mr. Arthurs - $175,000. These executive officers will also be entitled to
one year of salary and bonus if the executive's employment is terminated (not
following a change in control) for any reason other than termination for cause
or voluntary resignation.
NEW BENEFIT PLANS AND AGREEMENTS
Information regarding new employment, compensation and benefit
arrangements that are presently expected to become effective as of the Effective
Date is set forth below.
Equity Incentive Plan. As of the Effective Date, Reorganized LGII will
implement the Equity Incentive Plan to attract, retain and motivate key
employees following the Effective Date. On the Effective Date, options
exercisable for shares of New Common Stock will be granted to certain employees
of the Reorganized Debtors as described on Exhibit IV.C.3 of the Plan.
Thereafter, the Reorganized LGII Board of Directors (or a committee thereof)
will determine the awards to be granted under the Equity Incentive Plan. The
Equity Incentive Plan will provide for grants of stock options or warrants,
restricted stock, deferred shares and other typical equity incentive awards to
the employees and members of the Reorganized LGII Board of Directors. A total of
4,500,000 shares of New Common Stock will be available for issuance in
satisfaction of awards under the Equity Incentive Plan, including the grant of
options to be made as of the Effective Date. Options covering 2,475,000 shares
will be granted on the Effective Date and 2,025,000 shares will be available for
future grants under the Equity Incentive Plan.
Annual Incentive Payments. Under the Annual Incentive Plan, Reorganized
LGII expects to motivate and reward designated key employees for the achievement
of annual corporate, departmental or individual goals and objectives through new
annual cash incentives. The new annual incentives will compensate key employees
chosen by the Compensation Committee of the Board of Directors based on certain
performance levels. If designated performance levels are achieved, key employees
will be eligible to receive a cash bonus payment.
Change in Control Agreements. Reorganized LGII will enter into change
in control severance agreements (the "Severance Agreements") with four executive
officers: Mr. Sloan, Mr. Stam, Mr. Orlikow and Mr. Arthurs. The Severance
Agreements will have an initial term ending on December 31, 2003, and thereafter
will be extended for additional one-year periods unless Reorganized LGII or the
executive gives notice by September 30 of any year that the term of the
Severance Agreement will not be extended. In the event of a change in control of
Reorganized LGII (as defined in the Severance Agreements), the executive will be
entitled to severance benefits if
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the executive's employment is terminated without cause (as defined in the
Severance Agreements) or if the executive resigns because of certain adverse
changes in compensation, benefits or position during either the two-year period
following the change in control or the one-year period prior to a change in
control, but after discussions have begun that ultimately lead to a change in
control.
The severance benefits under the Severance Agreements will consist of a
lump sum payment equal to two times the executive's base salary and two times
the executive's annual bonus (calculated at not less than the highest annual
bonus earned in any of the three years preceding the year in which the change in
control occurred), plus continued benefit coverage for a period of two years and
outplacement services with a value of up to 20% of the executive's base salary.
In addition, vesting with respect to stock options or other long term incentive
compensation will accelerate, and any restrictions on the payment of such
compensation will lapse, on a change in control, and the executive will be
entitled to a tax gross-up payment in the event the severance benefits are
subject to the excise tax imposed under the Internal Revenue Code on so-called
excess parachute payments.
CERTAIN CORPORATE GOVERNANCE MATTERS
INTRODUCTION
Certain provisions of Reorganized LGII's Certificate of Incorporation
and Bylaws and the provisions of the Share Purchase Rights Agreement described
below, together with applicable Delaware state law, may discourage or make more
difficult the acquisition of control of Reorganized LGII by means of a tender
offer, open market purchase, proxy fight or otherwise. These provisions are
intended to discourage, or may have the effect of discouraging, certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of Reorganized LGII first to negotiate with
Reorganized LGII. The management of the Debtors believes that these measures,
many of which are substantially similar to the takeover-related measures in
effect for numerous other publicly-held companies, provide benefits by enhancing
Reorganized LGII's potential ability to negotiate with the proponent of an
unsolicited proposal to acquire or restructure Reorganized LGII, which outweigh
the disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms. In
addition, management of the Debtors believes that such takeover-related measures
aid in protecting stockholders from takeover bids that the directors of such
companies have determined to be inadequate. While there necessarily can be no
assurance in this regard, the management of the Debtors also believes that the
foregoing measures are not likely to have a material impact on market prices for
New Common Stock in circumstances other than those described above in light of,
among other factors, the existence of generally comparable measures in effect
for other publicly-held companies and management's belief that market prices
will be influenced most significantly by Reorganized LGII's actual results of
operations, general market and economic conditions and other traditional
determinants of stock market prices, rather than takeover-related measures and
other corporate governance provisions.
CLASSIFIED BOARD OF DIRECTORS, REMOVAL OF DIRECTORS AND FILLING
VACANCIES IN DIRECTORSHIPS
The Reorganized LGII Certificate of Incorporation will provide that the
Reorganized LGII Board of Directors will be divided into three classes of
directors serving staggered three-year terms. See "-- Management --
Classification of the Board." In addition, the Reorganized LGII Certificate of
Incorporation will provide that directors may be removed only for cause by the
affirmative vote of the holders of at least 80% of securities entitled to vote
generally in the election of directors. Under the Reorganized LGII Certificate
of Incorporation, any vacancy on the Reorganized LGII Board of Directors,
including a vacancy resulting from an enlargement of the Reorganized LGII Board
of Directors, may be filled by the vote of a majority of the directors then in
office. The classification of the Reorganized LGII Board of Directors and the
limitations on the removal of directors and filling of vacancies may deter a
third party from seeking to remove incumbent directors and simultaneously
gaining control of the Reorganized LGII Board of Directors by filling the
vacancies created by such removal with its own nominees.
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STOCKHOLDER ACTION AND SPECIAL MEETINGS OF STOCKHOLDERS
The Reorganized LGII Certificate of Incorporation will eliminate the
ability of stockholders to act by written consent in lieu of a meeting. It will
also provide that special meetings of the stockholders may only be called (a) by
the Chairman of the Board, (b) by the President, (c) by the Secretary within ten
calendar days after receipt of a written request of a majority of the total
number of directors (assuming no vacancies) or (d) by persons holding at least
50% of all shares outstanding and entitled to vote at such meeting. Upon the
receipt by Reorganized LGII of a written request by any stockholder or
stockholders entitled to call a meeting of stockholders, the Board will (a) call
a special meeting of the stockholders for the purposes specified in the request
for a special meeting and (b) fix a record date for the determination of
stockholders entitled to notice of and to vote at such meeting, which record
date will not be later than 60 calendar days after the date of receipt by
Reorganized LGII of the request to call the meeting. No special meeting pursuant
to a stockholders' request will be required to be convened if (a) the Board
calls an annual or special meeting of stockholders to be held not later than 90
calendar days after receipt by Reorganized LGII of a proper request by a
stockholder to call a meeting and (b) the purposes of such annual or special
meeting include the purposes specified in the stockholder's request. The Bylaws
will provide that the business permitted to be conducted at any such meeting
will be limited to that business specified in the notice of the meeting given by
or at the direction of the Chairman of the Board, the President or a majority of
the total number of directors (assuming no vacancies) or that is otherwise
properly brought before the meeting by the presiding officer or by or at the
direction of a majority of the total number of directors (assuming no
vacancies).
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTORS
NOMINATIONS
The Reorganized LGII Bylaws will provide that stockholders seeking to
bring business before an annual meeting of stockholders or nominate candidates
for election as directors at an annual meeting of stockholders must provide
timely notice in writing. To be timely, a stockholder's notice must be delivered
to or mailed and received at Reorganized LGII's principal executive offices not
less than 60 calendar days nor more than 90 calendar days prior to the
anniversary date of the date on which Reorganized LGII first mailed its proxy
materials for the prior year's annual meeting of stockholders, except that if
there was no annual meeting held during the prior year or if the annual meeting
is called for a date that is not within 30 calendar days before or after that
anniversary, notice by the stockholder in order to be timely must be received
not later than the close of business on the later of the 90th calendar day prior
to such annual meeting or the tenth calendar day following the date on which
public announcement was first made of the date of the annual meeting. The
Reorganized LGII Bylaws will also specify requirements as to the form and
content of a stockholder's notice. These provisions may preclude stockholders
from bringing matters before an annual meeting of stockholders or from making
nominations for directors at an annual meeting of stockholders. See "--
Management -- Director Nomination Procedures."
AUTHORIZED BUT UNISSUED SHARES
The Reorganized LGII Certificate of Incorporation will provide that
Reorganized LGII is authorized to issue 100,000,000 shares of New Common Stock,
par value $0.01 per share, and 10,000,000 shares of New Preferred Stock, par
value $0.01 per share. See "Securities To Be Issued Pursuant to the Plan and
Other Post-Reorganization Indebtedness -- New Common Stock" for a description of
the New Common Stock.
The Reorganized LGII Board of Directors will have the authority, within
the limitations and restrictions stated in the Reorganized LGII Certificate of
Incorporation, to provide by resolution for the issuance of shares of New
Preferred Stock, in one or more classes or series, and to fix the rights,
preferences, privileges and restrictions for them, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences
and the number of shares constituting any series and the designation of that
series. Reorganized LGII will be authorized to issue an initial class of New
Preferred Stock that will be designated "Series A Junior Participating Preferred
Stock," as contemplated by the Share Purchase Rights Agreement described below
(the "Series A Preferred Shares"). Each holder of Series A Preferred Shares will
be entitled to 100 votes per share and, except as otherwise required by law,
will vote together with the New Common Stock as a single class on all matters
properly submitted to a vote of a meeting of the stockholders. The Series A
Preferred Shares may be issued only in connection with the exercise of Share
Purchase Rights under the Share Purchase Rights Agreement described below.
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Authorized but unissued shares of New Common Stock and New Preferred
Stock of Reorganized LGII under the Reorganized LGII Certificate of
Incorporation will be available for future issuance without stockholder
approval. These additional shares may be used for a variety of corporate
purposes, including future public offerings to raise additional capital,
corporate acquisitions and employee benefit plans. The existence of authorized
but unissued shares of New Common Stock and New Preferred Stock could render
more difficult or discourage an attempt to obtain control of Reorganized LGII by
means of a proxy contest, tender offer, merger or otherwise.
SUPERMAJORITY VOTE REQUIREMENTS
Delaware law provides generally that the affirmative vote of a majority
of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or bylaws, unless a corporation's
certificate of incorporation or bylaws, as the case may be, requires a greater
percentage. The Reorganized LGII Certificate of Incorporation and Bylaws will
require the affirmative vote of the holders of at least 80% of securities
entitled to vote, to amend, repeal or adopt any provision inconsistent with some
provisions, including those provisions relating to: (a) the classified board of
directors; (b) directorship vacancies and removal of directors; (c) action by
written consent of stockholders; (d) special meetings of stockholders; and (e)
stockholder proposals and nomination of directors.
SHARE PURCHASE RIGHTS AGREEMENT
Pursuant to the Share Purchase Rights Agreement, which agreement will
be approved by the Bankruptcy Court pursuant to the Confirmation Order and
become effective as of the Effective Date, each share of New Common Stock issued
will be accompanied by one Share Purchase Right. Each Share Purchase Right will
provide the holder with the right to purchase one one-hundredth of a share of
Series A Preferred Stock at a price of $70 per one-hundredth of a Series A
Preferred Share, subject to adjustment in accordance with the terms of the Share
Purchase Rights Agreement (the "Purchase Price"). Under the Share Purchase
Rights Agreement, the Share Purchase Rights will be evidenced by the New Common
Stock share certificates until the earlier of the following (the "Distribution
Date"): (a) the close of business on the first date (the "Share Acquisition
Date") of public announcement that a person (other than Reorganized LGII or any
of its subsidiaries or any employee benefit or stock ownership plan of
Reorganized LGII or any of its affiliates or associates), together with its
affiliates and associates, has acquired beneficial ownership of 15% or more (or
25% or more in the case of each of the Principal CTA Creditors (in each case
only if such Principal CTA Creditor, together with its affiliates and
associates, acquires beneficial ownership of at least 15% of the outstanding
shares of New Common Stock solely as a result of distributions made pursuant to
the Plan on account of Allowed Claims held as of the Distribution Record Date)
and any other person that acquired beneficial ownership of at least 15% of the
outstanding shares of New Common Stock solely as a result of distributions made
pursuant to the Plan on account of Allowed Claims held as of the Distribution
Record Date) of the outstanding shares of New Common Stock (any such person or
group being hereinafter called an "Acquiring Person"); or (b) the close of
business on the tenth Business Day (or such later date as may be specified by
the Reorganized LGII Board of Directors) following the commencement of a tender
offer or exchange offer by any person (other than Reorganized LGII or any of its
subsidiaries or any employee benefit or stock ownership plan of Reorganized
LGII, or any of its affiliates or associates), the consummation of which would
result in beneficial ownership by such person of 15% or more of the outstanding
shares of New Common Stock.
Under the Share Purchase Rights Agreement, in the event (a "Flip-in
Event") that: (a) any person or group, together with its affiliates and
associates, becomes an Acquiring Person; (b) any Acquiring Person or any
affiliate or associate thereof merges into or combines with Reorganized LGII and
Reorganized LGII is the surviving corporation; (c) any Acquiring Person or any
affiliate or associate thereof effects certain other transactions with
Reorganized LGII; or (d) during such time as there is an Acquiring Person,
Reorganized LGII effects certain transactions, in each case as described in the
Share Purchase Rights Agreement, then, in each such case, proper provision will
be made so that from and after the later of the Distribution Date and the date
of the occurrence of such Flip-in Event each holder of a Share Purchase Right,
other than Share Purchase Rights that are or were owned beneficially by an
Acquiring Person (which, from and after the date of a Flip-in Event, will be
void), will have the right to receive, upon exercise thereof at the adjusted
Purchase Price, that number of shares of New Common Stock (or, under certain
circumstances, an economically equivalent security or securities of Reorganized
LGII) that at the time of such Flip-in Event have a market value of two times
the Purchase Price, as adjusted.
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At any time after a person has become an Acquiring Person, in the event
(a "Flip-over Event") that: (a) Reorganized LGII merges with or into any person
and Reorganized LGII is not the surviving corporation; (b) any person mergers
with or into Reorganized LGII and Reorganized LGII is the surviving corporation,
but all or part of the New Common Stock is changed or exchanged for stock or
other securities of any other person or cash or any other property; or (c) 50%
or more of Reorganized LGII assets or earning power, including securities
creating obligations of Reorganized LGII, are sold, in each case as described in
the Share Purchase Rights Agreement, then, in each such case, proper provision
will be made so that each holder of a Share Purchase Right, other than Share
Purchase Rights that have become void, will thereafter have the right to
receive, upon the exercise thereof at the adjusted Purchase Price, that number
of shares of common stock (or, under certain circumstances, an economically
equivalent security or securities) of such other person that at the time of such
Flip-over Event have a market value of two times the Purchase Price, as
adjusted.
For all purposes under the Share Purchase Rights Agreement, any person
that becomes the beneficial owner of 15% or more (or 25% or more in the case of
each of the Principal CTA Creditors (in each case only if such Principal CTA
Creditor, together with its affiliates and associates, acquires beneficial
ownership of at least 15% of the outstanding shares of New Common Stock solely
as a result of distributions made pursuant to the Plan on account of Allowed
Claims held as of the Distribution Record Date) and any other person that
acquired beneficial ownership of at least 15% of the outstanding shares of New
Common Stock solely as a result of distributions made pursuant to the Plan on
account of Allowed Claims held as of the Distribution Record Date) of the
then-outstanding shares of New Common Stock solely as a result of a reduction in
the number of shares of New Common Stock outstanding, will not be deemed to have
become an Acquiring Person unless and until such time as (a) such person, or any
affiliate or associate thereof, subsequently becomes the beneficial owner of
additional shares of New Common Stock representing 1% or more of the
then-outstanding New Common Stock or (b) any other person that is the beneficial
owner of shares of New Common Stock representing 1% or more of the
then-outstanding New Common Stock subsequently becomes an affiliate or associate
of such person.
Reorganized LGII may, at its option, redeem the Share Purchase Rights
in whole, but not in part, at a price of $0.01 per Share Purchase Right, subject
to adjustment (the "Redemption Price"), at any time prior to the close of
business on the Share Acquisition Date. Immediately upon any redemption of the
Share Purchase Rights, the right to exercise the Share Purchase Rights will
terminate and the only right of the holders of Share Purchase Rights will be to
receive the Redemption Price. In addition, at any time after the Share
Acquisition Date and prior to the acquisition by any person or group of
affiliated or associated person of 50% or more of the outstanding shares of New
Common Stock, Reorganized LGII may exchange the Share Purchase Rights (other
than any Share Purchase Rights that have become void), in whole or in part, at
an exchange ratio of one share of New Common Stock per Share Purchase Right
(subject to adjustment).
The Share Purchase Rights Agreement may be amended by Reorganized LGII
without the approval of any holders of Share Purchase Rights, including
amendments that (a) increase or decrease the Purchase Price, (b) add other
events requiring adjustment to the Purchase Price payable and the number of the
Series A Preferred Shares or other securities issuable upon the exercise of the
Share Purchase Rights or (c) modify procedures relating to the redemption of the
Share Purchase Rights, except that no amendment may be made that decreases the
stated Redemption Price to an amount less than $0.01 per Share Purchase Right.
The Share Purchase Rights Agreement will expire on (a) the first anniversary of
the Effective Date or (b) such later date as the Reorganized LGII Board of
Directors, by resolution adopted prior to the first anniversary of the Effective
Date, may establish, but not later than the tenth anniversary of the Effective
Date. In accordance with the foregoing, the Reorganized LGII Board of Directors
(a) will have the right to reconsider any of the terms of the Share Purchase
Rights Agreement at any time and (b) may take such action with respect to the
Share Purchase Rights Agreement as the Reorganized LGII Board of Directors deems
appropriate.
DELAWARE SECTION 203
Reorganized LGII will be subject to the provisions of section 203 of
the General Corporation Law of the State of Delaware (the "DGCL"). Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the person became an interested stockholder, unless the interested stockholder
attained that status with the approval of the board of
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directors or the business combination is approved in a prescribed manner. A
"business combination" includes certain mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
Subject to certain exceptions, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within the prior three years
did own, 15% or more of the corporation's voting stock.
LIMITATION OF LIABILITY; INDEMNITY ARRANGEMENTS
The Reorganized LGII Certificate of Incorporation will limit the
liability of the directors of Reorganized LGII to the maximum extent permitted
by the DGCL. The DGCL provides that a director of a corporation will not be
personally liable for monetary damages for breach of that individual's fiduciary
duties as a director except for liability for any of the following: (a) a breach
of the director's duty of loyalty to the corporation or its stockholders, (b)
any act or omission not in good faith or that involves intentional misconduct or
a knowing violation of the law, (c) unlawful payments of dividends or unlawful
stock repurchases or redemptions or (d) any transaction from which the director
derived an improper personal benefit. This limitation of liability does not
apply to liabilities arising under federal securities laws and does not affect
the availability of equitable remedies such as injunctive relief or rescission.
Section 145 of the DGCL provides that a corporation may indemnify
directors and officers, as well as other employees and individuals, against
attorneys' fees and other expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
any threatened, pending or completed actions, suits or proceedings in which such
person was or is a party or is threatened to be made a party by reason of such
person being or having been a director, officer, employee or agent of the
corporation. The DGCL provides that section 145 is not exclusive of other rights
to which those seeking indemnification may be entitled under any bylaw,
agreement, vote of stockholders of disinterested directors or otherwise.
The Reorganized LGII Certificate of Incorporation will provide that
Reorganized LGII is required to indemnify its directors and officers to the
maximum extent permitted by law. Notwithstanding the foregoing, the Reorganized
LGII Certificate of Incorporation will not require Reorganized LGII to indemnify
any such directors and officers in connection with any Proceeding (as such term
is defined in the Reorganized LGII Certificate of Incorporation) that is
initiated prior to the Effective Date; provided, however, that Reorganized LGII
may, in its sole discretion, elect to provide such indemnification in the event
that any of the Debtors' directors and officers liability insurance carriers
fails or refuses to provide coverage. The Reorganized LGII Certificate of
Incorporation also will require Reorganized LGII to advance expenses incurred by
an officer or director in connection with the defense of any action or
proceeding arising out of that party's status or service as a director or
officer of Reorganized LGII or as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, if serving as such at Reorganized LGII's request. In addition,
the Reorganized LGII Certificate of Incorporation will permit Reorganized LGII
to secure insurance on behalf of any director or officer for any liability
arising out of his or her actions in a representative capacity.
It is anticipated that Reorganized LGII will enter into indemnification
agreements with its directors and its executive officers containing provisions
that will obligate Reorganized LGII to: (a) indemnify, to the maximum extent
permitted by Delaware law, those directors and officers against liabilities that
may arise by reason of their status or service as directors or officers, except
liabilities arising from willful misconduct of a culpable nature; (b) advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified; and (c) obtain directors' and officers' liability
insurance if maintained for other directors of officers.
The management of the Debtors believes that the provisions of
Reorganized LGII's Certificate of Incorporation described above and
indemnification agreements are necessary to attract and retain qualified persons
as directors and officers.
Under the Plan and subject to the provisions described below and in
Section V.E of the Plan, the obligations of each Debtor or Reorganized Debtor to
indemnify any person serving as one of its directors, officers or employees as
of December 31, 2000 by reason of such person's prior or future service in such
a capacity or as a director, officer or employee of another corporation,
partnership or other legal entity to the extent provided in the applicable
articles of incorporation, code of regulations or similar constituent documents,
by statutory law or by
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written agreement, policies or procedures of or with such Debtor, will be deemed
and treated as executory contracts that are assumed by the applicable Debtor or
Reorganized Debtor pursuant to the Plan and section 365 of the Bankruptcy Code
as of the Effective Date, to the extent that the provision of such
indemnification is authorized by the certificate of incorporation or similar
constituent document of the applicable Reorganized Debtor. Accordingly, such
indemnification obligations will survive and be unaffected by entry of the
Confirmation Order, irrespective of whether such indemnification is owed for an
act or event occurring before or after the Petition Date. The obligations of
each Debtor or Reorganized Debtor to indemnify any person who, as of December
31, 2000, was no longer serving as a director, officer or employee of such
Debtor or Reorganized Debtor, which indemnity obligation arose by reason of such
person's prior service in any such capacity or as a director, officer or
employee of another corporation, partnership or other legal entity, whether
provided in the applicable articles of incorporation, code of regulations or
similar constituent documents, by statutory law or by written agreement,
policies or procedures of or with such Debtor, will terminate and be discharged
pursuant to section 502(e) of the Bankruptcy Code or otherwise, as of the
Effective Date; provided, however, that, to the extent that such indemnification
obligations no longer give rise to contingent Claims that can be disallowed
pursuant to section 502(e) of the Bankruptcy Code, such indemnification
obligations will be deemed and treated as executory contracts that are rejected
by the applicable Debtor pursuant to the Plan and section 365 of the Bankruptcy
Code, as of the Effective Date, and any Claims arising from such indemnification
obligations (including any rejection damage claims) will be subject to the bar
date provisions of Section V.D of the Plan. Additionally, Reorganized LGII will
purchase a director and officer insurance policy to cover claims against any
person serving as one of the Debtors' directors, officers and employees as of
December 31, 2000 for acts occurring prior to the Effective Date.
SECURITIES TO BE ISSUED PURSUANT TO THE PLAN AND
OTHER POST-REORGANIZATION INDEBTEDNESS
REORGANIZATION VALUE
The Debtors have been advised by Wasserstein with respect to the range
of estimated reorganization equity value of Reorganized LGII and the other
Reorganized Debtors. The midpoint of the reorganization equity value range,
which includes the Loewen Companies' operating businesses, the expected present
value of certain non-operating assets and the estimated debt balances at and
beyond the Effective Date, was estimated by Wasserstein to be approximately
$683.5 million as of an assumed Effective Date of March 31, 2001. The foregoing
reorganization equity value (ascribed as of the date of this Disclosure
Statement) reflects, among other factors discussed below, current financial
market conditions and the inherent uncertainty as to the achievement of the
Projections.
Based on the assumed reorganization equity value set forth above, the
midpoint value of the 40,000,000 shares of New Common Stock to be issued to the
holders of Allowed Claims and Interests under the Plan is estimated to be
approximately $17.09 per share. The foregoing valuations also reflect a number
of assumptions, including a successful reorganization of the Debtors' businesses
and finances in a timely manner, the forecasts reflected in the Projections, the
amount of available cash, market conditions and the Plan becoming effective in
accordance with its terms on a basis consistent with the estimates and other
assumptions discussed herein.
In preparing the estimated reorganization equity value, Wasserstein:
(a) reviewed certain historical financial information of the Loewen Companies
for recent years and interim periods; (b) reviewed certain internal financial
and operating data of the Loewen Companies and assisted in developing financial
projections relating to their businesses and prospects; (c) met with certain
members of senior management of the Loewen Companies to discuss the Loewen
Companies' operations and future prospects; (d) reviewed publicly available
financial data and considered the market values of public companies that
Wasserstein deemed generally comparable to the operating businesses of the
Loewen Companies; (e) reviewed the financial terms, to the extent publicly
available, of certain acquisitions of companies that Wasserstein believes were
comparable to the operating businesses of the Loewen Companies; (f) considered
certain economic and industry information relevant to the Loewen Companies'
operating businesses; and (g) reviewed certain analyses prepared by other firms
retained by the Debtors and conducted such other analyses as Wasserstein deemed
appropriate. Although Wasserstein conducted a review and analysis of the Loewen
Companies' businesses, operating assets and liabilities and business plans,
Wasserstein assumed and relied on the accuracy and completeness of all (a)
financial and other information furnished to it by the Debtors and by
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other firms retained by the Debtors and (b) publicly available information. In
addition, Wasserstein did not independently verify the assumptions underlying
the Projections in connection with such valuation. No independent evaluations or
appraisals of the Debtors' assets were sought or were obtained in connection
therewith.
Estimates of reorganization equity value do not purport to be
appraisals, nor do they necessarily reflect the values that might be realized if
assets were to be sold. The estimates of reorganization equity value prepared by
Wasserstein assume that the Reorganized Debtors will continue as the owner and
operator of their businesses and assets. Such estimates were developed solely
for purposes of formulation and negotiation of a plan of reorganization and
analysis of implied relative recoveries to creditors thereunder. Such estimates
reflect computations of the estimated reorganization equity value of the Loewen
Companies through the application of various valuation techniques and do not
purport to reflect or constitute appraisals, liquidation values or estimates of
the actual market value that may be realized through the sale of any securities
to be issued pursuant to the Plan, which may be significantly different from the
amounts set forth herein. The value of an operating business is subject to
uncertainties and contingencies that are difficult to predict and will fluctuate
with changes in factors affecting the financial conditions and prospects of such
a business. As a result, the estimate of reorganization equity value set forth
herein is not necessarily indicative of actual outcomes, which may be
significantly more or less favorable than those set forth herein. Because such
estimates are inherently subject to uncertainties, none of the Loewen Companies,
Wasserstein or any other person assumes responsibility for their accuracy.
Depending on the results of the Debtors' operations or changes in the financial
markets, Wasserstein's valuation analysis as of the Effective Date may differ
from that disclosed herein.
In addition, the valuation of newly-issued securities is subject to
additional uncertainties and contingencies, all of which are difficult to
predict. Actual market prices of such securities at issuance will depend upon,
among other things, prevailing interest rates, conditions in the financial
markets, the anticipated initial securities holding of prepetition creditors,
some of which may prefer to liquidate their investment rather than hold it on a
long-term basis, and other factors that generally influence the prices of
securities. Actual market prices of such securities also may be affected by the
Debtors' history in chapter 11, conditions affecting the Debtors' competitors or
the industry generally in which the Debtors participate or by other factors not
possible to predict. Accordingly, the reorganization equity value estimated by
Wasserstein does not necessarily reflect, and should not be construed as
reflecting, values that will be attained in the public or private markets. The
equity value ascribed in the analysis does not purport to be an estimate of the
post-reorganization market trading value. Such trading value may be materially
different from the reorganization equity value ranges associated with
Wasserstein's valuation analysis. Indeed, there can be no assurance that a
trading market will develop for the New Common Stock.
Furthermore, in the event that the actual distributions to Claim
holders in particular Divisions of Class 9 differ from those assumed by the
Debtors in their recovery analysis, the actual recoveries realized by holders of
Claims in those Divisions could be significantly higher or lower than estimated
by the Debtors.
NEW COMMON STOCK
As of the Effective Date, Reorganized LGII will be authorized to issue
100,000,000 shares of New Common Stock, par value $0.01 per share, of which: (a)
approximately 40,000,000 shares will be distributed to holders of Allowed Claims
in Classes 5, 6 and 9; and (b) up to 4,500,000 shares will be reserved for
issuance under the Equity Incentive Plan, of which 2,475,000 shares will be
reserved for issuance pursuant to the options granted to certain employees as of
the Effective Date. See "Reorganized LGII -- Management -- New Benefit Plans and
Agreements."
The holders of New Common Stock will be entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders and will
not have cumulative voting rights. See "Distributions Under the Plan -- Disputed
Claims; Reserve and Estimations" and Section VI.E.2 of the Plan for provisions
regarding voting of New Common Stock held in the Unsecured Claims Reserves.
Holders of New Common Stock will be entitled to receive ratably such dividends
as may be declared by Reorganized LGII's Board of Directors out of funds legally
available for payment of dividends. However, it is not presently anticipated
that dividends will be paid on New Common Stock in the foreseeable future. See
"Risk Factors -- Dividend Policies; Restrictions on Payment of Dividends." In
the event of a liquidation, dissolution or winding up of Reorganized LGII,
holders of New Common Stock will be
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entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preference of any New Preferred Stock. Holders of New Common
Stock will have no preemptive, subscription, redemption or conversions rights.
All of the outstanding shares of New Common Stock to be issued pursuant
to the Plan will be, upon such issuance, validly issued, fully paid and
nonassessable. Subject to the terms and conditions set forth in the Share
Purchase Rights Agreement, each share of New Common Stock issued pursuant to the
Plan will be accompanied by a Share Purchase Right. See "Reorganized LGII --
Certain Corporate Governance Matters -- Share Purchase Rights Agreement."
NEW FIVE-YEAR SECURED NOTES
GENERAL
Under the Plan, on the Effective Date, holders of Allowed CTA Note
Claims in Class 5 may receive, among other things, New Five-Year Secured Notes
in respect of their Claims. New Five-Year Secured Notes will not be issued if
the Exit Financing Term Loan Closing occurs. See "Overview of the Plan --
Summary of Classes and Treatment of Claims and Interests."
The New Five-Year Secured Notes are to be issued under the New
Five-Year Secured Notes Indenture to be dated as of the Effective Date between
Reorganized LGII and the trustee named therein. The following description of the
New Five-Year Secured Notes is qualified in its entirety by reference to the
Five-Year Secured Notes Indenture, a copy of which will be filed as Exhibit
I.A.91 to the Plan and will be available in the Document Reviewing Centers.
The New Five-Year Secured Notes will mature on the fifth anniversary of
the Effective Date and will bear interest at the rate of the London Interbank
market rate of interest plus 2% per annum, payable semiannually on June 15 and
December 15 of each year, commencing June 15, 2001. Reorganized LGII will pay on
each of the dates indicated below the amount of principal of the New Five-Year
Secured Notes set forth opposite such date:
<TABLE>
<CAPTION>
Principal
Date Repayment
---- ---------
<S> <C>
1st anniversary of Effective Date.......... $10 million
2nd anniversary of Effective Date.......... $20 million
3rd anniversary of Effective Date.......... $30 million
4th anniversary of Effective Date.......... $40 million
5th anniversary of Effective Date.......... $150 million
</TABLE>
RANKING AND COLLATERAL
The New Five-Year Secured Notes will be senior and secured by the
capital stock of Restricted Subsidiaries (as defined in the New Five-Year
Secured Notes Indenture), each of which will be wholly owned directly or
indirectly by Reorganized LGII. The security interest in such capital stock will
be subject to release in order to effectuate: (a) mergers between Restricted
Subsidiaries or of Restricted Subsidiaries into Reorganized LGII; or (b) certain
permitted asset sales, including sales of the Disposition Properties.
OPTIONAL REDEMPTION; MANDATORY OFFER TO REPURCHASE UPON A CHANGE OF
CONTROL
The New Five-Year Secured Notes are redeemable at any time at the
option of Reorganized LGII, in whole or in part. Upon the occurrence of a Change
of Control (as defined in the New Five-Year Secured Notes Indenture),
Reorganized LGII will be required to offer to purchase all of the
then-outstanding New Five-Year Secured Notes.
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<PAGE> 98
The price of any such redemption or repurchase of the New Five-Year Secured
Notes shall be equal to 100% of the stated principal amount plus accrued and
unpaid interest to the applicable redemption or repurchase date.
EVENTS OF DEFAULT
Each of the following events will constitute an Event of Default (as
defined in the New Five-Year Secured Notes Indenture) with respect to the New
Five-Year Secured Notes: (a) default in the payment of interest when due and
payable and the continuance of such default for 30 days; (b) default in the
payment of principal or premium, if any, when due and payable; (c) default in
the performance of or compliance with any covenant and the continuance of such
default for 60 days after notice to Reorganized LGII by the trustee or to
Reorganized LGII and the trustee by holders of at least 25% of the aggregate
principal amount of outstanding New Five-Year Secured Notes; (d) default under
any Indebtedness (as defined in the New Five-Year Secured Notes Indenture) under
which Reorganized LGII or any Restricted Subsidiary then has outstanding
Indebtedness in excess of $50 million and either such Indebtedness is due and
payable in full or such default has resulted in the acceleration of the maturity
of such Indebtedness; and (e) specified events involving bankruptcy or other
insolvency-related matters.
AFFIRMATIVE COVENANTS
Except to the extent otherwise permitted under the New Five-Year
Secured Notes Indenture, Reorganized LGII will (and, where applicable, will
cause each of its Restricted Subsidiaries to): (a) pay the principal of and
interest on the New Five-Year Secured Notes on the dates and in the manner
provided in the New Five-Year Secured Notes Indenture; (b) maintain an office or
agency in the Borough of Manhattan, the City of New York, for the purposes of
registration of transfer or exchange, presentation for payment and notices and
demands; (c) preserve and keep in full force and effect their respective
existence and rights, licenses or franchises; (d) pay or discharge all taxes,
assessments and governmental charges levied upon them or their income, profits
or property and all claims which, if unpaid, might result in a Lien (as defined
in the New Five-Year Secured Notes Indenture) upon their property; (e) maintain
and keep their properties and assets in good condition, repair and working order
(reasonable wear and tear excepted); (f) maintain insurance as may be required
by law and as is customarily maintained by companies similarly situated; (g)
keep proper books and records; (h) comply with all statutes, laws, ordinances or
governmental rules and regulations to which it is subject; and (i) file with the
SEC, or, if not permitted or required to so file, deliver to the trustee under
the New Five-Year Secured Notes Indenture, the annual reports, quarterly reports
and the information, documents and other reports required to be filed with the
SEC pursuant to sections 13 and 15 of the Exchange Act, whether or not
Reorganized LGII has a class of securities registered under such act.
NEGATIVE COVENANTS
Except as otherwise permitted under the New Five-Year Secured Notes
Indenture, Reorganized LGII will not (and, where applicable, will cause each of
its Restricted Subsidiaries not to): (a) create, incur, issue, assume, guarantee
or otherwise become liable for any Funded Indebtedness (as defined in the New
Five-Year Secured Notes Indenture) unless at the time the Consolidated Fixed
Charge Coverage Ratio (as defined in the New Five-Year Secured Notes Indenture)
of Reorganized LGII is at least equal to 1:1; (b) declare, make or pay any
Restricted Payments (as defined in the New Five-Year Secured Notes Indenture)
unless (i) immediately after such Restricted Payments, Reorganized LGII could
properly incur an additional dollar of Funded Indebtedness and (ii) the
aggregate amount of all Restricted Payments declared or made would not exceed
the sum of (A) $25 million plus (B) 50% of the aggregate Consolidated Net Income
(as defined in the New Five-Year Secured Notes Indenture) of Reorganized LGII
during the period beginning on the Effective Date and ending on the last day of
the fiscal quarter of Reorganized LGII preceding the date of such proposed
Restricted Payment, which period shall be treated as a single accounting period
(or, if such aggregate cumulative Consolidated Net Income for such period shall
be a deficit, minus 100% of such deficit) plus (C) the aggregate net cash
proceeds received by Reorganized LGII for the issuance or sale of capital stock
after the Effective Date; (c) create or permit to exist or become effective any
contractual restriction on the ability of any Restricted Subsidiary to pay
dividends on its capital stock or to pay its obligations owed to Reorganized
LGII, except as required by applicable law; (d) create, incur, assume or suffer
to exist any Liens of any kind against or upon any of its properties or assets
where the aggregate amount of Indebtedness secured by any such Liens exceeds 25%
of Reorganized LGII's Consolidated Net Worth (as defined in the New Five-Year
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<PAGE> 99
Secured Notes Indenture); (e) make any Asset Sale (as defined in the New
Five-Year Secured Notes Indenture) (other than sales of assets identified as
Disposition Properties), except sales of assets involving $50 million or less,
unless the proceeds of the Asset Sale are reinvested in Replacement Assets (as
defined in the New Five-Year Secured Notes Indenture) or are used to make an
offer to purchase New Five-Year Secured Notes at 100% of stated principal amount
(plus accrued and unpaid interest thereon) as provided by the New Five-Year
Secured Notes Indenture; or (f) enter into any transaction with an Affiliate (as
defined in the New Five-Year Secured Notes Indenture) of Reorganized LGII (other
than wholly owned subsidiaries or any subsidiary that is not wholly owned solely
to comply with regulatory requirements) unless such transaction is on terms no
less favorable than those that could have been obtained in a comparable
transaction with a non-Affiliate and, with respect to any transaction involving
aggregate payments or value of $10 million or greater, Reorganized LGII has
obtained a written opinion from an Independent Financial Advisor (as defined in
the New Five-Year Secured Notes Indenture) stating such transaction is fair to
Reorganized LGII from a financial point of view. Certain negative covenants
(e.g., those described in items (a) - (f) in the preceding sentence) will be
suspended during any time period when the New Five-Year Secured Notes are rated
not less than BBB- and Baa3 by Standard & Poor's Corporation and Moody's
Investors Service, Inc., respectively.
AMENDMENT, WAIVER OR MODIFICATION OF INDENTURE
The affirmative vote of the holders of at least a majority of the
aggregate principal amount of the New Five-Year Secured Notes will be required
to approve amendments, waivers or other modifications to the New Five-Year
Secured Notes Indenture other than amendments, waivers or other modifications
customarily requiring unanimous noteholder approval under indentures similar to
the New Five-Year Secured Notes Indenture, including the obligation of
Reorganized LGII to offer to purchase outstanding New Seven-Year Unsecured Notes
upon the occurrence of a Change of Control (all of which will require unanimous
approval).
REMEDIES UPON DEFAULT
After an Event of Default has occurred and is continuing under the New
Five-Year Secured Notes Indenture, the trustee or holders of at least 25% of the
aggregate outstanding principal amount of the New Five-Year Secured Notes may
declare the entire principal amount of and accrued and unpaid interest on the
New Five-Year Secured Notes to be immediately due and payable. The holders of a
majority in outstanding principal amount of the New Five-Year Secured Notes may
rescind any such acceleration as provided in the New Five-Year Secured Notes
Indenture.
TRUSTEE DUTIES AND INDEMNIFICATION
The holders of a majority in aggregate outstanding principal amount of
the New Five-Year Secured Notes may direct the time, method and place of
conducting any proceeding for any remedy available to the trustee or exercising
any trust or power conferred on the trustee, provided that the trustee, with
advice of counsel, may decline to follow such direction if the direction is in
conflict with any rule of law or the New Five-Year Secured Notes Indenture or if
the trustee in good faith determines that the action so directed would be unduly
prejudicial to any holders of the New Five-Year Secured Notes not taking part in
such direction or would expose the trustee to personal liability. Before
proceeding to exercise any right or power under the New Five-Year Secured Notes
Indenture at the direction of the noteholders, the trustee will be entitled to
receive from such holders reasonable security or indemnity satisfactory to it
against the costs, expenses and liabilities that might be incurred by it in
complying with any such direction.
No holder of the New Five-Year Secured Notes will have any right to
pursue any remedy with respect to the New Five-Year Secured Notes Indenture or
the New Five-Year Secured Notes, unless (a) such holder has previously given the
trustee written notice of a continuing Event of Default, (b) the holders of at
least 25% in aggregate principal amount of the outstanding New Five-Year Secured
Notes have made a written request to the trustee to pursue such remedy and
offered reasonable indemnity satisfactory to the trustee, (c) the trustee has
not received from the holders of a majority in aggregate principal amount of the
outstanding New Five-Year Secured
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Notes a direction inconsistent with such request within 60 days after receipt of
such request and (d) the trustee has failed to comply with the request within
such 60-day period.
NEW TWO-YEAR UNSECURED NOTES
GENERAL
Under the Plan, on the Effective Date, holders of Allowed CTA Note
Claims in Class 5 may receive, among other things, New Two-Year Unsecured Notes
in respect of their Claims. New Two-Year Unsecured Notes will be issued only if
the Realized Asset Disposition Proceeds Amount is less than $165 million. See
"Overview of the Plan -- Summary of Classes and Treatment of Claims and
Interests."
The New Two-Year Unsecured Notes are to be issued under the New
Two-Year Unsecured Notes Indenture to be dated as of the Effective Date between
Reorganized LGII and the trustee named therein. The following description of the
New Two-Year Unsecured Notes is qualified in its entirety by any reference to
the New Two-Year Unsecured Notes Indenture, a copy of which will be filed as
Exhibit I.A.99 to the Plan and will be available in the Document Reviewing
Centers.
The New Two-Year Unsecured Notes will mature on the second anniversary
of the Effective Date and will bear interest at a rate of 12-1/4% per annum,
payable semiannually on June 15 and December 15 of each year, commencing on June
15, 2001.
RANKING
The New Two-Year Unsecured Notes will be unsecured senior obligations
of Reorganized LGII, ranking equally with other senior unsecured indebtedness of
Reorganized LGII (including the New Seven-Year Unsecured Notes), senior to any
subordinated indebtedness of Reorganized LGII, and effectively junior to any
secured indebtedness of Reorganized LGII (including the New Five-Year Secured
Notes) and all liabilities of Reorganized LGII's subsidiaries.
OPTIONAL AND MANDATORY REDEMPTION; MANDATORY OFFER TO REPURCHASE UPON A
CHANGE OF CONTROL
The New Two-Year Unsecured Notes are redeemable at any time at the
option of Reorganized LGII, in whole or in part. In addition, Reorganized LGII
will be required to apply Net Proceeds received by the Reorganized Debtors
following the Effective Date in respect of the sale of any Disposition
Properties to the redemption of the New Two-Year Unsecured Notes, provided,
however, that Reorganized LGII will not be required to apply Net Proceeds so
received to such redemption if the amount of such Net Proceeds would be an
amount less than $5 million, but any such Net Proceeds shall be carried forward
and applied to redemption after the receipt of, and together with, any
subsequent Net Proceeds which, together with such Net Proceeds and any other
amount or amounts so carried forward, shall aggregate $5 million or more.
Furthermore, upon the occurrence of a Change of Control (as defined in the New
Two-Year Unsecured Notes Indenture), Reorganized LGII will be required to offer
to purchase all of the then-outstanding New Two-Year Unsecured Notes. The price
of any such redemption or repurchase of the New Two-Year Unsecured Notes shall
be equal to 100% of stated principal amount plus accrued and unpaid interest to
the applicable redemption or repurchase date.
EVENTS OF DEFAULT
Each of the following events will constitute an Event of Default (as
defined in the New Two-Year Unsecured Notes Indenture) with respect to the New
Two-Year Unsecured Notes: (a) default in the payment of interest when due and
payable and the continuance of such default for 30 days; (b) default in the
payment of principal or premium, if any, when due and payable; (c) default in
the performance of or compliance with any covenant and the continuance of such
default for 60 days after notice to Reorganized LGII by the trustee or to
Reorganized LGII and the trustee by holders of at least 25% of the aggregate
principal amount of outstanding New
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Two-Year Unsecured Notes; (d) default under any Indebtedness (as defined in the
New Two-Year Unsecured Notes Indenture) under which Reorganized LGII or any
Restricted Subsidiary then has outstanding Indebtedness in excess of $50 million
and either such Indebtedness is due and payable in full or such default has
resulted in the acceleration of the maturity of such Indebtedness; and (e)
specified events involving bankruptcy or other insolvency-related matters.
AFFIRMATIVE COVENANTS
Except to the extent otherwise permitted under the New Two-Year
Unsecured Notes Indenture, Reorganized LGII will (and, where applicable, will
cause each of its Restricted Subsidiaries to): (a) pay the principal of and
interest on the New Two-Year Unsecured Notes on the dates and in the manner
provided in the New Two-Year Unsecured Notes Indenture; (b) maintain an office
or agency in the Borough of Manhattan, the City of New York, for the purposes of
registration of transfer or exchange, presentation for payment and notices and
demands; (c) preserve and keep in full force and effect their respective
existence and rights, licenses or franchises; (d) maintain and keep their
properties and assets in good condition, repair and working order (reasonable
wear and tear excepted); (e) maintain insurance as may be required by law and as
is customarily maintained by companies similarly situated; (f) keep proper books
and records; and (g) comply with all statutes, laws, ordinances or governmental
rules and regulations to which it is subject.
NEGATIVE COVENANTS
Except as otherwise permitted under the New Two-Year Unsecured Notes
Indenture, Reorganized LGII will not (and, where applicable, will cause each of
its Restricted Subsidiaries not to): (a) declare, make or pay any Restricted
Payments (as defined in the New Two-Year Unsecured Notes Indenture) unless the
aggregate amount of all Restricted Payments declared or made would not exceed
the sum of (i) $25 million plus (ii) 50% of the aggregate Consolidated Net
Income (as defined in the New Two-Year Unsecured Notes Indenture) of Reorganized
LGII during the period beginning on the Effective Date and ending on the last
day of the fiscal quarter of Reorganized LGII preceding the date of such
proposed Restricted Payment, which period shall be treated as a single
accounting period (or, if such aggregate cumulative Consolidated Net Income for
such period shall be a deficit, minus 100% of such deficit) plus (iii) the
aggregate net cash proceeds received by Reorganized LGII from the issuance or
sale of capital stock after the Effective Date; (b) create or permit to exist or
become effective any contractual restriction on the ability of any Restricted
Subsidiary to pay dividends on its capital stock or to pay its obligations owed
to Reorganized LGII, except as required by applicable law; and (c) enter into
any transaction with an Affiliate (as defined in the New Two-Year Unsecured
Notes Indenture) of Reorganized LGII (other than wholly owned subsidiaries or
any subsidiary that is not wholly owned solely to comply with regulatory
requirements) unless such transaction is on terms no less favorable than those
that could have been obtained in a comparable transaction with a non-Affiliate
and, with respect to any transaction involving aggregate payments or value of
$50 million or greater, Reorganized LGII has obtained a written opinion from an
Independent Financial Advisor (as defined in the New Two-Year Unsecured Notes
Indenture) stating such transaction is fair to Reorganized LGII from a financial
point of view.
AMENDMENT, WAIVER OR MODIFICATION OF INDENTURE
The affirmative vote of the holders of at least a majority of the
aggregate principal amount of the New Two-Year Unsecured Notes will be required
to approve amendments, waivers or other modifications to the New Two-Year
Unsecured Notes Indenture other than amendments, waivers or other modifications
customarily requiring unanimous noteholder approval under indentures similar to
the New Two-Year Note Indenture, including the obligation of Reorganized LGII to
offer to purchase outstanding New Two-Year Unsecured Notes upon the occurrence
of a Change of Control (all of which will require unanimous approval).
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REMEDIES UPON DEFAULT
After an Event of Default has occurred and is continuing under the New
Two-Year Unsecured Notes Indenture, the trustee or holders of at least 25% of
the aggregate outstanding principal amount of the New Two-Year Unsecured Notes
may declare the entire principal amount of and accrued and unpaid interest on
the New Two-Year Unsecured Notes to be immediately due and payable. The holders
of a majority in outstanding principal amount of the New Two-Year Unsecured
Notes may rescind any such acceleration as provided in the New Two-Year
Unsecured Notes Indenture.
TRUSTEE DUTIES AND INDEMNIFICATION
The holders of a majority in aggregate outstanding principal amount of
the New Two-Year Unsecured Notes may direct the time, method and place of
conducting any proceeding for any remedy available to the trustee or exercising
any trust or power conferred on the trustee, provided that the trustee, with
advice of counsel, may decline to follow such direction if the direction is in
conflict with any rule of law or the New Two-Year Unsecured Notes Indenture or
if the trustee in good faith determines that the action so directed would be
unduly prejudicial to any holders of the New Two-Year Unsecured Notes not taking
part in such direction or would expose the trustee to personal liability. Before
proceeding to exercise any right or power under the New Two-Year Unsecured Notes
Indenture at the direction of the noteholders, the trustee will be entitled to
receive from such holders reasonable security or indemnity satisfactory to it
against the costs, expenses and liabilities that might be incurred by it in
complying with any such direction.
No holder of the New Two-Year Unsecured Notes will have any right to
pursue any remedy with respect to the New Two-Year Unsecured Notes Indenture or
the New Two-Year Unsecured Notes, unless (a) such holder has previously given
the trustee written notice of a continuing Event of Default, (b) the holders of
at least 25% in aggregate principal amount of the outstanding New Two-Year
Unsecured Notes have made a written request to the trustee to pursue such remedy
and offered reasonable indemnity satisfactory to the trustee, (c) the trustee
has not received from the holders of a majority in aggregate principal amount of
the outstanding New Two-Year Unsecured Notes a direction inconsistent with such
request within 60 days after receipt of such request and (d) the trustee has
failed to comply with the request within such 60-day period.
NEW SEVEN-YEAR UNSECURED NOTES
GENERAL
Under the Plan, on the Effective Date, holders of Allowed CTA Note
Claims in Class 5 will receive, among other things, New Seven-Year Unsecured
Notes in respect of their Claims. See "Overview of the Plan -- Summary of
Classes and Treatment of Claims and Interests."
The New Seven-Year Unsecured Notes are to be issued under the New
Seven-Year Unsecured Notes Indenture to be dated as of the Effective Date
between Reorganized LGII and the trustee named therein. The following
description of the New Seven-Year Unsecured Notes is qualified in its entirety
by reference to the New Seven-Year Unsecured Notes Indenture, a copy of which
will be filed as Exhibit I.A.95 to the Plan and will be available in the
Document Reviewing Centers.
The New Seven-Year Unsecured Notes will mature on the seventh
anniversary of the Effective Date and will bear interest at the rate of 12-1/4%
per annum, payable semiannually on June 15 and December 15 of each year,
commencing June 15, 2001.
RANKING
The New Seven-Year Unsecured Notes will be unsecured senior obligations
of Reorganized LGII, ranking equally with other senior unsecured indebtedness of
Reorganized LGII (including the New Two-Year Unsecured
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Notes), senior to any subordinated indebtedness of Reorganized LGII, and
effectively junior to any secured indebtedness of Reorganized LGII (including
the New Five-Year Secured Notes) and all liabilities of Reorganized LGII's
subsidiaries.
OPTIONAL REDEMPTION; MANDATORY OFFER TO REPURCHASE UPON A CHANGE OF
CONTROL
The New Seven-Year Unsecured Notes are redeemable from and after the
third anniversary of the Effective Date, at the option of Reorganized LGII, in
whole or in part. The price of any such redemption of the New Seven-Year
Unsecured Notes shall be equal to the following redemption prices (indicated as
a percentage of stated principal amount) plus accrued and unpaid interest to the
applicable redemption date:
<TABLE>
<S> <C>
From the 3rd to the 4th anniversary of
the Effective Date............................. 102.0%
From the 4th to the 5th anniversary of
the Effective Date............................. 101.0%
Thereafter..................................... 100.0%
</TABLE>
Furthermore, upon the occurrence of a Change of Control (as defined in
the New Seven-Year Unsecured Notes Indenture), Reorganized LGII will be required
to offer to purchase all of the then outstanding New Seven-Year Unsecured Notes
at a purchase price equal to the lesser of (a) 101% of the principal amount
thereof plus accrued and unpaid interest and (b) the applicable redemption price
set forth above.
EVENTS OF DEFAULT
Each of the following events will constitute an Event of Default (as
defined in the New Seven-Year Unsecured Notes Indenture) with respect to the New
Seven-Year Unsecured Notes: (a) default in the payment of interest when due and
payable and the continuance of such default for 30 days; (b) default in the
payment of principal or premium, if any, when due and payable; (c) default in
the performance of or compliance with any covenant and the continuance of such
default for 60 days after notice to Reorganized LGII by the trustee or to
Reorganized LGII and the trustee by holders of at least 25% of the aggregate
principal amount of outstanding New Seven-Year Unsecured Notes; (d) default
under any Indebtedness (as defined in the New Seven-Year Unsecured Notes
Indenture) under which Reorganized LGII or any Restricted Subsidiary then has
outstanding Indebtedness in excess of $50 million and either such Indebtedness
is due and payable in full or such default has resulted in the acceleration of
the maturity of such Indebtedness; and (e) specified events involving bankruptcy
or other insolvency-related matters.
AFFIRMATIVE COVENANTS
Except to the extent otherwise permitted under the New Seven-Year
Unsecured Notes Indenture, Reorganized LGII will (and, where applicable, will
cause each of its Restricted Subsidiaries to): (a) pay the principal of and
interest on the New Seven-Year Unsecured Notes on the dates and in the manner
provided in the New Seven-Year Unsecured Notes Indenture; (b) maintain an office
or agency in the Borough of Manhattan, the City of New York, for the purposes of
registration of transfer or exchange, presentation for payment and notices and
demands; (c) preserve and keep in full force and effect their respective
existence and rights, licenses or franchises; (d) pay or discharge all taxes,
assessments and governmental charges levied upon them or their income, profits
or property and all claims which, if unpaid, might result in a Lien (as defined
in the New Seven-Year Unsecured Notes Indenture) upon their property; (e)
maintain and keep their properties and assets in good condition, repair and
working order (reasonable wear and tear excepted); (f) maintain insurance as may
be required by law and as is customarily maintained by companies similarly
situated; (g) keep proper books and records; (h) comply with all statutes, laws,
ordinances or governmental rules and regulations to which it is subject; and (i)
file with the SEC, or, if not permitted or required to so file, deliver to the
trustee under the New Seven-Year Unsecured Notes Indenture, the annual reports,
quarterly reports and the information, documents and other reports required to
be filed with the
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SEC pursuant to sections 13 and 15 of the Exchange Act, whether or not
Reorganized LGII has a class of securities registered under such act.
NEGATIVE COVENANTS
Except as otherwise permitted under the New Seven-Year Unsecured Notes
Indenture, Reorganized LGII will not (and, where applicable, will cause each of
its Restricted Subsidiaries not to): (a) create, incur, issue, assume, guarantee
or otherwise become liable for any Funded Indebtedness (as defined in the New
Seven-Year Unsecured Notes Indenture) unless at the time the Consolidated Fixed
Charge Coverage Ratio (as defined in the New Seven-Year Unsecured Notes
Indenture) of Reorganized LGII is at least equal to 1:1; (b) declare, make or
pay any Restricted Payments (as defined in the New Seven-Year Unsecured Notes
Indenture) unless (i) immediately after such Restricted Payments, Reorganized
LGII could properly incur an additional dollar of Funded Indebtedness and (ii)
the aggregate amount of all Restricted Payments declared or made would not
exceed the sum of (A) $25 million plus (B) 50% of the aggregate Consolidated Net
Income (as defined in the New Seven-Year Unsecured Notes Indenture) of
Reorganized LGII during the period beginning on the Effective Date and ending on
the last day of the fiscal quarter of Reorganized LGII preceding the date of
such proposed Restricted Payment, which period shall be treated as a single
accounting period (or, if such aggregate cumulative Consolidated Net Income for
such period shall be a deficit, minus 100% of such deficit) plus (C) the
aggregate net cash proceeds received by Reorganized LGII from the issuance or
sale of capital stock after the Effective Date; (c) create or permit to exist or
become effective any contractual restriction on the ability of any Restricted
Subsidiary to pay dividends on its capital stock or to pay its obligations owed
to Reorganized LGII, except as required by applicable law; (d) create, incur,
assume or suffer to exist any Liens of any kind against or upon any of its
properties or assets where the aggregate amount of Indebtedness secured by any
such Liens exceeds 25% of Reorganized LGII's Consolidated Net Worth (as defined
in the New Seven-Year Unsecured Notes Indenture); (e) enter into any transaction
with an Affiliate (as defined in the New Seven-Year Unsecured Notes Indenture)
of Reorganized LGII (other than wholly owned subsidiaries or any subsidiary that
is not wholly owned solely to comply with regulatory requirements) unless such
transaction is on terms no less favorable than those that could have been
obtained in a comparable transaction with a non-Affiliate and, with respect to
any transaction involving aggregate payments or value of $50 million or greater,
Reorganized LGII has obtained a written opinion from an Independent Financial
Advisor (as defined in the New Seven-Year Unsecured Notes Indenture) stating
such transaction is fair to Reorganized LGII from a financial point of view.
Certain negative covenants (e.g., those described in items (a) - (e) in the
preceding sentence) will be suspended during any time period when the New
Seven-Year Unsecured Notes are rated not less than BBB- and Baa3 by Standard and
Poor's Corporation and Moody's Investors Service, Inc., respectively.
AMENDMENT, WAIVER OR MODIFICATION OF INDENTURE
The affirmative vote of the holders of at least a majority of the
aggregate principal amount of the New Seven-Year Unsecured Notes will be
required to approve amendments, waivers or other modifications to the New
Seven-Year Unsecured Notes Indenture other than amendments, waivers or other
modifications customarily requiring unanimous noteholder approval under
indentures similar to the New Seven-Year Notes Indenture, including the
obligation of Reorganized LGII to offer to purchase outstanding New Seven-Year
Unsecured Notes upon the occurrence of a Change of Control (all of which will
require unanimous approval).
REMEDIES UPON DEFAULT
After an Event of Default has occurred and is continuing under the New
Seven-Year Unsecured Notes Indenture, the trustee or holders of at least 25% of
the aggregate outstanding principal amount of the New Seven-Year Unsecured Notes
may declare the entire principal amount of and accrued and unpaid interest on
the New Seven-Year Unsecured Notes to be immediately due and payable. The
holders of a majority in outstanding principal amount of the New Seven-Year
Unsecured Notes may rescind any such acceleration as provided in the New
Seven-Year Unsecured Notes Indenture.
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TRUSTEE DUTIES AND INDEMNIFICATION
The holders of a majority in aggregate outstanding principal amount of
the New Seven-Year Unsecured Notes may direct the time, method and place of
conducting any proceeding for any remedy available to the trustee or exercising
any trust or power conferred on the trustee, provided that the trustee, with
advice of counsel, may decline to follow such direction if the direction is in
conflict with any rule of law or the New Seven-Year Unsecured Notes Indenture or
if the trustee in good faith determines that the action so directed would be
unduly prejudicial to any holders of the New Seven-Year Unsecured Notes not
taking part in such direction or would expose the trustee to personal liability.
Before proceeding to exercise any right or power under the New Seven-Year Notes
Indenture at the direction of the noteholders, the trustee will be entitled to
receive from such holders reasonable security or indemnity satisfactory to it
against the costs, expenses and liabilities that might be incurred by it in
complying with any such direction.
No holder of the New Seven-Year Unsecured Notes will have any right to
pursue any remedy with respect to the New Seven-Year Unsecured Notes Indenture
or the New Seven-Year Unsecured Notes, unless (a) such holder has previously
given the trustee written notice of a continuing Event of Default, (b) the
holders of at least 25% in aggregate principal amount of the outstanding New
Seven-Year Unsecured Notes have made a written request to the trustee to pursue
such remedy and offered reasonable indemnity satisfactory to the trustee, (c)
the trustee has not received from the holders of a majority in aggregate
principal amount of the outstanding New Seven-Year Unsecured Notes a direction
inconsistent with such request within 60 days after receipt of such request and
(d) the trustee has failed to comply with the request within such 60-day period.
NEW UNSECURED SUBORDINATED NOTES
It is presently anticipated that, pursuant to the Blackstone
Settlement, on the Effective Date Reorganized LGII will issue to Blackstone the
New Unsecured Subordinated Note in the original principal amount of $25 million,
in exchange for all of the outstanding common stock of Rose Hills held by
Blackstone. See "Operations During the Reorganization Cases -- Blackstone
Transactions -- Blackstone Settlement." It is presently anticipated that the New
Unsecured Subordinated Note will mature on the tenth anniversary of the
Effective Date and will bear interest at the rate of 12"% per annum, payable
semiannually on June 15 and December 15 of each year, commencing June 15, 2001.
It is also anticipated that the New Unsecured Subordinated Note will be
expressly subordinated to all senior debt of Reorganized LGII, will be
convertible into New Common Stock at an initial conversion rate equal to the
assumed per share reorganization equity value and will contain events of
default, covenants and other terms to be agreed by the Debtors and Blackstone.
EXIT FINANCING
EXIT FINANCING REVOLVING CREDIT FACILITY
On the Effective Date, Reorganized LGII and the Exit Financing Facility
Agent Bank will enter into the Exit Financing Revolving Credit Facility. See
"Overview of the Plan -- Exit Financing Revolving Credit Facility." The
commitment by the Confirmation Date of the Exit Financing Facility Agent Bank to
provide the Exit Financing Revolving Credit Facility on terms satisfactory to
the Debtors is a condition to Confirmation, and the execution and delivery of
the documents effectuating the Exit Financing Revolving Credit Facility by
Reorganized LGII and the Exit Financing Facility Agent Bank are conditions to
the Effective Date.
The Debtors currently contemplate that the Exit Financing Revolving
Credit Facility will be a $100 million revolving credit facility, $30 million of
which will also be available in the form of letters of credit, and that
borrowings under the Exit Financing Revolving Credit Facility will bear interest
at a floating rate based on the London Interbank Borrowing Rate plus a specified
margin and will be secured by the capital stock of certain subsidiaries of
Reorganized LGII. The Projections assume that there will be no borrowings under
the Exit Financing Revolving Credit Facility as of the Effective Date.
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EXIT FINANCING TERM LOAN
The Debtors also will seek to obtain from the Exit Financing Facility
Agent Bank a $250 million Exit Financing Term Loan as of the Effective Date. It
is currently contemplated that such Exit Financing Term Loan, like the Exit
Financing Revolving Credit Facility, would bear interest at a floating rate
based on the London Interbank Borrowing Rate plus a specified margin and would
be secured by the capital stock of certain subsidiaries of Reorganized LGII.
If Reorganized LGII and the Exit Financing Facility Agent Bank agree on
satisfactory terms for the Exit Financing Term Loan and the Exit Financing Term
Loan Closing occurs, the New Five-Year Secured Notes will not be issued pursuant
to the Plan, but rather the amount of cash to be distributed to holders of
Allowed Claims in Class 5 would be increased by $250 million.
ROSE HILLS INDEBTEDNESS
Upon consummation of the transactions contemplated by the Blackstone
Settlement, Reorganized LGII will own all or substantially all of the
outstanding capital stock of Rose Hills. Rose Hills has a senior secured
amortization extended term loan facility (the "Rose Hills Term Facility") in an
aggregate principal amount of $75 million and a senior secured revolving credit
facility (the "Rose Hills Revolving Facility") in an aggregate principal amount
of up to $25 million. The Rose Hills Term Facility and the Rose Hills Revolving
Facility mature on November 1, 2003 and 2001, respectively. The Rose Hills Term
Facility is subject to amortization, subject to certain conditions, in
semi-annual installments in the amounts of $1 million in each of the first three
years after the anniversary of the closing date of the Rose Hills Term Facility
(the "Bank Closing"), which occurred in November 1996; $3 million in the fourth
year after the Bank Closing; $7 million in the fifth year after the Bank
Closing; $9 million in the sixth year after the Bank Closing and $53 million
upon maturity of the Bank Term Facility. The Rose Hills Revolving Credit
Facility is payable in full at maturity, with no prior amortization. As of June
30, 2000, the outstanding principal amount under the Rose Hills Term Facility
was approximately $71 million and there were no outstanding borrowings under the
Rose Hills Revolving Facility.
Rose Hills also issued $80 million aggregate principal amount of 9"%
Senior Subordinated Notes due 2004 (the "Rose Hill Notes"). The Rose Hills Notes
mature on November 15, 2004 and bear interest at the rate of 9"% per annum,
payable semiannually on May 15 and November 15 of each year. The Rose Hills
Notes are redeemable from and after November 15, 2000, at the option of Rose
Hills, in whole or in part. The initial price of any such redemption is 104.75%
of stated principal amount (subject to annual reduction reaching 100% in 2003),
plus accrued and unpaid interest to the applicable redemption date.
OTHER INDEBTEDNESS
Pursuant to the treatment of holders of Class 4 Claims under the Plan,
certain secured indebtedness of the Debtors incurred or assumed primarily in
connection with TLGI's acquisition of funeral home and cemetery business will be
Reinstated on the Effective Date. See "Overview of the Plan -- Summary of
Classes and Treatment of Claims and Interests." Generally, this indebtedness is
secured by liens on certain specific properties that were the subject of such
acquisition and contains favorable interest and payment terms. The Debtors
estimate that approximately $70 million of such indebtedness will be paid in
full or Reinstated on the Effective Date.
RISK FACTORS
The securities to be issued pursuant to the Plan are subject to a
number of material risks, including those enumerated below. The risk factors
enumerated below assume Confirmation and the consummation of the Plan and the
transactions contemplated by the Plan and do not include matters that could
prevent Confirmation. See "Overview of the Plan -- Summary of Classes and
Treatment of Claims and Interests," "Overview of the Plan -- Conditions to
Confirmation and Effective Date of the Plan" and "Voting and Confirmation of the
Plan" for discussions of such matters. Prior to voting on the Plan, each holder
of Claims entitled to vote should carefully
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consider the risk factors enumerated or referred to below, as well as all of the
information contained in this Disclosure Statement, including the exhibits
hereto.
PROJECTIONS
The fundamental premise of the Plan is the successful implementation of
the Debtors' business plan, as reflected in the Projections. The Projections are
inherently uncertain and are dependent upon the successful implementation of the
business plan and the reliability of the other assumptions contained therein.
The Projections reflect numerous assumptions, including Confirmation and
consummation of the Plan in accordance with its terms, the anticipated future
performance of Reorganized LGII, industry performance, general business and
economic conditions and other matters, most of which are beyond the control of
Reorganized LGII and some of which may not materialize. In addition,
unanticipated events and circumstances occurring subsequent to the date of this
Disclosure Statement, including unanticipated changes in applicable regulations
or U.S. GAAP, may affect the actual financial condition, results of operations
and cash flows of the Reorganized Debtors in the future.
SUBSTANTIAL LEVERAGE
Giving pro forma effect to the Confirmation of the Plan, on the
Effective Date the Reorganized Debtors' long-term indebtedness is expected to be
approximately $820 million. While management of the Debtors believe that future
operating cash flow, together with financing arrangements, will be sufficient to
finance operating requirements under the Debtors' business plan, the Reorganized
Debtors' leverage and debt service requirements could make them more vulnerable
to economic downturns in the markets the Reorganized Debtors intend to serve or
in the economy generally. The Reorganized Debtors' indebtedness could restrict
their ability to obtain additional financing in the future and, because the
Reorganized Debtors may be more leveraged than certain of their competitors,
could place the Reorganized Debtors at a competitive disadvantage. In addition,
the Exit Financing Facility, the New Five-Year Secured Notes, if issued, the New
Two-Year Unsecured Notes, if issued, and the New Seven-Year Unsecured Notes, as
well as the New Unsecured Subordinated Notes, will contain covenants that impose
operating and financial restrictions on the Reorganized Debtors. These covenants
could adversely affect the Reorganized Debtors' ability to finance future
operations, potential acquisitions or capital needs or to engage in business
activities that may be in their interest, including in implementing the Debtors'
business plan.
SECURITY INTERESTS
The capital stock of certain of Reorganized LGII's subsidiaries will be
subject to various liens and security interests. See "Securities To Be Issued
Pursuant to the Plan and Other Post-Reorganization Indebtedness -- New Five-Year
Secured Notes" and "Securities To Be Issued Pursuant to the Plan and Other
Post-Reorganization Indebtedness -- Exit Financing." If a holder of a security
interest becomes entitled to exercise its rights as a secured party, it would
have the right to foreclose upon and sell or otherwise transfer the collateral
subject to its security interest, and the collateral accordingly would be
unavailable to Reorganized LGII or the subsidiary owning the collateral and to
other creditors of Reorganized LGII or such subsidiary, except to the extent, if
any, that such other creditors have a superior or equal security interest in the
affected collateral, or the value of the affected collateral exceeds the amount
of indebtedness in respect of which such foreclosure rights are exercised.
THE SECURITY FOR THE NEW FIVE-YEAR SECURED NOTES MAY NOT BE SUFFICIENT TO MAKE
PAYMENTS ON SUCH NOTES
Reorganized LGII's obligations under the New Five-Year Secured Notes
Indenture will be secured by collateral which will consist of the capital stock
of certain wholly owned subsidiaries of Reorganized LGII. The proceeds from the
sale of this pledged capital stock may not be sufficient to satisfy amounts due
on the New Five-Year Secured Notes. The New Five-Year Secured Notes will not be
secured by any lien on, or any other security interest in, any of the properties
or assets of Reorganized LGII or any subsidiary of Reorganized LGII.
If, upon a foreclosure on the pledged capital stock, the proceeds from
such stock are insufficient to satisfy the entire amount due on the New
Five-Year Secured Notes, the claim by the holders of the New Five-Year Secured
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Notes against Reorganized LGII for this deficiency would rank equally with the
claims of the other general, unsubordinated creditors of Reorganized LGII. The
remaining assets of Reorganized LGII may not be sufficient to satisfy this
deficiency.
THE NEW SENIOR NOTES WILL BE EFFECTIVELY SUBORDINATED TO OBLIGATIONS OF THE
SUBSIDIARIES OF REORGANIZED LGII
Reorganized LGII principally will be a holding company, and therefore
its right to participate in any distribution of assets of any subsidiary upon
that subsidiary's dissolution, winding-up, liquidation or reorganization or
otherwise (and thus the ability of holders of the New Five-Year Secured Notes,
if issued, the New Two-Year Unsecured Notes, if issued, and the New Seven-Year
Unsecured Notes to benefit indirectly from the distribution) is subject to the
prior claims of creditors of that subsidiary, except to the extent that
Reorganized LGII may be a creditor of that subsidiary and its claims are
recognized. There are various legal limitations on the extent to which some of
the subsidiaries of Reorganized LGII may extend credit, pay dividends or
otherwise supply funds to, or engage in transactions with, Reorganized LGII or
its other subsidiaries. The New Five-Year Secured Notes, if issued, the New
Two-Year Unsecured Notes, if issued, and the New Seven-Year Unsecured Notes will
be effectively subordinated to all indebtedness and other obligations of the
subsidiaries. Those subsidiaries are separate legal entities and have no
obligations to pay, or make funds available for the payment of, any amounts due
on the New Five-Year Secured Notes, if issued, the New Two-Year Unsecured Notes,
if issued, and the New Seven-Year Unsecured Notes.
DIVIDEND POLICIES; RESTRICTIONS ON PAYMENT OF DIVIDENDS
Reorganized LGII does not anticipate paying any dividends on the New
Common Stock in the foreseeable future. In addition, covenants in the respective
indentures governing the New Five-Year Secured Notes, if issued, New Two-Year
Unsecured Notes, if issued, the New Seven-Year Unsecured Notes and the Exit
Financing Facility will restrict the ability of Reorganized LGII to pay
dividends and may prohibit the payment of dividends and certain other payments.
Certain institutional investors may only invest in dividend-paying equity
securities or may operate under other restrictions that may prohibit or limit
their ability to invest in the New Common Stock.
LACK OF ESTABLISHED MARKET FOR NEW COMMON STOCK AND NEW SENIOR NOTES; POSSIBLE
VOLATILITY
No established market exists for the New Five-Year Secured Notes, the
New Two-Year Unsecured Notes, the New Seven-Year Unsecured Notes or the New
Common Stock. Although it is currently anticipated that the New Common Stock
will be designated as a Nasdaq National Market security by The Nasdaq Stock
Market, Inc., there can be no assurance, even if such designation is obtained,
that an active market for the New Common Stock will develop or, if any such
market does develop, that it will continue to exist or as to the degree of price
volatility in any such market that does develop. Moreover, the New Common Stock
will be issued pursuant to the Plan to holders of Allowed Claims in Classes 5,
6, 9 and 15, some of which may prefer to liquidate their investment rather than
hold it on a long-term basis. Accordingly, it is anticipated that the market for
the New Common Stock will be volatile, at least for an initial period after the
Effective Date. Moreover, although the Plan was developed based upon an assumed
midpoint reorganization value of $17.09 per share of the New Common Stock, such
valuation was not an estimate of the prices at which the New Common Stock may
trade in the market, and the Debtors have not attempted to make any such
estimate in connection with the development of the Plan. In addition, the market
price of the New Common Stock may be subject to significant fluctuations in
response to numerous factors, including variations in Reorganized LGII's annual
or quarterly financial results or those of its competitors, changes by financial
analysts in their estimates of the future earnings of Reorganized LGII,
conditions in the economy in general or in the funeral industry in particular or
unfavorable publicity. The stock market also has, from time to time, experienced
significant price and volume fluctuations that have been unrelated to the
operating performance of companies with publicly-traded securities. See
"Securities To Be Issued Pursuant to the Plan and Other Post-Reorganization
Indebtedness -- Reorganization Value." No assurance can be given as to the
market prices for New Common Stock that will prevail following the Effective
Date.
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None of the New Five-Year Secured Notes, if issued, the New Two-Year
Unsecured Notes, if issued, or the New Seven-Year Unsecured Notes will be listed
on any exchange. In addition, there can be no assurance that an active market
therefor will develop or as to the degree of price volatility in any such
particular market. Accordingly, no assurance can be given that a holder of the
New Senior Notes will be able to sell such securities in the future or as to the
price at which any such sale may occur. If such markets were to exist, the New
Senior Notes could trade at prices higher or lower than the face amount thereof,
depending on many factors, including prevailing interest rates, markets for
similar securities, industry conditions and the performance of, and investor
expectations for, Reorganized LGII.
NONCOMPARABILITY OF HISTORICAL FINANCIAL INFORMATION
As a result of the consummation of the Plan and the transactions
contemplated thereby, Reorganized LGII will operate the existing business of the
Loewen Companies under a new capital structure. In addition, Reorganized LGII
will be subject to the fresh-start accounting rules, will report using U.S. GAAP
rather than Canadian GAAP and will, as a result of SAB 101, apply accounting
policies relating to preneed revenue recognition that differ from those applied
by TLGI for 1999 and earlier fiscal years. See "Reorganized LGII --
Restructuring Transactions," "Reorganized LGII -- Business of Reorganized LGII"
and "Reorganized LGII -- Projected Financial Information." In addition,
historically the financial statements of TLGI have not consolidated the assets,
liabilities and results of operations of Rose Hills as they will after the
Blackstone Settlement is consummated, and in the future the consolidated
financial statements of Reorganized LGII will not reflect the assets,
liabilities or results of operations of properties that have been or will, as
part of the Debtors' disposition program, be sold or otherwise disposed of.
Accordingly, the financial condition and results of operations of Reorganized
LGII from and after the Effective Date will not be comparable to the financial
condition or results of operations reflected in the historical financial
statements of TLGI set forth in Exhibit III to this Disclosure Statement.
TREATMENT OF CLAIMS; DILUTION
A number of Disputed Claims are expected to be material, and the total
amount of all Claims, including Disputed Claims, may be materially in excess of
the total amount of Allowed Claims assumed in the development of the Plan. The
actual ultimate aggregate amount of Allowed Claims in any Class or, in the case
of Class 9, any Division, may differ significantly from the estimates set forth
in the table under the caption "Overview of the Plan -- Summary of Classes and
Treatment of Claims and Interests." Accordingly, the amount of distributions
that ultimately will be received by any particular holder of an Allowed
Unsecured Claim in a Division of Class 9 may be adversely affected by the
aggregate amount of Claims ultimately allowed in that Division. Consequently,
distributions to holders of Allowed Unsecured Claims in each Division of Class 9
will be made on an incremental basis until all Disputed Claims in each such
Division have been resolved. See "Distributions Under the Plan -- Timing and
Calculation of Amounts To Be Distributed." In addition, the amount of any
Disputed Claim that ultimately is allowed by the Bankruptcy Court may be
significantly less than the amount of the Disputed Claim asserted by the holder
thereof.
NAFTA CLAIMS
In October 1998, TLGI filed the NAFTA Claims against the U.S.
government seeking damages under the arbitration provisions of NAFTA. See
"Collateral Trust Agreement Issues; Recovery Actions; and Other Legal
Proceedings -- Other Legal Proceedings -- NAFTA Claims." Prior to the Effective
Date, TLGI will cause LGII to form (a) Delco, a wholly owned Delaware limited
liability company, and (b) Nafcanco, a wholly owned Nova Scotia unlimited
liability company. On the Effective Date, LGII will transfer its rights to
receive any proceeds of the NAFTA Claims arising under Article 1117 of NAFTA to
Delco and will transfer the membership interests in Delco to TLGI. Immediately
thereafter, TLGI will transfer to Nafcanco all right, title and interest to any
proceeds of the NAFTA Claims arising under Article 1116 of NAFTA and TLGI will
cause Delco to transfer to LGII all right, title, and interest to any proceeds
of the NAFTA Claims arising under Article 1117 of NAFTA, and in respect thereof,
TLGI will irrevocably delegate to Nafcanco all powers and responsibilities of
TLGI in respect of the pursuit and prosecution of the NAFTA Claims, all in
accordance with the terms of Exhibit I.A.29 of the Plan. Although TLGI and LGII
believe that these actions should not affect the NAFTA Claims, the U.S.
government, respondent in the
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NAFTA proceeding, will likely argue that these actions, if taken before an award
is issued, would divest the arbitration panel of jurisdiction over some or all
of the claims. See "Overview of the Plan - The CCAA Order." In addition, the
Debtors do not believe that it is possible at this time to predict the final
outcome of this proceeding or to establish a reasonable estimate of the damages,
if any, that may be awarded, or the proceeds, if any, that may be received in
respect of the NAFTA Claims.
REVENUES FROM PRENEED SALES IS DEPENDENT UPON AN ADEQUATE SALESFORCE
Revenue from funeral and cemetery operations is significantly impacted
by the level of preneed sales, and the level of preneed sales is largely
dependent upon maintaining an adequate salesforce. Accordingly, the future
success of Reorganized LGII is dependent upon the ability of the Debtors and the
Reorganized Debtors to attract, train and retain an adequate number of
salespeople.
REVENUE FROM TRUST AND FINANCE INCOME IS SUBJECT TO MARKET CONDITIONS
Revenue from funeral and cemetery operations is significantly impacted
by the level of trust income from perpetual care and merchandise trust funds.
The level of trust income is largely dependent upon yields available in
connection with the investment of the balances held in such trust funds.
Available yields may be subject to significant fluctuations in response to
conditions in the economy in general.
FEDERAL, STATE AND LOCAL REGULATIONS MAY CHANGE TO THE DETRIMENT OF REORGANIZED
LGII
The operations of Reorganized LGII will be subject to regulation,
supervision and licensing under numerous federal, state and local laws,
ordinances and regulations, including extensive regulations concerning trust
funds, preneed sales of funeral and cemetery products and services and various
other aspects of the business. The impact of such regulations varies depending
on the location of funeral homes and cemeteries.
From time to time, states and other regulatory agencies have considered
and may enact additional legislation or regulations that could affect the
industry. For example, some states and regulatory agencies have considered or
are considering regulations that could require more liberal refund and
cancellation policies for preneed sales of products and services, prohibit
door-to-door or telephone solicitation of potential customers, increase trust
requirements and prohibit the common ownership of funeral homes and cemeteries
in the same market. If adopted in the states in which Reorganized LGII operates,
these and other possible proposals could have a material adverse effect on the
results of operations of Reorganized LGII.
THE DEATH RATE MAY DECREASE
The death rate in the United States declined approximately 1% in 1997
and approximately 2% in 1998, reversing a trend of an approximately 1% increase
per year since 1980. Industry studies indicate that the average age of the
population is increasing. The financial results of Reorganized LGII may be
affected by any decline in the death rate.
THE RATE OF CREMATION IS INCREASING
There is an increasing trend in the United States toward cremation.
According to industry studies, cremations represented approximately 24% of the
burials performed in the United States in 1997, as compared with approximately
10% in 1980. Compared to traditional funeral services, cremations have
historically generated similar gross profit percentages but lower revenues. A
substantial increase in the rate of cremations performed by Reorganized LGII
could have a material adverse effect on the results of operations of Reorganized
LGII.
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CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of the Certificate of Incorporation and Bylaws, as
well as the DGCL, may have the effect of delaying, deferring or preventing a
change in control of Reorganized LGII. Such provisions, including those
providing for the possible issuance of New Preferred Stock without stockholder
approval, regulating the nomination of directors, limiting who may call special
stockholders' meetings and eliminating stockholder action by written consent,
together with the Share Purchase Rights Agreement, may make it more difficult
for other persons, without the approval of the Board of Directors, to make a
tender offer or otherwise acquire substantial amounts of the New Common Stock or
to launch other takeover attempts that a stockholder might consider to be in
such stockholder's best interest. See "Reorganized LGII -- Certain Corporate
Governance Matters."
GENERAL INFORMATION CONCERNING THE PLAN
Confirmation of the Plan and the occurrence of the Effective Date will
result in the discharge of certain Claims and Interests and the creation of
related injunctions with respect thereto. Moreover, upon Confirmation and the
occurrence of the Effective Date, the Debtors will retain and may enforce
certain claims and causes of actions against other entities, including the
Retained Claims, not specifically released pursuant to the Plan. These legal
effects of the Plan are set forth in Article XI of the Plan and are described
below.
DISCHARGE OF CLAIMS AND TERMINATION OF INTERESTS; RELATED INJUNCTION
Except as provided in the Plan or in the Confirmation Order, the rights
afforded under the Plan and the treatment of Claims and Interests under the Plan
will be in exchange for and in complete satisfaction, discharge and release of
all Claims and termination of all Interests arising on or before the Effective
Date, including any interest accrued on Claims from the Petition Date. Except as
provided in the Plan or in the Confirmation Order, Confirmation will, as of the
Effective Date: (a) discharge the Debtors from all Claims or other debts that
arose on or before the Effective Date, and all debts of the kind specified in
section 502(g), 502(h) or 502(i) of the Bankruptcy Code, whether or not (i) a
proof of Claim based on such debt is Filed or deemed Filed pursuant to section
501 of the Bankruptcy Code, (ii) a Claim based on such debt is allowed pursuant
to section 502 of the Bankruptcy Code or (iii) the holder of a Claim based on
such debt has accepted the Plan; and (b) terminate all Interests and other
rights of equity security holders in the Debtors.
Except as provided in the Plan or the Confirmation Order, as of the
Effective Date, the Confirmation Order will be a judicial determination of a
discharge of all such Claims and other debts and liabilities against the Debtors
and a termination of all such Interests and other rights of equity security
holders in the Debtors, pursuant to sections 524 and 1141 of the Bankruptcy
Code, and such discharge will void any judgment obtained against a Debtor at any
time, to the extent that such judgment relates to a discharged Claim or
terminated Interest.
Except as provided in the Plan or the Confirmation Order, as of the
Effective Date, all entities that have held, currently hold or may hold a Claim
or other debt or liability that is discharged or an Interest or other right of
an equity security holder that is terminated pursuant to the terms of the Plan
will be permanently enjoined from taking any of the following actions on account
of any such discharged Claims, debts or liabilities or terminated Interests or
rights: (a) commencing or continuing in any manner any action or other
proceeding against the Debtors, the Reorganized Debtors or their respective
property, other than to enforce any right pursuant to the Plan to a
distribution; (b) enforcing, attaching, collecting or recovering in any manner
any judgment, award, decree or order against the Debtors, the Reorganized
Debtors or their respective property, other than as permitted pursuant to (a)
above; (c) creating, perfecting or enforcing any lien or encumbrance against the
Debtors, the Reorganized Debtors or their respective property; (d) asserting a
setoff, right of subrogation or recoupment of any kind against any debt,
liability or obligation due to the Debtors or the Reorganized Debtors; and (e)
commencing or continuing any action, in any manner, in any place that does not
comply with or is inconsistent with the provisions of the Plan.
As of the Effective Date, all entities that have held, currently hold
or may hold any claims, obligations, suits, judgments, damages, demands, debts,
rights, causes of action or liabilities that are released pursuant to the Plan,
including pursuant to Section IV.F of the Plan, will be permanently enjoined
from taking any of the following
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actions against any released entity or its property on account of such released
claims, obligations, suits, judgments, damages, demands, debts, rights, causes
of action or liabilities: (a) commencing or continuing in any manner any action
or other proceeding; (b) enforcing, attaching, collecting or recovering in any
manner any judgment, award, decree or order; (c) creating, perfecting or
enforcing any lien or encumbrance; (d) asserting a setoff, right of subrogation
or recoupment of any kind against any debt, liability or obligation due to any
released entity; and (e) commencing or continuing any action, in any manner, in
any place that does not comply with or is inconsistent with the provisions of
the Plan.
By accepting distributions pursuant to the Plan, each holder of an
Allowed Claim receiving distributions pursuant to the Plan will be deemed to
have specifically consented to the injunctions set forth in the Plan.
The classification and manner of satisfying all Claims and Interests
under the Plan take into consideration all subordination rights, whether arising
under general principles of equitable subordination, contract, section 510(c) of
the Bankruptcy Code or otherwise, that a holder of a Claim or Interest may have
against other Claim or Interest holders with respect to any distribution made
pursuant to the Plan. All subordination rights that a holder of a Claim may have
with respect to any distribution to be made pursuant to the Plan will be
discharged and terminated, and all actions related to the enforcement of such
subordination rights will be permanently enjoined. Accordingly, distributions
pursuant to the Plan to holders of Allowed Claims will not be subject to payment
to a beneficiary of such terminated subordination rights or to levy,
garnishment, attachment or other legal process by a beneficiary of such
terminated subordination rights.
Pursuant to Bankruptcy Rule 9019 and in consideration for the
distributions and other benefits provided under the Plan, the provisions of the
Plan will constitute a good faith compromise and settlement of all claims or
controversies relating to the subordination rights that a holder of a Claim may
have with respect to any Allowed Claim or any distribution to be made pursuant
to the Plan on account of any Allowed Claim. The entry of the Confirmation Order
will constitute the Bankruptcy Court's approval, as of the Effective Date, of
the compromise or settlement of all such claims or controversies and the
Bankruptcy Court's finding that such compromise or settlement is in the best
interests of the Debtors, the Reorganized Debtors and their respective property
and Claim and Interest holders and is fair, equitable and reasonable.
PRESERVATION OF RIGHTS OF ACTION HELD BY THE DEBTORS OR THE REORGANIZED DEBTORS
Except as provided in the Plan or in any contract, instrument, release
or other agreement entered into or delivered in connection with the Plan, in
accordance with section 1123(b) of the Bankruptcy Code, the Reorganized Debtors
will retain and may enforce any claims, demands, rights and causes of action
that any Debtor or Estate may hold, including claims transferred to Reorganized
LGII by TLGI on the Effective Date and the Retained Claims, against any person
or entity. The Reorganized Debtors or their successors may pursue such retained
claims, demands, rights or causes of action, as appropriate, in accordance with
the best interests of the Reorganized Debtors or their successors holding such
claims, demands, rights or causes of action. Further, the Reorganized Debtors
retain their rights to File and pursue any adversary proceedings against any
trade creditor or vendor related to debit balances or deposits owed to any
Debtor. Notwithstanding the foregoing, on the Effective Date, the Reorganized
Debtors will be deemed to waive and release any claims, rights or causes of
action arising under section 547 of the Bankruptcy Code relating to preferential
transfers held by any Debtor or Reorganized Debtor against any entity other than
any Retained Claims identified on Exhibit IV.F.1 to the Plan.
RELEASES AND RELATED INJUNCTION
As of the Effective Date, in consideration for the obligations of the
Debtors and the Reorganized Debtors under the Plan and the cash, New Senior
Notes, New Common Stock and other contracts, instruments, releases, agreements
or documents to be entered into or delivered in connection with the Plan, (a)
each holder of a Claim or Interest that votes in favor of the Plan and (b) to
the fullest extent permissible under applicable law, as such law may be extended
or interpreted subsequent to the Effective Date, each entity that has held,
holds or may hold a Claim or Interest or at any time was a creditor or
stockholder of any of the Debtors and that does not vote on the Plan or votes
against the Plan will be deemed to forever release, waive and discharge all
claims, obligations, suits, judgments, damages, demands, debts, rights, causes
of action and liabilities (other than the right to enforce the Debtors' or the
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Reorganized Debtors' obligations under the Plan and the contracts, instruments,
releases, agreements and documents delivered thereunder), whether liquidated or
unliquidated, fixed or contingent, matured or unmatured, known or unknown,
foreseen or unforeseen, then existing or thereafter arising in law, equity or
otherwise, that are based in whole or in part on any act, omission, transaction
or other occurrence taking place on or prior to the Effective Date in any way
relating to a Debtor, the Reorganization Cases or the Plan that such entity has,
had or may have against any Debtor or other Loewen Company, the members of the
Creditors' Committee and each of their respective present or former directors,
officers, employees, attorneys, accountants, financial advisors and agents,
acting in such capacity (which release will be in addition to the discharge of
Claims and termination of Interests provided in the Plan and under the
Confirmation Order and the Bankruptcy Code).
As of the Effective Date, and upon cancellation of the CTA as provided
in Section IV.I of the Plan, each Indenture Trustee, the CTA Trustee and each
holder of a CTA Note Claim will be deemed to forever release, waive and
discharge each Loewen Company, including as a Pledgor under the CTA, from any
claims, demands, rights or courses of action in respect to any rights or claims
under or in respect to the CTA and CTA Note Claims, all of such claims having
been settled and discharged through the respective distributions to holders of
Claims in Class 5.
In connection with the Debtors' 1994 Management Equity Incentive Plan
(the "1994 Plan"), approximately 30 executives financed their acquisition of
options to acquire MEIPs Debentures under the 1994 Plan. As a result of such
financing, the Debtors have claims against such participants for interest costs
in the aggregate amount of approximately $1.4 million and such participants have
filed other Claims against the Debtors in respect of the 1994 Plan. Pursuant to
the Plan, to the extent not otherwise settled or resolved prior to the Effective
Date, the Debtors will release each such participant (other than Raymond L.
Loewen) from any and all claims of the Debtors against such participant arising
from the financing of such participant's purchase of an option to purchase MEIPs
Debentures pursuant to the 1994 Plan, subject, however, to the execution and
delivery by such participant on or prior to the Effective Date of a release of
the Loewen Companies from any and all Claims of such participant related to the
1994 Plan or such participant's participation therein.
As further provided in Section XI.B of the Plan, the Confirmation Order
will permanently enjoin the commencement or prosecution by any entity, whether
directly, derivatively or otherwise, of any claims, obligations, suits,
judgments, damages, demands, debts, rights, causes of action or liabilities
released pursuant to the Plan.
EXECUTORY CONTRACTS AND UNEXPIRED LEASES
Except as otherwise provided in the Plan or in any contract,
instrument, release or other agreement or document entered into in connection
with the Plan, on the Effective Date, pursuant to section 365 of the Bankruptcy
Code, the applicable Debtor or Debtors will assume, or assume and assign, as
indicated, each Executory Contract and Unexpired Lease including those listed on
Exhibits V.A.1 and V.A.3 to the Plan, but excluding those listed on Exhibit V.C.
to the Plan; provided, however, that the Debtors or Reorganized Debtors reserve
the right, at any time through and including 90 days after the Effective Date,
to amend Exhibit V.A.1 or V.A.3 to the Plan to: (a) delete any Executory
Contract or Unexpired Lease listed therein, thus providing for its rejection
pursuant to Section V.C of the Plan; or (b) add any Executory Contract or
Unexpired Lease thereto, thus providing for its assumption or assumption and
assignment pursuant to Section V.A of the Plan. The Debtors or Reorganized
Debtors will provide notice of any amendments to Exhibit V.A.1 or V.A.3 to the
Plan to the parties to the Executory Contracts or Unexpired Leases affected
thereby and, if prior to the Effective Date, to the parties on the
then-applicable service list in the Reorganization Cases (including counsel to
the Creditors' Committee). Listing a contract or lease on Exhibit V.A.1 or V.A.3
to the Plan will not constitute an admission by a Debtor or Reorganized Debtor a
Debtor or Reorganized Debtor has any liability thereunder or that such contract
or lease is executory.
Each (a) Real Property Executory Contract and Unexpired Lease and (b)
Executory Contract or Unexpired Lease assumed under Section V.A of the Plan will
include any modifications, amendments, supplements, restatements or other
agreements made directly or indirectly by any agreement, instrument or other
document that in any manner affects such contract or lease, irrespective of
whether such agreement, instrument or other document is listed on Exhibit V.A.1
or V.A.3 to the Plan, unless any such modification, amendment, supplement,
restatement or other agreement is rejected pursuant to Section V.C of the Plan
and is listed on Exhibit V.C to the Plan.
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Any Executory Contract or Unexpired Lease (including those listed on
Exhibit V.A.3 and any related agreements as described in Sections I.A.126 and
V.A.2) to be held by any Debtor or another surviving, resulting or acquiring
corporation in an applicable Restructuring Transaction, will be deemed assigned
to the applicable entity, pursuant to section 365 of the Bankruptcy Code, as of
the Effective Date (irrespective of when the applicable Restructuring
Transaction is effected). Nothing in the preceding sentence shall restrict,
modify or otherwise limit the Debtors' or Reorganized Debtors' right to amend
Exhibit V.A.1, V.A.3 or V.C in accordance with Sections V.A.1 and V.C,
respectively, of the Plan.
The Confirmation Order will constitute an order of the Bankruptcy Court
approving the assumptions and assignments described in Sections V.A and V.E of
the Plan, pursuant to section 365 of the Bankruptcy Code, as of the Effective
Date. An order of the Bankruptcy Court entered on or prior to the Confirmation
Date will specify the procedures for providing notice to each party whose
Executory Contract or Unexpired Lease is being assumed or assumed and assigned
pursuant to the Plan of: (a) the contract or lease being assumed or assumed and
assigned; (b) the Cure Amount Claim, if any, that the applicable Debtor believes
it would be obligated to pay in connection with such assumption; and (c) the
procedures for such party to object to the assumption or assumption and
assignment of the applicable contract or lease or the amount of the proposed
Cure Amount Claim.
To the extent that such Claims constitute monetary defaults, the Cure
Amount Claims associated with each Executory Contract and Unexpired Lease to be
assumed pursuant to the Plan will be satisfied, pursuant to section 365(b)(1) of
the Bankruptcy Code, at the option of the Debtor assuming such contract or lease
or the assignee of such Debtor, if any: (a) by payment of the Cure Amount Claim
in cash on the Effective Date; (b) after the Effective Date, as soon as
practicable after the amendment to Exhibit V.A.1 or V.A.3, as applicable,
providing for the assumption or the assumption and assignment of the Executory
Contract or Unexpired Lease; or (c) on such other terms as are agreed to by the
parties to such Executory Contract or Unexpired Lease. If there is a dispute
regarding (a) the amount of any Cure Amount Claim, (b) the ability of the
applicable Reorganized Debtor or any assignee to provide "adequate assurance of
future performance" (within the meaning of section 365 of the Bankruptcy Code)
under the contract or lease to be assumed or (c) any other matter pertaining to
assumption or assumption and assignment of such contract or lease, the payment
of any Cure Amount Claim required by section 365(b)(1) of the Bankruptcy Code
will be made following the entry of a Final Order resolving the dispute and
approving the assumption. For assumptions of Executory Contracts or Unexpired
Leases between Debtors, the Reorganized Debtor assuming such contract may cure
any monetary default (a) by treating such amount as either a direct or indirect
contribution to capital or distribution (as appropriate) or (b) through an
intercompany account balance in lieu of payment in cash.
On the Effective Date, except for an Executory Contract or Unexpired
Lease that was previously assumed, assumed and assigned or rejected by an order
of the Bankruptcy Court or that is assumed pursuant to Section V.A or V.E of the
Plan (including any related agreements assumed pursuant to Sections I.A.126 and
V.A.2 of the Plan), each Executory Contract and Unexpired Lease listed on
Exhibit V.C to the Plan that has not previously expired or terminated pursuant
to its own terms will be rejected pursuant to section 365 of the Bankruptcy
Code; provided, however, that the Debtors or Reorganized Debtors reserve the
right, at any time through and including 90 days after the Effective Date, to
amend Exhibit V.C to the Plan to: (a) delete any Executory Contract or Unexpired
Lease listed therein, thus providing for its assumption or assumption and
assignment pursuant to Section V.A of the Plan; or (b) add any Executory
Contract or Unexpired Lease thereto, thus providing for its rejection pursuant
to Section V.C of the Plan. The Debtors or Reorganized Debtors will provide
notice of any amendments to Exhibit V.C to the Plan to the parties to the
Executory Contracts or Unexpired Leases affected thereby and, if prior to the
Effective Date, to the parties on the then-applicable service list in the
Reorganization Cases (including counsel to the Creditors' Committee). Listing a
contract or lease on Exhibit V.C to the Plan will not constitute an admission by
a Debtor or Reorganized Debtor a Debtor or Reorganized Debtor has any liability
thereunder or that such contract or lease is executory. The Confirmation Order
will constitute an order of the Bankruptcy Court approving such rejections,
pursuant to section 365 of the Bankruptcy Code, as of the Effective Date.
Notwithstanding anything in the Bar Date Order to the contrary, if the
rejection of an Executory Contract or Unexpired Lease pursuant to Section V.C of
the Plan gives rise to a Claim (including any Claims arising from those
indemnification obligations described in Section V.E.2 of the Plan) by the other
party or parties to such contract or lease, such Claim will be forever barred
and will not be enforceable against the Debtors, the Reorganized Debtors, their
respective successors or their respective properties unless a proof of Claim is
Filed and served on the
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Reorganized Debtors, pursuant to the procedures specified in the Confirmation
Order and the notice of the entry of the Confirmation Order or another order of
the Bankruptcy Court, no later than: (a) 30 days after the Effective Date; or
(b) if Exhibit V.C is amended after the Effective Date to provide for the
rejection of the Executory Contract or Unexpired Lease, 30 days after the
Debtors or Reorganized Debtors serve notice of such amendment.
Contracts and leases entered into after the Petition Date by any
Debtor, including any Executory Contracts and Unexpired Leases assumed by such
Debtor, will be performed by the Debtor or Reorganized Debtor liable thereunder
in the ordinary course of its business. Accordingly, such contracts and leases
(including any assumed Executory Contracts and Unexpired Leases) will survive
and remain unaffected by entry of the Confirmation Order.
DISTRIBUTIONS UNDER THE PLAN
GENERAL
Except as otherwise provided in Article VI of the Plan, distributions
of cash, New Senior Notes and New Common Stock to be made on the Effective Date
to holders of Claims that are allowed as of the Effective Date will be deemed
made on the Effective Date if made on the Effective Date or as promptly
thereafter as practicable, but in any event no later than: (a) 60 days after the
Effective Date; or (b) such later date when the applicable conditions of Section
V.B of the Plan (regarding cure payments for Executory Contracts and Unexpired
Leases being assumed), Section VI.E.2 of the Plan (regarding undeliverable
distributions) or Section VI.J of the Plan (regarding surrender of canceled
instruments and securities) are satisfied. Distributions on account of Claims
that become Allowed Claims after the Effective Date will be made pursuant to
Sections VI.H and VII.C of the Plan.
METHODS OF DISTRIBUTIONS
The method of distributing the consideration provided for in the Plan
is set forth in Article VI of the Plan and summarized below.
DISTRIBUTIONS TO HOLDERS OF ALLOWED CLAIMS AND INTERESTS
Reorganized LGII, or such Third Party Disbursing Agents as Reorganized
LGII may employ in its sole discretion, will make all distributions of cash, New
Senior Notes, New Common Stock and other instruments or documents required under
the Plan. Each Disbursing Agent will serve without bond, and any Disbursing
Agent may employ or contract with other entities to assist in or make the
distributions required by the Plan.
COMPENSATION AND REIMBURSEMENT FOR SERVICES RELATED TO DISTRIBUTIONS
Each Third Party Disbursing Agent providing services related to
distributions pursuant to the Plan will receive from Reorganized LGII, without
further Bankruptcy Court approval, reasonable compensation for such services and
reimbursement of reasonable out-of-pocket expenses incurred in connection with
such services. These payments will be made on terms agreed to with Reorganized
LGII and will not be deducted from distributions to be made pursuant to the Plan
to holders of Allowed Claims (including any distributions of Cash Investment
Yield) receiving distributions from a Third Party Disbursing Agent.
DELIVERY OF DISTRIBUTIONS IN GENERAL
Except as provided below for distributions to holders of the Public
Notes, distributions to holders of Allowed Claims will be made by a Disbursing
Agent: (a) at the addresses set forth on the respective proofs of Claim Filed by
holders of such Claims, (b) at the addresses set forth in any written
certification of address change delivered to the Disbursing Agent (including
pursuant to a letter of transmittal delivered to a Disbursing Agent) after the
date of Filing of any related proof of Claim or (c) at the addresses reflected
in the applicable Debtor's Schedules if no proof of Claim has been Filed and the
Disbursing Agent has not received a written notice of a change of address.
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SPECIAL PROVISIONS FOR DISTRIBUTIONS TO HOLDERS OF PUBLIC NOTE CLAIMS
Subject to the requirements of Section VI.J of the Plan, distributions
to holders of Allowed Public Note Claims will be made by a Disbursing Agent to
the record holders of the Public Notes as of the Distribution Record Date, as
identified on a record holder register to be provided to the Disbursing Agent by
the applicable Indenture Trustee within five Business Days after the
Distribution Record Date. Such record holder register: (a) will provide the
name, address and holdings of each respective registered holder of Public Notes
as of the Distribution Record Date; and (b) must be consistent with the
respective Indenture Trustee's Allowed proof of Claim. Each entry on the
applicable record holder register will be treated as an Allowed Class 5 Claim
for purposes of distributions made pursuant to Article VI of the Plan.
UNDELIVERABLE OR UNCLAIMED DISTRIBUTIONS
If any distribution to a holder of an Allowed Claim is returned to a
Disbursing Agent as undeliverable, no further distributions will be made to such
holder unless and until the applicable Disbursing Agent is notified by written
certification of such holder's then-current address. Subject to Section VI.E.2.c
of the Plan (regarding the failure to claim undeliverable distributions),
undeliverable distributions will remain in the possession of the applicable
Disbursing Agent pursuant to Section VI.E.2.a.i of the Plan until such time as a
distribution becomes deliverable. Undeliverable cash (including dividends or
other distributions on account of undeliverable New Common Stock) will be held
in segregated bank accounts in the name of the applicable Disbursing Agent for
the benefit of the potential claimants of such funds. Any Disbursing Agent
holding undeliverable cash will invest such cash in a manner consistent with the
Reorganized Debtors' investment and deposit guidelines. Undeliverable New Common
Stock will be held by the applicable Disbursing Agent for the benefit of the
potential claimants of such securities.
Pending the distribution of any New Common Stock, the applicable
Disbursing Agent will cause all of the New Common Stock held by it in its
capacity as Disbursing Agent to be (a) represented in person or by proxy at each
meeting of the stockholders of Reorganized LGII, (b) voted in any election of
directors of Reorganized LGII for the nominees recommended by the Board of
Directors of Reorganized LGII and (c) voted with respect to any other matter as
recommended by the Board of Directors of Reorganized LGII.
On each Quarterly Distribution Date, the applicable Disbursing Agents
will make all distributions that become deliverable to holders of Allowed Claims
during the preceding calendar quarter. Each such distribution will include, to
the extent applicable: (a) a Pro Rata share of dividends or other distributions,
if any, that were previously paid to the Disbursing Agent in respect of any New
Common Stock included in such distribution; and (b) a Pro Rata share of the Cash
Investment Yield from the investment of any undeliverable cash (including
dividends or other distributions on undeliverable New Common Stock) from the
date that such distribution would have first been due had it then been
deliverable to the date that such distribution becomes deliverable.
Any holder of an Allowed Claim that does not assert a claim pursuant to
the Plan for an undeliverable distribution to be made by a Disbursing Agent
within two years after the later of (a) the Effective Date and (b) the last date
on which a distribution was deliverable to such holder will have its claim for
such undeliverable distribution discharged and will be forever barred from
asserting any such claim against the Reorganized Debtors or their respective
property. In such cases with respect to Allowed Claims in any Division of Class
9: (a) unclaimed cash and New Common Stock will be retained in the applicable
Unsecured Claims Reserve for Pro Rata distribution to holders of Allowed Claims
in such Division, pursuant to Section VI.H.2.d of the Plan; and (b) for purposes
of this redistribution, each Allowed Claim in such Division of Class 9 for which
such distributions are undeliverable will be deemed disallowed in its entirety.
In such cases with respect to Allowed Claims in any Class other than Class 9,
unclaimed distributions will become property of Reorganized LGII, free of any
restrictions thereon, and any such unclaimed distribution held by a Third Party
Disbursing Agent will be returned to Reorganized LGII. Nothing contained in the
Plan will require any Debtor, Reorganized Debtor or Disbursing Agent to attempt
to locate any holder of an Allowed Claim.
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DISTRIBUTION RECORD DATE
A Disbursing Agent will have no obligation to recognize the transfer
of, or the sale of any participation in, any Allowed Claim that occurs after the
close of business on the Distribution Record Date and will be entitled for all
purposes under the Plan to recognize and make distributions only to those
holders of Allowed Claims that are holders of such Claims, or participants
therein, as of the close of business on the Distribution Record Date. Pursuant
to the Plan, the Distribution Record Date will be the date on which the
Bankruptcy Court enters the Confirmation Order on its docket. In addition, as of
the close of business on the Distribution Record Date, the respective transfer
registers for the Public Notes, as maintained by the Debtors or the respective
Indenture Trustee, will be closed. The applicable Disbursing Agent will have no
obligation to recognize the transfer or sale of any Public Notes Claims that
occurs after the close of business on the Distribution Record Date and will be
entitled for all purposes under the Plan to recognize and make distributions
only to those holders of Public Notes Claims who are holders of such Claims as
of the close of business on the Distribution Record Date. Except as otherwise
provided in a Final Order of the Bankruptcy Court, the transferees of Claims
that are transferred pursuant to Bankruptcy Rule 3001 on or prior to the
Distribution Record Date will be treated as the holders of such Claims for all
purposes, notwithstanding that any period provided by Bankruptcy Rule 3001 for
objecting to such transfer has not expired by the Distribution Record Date.
MEANS OF CASH PAYMENTS
Except as otherwise specified in the Plan, cash payments made pursuant
to the Plan will be in U.S. currency by checks drawn on a domestic bank selected
by the applicable Debtor or Reorganized Debtor or, at the option of the
applicable Debtor or Reorganized Debtor, by wire transfer from a domestic bank;
provided, however, that cash payments to foreign holders of Allowed Trade Claims
may be made, at the option of the applicable Debtor or Reorganized Debtor, in
such funds and by such means as are necessary or customary in a particular
foreign jurisdiction.
TIMING AND CALCULATION OF AMOUNTS TO BE DISTRIBUTED
Subject to Section VI.A of the Plan, on the Effective Date, each holder
of an Allowed Claim in a Class other than Class 9 will receive the full amount
of the distributions that the Plan provides for Allowed Claims in the applicable
Class. On each Quarterly Distribution Date, distributions also will be made,
pursuant to Section VII.C of the Plan, to holders of Disputed Claims in any such
Class that were allowed during the preceding calendar quarter. Such quarterly
distributions also will be in the full amount that the Plan provides for Allowed
Claims in the applicable Class.
The amount of distributions to be made on the Effective Date (subject
to Section VI.A of the Plan) to holders of Allowed Claims in a Division of Class
9 on account of such Claims will be made from the applicable Unsecured Claims
Reserve for such Class and will be calculated as if each Disputed Claim in each
such Division were an Allowed Claim in its Face Amount. On each Quarterly
Distribution Date, distributions also will be made, pursuant to Section VII.C of
the Plan, to holders of Disputed Claims in each such Division that were allowed
during the preceding calendar quarter. Such quarterly distributions also will be
calculated pursuant to the provisions set forth in Section VI.H.2.a of the Plan.
On the fourth Quarterly Distribution Date and annually thereafter, each
holder of a Claim previously allowed in a Division of Class 9 will receive an
additional distribution from the applicable Unsecured Claims Reserve for such
Class on account of such Claim in an amount equal to: (a) the amount of New
Common Stock that such holder would have been entitled to receive pursuant to
Section VI.H.2.a of the Plan as if such Claim had become an Allowed Claim on the
applicable Quarterly Distribution Date, minus (b) the aggregate amount of New
Common Stock previously distributed on account of such Claim. Each such
additional distribution also will include, on the basis of the amount then being
distributed (a) a Pro Rata share of any dividends or other distributions made on
account of the New Common Stock held in the Unsecured Claims Reserve and (b) a
Pro Rata share of the related Cash Investment Yield from the investment of any
cash dividends or other distributions in the Unsecured Claims Reserve, from the
date such cash was deposited into the Unsecured Claims Reserve to the date that
such distribution is made.
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DISTRIBUTIONS OF NEW COMMON STOCK
Notwithstanding any other provision of the Plan, only whole numbers of
shares of New Common Stock will be issued. When any distribution on account of
an Allowed Claim would otherwise result in the issuance of a number of shares of
New Common Stock that is not a whole number, the actual distribution of shares
of such stock will be rounded to the next higher or lower whole number as
follows: (a) fractions equal to or greater than -1/2 will be rounded to the next
higher whole number and (b) fractions less than -1/2 will be rounded to the next
lower whole number. The total number of shares of New Common Stock to be
distributed on account of Allowed Claims will be adjusted as necessary to
account for the rounding provided for in Section VI.H.3 of the Plan. No
consideration will be provided in lieu of fractional shares that are rounded
down.
Each share of New Common Stock distributed pursuant to the Plan will be
accompanied by one Share Purchase Right.
DE MINIMIS DISTRIBUTIONS
No Disbursing Agent will distribute cash to the holder of an Allowed
Claim in an impaired Class if the amount of cash to be distributed on account of
such Claim is less than $25. Any holder of such an Allowed Claim on account of
which the amount of cash to be distributed is less than $25 will have its claim
for such distribution discharged and will be forever barred from asserting any
such claim against the Reorganized Debtors or their respective property. Any
cash not distributed pursuant to Section VI.H.4 of the Plan with respect to
Claims in a Class other than Class 9 will be the property of Reorganized LGII,
free of any restrictions thereon, and any such cash held by a Third Party
Disbursing Agent will be returned to Reorganized LGII. Any cash not distributed
pursuant to Section VI.H.4 of the Plan with respect to Allowed Claims in a
Division of Class 9, including dividends or other distributions made on account
of New Common Stock held in an Unsecured Claims Reserve, will be retained in the
applicable Unsecured Claims Reserve for redistribution Pro Rata to holders of
Allowed Claims in such Division of Class 9, pursuant to Section VI.H.2.b of the
Plan. For purposes of this redistribution, each Allowed Claim in Class 9 for
which distributions are less than $25 will have its claim for such distribution
discharged and will be forever barred from asserting any such claim against the
Unsecured Claims Reserve or otherwise.
COMPLIANCE WITH TAX REQUIREMENTS
In connection with the Plan, to the extent applicable, each Disbursing
Agent will comply with all Tax withholding and reporting requirements imposed on
it by any governmental unit, and all distributions pursuant to the Plan will be
subject to such withholding and reporting requirements. Each Disbursing Agent
will be authorized to take any actions that may be necessary or appropriate to
comply with such withholding and reporting requirements. Notwithstanding any
other provision of the Plan, each entity receiving a distribution of cash, New
Senior Notes or New Common Stock or pursuant to the Plan will have sole and
exclusive responsibility for the satisfaction and payment of any Tax obligations
imposed on it by any governmental unit on account of such distribution,
including income, withholding and other Tax obligations.
SURRENDER OF CANCELED SECURITIES OR OTHER INSTRUMENTS
As a condition precedent to receiving any distribution pursuant to the
Plan on account of an Allowed Claim evidenced by the notes, instruments,
securities or other documentation canceled pursuant to Section IV.I of the Plan,
the holder of such Claim must tender, as specified in Section VI.J of the Plan,
the applicable notes, instruments, securities or other documentation evidencing
such Claim to the applicable Disbursing Agent together with any letter of
transmittal required by such Disbursing Agent. Pending such surrender, any
distributions pursuant to the Plan on account of any such Claim will be treated
as an undeliverable distribution pursuant to Section VI.E.2 of the Plan.
Except as provided in Section VI.J.2 of the Plan for lost, stolen,
mutilated or destroyed Public Notes, each holder of an Allowed Public Note Claim
must tender the applicable Public Notes to the applicable Disbursing Agent in
accordance with a letter of transmittal to be provided to such holders by the
Disbursing Agent as promptly as practicable following the Effective Date. The
letter of transmittal will include, among other provisions, customary
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provisions with respect to the authority of the holder of the applicable Public
Notes to act and the authenticity of any signatures required thereon. All
surrendered Public Notes will be marked as canceled and delivered to the
appropriate Reorganized Debtor.
Any holder of an Allowed Public Note Claim with respect to which the
underlying Public Note has been lost, stolen, mutilated or destroyed must, in
lieu of surrendering such Public Note, deliver to the applicable Disbursing
Agent (a) evidence satisfactory to the Disbursing Agent of the loss, theft,
mutilation or destruction and (b) such security or indemnity as may be required
by the Disbursing Agent to hold the Disbursing Agent and the Reorganized
Debtors, as applicable, harmless from any damages, liabilities or costs incurred
in treating such individual as a holder of an Public Note. Upon compliance with
the foregoing procedures (as contained in Section VI.J.2 of the Plan) by a
holder of an Allowed Public Note Claim, such holder will, for all purposes under
the Plan, be deemed to have surrendered the applicable Public Note.
Any holder of an Allowed Public Note Claim that fails to surrender or
be deemed to have surrendered the applicable Public Note within two years after
the Effective Date will have its right to distributions pursuant to the Plan on
account of such Public Note Claim discharged and will be forever barred from
asserting any such Claim against the Reorganized Debtors or their respective
property. In such case, any cash, New Senior Notes or New Common Stock held for
distribution on account of such Public Note Claim will be treated pursuant to
the provisions set forth in Section VI.E.2.c of the Plan.
Holders of Allowed Claims will be required to tender any notes
evidencing such Claims or, if not evidenced by a note, any other instrument
evidencing their respective Allowed Claims to the applicable Disbursing Agent as
and when such entities receive distributions under the Plan. If any such
entity's notes or other instruments evidencing its Allowed Claims are lost,
stolen, mutilated or destroyed, such entity will be required, in lieu of
surrendering such note or other instrument, to deliver to the applicable
Disbursing Agent (a) evidence satisfactory to the Disbursing Agent of the loss,
theft, mutilation or destruction and (b) such security or indemnity as may be
required by the Disbursing Agent to hold the Disbursing Agent and the
Reorganized Debtors, as applicable, harmless from any damages, liabilities or
costs incurred in treating such individual as the holder of such Claims.
SETOFFS
Except with respect to claims of a Debtor or Reorganized Debtor
released pursuant to the Plan or any contract, instrument, release or other
agreement or document entered into or delivered in connection with the Plan, the
Reorganized Debtors or, as instructed by the applicable Reorganized Debtor, a
Third Party Disbursing Agent may, pursuant to section 553 of the Bankruptcy Code
or applicable non-bankruptcy law, set off against any Allowed Claim and the
distributions to be made pursuant to the Plan on account of such Claim (before
any distribution is made on account of such Claim) the claims, rights and causes
of action of any nature that the applicable Debtor or Reorganized Debtor may
hold against the holder of such Allowed Claim; provided, however, that neither
the failure to effect a setoff nor the allowance of any Claim under the Plan
will constitute a waiver or release by the applicable Debtor or Reorganized
Debtor of any claims, rights and causes of action that the Debtor or Reorganized
Debtor may possess against such a Claim holder.
DISPUTED CLAIMS; RESERVES AND ESTIMATIONS
Notwithstanding any other provisions of the Plan, no payments or
distributions will be made on account of a Disputed Claim until such Claim
becomes an Allowed Claim. In lieu of distributions under the Plan to holders of
Disputed Claims in Class 9, if allowed, the applicable Unsecured Claims Reserves
will be established on the Effective Date to hold property for the benefit of
these Claim holders, as well as holders of Allowed Claims in that Division of
Class 9. Reorganized LGII will fund the Unsecured Claims Reserve with New Common
Stock, as described in Section VI.D.1 of the Plan.
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FUNDING OF UNSECURED CLAIMS RESERVES
On the Effective Date, the respective number of Reserved Shares, will
be placed in the applicable Unsecured Claims Reserve for the benefit of holders
of Allowed Claims in each Division of Class 9.
Each holder of an Allowed Claim (or a Disputed Claim that ultimately
becomes an Allowed Claim) in Class 9 will have recourse only to the
undistributed cash and New Common Stock held in the applicable Unsecured Claims
Reserve for satisfaction of the distributions to which such holders of that
Division of Class 9 are entitled under the Plan, and not to any Reorganized
Debtor, its property or any assets previously distributed on account of any
Allowed Claim. Cash held in an Unsecured Claims Reserve as a result of dividends
and other distributions (a) will be deposited in a segregated bank account in
the name of the applicable Disbursing Agent and held in trust pending
distribution by the Disbursing Agent for the benefit of holders of the
respective Division of Class 9, (b) will be accounted for separately and (c)
will not constitute property of the Reorganized Debtors. The Disbursing Agent
will invest the cash held in the Unsecured Claims Reserve in a manner consistent
with the Reorganized Debtors' investment and deposit guidelines. The Disbursing
Agent also will place in the Unsecured Claims Reserve the Cash Investment Yield
from such investment of cash, and distributions on account of each Allowed Class
9 Claim will include a Pro Rata share of the Cash Investment Yield from such
investment of cash.
DISTRIBUTIONS ON ACCOUNT OF DISPUTED CLAIMS ONCE THEY ARE ALLOWED
On each Quarterly Distribution Date, the applicable Disbursing Agent
will make all distributions on account of any Disputed Claim that has become an
Allowed Claim during the preceding calendar quarter. Such distributions will be
made pursuant to the provisions of the Plan governing the applicable Class,
including the incremental distribution provisions set forth in Section VI.H.2 of
the Plan.
PAYMENT OF POST-EFFECTIVE DATE INTEREST FROM CASH INVESTMENT YIELD
In the event that any cash or dividends on New Common Stock are held in
an Unsecured Claims Reserve, holders of the respective Class may receive
post-Effective Date interest at a rate determined by the Cash Investment Yield.
For the federal income tax consequences to the holders of receipt of Cash
Investment Yield, see "Certain U.S. Federal Income Tax Consequences of
Consummation of the Plan -- Certain Other Tax Considerations for Holders of
Claims -- Receipt of Pre-Effective Date Interest" and "Certain U.S. Federal
Income Tax Consequences of Consummation of the Plan -- Certain Other Tax
Considerations for Holders of Claims -- Receipt of Dividend and Interest Income
Earned by the Unsecured Claims Reserve."
OBJECTIONS TO CLAIMS OR INTERESTS AND AUTHORITY TO PROSECUTE OBJECTIONS
All objections to Claims must be Filed and served on the holders of
such Claims by the Claims Objection Bar Date, and, if Filed prior to the
Effective Date, such objections will be served on the parties on the
then-applicable service list in the Reorganization Cases. If an objection has
not been Filed to a proof of Claim or a scheduled Claim by the Claims Objection
Bar Date, the Claim to which the proof of Claim or scheduled Claim relates will
be treated as an Allowed Claim if such Claim has not been allowed earlier. An
objection is deemed to have been timely Filed as to all Tort Claims, thus making
each such Claim a Disputed Claim as of the Claims Objection Bar Date. Each such
Tort Claim will remain a Disputed Claim until it becomes an Allowed Claim in
accordance with Section I.A.4 of the Plan.
After the Confirmation Date, only the Debtors or the Reorganized
Debtors will have the authority to File, settle, compromise, withdraw or
litigate objections to Claims, including pursuant to any alternative dispute
resolution or similar procedures previously or hereafter approved by the
Bankruptcy Court. After the Effective Date, the Reorganized Debtors may settle
or compromise any Disputed Claim without approval of the Bankruptcy Court.
Notwithstanding any other provisions of the Plan, the Debtors or Reorganized
Debtors will not object to the classification of all CTA Note Claims as Class 5
Claims; provided, however, that the Debtors or Reorganized Debtors may object to
such Claims on any other grounds.
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DISSOLUTION OF THE CREDITORS' COMMITTEES
On the Effective Date, the Creditors' Committee will dissolve and the
members of the Creditors' Committee will be released and discharged from all
duties and obligations arising from or related to the Reorganization Cases.
VOTING AND CONFIRMATION OF THE PLAN
GENERAL
To confirm the Plan, the Bankruptcy Code requires that the Bankruptcy
Court make a series of findings concerning the Plan and the Debtors, including
that: (a) the Plan has classified Claims and Interests in a permissible manner;
(b) the Plan complies with the applicable provisions of the Bankruptcy Code; (c)
the Debtors have complied with the applicable provisions of the Bankruptcy Code;
(d) the Debtors, as proponents of the Plan, have proposed the Plan in good faith
and not by any means forbidden by law; (e) the disclosure required by section
1125 of the Bankruptcy Code has been made; (f) the Plan has been accepted by the
requisite votes of creditors and equity interest holders (except to the extent
that cramdown is available under section 1129(b) of the Bankruptcy Code (see "
-- Confirmation" and " -- Acceptance or Cramdown")); (g) the Plan is feasible
and Confirmation will not likely be followed by the liquidation or the need for
further financial reorganization of the Debtors or the Reorganized Debtors; (h)
the Plan is in the "best interests" of all holders of Claims or Interests in an
impaired Class by providing to creditors or interest holders on account of such
Claims or Interests property of a value, as of the Effective Date, that is not
less than the amount that such holder would receive or retain in a chapter 7
liquidation, unless each holder of a Claim or Interest in such Class has
accepted the Plan; (i) all fees and expenses payable under 28 U.S.C. Section
1930, as determined by the Bankruptcy Court at the Confirmation Hearing, have
been paid or the Plan provides for the payment of such fees on the Effective
Date; (j) the Plan provides for the continuation after the Effective Date of all
retiree benefits, as defined in section 1114 of the Bankruptcy Code, at the
level established at any time prior to Confirmation pursuant to section
1114(e)(1)(B) or 1114(g) of the Bankruptcy Code, for the duration of the period
that the applicable Debtor has obligated itself to provide such benefits; and
(k) the disclosures required under section 1129(a)(5) concerning the identity
and affiliations of persons who will serve as officers and directors of the
Reorganized Debtors have been made.
The Plan constitutes a separate plan of reorganization for each Debtor.
As such, in order to confirm the Plan as to any Debtor, the Bankruptcy Court
will have to find compliance of the Plan with respect to each of the foregoing
as to each such Debtor.
VOTING PROCEDURES AND REQUIREMENTS
Pursuant to the Bankruptcy Code, only classes of claims against or
equity interests in a debtor that are "impaired" under the terms of a plan of
reorganization are entitled to vote to accept or reject a plan. A class is
"impaired" if the legal, equitable or contractual rights attaching to the claims
or interests of that class are modified, other than by curing defaults and
reinstating maturity. Classes of Claims and Interests that are not impaired are
not entitled to vote on the Plan and are conclusively presumed to have accepted
the Plan. In addition, Classes of Claims and Interests that receive no
distributions under the Plan and Class 4 Claims as to which the applicable
Debtor elects Option C treatment are impaired, are not entitled to vote on the
Plan and are deemed to have rejected the Plan unless such Class otherwise
indicates acceptance. The classification of Claims and Interests is summarized,
together with an indication of whether each Class of Claims or Interests is
impaired or unimpaired, in "Overview of the Plan -- Summary of Classes and
Treatment of Claims and Interests."
Pursuant to section 502 of the Bankruptcy Code and Bankruptcy Rule
3018, the Bankruptcy Court may estimate and temporarily allow a Claim for voting
or other purposes. By order of the Bankruptcy Court, certain vote tabulation
rules have been approved that temporarily allow or disallow certain Claims for
voting purposes only. These tabulation rules are described in the solicitation
materials provided with your Ballot.
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VOTING ON THE PLAN BY EACH HOLDER OF AN IMPAIRED CLAIM ENTITLED TO VOTE
ON THE PLAN IS IMPORTANT. IF YOU HOLD CLAIMS IN MORE THAN ONE CLASS OR IF YOU
HOLD MULTIPLE GENERAL UNSECURED CLAIMS OR UNDER CERTAIN OTHER CIRCUMSTANCES, YOU
MAY RECEIVE MORE THAN ONE BALLOT. YOU SHOULD COMPLETE, SIGN AND RETURN EACH
BALLOT YOU RECEIVE.
PLEASE CAREFULLY FOLLOW ALL OF THE INSTRUCTIONS CONTAINED ON THE BALLOT
PROVIDED TO YOU. ALL BALLOTS MUST BE COMPLETED AND RETURNED IN ACCORDANCE WITH
THE INSTRUCTIONS PROVIDED.
TO BE COUNTED, YOUR BALLOT MUST BE ACTUALLY RECEIVED BY 5:00 P.M.,
EASTERN TIME, ON , 2001 (OR SUCH OTHER TIME AND DATE IDENTIFIED ON
YOUR BALLOT) AT THE ADDRESS SET FORTH ON THE PREADDRESSED ENVELOPE PROVIDED TO
YOU. IT IS OF THE UTMOST IMPORTANCE TO THE DEBTORS THAT YOU VOTE PROMPTLY TO
ACCEPT THE PLAN.
VOTES CANNOT BE TRANSMITTED ORALLY. ACCORDINGLY, YOU ARE URGED TO
RETURN YOUR SIGNED AND COMPLETED BALLOT PROMPTLY.
IF ANY OF THE CLASSES OF HOLDERS OF IMPAIRED CLAIMS VOTE TO REJECT THE
PLAN, (A) THE DEBTORS MAY SEEK TO SATISFY THE REQUIREMENTS FOR CONFIRMATION OF
THE PLAN UNDER THE CRAMDOWN PROVISIONS OF SECTION 1129(b) OF THE BANKRUPTCY CODE
AND, IF REQUIRED, MAY AMEND THE PLAN TO CONFORM TO THE STANDARDS OF SUCH SECTION
OR (B) THE PLAN MAY BE MODIFIED OR WITHDRAWN WITH RESPECT TO A PARTICULAR
DEBTOR, WITHOUT AFFECTING THE PLAN AS TO OTHER DEBTORS, OR IN ITS ENTIRETY. See
" -- Acceptance or Cramdown" and " -- Alternatives to Confirmation and
Consummation of the Plan."
IF YOU ARE ENTITLED TO VOTE AND YOU DID NOT RECEIVE A BALLOT, RECEIVED
A DAMAGED BALLOT OR LOST YOUR BALLOT, PLEASE CALL THE DEBTORS' VOTING AGENT,
, AT ( ) .
Holders of Unsecured Claims in Class 9 against any Debtor other than
TLGI or LGII in amounts greater than $10,000 and holders of Unsecured Claims in
Class 9 against TLGI or LGII in amounts greater than $1,000 that wish for such
Claims to be treated in Class 2 or Class 3, respectively (convenience Classes)
must indicate that election on the Ballot. A separate Ballot will be provided,
and a separate election may be made, for each such Claim. If a holder of a Class
9 Claim elects to be treated in Class 2 or Class 3, the Ballot submitted with
respect to such Claim shall be treated as a Class 2 or Class 3 Ballot, as the
case may be, for voting purposes under the Plan. See "Overview of the Plan --
Summary of Classes and Treatment of Claims and Interests."
CONFIRMATION HEARING
The Bankruptcy Code requires the Bankruptcy Court, after notice, to
hold a hearing on whether the Debtors have fulfilled the Confirmation
requirements of section 1129 of the Bankruptcy Code. The Confirmation Hearing
has been scheduled for _____________, 2001 at _________ __.m. before the
Honorable Peter J. Walsh, Chief U.S. Bankruptcy Judge for the District of
Delaware, in the Judge's usual courtroom at the U.S. District Court for the
District of Delaware, 824 Market Street, Wilmington, Delaware 19801. The
Confirmation Hearing may be adjourned from time to time by the Bankruptcy Court
without further notice, except for an announcement of the adjourned date made at
the Confirmation Hearing. Any objection to Confirmation must be made in writing
and must specify in detail the name and address of the objector, all grounds for
the objection and the amount of the Claim or Interest held by the objector. Any
such objections must be Filed and served upon the persons designated in the
notice of the Confirmation Hearing, in the manner and by the deadline described
therein.
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CONFIRMATION
At the Confirmation Hearing, the Bankruptcy Court will confirm the Plan
only if all of the applicable requirements of section 1129 of the Bankruptcy
Code are met. Among the requirements for Confirmation are that the Plan: (a) is
accepted by the requisite holders of Claims and Interests in impaired Classes of
such Debtor or, if not so accepted, is "fair and equitable" and "does not
discriminate unfairly" as to the nonaccepting Class; (b) is in the "best
interests" of each holder of a Claim or Interest in each impaired Class under
the Plan for such Debtor; (c) is feasible; and (d) complies with the applicable
provisions of the Bankruptcy Code.
ACCEPTANCE OR CRAMDOWN
A plan is accepted by an impaired class of claims if holders of at
least two-thirds in dollar amount and a majority in number of claims of that
class vote to accept the plan. Only those holders of claims who actually vote
(and are entitled to vote) to accept or to reject a plan count in this
tabulation. For purposes of determining whether the requisite approval has been
received as to any Debtor, the votes in each Class or, in the case of Class 9,
each Division, in respect to each Debtor will be tabulated. In addition to this
voting requirement, section 1129 of the Bankruptcy Code requires that a plan be
accepted by each holder of a claim or interest in an impaired class or that the
plan otherwise be found by the Bankruptcy Court to be in the best interests of
each holder of a claim or interest in an impaired class. See "Voting and
Confirmation of the Plan -- Best Interests Test; Liquidation Analysis." The
Bankruptcy Code contains provisions for confirmation of a plan even if it is not
accepted by all impaired classes, as long as at least one impaired class of
claims has accepted it. These so-called "cramdown" provisions are set forth in
section 1129(b) of the Bankruptcy Code. As indicated above, the Plan may be
confirmed under the cramdown provisions if, in addition to satisfying the other
requirements of section 1129 of the Bankruptcy Code, it: (a) is "fair and
equitable;" and (b) "does not discriminate unfairly" with respect to each Class
of Claims or Interests that is impaired under, and has not accepted, the Plan.
The "fair and equitable" standard, also known as the "absolute priority rule,"
requires, among other things, that unless a dissenting Class of Unsecured Claims
or a Class of Interests receives full compensation for its Allowed Claims or
Allowed Interests, no holder of Allowed Claims or Interests in any junior Class
may receive or retain any property on account of such Claims or Interests. With
respect to a dissenting Class of Secured Claims, the "fair and equitable"
standard requires, among other things, that holders either (a) retain their
liens and receive deferred cash payments with a value as of the Effective Date
equal to the value of their interest in property of the applicable Estate or (b)
receive the indubitable equivalent of their Secured Claims. The "fair and
equitable" standard has also been interpreted to prohibit any Class senior to a
dissenting Class from receiving under a plan more than 100% of its Allowed
Claims or Allowed Interests. The Debtors believe that, if necessary, the Plan
may be crammed down over the dissent of certain Classes of Claims, in view of
the treatment proposed for such Classes. If necessary and appropriate, the
Debtors intend to modify the Plan to permit cramdown of dissenting Classes of
Claims.
The requirement that the Plan not "discriminate unfairly" means, among
other things, that a dissenting Class must be treated substantially equally with
respect to other Classes of equal rank. The Debtors do not believe that the Plan
unfairly discriminates against any Class that may not accept or otherwise
consent to the Plan.
Any Class of Claims or Interests that receives nothing under the Plan
and Class 4 Claims as to which the applicable Debtor elects Option C treatment
are deemed to be dissenting Classes. As a result, in addition to any Class or
Division of Class 9 that does not vote to accept the Plan, the Debtors will, to
the extent required, seek to use the "cramdown" provisions described above in
respect to the Claims and Interests in Classes 7, 10, 11, 12, 13, 14, 15 and 17
and in Class 4 (as to which the applicable Debtor elects Option C treatment).
While certain Intercompany Claims in Class 8 will receive nothing under the
Plan, the Loewen Companies will be deemed to have consented.
Subject to the conditions set forth in the Plan, a determination by the
Bankruptcy Court that the Plan, as it applies to any particular Debtor, is not
confirmable pursuant to section 1129 of the Bankruptcy Code will not limit or
affect: (a) the confirmability of the Plan as it applies to any other Debtor; or
(b) the Debtors' ability to modify the Plan, as it applies to any particular
Debtor, to satisfy the provisions of section 1129(b) of the Bankruptcy Code.
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SUBSTANTIVE CONSOLIDATION
The Debtors reserve the right to seek approval of the Bankruptcy Court
for the substantive consolidation of some or all of the Debtors for the purpose
of implementing the Plan, including for purposes of voting, Confirmation and
distributions to be made under the Plan.
BEST INTERESTS TEST; LIQUIDATION ANALYSIS
Notwithstanding acceptance of the Plan by each impaired Class, to
confirm the Plan, the Bankruptcy Court must determine that the Plan is in the
best interests of each holder of a Claim or Interest in any such impaired Class
who has not voted to accept the Plan. Accordingly, if an impaired Class does not
unanimously accept the Plan, the "best interests" test requires that the
Bankruptcy Court find that the Plan provides to each member of such impaired
Class a recovery on account of the member's Claim or Interest that has a value,
as of the Effective Date, at least equal to the value of the distribution that
each such member would receive if the applicable Debtors were liquidated under
chapter 7 of the Bankruptcy Code on such date.
To estimate what members of each impaired Class of Claims or Interests
would receive if the Debtors were liquidated under chapter 7 of the Bankruptcy
Code, the Bankruptcy Court must first determine the aggregate dollar amount that
would be available if each of the Reorganization Cases were converted to a
chapter 7 case under the Bankruptcy Code and each of the respective Debtor's
assets were liquidated by a chapter 7 trustee (the "Liquidation Value"). The
Liquidation Value of a Debtor would consist of the net proceeds from the
disposition of the assets of the Debtor, augmented by any cash held by the
Debtor.
The Liquidation Value available to holders of Unsecured Claims and
Interests would be reduced by, among other things: (a) the Claims of secured
creditors to the extent of the value of their collateral; (b) the costs, fees
and expenses of the liquidation, as well as other administrative expenses of the
Debtor's chapter 7 case; (c) unpaid Administrative Claims of the Reorganization
Cases; and (d) Priority Claims and Priority Tax Claims. The Debtors' costs of
liquidation in chapter 7 cases would include the compensation of trustees, as
well as of counsel and of other professionals retained by such trustees, asset
disposition expenses, applicable Taxes, litigation costs, Claims arising from
the operation of the Debtors during the pendency of the chapter 7 cases and all
unpaid Administrative Claims incurred by the Debtors during the Reorganization
Cases that are allowed in the chapter 7 cases. The liquidation itself would
trigger certain Priority Claims, such as Claims for severance pay, and would
likely accelerate the payment of other Priority Claims and Priority Tax Claims
that would otherwise be payable in the ordinary course of business. These
Priority Claims and Priority Tax Claims would be paid in full out of the net
liquidation proceeds, after payment of Secured Claims, before the balance would
be made available to pay Unsecured Claims or to make any distribution in respect
of Interests. The Debtors believe that the liquidation also would generate a
significant increase in Unsecured Claims, such as rejection damage Claims, and
Tax and other governmental Claims.
The information contained in Exhibit IV hereto provides a summary of
the Liquidation Values of the Debtors' interests in property, on a consolidated
basis by Division, assuming a hypothetical chapter 7 liquidation in which a
trustee appointed by the Bankruptcy Court would liquidate the Debtors'
properties and interests in property. (The Debtors will provide a summary of the
Liquidation Values of the Debtors' interests in property on a Debtor-by-Debtor
basis upon request by parties in interest to counsel for the Debtors.) This
liquidation analysis also assumes that the holders of the CTA Note Claims would
receive a distribution of the applicable Debtors' assets on a pari passu basis.
As more fully described in Exhibit IV, the liquidation analysis is based on a
number of estimates and assumptions that are subject to significant
uncertainties, including estimates and assumptions relating to the proceeds of
sales of assets, the timing of such sales, the impact of pending liquidations on
continuing operations and values and certain tax matters. No amounts have been
included in the liquidation analysis in respect of any potential recovery by the
Debtors in respect of the Retained Claims or the NAFTA Claims. While the Debtors
believe that these estimates and assumptions are reasonable for the purpose of
preparing hypothetical chapter 7 liquidation analyses, no assurance exists that
such estimates and assumptions would be valid if the Debtors were, in fact, to
be liquidated. Moreover, as noted above, the Debtors believe that chapter 7
liquidations could result in substantial litigation that could delay the
liquidation beyond the periods assumed in Exhibit IV. This delay could
materially reduce the amount determined on a present value basis available for
distribution to creditors. Moreover, the Debtors
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believe that such litigation and attendant delay could adversely affect the
values realizable in the sale of the Debtors' assets to an extent that cannot be
estimated at this time.
Based on the liquidation analyses set forth in Exhibit IV, the Debtors
believe that holders of Claims will receive greater value as of the Effective
Date under the Plan than such holders would receive under a chapter 7
liquidation.
In actual liquidations of the Debtors, distributions to holders of
Claims would be made substantially later than the Effective Date assumed in
connection with the Plan. This delay would materially reduce the amount
determined on a present value basis available for distribution to creditors,
including holders of Unsecured Claims. The hypothetical chapter 7 liquidations
of the Debtors are assumed to commence on April 1, 2001 and to be completed on
March 31, 2002.
In summary, the Debtors believe that chapter 7 liquidations of the
Debtors would result in substantial diminution in the value to be realized by
holders of Claims, as compared to the proposed distributions under the Plan,
because of, among other factors: (a) the failure to realize the maximum going
concern value of the Debtors' assets; (b) the substantial negative impact of
conversion to a chapter 7 case and subsequent liquidation on the employees and
customers of the Debtors; (c) additional costs and expenses involved in the
appointment of trustees, attorneys, accountants and other professionals to
assist such trustees in the chapter 7 cases; (d) additional expenses and Claims,
some of which would be entitled to priority in payment, which would arise by
reason of the liquidation and from the rejection of unexpired real estate leases
and other Executory Contracts and Unexpired Leases in connection with a
cessation of the Debtors' operations; and (e) the substantial time that would
elapse before entities would receive any distribution in respect of their
Claims. Consequently, the Debtors believe that the Plan will provide a
substantially greater ultimate return to holders of Claims than would chapter 7
liquidations.
FEASIBILITY
Section 1129(a)(11) of the Bankruptcy Code requires that Confirmation
not be likely to be followed by the liquidation, or the need for further
financial reorganization, of the Debtors or any successor to the Debtors (unless
such liquidation or reorganization is proposed in the Plan). For purposes of
determining whether the Plan meets this requirement, the Debtors have analyzed
their ability to meet their respective obligations under the Plan. As part of
this analysis, the Debtors have prepared the Projections. See "Reorganized LGII
-- Projected Financial Information." Based upon the Projections, the Debtors
believe that their reorganization under the Plan will meet the feasibility
requirements of the Bankruptcy Code.
COMPLIANCE WITH APPLICABLE PROVISIONS OF THE BANKRUPTCY CODE
Section 1129(a)(1) of the Bankruptcy Code requires that the Plan comply
with the applicable provisions of the Bankruptcy Code. The Debtors have
considered each of these issues in the development of the Plan and believe that
the Plan complies with all provisions of the Bankruptcy Code.
ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN
The Debtors have evaluated numerous alternatives to the Plan, including
alternative structures and terms of the Plan, the liquidation of the Debtors and
delaying the adoption of any plan of reorganization and the pursuit of various
litigation strategies. While the Debtors have concluded that the Plan is the
best alternative and will maximize recoveries by holders of Claims, if the Plan
is not confirmed, the Debtors, individually or collectively, or (subject to the
Debtors' exclusive periods under the Bankruptcy Code to File and solicit
acceptances of a plan or plans of reorganization) any other party in interest in
the Reorganization Cases could attempt to formulate and propose a different plan
or plans of reorganization. Further, if no plan of reorganization can be
confirmed, the Reorganization Cases may be converted to chapter 7 cases. In a
liquidation case under chapter 7 of the Bankruptcy Code, a trustee or trustees
would be elected or appointed to liquidate the assets of each Debtor. The
proceeds of the liquidation would be distributed to the respective creditors of
the Debtors in accordance with the priorities established by the Bankruptcy
Code. For further discussion of the potential impact on the Debtors of the
conversion
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of the Reorganization Cases to chapter 7 liquidations, see " -- Best Interests
Test; Liquidation Analysis." The Debtors believe that Confirmation and
consummation of the Plan is preferable to the alternatives described above.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF CONSUMMATION OF THE PLAN
GENERAL
A DESCRIPTION OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE
PLAN IS PROVIDED BELOW. THE DESCRIPTION IS BASED ON THE INTERNAL REVENUE CODE,
TREASURY REGULATIONS ISSUED THEREUNDER, JUDICIAL DECISIONS AND IRS AND
ADMINISTRATIVE DETERMINATIONS, ALL AS IN EFFECT ON THE DATE HEREOF. CHANGES IN
ANY OF THESE AUTHORITIES, OR CHANGES IN THE INTERPRETATIONS OF ANY OF THESE
AUTHORITIES, WHICH MAY HAVE RETROACTIVE EFFECT, MAY CAUSE THE FEDERAL INCOME TAX
CONSEQUENCES OF THE PLAN TO DIFFER MATERIALLY FROM THE CONSEQUENCES DESCRIBED
BELOW. MOREOVER, NO RULING HAS BEEN REQUESTED FROM THE IRS AND NO LEGAL OPINION
HAS BEEN REQUESTED FROM COUNSEL CONCERNING ANY TAX CONSEQUENCE OF THE PLAN, AND
NO TAX OPINION IS GIVEN BY THIS DISCLOSURE STATEMENT.
THIS DESCRIPTION DOES NOT COVER ALL ASPECTS OF FEDERAL INCOME TAXATION
THAT MAY BE RELEVANT TO THE DEBTORS OR HOLDERS OF CLAIMS. FOR EXAMPLE, THE
DESCRIPTION DOES NOT ADDRESS ISSUES OF SPECIAL CONCERN TO CERTAIN TYPES OF
TAXPAYERS, SUCH AS DEALERS IN SECURITIES, LIFE INSURANCE COMPANIES, FINANCIAL
INSTITUTIONS, TAX EXEMPT ORGANIZATIONS AND FOREIGN TAXPAYERS (OTHER THAN TLGI),
NOR DOES IT ADDRESS TAX CONSEQUENCES TO HOLDERS OF STOCK INTERESTS IN TLGI. IN
ADDITION, THIS DESCRIPTION DOES NOT ADDRESS ANY TAX CONSEQUENCES OF THE
SUBSIDIARY RESTRUCTURING TRANSACTIONS OR THE BLACKSTONE SETTLEMENT. MOREOVER,
THE DESCRIPTION IS LIMITED TO U.S. FEDERAL INCOME TAX CONSEQUENCES AND DOES NOT
DISCUSS U.S. STATE LAW OR THE POSSIBLE STATE TAX CONSEQUENCES OR NON-U.S. TAX
CONSEQUENCES THAT MIGHT APPLY TO THE DEBTORS OR TO HOLDERS OF CLAIMS UNDER
CANADIAN OR OTHER FOREIGN TAX LAWS.
FOR THESE REASONS, THE DESCRIPTION THAT FOLLOWS IS NOT A SUBSTITUTE FOR
CAREFUL TAX PLANNING AND PROFESSIONAL TAX ADVICE BASED UPON THE INDIVIDUAL
CIRCUMSTANCES OF EACH HOLDER OF A CLAIM OR INTEREST. HOLDERS OF CLAIMS OR
INTERESTS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE PLAN.
CONSEQUENCES TO THE DEBTORS
For U.S. federal income tax purposes, the Plan consists of two parts:
(a) the recapitalization of LGII and its Debtor subsidiaries, in which the LGII
Old Stock is canceled and the holders of Allowed Claims against LGII and its
Debtor subsidiaries receive cash, New Five-Year Secured Notes, if issued, New
Two-Year Unsecured Notes, if issued, New Seven-Year Unsecured Notes and New
Common Stock; and (b) the portion of the Reinvestment Transactions in which TLGI
transfers its assets to LGII in return for LGII's agreement to transfer New
Five-Year Secured Notes, if issued, New Two-Year Unsecured Notes, if issued, New
Seven-Year Unsecured Notes and New Common Stock to the holders of Allowed Claims
against TLGI and the other CCAA Debtors. The Debtors believe that the
recapitalization of LGII will qualify as a reorganization under section
368(a)(1)(E) of the Internal Revenue Code, and that the Reinvestment
Transactions should qualify as a reorganization under section 368(a)(1)(G) of
the Internal Revenue Code. As a consequence, none of the Debtors expects to
recognize taxable income or loss as a result of the implementation of the Plan.
The discharge of a debt obligation for an amount less than its adjusted
issue price (in most cases, the amount the debtor received on incurring the debt
obligation, with certain adjustments) generally gives rise to
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cancellation of indebtedness ("COD") income, which must be included in the
debtor's income. However, COD income is not recognized by a taxpayer that is a
debtor in a chapter 11 case if the discharge is granted by the court or pursuant
to a plan of reorganization approved by the court. The Plan, if approved, would
enable the Debtors to qualify for this bankruptcy exclusion rule with respect to
any COD income triggered by the Plan.
If debt is discharged in a chapter 11 case, however, certain tax
attributes otherwise available and of value to the debtor are reduced, in most
cases by the principal amount of the indebtedness forgiven. The tax attributes
subject to reduction (and the order of reduction) are: (a) net operating losses
("NOLs") and NOL carryforwards; (b) most credit carryforwards, including the
general business credit and the minimum tax credit carryforward; (c) capital
losses and capital loss carryforwards; (d) the tax basis of the debtor's
depreciable and nondepreciable assets, but not in an amount greater than the
excess of the aggregate tax bases of the property held by the debtor immediately
after the discharge over the aggregate of the debtor's liabilities immediately
after the discharge; and (e) foreign tax credit carryforwards. Attribute
reduction is calculated only after the tax for the year of discharge has been
determined.
A debtor may elect to avoid the prescribed order of attribute reduction
and instead reduce the basis of depreciable property first. The Debtors do not
plan to make this election. In the case of affiliated corporations filing a
consolidated return (such as LGII and its subsidiaries), the attribute reduction
rules generally should apply separately to the particular corporation whose debt
is being discharged, not to the entire consolidated group without regard to the
identity of the particular debtor. The IRS recently has taken the position,
however, that consolidated NOLs must be reduced irrespective of the source of
those losses. The current IRS position as to the impact of the attribute
reduction rules on other tax attributes of consolidated group members is
unclear. The Projected Consolidated Statements of Operations contained in this
Disclosure Statement assume that all of the NOLs and NOL carryforwards generated
by the LGII affiliated group prior to the Effective Date will be eliminated by
the triggering of COD income in the Plan, and otherwise assume that attribute
reduction applies separately to the particular corporation whose debt is
discharged, resulting in assumed basis reduction to the assets (both stock and
non-stock) of the subsidiaries of LGII of approximately $40 million (without
regard to any reduction of NOLs). See "Reorganized LGII -- Projected Financial
Information -- Principal Assumptions for Projections -- Income Taxes."
CONSEQUENCES TO HOLDERS OF CLAIMS
The federal income tax consequences of the Plan to a holder of a Claim
will depend, in part, on whether the Claim constitutes a "tax security" for
federal income tax purposes, what type of consideration was received in exchange
for the Claim, whether the holder is a resident of the U.S. for tax purposes,
whether the holder reports income on the accrual or cash basis, whether the
holder has taken a bad debt deduction or worthless security deduction with
respect to the Claim and whether the holder receives distributions under the
Plan in more than one taxable year.
DEFINITION OF SECURITIES
There is no precise definition of what constitutes a "security under
the federal income tax law," and all facts and circumstances pertaining to the
origin and character of a claim are relevant in determining its status.
Nevertheless, courts generally have held that corporate debt obligations
evidenced by written instruments with original maturities of ten years or more
will be considered tax securities for this purpose. Based on their original
maturities, it is likely that the Series D Notes and Series E Notes will be
considered tax securities for this purpose. By contrast, it is likely that the
PATS Notes will not be considered tax securities for this purpose.
HOLDERS OF CLAIMS CONSTITUTING TAX SECURITIES
Under the terms of the Plan, holders of Allowed Claims constituting tax
securities will receive some combination of, among other things: (a) cash; (b)
New Five-Year Secured Notes, if issued; (c) New Two-Year Unsecured Notes, if
issued; (d) New Seven-Year Unsecured Notes; or (e) New Common Stock in
satisfaction of their Claims under the Plan. Holders of Claims constituting tax
securities who receive only New Common Stock in satisfaction of their Claims
generally will not recognize income or gain on the exchange (except that amounts
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allocable to interest on their Claims will be treated as interest income).
Holders of Claims constituting tax securities may, however, recognize gain if
they receive cash, an obligation not constituting a tax security, or any other
non-cash items ("Boot"), in either full or partial satisfaction of those Claims.
In that event, any gain on the exchange, measured generally by the excess of the
amount realized by the holder over the holder's tax basis in the Claim, will be
recognized by the holder, but in an amount not exceeding the sum of the cash and
the fair market value of the non-cash Boot received. Any gain so recognized will
generally be capital gain provided that the Claim was held as a capital asset by
the holder at the time of the exchange.
Holders of Claims constituting tax securities who receive New Common
Stock or New Notes constituting tax securities under the Plan in either partial
or full satisfaction of their Claims generally will not be permitted to
recognize any loss on the exchange.
A holder's aggregate tax basis in the New Common Stock received under
the Plan in respect of a Claim constituting a tax security -- aside from amounts
allocable to interest -- generally will equal the holder's basis in the Claim,
decreased by the amount of any cash and New Senior Notes not constituting tax
securities received by the holder and increased by the amount of any gain
recognized by the holder in connection with the exchange. The holding period for
any New Common Stock or New Senior Notes constituting tax securities received in
the exchange -- other than those allocable to interest -- generally will include
the holding period of the Claim surrendered. A holder's tax basis in New Common
Stock or New Senior Notes constituting tax securities allocable to interest will
equal the fair market value of such New Common Stock or New Senior Notes, and a
holding period will begin upon receipt.
HOLDERS OF CLAIMS NOT CONSTITUTING TAX SECURITIES
Holders of Claims not constituting tax securities will recognize gain
or loss equal to the amount realized under the Plan in respect of their Claims
less their respective tax bases in those Claims. The amount realized for this
purpose generally will equal the sum of the cash and the fair market value of
any other consideration received under the Plan, including any New Common Stock.
Any gain or loss recognized in the exchange will be capital or ordinary
depending on the status of the Claim in the holder's hands, including whether or
not the Claim constitutes a market discount bond in the holder's hands. The
holder's aggregate tax basis for any consideration received under the Plan
generally will equal the amount realized. The holding period for any
consideration received under the Plan generally will begin on the day following
the receipt of that consideration.
DIVIDEND AND INTEREST INCOME EARNED BY THE UNSECURED CLAIMS RESERVE
Pursuant to the Plan, shares of New Common Stock issued as of the
Effective Date but not then subject to distribution to holders of Allowed Claims
will be held by an Unsecured Claims Reserve until distribution is required by
the Plan. Therefore, it is possible that an Unsecured Claims Reserve will
receive cash dividends or other distributions from Reorganized LGII on account
of the shares of New Common Stock held in such Unsecured Claims Reserve. Any
cash thus received would be reinvested pursuant to the Plan, thereby generating
additional income.
Congress has made it clear that amounts earned by an escrow account,
settlement fund or similar fund are subject to current tax, but Treasury
Regulations addressing the tax treatment of reserve accounts like an Unsecured
Claims Reserve in a bankruptcy setting have not yet become effective. Therefore,
depending on the facts (and the interpretation given to those facts), reserve
accounts like an Unsecured Claims Reserve might be treated for tax purposes
under current law as separately taxable trusts, grantor trusts treated as owned
by either the corporate transferor or the creditor beneficiaries, or in some
other fashion.
On February 1, 1999, the IRS issued a proposed Treasury Regulation that
would cause reserve accounts like the Unsecured Claims Reserves to be treated as
"qualified settlement funds" for federal income tax purposes, which, in turn,
would have the consequence of causing income earned by those accounts to be
subject to a separate
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entity-level tax. The proposed Treasury Regulation is not currently in effect
and will only become effective once it is promulgated in final form. In the
interim, the proposed Treasury Regulation provides that the IRS will not
challenge any reasonable, consistently-applied method for reporting income
earned by a reserve account like an Unsecured Claims Reserve.
Against this background, the Debtors have determined to treat the
Unsecured Claims Reserves as grantor trusts of which the Reorganized Debtors are
the grantors, and therefore will treat income earned by an Unsecured Claims
Reserve as income of the Reorganized Debtors. To assure that this income is
fully subject to tax, the Reorganized Debtors will waive whatever right they
might otherwise have to claim a dividends-received deduction with respect to any
dividends paid to an Unsecured Claims Reserve on account of the undistributed
New Common Stock. Any income thus earned should be offset dollar-for-dollar on a
current basis by an interest deduction to the Reorganized Debtors reflecting
their obligations under the Plan to pay any income earned by the Unsecured
Claims Reserve on account of New Common Stock (or on the reinvestment of
dividends paid on that New Common Stock) to holders of Allowed Claims.
CERTAIN OTHER TAX CONSIDERATIONS FOR HOLDERS OF CLAIMS
RECEIPT OF PRE-EFFECTIVE DATE INTEREST
Holders of Claims not previously required to include in their taxable
income any accrued but unpaid pre-Effective Date interest on a Claim may be
treated as receiving taxable interest to the extent any consideration they
receive under the Plan is allocable to such interest. Holders previously
required to include in their taxable income any accrued but unpaid interest on a
Claim may be entitled to recognize a deductible loss to the extent that such
interest is not satisfied under the Plan.
RECEIPT OF DIVIDEND AND INTEREST INCOME EARNED BY THE UNSECURED CLAIMS
RESERVE
As described above (see " -- Consequences to Holders of Claims" and "
-- Dividend and Interest Income Earned by the Unsecured Claims Reserve"), it is
possible that the Unsecured Claims Reserve will receive cash dividends on shares
of New Common Stock held by it and then generate additional cash by reinvesting
those dividends pending distribution. When that cash is distributed to holders
of Allowed Claims, the Reorganized Debtors will treat the cash as taxable
interest income to the holder, and will file information returns reflecting that
treatment.
REINSTATEMENT OF CLAIMS
Holders generally should not recognize gain, loss or other taxable
income upon the Reinstatement of their Claims under the Plan. Taxable income,
however, may be recognized by those holders if they are considered to receive
interest, damages or other income in connection with the Reinstatement or if the
Reinstatement is considered for tax purposes to involve a substantial
modification of the Claim.
BAD DEBT DEDUCTION
A holder who, under the Plan, receives in respect of a Claim an amount
less than the holder's tax basis in that Claim may be entitled in the year of
receipt (or in an earlier year) to a bad debt deduction under section 166(a) of
the Internal Revenue Code. The rules governing the timing and amount of bad debt
deductions place considerable emphasis on the facts and circumstances of the
holder, the obligor and the instrument with respect to which a deduction is
claimed; holders of Claims therefore are urged to consult their tax advisors
with respect to their ability to take such a deduction.
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INFORMATION REPORTING AND WITHHOLDING
Under the Internal Revenue Code's backup withholding rules, a holder of
a Claim may be subject to backup withholding with respect to distributions or
payments made pursuant to the Plan unless that holder (a) comes within certain
exempt categories (which generally include corporations) and, when required,
demonstrates that fact or (b) provides a correct taxpayer identification number
and certifies under penalty of perjury that the taxpayer identification number
is correct and that the holder is not subject to backup withholding because of a
failure to report all dividend and interest income. Backup withholding is not an
additional tax, but merely an advance payment that may be refunded to the extent
it results in an overpayment of tax. Holders of Claims may be required to
establish exemption from backup withholding or to make arrangements with respect
to the payment of backup withholding.
In addition, holders of Claims against TLGI are urged to consult their
tax advisors to determine whether or not receipt of the New Senior Notes will
result in a withholding obligation that did not exist in the past.
CERTAIN CANADIAN FEDERAL INCOME TAX CONSEQUENCES
OF CONSUMMATION OF THE PLAN
GENERAL
A DESCRIPTION OF CERTAIN CANADIAN FEDERAL INCOME TAX CONSEQUENCES OF
THE CONSUMMATION OF THE PLAN IS PROVIDED BELOW. THE DESCRIPTION IS BASED ON THE
PROVISIONS OF THE INCOME TAX ACT (CANADA) AND THE REGULATIONS THERETO ("THE
ACT"), THE PUBLISHED ADMINISTRATIVE AND INTERPRETIVE POSITIONS OF THE CANADA
CUSTOMS & REVENUE AGENCY, PROPOSED AMENDMENTS TO THE ACT AND CASE LAW PUBLISHED
OR REPORTED AS AT THE DATE OF THIS DISCLOSURE STATEMENT. CHANGES IN ANY OF THESE
AUTHORITIES, OR CHANGES IN THE INTERPRETATIONS OF ANY OF THESE AUTHORITIES,
WHICH MAY HAVE RETROACTIVE EFFECT, MAY CAUSE THE CANADIAN FEDERAL INCOME TAX
CONSEQUENCES OF THE PLAN TO DIFFER MATERIALLY FROM THE CONSEQUENCES DESCRIBED
BELOW. MOREOVER, NO ADVANCE INCOME TAX RULING HAS BEEN REQUESTED FROM CANADA
CUSTOMS & REVENUE AGENCY AND NO LEGAL OPINION HAS BEEN REQUESTED FROM COUNSEL
CONCERNING ANY TAX CONSEQUENCE OF THE PLAN, AND NO TAX OPINION IS GIVEN BY THIS
DISCLOSURE STATEMENT.
THIS DESCRIPTION DOES NOT COVER ALL ASPECTS OF CANADIAN FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO THE DEBTORS OR HOLDERS OF CLAIMS OR INTERESTS.
IN PARTICULAR, THIS DESCRIPTION DOES NOT ADDRESS THE CCAA DEBTOR RESTRUCTURING
TRANSACTIONS DESCRIBED IN EXHIBIT I.A.28 TO THE PLAN OR ANY OTHER SIMILAR
TRANSACTIONS UNDERTAKEN PRIOR TO THE CCAA DEBTOR RESTRUCTURING TRANSACTIONS, THE
BLACKSTONE SETTLEMENT OR ISSUES OF CONCERN TO HOLDERS OF CLAIMS WITH RESPECT TO
THE CANADIAN FEDERAL INCOME TAX CONSEQUENCES OF THE DISPOSITION OR SETTLEMENT OF
SUCH CLAIMS OR INTERESTS.
FOR THESE REASONS, THE DESCRIPTION THAT FOLLOWS IS NOT A SUBSTITUTE FOR
CAREFUL TAX PLANNING AND PROFESSIONAL TAX ADVICE BASED UPON THE INDIVIDUAL
CIRCUMSTANCES OF EACH HOLDER OF A CLAIM OR INTEREST. HOLDERS OF CLAIMS OR
INTERESTS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE
CANADIAN FEDERAL, PROVINCIAL AND LOCAL AND NON-CANADIAN CONSEQUENCES OF THE
PLAN.
SETTLEMENT OF DEBT
The settlement of TLGI's Commercial Debt Obligations (as defined in the
Act, which do not include any debt obligations arising from a guarantee given by
TLGI in respect of another party's debt) will result in the
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application of the Canadian debt forgiveness rules. Under these rules, the
Forgiven Amount (as defined in the Act and briefly described following) will
reduce certain tax attributes of TLGI in prescribed order. The Forgiven Amount
is the lesser of the amount for which the obligation was issued and the unpaid
principal amount, plus any accrued interest which was deducted or is deductible,
less amounts paid in satisfaction of the debt and certain other adjustments.
The Plan will result in an amount being paid in satisfaction of TLGI's
indebtedness equal to the amount of cash and the fair market value of the New
Five-Year Secured Notes, if issued, New Two-Year Unsecured Notes, if issued, New
Seven-Year Unsecured Notes and New Common Stock received by the holders of
Claims against TLGI in respect of TLGI's indebtedness. Under the terms of the
Plan, such payment is not allocated between indebtedness that would constitute
Commercial Debt Obligations (as defined in the Act) and other indebtedness
(principally the obligations of TLGI arising as a guarantor). If, for example,
the full amount of the payment was considered to apply to TLGI's indebtedness
other than its Commercial Debt Obligations, TLGI would have a Forgiven Amount
equal to the full amount of its Commercial Debt Obligations.
Any Forgiven Amount will result in the reduction of TLGI's non-capital
losses and capital losses of prior years and will result in the reduction of its
capital losses, but not its non-capital losses, arising in the year of
settlement. Even if the Forgiven Amount is equal to the full amount of TLGI's
Commercial Debt Obligations, the aggregate of available non-capital losses and
capital losses of prior years and capital losses of the year of settlement is
expected to exceed the Forgiven Amount, so that no adverse Canadian federal tax
consequences are expected to arise as a result of settlement of TLGI's
Commercial Debt Obligations.
TRANSFER OF ASSETS TO CANADIAN HOLDING COMPANIES
As part of the CCAA Debtor Restructuring Transactions, all of TLGI's
assets, other than the shares of its subsidiaries, will be transferred to two
Canadian holding companies. For purposes of determining TLGI's proceeds of
disposition and tax loss as a result of this transfer, and the tax cost of the
transferred assets to the Canadian company, these assets are disposed of by TLGI
and acquired by the Canadian company at fair market value. In the case of the
tangible assets, it is expected that this will result in a substantial reduction
in the tax cost of such assets to the Canadian company as compared to the
current tax cost to TLGI, and will result in a corresponding non-capital loss to
TLGI.
TRANSFER OF ASSETS TO LGII
For Canadian tax purposes, the transfer by TLGI to LGII of all of its
assets, including the shares of the Canadian holding companies referred to
above, pursuant to the CCAA Order, should be treated as having taken place for
proceeds of disposition equal to the fair market value of those assets.
CANCELLATION OF LGII SHARES
The cancellation of LGII shares owned by TLGI will result in a capital
loss to TLGI equal to the tax cost of the shares for Canadian tax purposes.
ACQUISITION OF CONTROL
A number of provisions of the Act apply to a corporation which
undergoes an acquisition of control. These include reductions of the tax cost of
certain property, expiry of capital losses, restrictions on the deductibility of
non-capital losses and deemed taxation year ends. The application of these
provisions may be undesirable relative to future operations; however, their
application would not alter the tax consequences described herein. Furthermore,
the Debtors have no knowledge that any person or group of persons acting in
concert will control LGII after the Effective Date. Provided that this holds
true, there should be no acquisition of control of LGII or any of its
subsidiaries for Canadian federal income tax purposes as a result of the Plan.
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APPLICABILITY OF CERTAIN U.S. FEDERAL AND STATE SECURITIES LAWS
GENERAL
No registration statement will be filed under the Securities Act of
1933, as amended, 15 U.S.C. Section 77a-77aa (the "Securities Act"), or
any state securities laws with respect to the offer and distribution under the
Plan of the New Five-Year Secured Notes, if issued, the New Two-Year Unsecured
Notes, if issued, the New Seven-Year Unsecured Notes or the New Common Stock.
The Debtors believe that the provisions of section 1145(a)(1) of the Bankruptcy
Code exempt the offer and distribution of such securities under the Plan from
federal and state securities registration requirements.
BANKRUPTCY CODE EXEMPTIONS FROM REGISTRATION REQUIREMENTS
INITIAL OFFER AND SALE OF SECURITIES
Section 1145(a)(1) of the Bankruptcy Code exempts the offer and sale of
securities under a plan of reorganization from registration under the Securities
Act and state securities laws if three principal requirements are satisfied: (a)
the securities must be offered and sold under a plan of reorganization and must
be securities of the debtor, an affiliate participating in a joint plan with the
debtor or a successor to the debtor under the plan; (b) the recipients of the
securities must hold a prepetition or administrative expense claim against the
debtor or an interest in the debtor; and (c) the securities must be issued
entirely in exchange for the recipient's claim against or interest in the
debtor, or principally in such exchange and partly for cash or property. The
Debtors believe that the offer and sale of the New Five-Year Secured Notes, if
issued, the New Two-Year Unsecured Notes, if issued, the New Seven-Year
Unsecured Notes and the New Common Stock under the Plan satisfies the
requirements of section 1145(a)(1) of the Bankruptcy Code and, therefore, are
exempt from registration under the Securities Act and state securities laws.
SUBSEQUENT TRANSFERS OF SECURITIES
In general, all resales and subsequent transactions in the New
Five-Year Secured Notes, if issued, the New Two-Year Unsecured Notes, if issued,
the New Seven-Year Unsecured Notes or the New Common Stock distributed under the
Plan will be exempt from registration under the Securities Act pursuant to
section 4(1) of the Securities Act, unless the holder thereof is deemed to be an
"affiliate" of Reorganized LGII or an "underwriter" with respect to such
securities. Rule 144 under the Securities Act defines "affiliate" of an issuer
as any person directly or indirectly through one or more intermediaries
controlling, controlled by or under common control with the issuer. Section
1145(b) of the Bankruptcy Code defines four types of "underwriters":
(a) persons who purchase a claim against, an interest in, or a claim
for administrative expense against the debtor with a view to
distributing any security received in exchange for such a claim or
interest ("accumulators");
(b) persons who offer to sell securities offered under a plan for the
holders of such securities ("distributors");
(c) persons who offer to buy securities from the holders of such
securities, if the offer to buy is (i) with a view to distributing
such securities and (ii) made under a distribution agreement; and
(d) a person who is an "issuer" with respect to the securities, as the
term "issuer" is defined in section 2(11) of the Securities Act.
Under section 2(11) of the Securities Act, an "issuer" includes any "affiliate"
of the issuer. Whether or not any particular person would be deemed to be an
"affiliate" of Reorganized LGII or an "underwriter" with respect to any security
to be issued pursuant to the Plan would depend upon various facts and
circumstances applicable to that
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person. Accordingly, the Debtors express no view as to whether any person would
be deemed to be an "affiliate" of Reorganized LGII or an "underwriter" with
respect to any security to be issued pursuant to the Plan.
Rule 144 under the Securities Act provides an exemption from
registration under the Securities Act for certain limited public resales of
unrestricted securities by "affiliates" of the issuer of such securities. Rule
144 allows a holder of unrestricted securities that is an "affiliate" of the
issuer of such securities to sell, without registration, within any three-month
period a number of shares of such unrestricted securities that does not exceed
the greater of 1% of the number of outstanding securities in question or the
average weekly trading volume in the securities in question during the four
calendar weeks preceding the date on which notice of such sale was filed
pursuant to Rule 144, subject to the satisfaction of certain other requirements
of Rule 144 regarding the manner of sale, notice requirements and the
availability of current public information regarding the issuer. The Debtors
believe that, pursuant to section 1145(c) of the Bankruptcy Code, the New
Five-Year Secured Notes, the New Two-Year Unsecured Notes, the New Seven-Year
Unsecured Notes and the New Common Stock to be issued pursuant to the Plan will
be unrestricted securities for purposes of Rule 144.
In connection with prior bankruptcy cases, the staff of the SEC has
taken the position that resales by accumulators and distributors of securities
distributed under a plan of reorganization that are not "affiliates" of the
issuer are exempt from registration under the Securities Act if effected in
"ordinary trading transactions." The staff of the SEC has indicated in this
context that a transaction may be considered an "ordinary trading transaction"
if it is made on an exchange or in the over-the-counter market and does not
involve any of the following factors:
(a) either (i) concerted action by the recipients of securities issued
under a plan in connection with the sale of such securities or
(ii) concerted action by distributors on behalf of one or more
such recipients in connection with such sales;
(b) the use of informational documents concerning the offering of the
securities prepared or used to assist in the resale of such
securities, other than a bankruptcy court-approved disclosure
statement and supplements thereto and documents filed with the SEC
pursuant to the Exchange Act; or
(c) the payment of special compensation to brokers and dealers in
connection with the sale of such securities designed as a special
incentive to the resale of such securities (other than the
compensation that would be paid pursuant to arms' length
negotiations between a seller and a broker or dealer, each acting
unilaterally, not greater than the compensation that would be paid
for a routine similar-sized sale of similar securities of a
similar issuer).
The Debtors have not sought the views of the SEC on this matter and, therefore,
no assurance can be given regarding the proper application of the "ordinary
trading transaction" exemption described above. Any persons intending to rely on
such exemption are urged to consult their own counsel as to the applicability
thereof to any particular circumstances.
GIVEN THE COMPLEX NATURE OF THE QUESTION OF WHETHER A PARTICULAR PERSON
MAY BE AN "AFFILIATE" OR REORGANIZED LGII OR "UNDERWRITER" WITH RESPECT TO THE
NEW COMMON STOCK OR THE NEW NOTES TO BE ISSUED PURSUANT TO THE PLAN, THE DEBTORS
MAKE NO REPRESENTATIONS CONCERNING THE RIGHT OF ANY PERSON TO TRADE IN SUCH
SECURITIES AND RECOMMEND THAT HOLDERS OF CLAIMS CONSULT THEIR OWN COUNSEL
CONCERNING WHETHER THEY MAY FREELY TRADE SUCH SECURITIES.
State securities laws generally provide registration exemptions for
subsequent transfers by a bona fide owner for the owner's own account and
subsequent transfers to institutional or accredited investors. Such exemptions
generally are expected to be available for subsequent transfers of the New
Five-Year Secured Notes, the New Two-Year Unsecured Notes, the New Seven-Year
Unsecured Notes and the New Common Stock.
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CERTAIN TRANSACTIONS BY STOCKBROKERS
Under section 1145(a)(4) of the Bankruptcy Code, stockbrokers effecting
transactions in the New Five-Year Secured Notes, if issued, the New Two-Year
Unsecured Notes, if issued, the New Seven-Year Unsecured Notes or the New Common
Stock prior to the expiration of 40 days after the first date on which such
securities were bona fide offered to the public by Reorganized LGII or by or
through an underwriter are required to deliver to the purchaser of such
securities a copy of this Disclosure Statement (and supplements hereto, if any,
if ordered by the Bankruptcy Court) at or before the time of delivery of such
securities to such purchaser. In connection with prior bankruptcy cases, the
staff of the SEC has taken so-called "no-action" positions with respect to
noncompliance by stockbrokers with such requirement in circumstances in which
the debtor was, and the reorganized debtor was to continue to be, subject to and
in compliance with the periodic reporting requirements of the Exchange Act. The
views of the SEC on this matter, however, have not been sought by the Debtors
and, therefore, no assurance can be given regarding the possible consequences of
noncompliance by stockbrokers with the disclosure statement delivery
requirements of section 1145(a)(4). Stockbrokers are urged to consult their own
counsel with respect to such requirements.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Plan, each of the Principal CTA Creditors (in each case
only if such Principal CTA Creditor is entitled to receive at least 10% of the
outstanding shares of New Common Stock solely as a result of distributions made
pursuant to the Plan on account of Allowed Claims held as of the Distribution
Record Date) and each other person or entity entitled to receive at least 10% of
the outstanding shares of New Common Stock solely as a result of distributions
made pursuant to the Plan on account of Allowed Claims held as of the
Distribution Record Date ("Eligible Holders") will be entitled to enter into a
registration rights agreement with Reorganized LGII (the "Registration Rights
Agreement") on the Effective Date. Under the Registration Rights Agreement, the
Eligible Holders or their permitted transferees will be entitled to registration
rights with respect to shares of New Common Stock issued to them pursuant to the
Plan, until such shares: (a) are disposed of pursuant to an effective
registration statement under the Securities Act; (b) are distributed to the
public pursuant to Rule 144 under the Securities Act; (c) may be freely sold
publicly without either registration under the Securities Act or compliance with
any restrictions under Rule 144 under the Securities Act; (d) have been
transferred other than to permitted transferees; or (e) have ceased to be
outstanding ("Registrable Securities"), as described below.
Holders of at least a majority of the Registrable Securities may demand
a maximum of two registrations under the Securities Act, provided in each case
that the securities to be registered have an aggregate offering price of at
least $10.0 million and provided further that a second demand cannot be made
sooner than 12 months after the effectiveness of the registration pursuant to
the first demand. Reorganized LGII will have the right to defer the filing of a
demand registration in certain circumstances, and customary priority provisions
will apply in the context of an underwritten offering. Rights to demand
registration will be suspended during any period in which a shelf registration
may be utilized.
If Reorganized LGII registers New Common Stock for its own account or
the account of other stockholders (other than in connection with employee
benefit plans or a merger or reorganization), each holder of Registrable
Securities will be offered the opportunity to include its Registrable Securities
in such registration. Customary priority provisions will apply in the context of
an underwritten offering.
After Reorganized LGII has qualified to use Form S-3, holders of
Registrable Securities may request a shelf registration on Form S-3, provided in
each case that the securities to be registered have an aggregate offering price
of at least $10.0 million. Any such shelf registration will be subject to
customary blackout provisions.
Rights under the Registration Rights Agreement may be assigned in
connection with any transfer of Registrable Securities provided that such
transfer is made in accordance with applicable securities laws, the
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transferee receives all of the Registrable Securities then held by the
transferor and the transferee agrees to be bound by the provisions of the
Registration Rights Agreement.
The Registration Rights Agreement will terminate on the third
anniversary of the Effective Date. The Registration Rights Agreement will
contain customary indemnification provisions, which will survive termination.
APPLICABILITY OF CERTAIN CANADIAN SECURITIES LAWS
The issuance by Reorganized LGII of the New Five-Year Secured Notes, if
issued, the New Two-Year Unsecured Notes, if issued, the New Seven-Year
Unsecured Notes and the New Common Stock will be subject to the Securities Act
(Ontario) and to the applicable securities laws of such other provinces of
Canada in which persons entitled to receive such securities reside. The issuance
and subsequent transfer of such securities will be made pursuant to exemptions
from applicable dealer registration and prospectus requirements of applicable
Canadian securities laws or pursuant to discretionary orders or rulings from
applicable Canadian provincial securities regulatory authorities. Based on
relief granted in connection with similar CCAA restructurings in the past to
other public companies, the Debtors believe that such discretionary relief is
obtainable.
There is no assurance that such relief will be obtained or that it will
not be subject to certain restrictions or conditions, including restrictions on
the transferability of such securities.
Persons resident in a province of Canada who are entitled to receive
such securities pursuant to such exemptions or discretionary relief are advised
that they will not be entitled to rights that would have been afforded to them
had such securities been distributed pursuant to a prospectus including rights
of rescission and damages.
If at the time of any subsequent transfer in Canada of New Common Stock
or New Senior Notes, the seller holds a sufficient number of any securities of
Reorganized LGII to materially affect its control, a prospectus will be required
to be delivered to the purchaser(s) unless a prospectus exemption is then
available for such transfer. For these purposes, the holding by any person or
combination of persons of more than 20% of the voting securities of a company is
deemed to affect materially the control of the company.
The Plan constitutes a "related party transaction" under Ontario
Securities Commission Rule 61-501 and Policy Statement No. Q-27 of the
Commission des valeurs mobiliers du Quebec (the "Related Party Transaction
Rules"). The Related Party Transaction Rules are applicable to TLGI since it is
a "reporting issuer" under the securities legislation of the provinces of
Ontario and Quebec. These rules impose disclosure, valuation and minority
approval requirements on certain related party transactions. TLGI intends to
comply with the disclosure requirements of the rules. However, the Related Party
Transaction Rules provide exemptions from the valuation and minority approval
requirements applicable to related party transactions if the proposed
transaction is subject to court approval under the Bankruptcy and Insolvency Act
(Canada) or the Companies' Creditors Arrangement Act (Canada) or bankruptcy or
insolvency laws of another jurisdiction and the court is advised of the
requirements of the Related Party Transaction Rules and does not require
compliance with the valuation and minority approval requirements. TLGI believes
these exemptions are applicable in respect of the Plan since the Plan requires
that the CCAA Order be entered by the Canadian Court and TLGI intends to advise
such court of the requirements of the Related Party Transaction Rules.
ADDITIONAL INFORMATION
Any statements in this Disclosure Statement concerning the provisions
of any document are not necessarily complete, and in each instance reference is
made to such document for the full text thereof. Certain documents described or
referred to in this Disclosure Statement have not been attached as exhibits
because of the impracticability of furnishing copies of these documents to all
recipients of this Disclosure Statement. All of the exhibits and schedules to
the Plan (once Filed with the Bankruptcy Court) and this Disclosure Statement
are available for inspection during regular business hours at the Document
Reviewing Centers located at: (a) the office
126
<PAGE> 136
of Jones, Day, Reavis & Pogue, 901 Lakeside Avenue, Cleveland, Ohio 44114; (b)
the office of Jones, Day, Reavis & Pogue, 599 Lexington Avenue, 32nd Floor, New
York, New York 10022; (c) the office of Meighen Demers, Suite 1100, Merrill
Lynch Canada Tower, 200 King Street West, Toronto, Canada M5H 3T4; or (d) at any
other location designated by the Debtors, and may be obtained from the copy
services identified in the notice of the Confirmation Hearing.
RECOMMENDATION AND CONCLUSION
For all of the reasons set forth in this Disclosure Statement, the
Debtors believe that the Confirmation and consummation of the Plan is preferable
to all other alternatives. Consequently, the Debtors urge all holders of Claims
in voting Classes to vote to accept the Plan and to evidence their acceptance by
duly completing and returning their Ballots so that they will be received on or
before the Voting Deadline.
127
<PAGE> 137
Dated: November 14, 2000 Respectfully submitted,
THE LOEWEN GROUP INC., on its own behalf and
on behalf of all Loewen Subsidiary Debtors
By: /s/ Bradley D. Stam
----------------------------------------
Name: Bradley D. Stam
Title: Senior Vice President, Legal & Asset
Management
LOEWEN GROUP INTERNATIONAL, INC.
By: /s/ Bradley D. Stam
----------------------------------------
Name: Bradley D. Stam
Title: Senior Vice President, Legal & Asset
Management
COUNSEL:
/s/ William H. Sudell, Jr.
----------------------------------
William H. Sudell, Jr. (DE 463)
Robert J. Dehney (DE 3578)
MORRIS, NICHOLS, ARSHT & TUNNELL
1201 North Market Street
Wilmington, Delaware 19899-1347
(302) 658-9200
Richard M. Cieri (OH 0032464)
Lyle G. Ganske (OH 0031493)
JONES, DAY, REAVIS & POGUE
North Point
901 Lakeside Avenue
Cleveland, Ohio 44114
(216) 586-3939
Henry L. Gompf (TX 08116400)
Gregory M. Gordon (TX 08435300)
Troy B. Lewis (TX 12308650)
Michael O. Weinberg (TX 21084700)
JONES, DAY, REAVIS & POGUE
2727 North Harwood Street
Dallas, Texas 75201
(214) 220-3939
ATTORNEYS FOR DEBTORS AND
DEBTORS IN POSSESSION
128
<PAGE> 138
EXHIBIT I
TLGI, LGII AND LOEWEN SUBSIDIARY DEBTORS, INCLUDING THE APPLICABLE DIVISION
TO WHICH EACH HAS BEEN ASSIGNED FOR PURPOSES OF CLASS 9 OF THE PLAN, AN
IDENTIFICATION OF PLEDGORS AND AN IDENTIFICATION OF NON-OWNERSHIP
REGULATED DEBTORS FOR PURPOSES OF CLASS 15 OF THE PLAN
<PAGE> 139
TLGI, LGII AND
LOEWEN SUBSIDIARY DEBTORS
<TABLE>
<CAPTION>
NON-
DIVISION OWNERSHIP
FOR PURPOSES CTA REGULATED
CASE NO. ENTITY NAME* OF CLASS 9 PLEDGOR DEBTOR
-------- ------------ ------------ ------- ---------
<S> <C> <C> <C> <C>
99-1247 50th State Funeral Plan, Ltd. H No No
99-1248 A. C. Hemperley & Sons, Inc. C No No
99-1249 Abreu Gonzalez Funeral Homes, Inc. H No No
99-1250 Acacia Memorial Park C No No
99-1251 ADA Cemetery Holding Company, Inc. H Yes No
99-1252 Added Touch Flower Shop, Inc. H No No
99-1253 Advance Funeral Insurance Services H No No
99-1258 Advance Planning - Southwest, Inc. H No No
99-1255 Advance Planning of Arkansas, Inc. C No No
99-1254 Advance Planning of Mississippi, Inc. H No No
99-1257 Advance Planning of Tennessee, Inc. H No No
99-1256 Advance Planning of West Virginia, Inc. H No No
99-1259 Advanced Funeral Planning of North Carolina, Inc. H No No
99-1260 Advanced Funeral Planning of The Dakotas, Inc. H No No
99-1262 Advanced Planning (Alabama), Inc. H No No
99-1268 Advanced Planning of Georgia, Inc. H No No
99-1267 Advanced Planning of Indiana, Inc. H No No
99-1265 Advanced Planning of Kentucky, Inc. H No No
99-1264 Advanced Planning of Virginia, Inc. H No No
99-1263 Advanced Planning of Washington, Inc. H No No
99-1266 Advanced Planning Services of Maryland, Inc. H No No
99-1261 Advanced Planning, Inc. H No No
99-1269 Affordable Caskets, Inc. H No No
99-1270 AFH, Inc. H No No
99-1271 Alexandria Cemetery Association, Inc. H No No
99-1272 Allen-Melvin Funeral Home, Ltd. F No No
99-1273 Alleva Leasing Corporation H No No
99-1274 Almont, Inc. C No No
99-1275 Alpharetta Funeral Home, Inc. G No No
99-2098 Alternative Acquisition, Inc. F No No
99-1276 American Burial & Cremation Services, Inc. C No No
99-1278 American Burial & Cremation Services, Inc. C No No
99-1277 American Burial & Crematory Service H No No
99-1279 American Burial and Cremation Centers, Inc. H No No
99-1281 American Mausoleum Co. G No No
99-1282 AMG, Inc. H No No
99-1283 APC Association H No No
99-1284 Area Funeral Services, Inc. C No No
99-1285 Arlington Funeral Home, Incorporated C No No
99-1286 Arlington Memory Gardens, Inc. E No No
</TABLE>
----------
* Loewen Subsidiary Debtors that are not wholly-owned by the Loewen Companies
after giving effect to the exercise of repurchase options for nominal cost of
certain interests owned by third parties prior to the Confirmation Date are
marked with an asterisk.
<PAGE> 140
TLGI, LGII AND
LOEWEN SUBSIDIARY DEBTORS
<TABLE>
<CAPTION>
NON-
DIVISION OWNERSHIP
FOR PURPOSES CTA REGULATED
CASE NO. ENTITY NAME OF CLASS 9 PLEDGOR DEBTOR
-------- ----------- ------------ ------- ---------
<S> <C> <C> <C> <C>
99-1287 Arlington Park Cemetery, Inc. C No No
99-1289 Associated Memorial Group Ltd. G Yes No
99-1290 B & H Contractors Inc. E No No
99-1291 Baggerley Acquisition, Inc. E No No
99-1292 Baldwin-Lee Funeral Homes, Inc. C No No
99-1293 Bannon Disposition, Inc. H No No
99-1294 Barham Funeral Home, Inc. F No No
99-1295 Barnett's Marion Funeral Home, Inc. H No No
99-1296 Bateman Funeral Chapel, Inc. C No No
99-1297 Batesville Funeral Services, Inc. H No No
99-1298 Bauer Funeral Chapel, Inc. C No No
99-1299 Beam Funeral Home, Inc. E No No
99-1300 Beau Pre Memorial Park, Inc. H No No
99-1301 Beaverton Funeral Home, Inc. C No No
99-1302 Behrens Mortuary, Inc. H No No
99-1303 Belcrest Memorial Park, Inc. F No No
99-1304 Bell Bros., Incorporated C No No
99-1305 Bennett-Emmert Funeral Home, Inc. D No No
99-1306 Benton County Memorial Park, Inc. F No No
99-1307 Berhalter-Hutchins Funeral Home, Inc. C No No
99-1308 Bernard Probst Funeral Home, Inc. C No No
99-1309 Berry Funeral Home, Inc. C No No
99-1310 Bess-Kolski-Combs, Inc. C No No
99-1311 Beth David Memorial Gardens, Inc. F No No
99-1313 BFH Acquisition, Inc. H No No
99-1314 BFMI Co. H No No
99-1315 Bicknell Memorial Cemetery, Inc. H No No
99-1316 Bill Eisenhour Funeral Homes, Inc. C No No
99-1317 Bishop Funeral Chapel Inc. H No No
99-1318 BJFH Acquisition, Inc. H No No
99-1319 Blackhawk Garden of Memories, Inc. F No No
99-1320 Blalock-Coleman Funeral Home, Inc.* H No No
99-1321 Blasberg Memorial Chapels, Inc. H No No
99-1322 Blessing Funeral Home, Inc. H No No
99-1323 BLH Management, Inc. D No No
99-1324 BN Incorporated C No No
99-1325 Bob Miller Funeral Home, Inc. C No No
99-1326 Boelter Funeral Home, Inc. G No No
99-1327 Bond-Mitchell Funeral Home, Inc. C No No
99-1328 Bowling Green-Warren County Memorial Gardens, Inc. H No No
99-1329 Boyd E. Braman Mortuary, Inc. C No No
99-1330 Brentwood Funeral Home, Inc. C No No
99-1331 Bright Undertaking Company C No No
99-1332 Broadlawn, Inc. E No No
99-1333 Brooks-Cargile Funeral Home, Inc. G No No
99-1334 Brosmer Drabing Funeral Home, Inc. C No No
99-1335 Brown Funeral Home, Ltd. H No No
99-1336 Brown Mortuary Service, Inc. C No No
</TABLE>
Page 2 of 18
<PAGE> 141
TLGI, LGII AND
LOEWEN SUBSIDIARY DEBTORS
<TABLE>
<CAPTION>
NON-
DIVISION OWNERSHIP
FOR PURPOSES CTA REGULATED
CASE NO. ENTITY NAME OF CLASS 9 PLEDGOR DEBTOR
-------- ----------- ------------ ------- ---------
<S> <C> <C> <C> <C>
99-1337 Browning Funeral Home, Inc. Water Valley, Mississippi C No No
99-1338 Browning Funeral Homes, Inc. C No No
99-1339 Buck-Heggie Funeral Home, Inc. H No No
99-1340 Bucktrout Funeral Home of Williamsburg, Inc. H No No
99-1341 Buell Chapel, Inc. C No No
99-1342 Burcham Funeral Home, Inc. C No No
99-1343 Burlington Cemetery Management, Inc. G No No
99-1344 Burris Funeral Home, Inc. F No No
99-1345 Byrd-Snodgrass Funeral Home, Inc. C No No
99-2097 Calico General Partners, Inc. H Yes No
99-1346 Campbellsville Memorial Gardens, Incorporated H No No
99-2099 Camposanto PR, Inc.* D No Yes
99-1347 Camposanto-Aguadilla, Inc. H No No
99-1348 Cardinal Flowers & Fine Gifts, Inc. G No No
99-1349 Cardwell Funeral Home, Inc. C No No
99-1350 Care Memorial Society, Inc. H No No
99-1352 Carothers Holding Company (Georgia), Inc. C No No
99-1353 Carothers Holding Company (South Carolina), Inc. D Yes No
99-1351 Carothers Holding Company, Inc. E Yes No
99-1354 Carpenter's Funeral Homes, Inc. C No No
99-1355 Carr Mortuary, Inc. C No No
99-1356 Cauthen's, Inc. of York County H No No
99-1357 Cauthen's, Inc. E Yes No
99-1358 Cavazos Memorial Chapel, Inc. F No No
99-1359 Cecere Acquisition, Inc. H No No
99-1360 Cedar Hill Memorial Cemetery Association H No No
99-1361 Cedar Park Acquisition, Inc. H No No
99-1362 Cemetery Management Company, Inc. H No No
99-1363 Cemetery Management Corp. G No No
99-1364 Cemetery Sales Holding Corp. F Yes No
99-1365 Cemetery Services, Inc. F No No
99-1366 Ceredo Mortuary Chapel, Inc. H No No
99-1367 Champion Funeral Home, Inc. H No No
99-1368 Chapel Hill Memorial Gardens & Funeral Home Ltd. H No No
99-1369 Chapel Lawn Memorial Gardens, Inc. F No No
99-1371 Chapel of Chimes Funeral Home, Inc. C No No
99-1370 Chapel of Seaside, Inc. C No No
99-1373 Chapel of the Pines Funeral Home, Inc. C No No
99-1372 Chapel of the Valley of Castro Valley, Inc. C No No
99-1375 Charlotte Memorial Gardens Acquisition, Inc. G No No
99-1374 Charlotte Memorial Gardens, Inc. G No No
99-1376 Chatham Memorial Park, Inc. C No No
99-1377 Chicago Cemetery Corporation C No No
99-1378 Chism-Smith Funeral Home, Inc. G No No
99-1379 Chrastka Funeral Home, Ltd. E No No
99-1381 Coal Creek Memorial Cemetery, Inc. G No No
99-1382 Cockrell Funeral Home, Inc. C No No
99-1383 Coffey Mortuary, Inc. G No No
</TABLE>
Page 3 of 18
<PAGE> 142
TLGI, LGII AND
LOEWEN SUBSIDIARY DEBTORS
<TABLE>
<CAPTION>
NON-
DIVISION OWNERSHIP
FOR PURPOSES CTA REGULATED
CASE NO. ENTITY NAME OF CLASS 9 PLEDGOR DEBTOR
-------- ----------- ------------ ------- ---------
<S> <C> <C> <C> <C>
99-1384 Coge Investment Corporation C No No
99-1385 Coleman Funeral Home, Inc. C No No
99-1386 Coloni Funeral Homes, Inc. E No No
99-1387 Colonial Services, Ltd. H No No
99-2100 Community Funeral Homes of Wisconsin, Inc.* H Yes Yes
99-1388 Community-Opyt Funeral Home, Ltd. C No No
99-1389 Conejo Mountain Memorial Park C No No
99-1390 Conrad Lemon Grove Mortuary, Inc. C No No
99-1391 Cook-Webb Funeral Home, Inc.* C No No
99-1392 Coral Ridge Funeral Home and Cemetery, Inc. E No No
99-1393 Corrigan Funeral Home, Inc. C No No
99-1394 Covell Funeral Home, Inc. C No No
99-1395 Covell-Smith Funeral Home, Inc. C No No
99-1396 Craciun Funeral Home, Inc. C No No
99-1397 Crescent Hill Memorial Gardens C No No
99-1398 Crest Lawn Acquisitions, Inc. H No No
99-1400 Crestview Memorial Park, Inc. D No No
99-1399 Crestview Memorial Park, Inc. H No No
99-1401 Crown Hill Memorial Park, Inc. G No No
99-1402 Culjis, Miller, Skelton and Herberger, Inc. H No No
99-1403 Cumberland Memorial Gardens, Inc. F No No
99-1404 Curry Raley Funeral Home, Inc. H No No
99-1405 Cusimano & Russo, Inc. D No No
99-1406 Dahl McVicker Funeral Homes, Inc. C No No
99-1407 Dakota Memorial Chapel, Inc. G No No
99-1408 Dale Maloney Funeral Home, Inc. G No No
99-1409 Danlan Corporation H No No
99-1410 Danville Memorial Gardens, Incorporated H No No
99-1411 Darling-Mouser Funeral Home, Inc. C No No
99-1412 David T. Ferguson Funeral Home, Inc. D No No
99-1413 Davies Cremation & Burial Services, Inc. E No No
99-1414 Daviess Co. Cemetery Assoc., Inc. G No No
99-1415 Davis Funeral Home Memorial Plan H No No
99-1416 Davis Funeral Home, Inc. C No No
99-1417 Davis Funeral Home, Inc. F No No
99-1418 Dekle-Wainwright Funeral Home, Inc. H No No
99-1419 Delano Mortuary C No No
99-1420 Delaware Park Memorial Chapel, Inc. H No No
99-1421 Denbo Funeral Home, Inc. C No No
99-1422 Deremiah-Frye Mortuary, Inc. C No No
99-1423 Desert DR Acquisition, Inc. G No No
99-1424 DeVaney-Bennett Funeral Home, Inc. C No No
99-1425 Devon Livery, Inc. H No No
99-1426 Devotional Gardens, Inc. D No No
99-1428 DiCicco and Son, Inc. C No No
99-1429 Dickson Funeral Home, Incorporated C No No
99-1430 Dimond & Sons Silver Bell Chapel, Inc. C No No
99-1431 Dixon-Bowen-Taylor Funeral Home, Inc. F No No
</TABLE>
Page 4 of 18
<PAGE> 143
TLGI, LGII AND
LOEWEN SUBSIDIARY DEBTORS
<TABLE>
<CAPTION>
NON-
DIVISION OWNERSHIP
FOR PURPOSES CTA REGULATED
CASE NO. ENTITY NAME OF CLASS 9 PLEDGOR DEBTOR
-------- ----------- ------------ ------- ---------
<S> <C> <C> <C> <C>
99-1432 DMA Corporation F No No
99-1433 Dorsey Funeral Home, Inc. C No No
99-1434 Dowell & Martin Funeral Home, Inc.* D No No
99-1435 Driscoll Mortuary, Inc. H No No
99-1436 Drownwood Forest National Pet Cemetery, Inc. H No No
99-1438 Dudley M. Hughes Funeral Home North Chapel, Inc. H No No
99-1437 Dudley M. Hughes Funeral Home, Inc. H No No
99-1439 E. & M. Frandsen, Inc. C No No
99-1440 E.K. May Funeral Home, Inc. C No No
99-1441 Eagle Financial Association, Inc. H No No
99-1442 Eagle Lending Inc. H No No
99-2101 Earthman Holdings, Inc.* F Yes Yes
99-1443 East Ashland Memorial Gardens, Inc. H No No
99-1444 East Metro Agency, Inc. H No No
99-1445 Eastern Arkansas Memorial Gardens, Inc. H No No
99-1446 Eastgate Funeral Service, Inc. C No No
99-1447 Eastgate Holdings, Inc. G Yes No
99-1448 Eastview Memorial Gardens, Inc. H No No
99-1449 Eastwood Memorial Gardens, Inc. D No No
99-1450 Ed C. Smith & Brothers Funeral Directors, Inc. H No No
99-1451 Edgecombe Forest, Inc. F No No
99-1452 Edo Miller Merger, Inc. C No No
99-1453 Edward F. Carter, Inc. C No No
99-1454 Edward Swanson & Son Funeral Home, Inc. C No No
99-1455 Elmwood Acquisition Corporation F No No
99-1456 Elmwood Cemetery & Gardens, Inc. H No No
99-1457 Elzey & Haggard Funeral Homes, Inc. C No No
99-1458 Enga Memorial Chapels, Inc. G No No
99-1460 Eternal Light Funeral Directors And Counselors, Inc. E No No
99-1461 Eternity Memorial, Inc. D No No
99-1462 Evangeline Funeral Home, Inc. C No No
99-1463 Evergreen Acquisition, Inc. H No No
99-1464 Evergreen Funeral Home and Cemetery, Inc. C No No
99-1466 Evergreen Memorial Cemetery, Inc. D No No
99-1465 Evergreen Memorial Chapel, Inc. C No No
99-1467 Evergreen Memorial Gardens, Inc. G No No
99-1468 F. J. W. Incorporated H No No
99-1469 Fairview Memorial Park of Albemarle, Inc. H No No
99-1470 Family Care, Inc. H No No
99-2102 Family Funeral Service Group, Inc.* G Yes No
99-1471 Family Memorial Caskets, Inc. H No No
99-1472 Ferrell Mortuary, Inc. D No No
99-1473 FFH, Inc. H No No
99-1474 Fir Lawn Chapel, Inc. C No No
99-1475 Fisher-Riles Funeral Insurance Company H No No
99-1476 Fitzgerald & Son Funeral Directors, Inc. C No No
99-1477 Fitzpatrick Funeral Services, Ltd. C No No
99-1478 Flagstaff-Greenlaw Mortuary, Inc. C No No
</TABLE>
Page 5 of 18
<PAGE> 144
TLGI, LGII AND
LOEWEN SUBSIDIARY DEBTORS
<TABLE>
<CAPTION>
NON-
DIVISION OWNERSHIP
FOR PURPOSES CTA REGULATED
CASE NO. ENTITY NAME OF CLASS 9 PLEDGOR DEBTOR
-------- ----------- ------------ ------- ---------
<S> <C> <C> <C> <C>
99-1479 FLMG Cemetery Corp. H No No
99-1480 Floral Hills Memorial Gardens, Inc. G No No
99-1482 Forest Hills Management Company H No No
99-1483 Forest Lawn Cemetery, Inc. G No No
99-1484 Forest Lawn Memorial Gardens, Inc. F No No
99-1485 Forest Lawn Memorial Gardens, Inc. H No No
99-1486 Forest LMP, Inc. H No No
99-1488 Forest Park Cemetery of Shreveport, Inc. G No No
99-1487 Forest Park Cemetery West of Shreveport, Inc. D No No
99-1489 Fort Steuben Management, Inc. H No No
99-1490 Foster and Good Funeral Home, Incorporated C No No
99-1491 Foster Family Funeral Home, Inc. G No No
99-1492 Frank J. Fisher Funeral Directors, Inc C Yes No
99-1493 Frank R. Gorton & Sons, Inc. C No No
99-1494 Franklin Memorial Chapel, Inc. C No No
99-1495 Frazier & Son Funeral Home, Inc. C No No
99-1496 Frederica Cemeteries, Inc. G No No
99-1497 Frederick Memorial Gardens, Inc. F No No
99-1498 Fryberger Acquisition, Inc. G No No
99-1499 Funeral Concepts of Knoxville, Inc. H No No
99-1500 Funeral Discount Center, Inc. H No No
99-1502 Funeral Services Acquisition Group, Inc. G Yes No
99-1503 Furman Funeral Home, Inc. H No No
99-1504 Gable and Parkrose Funeral Chapels, Inc. D No No
99-1505 Garden Sanctuary Acquisition, Inc. G No No
99-1507 Gardens of Faith Cemetery, Inc. D No No
99-1506 Gardens of Memory, Inc. H No No
99-1508 Gemini Memorial, Inc. H Yes No
99-1509 Genesis Associates, Ltd. H Yes No
99-1510 George M. Wilbur-Romano & Sons, Inc. C No No
99-1512 Gethsemane Cemetery North, Inc. H No No
99-1513 Gethsemane Cemetery, Inc. H No No
99-1511 Gethsemane Mausoleum and Sales Company H No No
99-1514 Gilman Funeral Home, Inc. C No No
99-1515 Glacier Memorial Gardens, Inc. G No No
99-1516 Gleason Mortuary, Inc H No No
99-1517 Glendale Memorial Gardens, Inc. G No No
99-1518 Golden Oaks Memorial Gardens, Incorporated H No No
99-1519 Good Shepherd Memorial Park, Inc. H No No
99-1520 GOR Cemetery Corp. H No No
99-1521 Gorder Funeral Home, Inc. C No No
99-1522 Gordon E. Utt Funeral Home, Inc. C No No
99-1523 Grace Memorial Park, Inc. F No No
99-1524 Graceland Cemetery Development Co. E No No
99-1525 Grants Mortuary, Inc. C No No
99-1526 Gray Funeral Service, Inc. C No No
99-1527 Gray Gish, Inc. C No No
99-1528 Great Lake Cemetery Corp. H No No
</TABLE>
Page 6 of 18
<PAGE> 145
TLGI, LGII AND
LOEWEN SUBSIDIARY DEBTORS
<TABLE>
<CAPTION>
NON-
DIVISION OWNERSHIP
FOR PURPOSES CTA REGULATED
CASE NO. ENTITY NAME OF CLASS 9 PLEDGOR DEBTOR
-------- ----------- ------------ ------- ---------
<S> <C> <C> <C> <C>
99-1529 Great Lakes Cemeteries I, Inc. G No No
99-1530 Green Hills Memorial Gardens, Inc. H No No
99-1531 Green Lawn Cemetery Corporation C No No
99-1532 Green Service Corporation E Yes No
99-1533 Greenview Cemetery, Inc. H No No
99-1534 Greenwell-Jenkins Funeral Home, Inc.* C No No
99-1536 Greer - Mountain View Mortuary, Inc. C No No
99-1535 Greer Funeral Home C No No
99-1537 Grennan Funeral Home, Ltd. F No No
99-1538 Griffin Funeral Home, Inc. C No No
99-1540 Guerrero Mortuary, Inc. C No No
99-1541 Gulf Coast Funeral Services, Inc. H No No
99-1542 H. & D. Management Company, Inc. H Yes No
99-1543 H. C. Alexander Funeral Home, Inc. C No No
99-1544 H. H. Birkenkamp Funeral Home, Inc. C No No
99-1545 H. P. Brandt Funeral Home, Inc. C No No
99-1546 H. Samson, Inc. E No No
99-1547 Haakinson-Groulx Mortuary, Inc. C No No
99-1548 Hadley Funeral Chapels, Inc. C No No
99-1549 Halverson Chapel, Inc. E No No
99-1550 Hanes-Lineberry Advanced Funeral Planning, Inc. H No No
99-1552 Harnett Devotional Gardens, Inc. C No No
99-1553 Harrell-Faircloth Funeral Home, Inc. D No No
99-1554 Harris Funeral Home, Inc. E No No
99-1555 Harvey Funeral Home, Inc. D No No
99-1556 Hatfield Funeral Home, Inc. C No No
99-1557 Hawaiian Memorial Park Mortuary Corporation G Yes No
99-1558 Hawks Funeral Home, Inc. F No No
99-1559 Heffner Funeral Home, Inc. H No No
99-1560 Heritage Cemetery Management Corporation C No No
99-1562 HFH Acquisition, Inc. C No No
99-1563 HFH, Inc. C No No
99-1564 Hibbard-Ruggles Funeral Home, Inc. F No No
99-1565 Highland Management Corp. C No No
99-1566 Highland Memorial Gardens, Inc. E No No
99-1568 Hill Funeral Home, Inc. C No No
99-1567 Hill Funeral Home, Inc. H No No
99-1569 Hillcrest Cemetery Corporation G No No
99-1570 Hillcrest Garden of Memories, Inc. H No No
99-1571 Hillcrest Memorial Gardens Cemetery, Inc. G No No
99-1572 HLLB, Inc. C No No
99-1573 HM Acquisition, Inc. G No No
99-1574 Hofmeister Funeral Chapels, Inc. C No No
99-1575 Hogenkamp-Bonham Funeral Home, Inc. H No No
99-1576 Holder-Wells Funeral Home, Inc. C No No
99-1577 Horizon Funeral Direction, Inc. H No No
99-1578 Horizon-Glynn Properties, Inc. H No No
99-1579 Howell-Edwards-Doerksen Chapel of the Gardens, Inc. C No No
</TABLE>
Page 7 of 18
<PAGE> 146
TLGI, LGII AND
LOEWEN SUBSIDIARY DEBTORS
<TABLE>
<CAPTION>
NON-
DIVISION OWNERSHIP
FOR PURPOSES CTA REGULATED
CASE NO. ENTITY NAME OF CLASS 9 PLEDGOR DEBTOR
-------- ----------- ------------ ------- ---------
<S> <C> <C> <C> <C>
99-1581 HPS Acquisition, Inc. H No No
99-1582 HRMP Management, Inc. H No No
99-1583 Huff-Cook Funeral Home, Inc. H No No
99-1584 Hughes Funeral Homes, Inc. H No No
99-1585 Hughes Funerals, Inc. H No No
99-1586 Hughes Southland Funeral Home, Inc. H No No
99-1587 Hunsaker-Wooten Funeral Home, Inc. C No No
99-1588 Imperial Memorial Gardens, Inc. F No No
99-1589 International Memorial Society, Inc. E No No
99-1590 Ives-Pearson Funeral Homes, Inc. H No No
99-1591 J & K Management Company C No No
99-1592 J. H. Finefrock & Sons, Inc. C No No
99-1593 J. W. Curry & Son, Inc. C No No
99-1594 James & Dean, Inc. E No No
99-1596 James Funeral Home, Inc. C Yes No
99-1597 James J. Stout Funeral Home, Inc. C No No
99-1598 Janousek Funeral Home, Inc. F No No
99-1599 Jenkins Funeral Home, Inc.* C No No
99-1600 Jensen-Carpenter Mortuary, Inc. C No No
99-1601 Jerns Funeral Chapel, Inc. C No No
99-1602 Jewish Memorial Society, Inc. H No No
99-1603 Jibe Services Corporation F No No
99-1604 John B. Romano & Sons, Inc. H No No
99-1605 John Dormi & Sons, Inc. D No No
99-1606 John J. Healey Funeral Home, Inc. C No No
99-1608 Johnson Funeral Home Of Church Hill, Inc. F No No
99-1607 Johnson Funeral Home, Inc. C No No
99-1609 Jones-Ash Funeral Home, Inc. C No No
99-1610 Joseph B. Cofer Funeral Home, Inc. H No No
99-1611 Joseph G. Duffy, Inc. C No No
99-1612 Kadek Enterprises of Florida, Inc. E No No
99-1613 KAL Cemetery Management, Inc. H No No
99-1614 Kapala-Glodek Funeral Service, Ltd. G Yes No
99-1615 Kapala-Glodek Gearhart Funeral Home, Inc. D No No
99-1616 Keaton Mortuaries, Inc. C No No
99-1617 Keith Monument Co. of Bowling Green, Inc. G No No
99-1618 Kemple Funeral Homes, Inc. C No No
99-1619 Kennedy Monument Co., Inc. H No No
99-1620 Kennedy-Morgan Funeral Home, Inc. F No No
99-1621 Kennedy-Roth Funeral Home, Inc. C No No
99-1622 Kiesau Funeral Home, Inc. C No No
99-1623 Kimball Funeral Home, Inc. C No No
99-1624 Kingston Memorial Gardens, Inc. C No No
99-1625 Kiser Funeral Home, of Greeneville, Incorporated C No No
99-1626 Knauff Funeral Home, Inc. E No No
99-1627 Knee Funeral Home of Wilkinsburg, Inc. D No No
99-1628 Kraeer Funeral Homes, Inc. C No No
99-1629 Kraeer Holdings, Inc. G Yes No
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<CAPTION>
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FOR PURPOSES CTA REGULATED
CASE NO. ENTITY NAME OF CLASS 9 PLEDGOR DEBTOR
-------- ----------- ------------ ------- ---------
<S> <C> <C> <C> <C>
99-1631 Kyger Funeral Home, Inc. H No No
99-1632 L & D Enterprises, Incorporated C No No
99-1633 La Familia Funeral Home, Inc. H No No
99-1634 Lacy Funeral Home, Inc. C No No
99-1635 Lake Havasu Memorial Gardens, Inc. H No No
99-1636 Lang-Tobia-DiPalma Funeral Home, Inc. F No No
99-1638 Larry A. McGee, Inc. C No No
99-1639 Laurel Funeral Home, Inc.* F No No
99-2093 Leasure-Stein Management Company, L.L.C. H No No
99-1641 Leavitt Acquisition One, Inc. H No No
99-1640 Leavitt Acquisition Two, Inc. H No No
99-1642 Lee Funeral Home of Manassas, Inc. C No No
99-1643 Leitz-Eagan Funeral Home, Inc. F Yes No
99-1644 Lester L. Hayman Funeral Home, Inc. H No No
99-1645 Levitt Memorial Chapel, Inc. H No No
99-1646 Levitt-Weinstein Memorial Chapels, Inc. F Yes No
99-1648 Lienkaemper Chapels, Inc. C No No
99-1649 Lindsey Funeral Home, Inc.* G No No
99-1650 Lineberry Cemetery Corporation H No No
99-1652 Lineberry Group (Virginia), Inc. D Yes No
99-1651 Lineberry Group, Inc. F Yes No
99-1653 Litwiller Funeral Home, Inc. C No No
99-1654 Livingston-Malletta & Geraghty Funeral Home, Inc. H No No
99-1655 LM Park, Inc. G No No
99-2096 Loewen (Alabama), L.P. C No No
99-1689 Loewen (Alabama),Inc. H Yes No
99-1656 Loewen (Arkansas) Holdings, Inc. H Yes No
99-1657 Loewen (Georgia), Inc. F Yes No
99-1658 Loewen (Indiana), Inc. H Yes No
99-2095 Loewen (Indiana), L.P. D No No
99-1659 Loewen (Iowa), Inc. G No No
99-1660 Loewen (Kentucky), Inc.* F No No
99-1661 Loewen (Michigan), Inc. C No No
99-1662 Loewen (North Carolina), Inc. C No No
99-1663 Loewen (Oklahoma), Inc. C Yes No
99-1664 Loewen (Texas) II, Inc. H No No
99-1665 Loewen (Texas), Inc. H Yes No
99-2094 Loewen (Texas), L.P. C No No
99-1666 Loewen Cape Cod Holdings (1991), Inc. G No No
99-1667 Loewen Capital Corporation H No No
99-1669 Loewen Cemetery (Ohio), Inc. H No No
99-1668 Loewen Cemetery (Texas), Inc. E Yes No
99-1670 Loewen Communication Center, Inc. H No No
99-1671 Loewen Corporate Benefits of North Carolina, Inc. H No No
99-1672 Loewen Eastern Massachusetts Holdings (1992), Inc. G No No
99-1673 Loewen Group Acquisition Corp. G Yes No
99-1246 Loewen Group Capital, L.P. H No No
99-1244 Loewen Group International, Inc. B No No
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<CAPTION>
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FOR PURPOSES CTA REGULATED
CASE NO. ENTITY NAME OF CLASS 9 PLEDGOR DEBTOR
-------- ----------- ------------ ------- ---------
<S> <C> <C> <C> <C>
99-1674 Loewen Group, Inc. F Yes No
99-2103 Loewen HDG Acquisition, Inc.* H No Yes
99-1675 Loewen Life Insurance Group, Inc. C No No
99-1676 Loewen Louisiana Holdings, Inc. G Yes No
99-2114 Loewen Luxembourg (No. 1) S.A. H Yes No
99-1677 Loewen Management Investment Corporation H No No
99-1678 Loewen Massachusetts Holding (1991), Inc. F No No
99-1679 Loewen Missouri, Inc. H No No
99-1680 Loewen New Hampshire Holdings 1990, Inc. H No No
99-1681 Long and Folk Funeral Home, Inc. C No No
99-1682 Longview Memorial Park, Inc. G No No
99-1683 Los Jardines Memorial Park, Inc. C No No
99-1684 Los Rosales Memorial Park, Inc. F No No
99-1685 Lough, Inc. C Yes No
99-1686 Louis Hirsch & Sons, Inc. D No No
99-1687 Louisville Memorial Gardens, Inc. F Yes No
99-2104 Lowell Holdings, Inc.* H Yes Yes
99-1691 Lower Valley Memorial Gardens, Inc. E No No
99-1688 Lowe's Funeral Home, Inc. C No No
99-1692 Ludlum Management Services, Inc. C No No
99-1693 Luff Bowen Funeral Home, Inc. C No No
99-1694 Lumbee Memorial Gardens, Inc. D No No
99-1695 M. J. Smith Sons, Inc. C No No
99-1696 Macedonia Memorial Park, Inc. H No No
99-1697 Madison County Memorial Gardens, Inc. G No No
99-1698 Magnolia Memorial Gardens of Meridian, Inc. H No No
99-1699 Malletta-Vertin Holdings, Inc. H Yes No
99-1700 Malone Funeral Home, Inc. F No No
99-1701 Mann-Walden Funeral Home, Inc. C No No
99-1702 Maple Valley Chapel, Inc. C No No
99-1703 Maplelawn Park Cemetery, Inc. H No No
99-1704 Martin Funeral Home Acquisition, Inc. D No No
99-1705 Marysville Acquisition, Inc. F No No
99-1706 Mass-Hinitt-Alexander Funeral Home, Inc. H No No
99-1707 Maui Funeral Plan, Inc. E No No
99-2105 Maui Memorial Park, Inc. C Yes No
99-1708 Max Martinez Funeral Home, Incorporated H No No
99-1709 Maxwell Holding Company, Inc. H Yes No
99-1710 Mayes Mortuary, Inc. C Yes No
99-1711 McClure Funeral Service, Inc. C No No
99-1712 McCracken Funeral Home, Inc. H No No
99-1713 McLeod Mortuary, Inc. C No No
99-1714 MCM Acquisition, Inc. H No No
99-1715 McPeters, Incorporated - Funeral Directors H No No
99-1716 Melwood Cemetery, Inc. H No No
99-1717 Memorial Cemetery Advisors, Inc. H No No
99-1718 Memorial Consultants of California, Inc. D No No
99-1719 Memorial Consultants, Inc. H Yes No
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<CAPTION>
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FOR PURPOSES CTA REGULATED
CASE NO. ENTITY NAME OF CLASS 9 PLEDGOR DEBTOR
-------- ----------- ------------ ------- ---------
<S> <C> <C> <C> <C>
99-1720 Memorial Gardens Association, Inc. F No No
99-1721 Memorial Gardens of Charleston, Inc. G No No
99-1722 Memorial Guardian Company H No No
99-1723 Memorial Park of Ada, Inc. H No No
99-1724 Memorial Park, Inc. D No No
99-1726 Memorial Services Acquisition, Inc. D No No
99-1725 Memorial Services Corporation H No No
99-1727 Memorial Services, Inc. H Yes No
99-1728 Memory Chapel, Inc. C No No
99-1729 Merced Funeral Chapel C No No
99-1730 Merkley-Mitchell Mortuary C No No
99-1731 MHI Financial, Inc. H No No
99-1732 MHI Group, Inc. H Yes No
99-1733 Midwest Cemetery Service Company H Yes No
99-1734 Miller's Tulare Funeral Home C No No
99-1735 Mission Chapel of San Jose, Inc. G No No
99-1736 Mission Memorial Park F No No
99-1737 Mission Mortuary, Inc. H No No
99-1738 Missouri Cemetery Management, Inc. H No No
99-1739 Mittendorf Calvert Funeral Home, Ltd. H No No
99-1740 Montana Memorial Services, Inc. H Yes No
99-1741 Monte Cristo, Inc. D No No
99-1742 Montgomery Memorial Cemetery, Inc. H No No
99-1743 Monument Hill Memorial Park E No No
99-1744 Moody Funeral Home, Inc. G No No
99-1745 Moon Acquisition, Inc. H No No
99-1746 Morningside Memorial Gardens, Inc. G No No
99-1747 Morrison Funeral Home, Inc. C No No
99-1749 Mount Auburn Cemetery Company H No No
99-1750 Mount Auburn Funeral Home, Inc. E No No
99-1748 Mount Auburn Memorial Park, Inc. C No No
99-1759 Mount Hope Cemetery, Inc. E No No
99-1751 Mount Hope Woodlawn Corporation H No No
99-1754 Mount Nebo Chapels, Inc. H No No
99-1753 Mount Nebo Memorial Gardens, Inc. G No No
99-1752 Mount Nebo of the Palm Beaches Memorial Gardens, Inc. H No No
99-1756 Mountain Vale Memorial Park, Inc. H No No
99-1757 Mountain View Floral, Inc. H No No
99-1758 Mozley Memorial Gardens, Inc. H No No
99-1760 Mullins Holding Company F Yes No
99-1761 Murdock Funeral Home, Inc. C No No
99-1762 Murray Memorial Gardens, Inc. H No No
99-2106 Nakamura Mortuary, Inc. G Yes No
99-1764 Naples Memorial Gardens, Inc. E No No
99-1765 Nashville Funeral Home, Inc. H No No
99-1766 National Home Service Institute, Inc. H No No
99-1767 Nave Funeral Home, Inc. C No No
99-1768 NCG Cemetery Corp. H No No
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DIVISION OWNERSHIP
FOR PURPOSES CTA REGULATED
CASE NO. ENTITY NAME OF CLASS 9 PLEDGOR DEBTOR
-------- ----------- ------------ ------- ---------
<S> <C> <C> <C> <C>
99-1769 New Crown Cemetery Company, Inc. G No No
99-1770 New England Holding Co., Inc. G Yes No
99-1771 New Rose Hill, Inc. H No No
99-1772 Newby Funeral Home, Inc. C No No
99-4537 Neweol (Delaware) LLC H No No
99-1773 Newoel Investments (U.S.A.), Inc. H No No
99-1774 Newton County Memorial Gardens, Inc. G No No
99-1775 NFH Leasing Corporation H No No
99-1776 Nicoletti, Culjis & Herberger Funeral Home, Inc. C No No
99-1777 Norman's Family Chapel, Inc. C No No
99-1778 North Alabama Memorial Gardens, Inc. H No No
99-1779 North American Cremation Society, Inc. D No No
99-1780 North American Cremation Society, Inc. H No No
99-1781 North Lawn Cemetery, Inc. H No No
99-1782 Northeast Monument Company, Inc. H No No
99-1783 Northeast Ohio Crematory, Inc. H No No
99-1784 Northern Land Company, Inc. H No No
99-1785 Northridge/Woodhaven Chapel & Cemetery, Inc. D No No
99-1786 Northwest Services, Inc. C No No
99-1787 Northwood Park Cemetery, Inc. H No No
99-1791 Oak Bluff Memorial Park, Inc., of Port Neches F No No
99-1792 Oak Enterprises, Inc. F No No
99-1794 Oak Ridge Memorial Park, Inc. F No No
99-1795 Oak Woods Management Company H No No
99-1796 Oakland Memory Lanes, Inc. F Yes No
99-1797 OBC Acquisitions, Ltd. C No No
99-1798 OCG Cemetery Corp. H No No
99-1788 O'Connor Funeral Home & Crematory, Inc. C No No
99-1799 Oehler Building Corporation H No No
99-1789 O'Hair's Funeral Chapel, Inc. C No No
99-1790 O'Neill-Redden-Drown Funeral Home, Inc. C No No
99-2107 Ordenstein Holdings Company, Inc.* H No Yes
99-1805 Osiris Holding Corporation G Yes No
99-1801 Osiris Holding of Florida, Inc. H No No
99-1802 Osiris Holding of Illinois G Yes No
99-1803 Osiris Holding of Kentucky, Inc. H No No
99-1800 Osiris Holding of Michigan, Inc. H No No
99-1804 Osiris Holding of Wisconsin, Inc. G Yes No
99-1806 Osiris Insurance Agency of Pennsylvania H No No
99-1807 Osthus Funeral Home, Inc. G No No
99-1809 Ourso Funeral Home, Airline Gonzales, Inc. H No No
99-1808 Ourso Funeral Home, Inc. C No No
99-1810 Pace-Stancil Funeral Home, Inc. C No No
99-1811 Pace-Stancil Memorial Rest Gardens, Inc. G No No
99-1812 Pacific Mausoleum Co., Inc. F No No
99-1813 Padgett Funeral Home, Inc. F No No
99-1814 Page Mortuary, Inc. H No No
99-1815 Palm Beach County Community Chapel, Inc. G No No
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<TABLE>
<CAPTION>
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FOR PURPOSES CTA REGULATED
CASE NO. ENTITY NAME OF CLASS 9 PLEDGOR DEBTOR
-------- ----------- ------------ ------- ---------
<S> <C> <C> <C> <C>
99-1816 Palm Springs Mausoleum, Inc. F No No
99-1817 Pamlico Memorial Gardens, Inc. H No No
99-1818 Paradise Memorial Gardens, Inc. G No No
99-1819 Paragon Trevino Funeral Home, Inc. H No No
99-1820 Paris-Frederick Mortuary, Inc. F No No
99-1821 Park Cemetery of Carthage, Inc. H No No
99-1822 Parks Development Company, Inc. F No No
99-1823 Parkway Garden Chapel, Inc. C No No
99-1824 Parkway Memorial Cemetery Corporation F No No
99-1825 Patterson Greer Funeral Home, Inc. C No No
99-1826 Paws Pet Cemetery, Inc. H No No
99-1827 Payne Family Mortuary, Inc. H No No
99-1828 Peace Rose, Inc. G No No
99-1829 Peake Memorial Chapel, Inc. E No No
99-1830 Perfection Management Corporation C No No
99-1831 Pet Haven Memorial Gardens, Inc. H No No
99-1832 Peter Feldpaush & Co., Inc. H No No
99-1833 Pettus-Owen & Wood Funeral Home, Inc. C No No
99-1834 Phil Kiser Funeral Home, Inc. C No No
99-1835 Phoenix Memorial Mortuary, Inc. C No No
99-1836 Pierce Mortuary Chapels, Inc. C No No
99-1837 Pineview Memorial Park, Inc. E No No
99-1838 Pinkham-Mitchell Mortuary, Inc. H No No
99-1840 Pitts Kreidler-Ashcraft Funeral Directors, Inc. H No No
99-1841 Pittsburg Cemetery Company H No No
99-1842 Pontarelli-Marino Funeral Home, Inc. C No No
99-1843 Portland Funeral Alternatives, Inc. D No No
99-1844 Poteet Funeral Home, Inc. H No No
99-1845 Poteet Holdings, Inc. C No No
99-1846 Potts Funeral Home, Inc. C No No
99-1847 Powers Ambulance Service, Inc. H No No
99-1848 Powers Funeral Home, Inc. C No No
99-1849 Prata Funeral Homes, Inc. C No No
99-1850 Pre-Arrangement Consultants, Inc. H No No
99-1851 Price-Helton Funeral Chapel, Inc. C No No
99-1853 Quiring Monument Company C No No
99-1854 R. J. P. Enterprises, Inc. H No No
99-1855 R. Stutzmann & Son, Inc. C No No
99-1856 Raleigh Memorial Park, Inc. F No No
99-1857 Rawlings Funeral Home, Inc. C No No
99-1858 Reed-Nichols Funeral Home, Inc. H No No
99-1859 Reese Leasing Corporation H No No
99-1860 Reese Management Corporation H No No
99-1861 Reeves Funeral Home, Inc. C No No
99-1862 Reeves, Inc. F No No
99-1864 Resmal, Inc. H No No
99-1865 Rest-Haven Cemetery Association, Inc. G No No
99-1866 Resthaven Memorial Company D No No
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<TABLE>
<CAPTION>
NON-
DIVISION OWNERSHIP
FOR PURPOSES CTA REGULATED
CASE NO. ENTITY NAME OF CLASS 9 PLEDGOR DEBTOR
-------- ----------- ------------ ------- ---------
<S> <C> <C> <C> <C>
99-1867 Restlawn Acquisition, Inc. H No No
99-1868 Restlawn Cemetery, Inc. H No No
99-1869 Restlawn Gardens of Memory, Inc. C No No
99-1870 Restlawn Memorial Gardens, Inc. H No No
99-1871 Restlawn Memory Gardens, Inc. H No No
99-1872 Resurrection Funeral Home, Inc. E No No
99-1873 Retz Funeral Home, Inc. C No No
99-1874 Reynolds Funeral Chapel, Inc. D No No
99-1875 Ridge Chapels, Inc. H No No
99-1876 Ridgewood Cemetery Company, Inc. E No No
99-1878 Riemann Enterprises, Inc. F No No
99-1879 Riemann Funeral Homes, Inc. C No No
99-1880 Riemann Funeral Insurance Company, Inc. H No No
99-2108 Riemann Holdings, Inc. G Yes No
99-1881 Riemann Insurance Company, Inc. H No No
99-1882 Riverside Memorial Park, Inc. C No No
99-1884 RKL Supply, Inc. H No No
99-1885 Roane Memorial Gardens, Inc. D No No
99-1887 Robert A. Weinstein Funeral Directors, Ltd. H No No
99-1886 Robert A. Weinstein, Ltd. H Yes No
99-1888 Robert Douglas Goundrey Funeral Home, Inc. C No No
99-1889 Robert E. Evans Funeral Home, Inc. E No No
99-1890 Rock Hill Memorial Gardens, Inc. H No No
99-1891 Rockfish Memorial Cemetery, Inc. F No No
99-1892 Rogers Funeral Home of Clarkson, Kentucky, Inc.* C No No
99-1893 Rose Hill Management Company, Inc. H No No
99-1894 Rose Hill Memorial Park, Inc. E No No
99-1898 Roseland Park Cemetery, Inc. G No No
99-1897 Roseland Park Sales Company H No No
99-1896 Roseland, Inc. H No No
99-1901 Roselawn Memorial Gardens Corporation E No No
99-1899 Roselawn Memorial Gardens, Inc. F No No
99-1900 Roselawn Memorial Park Company D No No
99-1902 Roselawn Operations, Inc. H No No
99-1903 Roses Delaware, Inc. E No No
99-1904 Rosewood Memorial Gardens, Inc. H No No
99-1905 Roth Funeral Chapel, Incorporated* G No No
99-1906 Roundtree Funeral Home, Inc. E No No
99-1907 Roy Brown Service Funeral Home, Inc. H No No
99-1908 Royal Palm Acquisition Corporation G No No
99-1909 Rushlow-Iacoi Funeral Home, Inc. F No No
99-1911 Rutherford County Memorial Cemetery, Inc. G No No
99-1912 Ruzich Funeral Home, Inc. H No No
99-1913 Ruzich Funeral Home, Inc. H No No
99-1914 S & H Properties and Enterprises, Inc. D Yes No
99-1916 Saint Clair Memorial Gardens, Incorporated H No No
99-1918 Sandling Funeral Home, Inc. C No No
99-1921 Sandy Springs Acquisition Corporation H No No
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<TABLE>
<CAPTION>
NON-
DIVISION OWNERSHIP
FOR PURPOSES CTA REGULATED
CASE NO. ENTITY NAME OF CLASS 9 PLEDGOR DEBTOR
-------- ----------- ------------ ------- ---------
<S> <C> <C> <C> <C>
99-1919 Sandy Springs Chapel, Inc. E No No
99-1920 Sandy Springs Development Corporation H No No
99-1922 Sarasota Memorial Park Acquisition, Inc. G No No
99-1924 Schaefer-Shipman Funeral Home, Inc. C No No
99-1925 Schoppenhorst Brothers - Funeral Home* G No No
99-1926 Scotland County Cemetery, Inc. F No No
99-1927 Scott Funeral Home, Inc. C No No
99-1928 Searcy Funeral Home, Inc. C No No
99-1929 Sears-Middleton-Jones Funeral Home, Inc. F No No
99-1930 Security Plus Mini & RV Storage, Inc. H No No
99-1931 Security Trust Plans, Inc. C No No
99-1932 Seeger Funeral Home, Inc. E No No
99-1934 Sensible Alternatives of Virginia, Inc. H No No
99-1933 Sensible Alternatives, Inc. H No No
99-1936 Shadowlawn Acquisition Corporation E No No
99-1937 Sharpstown Services, Inc. C No No
99-1938 Shaw & Sons Funeral Directors, Inc. C No No
99-1939 Sherrill-Guerry Funeral Home, Inc. C No No
99-1940 Short's Funeral Chapel, Inc. D No No
99-1941 Shrine of Memories, Inc. G No No
99-1942 Shuford-Hatcher Company C No No
99-1943 Sidney F. Harrell Funeral Home, Inc. C No No
99-1944 Siferd Professional Associates, Inc. C No No
99-1945 Sims - Medford Enterprises, Inc. G No No
99-1946 Sinai Funeral Home, Inc. H No No
99-1947 Sinfran, Inc. H No No
99-1948 Skyway Memorial Gardens Acquisition, Inc. G No No
99-1950 Smith Funeral Home, Inc. C No No
99-1951 Smith Reardon Incorporated H Yes No
99-1953 Smith-Tillman Mortuary, Inc. C No No
99-1954 South Bend Highland Cemetery Association, Inc. F No No
99-1955 Southeastern Cemeteries Association H No No
99-1956 Southeastern Funeral Homes, Inc. C No No
99-1957 Southern Memorial Park, Inc. D No No
99-1958 Spadaccino Funeral Home, Inc. F No No
99-1959 Sperry-McConnell-Bath Funeral Homes, Inc. C No No
99-1960 Spiker-Foster-Shriver Funeral Homes, Inc. E No No
99-1961 Spring Hill Cemetery Company F No No
99-1962 Springhill Memorial Gardens, Inc. H No No
99-1963 Spurgeon Funeral Home, Inc. E No No
99-1964 Squire-Simmons & Carr Funeral Home, Inc. G No No
99-1965 St. Joseph Valley Memorial Park, Inc. G No No
99-1966 St. Laurent Funeral Home, Inc. C No No
99-1967 Stanley N. Vaughan Funeral Home, Inc. H No No
99-1968 Stanly Gardens of Memory, Inc. H No No
99-1969 Star Cement and Vault Company H No No
99-1970 Star of David Memorial Gardens, Inc. H No No
99-1971 Stein Hebrew Memorial Funeral Home, Inc. F No No
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<TABLE>
<CAPTION>
NON-
DIVISION OWNERSHIP
FOR PURPOSES CTA REGULATED
CASE NO. ENTITY NAME OF CLASS 9 PLEDGOR DEBTOR
-------- ----------- ------------ ------- ---------
<S> <C> <C> <C> <C>
99-1972 Stephens & Bean C No No
99-1973 Stephens Burial Association, Inc. H No No
99-1974 Stephens Funeral Benefit Association, Inc. H No No
99-1975 Stephens Funeral Fund, Inc. H No No
99-1976 Stephens Funeral Homes, Inc. C Yes No
99-1977 Sticklin Funeral Chapel, Inc. H No No
99-1978 Stone & Metal, Inc. H No No
99-1979 Stringer's Hartman-Baldwin Funeral Home, Inc. C No No
99-1980 Strong-Thorne Mortuary, Inc. E No No
99-1982 Sunset Acquisition Corporation F No No
99-1983 Sunset Funeral Home, Inc. H No No
99-1984 Sunset Management, Inc. H No No
99-1985 Sunset Marketing, Inc. H No No
99-1987 Sunset Memorial Cemetery & Funeral Home, Inc. G No No
99-1991 Sunset Memorial Gardens of Billings, Inc. G No No
99-1986 Sunset Memorial Gardens of Irvine Kentucky, Inc. H No No
99-1989 Sunset Memorial Gardens, Inc. F No No
99-1988 Sunset Memorial Park, Inc. H No No
99-1990 Sunset Memorial, Inc. F No No
99-1992 Sunset Memory Gardens, Inc. E No No
99-1993 Sunset Ridge, Inc. F No No
99-1994 Swan Hill Acquisition, Inc. H No No
99-1995 Sweetwater Valley Memorial Park, Inc. G No No
99-1996 T.J. McGowan Sons Funeral Home, Inc. C No No
99-1997 Takoma Funeral Home, Inc. C No No
99-1998 Tankersley Funeral Home, Inc. D No No
99-1999 Tazewell County Memorial Gardens, Inc. H No No
99-2000 Tennessee Valley Memory Gardens and Funeral Home, Inc. H No No
99-2001 Terebinski Funeral Home Forest Hills Chapel, Inc. F No No
99-2002 The Center For Pre-Arranged Funeral Planning, Inc. H No No
99-2004 The Huntt Funeral Home, Inc. C No No
99-1245 The Loewen Group Inc. A No No
99-2006 The Oak Woods Cemetery Association C No No
99-2007 The Portland Memorial, Inc. F No No
99-2008 The Pulaski Funeral Home, Inc.* H No No
99-2009 The Schmidt-Dhonau Company C No No
99-2010 Thomas L. King Funeral Home, Inc. F No No
99-2011 Thompson Funeral Home, Incorporated C No No
99-2012 Thweatt Funeral Insurance Company, Inc. H No No
99-2013 Thweatt-King Funeral Home, Inc. F Yes No
99-2014 Titzer Funeral Home, Inc. C No No
99-2015 Tomlinson Funeral Home, Inc. H No No
99-2016 Travis Land Company H No No
99-2017 Trevino Funeral Home - Palo Alto, Inc. H No No
99-2018 Trevino Funeral Home, Inc. C No No
99-2019 UMG, Inc. H No No
99-2020 Umphlett Funeral Home, Inc. E No No
99-2021 United Cemetery Management & Development Corp. H No No
</TABLE>
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<TABLE>
<CAPTION>
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CASE NO. ENTITY NAME OF CLASS 9 PLEDGOR DEBTOR
-------- ----------- ------------ ------- ---------
<S> <C> <C> <C> <C>
99-2027 Universal Memorial Centers I, Inc. F No No
99-2028 Universal Memorial Centers II, Inc. H No No
99-2024 Universal Memorial Centers III, Inc. H No No
99-2022 Universal Memorial Centers V, Inc. C No No
99-2023 Universal Memorial Centers VI, Inc. D No No
99-2029 Valley Memory Gardens, Inc. F No No
99-2030 Valley Mortuary, Inc. C No No
99-2031 Valley of The Temples Mortuaries, Ltd. E No No
99-2032 Vancouver Funeral Chapel, Inc. D Yes No
99-2109 Vay-Meeson Holding Company, Inc.* H Yes Yes
99-2033 Vay-Schleich & Meeson Funeral Home Inc. D No No
99-2034 Vernon C. Wagner Funeral Homes, Inc. C No No
99-2035 W.B.M., Inc. C No No
99-2036 Wachterhauser-Brietzke Funeral Homes, Inc. E No No
99-2037 Waco Memorial Park, Inc. F No No
99-2110 Wagner Acquisition Corporation* G Yes Yes
99-2038 Walker Cemetery Corporation H No No
99-2039 Wallace-Martin Funeral Home, Inc.* C No Yes
99-2040 Wanamaker & Carlough, Inc. C No No
99-2041 Wattengel Funeral Home, Inc. F No No
99-2042 Weaver Funeral Home, Inc. C No No
99-2043 Weeks Funeral Home, Inc. C No No
99-2044 Weigel Funeral Home, Inc. G No No
99-2045 Weinstein Brothers, Inc. C Yes No
99-2046 Weinstein Chapels, Inc. H No No
99-2047 Weinstein Family Services, Inc. H Yes No
99-2111 Weinstein Family Services, Inc.* H Yes Yes
99-2048 West Funeral Home, Inc. C No No
99-2049 West Lawn Cemetery, Inc. E No No
99-2050 Westminster Gardens, Inc. E No No
99-2051 Westwood Memorial Chapel, Inc. C No No
99-2052 WHC, Inc. H Yes No
99-2053 White Mortuary, Inc. C No No
99-2056 Whitehurst - Grim Funeral Service C No No
99-2057 Whitehurst - Lakewood Memorial Park And Funeral Service D No No
99-2058 Whitehurst - Loyd Funeral Service C No No
99-2059 Whitehurst - McNamara Funeral Service C No No
99-2060 Whitehurst - Muller Funeral Service C No No
99-2061 Whitehurst - Norton - Diaz Funeral Service C No No
99-2063 Whitehurst - Terry Funeral Service H No No
99-2055 Whitehurst California D Yes No
99-2062 Whitehurst, Sullivan, Burns & Blair Funeral Service C No No
99-2064 Whitehurt-Norton Funeral Service H No No
99-2054 White's Vault Co. H No No
99-2065 Wilcoxen Funeral Home, Inc. H No No
99-2066 Wilder Funeral Home, Inc.* F No No
99-2067 William Leahy Funeral Home, Inc. C No No
</TABLE>
Page 17 of 18
<PAGE> 156
TLGI, LGII AND
LOEWEN SUBSIDIARY DEBTORS
<TABLE>
<CAPTION>
NON-
DIVISION OWNERSHIP
FOR PURPOSES CTA REGULATED
CASE NO. ENTITY NAME OF CLASS 9 PLEDGOR DEBTOR
-------- ----------- ------------ ------- ---------
<S> <C> <C> <C> <C>
99-2068 Williams Funeral Service, (Incorporated) C No No
99-2069 Williamsburg Funeral Home, Inc. H No No
99-2070 Willow Glen Mortuary, Inc. C No No
99-2071 Wilson County Memorial Park, Inc. G No No
99-2072 Windridge Funeral Home, Ltd. G No No
99-2112 Windward Crematory, Inc. H No No
99-2073 Wm. F. Cushing, Inc. H No No
99-2074 WMP, Inc. H No No
99-2075 Woodlawn (Michigan), Inc. H No No
99-2077 Woodlawn Cemetery of Chicago, Inc. E No No
99-2113 Woodlawn Memorial Park, Inc.* E No Yes
99-1895 Woodlawn Memory Gardens, Inc. G No No
99-2078 Woodmere, Inc. H No No
99-2079 Woodstock Funeral Home, Inc. C No No
99-2080 Woodward Funeral Home, Incorporated C No No
99-2081 Wren Funeral Home, Inc. C No No
99-2082 Wright & Ferguson Funeral Home H Yes No
99-2083 Wulff Family Mortuary, Inc. C Yes No
99-2084 Wylie-Baxley Funeral Home, Inc. C No No
99-2085 Yablokoff Kingsway Memorial Chapel, Inc. D No No
99-2086 Yablokoff-Wandy Funeral Home, Inc. H No No
99-2088 Young's Funeral Home, Inc. C No No
99-2089 Yuma Mortuary & Crematory, Inc. G No No
99-2090 Zefran Funeral Home, Ltd. C No No
99-2092 ZS Acquisition, Inc. C No No
</TABLE>
Page 18 of 18
<PAGE> 157
EXHIBIT II
JOINT PLAN OF REORGANIZATION OF
LOEWEN GROUP INTERNATIONAL, INC.,
ITS PARENT CORPORATION
AND THEIR DEBTOR SUBSIDIARIES
[See Exhibit 99.2 to this Form 8-K.]
<PAGE> 158
EXHIBIT III
THE LOEWEN GROUP INC. FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1999, AND THE
FORM 10-Q QUARTERLY REPORT FOR THE
QUARTER ENDED SEPTEMBER 30, 2000
[These documents are available on the Internet site
maintained by the SEC at http://www.sec.gov.]
<PAGE> 159
EXHIBIT IV
LIQUIDATION ANALYSIS
<PAGE> 160
EXHIBIT IV
THE LOEWEN GROUP INC. AND AFFILIATED DEBTORS
HYPOTHETICAL LIQUIDATION ANALYSIS
The liquidation analysis presented herein (the "Liquidation Analysis") reflects
the projected outcome of the hypothetical, orderly liquidation of the Debtors(1)
under chapter 7 of the Bankruptcy Code. Separate liquidation analyses were
performed for each legal entity (Debtors and non-Debtors) recognizing that
liquidation proceeds and distributions necessarily would differ on an
entity-by-entity basis.
Underlying the Liquidation Analysis is a number of estimates and assumptions
that, although developed and considered reasonable by management and by Zolfo
Cooper, LLC, are inherently subject to economic and competitive contingencies
beyond the control of the Company and its management. It is possible that the
time needed to dispose of the operating assets could exceed the timeframes
assumed in this analysis, causing an adverse impact on the recoveries depicted
herein. Similarly, other assumptions with respect to the liquidation process may
be subject to change. In addition, the proceeds from the liquidation have not
been discounted to reflect any delay in distributions following the completion
of the liquidation process. Applying an additional discount factor to the
proceeds from the liquidation to account for any such delay would result in a
lower range of recoveries for certain creditors. For all of the foregoing
reasons, there can be no assurance that the values reflected in the Liquidation
Analysis or recovery percentages would be realized if the Debtors were, in fact,
liquidated in chapter 7 cases, and actual results could vary materially from
those shown in this analysis. The following major assumptions have been made in
this Liquidation Analysis:
- The hypothetical liquidation is effectuated beginning on April 1,
2001.
- No proceeds for recoveries of any avoidance actions or NAFTA Claims
are included in the assets for distribution.
- The holders of the CTA Note Claims receive the same distribution or,
in other words, are treated as pari passu.
- No additional income tax liabilities arise from the liquidation of
the Debtors' assets.
- The Debtors are liquidated under the direction of a trustee appointed
by the Bankruptcy Court with the assistance of existing management
and specific Professionals.
- The liquidation of operating assets commences June 1, 2001 and is
completed by September 30, 2001.
- Administration of the chapter 7, other than the completion of final
tax returns, is assumed to be completed by March 31, 2002.
Assumptions utilized in the determination of asset proceeds and costs of the
liquidation for this analysis are as follows:
- Cash and Cash Equivalents are calculated net of outstanding checks as
of March 31, 2001. Cash flow from operations during the liquidation
process is assumed to approximate $60 million.
--------
(1) Capitalized terms not otherwise defined herein or in the Liquidation
Analysis have the meanings given to them in the Joint Plan of Reorganization of
Loewen Group International, Inc., Its Parent Corporation and Their Debtor
Subsidiaries.
<PAGE> 161
- Proceeds from Funeral Home and Cemetery Operations have been
calculated assuming that (i) all operations are sold through auctions
in Bankruptcy Court as "going-concerns" and (ii) all location-related
Executory Contracts and Unexpired Leases that have not been rejected
or terminated by the Debtors as of November 2000 are assigned to the
purchasers . The proceeds consist of the following:
(i) Estimated net proceeds of funeral home, cemetery
operations and other excess real estate assets being
actively marketed for sale at September 1, 2000, of
$121.9 million as estimated by management and
Wasserstein Perella & Co., Inc., ("Wasserstein"),
financial advisors to the Company.
(ii) Estimated net proceeds of all other funeral home and
cemetery operations are valued at a 4.0 multiple, for
the "Low" scenario, and a 5.0 multiple, for the
"High" scenario, of year 2000 projected operating
earnings after allocation of corporate overhead and
before depreciation, interest and taxes ("EBITDA").
Multiples estimated by Wasserstein are based, in
part, on the sales process currently underway.
Certain cemetery properties that the Company may not
be able to liquidate have been excluded.
- Proceeds from insurance operations consist of the sale of the
Mayflower National Life Insurance Company ("Mayflower") and Security
Industrial Insurance Company ("Security Industrial") businesses.
Mayflower is assumed to be sold as a "going concern" through an
auction in Bankruptcy Court at a 4.0 multiple, for the "Low Value",
and a 5.0 multiple, for the "High Value," of year 2000 projected
EBITDA as estimated by Wasserstein. Estimated proceeds from Security
Industrial insurance operations are based on the sales process
underway.
- The Investment in Rose Hills is assumed to be sold through auction in
Bankruptcy Court with the estimated enterprise valuation derived
utilizing the discounted cash flow and EBITDA multiple methodology by
Wasserstein.
- Proceeds of other assets consist of estimated net proceeds to be
realized from the sale of the real estate and furniture, fixtures and
equipment used to support the Debtors' corporate and field management
general and administrative ("G&A") functions.
- Wind down costs consist primarily of estimated costs for salary,
benefits, and occupancy costs. The wind down costs estimates are
based upon the Debtors' monthly G&A cost run rate for such expenses.
Wind down costs also include estimates for Professional and trustee
fees. It is assumed that although the liquidation of the Debtors'
operating locations occurs over a six month period, the
administrative structure required to complete the tasks associated
with the wrap up of the business continue at decreasing levels
through the first quarter of 2002 and for certain tax filings through
the second quarter of 2002.
- Priority and Administrative Claims consist of trustee fees,
Professional fees and expenses (including legal, consulting and
investment banking), employee severance claims and tax claims.
- Secured Claims consist of CTA Note Claims and other claims generally
secured by real property and/or equipment. Estimated proceeds
available for distribution to holders of Secured Claims represent
proceeds from the liquidation of assets subject to security
interests.
- General Unsecured Claims includes deficiency claims of secured
creditors other than CTA Note Claims.
Application of net liquidation proceeds have been made in accordance with the
priorities set forth in the Bankruptcy Code. This Liquidation Analysis does not
address any intercreditor issues.
<PAGE> 162
THE LOEWEN GROUP INC. AND AFFILIATED DEBTORS
HYPOTHETICAL LIQUIDATION ANALYSIS (CONTINUED)
($ in millions, USD)
<TABLE>
<CAPTION>
LOW HIGH
<S> <C> <C>
Estimated Asset Proceeds Available for Distribution:
Cash and Cash Equivalents $ 241.1 $ 241.1
Proceeds from Funeral Home and Cemetery Operations 769.5 931.4
Proceeds from Insurance Operations 58.8 64.2
Proceeds from Investment in Rose Hills 21.9 27.3
Proceeds from Other Assets 5.6 5.6
-------- ----------
Gross Proceeds 1,096.9 1,269.6
Wind Down Costs/Priority and Administrative Claims (127.3) (106.9)
-------- ----------
Net Proceeds Available for Secured and Unsecured Creditors $ 969.6 $ 1,162.7
======== ==========
</TABLE>
<TABLE>
<CAPTION>
Estimated Estimated Percent
Claims Recovery Amount Recovered
------ --------------- ---------
Low High Low High
--- ---- --- ----
<S> <C> <C> <C> <C> <C>
CTA Note Claims, including deficiency claims $2,038.4 $838.3 $1,027.7 41% 50%
Other Secured Claims 94.5 94.5 94.5 100% 100%
General Unsecured Claims
Class 6 33.1 3.6 4.6 11% 14%
</TABLE>
<TABLE>
<CAPTION>
Avg.Recovery Max. Recovery
------------ -------------
Low High Low High
--- ---- --- ----
<S> <C> <C> <C> <C> <C>
Class 9
Division A 368.8 1% 1% 1% 1%
Division B 466.8 0% 0% 0% 0%
Division C 22.5 90% 94% 100% 100%
Division D 7.4 46% 54% 72% 75%
Division E 7.0 33% 38% 53% 55%
Division F 13.7 20% 23% 33% 34%
Division G 24.4 9% 10% 18% 19%
Division H 15.8 0% 0% 5% 5%
</TABLE>
<PAGE> 163
EXHIBIT V
MEMORANDUM ENTITLED "THE STATUS OF THE SERIES 3 AND 4
NOTES, THE SERIES 6 AND 7 NOTES, AND THE PATS UNDER THE
COLLATERAL TRUST AGREEMENT (AMENDED AND RESTATED)"
DATED AS OF SEPTEMBER 19, 2000
<PAGE> 164
================================================================================
IN RE LOEWEN GROUP INTERNATIONAL, INC., ET AL.
================================================================================
THE STATUS OF THE SERIES 3 AND 4 NOTES, THE
SERIES 6 AND 7 NOTES, AND THE PATS UNDER
THE COLLATERAL TRUST AGREEMENT
(Amended and Restated)
JONES, DAY, REAVIS & POGUE
SEPTEMBER 19, 2000
HIGHLY CONFIDENTIAL
SUBJECT TO CONFIDENTIALITY AGREEMENTS
<PAGE> 165
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
EXECUTIVE SUMMARY....................................................................................... 2
I. Facts................................................................................. 2
II. Interpreting the CTA.................................................................. 4
III. Equitable Doctrines................................................................... 9
IV. Other Arguments....................................................................... 10
V. Litigation Risk....................................................................... 11
BACKGROUND.............................................................................................. 12
FACTUAL INVESTIGATION INTO THE
SECURED STATUS OF THE UNREGISTERED NOTES....................................................... 22
I. The CTA Draft Chain................................................................... 24
II. The Series 3 and 4 Notes.............................................................. 25
III. The Series 6 and 7 Notes.............................................................. 27
IV. The PATS.............................................................................. 28
V. The Collateral Trustee's Recordkeeping System......................................... 29
VI. Discovery of Registration Issues...................................................... 31
ANALYSIS................................................................................................ 32
I. Construction of the Collateral Trust Agreement........................................ 32
A. Analytical Framework......................................................... 32
1. Governing Law........................................................ 32
2. Judicial Standard of Interpretation.................................. 33
B. Interpretation............................................................... 34
1. Registration Requirement Necessary to Obtain Benefits................ 35
2. Registration Not Necessary to Obtain Benefits........................ 41
3. Analysis of Competing Arguments...................................... 43
a. Registration Is Consistent with the Provisions
of the CTA.................................................. 43
b. Potential Counterargument................................... 48
C. Guaranties................................................................... 49
D. The Effect of Ambiguity...................................................... 52
E. Conclusion................................................................... 54
II. Equitable Doctrines................................................................... 54
A. Salient Facts................................................................ 55
B. Reformation.................................................................. 57
C. Equitable Doctrines.......................................................... 61
III. Other Possible Arguments.............................................................. 66
A. Waiver....................................................................... 66
B. Impossibility................................................................ 67
C. Delivery to an Agent......................................................... 68
D. Section 544 of the Bankruptcy Code........................................... 71
</TABLE>
i
<PAGE> 166
<TABLE>
<S> <C> <C> <C>
1. Inapplicability of Section 544....................................... 72
2. Effect of Section 544(a)(1) if It Were Applicable.................... 73
E. Postpetition Registration.................................................... 75
1. Section 362(a)(3) of the Bankruptcy Code............................. 76
2. Section 362(a)(4) of the Bankruptcy Code............................. 78
3. Section 362(a)(6) of the Bankruptcy Code............................. 79
4. Section 549(a) of the Bankruptcy Code................................ 82
F. Sections 362(b)(3) and 546(b) of the Bankruptcy Code......................... 83
CONCLUSION.............................................................................................. 91
</TABLE>
ii
<PAGE> 167
Interested Parties:
IN RE LOEWEN GROUP INTERNATIONAL, INC., ET AL.
THE STATUS OF THE SERIES 3 AND 4 NOTES, THE SERIES 6 AND 7 NOTES,
AND THE PATS UNDER THE COLLATERAL TRUST AGREEMENT
This memorandum sets out the facts and analyzes the status of several
outstanding series of indebtedness of Loewen Group International, Inc. ("LGII")
under the Collateral Trust Agreement dated as of May 15, 1996 (as amended,
supplemented or otherwise modified, the "Collateral Trust Agreement" or the
"CTA"), among LGII and The Loewen Group, Inc. ("TLGI" and, collectively with
LGII, the "Companies" and each a "Company"), various other subsidiaries of TLGI,
as pledgors (collectively, the "Pledgors" and each a "Pledgor"), and Bankers
Trust Company, as Collateral Trustee ("Bankers Trust" or the "Collateral
Trustee").
Our analysis and conclusions are set forth in extensive detail below.
It is important to emphasize, however, that the outcome of any legal dispute
concerning the secured status of the Series 3 and 4 Notes, the Series 6 and 7
Notes, and the PATS is subject to substantial uncertainty. In the event of
litigation of any such dispute, the holders of this debt would face the
significant risk that a court would adopt a literal reading of the CTA, denying
the subject debt secured status due to failure to properly register with the
Collateral Trustee. Conversely, parties arguing for a literal interpretation
would face the substantial risk that a court, applying equitable principles,
would find all of the debt to be secured regardless of whether registered.
Moreover, litigation of this matter, regardless of its outcome, would present
the substantial threat of delaying the Companies' emergence from chapter 11,
resulting in a deterioration in enterprise
<PAGE> 168
value to the detriment of all creditors. Accordingly, an amicable resolution of
the issues addressed herein is in the interests of all parties.
EXECUTIVE SUMMARY
I. FACTS
In 1996, TLGI and LGII entered into the Collateral Trust Agreement to
provide collateral for a 1996 credit facility from a syndicate of banks and for
certain other outstanding indebtedness. The Collateral Trust Agreement expressly
permits the Companies, under the terms of the financing agreements governing the
debt already secured under the CTA, to issue additional secured indebtedness
under the CTA. Certain provisions in the CTA that address issuing additional
secured indebtedness under the CTA refer to the delivery of an Additional
Secured Indebtedness Registration Statement to, and acceptance and registration
of that statement by, the Collateral Trustee. The form of the Additional Secured
Indebtedness Registration Statement, which also refers to acceptance and
recordation by the Collateral Trustee, is attached as an exhibit to the
Collateral Trust Agreement.
After the effective date of the CTA, LGII issued, and TLGI guaranteed,
among others, five additional series of indebtedness intended to be secured
under the CTA: the Series 3 and Series 4 Senior Notes in the original principal
amount of $350 million (collectively, the "Series 3 and 4 Notes"), the Series 6
and Series 7 Senior Notes in the original principal amount of $450 million
(collectively, the "Series 6 and 7 Notes"), and the Pass-Through Asset Trust
Certificates in the original principal amount of $300 million (collectively, the
"PATS"). Exhibit A summarizes relevant facts about each issuance. Each of the
prospectuses for these public notes stated that the notes would be secured along
with other senior indebtedness. The board of directors of each Company
authorized these series of indebtedness and designated each series as secured
indebtedness under the Collateral Trust Agreement. Moreover, each Company,
together
2
<PAGE> 169
with the indenture trustee, executed the Additional Secured Indebtedness
Registration Statements for each series.
Nonetheless, as of June 1, 1999, the date the Companies and certain of
their affiliates filed for bankruptcy (the "Petition Date"), the records of the
Collateral Trustee did not contain an accurate Additional Secured Indebtedness
Registration Statement for any of these series of notes: the Additional Secured
Indebtedness Registration Statement for the Series 3 and 4 Notes reflected an
outstanding principal balance of $0, rather than $350 million, and the
Collateral Trustee had no registration statements at all for the Series 6 and 7
Notes, and the PATS.
A factual investigation conducted by Jones, Day, Reavis & Pogue
(Loewen's counsel) has revealed that, for the Series 6 and 7 Notes, and the PATS
no party recalls actually having delivered (and no party claims to have
delivered) the executed Additional Secured Indebtedness Registration Statements
or any drafts thereof to the Collateral Trustee or its counsel.(1) For the
Series 3 and 4 Notes, drafts of the Additional Secured Indebtedness Registration
Statement reflecting the correct outstanding principal balance were delivered to
counsel for the Collateral Trustee, but did not make their way into the
Collateral Trustee's retained files.
Although the Collateral Trust Agreement can be read to contemplate that
the Collateral Trustee would enter the information from the Additional Secured
Indebtedness Registration Statements into a Secured Indebtedness Register, the
Collateral Trustee apparently merely kept copies of registration statements that
it received and did not keep an independent Secured Indebtedness Register. While
any Secured Party Representative has the right under the Collateral
----------
(1) An associate with the law firm that represented the underwriter for the
PATS initially recalled having delivered Additional Secured
Indebtedness Registration Statements for the PATS to the Collateral
Trustee. That firm has since indicated that upon further investigation
it has determined that the associate was mistaken and no such delivery
was made.
3
<PAGE> 170
Trust Agreement to examine the Secured Indebtedness Register, it appears that no
party did so before the date of the Companies' chapter 11 filings.(2)
II. INTERPRETING THE CTA
A strict interpretation of the language of the Collateral Trust
Agreement suggests that Additional Secured Indebtedness Registration Statements
must be delivered to the Collateral Trustee in order for indebtedness to benefit
from the collateral provided in the CTA. This interpretation ultimately rests on
the definition of "Holder," which by its terms, requires registration.
Under the CTA, the Pledgors granted a security interest in the
collateral "in favor of the [Collateral] Trustee . . . for the equal and ratable
benefit of all Senior Secured Parties, as security for . . . the payment by the
Obligors of the Senior Secured Indebtedness." (CTA Section 3.1 (emphasis
added).) The CTA defines "Senior Secured Parties" as, among others, "Class C
Secured Parties." (CTA Section 1.1(104).) The term "Class C Secured Parties" is
then defined to include "each Holder of Additional Secured Indebtedness . . .
which Additional Secured Indebtedness is designated as Class C Secured
Indebtedness." (CTA Section 1.1(22).) The definition of "Holder" requires that
"in the case of any Holder of Additional Secured Indebtedness, its Secured Party
Representative shall have become a Secured Party Representative . . . pursuant
to Section 2.5." (CTA Section 1.1(52).) Finally, under Section 2.5, "[t]o become
a Secured Party Representative . . . each such representative . . . must deliver
to the [Collateral] Trustee, for acceptance and registration in the Secured
Indebtedness Register, an Additional Secured Indebtedness Registration
Statement." (CTA Section 2.5(1).) Because the security interest under the CTA is
granted for the benefit of "Senior Secured Parties," who in the case of
Additional Secured Indebtedness must have
--------
(2) Wachovia Bank of Georgia, N.A. ("Wachovia") apparently asked to review
the Secured Indebtedness Register before the chapter 11 filings, but no
such review occurred.
4
<PAGE> 171
delivered a registration statement to the Collateral Trustee, this definitional
chain suggests that additional indebtedness must be registered to be secured.
Other provisions of the CTA also support this interpretation. Section
2.1 provides that indebtedness shall be Secured Indebtedness "only upon and
subject to the conditions set forth in this Article [II]." (CTA Section 2.1.)
Sections 2.3 and 2.5 of that article contain the registration requirements.
Moreover, under Section 8.10, proceeds of collateral are to be paid to the
Secured Party Representative of each "Holder" it represents in the amount owed
to the "Holder." (CTA Section 8.10.) This indicates that proceeds of collateral
can only be distributed to parties who registered with the Collateral Trustee.
Further, the form of Additional Secured Indebtedness Registration Statement
appended to the Collateral Trust Agreement states that indebtedness will be
covered by the CTA "upon acceptance and registration of this Statement." This
language appears in each of the registration statements actually executed by the
parties. Thus, by their own terms, the registration statements indicated that
registration was a prerequisite to the holders receiving the benefit of the
security interest granted under the CTA.
This interpretation of the CTA, however, can be challenged on a number
of grounds. First, although Section 3.1 grants the security interest for the
"benefit of all Senior Secured Parties," it also states that the security
interest is granted "as security for . . . the payment by the Obligors of the
Senior Secured Indebtedness." (CTA Section 3.1 (emphasis added).) Unlike "Senior
Secured Parties," the definition of the phrase "Senior Secured Indebtedness"
does not lead to a registration requirement. "Senior Secured Indebtedness"
includes "Class C Secured Indebtedness." (CTA Section 1.1(102).) "Class C
Secured Indebtedness" includes "the Additional Secured Indebtedness designated
as Class C Secured Indebtedness pursuant to Section 2.6." (CTA Section 1.1(21)
(emphasis added).) In contrast to Section 2.5, Section 2.6 does not impose a
registration requirement.
5
<PAGE> 172
Second, Section 2.4 provides that the Companies, through resolutions of
their boards of directors, may designate certain types of indebtedness as
Additional Secured Indebtedness under the CTA to be "entitled to the security
hereby created." (CTA Section 2.4(1).) This language suggests that once debt is
designated it becomes entitled to the security interests under the CTA without
any requirement of registration.
Third, a recital in the CTA provides that all things have been done to
make additional indebtedness "when designated . . . entitled to the benefit of
the Senior Lien." (CTA Recital 9(b) (emphasis added).) This language further
supports the interpretation that designation by the board of directors is the
only prerequisite for obtaining the benefits of the CTA.
Notwithstanding these provisions, the registration interpretation of
the collateral provisions in the Collateral Trust Agreement appears more
consistent with the provisions of the CTA as a whole. Applying the
"nonregistration" interpretation to Section 3.1 of the Collateral Trust
Agreement leads to the inconsistent result that debt is secured (whether or not
it is registered), but the security interest is granted only for the benefit of
those parties who have registered. A similar inconsistency occurs in Section
8.1, as application of the nonregistration interpretation to that section would
produce the contradictory result that indebtedness could be secured, but not
entitled to any distributions of proceeds of collateral. Further, adoption of
the nonregistration interpretation effectively reads out of the Collateral Trust
Agreement all of the registration provisions, and ignores the registration
language in the registration statements themselves.
In contrast, a strict interpretation of the CTA leads to a different
result with respect to the guaranties. Under the Collateral Trust Agreement,
each Pledgor Subsidiary guaranteed "the due and punctual payment . . . and
performance of all Senior Secured Indebtedness of the Obligors . . . ." (CTA
Section 5.1.) As indicated above, "Senior Secured Indebtedness" is ultimately
6
<PAGE> 173
defined to include Additional Secured Indebtedness designated under Section 2.6.
Thus, unlike the CTA provisions that relate to the security interest granted
under the CTA, the provisions that govern the guaranties contain no reference to
any registration requirement. This conclusion is reinforced by the registration
section of the CTA, Section 2.5, which provides that a "Holder" or
representative thereof must register with the Collateral Trustee in order to "be
entitled to the benefits of the security interests in the Collateral as set out
herein . . . ." (CTA Section 2.5(1).) Thus, the registration section itself
makes no reference to the guaranties.
This interpretation of the guaranty provisions of the Collateral Trust
Agreement is also subject to challenge. The conclusion that a party need not
register in order to obtain the benefits of the guaranties is difficult to
reconcile with the conclusion that registration is a necessary prerequisite for
participation in the CTA security interest. An underlying premise of the
registration interpretation of the collateral provisions in the Collateral Trust
Agreement is that Senior Secured Indebtedness must be held by a registered
holder even though the term itself does not refer to registration. Because the
guaranties guarantee Senior Secured Indebtedness, a court could conclude that a
consistent reading of the CTA mandates the conclusion that registration is
necessary for participation in both the security interest and the guaranties.
Nonetheless, a court will more than likely conclude that registration
is not necessary for Holders to benefit from the CTA guaranties. Unlike the
contractual provisions regarding Collateral, none of the guaranty provisions in
the CTA contains any reference to a registration requirement. Moreover, unlike
the security interest, which is granted in favor of the Collateral Trustee for
the benefit of the Holders and can only be enforced by the Collateral Trustee,
the guaranties are direct contractual obligations between the Companies and the
noteholders that can be enforced by the noteholders independent of the
Collateral Trustee. Accordingly, registration arguably would serve no purpose in
the case of the guaranties.
7
<PAGE> 174
Finally, although a court will more than likely adopt the
"registration" interpretation of the CTA in assessing whether the Series 3 and 4
Notes, the Series 6 and 7 Notes, and the PATS should participate in the
collateral, it will nonetheless likely conclude that the Series 3 and 4 Notes
are covered by the Collateral Trust Agreement. First, a court could find that
the Additional Secured Indebtedness Registration Statement in the possession of
the Collateral Trustee is sufficient to satisfy any registration requirement in
the CTA because it actually refers to the $350 million original (as opposed to
outstanding) principal amount of the notes. Second, a court could conclude that
even if the registration statement is deficient because of its reference to a $0
outstanding principal amount, that deficiency constitutes a "manifest error"
that is not binding on the parties under the CTA. A finding that the Series 3
and 4 Notes are secured is also supported by the fact that Bankers' Trust's
counsel received drafts of the registration statement with the correct
outstanding principal amount prior to closing.
As with the other conclusions described above, this conclusion is also
uncertain and subject to attack. The form of Additional Secured Indebtedness
Registration Statement to be delivered to the Collateral Trustee requires the
entry of the current outstanding principal amount. In addition, Section 2.5(2)
of the Collateral Trust Agreement provides that increases in the principal
amounts of the initial secured indebtedness under the CTA must be registered in
order to obtain the benefits of the CTA. Thus, it could be argued that the
Series 3 and 4 Notes are not covered by the CTA because the $350 million
outstanding principal amount of the notes is not reflected in the Additional
Secured Indebtedness Registration Statement in the possession of the Collateral
Trustee. Nonetheless, because the original principal amount is correctly
reflected in the registration statement on file with the Collateral Trustee and
the error in the outstanding amount is obvious, it seems more likely that a
court will find that the Series 3 and 4 Notes are covered by the CTA.
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III. EQUITABLE DOCTRINES
Notwithstanding the "registration" interpretation of the collateral
provisions in the Collateral Trust Agreement, equitable arguments, if adopted,
weigh in favor of treating all of the notes as covered by the CTA. The doctrine
of reformation may be used by a court to correct the outstanding principal
amount in the Additional Secured Indebtedness Registration Statement for the
Series 3 and 4 Notes from $0 to $350 million. Reformation arguably does not
apply to the Series 6 and 7 Notes, and the PATS because there is no document in
the Collateral Trustee's files to be reformed. But general equitable principles
reflected in The Prudential Company of America v. SS American Lancer, 870 F.2d
867 (2d Cir. 1989), suggest that, since (i) all parties to the transactions
intended that the debt would be covered by the CTA, (ii) all parties to the
transactions and the public were on notice that the notes were intended and
believed to be covered by the CTA, (iii) no party could claim prejudice if the
notes were determined to be covered by the CTA since no one relied on the
registration of the debt with the Collateral Trustee and (iv) the registration
requirements were not precisely followed as to any of the additional series of
notes,(3) a court would be reluctant to treat any of these notes as unsecured
and thus give other creditors an unexpected windfall. Courts, of course, have
discretion in applying equitable principles so there is no assurance that
holders of these unregistered or potentially incorrectly registered notes would
be given relief.
IV. OTHER ARGUMENTS
Other arguments could be advanced to support the proposition that some
or all of the affected notes are secured. It could be argued that, because the
Collateral Trustee assertedly
----------
(3) Although an accurate Additional Secured Indebtedness Registration
Statement is on file for the Series 5 Notes, there is arguably no
Secured Indebtedness Register in which that indebtedness is recorded.
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failed to maintain a Secured Indebtedness Register, compliance with the
registration requirement is no longer required under the doctrines of waiver or
impossibility. Irrespective of whether the Collateral Trustee may have waived
compliance with the CTA's registration provisions, any waiver by the Collateral
Trustee would likely not be attributed to other parties to the CTA.
Impossibility appears by definition to be inapplicable, because the Collateral
Trustee's actions have not rendered it impossible for holders of Additional
Secured Indebtedness to file registration statements with the Collateral
Trustee. It could also be argued that the Series 3 and 4 Notes were, in fact,
properly registered because drafts of the Additional Secured Indebtedness
Registration Statement with the correct outstanding principal amount were
delivered to counsel for Bankers Trust. While applicable law provides that
attorneys are generally considered agents for their clients, the CTA specifies
that all "communications and notices" under the CTA should be delivered to
Bankers Trust rather than its counsel. Additionally, delivery to the Collateral
Trustee's counsel, even if viewed as delivery to the Collateral Trustee, may
still not constitute acceptance and registration of the registration statement
by the Collateral Trustee.
Parties may also attempt to use various sections of the Bankruptcy Code
either to avoid the security interests assertedly granted in favor of the
holders of the Series 3 and 4 Notes, the Series 6 and 7 Notes, and the PATS or
to correct the deficiencies in the registration of those notes. Section 544 of
the Bankruptcy Code (which involves the estate's avoidance powers) may be used
as a means to avoid any alleged lien of the Series 3 and 4 Notes, the Series 6
and 7 Notes, and the PATS. But this section does not appear to apply to the CTA
issues addressed in this memorandum because the lien that would be the target of
the avoidance action is actually held by the Collateral Trustee, not the
noteholders, and it is not currently disputed that the Collateral Trustee's lien
has attached and been properly perfected. Conversely, a party may argue that any
defects in registration can be remedied by postpetition compliance with the
registration
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requirements. But any postpetition effort by any party to register the affected
indebtedness would appear to be barred by various provisions of the automatic
stay contained in section 362 of the Bankruptcy Code and, if successful, could
also be viewed as an unauthorized postpetition transfer of property of the
Companies' estates under section 549 of the Bankruptcy Code. Finally, it could
be argued that registration of the affected debt at this point in time is a
permissible perfection of a security interest under section 546 of the
Bankruptcy Code and a related provision of the automatic stay; however, these
provisions appear to be inapplicable and limited to situations where applicable
law provides that perfection of the security interest relates back to an earlier
date. That is not the case here.
V. LITIGATION RISK
There is no interpretation of the CTA that fully reconciles all its
terms nor is there any assurance that a court will apply equitable principles or
utilize those principles to override the language of the Collateral Trust
Agreement. Moreover, it cannot be predicted whether a court may utilize
bankruptcy law principles or other principles to achieve a particular result.
Accordingly, all the competing arguments that can be offered with respect to the
notes at issue are subject to considerable uncertainty. If litigation is
commenced, it could lead to additional litigation involving many other parties.
This litigation will consume substantial time and generate considerable expense,
and could delay the reorganization process. Accordingly, a consensual resolution
of these issues is in the interests of all the parties.
BACKGROUND
Five years before executing the Collateral Trust Agreement, TLGI and
LGII executed a trust deed dated October 1, 1991 (the "1991 Trust Deed"). The
1991 Trust Deed provided collateral for three series of notes, the so-called
Series A, B, and C Notes, and for an October 1,
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1991 revolving credit facility of up to $100 million (the "1991 Revolver"),
executed among TLGI and LGII, as borrowers, and a syndicate of Canadian and U.S.
banks, as lenders.(4)
Under the 1991 Trust Deed, the Series A, B, and C Notes and the 1991
Revolver were secured equally and ratably by a common security package that was
comprised primarily of a security interest in and over all of TLGI's assets,
LGII's accounts receivable, the rights of LGII under voting trusts and share
option arrangements with respect to certain United States subsidiaries, and a
pledge of the stock held by TLGI, LGII, and TLGI's United States subsidiaries
(with certain exceptions) and certain other subsidiaries. The 1991 Trust Deed
provided that the trustee would concurrently release the security on behalf of
the lenders under the 1991 Revolver and the holders of the Series A, B, and C
Notes if all of the lenders under the 1991 Revolver agreed to release the
security or upon notice that the 1991 Revolver had been paid in full. Following
the issuance of the Series D Notes in September 1993, the 1991 Trust Deed was
amended to secure those notes.(5)
On February 16, 1994, TLGI and LGII repaid the 1991 Revolver in full
with the proceeds of a $400 million revolving credit loan from a bank group led
by The First National Bank of Chicago (the "First Chicago Bank Group"),(6) and
the collateral was released under the 1991 Trust Deed. After the 1994
refinancing with the First Chicago Bank Group, the Companies had virtually no
secured debt. Thereafter, in February 1994, the Series E Notes in the original
principal amount of $50 million were issued.
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(4) The Series A Notes were in the original principal amount of $100
million, the Series B Notes were in the original principal amount of
$40 million, and the Series C Notes were in the original principal
amount of $25 million.
(5) The Series D Notes were in the original principal amount of $60
million.
(6) The First Chicago Bank Group also provided a $100 million revolver.
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In November 1995, however, the Companies sustained an adverse judgment
of $500 million in a Mississippi state court case, O'Keefe, et al v. TLGI, et
al. The holders of the outstanding debt instruments took the position that the
O'Keefe judgment constituted a default event.(7) Thus, waivers were granted
under these outstanding debt instruments. The waivers granted in connection with
the First Chicago Bank Group $400 million revolver and the MEIP facility
required TLGI to provide collateral by May 31, 1996. The other outstanding debt
instruments contained "negative pledge" and "Equal and Ratable Lien Clauses"
that required that, if TLGI or LGII granted security to any existing or future
creditor, liens likewise had to be granted to these holders of outstanding debt
placing that debt on a pari passu basis with the other secured debt. As a
result, following the O'Keefe judgment and the later settlement of that
litigation, the Companies could not obtain additional financing without retiring
or securing all of these outstanding debt instruments.
On March 20, 1996, LGII issued the Series 1 Senior Notes in the
original principal amount of $250 million and the Series 2 Senior Notes in the
original principal amount of $125 million. These notes contained a covenant that
provided that, if the Companies granted security in respect of other senior
indebtedness, then the Series 1 and 2 Notes had to be collateralized on a pari
passu basis.
The proceeds from the Series 1 and 2 Notes were not sufficient to fund
the Companies' business plan, so in May 1996, TLGI and LGII obtained a $750
million credit facility from a
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(7) The outstanding indebtedness at that time included the First Chicago
Bank Group revolvers, the $121 million loan extended by Wachovia in
connection with the 1994 Management Equity Investment Plan ("MEIP"),
the Series A, B, C, D, and E Notes, a $50 million credit agreement
among TLGI, LGII, Royal Bank of Canada, and various lenders, and a $35
million credit agreement between TLGI, LGII, and Dresdner Bank Canada.
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syndicate of banks led by the Bank of Montreal (the "1996 Credit Facility").(8)
The lenders under the 1996 Credit Facility required collateral. The 1996 Credit
Facility is secured by:
- all of LGII's right, title, and interest in and to all rights
to receive payment under or in respect of accounts, contracts,
contractual rights, chattel paper, documents, instruments, and
general intangibles;
- a pledge of the shares of capital stock of substantially all
of the subsidiaries in which TLGI directly or indirectly held
more than 50 percent voting or economic interest; and
- a guaranty by each subsidiary that pledged stock.
The Collateral Trust Agreement was established as the mechanism to
secure the 1996 Credit Facility and the outstanding indebtedness that was
entitled to share equally and ratably in the collateral. The CTA designates
indebtedness secured under it as either Class A, B, C, or D Secured
Indebtedness. When the CTA went into effect, Class A Secured Indebtedness
consisted of the 1996 Credit Facility, the MEIP facility, and the credit
agreements with the Royal Bank of Canada and Dresdner Bank Canada.(9) Class B
Secured Indebtedness consisted of the outstanding Series A through E Notes.
Class C Secured Indebtedness consisted of the Series 1 and 2 Notes issued in
March 1996, and Class D Secured Indebtedness consisted of an intercompany loan
from Loewen Finance (Wyoming) LLC to LGII. Class D Secured Indebtedness was
junior and subordinate to the other classes of Secured Indebtedness. Although
the interests of these classes in the collateral granted under the CTA are pari
passu, decisions to enforce the CTA interests are based on voting rights
weighted to reflect the size of each class of debt.
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(8) The Companies had commenced negotiations with the First Chicago Bank
Group regarding a $750 million revolving credit facility to replace the
existing revolvers prior to the entry of the O'Keefe judgment.
Following the judgment, the First Chicago Bank Group decided not to
participate in any new facility. The First Chicago Bank Group revolvers
were later paid off with the proceeds of the 1996 Credit Facility.
(9) The Dresdner Bank Canada and Royal Bank of Canada loans were retired in
September 1997 and September 1998, respectively.
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The Collateral Trust Agreement contemplates that the benefits of
pledges and guaranties made thereunder could inure not only to the holders of
the Companies' indebtedness existing on the date of the Collateral Trust
Agreement, but also to holders of subsequently issued indebtedness of a Company.
In this regard, the CTA refers to certain registration procedures for the
later-issued indebtedness that involve the execution and delivery of Additional
Secured Indebtedness Registration Statements to the Collateral Trustee,
acceptance of those statements by the Collateral Trustee, and registration of
the statements in a Secured Indebtedness Register.
The CTA does not include any provisions requiring the consent of one or
more classes of secured indebtedness to the issuance of additional secured debt.
Rather, issuances of additional secured debt are permitted so long as the
issuances comply with the covenants and other terms and conditions of the
"Financing Agreements" relating to the various borrowings secured under the
Collateral Trust Agreement. In effect, rather than requiring the consent of
holders of indebtedness secured by the CTA before the Companies issue additional
secured debt, the holders of secured indebtedness relied on the covenants that
existed in the Financing Agreements to limit additional issuances of secured
debt.
After the date of the Collateral Trust Agreement, the Companies issued
six additional series of indebtedness in four separate transactions. These
series of indebtedness are: (i) the Series 3 and 4 Notes, issued on October 1,
1996, (ii) the Series 5 Senior Notes (collectively, the "Series 5 Notes") in the
original principal amount of Cdn. $200 million, issued on September 26, 1997,
(iii) the Series 6 and 7 Notes, issued on May 28, 1998, and (iv) the PATS,
issued on September 30, 1997.
The Companies and all other parties involved in these transactions
intended each additional series of debt to be entitled to the benefits of the
Collateral Trust Agreement. Each of
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the prospectuses for the Series 3 and 4 Notes, the Series 6 and 7 Notes, and the
PATS states that the notes will be secured under the Collateral Trust Agreement:
- Offering Memorandum dated October 1, 1996 relating to the
Series 3 and 4 Notes;
- Offering Circular dated September 25, 1997 relating to the
PATS; and
- Offering Memorandum dated May 21, 1998 relating to the Series
6 and 7 Notes.
The cover page of each of these prospectuses contains similar language
regarding collateral. As an example, the prospectus for the Series 3 and 4 Notes
states:
The Senior Notes and the Guarantees will be senior obligations
of LGII and [TLGI], respectively, and will rank pari passu in
right of payment with all other senior indebtedness of LGII
and [TLGI], respectively. Because other senior indebtedness is
secured, the Senior Notes, when issued, will be secured as
defined herein.
This intention to secure the notes is reiterated four or five other times in
each of the prospectuses.
In addition, the board of directors of each Company adopted resolutions
authorizing each series of indebtedness and designating each series as secured
indebtedness under the Collateral Trust Agreement. Further, each Company,
together with the indenture trustee for each series, executed Additional Secured
Indebtedness Registration Statements for each series. These fully executed
Additional Secured Indebtedness Registration Statements were in place at the
closings of the Series 3 and 4 Notes and the PATS and, in the case of the Series
6 and 7 Notes, were delivered to the underwriter's counsel (at whose offices the
closing occurred) the day after the closing of the notes. Copies of the executed
Additional Secured Indebtedness Registration Statements are included in each of
the relevant sets of closing documents.
After the issuance of each series of indebtedness intended to be
secured under the CTA, TLGI consistently referred to the notes as secured under
the CTA in each of its public securities filings:
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- Form 10-Q with respect to the quarter ended June 30, 1997;
- Form 10-Q with respect to the quarter ended September 30,
1997;
- Form 10-Q with respect to the quarter ended March 31, 1998;
- Form 10-Q/A with respect to the quarter ended June 30, 1998;
- Form 10-Q/A with respect to the quarter ended September 30,
1998;
- Form 10-Q with respect to the quarter ended March 31, 1999;
- Form 10-K with respect to the year ended December 31, 1997;
and
- Form 10-K with respect to the year ended December 31, 1998.
As an example, in the Form 10-K for the fiscal year ended December 31,
1998, TLGI stated:
In 1996, Loewen, LGII and their senior lenders entered into a
collateral trust agreement pursuant to which the senior
lenders share certain collateral and guarantees on a pari
passu basis (the "Collateral Trust Agreement"). * * * The
security is held by the trustee for the equal and ratable
benefit of the senior lending group. This senior lending group
consists principally of the lenders under the Series 1-7
Senior Notes, the Series D and E Amortizing Notes, the
Revolving Credit Agreement, the MEIP Loan and the PATS Senior
Notes, as well as holders of certain letters of credit. * * *
At December 31, 1998, the indebtedness owed to the senior
lending group subject to the Collateral Trust Agreement,
including holders of certain letters of credit, aggregated
approximately $2.1 billion.
The prospectus, dated May 29, 1997, prepared and disseminated in
connection with TLGI's offering of 12,000,000 common shares, similarly reported
that senior obligations, including at that time the Series 3 and 4 Notes, were
secured under the Collateral Trust Agreement.
Furthermore, it is apparent that other creditors of the Companies
understood and acknowledged not only that the Companies had the right to issue
other secured debt, but also that the subsequently issued debt was in fact
secured. For example, the Wachovia Credit
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Agreement(10) and the Bank of Montreal Credit Agreement(11) (together, the
"Credit Agreements") explicitly acknowledged and allowed for additional secured
debt under the Collateral Trust Agreement. The relevant covenants in the Credit
Agreements are identical and indicate that the parties contemplated that
additional debt would be secured and guaranteed under the CTA. For example, the
Credit Agreements defined "Secured Parties" as the lenders, the persons
specified on Schedule 3 of the Credit Agreements, and "all other Persons [as
designated by the Borrowers] who from time to time hold Senior Obligations which
are secured pursuant to the Collateral Trust Agreement." The definition of
"Senior Obligations" also recognized that debt, other than the indebtedness
described on Schedule 3, was not secured except as provided in the Collateral
Trust Agreement. The two covenants clearly suggest that the lenders anticipated
that additional debt would be secured.
Moreover, later amendments to the Credit Agreements expressly
acknowledge the senior secured status of the Series 3 and 4 Notes, and the PATS.
On March 27, 1998, the Bank of Montreal Credit Agreement was amended to reduce
the maximum aggregate outstanding principal amount of the commitments and for
other reasons. The Series 3 and 4 Notes and the PATS were specifically listed as
"Senior Obligations" (the Series 6 and 7 Notes had not yet been issued) and the
amendment expressly acknowledges that the collateral pledged to Bank of Montreal
will also secure these Notes. Similarly, the Wachovia Credit Agreement was
amended
----------
(10) Amended and Restated 1994 MEIP Credit Agreement Among Loewen Management
Investment Corporation, in its Capacity as Agent for Loewen Group
International, Inc., The Loewen Group, Inc., the Banks listed therein,
and Wachovia Bank of Georgia, N.A., as Agent, as Amended and Restated
as of May 15, 1996.
(11) Second Amended and Restated Credit Agreement Dated as of March 27, 1998
Among Loewen Group International, Inc., The Loewen Group, Inc., the
Lenders named therein, and Bank of Montreal, as L/C Issuer, Swing Line
Lender and Administrative and Syndication Agent.
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on May 1, 1998 and the amendment likewise acknowledges that the collateral for
the MEIP obligation would also secure the Series 3 and 4 Notes and the PATS
(again the Series 6 and 7 Notes had not, as of that time, been issued). Thus,
these lenders undoubtedly believed that the Series 3 and 4 Notes, and the PATS
were covered by the Collateral Trust Agreement, and agreed to amend their
facilities with the express understanding that these notes were secured on a
pari passu basis by the same collateral.
In addition to the covenants, both Credit Agreements contained
reporting requirements that put the lenders on notice of all outstanding debt,
including the debt in question. The Credit Agreements required TLGI and LGII to
deliver to the lenders annual audited reports and quarterly unaudited reports as
well as all other reports and documents filed with the United States Securities
and Exchange Commission, the Ontario Securities Commission, the Toronto Stock
Exchange, and the British Columbia Securities Commission. To our knowledge, TLGI
and LGII complied with the Credit Agreements' reporting requirements throughout
the prebankruptcy term of the Credit Agreements, and thus the lenders were
directly informed of the additional issuances of secured debt.
The holders of the Series 1 and 2 Notes were also informed that, if
collateral was provided to secure the notes (because it was provided to Bank of
Montreal), the notes would share that collateral pari passu with other senior
indebtedness, which could include additional indebtedness. This information was
disclosed in the prospectus for the Series 1 and 2 Notes. Additionally, State
Street Bank and Trust Company, formerly Fleet National Bank ("State Street"),
was the indenture trustee for the Series 1 and 2 Notes, as well as the Series 3
and 4 Notes, the Series 6 and 7 Notes, and the PATS. State Street's
representative, Michael Hopkins, acted on State Street's behalf in all four
cases, and State Street was represented by the same law firm in each case. State
Street has also filed proofs of claims in the Companies' chapter 11 cases
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<PAGE> 186
on behalf of the Series 1 and 2 Notes, the Series 3 and 4 Notes, the Series 6
and 7 Notes, and the PATS. Thus, State Street, as the representative of the
Series 1 and 2 Noteholders, had actual knowledge of the intent to secure the
notes at issue. The prospectus for the Series 5 Notes similarly disclosed that
the Series 5 Notes would be secured on a pari passu basis with other senior debt
and that senior secured debt included the Series 3 and 4 Notes and could include
additional debt.
Although the Collateral Trust Agreement contemplated registration of
additional series of debt with the Collateral Trustee, it appears that, before
the Petition Date, no party to the CTA ever reviewed the Secured Indebtedness
Register or the contents of any Additional Secured Indebtedness Registration
Statement in the possession of the Collateral Trustee. In addition, no party
appears to have been aware of any potential problem regarding the submission of
registration statements until well after the Petition Date.
As of the Petition Date, the Collateral Trustee's records apparently
did not contain the Additional Secured Indebtedness Registration Statements for
the Series 6 and 7 Notes, and the PATS.(12) In this regard, the Collateral
Trustee apparently kept no actual register or ledger containing the relevant
information, as arguably required by the terms of the Collateral Trust
----------
(12) It appears that there may be other executed Additional Secured
Indebtedness Registration Statements that are not contained in the
Collateral Trustee's records. A registration statement signed in
connection with a Bank of Montreal letter of credit facility under
which Bank of Montreal on July 16, 1996 issued two letters of credit to
LGII: (i) in favor of 2847 Wilson Blvd., Inc., in the maximum stated
amount of $2,662,192.28 and (ii) in favor of Steven E. Wooddell and
Mary R. Wooddell, in the maximum stated amount of $2,536,352.09 was
executed but does not appear in the Collateral Trustee's files. The
letters of credit were guaranteed by TLGI. Likewise, a registration
statement signed in connection with an interest rate call option
facility, dated September 25, 1997, with respect to the PATS between
LGII and Union Bank of Switzerland ("UBS") is not included in the
Collateral Trustee's records. This facility was also guaranteed by
TLGI. Neither Bank of Montreal nor UBS has asserted that either of
these facilities is secured, and the proofs of claim filed by each
designate the claims as unsecured.
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Agreement, but rather simply maintained all registration information it
received, both from the original closing of the Collateral Trust Agreement and
with respect to Additional Secured Indebtedness, in a file in its office.
Moreover, the Additional Secured Indebtedness Registration Statements for the
Series 3 and 4 Notes, despite stating that the original outstanding principal
amount of the debt was $350 million, indicated a current outstanding principal
balance for that series of zero.
Similarly, the original proof of claim filed by the Collateral Trustee
in LGII's bankruptcy case, which purported to attach all of the Additional
Secured Indebtedness Registration Statements that were delivered to the
Collateral Trustee, included no registration statements for the Series 6 Notes,
the Series 7 Notes, or the PATS, and included the registration statement with
the incorrect outstanding principal balance for the Series 3 and 4 Notes.(13)
The Collateral Trustee has since filed a motion to amend its proof of claim to
include the correct registration statement for the Series 3 and 4 Notes and the
registration statements for the Series 6 and 7 Notes, and the PATS. This motion
has not been served on creditors and is not being pursued by the Collateral
Trustee at the present time.
FACTUAL INVESTIGATION INTO THE
SECURED STATUS OF THE UNREGISTERED NOTES
The Companies' counsel, Jones, Day, Reavis & Pogue, investigated the
circumstances underlying the absence from the Collateral Trustee's files of any
Additional Secured Indebtedness Registration Statements for the Series 6 and 7
Notes, and the PATS, and the misstatement of the outstanding principal amount on
the Additional Secured Indebtedness Registration Statement for
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(13) The original proof of claim also includes registration statements for
the Series 5 Notes, and for loans by Loewen Luxembourg (No. 1) S.A.
("Lux 1"), including a registration statement reflecting that Lux 1 had
received an assignment of the existing intercompany loan from Loewen
Finance (Wyoming), LLC to LGII. The Lux 1 loans are classified as Class
D indebtedness.
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the Series 3 and 4 Notes. The following discussion reflects the results of that
investigation. Most of the involved parties, however, were interviewed only on
an informal basis and did not provide testimony under oath. Further, most of the
involved parties had difficulty recalling the details of these transactions.
Thus, this factual discussion must be considered to be only non-binding
background material.
Jones Day interviewed informally:
- Winnie Tse (Borden Ladner & Gervais), counsel for the
Companies, who participated in drafting the Collateral Trust
Agreement;
- Michelle Johnson and William O'Brien (Thelen Marrin Johnson &
Bridges LLP (now Thelen, Reid & Priest)), counsel for the
Companies, who represented the Companies in issuing all of the
involved notes;
- Michael Hopkins, a representative of State Street (successor
to Fleet National Bank of Connecticut), which served as
indenture trustee on all of the involved notes;
- Sue Ann Dillport (Davis Polk & Wardwell), counsel who
represented Salomon Brothers as underwriter of the Series 3
and 4 Notes, and the Series 6 and 7 Notes; and
- C. Thomas Kunz and Paul Roberts (Skadden, Arps, Slate, Meagher
& Flom), counsel who represented UBS as underwriter of the
PATS.
Some of these individuals also informally provided Jones Day with
copies of various documents involved in the transactions: These documents
included drafts of the CTA, correspondence related to the transactions, and
closing materials. Paul Roberts also provided a print-out reflecting a charge
for a car he initially recalled using to deliver to the Collateral Trustee the
Additional Secured Indebtedness Registration Statement for the PATS.
Jones Day also took testimony from three representatives of Bankers
Trust in a Bankruptcy Rule 2004 examination: Kevin Weeks, who served as
Corporate Account Manager
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from February 1997 until March 1998; Marc Parilla, who served as Corporate
Account Manager from March 1998 until February 2000; and Stanley Burg, who is
one of two Default Workout Officers handling the Loewen matter. Pursuant to the
court order authorizing the 2004 examination, Jones Day received documents
responsive to a formal document request from Bankers Trust. Jones Day has since
received additional documents from counsel for Bankers Trust, Michele Ross,
formerly of Kramer, Levin, Naftalis & Frankel LLP.
I. THE CTA DRAFT CHAIN
The CTA is a complex agreement that was negotiated at length. Parties
who participated in the negotiation and drafting of the CTA were the Companies,
Bankers Trust, Bank of Montreal, Wachovia, and holders of the Series A through E
Notes. Although the draft chain is lengthy, two facts stand out.
First, a draft of the entire CTA contains handwritten "KLN&F(14)
comments May 1, 1996." The registration provisions that appear in Section 2.5 of
the final CTA appear in Section 2.3 of the May 1 draft. Section 2.3 twice refers
to sending an Additional Secured Indebtedness Registration Statement for
"acceptance and recording" in the register. In Kramer Levin's handwritten notes,
both references to "recording" are circled, and the accompanying note asks:
"What is this intended to mean?" (Doc. No. MR 03018.) In the final version of
the CTA, the word "recording" has been changed to "registration."
Second, on May 3, 1996, Michele Ross (of Kramer Levin) sent her
comments on the form Additional Secured Indebtedness Registration Statement to
Winnie Tse (of Borden & Elliott) and David Graybeal and William O'Brien, Jr.
(both of Thelen Marrin). The draft form refers to "acceptance and recordation"
of the registration statement. Ross circled the word "recordation"
----------
(14) "KLN&F" is a reference to Kramer, Levin, Naftalis & Frankel LLP,
counsel for Bankers Trust.
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and asked: "Again same question. Is this supposed to be filed or do you add it
to the register?" (Doc. No. MR 03007.) The word "recordation" remained unchanged
in the final version of the form attached to the CTA.
The draft chain thus suggests that the parties focused on the
registration requirement. The substance of any discussions on that point may
warrant additional inquiry.
II. THE SERIES 3 AND 4 NOTES
The Series 3 and 4 Notes were issued on October 1, 1996, and the
closing took place on October 4, 1996 at the law firm of Davis Polk & Wardwell.
A team at Thelen Marrin Johnson & Bridges LLP (now Thelen, Reid & Priest)
(counsel for the Companies), including senior associate Carissa Coze and junior
associate David Higley, prepared the notes under the supervision of partner
Michelle Johnson. Davis Polk partner Dean Leonard (now retired), along with Of
Counsel Sue Ann Dillport and associate Tracy Kimmel, served as underwriter's
counsel.
Counsel for the Companies, Johnson, drafted the original Additional
Secured Indebtedness Registration Statement. Copies of the drafts were then
faxed to various parties as described below.
- On October 1, 1996, Johnson's associate Coze sent the
draft to Collateral Trustee's counsel Michele Ross
(Kramer, Levin), State Street's counsel Bruce Lutsk
(Reid & Reige), and State Street's representative,
Michael Hopkins, for comments. That draft reflected
an outstanding principal balance for each series of
$0. Counsel for the Collateral Trustee, Ross,
responded the same day with comments on the draft.
- On October 2, counsel for the Companies sent a
revised draft, along with copies of the Board of
Directors' resolutions authorizing each series and
designating each series as secured indebtedness under
the CTA, to counsel for the Collateral Trustee. The
revised draft reflected the correct outstanding
principal balance of $350 million.
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Michele Ross, counsel for Bankers Trust, produced a
copy of that draft from her files.
- On October 3, Johnson appears to have faxed to Davis
Polk another version of the Additional Secured
Indebtedness Registration Statement that contained
certain black-lined revisions to the text of the
document and again accurately reflected an
outstanding principal amount of $350 million (which
amount was not black- lined). Michele Ross also
produced a copy of that document from her files.
- On October 4, Johnson sent counsel for the Collateral
Trustee and Terrence Rawlins at the Collateral
Trustee an executed signature page of the revised
version of the registration statement. This fax
included only the signature page. She also sent them
the certified resolutions of the boards of directors
approving the notes.
The Additional Secured Indebtedness Registration Statement appears on
the closing checklist prepared by Davis Polk, which was (as is typical of
underwriter's counsel) running the closing. The document included in the closing
book as the Additional Secured Indebtedness Registration Statement, dated
October 4, 1996, reflects an outstanding principal balance of $350 million.
Somehow -- no one seems to know how -- the Bankers Trust file contains a
different version of the registration statement. That version is comprised of
the first page of the old draft with the outstanding principal amount of $0,
appended to the executed page for the October 4 draft. This is evident from the
fax lines for each page. The first page contains two October 1, 1996 fax lines
that indicate that it was initially sent from Thelen Marrin to Kramer Levin,
counsel for the Collateral Trustee, and thereafter from Kramer Levin to Bankers
Trust. The executed signature page likewise contains two fax lines indicating
that on October 4, 1996 the page was sent by underwriters' counsel, Davis Polk,
to Thelen Marrin and, later on the same day, sent by Thelen Marrin to the
Collateral Trustee and its counsel, Kramer Levin.
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<PAGE> 192
William O'Brien, a partner of Johnson's who attended the closing on
behalf of the Companies, does not recall any discussion at the closing regarding
the mechanics of filing the closing documents. So far as he can recall, the
closing documents were simply left on the table at Davis Polk at the end of the
closing. Johnson likewise recalls no discussion about registration. State
Street's representative, Michael Hopkins, also could not recall any discussion
of the mechanics of filing the registration statement. Counsel for the
underwriter, Dillport, similarly has no recollection of any specific
understanding regarding who would file particular documents.
III. THE SERIES 6 AND 7 NOTES
The Series 6 and 7 Notes were issued on May 21, 1998, and the closing
took place on May 28, 1998 at the law firm of Davis Polk & Wardwell. A team at
Thelen Marrin, counsel for the Companies, again operating under the supervision
of partner Michelle Johnson, including associates Christopher Ing, Carissa Coze,
and Kelly Canady, drafted the notes and revised the Additional Secured
Indebtedness Registration Statement. Dillport, of Davis Polk, again served as
underwriter's counsel.
Davis Polk's closing checklist used to identify all of the documents to
be executed at the closing does not include an Additional Secured Indebtedness
Registration Statement. On the day of the closing, counsel for the Companies,
Johnson, realized that the document had been omitted and asked her associate
Canady to prepare an Additional Secured Indebtedness Registration Statement.
Canady drafted one and faxed it around. Thus, the Additional Secured
Indebtedness Registration Statement appears in the closing volume with a fax
line of May 29, 1998, although it is dated May 28, 1998. On May 29, 1998, Canady
sent the Additional Secured Indebtedness Registration Statement to Hopkins at
State Street and Dwight Hawes at the Companies for their signatures. On June 1,
Canady sent the signed document to a paralegal at Davis Polk, Martina
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<PAGE> 193
Skobic, with (according to counsel for the Companies, Johnson) the expectation
that Davis Polk would submit the document to the Collateral Trustee.
Neither Johnson nor O'Brien (Johnson's partner who again attended the
closing) or underwriter's counsel, Dillport, recalls any discussion before or
during the closing regarding who would file the registration statement.
Moreover, no one claims to have delivered either drafts or the final versions of
the registration statements to Bankers Trust or its counsel.
IV. THE PATS
The PATS were issued on September 25, 1997, and the closing took place
on September 30, 1997 at the law firm of Skadden, Arps, Slate, Meagher & Flom.
There apparently was no closing checklist for this transaction. Counsel for the
Companies, Johnson, prepared and delivered two Additional Secured Indebtedness
Registration Statements to the closing. An April 9, 1998 fax(15) from Johnson's
associate Canady to Scott Jaffe and Paul Roberts at Skadden Arps, underwriter's
counsel, outlines the procedures that Skadden was to follow in having the
Additional Secured Indebtedness Registration Statements signed. The registration
statements appear in the closing book.
In Jones Day's informal interview, Paul Roberts, an associate at
Skadden, indicated that he remembered taking the executed registration
statements to Bankers Trust the day after the closing. Skadden's computer
records reflect that Roberts took a car at 8:23 that morning and made one stop,
but do not indicate where he went. Roberts stated in his informal interview that
--------
(15) Why this fax memorandum, which purports to attach documents for the
September 30, 1997 closing, bears a date almost seven months after the
closing is unclear. Johnson believes that the memorandum may have been
used as a template for a subsequent transaction, and that the date may
have inadvertently been changed in connection with that later
transaction. Irrespective of the date on the fax, it does appear that
executed registration statements were delivered to Skadden at or before
the closing. This is supported by the fact that the page of the
registration statement executed by UBS bears a fax legend of September
30, 1997.
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he believed that he went to Four Albany Street, which is the address listed in
the Collateral Trust Agreement. He said that he recalled a discussion with a
woman at Bankers Trust (who, according to Roberts, was behind a "cage") where he
dropped off the registration statements. Bankers Trust denies that there is any
"cage" at Four Albany Street, but has indicated that there is a cage at its
"Receipt and Deliveries" window at 123 Washington; Bankers Trust's main address
is 130 Liberty. In his interview, Roberts stated that the woman behind the cage
may remember him. He recalled that he received a receipt from Bankers Trust,
although he was not able to locate it. He also indicated that he may have sent a
copy to Canady at Thelen, but Johnson has not been able to locate any receipt.
On September 15, 2000, following the circulation of the initial version
of this memorandum, Skadden advised Jones Day that the information previously
provided by Roberts was incorrect, and that Skadden wished to withdraw that
information. Based on Skadden's further internal investigation, Roberts now
believes that the trip that he recalled to Bankers Trust did not occur in
October 1997 in connection with the PATS, but rather occurred in May 1998 in
connection with an unrelated transaction. According to Skadden, Roberts believes
that he has made only one trip to Bankers Trust, and Skadden has located
documents pertaining to the deal for which that trip occurred. Skadden has
further indicated that Roberts' revised recollection is confirmed by his effort
to make a luncheon appointment on the day that he went to Bankers Trust with a
former Skadden associate who had joined Bankers Trust; that associate did not
leave Skadden until February 1998. Skadden has been unable to locate information
on the destination of Roberts' car trip on October 1, 1997. As a result of its
further internal investigation, Skadden states that there is no reason to
believe that the firm assumed the duty or responsibility for delivering the
registration statements relating to the PATS to Bankers Trust.
V. THE COLLATERAL TRUSTEE'S RECORDKEEPING SYSTEM
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At a Bankruptcy Rule 2004 examination, representatives of Bankers Trust
testified about the Loewen Group Collateral Trust Agreement Account. Kevin Weeks
oversaw the account from February 1997 until March 1998. He testified that he
did not recall a particular file or log designated as the Secured Indebtedness
Register. Rather, any Additional Secured Indebtedness Registration Statements
that were received were simply added to the general Loewen Collateral Trust
Agreement account files. Marc Parilla, who oversaw the account from March 1998
until February 2000, testified that he recalled a particular sub-file designated
as the Secured Indebtedness Register. Any Additional Secured Indebtedness
Registration Statements that were received were placed into this sub-file.
According to Parilla, the attachments to Bankers Trust's original proof of claim
include all of the Additional Secured Indebtedness Registration Statements that
were in Bankers Trust's file on the Petition Date.
After the 2004 examination, Bankers Trust supplied a documentary
history of trust, which appears to catalog all of the sub-files in the Loewen
Group Collateral Trust Agreement Account File. According to that history of
trust, files entitled "Secured Indebtedness Register" and "Additional Secured
Indebtedness Registration Statement" were opened only after the Petition Date,
on April 14, 2000. There is, however, a file titled "Schedule of Additional
Secured Indebtedness," which was opened on October 3, 1996. Because the history
of trust was received after the 2004 examinations were completed, Jones Day did
not ask about this chronology during the Rule 2004 examinations. Bankers Trust's
counsel has since explained informally that Marc Parilla gathered the
attachments to the original Proof of Claim from the file that had been opened on
October 3, 1996.
All of the representatives of Bankers Trust agreed that, before the
date of the Companies' chapter 11 filings, no party had examined, or been told
orally about, the contents of any file containing the Additional Secured
Indebtedness Registration Statements. Wachovia has
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<PAGE> 196
indicated, however, that it attempted to review the Bankers Trust file prior to
the Petition Date, but that it was not provided access to the file.
Following the 2004 examination, Jones Day asked Bankers Trust to check
the following items: (i) who was behind the Receipt and Delivery Window on the
key dates; (ii) whether there is a receipt or a computer record of receipts
evidencing the receipt of documents at the Delivery Window; and (iii) whether
Bankers Trust has any policy manual addressing when receipts are generated for
items received.
Bankers Trust has since responded that it has no receipt for the PATS
registration statement. Further, Bankers Trust has indicated that, although it
maintained a paper log (and not a computer log) from 1996 through 1998 in which
the receipt of documents other than securities was recorded, that log was
discarded every few months. Thus, the log for the 1996 through 1998 time period
no longer exists. Finally, Bankers Trust has indicated that it has no written
policy relating to issuing receipts at the Receipt and Delivery Window.
VI. DISCOVERY OF REGISTRATION ISSUES
Counsel for Bankers Trust, Ross, reported that until State Street filed
its proof of claim, Bankers Trust had no knowledge of the Series 6 and 7 Notes
or the PATS. Marc Parilla, of Bankers Trust, double-checked the contents of the
Secured Indebtedness Register file in July 1999, but he was not then aware of
any problem. Bankers Trust may have first learned about the issue when the
Companies issued a press release raising the subject on April 7, 2000.
Hopkins, the representative of State Street, indicated that until the
bankruptcy cases were filed, State Street had no idea that there was any
question regarding the registration statements. Underwriter's counsel, Dillport,
became aware that there was a problem with the registration statement for the
Series 6 and 7 Notes in March or April 2000, when she received a request from
State Street for a copy of the closing documents. She apparently first became
aware of the $0
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principal amount in the Collateral Trustee's copy of the Series 3 and 4 Notes
registration statement during Jones Day's interview with her.
ANALYSIS
As an initial matter, the question whether the Series 3 and 4 Notes,
the Series 6 and 7 Notes, and the PATS are entitled to the benefits of the
Collateral Trust Agreement should not turn on an analysis of attachment and
perfection under the Uniform Commercial Code. There is no current dispute that
the lien granted to the Collateral Trustee by the Pledgors was properly created
and perfected. Rather, the relevant questions are: (1) as a matter of contract
interpretation, which parties are entitled to the benefits of the Collateral
Trust Agreement; (2) whether applicable contract and equitable doctrines could
affect the results of the contract interpretation analysis; and (3) whether
other legal principles are applicable to the issue, including whether sections
544, 546, and 549 of the Bankruptcy Code apply and may be used as a basis to
permit postpetition registration of the affected debt or to otherwise alter the
outcome of the contract interpretation and legal analyses. Each of these
questions is discussed below.
I. CONSTRUCTION OF THE COLLATERAL TRUST AGREEMENT
A. ANALYTICAL FRAMEWORK
1. GOVERNING LAW
Section 13.5 of the Collateral Trust Agreement provides that the
Collateral Trust Agreement "shall be governed by and construed in accordance
with the laws of the State of New York (without reference to any conflict or
other choice of law or rules which might otherwise apply, except General
Obligations Law Section 5-1401)." Under Section 5-1401 of the New York General
Obligations Law, the parties to a contract relating to obligations arising out
of a transaction covering in the aggregate of not less than $250,000 may agree
that New York law will govern the agreement, whether or not the agreement bears
a reasonable relation to New
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York. In addition, courts applying New York law in cases construing similar
choice-of-law provisions have given effect to the parties' choice of New York
law to govern their contracts. See, e.g., Broad v. Rockwell International
Corporation, 642 F.2d 929, 946 (5th Cir. 1981) (en banc)(construing an
indenture); Tucker Leasing Capital Corp. v. Marin Medical Management, Inc., 833
F. Supp. 948, 955 (E.D.N.Y. 1993) (construing a guaranty). Therefore, a court
interpreting the Collateral Trust Agreement almost certainly will give effect to
Section 13.5 and construe the Collateral Trust Agreement under New York law.
2. JUDICIAL STANDARD OF INTERPRETATION
Under New York law, courts will interpret written contracts to give
effect to the intention of the parties as expressed in the unequivocal language
the parties employed. Broad, 642 F.2d at 946. The parties' intent is determined
not by examining extrinsic sources, but by looking within the four corners of
the document. See WWW Associates v. Giancontieri, 77 N.Y.2d 157, 162 (N.Y.
1990). Courts will not accept extrinsic evidence of the parties' intent where
consideration of the contract as a whole resolves an ambiguity created by one
clause of the agreement. See Hudson-Port Ewen Associates v. Chien Kuo, 78 N.Y.2d
944, 944 (N.Y. 1991). Courts will attempt to reconcile all parts of a contract,
if possible, to give consistency to the contract. Broad, 642 F.2d at 947.
The words and phrases used in a contract are interpreted according to
their plain meaning, and courts will not "rewrite" or "reinterpret" contractual
language when the language is clear and unambiguous on its face. E.g., Broad,
642 F.2d at 947; Laba v. Carey, 327 N.Y.S.2d at 618; CCG Associates I v.
Riverside Associates, 556 N.Y.S.2d 859, 862 (App. Div. 1990). To decide whether
a part of an agreement is ambiguous, courts will examine the entire contract:
Particular words and phrases should be considered within the context of the
complete agreement. "Form should not prevail over substance and a sensible
meaning of the words should be sought." Kass
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v. Kass, 91 N.Y.2d 554, 566 (N.Y. 1998), quoting Atwater & Co. v. Panama R.R.
Co., 246 N.Y. 519, 524 (N.Y. 1927). The whole contract must be considered when
deciding between possible interpretations of an ambiguous term. The favored
interpretation will be the one that best accords with the remainder of the
contract and makes every part of the contract effective. Broad, 642 F.2d at 947.
A court will not adopt an interpretation of a clause that will leave another
provision of the contract without effect. Laba v. Carey, 29 N.Y.2d 302, 308
(N.Y. 1971).
Accordingly, the Collateral Trust Agreement should be analyzed by its
terms, and one should look to extrinsic sources only if the language of the
Collateral Trust Agreement is ambiguous and cannot be resolved by looking at the
contract as a whole.
B. INTERPRETATION
The Collateral Trust Agreement is potentially subject to two competing
interpretations. The first interpretation holds that registration of additional
indebtedness with the Collateral Trustee is a prerequisite to participation in
the benefits of the CTA. The other interpretation holds that registration is
merely an administrative aid to the Collateral Trustee that has no effect on a
party's rights under the CTA. Each interpretation is discussed in detail below,
followed by an analysis of their relative merits.
1. REGISTRATION REQUIREMENT NECESSARY TO OBTAIN
BENEFITS(16)
The first sentence of Article II of the Collateral Trust Agreement
provides:
The aggregate principal amount of indebtedness which may be
secured under this Collateral Trust Agreement at any time is
unlimited, but indebtedness shall be Secured Indebtedness only
upon and subject to the conditions set forth in this Article.
(CTA Section 2.1 (emphasis supplied).)
--------
(16) Attached as Exhibit B is a compilation of the principal provisions of
the Collateral Trust Agreement that support the "registration"
interpretation of the CTA.
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Under this language, additional indebtedness becomes "Secured Indebtedness" only
upon satisfying the conditions set forth in Article II of the Collateral Trust
Agreement. Sections 2.3 and 2.5 of the Collateral Trust Agreement then set forth
a registration scheme. Section 2.3 requires the Collateral Trustee to maintain a
register, called the Secured Indebtedness Register. The Collateral Trustee is
required to enter contact information for each Secured Party Representative, the
original principal amount of the related secured indebtedness and any commitment
amount. The Collateral Trustee is also required to note in the Secured
Indebtedness Register any changes, additions, or deletions to this information
upon receiving written notice from a registered Secured Party Representative or,
in certain circumstances, a Company. The Collateral Trustee is required to make
the Secured Indebtedness Register available for inspection by any Secured Party
Representative at the Collateral Trustee's offices in New York City during
normal business hours and with reasonable prior notice. The CTA contains no
other provision that permits any other party access to the Secured Indebtedness
Register.
Section 2.5 sets forth a detailed process by which Additional Secured
Indebtedness Registration Statements are delivered to and accepted by the
Collateral Trustee for registration. The second sentence of Section 2.5(1)
states that "[t]o become a Secured Party Representative [under the Collateral
Trust Agreement]" a representative or holder of "proposed Additional Secured
Indebtedness under Section 2.4(1)(i), (ii) or (iii) . . ."must deliver to the
[Collateral] Trustee, for acceptance and registration in the Secured
Indebtedness Register, an Additional Secured Indebtedness Registration Statement
. . . duly executed by such prospective representative or holder . . . ."
(emphasis supplied). Under the first sentence of Section 2.5(1), it is necessary
to become a Secured Party Representative to "be entitled to the benefits of the
security interests in the Collateral as set out [in the Collateral Trust
Agreement] and in the other Collateral Documents." By negative implication,
these provisions suggest that a representative or holder's failure to register
prevents that representative
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or holder from availing itself of the benefits of the security interests in the
Collateral.
In addition, the final sentence of Section 2.5(2) provides that to
"have the benefits of Additional Secured Indebtedness" under the Collateral
Trust Agreement, increases in commitment amounts, principal amounts, and
guaranties of indebtedness must have been registered.(17) Again, by negative
implication, this provision indicates that a failure to register an increase in
principal amounts of indebtedness deprives such increase of the benefits of
Additional Secured Indebtedness. Because indebtedness incurred after the closing
date of the Collateral Trust Agreement must be Additional Secured Indebtedness
to become Senior Secured Indebtedness that is entitled to the benefit of the
collateral granted under Section 3.1, it follows that registration is required
to benefit from the collateral under the Collateral Trust Agreement.
Further, Additional Secured Indebtedness Registration Statements must
be substantially in the form of Exhibit A to the Collateral Trust Agreement.
(CTA Section 2.5(1)). That form provides:
By executing and delivering this Additional Secured
Indebtedness Registration Statement and, upon the acceptance
and recordation hereof by the Trustee in accordance with
Section 2.3 of the Collateral Trust Agreement, ____________
(the "Secured Party Representative") hereby agrees on behalf
of itself and the Holders it represents to be bound by all the
terms and provision of the Collateral Trust Agreement
applicable to a Holder and a Secured Party Representative, as
applicable, of Secured Indebtedness. . . .
--------
(17) By its terms, Section 2.5(2) applies only to the initial secured
indebtedness under the CTA; i.e., the 1996 Credit Facility, the MEIP
facility, the credit agreements with Royal Bank of Canada and Dresdner
Bank Canada, the Series A through E Notes, the Series 1 and 2 Notes,
and the intercompany loan from Loewen Finance (Wyoming) LLC to LGII.
Additionally, Section 2.5(2) does not specify whether the phrase
"principal amounts" refers to original principal amounts or outstanding
principal amounts. The form of Additional Secured Indebtedness
Registration Statement to be filed in connection with Additional
Secured Indebtedness includes blanks for both original and outstanding
principal amounts.
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<PAGE> 202
The undersigned Companies and the Secured Party Representative
each hereby confirms that (i) the Secured Party Representative
represents Holders of Additional Secured Indebtedness, (ii)
furnished herewith is a true and complete copy of [GIVE
TITLE(S), DATE(S) AND PARTIES OF THE AGREEMENTS UNDER WHICH
THE INDEBTEDNESS HAS BEEN (OR IS TO BE) INCURRED] which shall,
upon acceptance and registration of this Statement pursuant to
section 2.5 of the Collateral Trust Agreement, be incorporated
in the definition of "Financing Agreements"(18) for the
purposes of the Collateral Trust Agreement. . . . (Emphasis
added.)
Thus, based on this language in the form of Additional Secured
Indebtedness Registration Statement, which language appears in all the
Additional Secured Indebtedness Registration Statements executed by the parties,
indebtedness is not covered by the CTA until the statement is accepted by the
Collateral Trustee and registered or recorded in the Secured Indebtedness
Register.
Finally, Section 3.1 of the Collateral Trust Agreement provides that
the security interest is granted to the Collateral Trustee "for the equal and
ratable benefit of all Senior Secured Parties." Under Section 1.1 of the CTA,
"Senior Secured Parties" means, among others, Class C Secured Parties (CTA
Section 1.1(104)), which, in turn, means "each Holder of Additional Secured
Indebtedness (if any), which Additional Secured Indebtedness is designated as
Class C Secured Indebtedness pursuant to Section 2.6, and their Secured Party
Representatives." (CTA Section 1.1(22) (emphasis supplied).) "Holder" is then
defined as:
[A]ny person who holds Secured Indebtedness and any successor
to or assignee from such a holder of such Secured
Indebtedness; provided that in the case of a Holder of
Additional Secured
----------
(18) "Financing Agreements" are defined in the Collateral Trust Agreement as
the Note Agreements, the 1996 Credit Agreement, the MEIP Credit
Agreement, the RBC Credit Agreement and the Dresdner Credit Agreement,
the LFW Loan Agreement, and any and all other agreements which by the
provisions of any Additional Secured Indebtedness Registration
Statement are incorporated in the definition of "Financing Agreements."
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Indebtedness, its Secured Party Representative(19) shall have
become a Secured Party Representative hereunder pursuant to
Section 2.5 (CTA Section 1.1 (52) (emphasis supplied).)
Accordingly, pursuant to Section 3.1, the lien is granted for the benefit of
parties who must have registered with the Collateral Trustee.
Before the Petition Date, registration statements for the Series 6 and
7 Notes, and the PATS were apparently not delivered to the Collateral Trustee.
Thus, under this interpretation, holders of those notes would not be entitled to
the benefits of the security interests in the collateral. In contrast, a
registration statement for the Series 3 and 4 Notes was on file with the
Collateral Trustee, but that statement reflects an outstanding principal balance
of zero (although it likewise states in the same sentence that the original
principal balance was $350 million). Further, there is no registration statement
contained in the Secured Indebtedness Register evidencing an increase of that
outstanding principal amount. Applying the registration interpretation, it could
be argued that the entire outstanding principal amount of the Series 3 and 4
Notes would not be entitled to the benefits of Additional Secured
Indebtedness.(20)
This argument seems inconsistent, however, with Section 2.3, which
specifies that the Secured Indebtedness Register must include the original
principal amount, not the outstanding
--------
(19) "Secured Party Representative" is defined to include "any agent,
trustee or like representative of any Holder(s) which is designated a
Secured Party Representative for such Holder(s) in . . . the related
Additional Secured Indebtedness Registration Statement."
(20) It could also be argued that no registration statement was ever
delivered to the Collateral Trustee since the registration statement
that appears in the Collateral Trustee's files is not the same
registration statement that was executed and included in the closing
binders. Whether or not the statements are the same, however, because a
registration statement appears in the Collateral Trustee's file, the
Collateral Trustee must necessarily have received and accepted delivery
of that registration statement.
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balance.(21) Accordingly, the somewhat better argument appears to be that the
registration statement for the Series 3 and Series 4 Notes did comply with the
registration requirements of the CTA because it contains the correct original
principal balance, and that original principal amount was never thereafter
increased.
This argument is further supported by the fact that the Collateral
Trust Agreement, by its terms, appears to anticipate that increases in the
outstanding principal amounts could occur after the delivery of registration
statements. Section 11.2 of the CTA provides that, following receipt of an
Enforcement Order, the Collateral Trustee shall request the Companies to deliver
to the Trustee a statement setting forth the amount of senior debt outstanding.
The Trustee is also required to deliver a similar request to each Secured Party
Representative. Thus, the CTA seems to contemplate enforcement actions based on
outstanding principal amounts that differ from the amounts set forth in the
registration statements. Similarly, Section 12.1 provides that the Companies
will provide the Collateral Trustee with a written statement of the outstanding
amount of each Senior Secured Party's senior secured indebtedness within one
business day of the receipt of a written request from the trustee. Again, the
CTA seems to contemplate that outstanding principal amounts may change from the
amounts set forth in the Additional Secured Indebtedness Registration
Statements. Conversely, it could be argued that these provisions merely
contemplate that outstanding principal amounts may decrease over time and that
increases in such amounts, nonetheless, require registration.
--------
(21) An additional problem in asserting that the outstanding principal
amount of additional indebtedness must be correctly registered is that
the CTA could have been used to secure additional revolving credit
debt. In that case, it would be difficult to argue that a registration
statement would be required each time an increase in the revolver
balance occurred.
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In addition, Section 2.3 provides that entries in the register "shall
be conclusive and binding for all purposes, absent manifest error." (Emphasis
supplied.) According to Black's Law Dictionary, manifest is defined as "evident
to the senses, especially to the sight, obvious to the understanding, evident to
the mind, not obscure or hidden, and is synonymous with open, clear, visible,
unmistakable, indubitable, indisputable, evident and self-evident." Courts have
similarly defined manifest error as error that is obvious or clear. See Bank One
Texas v. FDIC, 16 F. Supp. 2d 698, 713 (N.D. Tex. 1998) (using Black's Law
Dictionary and concluding that manifest error is an obvious mistake or departure
from the truth); Magee v. Magee, 661 So. 2d 1117, 1129 (Miss. 1995) (quoting
Black's Law Dictionary and concluding that manifest error is error that is
"unmistakable, clear, plain or indisputable"). In the case of the Series 3 and 4
Notes, it could be argued persuasively that the registration statement's
reference to a zero outstanding principal balance in connection with a public
offering of $350 million in notes is a clear and obvious mistake.(22) This
mistake also should have been obvious to the Collateral Trustee on the basis
that its counsel at the same time had drafts of the registration statement,
which reflected an outstanding principal balance of $350 million. Thus, for
these two reasons, even if the "registration" interpretation of the CTA is
adopted by a court, a court could conclude that the Series 3 and 4 Notes are
properly registered.
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(22) This "manifest error" exception would appear to have no application to
the Series 6 and 7 Notes, and the PATS because it applies to entries in
the Secured Indebtedness Register. In contrast to the Series 3 and 4
Notes, the Collateral Trustee apparently had no information at all
regarding the Series 6 and 7 Notes, or the PATS.
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2. REGISTRATION NOT NECESSARY TO OBTAIN BENEFITS(23)
Section 3.1 of the Collateral Trust Agreement describes the obligations
the collateral secures. Under that section, the security interest is granted to
secure "the payment by the Obligors of the Senior Secured Indebtedness." (CTA
Section 3.1(B).) The key defined term, "Senior Secured Indebtedness," is defined
under the Collateral Trust Agreement as Class A, Class B, or Class C Secured
Indebtedness (CTA Section 1.1(102)), each of which, in turn, is defined
substantially identically. the Companies designated the Series 3 and 4 Notes,
the Series 6 and 7 Notes, and the PATS as "Class C Indebtedness" in the
Companies' authorizing resolutions. "Class C Secured Indebtedness" is defined
as:
all Obligations in respect of the indebtedness arising under
or evidenced by the Financing Agreements listed under the
heading "Class C Secured Indebtedness" on Schedule 1 and (if
any) the Additional Secured Indebtedness designated as Class C
Secured Indebtedness pursuant to Section 2.6. (CTA Section
1.1(21) (emphasis supplied).)
Accordingly, Class C Secured Indebtedness (and therefore Senior Secured
Indebtedness), includes "Additional Secured Indebtedness" designated as Class C
Secured Indebtedness under Section 2.6 of the Collateral Trust Agreement.
As has been discussed above, indebtedness becomes Additional Secured
Indebtedness through the operation of Section 2.4 (the designation process).(24)
Section 2.6 describes the
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(23) Attached as Exhibit C is a compilation of the principal provisions of
the Collateral Trust Agreement that support the "non-registration"
interpretation of the CTA.
(24) Section 2.4 authorizes the Companies, by resolutions of their
directors, to designate certain types of indebtedness as Additional
Secured Indebtedness, "entitled to the security hereby created." (CTA
Section 2.4(1).) This language buttresses the nonregistration
interpretation as it suggests that upon designation (and without
registration) the debt becomes entitled to the security created by the
CTA.
On the other hand, the argument that compliance with Section 2.4 is all
that is required
(continued...)
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classification process. Because neither of these sections specifically requires
registration under Section 2.5 or otherwise, it is possible that indebtedness
can become Additional Secured Indebtedness without having to satisfy the
requirements of Section 2.5. The indebtedness at issue met the requirements of
both Sections 2.4 and 2.6 and therefore should constitute Senior Secured
Indebtedness secured by the security interest created by the Collateral Trust
Agreement.
Section 5.1, which sets forth the guaranty agreed to by each Pledgor
Subsidiary, bolsters the non-registration interpretation as that section
provides that: "Each Pledgor Subsidiary . . . unconditionally and irrevocably
guarantees, to the fullest extent permitted by Applicable Law, the due and
punctual payment . . . and performance of all Senior Secured Indebtedness of the
Obligors." Thus, the guaranties apply to Senior Secured Indebtedness, which has
no registration requirement. Finally, although not operative, one of the
recitals to the Collateral Trust Agreement states, in pertinent part, that "all
things necessary have been done and performed to make . . . additional
indebtedness of [a Company] when designated by either company as provided herein
as Additional Secured Indebtedness . . . entitled to the benefit of the Senior
----------
(24) (continued...)
for a party to become secured conflicts with the Collateral Trust
Agreement's definition of "Senior Secured Indebtedness." For
indebtedness to become Senior Secured Indebtedness, the indebtedness
must satisfy two conditions: it must (i) constitute Additional Secured
Indebtedness; and (ii) be classified under Section 2.6. Because there
is no classification requirement or a cross reference to Section 2.6 in
Section 2.4, it could be asserted that compliance with Section 2.4
alone is insufficient for indebtedness to become Senior Secured
Indebtedness.
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Lien."(25) (Recital 9(b) (emphasis supplied). Again, there is no reference to a
registration requirement.
Under this interpretation, holders of the unregistered (or, for the
Series 3 and 4 Notes, potentially incorrectly registered) debt would enjoy the
benefits of the Collateral Trust Agreement in the same manner as holders of
registered indebtedness.
3. ANALYSIS OF COMPETING ARGUMENTS
Each of the interpretations described above is supported by certain
provisions of the Collateral Trust Agreement. A court charged with interpreting
the Collateral Trust Agreement, however, will not look at the agreement's
individual provisions in a vacuum. Broad, 642 F.2d at 947. Rather, in construing
the Collateral Trust Agreement, courts applying New York law are required to
interpret the agreement in a way to read all provisions of the Collateral Trust
Agreement together in a consistent manner if that interpretation is possible.
Hudson-Port Ewen Assocs., 78 N.Y. 2d at 944.
a. REGISTRATION IS CONSISTENT WITH THE
PROVISIONS OF THE CTA
Taking into account all of the provisions of the Collateral Trust
Agreement, it is difficult to reconcile the "nonregistration" interpretation
with the other parts of the agreement. The first instance of this is in Section
3.1, which provides not only that the security interest in the Collateral is
granted to secure Senior Secured Indebtedness, but also that the security
interest is granted to the Collateral Trustee "for the equal and ratable benefit
of all Senior Secured Parties." As described above, the defined term "Senior
Secured Parties," leads to the definitions of
----------
(25) In contrast, the immediately preceding recital states that "[e]ach of
TLGI, LGII and the Pledgor Subsidiaries desires to grant security, the
granting of which is provided for by this Collateral Trust Agreement,
to the Trustee for the benefit of . . . any other party hereafter
becoming a Holder of . . . Class Indebtedness, to secure all such
Secured Indebtedness." (CTA Recital 8 (emphasis added).) By referring
to Holder, this recital arguably indicates that security will be
granted only to parties with registered debt.
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"Holder" and "Secured Party Representative," each of which requires registration
under Section 2.5 and therefore cannot be read in a consistent manner with the
"nonregistration" interpretation of the Collateral Trust Agreement.
Moreover, based on the references in Section 3.1 to Senior Secured
Parties and Senior Secured Indebtedness, one may conclude either (i) that the
security interest is granted to secure all Senior Secured Indebtedness of all
holders, whether or not those holders have registered or (ii) that the security
interest is granted to secure only Senior Secured Indebtedness that is held by
holders who have registered.
The "nonregistration" interpretation of the Collateral Trust Agreement
adopts the first conclusion. This conclusion, however, leads to the
contradictory result that, although all Senior Secured Indebtedness (whether or
not the applicable holder has registered) is secured by the security interest in
the collateral, the security interest is granted for the benefit of only those
parties who have registered. It also conflicts with the proviso in the
definition of Holder, which states that registration is a prerequisite to
becoming a Holder. In contrast, the alternative conclusion (that only registered
holders are covered) is consistent with all of the provisions of Section 3.1.
This position is reinforced by Section 8.10 of the Collateral Trust
Agreement. Under Section 8.10, distributions of proceeds of collateral are to be
made by the Collateral Trustee to "the Secured Party Representatives on behalf
of each Holder that they represent, respectively, in an amount equal to the
Senior Secured Indebtedness owing to each such Holder. . . . " (CTA Section 8.10
(emphasis supplied).) Proceeds are available only for "Holders," which as
mentioned above are only those who have registered under Section 2.5. Moreover,
although the definition of Senior Secured Indebtedness does not depend on
registration under Section 2.5, distributions
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are limited to the amount of Senior Secured Indebtedness "owing to a Holder,"
which again relates back to the registration requirements of Section 2.5 of the
Collateral Trust Agreement.
These distribution procedures appear to be inconsistent with the
"nonregistration" interpretation of the Collateral Trust Agreement. Under that
interpretation, there would be a class of holders who have not complied with the
registration requirement, but who nonetheless hold indebtedness that is secured
under the Collateral Trust Agreement. Under the mechanics of Section 8.10,
however, this class of holders would not be entitled to a distribution of the
proceeds of collateral because (i) they do not have a Secured Party
Representative and (ii) they are not Holders, as defined by the Collateral Trust
Agreement. In contrast, under the "registration" interpretation, this provision
can be reconciled. If a holder is not entitled to distributions, then the
indebtedness of that holder must not have been secured in the first place.
Further, Section 2.5(1) refers to indebtedness described in Section
2.4(1)(i), (ii), or (iii) as "proposed" Additional Secured Indebtedness. As
discussed above, Additional Secured Indebtedness is defined simply as
indebtedness that has satisfied the requirements of Section 2.4(1). The
"proposed" language of Section 2.5(1), however, implies that further steps must
be taken for that indebtedness to constitute Additional Secured Indebtedness.
Moreover, Section 2.5(2) provides that to "have the benefits of Additional
Secured Indebtedness" under the Collateral Trust Agreement, increases in
commitment amounts, principal amounts, and guaranties of the initial secured
indebtedness must have been registered. This language does not optionally
provide for, but rather mandates, registration of increases in principal amounts
of indebtedness. Mandatory registration for increases in principal amounts of
the initial indebtedness is inconsistent with the "nonregistration" view that
registration is not necessary for additional indebtedness.
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Finally, the "nonregistration" interpretation of the Collateral Trust
Agreement cannot easily be reconciled with the registration requirements of
Section 2.5. One suggested reconciliation is that Section 2.5 is not an
operative provision, but rather an administrative provision added to protect the
Collateral Trustee and provide it with a record upon which it can rely with
respect to the indebtedness secured under the Collateral Trust Agreement.
Because indebtedness could be added after the closing date, the Collateral
Trustee needed a mechanism to keep itself appraised of the identity of the
beneficiaries under the Collateral Trust Agreement over the life of the
agreement.(26) Similarly, it could be argued that registration was merely
intended as the mechanism by which a Secured Party Representative could obtain
the CTA lien to secure its costs and expenses and to provide the representative
with a right to appoint members of an Enforcement Committee.
On the other hand, merely labeling Section 2.5 as "administrative" does
not mean that compliance with it is optional. Contracts often contain
administrative provisions that can affect the substantive rights of the
parties.27 Where the parties to a contract do not intend for administrative
provisions to affect the rights of the parties, the contract typically says
so.28 The Collateral Trust Agreement contains no such provision.
----------
(26) As an example, section 2.3 states that "[t]he [Collateral] Trustee may
conclusively rely on the accuracy of the information certified to it by
each Secured Party Representative and shall have no duty whatsoever to
independently confirm its accuracy." (emphasis supplied).
(27) For example, credit agreements often require the borrower to give a
notice of borrowing by a certain time to receive loan proceeds on that
day. If the borrower fails to comply, then the lender is not required
to lend on that day. This is an administrative function that affects
the rights of the parties.
(28) A typical provision with respect to a register would read: "Any failure
by a Holder or the Trustee properly to record any transaction on the
register does not affect such Holder's or Trustee's rights under this
Agreement."
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Further, interpreting Section 2.5 solely as an administrative provision
is difficult to square with the structure of the Collateral Trust Agreement. One
of the primary duties of the Trustee under the Collateral Trust Agreement is to
distribute proceeds realized from exercising its remedies under the Collateral
Trust Agreement. Not requiring registration is arguably inconsistent with this
duty. An example is illustrative. If an Enforcement Event were to have occurred
and the Collateral Trustee had liquidated the Collateral, then under Section
8.10, the proceeds are to be distributed to the Secured Party Representatives.
If a holder of indebtedness had failed to register with the Collateral Trustee,
then that holder would not be entitled to any of the proceeds. There is nothing
in the Collateral Trust Agreement that would provide a remedy for such a holder.
In view of this result the registration requirements appear to go beyond the
province of "trustee protection" provisions.
In sum, the "nonregistration" interpretation of the Collateral Trust
Agreement is difficult to reconcile with various provisions of the CTA. Because
a court interpreting the Collateral Trust Agreement is required to read all of
its provisions consistently together, a court is less likely to adopt the
"nonregistration" interpretation as the correct interpretation of the agreement.
On the other hand, the competing "registration" interpretation is also not free
from considerable litigation risk. As explained below, adoption of the
"registration" interpretation also leads to inconsistencies and conflicts within
the Collateral Trust Agreement.
b. POTENTIAL COUNTERARGUMENT
The registration interpretation of the CTA rests heavily on the
definition of "Holder." This definition, however, poses several issues,
especially in light of its interaction with the definition of Secured Party
Representative and Section 2.5.
When read together with the definition of Secured Party Representative,
both definitions become circular because each term is used in defining the other
term (e.g., a Secured Party
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Representative is an agent of a Holder, while a Holder is a holder who has a
Secured Party Representative). In addition to these circularities, the
definition of "Holder" arguably conflicts with other provisions of the
Collateral Trust Agreement:
- First, if the definition of Holder requires a Secured Party
Representative to register under Section 2.5, then the
definition conflicts with the definitions of Secured Party
Representative and Additional Secured Indebtedness
Registration Statement. Under the definition of "Additional
Secured Indebtedness Registration Statement," a representative
becomes a Secured Party Representative by being designated in
an Additional Secured Indebtedness Registration Statement.
Under the definition of "Additional Secured Party
Representative," an instrument becomes an Additional Secured
Indebtedness Registration Statement by being in the form of
Exhibit A to the Collateral Trust Agreement and being signed
by the Companies and the related Secured Party Representative.
Taken together, these definitions indicate that a
representative can become a Secured Party Representative
without having to register the registration statement. This
would arguably conflict with the definition of "Holder," which
mandates that a representative must become a Secured Party
Representative under Section 2.5. It may also conflict with
Section 2.5 itself, which states that "to become a Secured
Party Representative [under the Collateral Trust Agreement]
each such representative" must register.
- Section 2.5(1) states that agents or like representatives of
Holders (or, if the Holders are unrepresented, the Holders
themselves) "may become" Secured Party Representatives under
the Collateral Trust Agreement by delivering a registration
statement. But the second sentence of the definition of
"Secured Party Representative" provides that a Holder who may
be represented, but whose representative has not been
designated in an Additional Secured Indebtedness Registration
Statement, shall be the Secured Party Representative for
itself. (CTA Section 1.1(100).) If this is true, then a
conflict appears because Section 2.5(1) indicates that only
representatives and unrepresented Holders can become Secured
Party Representatives. The same problem exists within the
definition of "Holder." The proviso in that definition states
that a Secured Party Representative must have become a Secured
Party Representative under Section 2.5, but Section 2.5 is
silent as to a represented Holder who becomes its own Secured
Party Representative under that definition.
- Another issue arises from the capitalization of the word
"Holder." The first sentence of Section 2.5(1) refers to a
"Holder of any proposed Additional Secured Indebtedness."
"Holder," however is defined to mean those who already have
registered. A "holder" of proposed indebtedness should have a
lowercase "h." A similar issue arises from the use of the word
"holder" (with a lowercase "h") in the last sentence of
Section
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2.5(1).(29) Because this sentence deals with the situation in
which a registration statement has already been registered,
and if the definition of "Holder" requires registration, then
why did the drafters of the Collateral Trust Agreement not use
the word "Holder" (with an uppercase "H") here?
Although these inconsistencies cannot be reconciled, they exist
primarily in a vacuum. In a complicated document such as the Collateral Trust
Agreement, with all of its attendant defined terms, there is always the
possibility that a drafting disconnect can lead to terms and provisions that, on
their own, do not precisely harmonize with the rest of the document, but when
read within the context of the entire document are not in direct conflict. In
these circumstances, technical drafting inconsistencies conceivably could be
disregarded in arriving at an interpretation that harmonizes as much of the
document as possible.
C. GUARANTIES
In addition to granting a security interest in the collateral, the
Collateral Trust Agreement also provides for guaranties of the Senior Secured
Indebtedness. Unlike the provisions in the CTA that concern collateral, the
guaranty provisions contain no cross-references or definitions that connect to
the registration requirement. Under Section 5.1, each Pledgor guarantees the
payment of the Senior Secured Indebtedness. As discussed earlier, the definition
of Senior Secured Indebtedness and the definitions to which it leads are all
independent of any registration requirement. Thus, a literal interpretation of
the guaranty language in the CTA would suggest that registration is not
necessary for a party to benefit from the guaranties. Bolstering this argument
is the language of the CTA's registration section, section 2.5(1), which
essentially states that registration is necessary only for a party to be
entitled to the benefits of the security interest in the collateral. There is no
mention of the guaranties. Therefore, although failure to
--------
(29) "Upon such delivery, acceptance and registration [of a registration
statement], such representative or holder shall have the rights of a
Secured Party Representative set out in this Collateral Trust
Agreement." (emphasis supplied).
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register may exclude a holder from participating in the collateral, it will
likely not vitiate the guaranties.
On the other hand, this conclusion conflicts in some respects with the
"registration" interpretation of the Collateral Trust Agreement. Based on its
analysis of Section 3.1,(30) a court could conclude that the interpretation that
is more consistent with the provisions of the Collateral Trust Agreement as a
whole is that only indebtedness held by registered holders is secured by the
collateral. Further, as discussed more thoroughly above, Section 2.5(31) implies
that only indebtedness held by parties who have registered becomes Additional
Secured Indebtedness and, in turn, Senior Secured Indebtedness. Thus, an
underlying premise of the "registration" interpretation of the Collateral Trust
Agreement is that Senior Secured Indebtedness must be held by a registered
holder. This is the case even though the definition of Senior Secured
Indebtedness makes no reference to any registration requirements. Because the
guaranties guarantee Senior Secured Indebtedness, adoption of the "registration"
interpretation may be viewed as mandating the conclusion that the security
interests would only be available to holders who have registered.
Nonetheless, we believe that a court will more than likely conclude
that registration is not necessary for holders to benefit from the guaranties,
as opposed to the security interests in the collateral. Unlike the contractual
provisions regarding collateral, none of the provisions in the CTA that
addresses the guaranties contains any reference to a registration requirement
nor uses any term that refers to registration. Moreover, a court can justify a
different result for the
--------
(30) Under Section 3.1, the Pledgors granted a security interest in favor of
the Senior Secured Parties to secure the Senior Secured Indebtedness.
(31) Section 2.5(1) makes reference to "proposed" Additional Secured
Indebtedness, while Section 2.5(2) requires registration to "have the
benefits of Additional Secured Indebtedness" under the Collateral Trust
Agreement.
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guaranties on the basis that registration serves a purpose with respect to the
collateral, but arguably serves no function in the case of the guaranties. The
security interest provided in the CTA is granted in favor of the Collateral
Trustee, to be held for the benefit of the Holders. Accordingly, a court could
reason that registration with the actual holder of the security interest is
necessary in order for noteholders to benefit from, or share in, that security
interest. In contrast, the guaranties guarantee "Senior Secured Indebtedness,"
which consists of obligations that arguably run directly between the companies
and the noteholders, and which can be enforced independent of the Collateral
Trustee. Thus, a court could conclude that registration with a Collateral
Trustee, who merely holds the collateral, would serve no purpose and, therefore,
support the view that registration would not be required. Nonetheless, as with
the "registration" interpretation for the collateral, this outcome is uncertain
and is subject to a material counterargument that it would result in
inconsistent interpretations of the same language in the CTA.
D. THE EFFECT OF AMBIGUITY
The preceding analysis examines exclusively the contractual language of
the Collateral Trust Agreement. It is possible, however, that a court would find
the contractual language to be ambiguous and thus would examine the contracting
parties' intent.
A provision of an agreement is ambiguous if reasonable people could
disagree as to the parties' intentions, considering the context of the entire
agreement. See, e.g., IV Servs. of America, Inc. v. Trustees of Am. Consulting
Engineers Council Ins. Trust Fund, 136 F.3d 114, 119 (2d Cir. 1998), citing
O'Neil v. Retirement Plan, 37 F.3d, 55, 59 (2d Cir. 1994). If a contract is
ambiguous, then a court will consider extrinsic evidence of the contracting
parties' intent. See,
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e.g., Haber v. St. Paul Guardian Ins. Co., 137 F.3d 691, 695 (2d Cir. 1998).(32)
Here, it is uncertain whether a court will find the contractual language to be
ambiguous.
On the one hand, the Collateral Trust Agreement was negotiated by
sophisticated parties who were represented by counsel. The Collateral Trust
Agreement is 80 single-spaced pages long and filled with provisions spelling out
the parties' obligations in great detail. In these circumstances, courts are
reluctant to find contractual language to be ambiguous. See, e.g., New Bank of
New England, N.A. v. The Toronto Dominion Bank, 768 F. Supp. 1017, 1022
(S.D.N.Y. 1991).
On the other hand, this memorandum presents two competing
interpretations of the registration provisions of the CTA. The memorandum also
notes that some of the relevant definitions in the CTA are circular, and that
there appears to be no one interpretation of the contractual language that
reconciles all of the contractual provisions. It is thus possible that a court
would find the contractual language to be ambiguous. The court would then look
at the parties' intent.
----------
(32) Based on the CTA draft chain, it appears that the attorneys for Bank of
Montreal were the principal drafters of the CTA, although the other
parties commented extensively on the drafts. Under New York law,
contractual ambiguities are typically construed against the drafter.
Jacobson v. Sassower, 489 N.E.2d 1283, 1284 (N.Y. 1985) ("In cases of
doubt or ambiguity, a contract must be construed most strongly against
the party who prepared it, and favorably to a party who had no voice in
the selection of its language"); In re Arbitration between Saranac
Central School District and Sweet Associates, Inc., 686 N.Y.S.2d 869,
870 (N.Y. App. Div. 1998) ("It is also well settled that contract
ambiguities should be construed against the drafter."); Bernstein v.
Sosnowitz, 603 N.Y.S.2d 493, 494 (N.Y. App. Div. 1993) ("[I]t is well
settled that any ambiguity which might exist must be construed against
the defendant as drafter of the agreement."); Zaremba v. Interface
Flooring Systems, Inc., 600 N.Y.S.2d 120, 122 (N.Y. App. Div. 1993) ("A
document is to be strictly construed against its drafter, and any
ambiguity will be resolved against him or her."). Accordingly, it could
be argued that any ambiguities in the Collateral Trust Agreement should
be construed against Bank of Montreal.
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If a court examines the intent of the contracting parties, then there
are again competing arguments to be made. The Companies and State Street plainly
intended the Series 3 and 4 Notes, the Series 6 and 7 Notes, and the PATS to be
secured. The Company had its directors designate the additional indebtedness as
secured indebtedness as required by the CTA, executed Additional Secured
Indebtedness Registration Statements, which then appeared in the closing
documents, and repeatedly stated in public filings that this debt was secured.
State Street, too, executed the Additional Secured Indebtedness Registration
Statements.
Those intentions, however, were as of October 1996, September 1997, and
May 1998, long after the CTA was executed in May 1996. Evidence of
contemporaneous intent is less revealing.
The CTA plainly anticipates that it can be used to secure future
indebtedness. The CTA does not, however, provide that it will secure all future
indebtedness. The contracting parties understood that circumstances would change
over time and thus retained flexibility to secure later indebtedness as desired.
There thus may be little evidence of intent, as of May 1996, to secure any
particular issuance of debt under the CTA. Moreover, a court might focus on the
parties' more specific intent as to the registration provisions themselves. For
example, the registration statements, including the form attached to the CTA,
recite that acceptance and recordation of the Additional Secured Indebtedness
Registration Statements is necessary for the debt to be treated as financing
entitled to the benefits of the CTA. Thus, when the intent of the parties is
viewed broadly, the parties may have intended the later debt to be secured. When
the intent of the parties is examined more narrowly, however, a court may
conclude, depending on the testimony of the witnesses who are proffered, that
the parties intended registration of Additional Secured Indebtedness
Registration Statements to be a required act to obtain the benefits of the
security and guaranties.
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E. CONCLUSION
The "nonregistration" interpretation conflicts with a variety of
provisions in the CTA. Although the "registration" interpretation better
reconciles all of the provisions of the Collateral Trust Agreement, even that
interpretation cannot be reconciled completely with every provision of the
Collateral Trust Agreement. Moreover, even if a court adopts the "registration"
interpretation, it may nonetheless conclude that the Series 3 and 4 Notes are
properly registered and may further conclude that the holders of the Series 3
and 4 Notes, the Series 6 and 7 Notes, and the PATS are entitled to the benefits
of the guaranties. Because neither interpretation can be fully reconciled with
all the provisions of the CTA, proponents of either the registration or
nonregistration view face substantial litigation risk.
II. EQUITABLE DOCTRINES
Under the "registration" interpretation, the Collateral Trust Agreement
requires that, to obtain secured status as Additional Secured Indebtedness under
the CTA, an Additional Secured Indebtedness Registration Statement reflecting an
accurate principal amount must be submitted to the Collateral Trustee. Even if
that interpretation is adopted by a court and applied to each of the series of
notes at issue, however, contract law and equitable doctrines arguably provide a
basis for treating the holders of the Series 3 and 4 Notes, the Series 6 and 7
Notes, and the PATS as entitled to the benefits of the CTA even absent the
delivery of an accurate Additional Secured Indebtedness Registration Statement.
A. SALIENT FACTS
It cannot be disputed that all of the parties to each transaction at
issue intended the Notes to be covered by the Collateral Trust Agreement. Each
of the Offering Memoranda/Prospectuses for the notes referred to the notes as
secured under the CTA. In addition, the board of directors of each Company
adopted resolutions authorizing each series of indebtedness and designating
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each series as secured indebtedness under the Collateral Trust Agreement.
Further, each Company, together with State Street, executed Additional Secured
Indebtedness Registration Statements for each series. These fully executed
Additional Secured Indebtedness Registration Statements were in place at the
closings of the Series 3 and 4 Notes, and the PATS and, in the case of the
Series 6 and 7 Notes, were delivered to the underwriter's counsel (at whose
offices the closing occurred) the day following the closing of such notes.
Copies of the executed Additional Secured Indebtedness Registration Statements
are included in each of the relevant sets of closing documents.
After the issuance of each series of indebtedness intended to be
secured under the CTA, TLGI consistently referred to the notes as secured under
the CTA in each of its public securities filings. Furthermore, all the other
parties who were secured by the CTA had knowledge of this additional secured
debt. The Wachovia Credit Agreement and the Bank of Montreal Credit Agreement
expressly permitted additional secured debt under the Collateral Trust Agreement
and both Credit Agreements contained reporting requirements that put the lenders
on notice of all outstanding debt, including the debt in question. Later
amendments to the Credit Agreements expressly identified the Series 3 and 4
Notes, and the PATS as senior obligations. Further, the prospectuses for the
Series 1 and 2 Notes, and the Series 5 Notes contained information regarding
pari passu additional secured indebtedness including, in the case of the Series
5 Notes, a direct reference to the Series 3 and 4 Notes, and the indenture
trustee for all the notes under the CTA, other than the Series 5 Notes, is State
Street.
Although the Collateral Trust Agreement contemplated registration of
additional series of debt with the Collateral Trustee, it appears that, before
the Petition Date, no party to the CTA actually examined the Secured
Indebtedness Register or the contents of any registration statement in the
possession of the Collateral Trustee. In addition, no party appears to have been
aware of
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any potential problem regarding the submission of registration statements until
well after the Petition Date. In short, there is currently no evidence to
indicate that any party ever relied on the Secured Indebtedness Register for any
purpose.
The parties apparently did not literally comply with the CTA's
registration requirements with respect to any of the issuances of additional
indebtedness. In none of the cases did the Collateral Trustee actually maintain
a Secured Indebtedness Register nor did it ever record the information provided
in any of the registration statements in a document of any kind. Additionally,
in the case of the Series 3 and 4 Notes, a correct registration statement was
apparently not delivered to the Collateral Trustee or, if it was, it was not
placed in the file the Collateral Trustee opened to hold registration
statements. Similarly, in the case of the Series 6 and 7 Notes, and the PATS,
the registration statements were apparently never delivered to the Collateral
Trustee. Moreover, in the case of two other debt facilities that the parties
apparently intended to secure under the CTA, the registration procedures again
were not followed. A registration statement was prepared and executed in
connection with a Bank of Montreal letter of credit facility, but was apparently
not delivered to the Collateral Trustee. Likewise, a registration statement was
prepared and executed in connection with an interest rate call option facility
with respect to the PATS between LGII and UBS. That registration statement also
was never delivered to the Collateral Trustee.
Accordingly, in no case of the issuance of additional secured
indebtedness did the parties literally follow each and every step of the
registration process referred to in the Collateral Trust Agreement.
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B. REFORMATION
Reformation provides a basis on which to treat as secured the Series 3
and 4 Notes.(33) "Under New York law, a contract may be reformed if there is a
mutual mistake of fact . . . . Also referred to as 'scrivener's error,' mutual
mistake occurs where the parties have reached a real and existing agreement on
particular terms and subsequently find themselves bound to a writing which does
not accurately express their agreement." The U.S. Russia Investment Fund v. Neal
& Company, Inc., 1998 U.S. Dist. LEXIS 13581 (S.D.N.Y. 1998) (internal
quotations and citations omitted). "In a case of mutual mistake, the parties
have reached an oral agreement and, unknown to either, the signed writing does
not express that agreement." Chimart Assocs v. Paul, 66 N.Y.S.2d 570 (N.Y.
1986).
The Additional Secured Indebtedness Registration Statement for the
Series 3 and 4 Notes arguably involves just this sort of scrivener's error. The
outstanding principal amount does not reflect the parties' mutual understanding
of that amount. Additionally, the very same sentence of the registration
statement refers to an original principal amount of $350 million. There is no
dispute that all of the parties to the notes and the registration statement
intended the notes to be secured under the CTA to the extent of $350 million and
believed that Additional Secured Indebtedness Registration Statements to this
effect had been executed and delivered to the Collateral Trustee. Thus, the
mistake appears to satisfy the requirement that it must have occurred when the
parties reduced their agreement to writing. Lent v. Cea, 619 N.Y.S. 2d 166
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(33) Resort to the reformation doctrine assumes that the Series 3 and 4
Notes are determined by a court to be unsecured because they did not
sufficiently meet the registration requirements of the CTA.
Consideration of reformation only becomes necessary, however, if a
court (i) adopts the "registration" interpretation, (ii) determines
that the reference to the correct original principal amount in the
Additional Secured Indebtedness Registration Statement is insufficient
to comply with the registration requirements, and (iii) the "manifest
error" language applicable to information in the Secured Indebtedness
Register cannot be used to correct the error.
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(3d Dept. 1994). The way in which the mistake occurred is not determinative of
the parties' right to reformation. In re Brucap Assocs., 158 B.R. 10 (Bankr.
E.D.N.Y. 1993) ("Where there is no mistake about the agreement, and the only
mistake alleged is in the reduction of that agreement to writing, such mistake
of the scrivener, or of either party, no matter how it occurred, may be
corrected." (quoting Harris v. Uhlendorf, 24 N.Y.2d 463, 467 (1969)).
If a court were to permit a party to proceed with a reformation claim,
the party would be permitted to introduce evidence, in this case the closing
documents and the drafts of the registration statements, among others, to show
that the $0 outstanding principal amount does not accord with their agreement.
"Because the thrust of a reformation claim is that a writing does not set forth
the actual agreement of the parties, generally neither the parol evidence rule
nor the Statute of Frauds applies to bar proof, in the form of parol or
extrinsic evidence, of the claimed agreement." Chimart, 66 N.Y.S.2d at 573.
Although the evidence of a mutual mistake must be "evidence of the clearest and
most satisfactory character," it seems likely that the closing documents,
particularly the executed registration statement with the proper amount, and
drafts, as well as the prospectus, and TLGI's subsequent securities filings, all
of which refer to the correct principal amount, would satisfy this standard.
Porter v. Commercial Cas. Ins. Co., 292 N.Y. 176, 181 (1944).
In one bankruptcy case, a security agreement and financing statement
failed to identify an individual as a secured party, although they did identify
his corporation as a secured party. The bankruptcy court explained that,
provided the individual could establish the prerequisites for reformation, the
security agreement could be reformed to reflect the parties' intent. In re
Clarence Graphics, 201 B.R. 46 (Bankr. W.D.N.Y. 1996). That court, however, went
on to distinguish the security agreement from the financing statement at issue
in the case. The financing statement could not be reformed because "it functions
not to memorialize the
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agreement of the signatories but to provide notice to third parties." Id. Thus,
"the appropriate test of a financing statement's adequacy is not one of intent
but that which is set forth in Section 9-402 of the Uniform Commercial Code."
Id. See also In re Pacific Trencher & Equipment, Inc., 735 F.2d 362 (9th Cir.
1984) (declining to reform a financing statement under the California Commercial
Code because the error in the financing statement "was seriously misleading
viewed from the standpoint of a potential creditor reviewing the records.").
Because the registration statement at issue here is not a public document
designed to put third parties on notice of a secured party's status, it arguably
should be regarded as an element of the security agreement, and thus a candidate
for reformation, rather than as a financing statement that cannot be reformed.
There is some risk, of course, that a court might treat the
registration statement as a financing statement since under the terms of the
CTA, the Secured Indebtedness Register that the Collateral Trustee theoretically
maintained was available for inspection by any Secured Party Representative. In
fact, however, according to the testimony of the Collateral Trustee, no Secured
Party Representative examined the Secured Indebtedness Register before the
Petition Date. Because both the Collateral Trustee and the other secured parties
in fact knew or could have known of the correct principal amount by reviewing
TLGI's securities filings, the registration statement should be reformed.
Moreover, another equitable factor weighs in favor of reforming the
Additional Secured Indebtedness Registration Statement for the Series 3 and 4
Notes. The Collateral Trust Agreement has detailed provisions governing the
parties' conduct if an Enforcement Event occurs. If the Trustee realizes
proceeds of any security, then the Trustee may ask Secured Party Representatives
to certify the amount of secured indebtedness they represent:
Prior to distribution of any funds to any Secured Party
Representative, the Trustee may request a certificate from
such Secured Party Representative as to the amounts of Secured
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Indebtedness of the types described in clauses second, third,
fourth and fifth owing to such Secured Party Representative
and the Holders (if any) it represents. The Trustee may
conclusively rely on such certificate received by it in making
any distributions pursuant hereto. (CTA Section 8.10 at 53.)
This provision is not mandatory. The Trustee "may," but is not required to, ask
for certificates. The provision nonetheless suggests that inaccuracies in the
amounts outstanding shown on Additional Secured Indebtedness Registration
Statements can be revised to ensure the correct distribution of proceeds. The
provision thus adds force to the argument in favor of reforming the statement
for the Series 3 and 4 Notes.
In contrast to the holders of the Series 3 and 4 Notes, the holders of
the Series 6 and 7 Notes, and the PATS cannot point to a particular provision of
the Collateral Trust Agreement or the registration statement that does not
conform to their prior agreement. "Because the purpose of reformation is to make
the written instrument conform to the real agreement or intention of the
parties, a definite intention or agreement of the parties must have preceded the
instrument in question. The prior agreement or intention must differ from the
instrument at issue, otherwise there is no ground for relief." 16 N.Y.Jur. 2d
(Cancellation and Reformation of Instruments) Section 55. Absent a prior
agreement that a registration statement is unnecessary, the holders of the
Series 6 and 7 Notes, and the PATS are probably not entitled to reformation.
There, the parties made a mistake in complying with the terms of the CTA, not in
reducing those terms to writing or in understanding the meaning of those terms.
C. EQUITABLE DOCTRINES
Nonetheless, general equitable doctrines provide a substantial basis on
which to treat the Series 6 and 7 Notes, and the PATS as secured, and provide an
additional basis on which to treat the Series 3 and 4 Notes as secured. As an
initial matter, a court may decide to consider equitable principles for two
fundamental reasons. First, it is indisputable that the Companies
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sold and the noteholders bought the Series 3 and 4 Notes, the Series 6 and 7
Notes, and the PATS with the belief and the intention that the notes would be
secured by the CTA. Accordingly, a court will be confronted with the question of
whether it is equitable to deprive these noteholders of this bargained-for value
due to a failure to record information with the Collateral Trustee. Second, all
the information available to the Companies' other creditors indicated that these
notes were, in fact, secured. The court will thus face the further question of
whether it is equitable for those creditors to receive a windfall based upon the
absence of information in a register to which they never had access or in a
majority of cases (including the case of all unsecured creditors) even a right
of access.
When faced with a similar situation, the Second Circuit chose to invoke
equitable principles to avoid what it perceived to be an unjust result. In The
Prudential Insurance Co. of America v. S.S. American Lancer, 870 F.2d 867 (2d
Cir. 1989), senior lenders to a ship owner agreed to a restructuring of their
outstanding secured indebtedness. The restructuring included an agreement by the
senior lenders to a moratorium, and in connection with that agreement The
Prudential Insurance Company of America ("Prudential") agreed to amend its
senior mortgage to reflect a reduction in the outstanding balance of its loan
from $126 million to $92,885,000. General Electric Capital Corporation ("GECC")
held a junior mortgage on the same vessels that secured Prudential's senior
lien, and GECC consented to the restructuring along with all the other creditors
with mortgages against the vessels. Notwithstanding Prudential's intention to
amend its mortgage to reflect a loan balance of $92,885,000, Prudential
inadvertently amended the mortgage to state an outstanding principal balance of
$92,885 instead of $92,885,000. Despite the restructuring, the ship owner's
financial condition continued to deteriorate and the owner and its affiliates
thereafter filed chapter 11 proceedings.
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In the bankruptcy proceedings, the debtor, GECC and other creditors
contended that Prudential's first mortgage was limited to $92,885, the mistaken
amount set forth in the amended mortgage. On appeal, the Second Circuit rejected
GECC's claim that Prudential should be considered secured only to the extent of
the mistaken amount stated in a mortgage amendment. The Second Circuit instead
held that Prudential's first preferred ship mortgage was valid for the amount
that Prudential and the debtor originally intended, not the amount erroneously
recorded on the mortgage amendment. In reaching this result, the Court noted
that GECC conceded, as it had to, that the $92,885 amount in the mortgage
amendment was the result of a purely clerical error and that Prudential and the
debtor intended that Prudential would have a first preferred ship mortgage in
the amount of $92,885,000. Moreover, the Court cited GECC's further concessions
that it:
(i) knew at all times that the Prudential debt amounted to
$92,885,000.00; (ii) knew that [the debtor] and Prudential
both intended to execute, and believed that they had executed,
an agreement extending to Prudential a first preferred ship
mortgage in the amount of $92,885,000.00; and (iii) did not
know until well after [the debtor] went into bankruptcy that
the corollary mortgage amendment mistakenly stated the amount
of Prudential's first preferred ship mortgage to be only
$92,885.00.
Id. at 871. Thus, for the Second Circuit it was highly significant that the
creditors were aware of the correct principal amount, were aware that the
parties intended to record a mortgage in that amount, and that the lower amount
was merely the result of a clerical error, and that no creditor was even aware
of the error until after the bankruptcy cases were filed.
Based on these facts, the court concluded: "If the preference is
recognized in the amount intended by all the parties, therefore, the [junior
mortgagee] will have lost nothing to which it was entitled or that it expected
to gain. . . . If the typographical error reduced [the senior mortgagee's]
preference by some $92 million, however, [the junior mortgagee] will be the
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beneficiary of a major windfall. WE KNOW OF NO GENERAL PRINCIPLE OF LAW OR
EQUITY THAT WOULD SUPPORT WHAT IS SO OBVIOUSLY AN UNJUST RESULT . . . ." Id.
(emphasis added).
This line of analysis falls within the unjust enrichment doctrine. "An
action to recover on the theory of unjust enrichment is based on the equitable
principle that a person must not be allowed to enrich himself unjustly at the
expense of another. Unjust enrichment does not require a wrongful act by the one
enriched and only requires that equity and good conscience demand that the one
enriched not retain the property held." 22A N.Y.Jur. 2d (Contracts) Section 512.
Where a subsequent mortgagee challenged the validity of a
prior-recorded mortgage because that mortgage improperly referred to guaranties
that it was intended to secure, the Bankruptcy Court for the Eastern District of
New York declined to treat the mortgage as invalid. Because the intentions of
the parties were clear, the subsequent mortgagee would receive "a windfall if
the [prior mortgage were] held invalid due to its scrivener's error." In re
Brucap Associates, 158 B.R. 10, 14 (Bankr. E.D.N.Y. 1993). See also In re McLean
Ind., 132 B.R. 271 (Bankr. S.D.N.Y. 1991) ("The Second Circuit has acknowledged
that where the intentions of parties are clear, the court will not elevate form
over substance and allow a windfall to a party." (citing Prudential Ins. Co. v.
S.S. American Lancer, 870 F.2d 867 (2d Cir. 1989)).
This general equitable anti-windfall theory may apply here to preserve
the secured status of the holders of the Series 6 and 7 Notes, and the PATS. All
of the Companies' creditors knew (or should have known) based on a variety of
information, including TLGI's public securities filings, the amount of the notes
and that the notes were intended to be secured. The creditors also knew or
should have known that the parties to the notes believed they were secured.
Further, it was not until after the Petition Date that any party discovered that
the requisite registration statements either had errors or did not appear in the
Collateral Trustee's files. As a consequence,
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any party contesting the status of the Series 6 and 7 Notes, and the PATS under
the Collateral Trust Agreement would have to concede that the failure to file
the registration statements was due to a mistake. As in the Prudential case,
creditors will have lost nothing if the notes are treated as secured and simply
would receive a windfall were these notes now treated as unsecured. Finally, the
Second Circuit's reasoning in Prudential is arguably not limited to a
scrivener's error as is the case with the reformation doctrine. To the contrary,
the Prudential analysis could potentially be applied to any type of ministerial
error.
If anything, the facts surrounding the issuance of the Series 6 and 7
Notes, and the PATS arguably present an even stronger case for applying the
equitable principles espoused in Prudential. In this case, unlike Prudential,
the only documents filed in the public record; i.e., the financing statements,
are not defective. The public thus was properly placed on constructive notice
that any debt entitled to the benefits of the CTA was entitled to the collateral
granted therein. Moreover, all the public documents that were issued regarding
that debt stated that the Series 6 and 7 Notes, and the PATS were secured. Thus,
all creditors were on notice that the Series 6 and 7 Notes, and the PATS were
intended to be covered by the CTA. The only information that indicated
otherwise, contained in the Collateral Trustee's purported Secured Indebtedness
Register, was never reviewed by any party. This contrasts significantly with
Prudential, where the error occurred in a public document, the mortgage
amendment, on which creditors by law were entitled to rely.(34) Based on the
strong similarities between the current issue regarding the status of the Series
6 and 7 Notes, and the PATS, and the facts in Prudential, a court could adopt
the Second Circuit's analysis and determine that the notes, notwithstanding the
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(34) The mortgage amendment in Prudential did, however, contain the
financing agreement, which reflected the correct amount, as an exhibit.
870 F.2d at 870.
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absence of registration by the Collateral Trustee, are entitled to the benefits
of the Collateral Trust Agreement.
The Second Circuit's Prudential analysis could also be applied to the
Series 3 and 4 Notes if the court finds the reformation argument to be
unavailing. The error that exists in the Additional Secured Indebtedness
Registration Statement for the Series 3 and 4 Notes is a clerical or
typographical error similar to the error at issue in Prudential. Moreover, the
parties who would seek to benefit from the error were aware of the true facts
and no party relied on the incorrect information. In view of the substantial
similarity between the facts in Prudential and the facts involving the Series 3
and 4 Notes, a court could very well apply the Prudential analysis to the Series
3 and 4 Notes and invoke equity to avoid an unjust result.
Nonetheless, there is substantial uncertainty as to whether a court
would apply the Prudential reasoning or other equitable doctrines to either the
Series 3 and 4 Notes, or the Series 6 and 7 Notes and the PATS. There is very
little case law applying equitable doctrines in factual situations similar to
this case. Moreover, a court may determine that equitable principles should not
be used to override the intent of the parties as embodied in a written contract,
particularly where, as here, the contract is complex and was negotiated and
agreed to by sophisticated parties. Further, a court may view the Prudential
case as inapplicable to the Series 6 and 7 Notes, and the PATS, reasoning that
Prudential was, in effect, a reformation case involving a scrivener's error.
There is no scrivener's error with respect to these notes.
Because of their very nature, equitable principles are applied on a
case-by-case basis at the discretion of the court. Accordingly, there is no
assurance that a court will utilize any equitable doctrine in resolving what is,
at its core, a contractual dispute.
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III. OTHER POSSIBLE ARGUMENTS
A. WAIVER
Because it appears that the Collateral Trustee did not actually
maintain a Secured Indebtedness Register as required under Section 2.3 of the
Collateral Trust Agreement, it may be argued that the Collateral Trustee waived
the right to require the filing of an accurate or any registration statement for
Additional Secured Indebtedness. "Waiver may be established as a matter of law
by the express declaration of a party or by the party's undisputed acts or
language which is so inconsistent with a purpose to stand on the contract
provisions as to leave no opportunity for a reasonable inference to the
contrary." 22A N.Y.Jur. 2d (Contracts) Section 370.
This argument, however, seems to fail for two reasons. First, the CTA
itself provides that the agreement cannot be amended except by "a writing
executed by the [Collateral] Trustee and each of the Pledgors. . . ." (CTA
Section 13.4.) There was certainly no waiver or amendment in writing by the
Collateral Trustee and the Pledgors. Second, because all of the Secured Party
Representatives (not just the Collateral Trustee) had the right to examine the
Secured Indebtedness Register under Section 2.3 of the Collateral Trust
Agreement, any waiver by the Collateral Trustee would not operate to vitiate the
other Secured Party Representative's rights under the registration provision.
There is no evidence that the Secured Party Representatives waived the right to
examine the Secured Indebtedness Register or the corresponding requirement of
filing an accurate Additional Secured Indebtedness Registration Statement
containing information to be used in the Secured Indebtedness Register. The case
law does not support the suggestion that an asserted failure by the Collateral
Trustee to fulfill its obligations under the Collateral Trust Agreement would
operate as a waiver of other parties' rights under the Collateral Trust
Agreement.
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B. IMPOSSIBILITY
Similarly, it may be suggested that an impossibility argument may
provide a basis on which to treat the unregistered notes as secured. According
to this argument, because the Collateral Trustee failed to keep a Secured
Indebtedness Register as literally required by Section 2.3 of the Collateral
Trust Agreement, it was impossible to comply with the full registration
requirements of the Collateral Trust Agreement. While under this approach it may
be true that it was impossible for the holders to "deliver to the Trustee, for
acceptance and registration in the Secured Indebtedness Register, an Additional
Secured Indebtedness Registration Statement" as Section 2.5 of the Collateral
Trust Agreement requires, it was not impossible for the holders of proposed
Additional Secured Indebtedness to file the registration statements. "The excuse
of impossibility is generally limited to destruction of the means of performance
by an act of God, vis major, or by law. Typically, impossibility excuses a
party's performance only when the destruction of the subject matter of the
contract or the means of performance renders performance objectively
impossible." 22A N.Y.Jur. 2d (Contracts) Section 384. Even if the Collateral
Trustee breached certain of its obligations under the Collateral Trust
Agreement, this would not justify the failure to deliver to the Collateral
Trustee the requisite registration statements under the doctrine of
impossibility.
C. DELIVERY TO AN AGENT
One could argue that Bankers Trust actually received delivery of the
correct Additional Secured Indebtedness Registration Statement for the Series 3
and 4 Notes through its counsel, Michele Ross of Kramer Levin. The available
documents indicate that Michelle Johnson (of Thelen) faxed drafts of the
Additional Secured Indebtedness Registration Statement for the Series 3 and 4
Notes to Michele Ross (representing the Collateral Trustee) on October 2 and
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October 3, 1996. Both drafts reflected the correct current outstanding amount of
$350 million. Ross may have sent those drafts to Bankers Trust. If she did,
Bankers Trust did not retain them in its registration statement file. Whether
Ross did or did not forward the correct versions of the registration statement
to Bankers Trust, the question is raised as to whether delivery to the
Collateral Trustee's counsel could constitute delivery under the CTA.
New York law provides that attorneys are generally considered agents
for their clients. See Ferrentino v. Dime Sav. Bank of New York, F.S.B., 606
N.Y.S.2d 554, 555 (N.Y. Sup. Ct. 1993). "An attorney in fact is essentially an
alter ego of the principal and is authorized to act with respect to any and all
matters on behalf of the principal with the exception of those acts which, by
their nature, by public policy, or by contract require personal performance."
Zaubler v. Picone, 473 N.Y.S.2d 580, 582 (N.Y. App. Div. 1984) (emphasis added).
Delivery to an agent ordinarily constitutes delivery to a principal. See, e.g.,
Singer v. National Fire Ins. Co.., 154 A.D. 783, 784-85 (N.Y. App. Div. 1913).
"Delivery to the agent constituted delivery to the principal and effected
performance of any duty imposed by the [delivered document]." Helfaer v. John
Hancock Mut. Life Ins. Co., 290 N.Y.S.2d 40, 44 (N.Y. App. Div. 1968), rev'd on
other grounds, 26 N.Y.2d 699 (N.Y. 1970); see also Fidelity & Deposit Co. of
Maryland v. J.G. McCrory Co., 164 N.Y.S. 561, 564 (N.Y. App. Div. 1917) (finding
that an insurer's delivery of renewal certificates to the agent of the insured
constituted an effective delivery under the terms of the insurance agreement).
A contract's terms, however, may be interpreted to preclude action by
an agent in lieu of the principal. See, e.g., Manufacturer's & Traders Trust Co.
v. Korngold, 618 N.Y.S.2d 744, 745 (N.Y. Sup. Ct. 1994). In Korngold, a New York
court held that a notice of default sent by a mortgagee's agent did not comply
with the mortgage agreement's requirement that the "lender"
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send notice of default. Id. The mortgage agreement provided that the mortgagee
could require immediate payment in full if, among other things, the "Lender"
sent a thirty-day notice of default to the mortgagor. Despite the agreement's
definition of "Lender" as "Midlantic Home Mortgage Corporation," an agent of
Midlantic sent a notice of default to the mortgagor. The court found that the
agent was neither the Lender nor its successor or assign and that the agreement,
which specifically required that the "Lender" send notice, did not permit an
agent of the Lender to act on its behalf. Id. Thus, the court deemed the notice
ineffective and precluded acceleration of the mortgage. Id.; see also In re
Royal Yarn Dyeing Corp., 114 B.R. 852, 860-61 (E.D.N.Y. 1990) (holding that
notice sent by a Landlord's attorney was ineffective to terminate a lease under
New York law, where the lease required that a party to the lease send notice);
Siegel v. Kentucky Fried Chicken of Long Island, Inc., 67 N.Y.2d 792, 793-94
(N.Y. App. Div. 1986) (holding that notice sent by a Landlord's attorney was
insufficient where the lease required that the "Landlord" send notice and where
the definition of "Landlord" did not include an agent of the landlord).
The question in this situation thus turns on whether anything in the
Collateral Trust Agreement precludes delivery to an agent of Bankers Trust
rather than to Bankers Trust itself. Section 2.5 requires the Secured Party
Representative or the Holder to "deliver to the Trustee" an Additional Secured
Indebtedness Registration Statement. The term Trustee under the CTA is defined
with specific reference to Bankers Trust Company itself in Section 1.1(126) and
the preamble. Further, Section 13.1(3) provides that "all communications and
notices" under the CTA intended for the Trustee shall be delivered to Bankers
Trust Company, Four Albany St., New York, NY 10006, not to counsel for Bankers
Trust. If this provision is determined to apply to Additional Secured
Indebtedness Registration Statements, a court would likely conclude that
delivery to Michele Ross was insufficient.
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On the other hand, it could be argued that this provision does not
apply to the delivery of registration statements to the Collateral Trustee.
Sections 2.3 and 2.5 of the CTA, which address registration, contain no details
regarding the method or place of delivery for registration statements. Thus, it
is arguable that the CTA is silent as to place of delivery. If that argument is
accepted by a court, then the common law rule would hold that delivery to Ross
constituted delivery to Bankers Trust. The analysis, however, does not end
there. The CTA arguably requires "delivery, acceptance and registration" of an
Additional Secured Indebtedness Registration Statement. Delivery to Ross might
fulfill the "delivery" portion of this requirement, but still not constitute
"acceptance" or "registration" by the Collateral Trustee.
In the case of the Series 5 Notes, there was an express agreement
between the Companies and the Collateral Trustee that delivery of Officer's
Certificates and legal opinions as required by Section 7.2(2) of the CTA, could
be made to Bankers Trust's counsel, and that delivery to counsel would
constitute delivery to the Collateral Trustee. Accordingly, it could be argued
that the Collateral Trustee expressly agreed that delivery of documents to its
counsel was sufficient to constitute delivery to the trustee.(35) If this
argument is accepted by a court, delivery to counsel might constitute both
delivery and acceptance by the Collateral Trustee.
D. SECTION 544 OF THE BANKRUPTCY CODE
It may be argued that the Companies, as debtors in possession, could
utilize the "strong arm" powers of section 544 of the Bankruptcy Code to avoid
the transfer of the security interests granted in favor of the holders of the
Series 3 and 4 Notes, the Series 6 and 7 Notes, and the
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(35) Conversely, it could be argued that this agreement, memorialized in a
letter between the Companies' counsel and counsel for Bankers Trust,
applied only to the Series 5 Notes and that the absence of similar
letters in the case of the Series 3 and 4 Notes establishes that there
was no comparable agreement with respect to those notes. Moreover, it
could be argued that this agreement, even if applicable to the Series 3
and 4 Notes, did not extend to the registration statements.
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PATS, and to preserve the avoided transfer for the benefit of unsecured
creditors. It appears, however, that section 544 of the Bankruptcy Code does not
apply in this instance because there are no unperfected security interests to be
avoided. Moreover, even if there were unperfected security interests that could
be avoided under section 544, the avoided transfers would be preserved for the
benefit of the estate, not unsecured creditors, to be distributed according to
the priorities (including lien priorities) under the Bankruptcy Code and other
applicable law.
1. INAPPLICABILITY OF SECTION 544
Under section 544(a)(1) of the Bankruptcy Code (the germane "strong
arm" provision of section 544 in this instance), a debtor in possession "may
avoid any transfer of property of the debtor or any obligation incurred by the
debtor that is voidable" by a hypothetical creditor that extends credit to the
debtor at the time of the commencement of the chapter 11 case and that obtains
at that time a judicial lien on all property on which a creditor to a simple
contract could have obtained a judicial lien. If a security interest securing an
obligation has not been perfected as of the commencement of the chapter 11 case,
the debtor in possession may use section 544 of the Bankruptcy Code to avoid the
security interest. See, e.g., In re The Greater Southeast Community Hosp.
Found., Inc., 237 B.R. 518, 522 (Bankr. D.D.C. 1999) (noting that the case law
is well established that section 544 of the Bankruptcy Code may be used to avoid
unperfected security interests).
The security interests at issue here were granted by the Companies
under the Collateral Trust Agreement and were granted not to the Senior Secured
Parties, but rather to the Collateral Trustee for the benefit of the Senior
Secured Parties. See N.Y. U.C.C. Section 9-105(m) ("When the holders of
obligations issued under an indenture of trust, equipment trust agreement or the
like
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are represented by a trustee or other person, the representative is the secured
party.").(36) Accordingly, the security interest subject to possible avoidance
under section 544(a)(1) of the Bankruptcy Code, if any, is the security interest
held by the Collateral Trustee. To our knowledge, the security interest of the
Collateral Trustee has attached(37) and has been perfected. To the extent that
this is the case, the Companies have no power under section 544(a)(1) of the
Bankruptcy Code to avoid any security interests granted pursuant to the
Collateral Trust Agreement. See, e.g., In re Long Chevrolet, Inc., 79 B.R. 759,
766 (N.D. Ill. 1987) ("Perfection makes [the secured creditor's] interest
enforceable over the claims of third parties, such as the trustee in
bankruptcy."). As discussed above, the question instead is whether the holders
of the Series 3 and 4 Notes, the Series 6 and 7 Notes, and the PATS are entitled
to the benefit of the security interests granted to the Collateral Trustee.
Section 544(a)(1) of the Bankruptcy Code simply does not bear on this question.
Likewise, if the obligations at issue here were determined not to be entitled to
the benefits of the Collateral Trust Agreement, the avoidance powers under
section 544(a)(1) of the Bankruptcy Code also would not be implicated because
there would be no "transfer" to avoid.
2. EFFECT OF SECTION 544(a)(1) IF IT WERE APPLICABLE
Even if section 544(a)(1) of the Bankruptcy Code were applicable under
these circumstances, the ultimate result would be the same. Any interest avoided
under section
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(36) The parties intended the security interests granted to the Collateral
Trustee to secure the obligations owed to the holders of the Series 3
and 4 Notes, the Series 6 and 7 Notes and the PATS. Under N.Y. U.C.C.
Section 9-204(3), "[o]bligations covered by a security agreement may
include future advances or other value whether or not the advances or
value are given pursuant to commitment."
(37) Under N.Y. U.C.C. Section 9-203, a security interest attaches when (i)
the debtor has signed a security agreement that contains a description
of the collateral, (ii) value has been given and (iii) the debtor has
rights in its collateral. All these elements of attachment were
satisfied at the time the parties entered into the Collateral Trust
Agreement.
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544(a)(1) of the Bankruptcy Code is automatically preserved for the benefit of
the estate. See 11 U.S.C. Section 551. In effect, section 551 of the Bankruptcy
Code "puts the estate in the shoes of the creditor whose lien is avoided."
Carvell v. Bank One, Lafayette, N.A. (In re Carvell), 222 B.R. 178, 180 (Bankr.
1st Cir. 1998). Here, assuming hypothetically that the security interests
securing the subject debt were avoided under section 544, the preserved
unperfected security interest would remain unperfected following the avoidance
and therefore would be subordinate to perfected security interests. In other
words, the preservation of an unperfected security interest for the benefit of
the estate would not improve the priority of that interest so that it would be
treated ahead of validly perfected security interests. See, e.g., Carvell, 222
B.R. at 180 (holding that where an unperfected security interest is avoided, the
debtor in possession preserves only an unperfected security interest for the
benefit of the estate and that such unperfected interest is junior to properly
perfected interests in the same collateral); Barnett Bank of South Florida, N.A.
v. Weitzner (In re Kavolchyck), 164 B.R. 1018, 1024 (S.D. Fla. 1994) (holding
that an unperfected lien preserved by operation of section 551 of the Bankruptcy
Code does not defeat a perfected lien); Connelly v. Marine Midland Bank, N.A.,
61 B.R. 748, 750 (W.D.N.Y. 1986) (unperfected security interest avoided by
trustee subordinate to perfected security interest in same collateral); Kopel v.
Campanile (In re Kopel), 232 B.R. 57, 70 (Bankr. E.D.N.Y. 1999) (stating that an
unperfected security interest is junior to a perfected security interest and
that the application of section 551 of the Bankruptcy Code does not elevate the
unperfected security interest).
Accordingly, even if separate security interests had been granted to
secure the obligations to the holders of the Series 3 and 4 Notes, the Series 6
and 7 Notes, and the PATS and those security interests could be avoided under
section 544 of the Bankruptcy Code, those security
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interests would remain subordinate following their avoidance to any security
interests in the collateral that are properly the subject of the Collateral
Trust Agreement.
E. POSTPETITION REGISTRATION
It may also be argued that the holders of the Series 3 and 4 Notes, the
Series 6 and 7 Notes, and the PATS might be able to deliver, and the Collateral
Trustee might be able to register, Additional Secured Indebtedness Registration
Statements at this time without violating the automatic stay imposed by section
362(a) of the Bankruptcy Code. Under this line of reasoning, delivery and
registration under the Collateral Trust Agreement could be argued to be merely
"ministerial" acts that do not implicate the automatic stay. There is authority
in the litigation context to the effect that a ministerial act in connection
with an entry or certification of a judgment by the clerk of the court does not
constitute the continuation of a judicial proceeding within the meaning of
section 362(a)(1) or an act to obtain possession of property under section
362(a)(3). See, e.g., Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 527-28
(2d Cir. 1994) (clerk's entry of judgment after commencement of bankruptcy,
based on court's oral directions issued prior to bankruptcy filing, was
ministerial and did not violate section 362(a)(1)); Heikkila v. Carver (In re
Carver), 828 F.2d 463, 464 (8th Cir. 1987) ("routine certification" by clerk of
court completed after petition date did not violate automatic stay provisions of
section 362(a)(1) or 362(a)(3)).
This "ministerial acts" exception, however, appears applicable
primarily, if not exclusively, to the acts of a court official, as distinguished
from private parties. See, e.g., McCarthy, Johnson & Miller v. North Bay
Plumbing, Inc. (In re Pettit), 217 F.3d 1072 (9th Cir. 2000) (ministerial act
exception "stems from the common-sense principle that a judicial 'proceeding'
within the meaning of section 362(a) ends once a decision on the merits has been
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reached"); Roberts v. IRS, 175 F.3d 889, 897 (11th Cir. 1999); Soares v.
Brockton Credit Union (In re Soares), 107 F.3d 969, 964 (1st Cir. 1997) ("[W]hen
an official's duty is delineated by, say, a law or a judicial decree with such
crystalline clarity that nothing is left to the exercise of the official's
discretion or judgment, the resultant act is ministerial.") (citation omitted).
In fact, we are not aware of any court that has accepted the "ministerial acts"
exception in the context where creditors have sought to undertake postpetition
actions to realize upon the benefits of a prepetition security interest.
In addition, this exception would not necessarily render other
subsections of section 362(a) inapplicable to the alleged ministerial actions of
registering the additional indebtedness. As discussed below, under the literal
language of section 362(a) and the relevant case law authority, it appears that
the postpetition filing and registration of Additional Secured Indebtedness
Registration Statements in this instance would violate at least three provisions
of section 362(a), including sections 362(a)(3), 362(a)(4) and 362(a)(6).
Furthermore, these acts would violate a primary purpose of the automatic stay,
described by one court as creating "a pronounced demarcation, after which all
parties must cease any attempts to change their positions in relation to their
interests in the debtor." Makoroff v. City of Lockport (In re Guterl Special
Steel), 95 B.R. 370, 373 (Bankr. W.D. Pa. 1989), aff'd, 111 B.R. 107 (W.D. Pa.
1990), aff'd, 916 F.2d 890 (3d Cir. 1990). It also appears that those acts would
constitute unauthorized postpetition transfers of property of the Companies'
estates that could be avoided by the Companies, as debtors in possession, under
section 549(a) of the Bankruptcy Code.
1. SECTION 362(a)(3) OF THE BANKRUPTCY CODE
First, it appears that delivery and registration would violate section
362(a)(3) of the Bankruptcy Code, which stays "any act to obtain possession of
property of the estate or of
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property from the estate or to exercise control over property of the estate."
Here, postpetition filing and registration would be undertaken with the intended
ultimate result that the holders of the Series 3 and 4 Notes, the Series 6 and 7
Notes, and the PATS would receive a distribution of the collateral, or the
proceeds thereof, that is distributed to pay the obligations secured by the
Collateral Trust Agreement. Accordingly, filing and registration would
constitute the first steps by the indenture trustee and the Collateral Trustee
toward obtaining possession of property of the estate and therefore would likely
fall within the scope of "any act to obtain possession of property of the
estate."
The Eighth Circuit's ruling in Carver, supra, regarding "ministerial
acts," while extending to section 362(a)(3), would not apply to the facts
present here. Carver involved a strict foreclosure action brought in state court
against the debtors prior to their bankruptcy filing on account of the debtors'
alleged default on a contract for deed. Under applicable South Dakota law, the
debtors were given 90 days to redeem the contract, after which time, if the
debtors did not redeem, their interest in the property would be defeated upon a
certification by the clerk of the court that the debtors had not exercised their
right of redemption.
When the debtors filed for bankruptcy, the 90-day redemption period had
not yet expired. The bankruptcy court concluded that the running of the
redemption period was automatically stayed. See Carver, 828 F.2d at 464. On
appeal, however, the district court concluded that the redemption period was
only temporarily stayed under section 108(b) of the Bankruptcy Code. See id. The
Eighth Circuit accepted this ruling, but the debtors still argued that an
affirmative act, the certification by the clerk of the court, was required to
defeat the debtors' interest in the property, and that act was barred by the
automatic stay. See id. The Eighth Circuit disagreed, stating that "[t]his
ministerial certification requirement can therefore never prevent the otherwise
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valid transfer of rights that occurs at the end of the judicially decreed
redemption period. We thus reject the [debtors'] contention that this routine
certification constitutes a judicial proceeding or act to obtain possession of
property under 11 U.S.C. Section 362(a)(1) or (a)(3)." Id.
For at least two reasons, Carver does not appear to apply to the facts
present here. First, the Eighth Circuit concluded that the clerk's certification
in Carver would have no impact on the debtors' property interests. Under the
"registration" interpretation of the Collateral Trust Agreement, that is not the
case with respect to the filing and registration of Additional Secured
Indebtedness Registration Statements. Second, unlike here, the party charged
with making the certification, the clerk of the court, did not stand to gain an
interest in property by virtue of the certification act.
2. SECTION 362(a)(4) OF THE BANKRUPTCY CODE
Second, it appears that filing and registration would violate section
362(a)(4) of the Bankruptcy Code, which stays "any act to create, perfect, or
enforce any lien against property of the estate." The term "lien" is defined
broadly in the Bankruptcy Code to mean a "charge against or interest in property
to secure payment of a debt or performance of an obligation." 11 U.S.C. Section
101(37). See Levin v. Kelton Realty, Inc. (In re Oxford Royal Mushroom Products,
Inc.), 39 B.R. 948, 949 (Bankr. E.D. Pa. 1984) (holding that, because the term
"lien" is to be construed broadly, [section] 362(a)(4) prohibited the
postpetition filing of an agreement containing a covenant running with the land
that required the debtor to supply the filing party with water from the property
subject to the covenant). Using this definition of "lien," section 362(a)(4)
prohibits any act to create, perfect, or enforce any "charge against or interest
in property to secure payment of a debt or performance of an obligation" against
property of the Debtors' estates.
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As discussed above, delivery and registration would be undertaken with
the intended result that the holders of the Series 3 and 4 Notes, the Series 6
and 7 Notes, and the PATS would receive the benefits of the security interests
granted to the Collateral Trustee. Delivery and registration, therefore, would
create an interest in property of the estate -- at least as to the holders of
these series of debt -- in that it would give these holders an interest in the
collateral that is the subject of the Collateral Trust Agreement, which interest
would secure the payment of the Debtors' funded debt obligations to the holders.
Accordingly, delivery and registration would constitute acts to create liens
against property of the Debtors' estates within the meaning of section 362(a)(4)
of the Bankruptcy Code. According to the relevant legislative history, Congress
intended to prevent such a result by enacting section 362(a)(4). "Paragraph (4)
stays lien creation against property of the estate . . . . To permit lien
creation after bankruptcy would give certain creditors preferential treatment by
making them secured instead of unsecured." H.R. Rep. No. 95-595, 95th Cong., 1st
Sess. 340-42 (1977). See also Makoroff, supra.
3. SECTION 362(a)(6) OF THE BANKRUPTCY CODE
Third, it appears that delivery and registration would violate section
362(a)(6) of the Bankruptcy Code, which stays "any act to collect, assess, or
recover a claim against the debtor that arose before the commencement of the
case under this title." 11 U.S.C. Section 362(a)(6). Although section 362(a)(6)
most often applies to situations where a creditor attempts to collect immediate
payment of a prepetition debt, section 362(a)(6) also covers situations where a
creditor takes an action that could result in an increase in the amount of, or a
reclassification of, an unsecured nonpriority prepetition claim, to the
detriment of other unsecured creditors of the debtor's estate. See In re Texaco
Inc., 73 B.R. 960, 967 (Bankr. S.D.N.Y. 1987) ("Texaco I").
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In Texaco I, a holder of certain unsecured notes issued by one of the
debtors, Texaco Capital Inc. ("Texaco Capital"), and the indenture trustee for
the notes together requested that the bankruptcy court modify the automatic stay
to permit the indenture trustee to deliver a "notice of acceleration" to Texaco
Capital with respect to the notes. The notice of acceleration would have
declared all principal and accrued interest on the notes to be immediately due
and payable and would have preserved the noteholder's and indenture trustee's
rights later to assert that the commencement of Texaco Capital's chapter 11 case
had the effect of accelerating the payments under the notes. According to the
noteholder and indenture trustee, this in turn would preserve the rights of the
noteholder and indenture trustee to assert that the interest rate on the notes
was 13.25% per annum, not a reduced rate of 7.75% per annum.(38)
The noteholder and the indenture trustee asserted that the sending of
the notice of acceleration should be permitted because, by sending the notice,
the indenture trustee in no way would be seeking to collect the amounts
assertedly due under the notes. See id. at 962. Accordingly, the noteholder and
the indenture trustee argued, the sending of the notice of acceleration was
merely a "ministerial act intended only to preserve the status quo." Id. at 967.
The bankruptcy court disagreed. Notwithstanding that the sending of the
notice of acceleration did not itself seek to collect the amounts assertedly
due, the court held, among other
----------
(38) The Texaco debtors "consistently maintained that they are solvent." In
re Texaco, Inc., 81 B.R. 804, 805 ("Texaco II"). Thus, interest
continued to accrue on the notes at issue during the Texaco chapter 11
cases even though the notes were unsecured. Approximately one month
after commencing its chapter 11 case, Texaco Capital had issued a
certificate identifying 7.75% per annum as the interest rate that it
would have established if its chapter 11 case had not intervened. Under
the indenture governing the notes, upon the issuance of such a
certificate, the noteholders either could tender their notes for
immediate repayment or could continue to hold the notes with the new
interest rate in effect. In response to the issuance of the
certificate, Texaco Capital and certain parties entered into a
court-approved stipulation that permitted noteholders to elect to
tender their notes while preserving all parties' rights with respect to
the notes. The noteholder that was seeking relief from the stay had not
tendered its notes.
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things, that the sending of the notice would violate the automatic stay because
it would constitute an act to collect, assess, or recover a claim against the
debtors. See id. at 967. According to the court, the sending of the notice of
acceleration would "automatically lock the Note holders into a 13.25% interest
rate and would foreclose the debtors from subsequently contending that the
reduced rate of 7.75% applied." The court refused to permit a modification of
the automatic stay in the circumstances because the modification would "advance
the interests of some unsecured claimants over others." Id. at 968. The court
indicated that the noteholder and indenture trustee could file proofs of claim
asserting that they were entitled to the higher interest rate, but they could
not take an action that could foreclose the debtors from asserting that the
lower interest rate was applicable, the effect of which would be to reduce the
recovery by other unsecured creditors of the debtor's estate.(39) Arguably, the
Collateral Trustee and the holders of the Series 3 and 4 Notes, the Series 6 and
7 Notes, and the PATS would similarly violate the automatic stay imposed by
section 362(a)(6) by taking acts that could foreclose the Companies from
asserting that their obligations to these holders are unsecured.
In addition, under the facts present in these cases, postpetition
registration, if it resulted in the treatment of the subject debt holders'
claims as secured, would result in a higher percentage recovery on those claims.
Accordingly, registration likely would be deemed to constitute as act
----------
(39) In a subsequent proceeding, the court ruled that the sending of a
notice of acceleration with respect to another series of notes would
not violate the automatic stay in circumstances where it appeared that,
whether the notice was sent or not, unsecured creditors would recover
in full, including prepetition and postpetition interest where
applicable, on their claims. See Texaco II, 81 B.R. at 806. Thus, in
Texaco II, the act of the creditor at issue would have been to the
detriment of equity holders, not other creditors, and accordingly was
concluded not to be within the intended scope of the automatic stay.
See Texaco II, 81 B.R. at 806. Since full creditor recoveries are not
expected in these cases, the reasoning of the Texaco II court does not
appear to apply here.
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to "recover" a claim against the Debtors that arose prior to the Petition Date,
within the meaning of section 362(a)(6).
4. SECTION 549(a) OF THE BANKRUPTCY CODE
Finally, it appears that delivery and registration would constitute
unauthorized postpetition transfers of property of the Companies' estates that
could be avoided by the Companies, as debtors in possession, under section
549(a) of the Bankruptcy Code. Under section 549, the trustee or debtor in
possession may avoid unauthorized postpetition transfers of property of the
estate. Under section 101(54) of the Bankruptcy Code, the term "transfer" is
defined broadly as "every mode, direct or indirect, absolute or conditional,
voluntary or involuntary, of disposing of or parting with property or with an
interest in property, including retention of title as a security interest and
foreclosure of the debtor's equity of redemption." This definition is intended
"to be all-inclusive and as broad as possible to encompass any surrender of an
interest in property, whether the transfer is of legal title or of possession,
custody or control." E-Tron Corp. v. National Bank of Sussex County (In re
E-Tron Corp.), 141 B.R. 49, 55 (Bankr. D.N.J. 1992). Property of the estate
likewise is a broad concept that includes, among other things,"all legal or
equitable interests of the debtor in property as of the commencement of the
case." 11 U.S.C. Section 541. Unauthorized postpetition transfers of estate
property effectuated by any party are subject to avoidance under the terms of
section 549(a).
Under the facts here, in light of the broad definitions quoted above,
the collateral held by the Collateral Trustee constitutes property of the
estate, and filing and registration arguably would effect a transfer of an
interest in the collateral. Furthermore, such a transfer would be unauthorized
under the Bankruptcy Code insofar as the transfer would violate the automatic
stay. Accordingly, it appears that delivery and registration would be avoidable
under section 549(a).
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F. SECTIONS 362(b)(3) AND 546(b) OF THE BANKRUPTCY CODE
It may be argued in the alternative that the holders of the Series 3
and 4 Notes, the Series 6 and 7 Notes, and the PATS might be able to file, and
the Collateral Trustee might be able to properly register, Additional Secured
Indebtedness Registration Statements under the exception to the automatic stay
set forth in section 362(b)(3) of the Bankruptcy Code, which, in conjunction
with section 546(b) of the Bankruptcy Code, permits the postpetition perfection
of security interests under certain circumstances. These sections, where
applicable, permit the postpetition perfection of security interests
notwithstanding the automatic stay provisions of section 362(a) and the
avoidance powers under, among other provisions, section 549. For the reasons
discussed below, however, it appears that sections 362(b)(3) and 546(b) are
inapplicable to the facts present here.
Under section 362(b)(3), the commencement of a chapter 11 case does not
stay, among other things, "any act to perfect, or to maintain or continue the
perfection of, an interest in property to the extent that the trustee's rights
and powers are subject to such perfection under section 546(b) of [the
Bankruptcy Code]." In turn, section 546(b)(1)(A), the relevant provision of
section 546(b) in this instance, provides that "[t]he rights and powers of a
trustee under section 544, 545, and 549 of [the Bankruptcy Code] are subject to
any generally applicable law that . . . permits perfection of an interest in
property to be effective against an entity that acquires rights in such property
before the date of perfection."(40)
----------
(40) Section 546(b)(2) provides for the perfection of a security interest by
the postpetition giving of notice in the bankruptcy court in instances
where applicable law requires seizure of property or commencement of an
action to accomplish perfection. Types of interests addressed by
section 546(b)(2) include, for example, mechanic's liens and
assignments of rents. See, e.g., Roofing Concepts, Inc. v. Kenyon
Industries, Inc. (In re Coated Sales, Inc.), 147 B.R. 842, 845-46
(S.D.N.Y. 1992) (mechanic's lien); In re C.G. Chartier Construction,
Inc., 126 B.R. 956, 959-60 (E.D. La. 1991) (assignment of rents);
(continued...)
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<PAGE> 248
Under Third Circuit case law, section 546(b) is narrowly construed. See
Equibank, N.A. v. Wheeling-Pittsburgh Steel Corp., 884 F.2d 80, 85 (3d Cir.
1989) ("The legislative history of Section 546(b) makes clear that its
exceptions to the trustee's avoiding power should be narrowly construed.");
Dicello v. United States (In re The Railway Reorganization Estate, Inc.), 133
B.R. 578, 583 (Bankr. D. Del. 1991) (section 546(b) is to be narrowly
construed); In re Wynnewood House Associates, 121 B.R. 716, 726 (Bankr. E.D. Pa.
1990) (stating that "the provisions of section 546(b), which are an exception to
the bankruptcy theme that the rights of a secured creditor are fixed as of the
date of the bankruptcy filing, are in this circuit narrowly construed") (citing
Equibank).
As an initial matter, sections 362(b)(3) and 546(b) by their terms do
not appear to apply to the filing and registration of Additional Secured
Indebtedness Registration Statements. The applicable provisions of sections
362(b)(3) and 546(b), as quoted above, provide for postpetition perfection of
security interests in applicable circumstances. As discussed above, however, the
security interests at issue here were granted by the Companies to the Collateral
Trustee at the time of entry into the Collateral Trust Agreement, and there is
no current dispute that those security interests have attached and have been
perfected. Thus, the facts here do not appear to fit within the plain meaning of
sections 362(b)(3) and 546(b). See, e.g., In re Vienna Park
----------
(40) (continued...)
In re Gelwicks, 81 B.R. 445, 448 (Bankr. N.D. Ill. 1987) (lien on
rents); FDIC v. Lancaster (In re Sampson), 57 B.R. 304, 309 (Bankr.
E.D. Tenn. 1986) (lien on rents). Section 546(b)(2) by its terms should
not apply to registration with the Collateral Trustee.
Sections 546(b)(1) and (2) also include parallel provisions regarding
the maintenance or continuation of the perfection of a security
interest. Our review of the case law concerning this section revealed
no cases in which these provisions were deemed to apply to anything
other than requirements under applicable law, such as the refiling of
liens on vehicles when the debtor moves or the filing of U.C.C.
continuation statements, for the preservation of preexisting liens.
Thus, it does not appear that these provisions are relevant to this
discussion.
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Properties, 136 B.R. 43, 51 (Bankr. S.D.N.Y. 1992) (in case involving
enforcement of assignment of rents clause, explaining that "perfection" relates
only to the process of putting third parties on notice of an interest, whereas
steps a party must take to realize its rights in the collateral are properly
viewed as "enforcement").
In addition, the Third Circuit and other courts have consistently
concluded that section 546(b) is not intended to be a mechanism by which parties
may correct deficiencies in a lien that existed as of the Petition Date or take
steps to secure a lien that were neglected prior to the petition date. See
Makoroff v. City of Lockport, 916 F.2d 890, 894 (3d Cir. 1990) (the city,
despite its "ever-present expectation of collecting taxes," did not have a
property interest in the real estate at issue prior to taking "the affirmative
acts necessary to fix the amount of tax due and to acquire a lien to the extent
of that amount"); In re Railway Reorganization, 133 B.R. at 583 ("an interest
under section 546(b) must be more than an abstract expectation; the creditor
must have taken the appropriate steps to secure its position") (citing
Makoroff); Bevill, Bresler & Schulman, Inc. v. Spencer Savings & Loan Assoc., 94
B.R. 817, 830 (Bankr. D.N.J. 1989) (the legislative history "clearly indicates
that its purpose is not to permit a creditor, who itself has taken no action
prior to the filing of the case, to perfect a lien subsequent to the filing of
the case") (citation omitted); Aikens v. City of Philadelphia, 94 B.R. 869, 876
(Bankr. E.D. Pa. 1989) (rejecting city's attempt to correct deficiencies in lien
on debtor's property). Instead, section 546(b) is intended to protect those
creditors who are in the process of perfecting their liens from the "surprise
intervention" of bankruptcy to complete the prepetition perfection process.
Aikens, 94 B.R. at 876 ("Secondly, the purpose of Section 546(b) is to allow
acts by a lienholder, in furtherance of perfection of the lien, to continue in
its ordinary course of perfecting its lien despite the intervention of
bankruptcy.").
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Most courts, including the Third Circuit and several lower courts in
the Third Circuit, have concluded that section 546(b)(1)(A) comes into play only
if the applicable law relied upon by the creditor provides for perfection to
"relate back" to a prior date. See Equibank, 884 F.2d at 85 (in case involving
real estate tax statute, stating that 546(b) applies only "to cases in which an
interest is created prior to bankruptcy and its post-petition perfection relates
back, as a matter of law, to the date of its creation") (citing legislative
history); Beatrice Cheese, Inc. v. Peter J. Schmitt Co., Inc., 154 B.R. 47, 50
(Bankr. D. Del. 1993) (perfection must relate back to a prepetition date);
Midlantic National Bank v. Sourlis, 141 B.R. 826, 837-38 (D.N.J. 1992)
("Moreover, Section 546(b) is a time statute which applies only where the state
law permits relation-back."); Funding Systems Asset Management Corp. v. Chemical
Business Credit Corp., 111 B.R. 500, 521 (Bankr. W.D. Pa. 1990) (perfection of
interest in proceeds could not "relate back" and thus fell outside the scope of
section 546(b)); Bevill, Bresler & Schulman, Inc., 94 B.R. at 830; Aikens, 94
B.R. at 876 (rejecting application of 546(b) where perfection would not "relate
back" to defeat the rights of a bona fide purchaser of the debtor's property);
In re TM Carlton House Partners, Ltd., 91 B.R. 349, 355-56 (Bankr. E.D. Pa.
1988) (citing legislative history and Collier on Bankruptcy); Valairco, Inc. v.
ATC Systems, Inc., 9 B.R. 289, 294 (Bankr. D.N.J. 1981) ("No mention [in the
legislative history] is made of liens which do not relate back for presumably
the drafters of the Bankruptcy Code intended that, absent language within the
state statute giving rise to a purported lien, it must be assumed that such
liens are susceptible to the trustee's avoiding power."); see also In re
Westport-Sandpiper Associates Ltd. Partnership, 116 B.R. 355 (Bankr. D. Conn.
1990) (state law must "specifically authorize" that the interest relate back to
a date prior to perfection); Kearney Hotel Partners v. Richardson, 92 B.R. 95,
105 (Bankr. S.D.N.Y. 1988) ("[T]he legislative history makes clear that Congress
had in mind only
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<PAGE> 251
those state law statutes permitting relation back to a period prior to the
filing of the bankruptcy petition."); Lawrence P. King, 5 Collier on Bankruptcy
Paragraph 546.03[2][c][i], at 546-23 (15th ed. rev. 2000) [hereinafter Collier].
An example of a "relation-back" law to which, under this majority view,
section 546(b) applies is Section 9-301(2) of the New York Uniform Commercial
Code, which provides that the filing of a financing statement with respect to a
purchase money security interest within 20 days after the debtor receives
possession of the collateral relates back to the time that the security interest
attached and takes priority over the interests of an intervening lien creditor.
See Collier, at 546-23. By contrast, under the majority view, section 546(b)
does not apply to a generally applicable law under which a perfected lien does
not "relate back" to a prior date. See, e.g., In re Alberto, 823 F.2d 712, 723
(3d Cir. 1987) (in case involving federal maritime law, section 546(b) of the
Bankruptcy Code was inapplicable where the postpetition recordation of the lien
at issue would not relate back in time under the applicable federal statute).
A minority of courts have concluded that section 546(b) applies to any
applicable law under which a lien, such as a tax or environmental "superlien,"
takes priority over previous liens, regardless of whether this priority "relates
back" to a prior date. See The Lionel Corp. v. Civale & Trovato, Inc., 29 F.3d
88, 93 (2d Cir. 1994) ("We see nothing in Section 546(b) indicating that it
applies only when the lienor fits within a 'relation-back' statute.") (applying
New York mechanic's lien statute); Marine Midland Bank v. Bennett Funding Corp.,
No. 96-61376, 1997 Bankr. LEXIS 2197, at *63-8 (Bankr. N.D.N.Y. Aug. 11, 1997)
(evaluating New York Uniform Commercial Code); In re Microfab, Inc., 105 B.R.
152, 158 (Bankr. D. Mass. 1989) (refusing to limit 546(b) to liens that "relate
back," noting that the statutory language does not contain this provision and
that other liens may fall within the scope of the clear meaning of such
language;
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finding Massachusetts environmental "superlien" law to be a "generally
applicable law" within the meaning of 546(b)); see also 229 Main Street Ltd.
Partnership v. Massachusetts, No. 99-40163, 2000 U.S. Dist. LEXIS 10778, at
*8-17 (D. Mass. July 26, 2000) (environmental "superlien" statute) (citing
Microfab). Under these cases, the generally applicable law at issue merely needs
to establish that the lien is superior to any hypothetical interest that a third
party could have acquired as of the petition date.
It may be argued in this case that the "future advances" provisions of
the New York Uniform Commercial Code, the provisions of the Collateral Trust
Agreement, and generally applicable contract law together may satisfy the
requirements of section 546(b). Under New York U.C.C. Section 9-204(3),
"[o]bligations covered by a security agreement may include future advances or
other value whether or not the advances or value are given pursuant to
commitment." In addition, New York U.C.C. Section 9- 312(7) provides:
If future advances are made while a security interest is
perfected by filing, the taking of possession, or under
Section 8-321 on securities, the security interest has the
same priority for the purposes of subsection (5) with respect
to the future advances as it does with respect to the first
advance. If a commitment is made before or while the security
interest is so perfected, the security interest has the same
priority with respect to advances made pursuant thereto. In
other cases a perfected security interest has priority from
the date the advance is made.
Under these provisions, future advances made pursuant to commitment(41) are
entitled to the same priority afforded to the initial advance subject to the
security interest. Future advances not made pursuant to commitment are afforded
priority as of the date such future advances are made.
--------
(41) Under New York U.C.C. Section 9-105(k), "[a]n advance is made 'pursuant
to commitment' if the secured party has bound himself to make it,
whether or not a subsequent event of default or other event not within
his control has relieved or may relieve him from his obligation."
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<PAGE> 253
These provisions regarding future advances appear to fall outside the
scope of section 546(b), whether that section is viewed to be limited to
"relation back" statutes or not. Section 546(b)(1)(A), as quoted above, applies
only to any generally applicable law permitting perfection to be effective
against an entity that acquires rights in the property "before the date of
perfection." Under the future advances statutes, as they apply to the Collateral
Trust Agreement, the holders of the additional indebtedness are entitled to the
same priority afforded to the holders of the initial indebtedness under the same
security interests granted to the Collateral Trustee, as of, not before, the
date of perfection of those security interests. None of the holders of
additional indebtedness can claim that registration under the Collateral Trust
Agreement would entitle it to priority over a security interest perfected before
perfection by the Collateral Trustee. Thus, under the facts present here,
neither the future advance statutes quoted above, the provisions of the
Collateral Trust Agreement, nor generally applicable contract law can constitute
the type of law covered by section 546(b)(1)(A), namely, "a generally applicable
law permitting perfection to be effective . . . before the date of perfection."
Parties may also argue that "generally applicable law" in this context
encompasses a law that would apply but for the intervention of bankruptcy. Under
this line of reasoning, it may be argued that - - by operation of the future
advances provisions of the New York Uniform Commercial Code and New York
contract law -- the holders of the Series 3 and 4 Notes, the Series 6 and 7
Notes, and the PATS, were it not for the intervention of bankruptcy, would have
been able to correct any deficiencies in realizing upon the benefits of CTA and
thereby gain priority over all parties perfecting security interests after the
CTA security interests were perfected. In other words, but for the intervention
of bankruptcy, the holders would have been
87
<PAGE> 254
able to obtain a security interest superior to that of post- Collateral Trust
Agreement, prepetition secured parties.
The language of the statute, legislative history, and case law,
however, do not support this argument. Aside from the points raised above, the
legislative history shows that Congress chose the term "generally applicable
law" to prevent states from establishing priorities that exist only in
bankruptcy. See Makoroff, 916 F.2d at 892 ("The legislative history also
indicates that 'generally applicable law' means 'provisions of applicable law
that apply both in bankruptcy cases and outside bankruptcy cases,' and warns
that '[the phrase] is not designed too [sic] give the States an opportunity to
enact disguised priorities in the form of liens that apply only in bankruptcy
cases.'") (bracketed comments in original); Microfab, 105 B.R. at 156
("generally applicable" is intended to indicate that the law must apply both in
and outside bankruptcy cases). Furthermore, nothing in the legislative history
or any of the cases of which we are aware suggests that Congress intended
"generally applicable law" to mean anything other than a generally applicable
statute, as distinguished from common law. See, e.g., Makoroff v. City of
Lockport, 95 B.R. 370, 375 (Bankr. W.D. Pa. 1989) (the "generally applicable
law" Congress envisioned in drafting this section only extended to statutes
allowing perfection to relate back and defeat an intervening perfected
creditor); H.R. Rep. No. 595, 95th Cong., 1st Sess. 371 (1977); S. Rep. No. 989,
95th Cong. 2d Sess. 86 (1978).
CONCLUSION
There are competing arguments as to all the issues that have been
raised with respect to the Series 3 and 4 Notes, the Series 6 and 7 Notes, and
the PATS. With respect to the contractual interpretation of the Collateral Trust
Agreement, we believe that a court is more likely to find that:
88
<PAGE> 255
- registration is required for additional indebtedness to be
secured under the CTA;
- registration is not necessary for the noteholders to obtain
the benefits of the guaranties; and
- even if registration is required for a noteholder to benefit
from the CTA's security interests, the Series 3 and 4 Notes
are properly registered and, therefore, secured under the CTA.
If a court determines to apply equitable doctrines to the facts, we
believe that a court is more likely to decide that:
- if the Series 3 and 4 Notes are defectively registered under
the CTA, the doctrine of reformation is available to correct
the mistake;
- all the notes at issue are secured and entitled to the
benefits of the guaranties, based on Prudential, because any
other result would generate an unjust windfall to creditors
who were not harmed by the deficiencies in registration.
As for the bankruptcy and other arguments addressed herein, we conclude
that a court will likely not apply them to any of the notes at issue and that,
therefore, they will not affect the outcome of the contract interpretation and
equitable analyses.
---------------------
Notwithstanding these conclusions, all of the potential arguments
discussed in this paper, as well as the conclusions reached, are subject to
considerable uncertainty. As described in detail above, each of the contract
interpretation arguments is subject to substantial counterarguments.
Additionally, there is no assurance that a court will apply any of the equitable
principles to the facts or, if it does, that it will utilize these principles
potentially to override the parties' intent as memorialized in the CTA.
Likewise, it is uncertain whether a court will utilize any of the bankruptcy and
other principles discussed herein to affect the outcome.
89
<PAGE> 256
Irrespective of how a court may ultimately rule, litigation of these
difficult and complex issues will undoubtedly be expensive and time-consuming
and could spawn other contentious litigation involving a myriad of parties. The
potential consequence of litigation is a substantial delay in the Companies'
chapter 11 cases to the detriment of the Companies' business operations and the
interests of all creditors.
An amicable resolution of the issues addressed in this paper is, from
the perspective of the Companies and all their creditors, unquestionably
preferable to the expense and uncertainty of protracted litigation. The
expeditious confirmation of a plan of reorganization in these cases may, indeed,
depend upon a prompt, consensual resolution of these matters.
JONES, DAY, REAVIS & POGUE
September 19, 2000
90
<PAGE> 257
EXHIBIT A
<PAGE> 258
SERIES 3 AND SERIES 4 NOTES
Issued: October 1, 1996
Closing Date: October 4, 1996
Principal Amount: $350 million
Indenture Trustee:
-----------------
Michael Hopkins
Fleet National Bank
Indenture Trustees' Counsel:
---------------------------
Eric A. Henzy
Reid and Riege, P.C.
Manager:
-------
Michael Klein
Salomon Smith Barney Inc.
Co-Managers:
-----------
Alex. Brown & Sons Incorporated
Nesbitt Burns Securities Inc.
RBC Dominion Securities Corporation
Midland Walwyn Capital Corporation
Underwriters' Counsel:
---------------------
Sue Ann Dillport
Davis, Polk & Wardwell
Loewen's Counsel:
----------------
Michelle Johnson
Thelen Reid & Priest LLP
Collateral Trustee:
------------------
Bankers Trust Company
Collateral Trustee's Counsel:
----------------------------
Michele Ross
Kramer Levin Naftalis & Frankel LLP
<PAGE> 259
PATS
Issued: September 25, 1997
Closing Date: September 30, 1997
Principal Amount: $300 million
Indenture Trustee:
-----------------
Michael Hopkins
State Street Bank and Trust Company
Indenture Trustee's Counsel:
---------------------------
Eric A. Henzy
Reid and Riege, P.C.
Manager:
-------
James Woolfrey
UBS Securities LLC
Co-Manager:
----------
Salomon Smith Barney Inc.
Underwriters' Counsel:
---------------------
C. Thomas Kunz
Skadden, Arps, Slate, Meagher & Flom LLP
Loewen's Counsel:
----------------
Michelle Johnson
Thelen Reid & Priest LLP
Collateral Trustee:
------------------
Bankers Trust Company
Collateral Trustee's Counsel:
----------------------------
Michele Ross
Kramer Levin Naftalis & Frankel LLP
<PAGE> 260
SERIES 6 AND SERIES 7 NOTES
Issued: May 21, 1998
Closing Date: May 28, 1998
Principal Amount: $450 million
Indenture Trustee:
-----------------
Michael Hopkins
State Street Bank and Trust Company
Indenture Trustee's Counsel:
---------------------------
Eric A. Henzy
Reid and Riege, P.C.
Manager:
-------
Michael Klein
Salomon Smith Barney Inc.
Co-Managers:
-----------
Goldman Sachs & Co.
Nesbitt Burns Securities Inc.
BT Alex. Brown
Deutsche Morgan Grenfell
Underwriters' Counsel:
---------------------
Sue Ann Dillport
Davis Polk & Wardwell
Loewen's Counsel:
----------------
Michelle Johnson
Thelen Reid & Priest LLP
Collateral Trustee:
------------------
Bankers Trust Company
Collateral Trustee's Counsel:
----------------------------
Michele Ross
Kramer Levin Naftalis & Frankel LLP
<PAGE> 261
EXHIBIT B
<PAGE> 262
PRIMARY CTA PROVISIONS THAT SUPPORT REGISTRATION INTERPRETATION
2.1 Secured Indebtedness: Classes: Initial Secured Indebtedness
The aggregate principal amount of indebtedness which may be secured
under this Collateral Trust Agreement at any time is unlimited, but indebtedness
shall be Secured Indebtedness only upon and subject to the conditions set forth
in this Article. Any Secured Indebtedness shall be classified as one of the
following in accordance with the provisions of this Article: Class A Secured
Indebtedness, Class B Secured Indebtedness, Class C Secured Indebtedness or
Class D Secured Indebtedness. The Class A Secured Indebtedness, the Class B
Secured Indebtedness and the Class C Secured Indebtedness shall be the Senior
Secured Indebtedness, having the benefit of the Senior Lien as provided herein.
The Class D Secured Indebtedness shall have the benefit of the Junior Lien as
provided herein. (Emphasis added.)
2.3 Secured Indebtedness Register
The Trustee shall cause to be kept a register (the "Secured
Indebtedness Register") in which shall be entered the name, address, telephone
number, facsimile number, if any, and representative capacity, if any, of each
Secured Party Representative together with the original principal amount of the
related Secured Indebtedness, if any, and the commitment amount, if any, under
the related Financing Agreement(s), and the name(s) or office(s) of the persons
responsible for giving instructions under this Collateral Trust Agreement. . . .
. The entries in the Secured Indebtedness Register shall be conclusive and
binding for all purposes absent manifest error, and the Trustee and each other
Secured Party may treat each Person whose name is recorded in the Secured
Indebtedness Register as a Secured Party Representative hereunder for the
related registered Secured Indebtedness for all purposes under this Collateral
Trust Agreement. The Secured Indebtedness Register shall be available for
inspection at the Trustee's office in New York City by an Secured Party
Representative during the Trustee's normal business hours and with reasonable
prior written notice. (Emphasis added.)
2.5 Additional Secured Indebtedness Registration
(1) From time to time after the date hereof, agents, trustees or like
representatives acting on behalf of Holders of any proposed Additional Secured
Indebtedness under Section 2.4((1)(i), (ii) or (iii) (or, if such Holders are
unrepresented, the Holders themselves) may become Secured Party Representatives
under this Collateral Trust Agreement and be entitled to the benefits of the
security interests in the Collateral as set out herein and in the other
Collateral Documents. To become a Secured Party Representative hereunder each
such representative or Holder much deliver to the Trustee, for acceptance and
registration in the Secured Indebtedness Register, an Additional Secured
<PAGE> 263
Indebtedness Registration Statement substantially in the form of Exhibit A, duly
executed by such prospective representative or holder and the Companies. Upon
such delivery, acceptance and registration, such representative or holder shall
have the rights of a Secured Party Representative set out in this Collateral
Trust Agreement. (Underscore in text deleted; emphasis added.)
(2) From time to time after the date hereof, a Secured Party Representative
may register increases in commitment amounts, principal amounts and guaranties
of indebtedness described in Section 2.4(1)(iv) or (v) as Additional Secured
Indebtedness by the delivery to the Trustee, for acceptance and registration in
the Secured Indebtedness Register, of an Additional Secured Indebtedness
Registration Statement substantially in the form of Exhibit A, duly executed by
such Secured Party Representative and the Companies. Upon such delivery,
acceptance and registration, such increases in commitment amounts, principal
amounts and guaranties shall have the benefits of Additional Secured
Indebtedness under this Collateral Trust Agreement. (Underscore in text deleted;
emphasis added.)
3.1 Grant of Senior Lien for Senior Secured Indebtedness.
[E]ach Pledgor does hereby pledge, charge, assign and transfer to and
in favor of the Trustee, and does hereby create and grant a first priority
security interest in favor of the Trustee in, in trust for the benefit of the
Trustee in such capacity, and for the equal and ratable benefit of all Senior
Secured Parties, as security for (A) the due payment by the Companies of all
amounts payable to the Trustee, the Enforcement Representatives and the Secured
Party Representatives hereunder, (B) the payment by the Obligors of the Senior
Secured Indebtedness, (C) the due performance of the obligations of the
Companies contained herein, and (D) in the case of a Pledgor Subsidiary, the due
performance by such Pledgor Subsidiary of its obligations contained herein,
including, without limitation, its obligations under Article V, all of the
following property, whether now existing or hereafter arising (the "Collateral")
. . . . (Underscore in text deleted; emphasis added.)
1.1 Defined Terms
(104) "Senior Secured Parties" means the Class A Secured Parties, the Class B
Secured Parties and the Class C Secured Parties, and "Senior Secured
Party" means any of them. (Underscore in text deleted; emphasis added.)
(22) "Class C Secured Parties" means the Holders of the Series 1 Notes and
the Series 2 Notes, and each Holder of Additional Secured Indebtedness
(if any), which Additional Secured Indebtedness is designated as Class
C Secured Indebtedness pursuant to Section 2.6, and their Secured Party
Representatives, and "Class C Secured
2
<PAGE> 264
Party" means any of them. (Underscore in text deleted; emphasis added.)
(50) "Holder" means any Person who holds Secured Indebtedness and any
successor to or assignee from such a holder of such Secured
Indebtedness; provided that in the case of any Holder of Additional
Secured Indebtedness, its Secured Party Representative shall have
become a Secured Party Representative hereunder pursuant to Section
2.5. (Underscore in text deleted; emphasis added.)
8.10 Application of Proceeds of Realization of Security
Except as otherwise provided herein or by law or by the order of a
court, the moneys arising from the enforcement of any remedy provided for
herein, including, without limitation, the carrying on of the Business and the
sale or other realization of the whole or any part of the Collateral, whether
under any sale by the Trustee or by judicial process or otherwise, shall be held
by the Trustee and, together with any other moneys then or thereafter in the
hands of the Trustee available for the purpose, shall be applied by the Trustee
as follows:
* * *
* * *
* * *
Fourth: To the Secured Party Representatives on behalf of each
Holder they represent, respectively, in an amount equal to the Senior
Secured Indebtedness owing to each such Holder as of the date of such
distribution . . . . (Emphasis added.)
3
<PAGE> 265
EXHIBIT C
<PAGE> 266
PRIMARY CTA PROVISIONS THAT SUPPORT NON-REGISTRATION INTERPRETATION
3.1 Grant of Senior Lien for Senior Secured Indebtedness
[E]ach Pledgor does hereby pledge, charge, assign and transfer to and
in favor of the Trustee, and does hereby create and grant a first priority
security interest in favor of the Trustee in, in trust for the benefit of the
Trustee in such capacity, and for the equal and ratable benefit of all Senior
Secured Parties, as security for (A) the due payment by the Companies of all
amounts payable to the Trustee, the Enforcement Representatives and the Secured
Party Representatives hereunder, (B) the payment by the Obligors of the Senior
Secured Indebtedness, (C) the due performance of the obligations of the
Companies contained herein, and (D) in the case of a Pledgor Subsidiary, the due
performance by such Pledgor Subsidiary of its obligations contained herein,
including, without limitation, its obligations under Article V, all of the
following property, whether now existing or hereafter arising (the "Collateral")
. . . . (Underscore in text deleted; emphasis added.)
1.1 Definitions
(102) Senior Secured Indebtedness" means the Class A Secured Indebtedness,
the Class B Secured Indebtedness and the Class C Secured Indebtedness.
(Underscore in text deleted; emphasis added.)
(21) "Class C Secured Indebtedness" means all Obligations in respect of the
indebtedness arising under or evidenced by the Financing Agreements
listed under the heading "Class C Secured Indebtedness" on Schedule 1
and (if any) the Additional Secured Indebtedness designated as Class C
Secured Indebtedness pursuant to Section 2.6. (Underscore in text
deleted; emphasis added.)
2.4 Designation of Additional Secured Indebtedness
(1) [E]ither Company may from time to time by resolutions of its Directors
designate any of the following to be Secured Indebtedness hereunder ("Additional
Secured Indebtedness") entitled to the security hereby created:
(i) new indebtedness for borrowed money . . . .
<PAGE> 267
2.6 Designation of Class for Additional Secured Indebtedness
Upon the designation of any Additional Secured Indebtedness, the
Companies shall determine, as of the date of the creation and issuance thereof,
with the holders thereof whether such Additional Secured Indebtedness shall be
Class A Secured Indebtedness, Class B Secured Indebtedness or Class C Secured
Indebtedness . . . and such determination shall be set forth in the related
Additional Secured Indebtedness Registration Statement, together with the
certification by the Companies to the effect that (i) the incurrence and
securing of such additional indebtedness or obligations is permitted by and will
not result in any breach of any Financing Agreement, and (ii) the proposed
classification of such additional indebtedness or obligations complies with the
terms of Section 2.4(2) hereof and has been approved by the requisite parties to
any Financing Agreement(s) under which such approval is required.
5.1 Guaranty
Each Pledgor Subsidiary hereby unconditionally and irrevocably
guarantees, to the fullest extent permitted by Applicable Law, the due and
punctual payment (whether at stated maturity, upon acceleration or otherwise)
and performance of all Senior Secured Indebtedness of the Obligors . . . . Upon
failure by any Obligor to pay or perform any Senior Secured Indebtedness, such
Pledgor Subsidiary shall forthwith on demand pay or perform such Secured
Indebtedness, at the place, in the manner and with the effect otherwise
specified in the related Financing Agreement. Such Pledgor Subsidiary hereby
agrees that its guaranty of the Senior Secured Indebtedness pursuant to this
Article V is an absolute guaranty of payment and is not a guaranty of
collection. (Underscore in text deleted; emphasis added.)
Recital 9. All things necessary have been done and performed to make:
(b) additional indebtedness of TLGI, LGII or any other Wholly-
Owned Subsidiary when designated by either Company as provided
herein as Additional Secured Indebtedness and either as Class
A Secured Indebtedness, Class B Secured Indebtedness or Class
C Secured Indebtedness, entitled to the benefit of the Senior
Lien . . . . (Emphasis added.)
2
