- 45 -
long period of time without hurting their business or possibly
going out of business.
Petitioners were thinly capitalized and heavily leveraged
during the years in issue largely because they borrowed large
amounts from LIIBV before and during the years in issue.
2. Petitioners' Cash-Flow During the Years in Issue
Petitioners' free cash-flow (earnings before interest,
taxes, depreciation, and amortization (EBITDA) - capital
expenditures (CAPEX)) for the years in issue17 was negative as
follows:
1986 1987 1988
LTI ($63,490,919) ($351,973,233) ($109,555,409)
LII ($3,177,391) ($294,312,141) ($67,858,322)
On August 31, 1988, petitioners did not have enough free
cash-flow to pay (a) principal and interest due on the LIIBV
advances unless petitioners stopped buying other companies and
reduced other capital expenses by 20 percent, and (b) principal
due over 7 years even if they stopped making all capital
expenditures.
Petitioners and their companies did not have enough cash-
flow during the years in issue to repay LIIBV's advances to them
that are at issue here. LII had negative free cash-flows during
the years in issue largely because it and its subsidiaries were
expanding. Petitioners could not repay in installments or pay
17 LII's free cash-flow was a positive $3,888,281 for its
1985 fiscal year.
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