UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
- - - ----------------------------------------------------X
IN RE :
: CHAPTER 11
CONSOLIDATED HYDRO, INC., : CASE NO. 97-1924 (SLR)
:
DEBTOR. :
:
- - - ----------------------------------------------------X
DEBTOR'S DISCLOSURE STATEMENT PURSUANT TO SECTION 1125 OF
THE BANKRUPTCY CODE RELATING TO DEBTOR'S PLAN OF REORGANIZATION
---------------------------------------------------------------
WEIL, GOTSHAL & MANGES LLP
ATTORNEYS FOR THE DEBTOR
767 FIFTH AVENUE
NEW YORK, NEW YORK 10153
(212) 310-8000
AND
RICHARDS, LAYTON & FINGER, P.A.
ATTORNEYS FOR THE DEBTOR
ONE RODNEY SQUARE
WILMINGTON, DELAWARE 19899
(302) 685-6541
DATED: STAMFORD, CONNECTICUT
AUGUST 8, 1997
THIS SOLICITATION IS BEING CONDUCTED TO OBTAIN SUFFICIENT ACCEPTANCES OF A PLAN
OF REORGANIZATION BEFORE THE FILING OF A VOLUNTARY REORGANIZATION CASE UNDER
CHAPTER 11 OF THE BANKRUPTCY CODE. BECAUSE A CHAPTER 11 CASE HAS NOT YET BEEN
COMMENCED, THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED BY THE BANKRUPTCY
COURT AS CONTAINING ADEQUATE INFORMATION WITHIN THE MEANING OF SECTION 1125(A)
OF THE BANKRUPTCY CODE. FOLLOWING THE COMMENCEMENT OF ITS CHAPTER 11 CASE,
CONSOLIDATED HYDRO, INC. EXPECTS TO PROMPTLY SEEK AN ORDER OF THE BANKRUPTCY
COURT (I) APPROVING THIS DISCLOSURE STATEMENT AS HAVING CONTAINED ADEQUATE
INFORMATION AND THE SOLICITATION OF VOTES AS HAVING BEEN IN COMPLIANCE WITH
SECTION 1126(B), AND (II) CONFIRMING ITS PLAN OF REORGANIZATION.
DISCLOSURE STATEMENT
DATED AUGUST 8, 1997
SOLICITATION OF VOTES ON
THE PLAN OF REORGANIZATION OF
CONSOLIDATED HYDRO, INC.
from the holders of Consolidated Hydro, Inc.'s outstanding
12% SENIOR DISCOUNT NOTES DUE 2003
SERIES F 8% SENIOR CONVERTIBLE PREFERRED STOCK
SERIES G 9.85% JUNIOR CONVERTIBLE PREFERRED STOCK AND
SERIES H 13.50% CUMULATIVE REDEEMABLE EXCHANGEABLE PREFERRED STOCK
================================================================================
THE VOTING DEADLINE TO ACCEPT OR REJECT THE PLAN OF
REORGANIZATION IS 5:00 P.M., EASTERN TIME, ON SEPTEMBER 9,
1997, UNLESS EXTENDED.
================================================================================
HOLDERS OF CLAIMS AGAINST AND EQUITY INTERESTS IN
CONSOLIDATED HYDRO, INC. ARE ENCOURAGED TO READ AND CAREFULLY CONSIDER THE
MATTERS DESCRIBED IN THIS DISCLOSURE STATEMENT UNDER "RISK FACTORS" PRIOR TO
VOTING. IN MAKING ITS VOTING DECISION, EACH HOLDER MUST RELY ON ITS OWN
EXAMINATION OF CONSOLIDATED HYDRO, INC. AND THE TERMS OF THE PLAN OF
REORGANIZATION, INCLUDING THE MERITS AND RISKS INVOLVED. HOLDERS SHOULD NOT
CONSTRUE THE CONTENTS OF THIS DISCLOSURE STATEMENT AS PROVIDING ANY LEGAL,
BUSINESS, FINANCIAL, OR TAX ADVICE AND SHOULD CONSULT WITH THEIR OWN ADVISORS.
CONSOLIDATED HYDRO INC. IS RELYING ON SECTION 3(A)(9) OF
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), TO EXEMPT FROM
REGISTRATION PURSUANT TO SUCH ACT AND UNDER APPLICABLE STATE SECURITIES OR "BLUE
SKY" LAWS THE OFFER OF NEW COMMON STOCK AND NEW WARRANTS WHICH MAY BE DEEMED TO
BE MADE PURSUANT TO THE SOLICITATION. THE NEW COMMON STOCK AND NEW WARRANTS TO
BE ISSUED ON THE EFFECTIVE DATE WILL NOT HAVE BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") UNDER THE SECURITIES ACT
OR UNDER ANY STATE SECURITIES OR "BLUE SKY" LAW AND WILL BE ISSUED IN RELIANCE
UPON THE EXEMPTION FROM THE SECURITIES ACT AND EQUIVALENT STATE LAW REGISTRATION
PROVIDED BY SECTION 1145(A)(1) OF THE BANKRUPTCY CODE. SEE ARTICLE XI, BELOW,
ENTITLED "SECURITIES LAW MATTERS" FOR INFORMATION ON CERTAIN REGISTRATION RIGHTS
TO BE GRANTED TO RECIPIENTS OF NEW COMMON STOCK AND NEW WARRANTS.
NEITHER THE NEW COMMON STOCK NOR THE NEW WARRANTS TO BE
ISSUED ON THE EFFECTIVE DATE HAVE BEEN APPROVED OR DISAPPROVED BY THE COMMISSION
OR BY ANY STATE SECURITIES COMMISSION OR SIMILAR PUBLIC, GOVERNMENTAL, OR
REGULATORY AUTHORITY, AND NEITHER THE COMMISSION NOR ANY SUCH AUTHORITY HAS
PASSED UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS
DISCLOSURE STATEMENT OR UPON THE MERITS OF THE PLAN OF REORGANIZATION.
CERTAIN STATEMENTS CONTAINED IN THIS DISCLOSURE
STATEMENT, INCLUDING PROJECTED FINANCIAL INFORMATION AND OTHER FORWARD-LOOKING
STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS. THERE CAN BE NO ASSURANCE
THAT SUCH STATEMENTS WILL BE REFLECTIVE OF ACTUAL OUTCOMES. FORWARD-LOOKING
STATEMENTS ARE PROVIDED IN THIS DISCLOSURE STATEMENT PURSUANT TO THE SAFE HARBOR
ESTABLISHED UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND
SHOULD BE EVALUATED IN THE CONTEXT OF THE ESTIMATES, ASSUMPTIONS, UNCERTAINTIES,
AND RISKS DESCRIBED HEREIN.
THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT
ARE MADE AS OF THE DATE HEREOF UNLESS OTHERWISE SPECIFIED.
THE TERMS OF THE PLAN GOVERN IN THE EVENT OF ANY
INCONSISTENCY WITH THE SUMMARIES IN THIS DISCLOSURE STATEMENT.
THE INFORMATION IN THIS DISCLOSURE STATEMENT IS BEING
PROVIDED SOLELY FOR PURPOSES OF VOTING TO ACCEPT OR REJECT THE PLAN OR OBJECTING
TO CONFIRMATION. NOTHING IN THIS DISCLOSURE STATEMENT MAY BE USED BY ANY ENTITY
FOR ANY OTHER PURPOSE.
TABLE OF CONTENTS
-----------------
GLOSSARY..............................................................iii
I. INTRODUCTION.......................................................... 1
A. WHO IS ENTITLED TO VOTE................................... 2
B. SUMMARY OF VOTING PROCEDURES.............................. 3
II. OVERVIEW OF THE PLAN.................................................. 6
III. GENERAL INFORMATION................................................... 12
A. CHI'S BUSINESS............................................ 12
1. General....................................... 12
2. Organizational Structure of CHI............... 12
3. The Hydroelectric Projects.................... 12
4. Power Purchase Agreements..................... 13
5. Industrial Infrastructure Business............ 14
6. Pumped Storage Development.................... 14
7. Employees..................................... 14
B. CHI'S SIGNIFICANT DEBT.................................... 15
1. The Senior Discount Notes..................... 15
2. The DnB Facility.............................. 15
3. Intercompany Indebtedness..................... 16
C. CHI'S EQUITY STRUCTURE.................................... 16
1. Series F Preferred Stock and Series G
Preferred Stock.............................16
2. Series H Preferred Stock...................... 17
3. Common Stock.................................. 18
D. MORGAN STANLEY............................................ 18
IV. FACTORS LEADING TO THE COMMENCEMENT OF THE CHAPTER 11
CASE AND NEW BUSINESS STRATEGY...................................... 18
A. THE CHANGING HYDRO BUSINESS............................... 18
i
B. CASH DIVIDENDS AND CASH INTEREST DUE IN 1998-1999........ 20
C. NEW BUSINESS STRATEGY.................................... 20
D. THE 1996-97 PREPETITION NEGOTIATIONS..................... 23
V. ANTICIPATED EVENTS DURING THE CHAPTER 11 CASE........................ 23
A. COMMENCEMENT OF THE CHAPTER 11 CASE...................... 23
B. ADMINISTRATION OF THE CHAPTER 11 CASE.................... 23
C. CREDITORS' COMMITTEE..................................... 24
D. CONFIRMATION HEARING..................................... 24
E. BAR DATE................................................. 24
VI. THE PLAN OF REORGANIZATION........................................... 25
A. INTRODUCTION............................................. 25
B. ADMINISTRATIVE EXPENSES.................................. 26
C. PRIORITY TAX CLAIMS...................................... 27
D. CLASSIFICATION AND TREATMENT OF CLAIMS AND
EQUITY INTERESTS.....................................27
E. SECURITIES TO BE ISSUED PURSUANT TO THE PLAN............. 33
1. New Common Stock............................. 33
2. New Series B Warrants........................ 34
3. New Series C Warrants........................ 34
4. Management Options........................... 35
F. EXECUTORY CONTRACTS AND UNEXPIRED LEASES................. 35
1. General...................................... 35
2. Insurance Policies........................... 36
3. Indemnification Obligations.................. 36
4. Compensation and Benefit Programs............ 36
5. Retiree Benefits............................. 37
6. Rejection of Certain Put and Call
Agreements............................ 37
G. IMPLEMENTATION OF THE PLAN............................... 37
1. Cancellation of Certain Securities........... 37
2. Issuance or Reservation of New Securities.... 37
3. Registration Rights.......................... 39
4. Effectuating Documents and Further
Transactions.......................... 39
5. Corporate Action............................. 39
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H. METHOD OF DISTRIBUTIONS UNDER THE PLAN................... 39
1. Date and Delivery of Distributions........... 39
2. No Fractional Shares......................... 40
3. Distributions to Holders as of the
Distribution Record Date.................. 40
4. Surrender of Existing Securities and
Agreements................................... 41
5. Hart-Scott-Rodino Act Filing Requirements.... 41
6. Waiver of Enforcement of Priority............ 42
I. PROCEDURES FOR TREATING DISPUTED CLAIMS AND EQUITY
INTERESTS................................................ 42
J. OTHER PLAN PROVISIONS.................................... 43
1. Exculpation.................................. 43
2. Exemption From Transfer Taxes................ 43
3. Limited Releases............................. 44
4. Dissolution of Committee..................... 45
5. Compliance with Tax Requirements............. 45
6. Vesting and Liens............................ 45
7. Discharge of CHI............................. 45
8. Permanent Injunction......................... 45
9. Retention of Jurisdiction.................... 46
10. Amendment or Modification of the Plan........ 46
11. Votes Solicited in Good Faith................ 46
VII. VOTING PROCEDURES AND REQUIREMENTS................................... 47
A. VOTING DEADLINE.......................................... 47
B. HOLDERS OF CLAIMS AND EQUITY INTERESTS ENTITLED TO VOTE.. 48
C. VOTE REQUIRED FOR ACCEPTANCE BY A CLASS.................. 48
D. VOTING PROCEDURES........................................ 49
1. Holders of Claims in Class 3 and Equity
Interests in Classes 7, 8 and 9....;;;;.... 49
2. Withdrawal of Ballot or Master Ballot........ 51
VIII. CONFIRMATION OF THE PLAN............................................. 52
A. CONFIRMATION HEARING..................................... 52
iii
B. REQUIREMENTS FOR CONFIRMATION OF THE PLAN............... 53
1. Statutory Requirements...................... 53
2. Unfair Discrimination and Fair and
Equitable Tests..............................54
3. Feasibility................................. 56
4. Best Interests Test......................... 57
C. EFFECTIVENESS OF THE PLAN............................... 59
1. Conditions Precedent to Effectiveness....... 59
2. Effect of Failure of Conditions............. 60
3. Effect of Confirmation...................... 60
IX. GOVERNANCE AND MANAGEMENT OF REORGANIZED CHI........................ 61
A. GOVERNANCE AND MANAGEMENT OF REORGANIZED CHI............ 61
1. General..................................... 61
2. Board of Directors of Reorganized CHI....... 61
3. Executive Officers of Reorganized CHI....... 62
4. Employment Agreements of Executive Officers
of Reorganized CHI..................... 63
5. Restated Certificate of Incorporation and
Amended By-laws of Reorganized CHI...... 63
B. OWNERSHIP OF REORGANIZED CHI............................ 63
C. MANAGEMENT OPTION PLAN.................................. 64
1. General..................................... 64
2. Tax Consequences............................ 65
X. RISK FACTORS........................................................ 67
A. CERTAIN BANKRUPTCY LAW CONSIDERATIONS................... 67
1. Failure to Satisfy Vote Requirement......... 67
2. Risk of Non-Confirmation of the Plan........ 68
3. Risk of Non-Occurrence of the Effective Date 68
4. Effect of CHI's Chapter 11 Case on Its
Subsidiaries.......................... 68
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B. FACTORS AFFECTING THE VALUE OF THE SECURITIES TO BE ISSUED
UNDER THE PLAN......................................... 68
1. The Industrial Infrastructure Business....... 68
2. The Hydroelectric Industry................... 69
3. Capital Requirements......................... 70
4. Variances from Projections................... 71
5. Lack of Trading Market........................71
6. Dividend Policies............................ 71
7. Significant Holders.......................... 72
C. CERTAIN TAX MATTERS...................................... 72
XI. SECURITIES LAW MATTERS............................................... 72
A. THE SOLICITATION......................................... 72
B. ISSUANCE OF NEW SECURITIES UNDER THE PLAN................ 73
C. REGISTRATION RIGHTS...................................... 74
D. STOCKHOLDERS' AGREEMENT.................................. 74
XII. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN.................. 74
A. CONSEQUENCES TO CHI...................................... 75
1. Cancellation of Debt......................... 75
2. Limitations on NOL Carryforwards and
Other Tax Attributes....................... 76
3. Alternative Minimum Tax...................... 78
B. CONSEQUENCES TO HOLDERS OF SENIOR DISCOUNT
NOTE CLAIMS............................................ 79
1. Gain or Loss................................. 79
2. Distributions in Discharge of Accrued OID.... 80
3. Subsequent Sale of New Common Stock.......... 81
4. Withholding.................................. 81
C. CONSEQUENCES TO HOLDERS OF OLD PREFERRED STOCK........... 81
1. Potential Dividend Characterization.......... 82
2. Sale or Exchange Treatment................... 83
3. Proposed Regulations......................... 83
v
D. CONSEQUENCES TO HOLDERS OF OLD COMMON STOCK............. 84
XIII. VALUATION........................................................... 84
A. ESTIMATED LIQUIDATION VALUE OF ASSETS................... 84
B. REORGANIZATION VALUE.................................... 85
C. NEW WARRANTS AND MANAGEMENT OPTIONS VALUES.............. 87
XIV. FINANCIAL INFORMATION............................................... 89
A. GENERAL................................................. 89
B. CHANGE IN FISCAL YEAR................................... 89
C. SELECTED FINANCIAL DATA................................. 89
D. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................... 89
E. RECENT PERFORMANCE...................................... 90
XV. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION
OF THE PLAN....................................................... 90
A. LIQUIDATION UNDER CHAPTER 7............................. 90
B. ALTERNATIVE PLAN OF REORGANIZATION...................... 91
XVI. CONCLUSION.......................................................... 91
vi
EXHIBITS
PLAN OF REORGANIZATION...................................................... A
CONSOLIDATED HYDRO, INC. ANNUAL REPORT ON FORM 10-K......................... B
CONSOLIDATED HYDRO, INC. QUARTERLY REPORT ON FORM 10-Q...................... C
PROJECTED FINANCIAL INFORMATION............................................. D
LIQUIDATION ANALYSIS........................................................ E
SCHEDULE
CHI'S HYDROELECTRIC PROJECTS................................................ 1
vii
GLOSSARY
The following glossary contains certain important terms
used throughout this Disclosure Statement. If there are any inconsistencies
between the definitions used in the Plan and the definitions used in this
Disclosure Statement, the definitions in the Plan are controlling.
Bankruptcy title 11 of the United States Code, as amended from time to
Code time, as applicable to the Chapter 11 Case.
Bankruptcy the United States District Court for the District of Delaware
Court having jurisdiction over the Chapter 11 Case and, to the
extent of any reference under section 157 of title 28 of the
United States Code, the unit of such District Court under
section 151 of title 28 of the United States Code.
Bankruptcy the Federal Rules of Bankruptcy Procedure as promulgated by
Rules the United States Supreme Court under section 2075 of title 28
of the United States Code, and any Local Rules of the
Bankruptcy Court.
Business Day any day other than a Saturday, Sunday or any
other day on which commercial banks in New York, New York are
required or authorized to close by law or executive order.
Chapter 11 Case the case under chapter 11 of the Bankruptcy Code commenced by
CHI, styled In re Consolidated Hydro, Inc.
Claim as defined in section 101(5) of the Bankruptcy Code.
Class A the authorized class A common stock, par value $0.001 per
Common Stock share, issued by CHI.
Commencement the date on which CHI commences the Chapter 11 Case.
Date
Company collectively, Consolidated Hydro, Inc. and its consolidated
subsidiaries.
Confirmation the date on which the Confirmation Order is signed by the
Date Bankruptcy Judge.
Confirmation the order of the Bankruptcy Court confirming the Plan pursuant
Order to Section 1129 the Bankruptcy Code.
Distribution the day that is three Business Days from and after the
Record Date Confirmation Date.
viii
Effective Date the first Business Day on which the conditions specified in
Section 11.1 of the Plan have been satisfied or waived.
Equity Interest an interest in CHI evidenced by Old Preferred Stock, Old
Common Stock, Old Warrants, Old Options or other instruments
evidencing an ownership interest in CHI, whether or not
transferable.
Industrial as defined in Section III.A.5, entitled "Industrial
Infrastructure Infrastructure Business."
Business
Management options to purchase 810,811 shares of New Class A Common Stock
Options pursuant to the provisions of the Management Option
Agreements to be entered into under the Management Option
Plan.
MS Leveraged The Morgan Stanley Leveraged Equity Fund II, L.P., an
Equity affiliate of Morgan Stanley, Dean Witter, Discover & Co., and
a holder of Series F Preferred Stock and Series G Preferred
Stock.
New Class A the class A common stock of Reorganized CHI authorized and to
Common Stock be issued pursuant to the Plan. The New Class A Common Stock
will have a par value of $.01 per share and such rights with
respect to dividends, liquidation and other matters as are
provided for by applicable nonbankruptcy law or in the
Restated CHI Certificate of Incorporation and the Amended CHI
By-Laws. Each share of New Class A Common Stock will have one
vote.
New Class B the class B common stock of Reorganized CHI authorized and to
Common Stock be issued pursuant to the Plan. The New Class B Common Stock
will have a par value of $.01 per share and such rights with
respect to dividends, liquidation and other matters as are
provided for by applicable nonbankruptcy law or in the
Restated CHI Certificate of Incorporation and the Amended CHI
By-Laws. Each share of New Class B Common Stock will have
one-hundredth (1/100) of one vote.
New Common collectively, the New Class A Common Stock and the New Class B
Stock Common Stock.
New Series B warrants issued by Reorganized CHI to purchase 810,811 shares
Warrants of New Common Stock pursuant to the provisions of the
Series B Warrant Agreement, the form of which is annexed to
the Plan as Exhibit E.
New Series C warrants issued by Reorganized CHI to purchase 526,316 shares
Warrants of New Common Stock pursuant to the provisions of the
Series C Warrant Agreement, the form of which is annexed to
the Plan as Exhibit F.
New Warrants collectively, the New Series B Warrants and the New Series C
Warrants.
ix
Old Common all authorized and issued Class A Common Stock, authorized
Stock class B common stock issued by CHI, Old Options and Old
Warrants, including any right, contractual or otherwise, to
acquire any common stock of CHI, existing prior to the
Commencement Date.
Old Preferred collectively, the Series F Preferred Stock, the Series H
Stock Preferred Stock, and the Series G Preferred Stock.
Pro Rata Share a proportionate share, so that the ratio of the consideration
distributed on account of an Allowed Claim or Allowed Equity
Interest in a Class to the amount of such Allowed Claim or
Allowed Equity Interest is the same as the ratio of the amount
of the consideration distributed on account of all Allowed
Claims or Allowed Equity Interests in such Class to the amount
of all Allowed Claims or Allowed Equity Interests in such
Class.
Reorganized CHI Energy, Inc., or any successor thereto by merger,
CHI consolidation or otherwise, on and after the Effective
Date.
Schedules the schedules of assets and liabilities to be filed by CHI
pursuant to section 521 of the Bankruptcy Code and Bankruptcy
Rule 1007, including any amendments and modifications thereto
through the Confirmation Date.
Senior Discount the 12% Senior Discount Notes due 2003 issued pursuant to that
Notes certain Indenture, dated as of June 15, 1993, as amended
and restated in the Amended and Restated Indenture as of
February 7, 1994.
Series F the Series F 8% Senior Convertible Preferred Stock issued
Preferred Stock pursuant to that certain Purchase Agreement,
dated March 25, 1992, among CHI, The Morgan Stanley Leveraged
Equity Fund II, L.P. and Madison Group, L.P.
Series G the Series G 9.85% Junior Convertible Preferred Stock issued
Preferred Stock pursuant to that certain Purchase Agreement,
dated March 25, 1992, among CHI, The Morgan Stanley Leveraged
Equity Fund II, L.P. and Madison Group, L.P.
Series H the Series H 13.5% Cumulative Redeemable Exchangeable
Preferred Stock Preferred Stock governed by the Certificate of
Designations for the Series H Preferred Stock.
Voting Record August 8, 1997.
Date
x
I.
INTRODUCTION
------------
Consolidated Hydro, Inc. ("CHI") is soliciting
acceptances of its chapter 11 plan of reorganization (the "Plan") attached as
Exhibit A to this Disclosure Statement. This solicitation is being conducted at
this time in order to obtain (prior to the commencement of a chapter 11 case)
sufficient acceptances to enable the Plan to be confirmed by the Bankruptcy
Court pursuant to the provisions of the Bankruptcy Code. CHI anticipates that a
pre-commencement solicitation will significantly simplify, shorten, and reduce
the cost of the administration of the Chapter 11 Case. CHI does not intend to
commence chapter 11 cases for any of its subsidiaries. Unless otherwise defined
herein or in the Glossary, all capitalized terms used herein shall have the same
meanings ascribed to them in the Plan.
CHI is commencing this solicitation after several months
of discussions with (i) an informal committee of substantial bondholders,
consisting of Morgan Stanley & Co. Incorporated ("Morgan Stanley"), Swiss Bank
Corporation ("SBC"), Merrill Lynch Asset Management and Stonehill Investment
Corp. (collectively, the "Unofficial Bondholders' Committee"), (ii)
representatives of The Morgan Stanley Leveraged Equity Fund II, L.P. ("MS
Leveraged Equity"), a significant holder of both the Series F Preferred Stock
and Series G Preferred Stock, and (iii) certain significant holders of the
Series H Preferred Stock. The members of the Unofficial Bondholders' Committee
have been represented by Wachtell, Lipton, Rosen & Katz.
THE PLAN IS THE PRODUCT OF NEGOTIATIONS AMONG THE
COMPANY, MEMBERS OF THE UNOFFICIAL BONDHOLDERS' COMMITTEE, REPRESENTATIVES OF MS
LEVERAGED EQUITY AND REPRESENTATIVES OF MORGAN STANLEY, A HOLDER OF
APPROXIMATELY 32.4% OF THE SERIES H PREFERRED STOCK. CHI'S BOARD OF DIRECTORS,
CHI'S MANAGEMENT, THE UNOFFICIAL BONDHOLDERS' COMMITTEE, MS LEVERAGED EQUITY AND
MORGAN STANLEY, A SIGNIFICANT HOLDER OF THE SERIES H PREFERRED STOCK, STRONGLY
SUPPORT THE PLAN AND CHI STRONGLY URGES YOU TO VOTE TO ACCEPT THE PLAN.
Attached as Exhibits to or accompanying this Disclosure
Statement are copies of the following:
1. The Plan (Exhibit A);
2. Consolidated Hydro, Inc. Annual Report on Form
10-K, dated September 30, 1996 (Exhibit B);
3. Consolidated Hydro, Inc. Quarterly Report on Form
10-Q, dated May 14, 1997 (Exhibit C);
1
4. Projected Financial Information (Exhibit D); and
5. Liquidation Analysis (Exhibit E).
In addition, a ballot for the acceptance or rejection of
the Plan is enclosed with this Disclosure Statement for those holders of Claims
and Equity Interests that CHI believes are entitled to vote to accept or reject
the Plan.
A. WHO IS ENTITLED TO VOTE
-----------------------
Under the Bankruptcy Code, only classes of claims or
equity interests that are impaired are entitled to vote to accept or reject a
proposed chapter 11 plan. Classes of claims or equity interests in which the
holders of claims or interests will not receive or retain any property under a
proposed chapter 11 plan are deemed to have rejected the plan. The holders of
claims or equity interests that are unimpaired under a proposed chapter 11 plan
are deemed to have accepted the plan.
The creditors and equity interest holders that
beneficially own, AS OF THE AUGUST 8, 1997 VOTING RECORD DATE, any of the
following securities issued by CHI, are entitled to vote on the Plan:
12% Senior Discount Notes due 2003 (Class 3)
Series F 8% Senior Convertible Preferred Stock (Class 7)
Series H 13.50% Cumulative Redeemable Exchangeable
Preferred Stock (Class 8)
Series G 9.85% Junior Convertible Preferred Stock (Class 9)
Claims in each of Class 1 (Other Priority Claims), Class
2 (Secured Claims), Class 4 (DnB Claims), Class 5 (General Unsecured Claims) and
Class 6 (Intercompany Claims) will, to the extent unpaid prior to the Effective
Date, be rendered unimpaired or reinstated in accordance with section 1124 of
the Bankruptcy Code. Holders of Claims in those Classes are deemed to have
accepted the Plan.
Equity Interests in Class 10 will be cancelled and will
receive no distributions under the Plan. Therefore, the holders of Equity
Interests in Class 10 are deemed to have rejected the Plan.
CHI is soliciting acceptances only from holders of
Allowed Claims and Allowed Equity Interests in Classes 3, 7, 8 and 9.
2
The Bankruptcy Code defines "acceptance" of a chapter 11
plan by a class of claims if holders of at least two-thirds in amount, and more
than one-half in number, of the claims of that class that actually vote, accept
the Plan. Acceptance of the Plan by a class of equity interest holders requires
the acceptance by the holders of two-thirds of the total number of shares or
interests held by the equity interest holders of that class that actually vote.
For a discussion of these matters, see Article VII "Voting Procedures and
Requirements," and Section VIII.C.1, "Conditions Precedent to Effectiveness."
As Class 10 (Old Common Stock) is deemed to have
rejected the Plan, CHI is requesting confirmation of the Plan under section
1129(b) of the Bankruptcy Code. Section 1129(b) of the Bankruptcy Code permits
the confirmation of a plan of reorganization, notwithstanding the rejection of
such plan by one or more impaired classes of claims or equity interests, if it
does not discriminate unfairly and is "fair and equitable" with respect to the
rejecting class.
Liabilities incurred in the ordinary course of business
by CHI after the Commencement Date that are described in the Plan as
Administrative Expense Claims will be paid by CHI in accordance with the terms
and subject to the conditions of any agreements governing, instruments
evidencing or other documents relating to such transactions. Holders of
Administrative Expense Claims are not entitled to vote to accept or reject the
Plan.
B. SUMMARY OF VOTING PROCEDURES
----------------------------
To be counted, your vote must be received by The Altman
Group, Inc., CHI's voting agent (the "Voting Agent"), so that it is received by
the Voting Agent at the following address, before the VOTING DEADLINE OF 5:00
P.M. (EASTERN TIME) ON SEPTEMBER 9, 1997:
CONSOLIDATED HYDRO, INC.
c/o The Altman Group, Inc.
60 East 42nd Street
New York, New York 10165
(212) 681-9600
DO NOT RETURN YOUR NOTES OR SECURITIES WITH YOUR BALLOT.
IF YOU ARE, AS OF AUGUST 8, 1997, THE VOTING RECORD DATE, THE BENEFICIAL OWNER
OF 12% Senior Discount Notes (Class 3), Series F 8% Senior Convertible Preferred
Stock (Class 7), Series H 13.50% Cumulative Redeemable Exchangeable Preferred
Stock (Class 8) or Series G 9.85% Junior Convertible Preferred
Stock (Class 9) you are entitled to vote.
IF YOUR NOTES OR SHARES ARE REGISTERED IN YOUR OWN NAME:
Please complete the information requested on the Ballot, sign, date, and
indicate your vote on the
3
Ballot, and return the Ballot in the pre-addressed, postage-paid
envelope so that it is actually received by the Voting Agent before
the Voting Deadline.
IF YOUR NOTES OR SHARES ARE REGISTERED IN "STREET NAME"
AND:
YOUR BALLOT HAS ALREADY BEEN SIGNED (OR
"PREVALIDATED") BY YOUR NOMINEE (YOUR
BROKER, BANK, OTHER NOMINEE, OR THEIR
AGENT): Please complete the information
requested on the Ballot, indicate your vote
on the Ballot, and return your completed
Ballot in the enclosed pre-addressed
postage-paid envelope so that it is actually
received by the Voting Agent before the
Voting Deadline;
OR
YOUR BALLOT HAS NOT BEEN SIGNED (OR
"PREVALIDATED") BY YOUR NOMINEE (YOUR
BROKER, BANK, OTHER NOMINEE, OR THEIR
AGENT): Please sign the Ballot, complete the
information requested on the Ballot, date
and indicate your vote on the Ballot, and
return the Ballot to your nominee in
sufficient time for your nominee to then
forward your Ballot to the Voting Agent so
that it is actually received by the Voting
Agent before the Voting Deadline.
IF YOU ARE, AS OF THE VOTING RECORD DATE, THE NOMINEE FOR A BENEFICIAL OWNER of
12% Senior Discount Notes (Class 3), Series F 8% Senior Convertible Preferred
Stock (Class 7), Series H 13.50% Cumulative Redeemable Exchangeable Preferred
Stock (Class 8) or Series G 9.85% Junior Convertible Preferred Stock (Class 9),
please follow the instructions below:
Please forward a copy of this Disclosure
Statement and the appropriate Ballot to each beneficial owner, AND:
ALL BALLOTS THAT YOU HAVE SIGNED (OR
"PREVALIDATED") should be completed and
returned by the beneficial owners directly
to the Voting Agent so that such Ballots are
received by the Voting Agent prior to the
Voting Deadline.
ALL BALLOTS THAT YOU HAVE NOT SIGNED (OR
"PREVALIDATED") must be collected by you,
and you should complete the appropriate
Master Ballot, and deliver the completed
Master Ballot so that it is actually
received by the Voting Agent prior to the
Voting Deadline.
4
IF YOU ARE A SECURITIES CLEARING AGENCY: PLEASE ARRANGE
FOR YOUR RESPECTIVE PARTICIPANTS TO VOTE BY EXECUTING AN OMNIBUS PROXY IN THEIR
FAVOR.
Entities not voting to accept the Plan will be bound by
the Plan if it is accepted by the requisite holders of Claims and Equity
Interests, as described in Article VII "Voting Procedures and Requirements," and
confirmed.
If you are a creditor or a holder of an Equity Interest
entitled to vote on the Plan and did not receive a Ballot, received a damaged
Ballot or lost your Ballot, or if you have any questions about this Disclosure
Statement, the Plan or the procedures for voting on the Plan, please call The
Altman Group, Inc. at (212) 681-9600.
For detailed voting instructions, see Article VII,
below, entitled "VOTING PROCEDURES AND REQUIREMENTS" and the instructions
accompanying your Ballot.
5
II.
OVERVIEW OF THE PLAN
--------------------
The following table briefly summarizes the
classification and treatment of Claims and Equity Interests under the Plan.
SUMMARY OF CLASSIFICATION AND TREATMENT
oF CLAIMS AND EQUITY INTERESTS1
====================================================================================================================================
Estimated
CLASS Type of Claim Treatment Percent
Recovery
- - - -----------------------------------------------------------------------------------------------------------------------------------
Compensation and Unimpaired; to be paid in full, in Cash, on the Effective Date, or in 100%
-- Reimbursement, and accordance with such terms as may be mutually agreed to by the holder
Other Administrative and CHI.
Expense Claims
- - - -----------------------------------------------------------------------------------------------------------------------------------
Priority Tax Claims Unimpaired; except to the extent that a holder of an Allowed Priority Tax 100%
-- Claim has been paid by CHI prior to the Effective Date or agrees to a
different treatment, each such holder will be paid, at the sole discretion of
Reorganized CHI, (i) in full by Reorganized CHI in the ordinary course
of business in accordance with the terms and conditions of any law,
regulation, agreement, instrument or other document relating to such
claims or (ii) deferred Cash having a value, as of the Effective Date,
equal to such Allowed Priority Tax Claim, over a period not exceeding
six years after the date of assessment of such Allowed Priority Tax
Claim.
- - - -----------------------------------------------------------------------------------------------------------------------------------
1 Other Priority Claims Unimpaired; to the extent unpaid prior to the Effective Date and except to 100%
the extent that a holder of such a claim agrees to a different treatment,
each Allowed Other Priority Claim shall be rendered unimpaired or
reinstated in accordance with section 1124 of the Bankruptcy Code.
- - - -----------------------------------------------------------------------------------------------------------------------------------
2 Secured Claims Unimpaired; except to the extent that a holder of such a claim agrees to a 100%
different treatment, each claim shall be rendered unimpaired or reinstated in
accordance with section 1124 of the Bankruptcy Code.
- - - -----------------------------------------------------------------------------------------------------------------------------------
<FN>
1. This table is only a summary of the classification and treatment of Claims
and Equity Interests under the Plan. Reference should be made to the entire
Disclosure Statement and the Plan for a complete description of the
classification and treatment of Claims and Equity Interests.
</FN>
6
====================================================================================================================================
Estimated
CLASS Type of Claim Treatment Percent
Recovery
- - - ------------------------------------------------------------------------------------------------------------------------------------
3 12% Senior Discount Impaired; accreted claim, as of the Commencement Date, to be 52.2%2
Notes due 2003 exchanged for:
o 100% of the New Common Stock, subject to dilution from the
New Series B Warrants and New Series C Warrants, and also
subject to dilution from the Management Options; and
o $15 million plus the Unofficial Bondholders' Committee
Expenses in Cash distributed as follows:
(i) $10,000,000 plus the Unofficial Bondholders' Committee
Expenses on the Effective Date;
(ii) up to $5,000,000 payable out of Excess Cash and the
proceeds of the Working Capital Facility (to the extent
permitted by the lender under the Working Capital Facility)
on or before December 31, 1997; and
(iii) if the payment set forth in subsection (ii) is not
made in full by December 31, 1997, the balance of the
$5,000,000 payment on or before March 31, 1998, with interest
thereon at the Prime Rate from December 31, 1997 until the date
the balance is paid in full.
- - - ------------------------------------------------------------------------------------------------------------------------------------
4 DnB Claims Unimpaired; except to the extent that DnB agrees to a different treatment, 100%
the DnB Claims shall be rendered unimpaired or reinstated in accordance
with section 1124 of the Bankruptcy Code.
- - - ------------------------------------------------------------------------------------------------------------------------------------
5 General Unsecured Unimpaired; to the extent unpaid prior to the Effective Date and except to 100%
Claims the extent that a holder of such a claim agrees to a different treatment,
each Allowed General Unsecured Claim shall be rendered unimpaired or
reinstated in accordance with section 1124 of the Bankruptcy Code.
- - - ------------------------------------------------------------------------------------------------------------------------------------
6 Intercompany Claims Unimpaired; to the extent unpaid prior to the Effective Date and except to 100%
the extent that a holder of such a claim agrees to a different treatment,
each Allowed Intercompany Claim shall be rendered unimpaired or
reinstated in accordance with section 1124 of the Bankruptcy Code.
- - - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
2. The estimated recoveries for holders of Allowed Senior Discount Note
Claims are based upon the midpoint of the current estimates of the value of
the New Common Stock to be issued under the Plan and the $15 million Cash
payment (without taking into account the Unofficial Bondholders' Committee
Expenses) under the Plan without any discount with respect to the timing of
such payment. The market and economic conditions upon which the value of
the New Common Stock is based are beyond the control of CHI, and therefore,
the actual results achieved necessarily may vary (higher or lower). If the
value of the New Common Stock varies from the current estimates, the
estimated percent recovery will also change. Such variation may be material
and adverse.
</FN>
7
====================================================================================================================================
ESTIMATED
CLASS Type of Interest TREATMENT PERCENT
RECOVERY
- - - ------------------------------------------------------------------------------------------------------------------------------------
7 Series F 8% Senior Impaired. The Series F Preferred Stock will be treated pari passu with 0.7%5
Convertible Preferred Series G Preferred Stock and Series H Preferred Stock.3 The preferred
Stock Interests liquidation preference and accrued dividends will be exchanged for:
o New Series B Warrants - which entitle the holders to
purchase in the aggregate approximately 224,387 shares
or approximately 2.1%4 of the New Class A Common Stock
(subject to dilution as set forth below); and
o New Series C Warrants - which entitle the holders to
purchase in the aggregate approximately 145,655 shares
or approximately 1.4%4 of the New Class A Common Stock
(subject to dilution as set forth below).
The New Series B Warrants and the New Series C Warrants have the terms and
conditions described below.
- - - ------------------------------------------------------------------------------------------------------------------------------------
8 Series H 13.50% Impaired. The Series H Preferred Stock will be treated pari passu with 0.7%5
Cumulative Series F Preferred Stock and Series G Preferred Stock.3 The preferred
Redeemable liquidation preference and accrued dividends will be exchanged for:
Exchangeable
Preferred Stock o New Series B Warrants - which entitle the holders to purchase
Interests in the aggregate approximately 346,525 shares or
approximately 3.2%4 of New Common Stock (subject to
dilution as set forth below); and
o New Series C Warrants - which entitle the holders to purchase in
the aggregate approximately 224,937 shares or approximately
2.1%4 of New Common Stock (subject to dilution as set forth
below).
The New Series B Warrants and the New Series C Warrants have the terms and
conditions described below.
- - - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
3. If Class 8 (Series H Preferred Stock) votes to reject the Plan, each Class of
Old Preferred Stock will not be treated pari passu. Instead, the holders of
Allowed Series F Preferred Stock Equity Interests will receive, in addition to
the treatment described in the chart above, the treatment that otherwise would
have been provided to Class 9 (Series G Preferred Stock) and Class 9 will
receive no distribution. The distributions to Class 8 (Series H Preferred Stock)
will not change regardless of whether Class 8 votes to accept or reject the
Plan.
4. The percentage and number of New Series B Warrants and New Series C
Warrants to be distributed to each of Classes 7, 8 and 9 are based upon the
accrued liquidation preference of the Series F Preferred Stock, the Series G
Preferred Stock and the Series H Preferred Stock as of the Commencement Date.
For purposes of this Disclosure Statement, CHI has projected that the
Commencement Date will be September 30, 1997. To the extent that the
Commencement Date is later or earlier than September 30, 1997, the actual
percentage and number of New Series B Warrants and New Series C Warrants to be
distributed may vary. Such variation is not likely to be material.
5. The estimated recoveries for holders of Equity Interests in Classes 7, 8
and 9 on their respective allowed claim amounts, as of the Commencement Date are
based upon the midpoint of the current estimates of the value of the New Series
B Warrants and the New Series C Warrants to be issued under the Plan. The market
and economic conditions upon which the values of the New Series B Warrants and
New Series C Warrants are based are beyond the control of CHI, and therefore,
the actual results achieved necessarily may vary (higher or lower). If the value
of the New Series B Warrants and/or New Series C Warrants varies from the
current estimates, the estimated percent recovery will also change. Such
variation may be material and adverse.
</FN>
8
====================================================================================================================================
ESTIMATED
CLASS Type of Interest TREATMENT PERCENT
RECOVERY
- - - ------------------------------------------------------------------------------------------------------------------------------------
9 Series G 9.85% Junior Impaired. The Series G Preferred Stock will be treated pari passu with 0.7%8
Convertible Preferred Series F Preferred Stock and Series H Preferred Stock.6 The preferred
Stock Interests liquidation preference and accrued dividends will be exchanged for:
o New Series B Warrants - which entitle the holders to purchase in
the aggregate approximately 239,899 shares or approximately
2.2%7 of the New Class A Common Stock (subject to dilution as
set forth below); and
o New Series C Warrants - which entitle the holders to purchase in
the aggregate approximately 155,724 shares or approximately
1.5%7 of the New Class A Common Stock (subject to dilution as
set forth below).
The New Series B Warrants and the New Series C
Warrants have the terms and conditions described below.
- - - ------------------------------------------------------------------------------------------------------------------------------------
7 Summary Description New Series B Warrants: N/A
---------------------
8 of New Warrants
and Amount: Warrants exercisable for up to 7.5%, or a total of
9 810,811 shares, of New Common Stock (subject to
dilution as set forth below).
Term: 6 years from the Effective Date
Price: $10 per share
Vesting Exercisable for up to 1% of the New Common Stock
Schedule: if, as and when the total capital (debt and equity)
invested in industrial infrastructure projects
that either (i) close within 3 years from the Effective
Date or (ii) are subject to Definitive Agreements (as
such term is defined in the Series B Warrant Agreement)
within such 3 year period and thereafter close within
the term of the warrants, equals $60 million.
The additional New Series B Warrants exercisable for
the remaining 6.5% of the New Common Stock will vest
incrementally if, as and when the total capital
invested in industrial infrastructure projects
increases from $60 million to $450 million within the
time periods set forth above.
Dilution and Subject to dilution from the New Series C Warrants
Protections: and the Management Options; customary antidilution
provisions and protections against Extraordinary
Dividends (as defined in the Series B Warrant
Agreement).
<FN>
6. See Footnote 3, supra.
7. See Footnote 4, supra.
8. See Footnote 5, supra.
</FN>
9
====================================================================================================================================
ESTIMATED
CLASS Type of Interest TREATMENT PERCENT
RECOVERY
- - - ------------------------------------------------------------------------------------------------------------------------------------
7 Summary Description New Series C Warrants: N/A
---------------------
8 of New Warrants
and (continued) Amount: Warrants exercisable for up to 5%, or 526,316 shares,
9 of the New Common Stock (subject to dilution as set
forth below).
Term: 8 years from the Effective Date
Price: $18.45 per share9
Dilution and Subject to dilution from the New Series B Warrants
Protections: and the Management Options; customary antidilution
provisions and protections against Extraordinary
Dividends (as defined in the Series C Warrant Agreement).
- - - ------------------------------------------------------------------------------------------------------------------------------------
10 Old Common Stock Impaired; no distributions; Old Common Stock will be cancelled. 0%
Interests
====================================================================================================================================
THE CONFIRMATION HEARING
- - - ------------------------
If the Plan is approved by the requisite number and
amount of Claims and Equity Interests, as applicable, CHI will file its Chapter
11 Case and request that the Bankruptcy Court schedule a hearing to consider the
confirmation of the Plan (the "Confirmation Hearing") as soon as possible, at
the United States Bankruptcy Court, 824 Market Street, Sixth Floor, Wilmington,
Delaware 19801 or such other location as the Bankruptcy Court directs.
THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT
ARE MADE AS OF THE DATE HEREOF UNLESS ANOTHER TIME IS SPECIFIED HEREIN, AND THE
DELIVERY OF THIS DISCLOSURE STATEMENT SHALL NOT CREATE AN IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE INFORMATION STATED SINCE THE DATE HEREOF. HOLDERS OF
CLAIMS AND EQUITY INTERESTS SHOULD CAREFULLY READ THIS DISCLOSURE STATEMENT IN
ITS ENTIRETY PRIOR TO VOTING ON THE PLAN.
FOR THE CONVENIENCE OF HOLDERS OF CLAIMS AND EQUITY
INTERESTS, THIS DISCLOSURE STATEMENT SUMMARIZES THE TERMS OF THE
PLAN, BUT THE PLAN ITSELF QUALIFIES ALL SUMMARIES. IF ANY
INCONSISTENCY EXISTS BETWEEN THE PLAN AND THIS DISCLOSURE STATE-
- - - --------
[FN]
9. The exercise price of the New Series C Warrants will be based on the accreted
claim of the holders of the Senior Discount Notes as of the Commencement Date.
For purposes of the Disclosure Statement, CHI has projected that the
Commencement Date will be September 30, 1997. To the extent that the
Commencement Date is later or earlier that September 30, 1997, the exercise
price of the New Series C Warrants will vary. Such variation is not likely to be
material.
</FN>
10
MENT, THE TERMS OF THE PLAN ARE CONTROLLING. THIS DISCLOSURE STATEMENT MAY NOT
BE RELIED ON FOR ANY PURPOSE OTHER THAN TO DETERMINE WHETHER TO VOTE TO ACCEPT
OR REJECT THE PLAN, AND NOTHING STATED SHALL CONSTITUTE AN ADMISSION OF ANY FACT
OR LIABILITY BY ANY PARTY, OR BE ADMISSIBLE IN ANY PROCEEDING INVOLVING CHI OR
ANY OTHER PARTY, OR BE DEEMED CONCLUSIVE EVIDENCE OF THE TAX OR OTHER LEGAL
EFFECTS OF THE PLAN ON CHI OR HOLDERS OF CLAIMS OR EQUITY INTERESTS. CERTAIN OF
THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT, BY NATURE, ARE FORWARD
LOOKING AND CONTAIN ESTIMATES AND ASSUMPTIONS. THERE CAN BE NO ASSURANCE THAT
SUCH STATEMENTS WILL BE REFLECTIVE OF ACTUAL OUTCOMES. ALL HOLDERS OF CLAIMS AND
EQUITY INTERESTS SHOULD CAREFULLY READ AND CONSIDER FULLY ARTICLE X "RISK
FACTORS" BEFORE VOTING TO ACCEPT OR REJECT THE PLAN.
SUMMARIES OF CERTAIN PROVISIONS OF AGREEMENTS REFERRED
TO IN THIS DISCLOSURE STATEMENT DO NOT PURPORT TO BE COMPLETE AND ARE SUBJECT
TO, AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO, THE FULL TEXT AND TO
ALL OF THE PROVISIONS OF THE APPLICABLE AGREEMENT, INCLUDING THE DEFINITIONS OF
CERTAIN TERMS CONTAINED IN SUCH AGREEMENT.
CHI BELIEVES THAT THE PLAN ENABLES IT TO SUCCESSFULLY
REORGANIZE AND ACCOMPLISH THE OBJECTIVES OF CHAPTER 11 AND PROVIDES FOR THE BEST
RECOVERIES TO HOLDERS OF CLAIMS AND EQUITY INTERESTS. ESSENTIALLY, THE NET
RESULT OF THE PLAN IS TO DELEVERAGE THE BUSINESS OF CHI BY ELIMINATING
APPROXIMATELY $202 MILLION IN FACE AMOUNT OF DEBT BY EXCHANGING SUCH DEBT FOR
THE NEW COMMON STOCK AND CASH AND CONVERTING $280.6 MILLION OF PREFERRED STOCK
INTO WARRANTS FOR UP TO A MAXIMUM OF 12.5% OF THE NEW COMMON STOCK OF
REORGANIZED CHI, IF CERTAIN SPECIFIED CONDITIONS ARE SATISFIED.
11
III.
GENERAL INFORMATION
-------------------
A. CHI'S BUSINESS
--------------
1. GENERAL
CHI and its operating subsidiaries (collectively, the
"Company") are principally engaged in the development, operation and management
of hydroelectric power plants throughout the United States and in Canada.
Founded in 1985, the Company is the largest independent hydroelectric power
producer in the United States, based on operating megawatts. As of June 30,
1997, the Company owned, operated or leased 91 hydroelectric projects in the
United States and Canada, with aggregate capacity of approximately 343 megawatts
and has one 15-megawatt project under construction in Canada.
The Company's hydroelectric projects are located in 15
states and two Canadian provinces. The United States hydroelectric projects are
clustered in four regions: the Northeast, Southeast, Northwest and West, with a
concentration in the Northeast, a region characterized by relatively consistent
long-term water flow and power purchase contract rates which are higher on
average than in most other regions in the country. Additionally, the Company
operates three hydroelectric projects with an aggregate capacity of 80 megawatts
in Ontario, Canada pursuant to an operations and maintenance contract, and has
begun construction of a 15-megawatt hydroelectric project in Newfoundland,
Canada in partnership with a Canadian paper company.
2. ORGANIZATIONAL STRUCTURE OF CHI
CHI is a holding company which owns interests in
numerous entities which own directly or indirectly various interests in the
hydroelectric projects. CHI has 81 direct and indirect wholly-owned
subsidiaries, in both corporate and non-corporate forms. In addition, CHI has
less than a 100% ownership interest in 6 corporate subsidiaries. CHI also has
less than 100% ownership interest in 17 partnerships and joint ventures. Each of
the Company's hydroelectric projects is owned by one or more, of the foregoing
entities. The Company's hydroelectric projects, as of June 30, 1997, are listed
on Schedule 1 to this Disclosure Statement.
3. THE HYDROELECTRIC PROJECTS
As of June 30, 1997, the Company had a 100% ownership
interest or long- term lease interest in 55 hydroelectric projects (145
megawatts), a partial ownership interest in 11 hydroelectric projects (82
megawatts), operations and maintenance ("O&M") contracts with 25 hydroelectric
projects (116 megawatts) and one hydroelectric project (15 megawatts)
12
under construction. CHI sells substantially all of the output from these
hydroelectric projects, excluding the operating Canadian hydroelectric projects,
to public utility companies pursuant to take and pay power purchase contracts.
These contracts vary in their terms but typically provide scheduled rates
throughout the life of the contracts, which are generally for a term of 15 to 40
years from inception. Currently, all of the Company's revenue is derived from
the ownership and operation of hydroelectric facilities.
The hydroelectric projects were financed using a variety
of structures primarily consisting of limited recourse or non-recourse debt. As
of June 30, 1997, the Company had $100.3 million (exclusive of the Boott project
operating lease) of direct project financing obligations that are limited
recourse or non-recourse to CHI. Such obligations are structured to be fully
serviced out of each applicable project's cash flow, however, many of the
projects are cross-defaulted. In the event of a project default and assuming CHI
is unable or chooses not to cure such default within applicable cure periods (if
any), the lenders or lessor would generally have rights to the facility, related
contracts and all licenses and permits necessary to operate the facility and, in
the event of foreclosure after such a default, the Company might not retain any
interest in such project. As of June 30, 1997, the Company is not aware of, and
does not believe that there are, any events of default which exist at any
project.
4. POWER PURCHASE AGREEMENTS
As of June 30, 1997, substantially all energy and
capacity of the Company's existing majority-owned hydroelectric projects in the
United States is sold to 19 public utilities pursuant to take and pay long-term
power purchase agreements with remaining terms ranging from approximately 6
months to 28 years. The Company's power purchase agreements generally require
the utility company to purchase all energy delivered by the relevant facility.
These power purchase agreements generally do not provide for termination prior
to expiration except in the case of continuing nonperformance by the
project-owning entity and certain events of bankruptcy or insolvency of the
project subsidiary.
The Company's power purchase agreements have either
fixed or fluctuating rates or a combination thereof. Fluctuating rates and
combination rate contracts are generally based on avoided costs,10 or a
percentage thereof. The Company's fixed rate contracts often contain (i) blended
rates typically determined as of the date of the contract based on projected
annual avoided costs averaged over a 15 to 30 year period; or (ii) an escalation
factor that reflects estimated increases in projected annual avoided costs over
the term of the contract.
- - - --------
10. Avoided cost generally means the costs that the utility would otherwise
incur in (i) producing the incremental energy itself or (ii) purchasing energy
from another source.
13
All of the Company's existing hydroelectric facilities
in the United States are qualifying facilities (each a "QF") under the Public
Utility Regulatory Policy Act of 1978 ("PURPA"), which requires utilities to
purchase power from QFs, and exempts QFs from most utility regulatory
requirements. Pursuant to PURPA, electric utilities are required to purchase
power from QFs at prices based on the utilities' current avoided cost. In recent
years, a number of utilities have begun to challenge certain provisions of PURPA
as no longer appropriate in the current U.S. energy market.
5. INDUSTRIAL INFRASTRUCTURE BUSINESS
In November 1995, the Company established a subsidiary,
CHI Power, Inc. ("CHI Power"), for the purpose of developing, acquiring,
operating and managing industrial energy facilities and related industrial
assets in such sectors as pulp and paper, petroleum refining, chemical,
textiles, and other energy-intensive industries (the "Industrial Infrastructure
Business"). The Company has begun to seek opportunities for providing
energy-related products and services in an effort to respond to changing market
conditions. Such opportunities, if available, will permit the Company to move
away from relying exclusively on hydroelectric power.
For a more detailed discussion of the Industrial
Infrastructure Business, see
Section IV.C, below, entitled "New Business Strategy."
6. PUMPED STORAGE DEVELOPMENT
As of June 30, 1997, the Company held interests in the
development of four pumped storage facilities through its majority-owned
subsidiaries Consolidated Pumped Storage, Inc. and Summit Energy Storage Inc.
The Company has concluded however, that the prospects for successfully
developing its pumped storage prospects are remote, and is currently limiting
its pumped storage activities to the minimum necessary to maintain the viability
of the Summit and River Mountain projects and the monitoring of market
conditions relevant to the projects with the intention of pursuing commitments
from utilities for the balance of the projects' capacity. In fiscal year 1995,
the Company wrote off its $1.3 million investment in two of its early stage
pumped storage development projects, Boulder Valley and Lewis River. In fiscal
year 1996, in conjunction with its implementation of Statement of Financial
Accounting Standards No. 121 Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, the Company additionally wrote off
all but $0.1 million of its remaining pumped storage investments, amounting to a
write-off of $38.5 million in such fiscal year.
7. EMPLOYEES
As of June 30, 1997, CHI had approximately 250 employees
(including part- time and seasonal personnel) at its corporate headquarters and
various facilities. None of the
14
employees are subject to collective bargaining agreements. The Company maintains
offices in Stamford, Connecticut (Corporate Headquarters); Houston, Texas (CHI
Power Headquarters); Andover, Massachusetts; Greenville, South Carolina;
Montreal, Quebec; and North Bend, Washington, in addition to other operations
and maintenance facilities.
B. CHI'S SIGNIFICANT DEBT
----------------------
The significant debt of CHI generally consists of
obligations under or pursuant to (i) the Senior Discount Notes, (ii) the DnB
Facility and (iii) intercompany indebtedness.
1. THE SENIOR DISCOUNT NOTES
In June 1993, the Company raised $182.4 million through
an offering in reliance on Rule 144A of the Securities Act, comprised of $112.1
million from the sale of 12% senior discount notes due 2003 (the "Old Notes")
and $70.3 million from the sale of 13,695 units. Each unit consisted of 10
shares of 13.5% cumulative redeemable exchangeable series H preferred stock (the
"Old Series H Preferred Stock") and 18 warrants (the "Old Class B Warrants") to
purchase Class B common stock (the "Class B Common Stock") of the Company. Each
Class B Warrant entitled the holder to purchase one share of Class B Common
Stock at an exercise price of $40 per share. The Class B Warrants detached and
became separately transferable from the Old Series H Preferred Stock at the
close of business on November 22, 1993.
In February 1994, the Company consummated an offer to
exchange the Old Notes and the Old Series H Preferred Stock for the Senior
Discount Notes and the Series H Preferred Stock. The forms and terms of the old
and new securities are identical, except that: (i) each of the Senior Discount
Notes and the Series H Preferred Stock are registered under the Securities Act
and hence do not bear the legend restricting the transfer thereof; and (ii)
holders of each of the Senior Discount Notes and the Series H Preferred Stock
are not entitled to certain rights of holders of the Old Notes and Old Series H
Preferred Stock, respectively, under a registration rights agreement.
2. THE DNB FACILITY
In October 1993, one of the Company's former senior
lenders, Den norske Bank AS ("DnB"), provided the Company with a $20 million
unsecured working capital facility (the "DnB Facility"), which had an initial
expiration date of June 30, 1997. The DnB Facility is pari passu with the Senior
Discount Notes. Under certain limited circumstances, pursuant to the terms of
the agreement, DnB had the right, upon notice to the Company, to limit any
further borrowings under the DnB Facility and require the Company to repay any
and all outstanding indebtedness thereunder within one year from the date DnB
provides such notice to the Company. Throughout 1996, the Company and DnB
negotiated
15
an amendment to the DnB Facility to extend the maturity date thereof and reduce
the outstanding indebtedness under the facility.
Effective July 1, 1996, the Company and DnB agreed on an
amendment to the DnB Facility, which amendment, among other things, changes the
final expiration date of the DnB Facility to June 30, 1998 from June 30, 1997,
reduces (in steps) the total commitment under the DnB Facility from
approximately $6.0 million at September 30, 1996 to $2 million at July 31, 1997,
to zero at June 30, 1998, limits the use of the facility to letters of credit
only and modifies certain financial covenants.
The DnB Facility contains certain affirmative and
restrictive covenants which are generally consistent with the terms of the
Senior Discount Notes and the Old Preferred Stock. As of August 1, 1997, the
aggregate amount of letters of credit outstanding under the DnB Facility was
approximately $2 million.
3. INTERCOMPANY INDEBTEDNESS
As of the Commencement Date, CHI's long-term debt
includes an unsecured demand note, dated June 23, 1993 (the "CHI/Finance Note"),
issued to CHI Finance, Inc. ("CHI Finance"), a wholly-owned subsidiary of CHI.
Interest on the CHI/Finance Note accrues at the rate of 7% per year. As of June
30, 1997, approximately $300.1 million was outstanding under the CHI/Finance
Note. The net amount of the Intercompany Claims of CHI Finance against CHI,
including amounts owed on the CHI/Finance Note, is approximately $326.6 million,
as of June 30, 1997 (the "CHI Finance Claims").
Other than the CHI Finance Claims, the Claims of the
Nondebtor Subsidiaries against CHI are not significant. As of June 30, 1997, in
the aggregate CHI has a net receivable from the Nondebtor Subsidiaries, other
than CHI Finance, of approximately $60.1 million. In addition, as a result of
CHI's centralized cash management system, at any given time certain of the
Nondebtor Subsidiaries may hold Intercompany Claims.
C. CHI'S EQUITY STRUCTURE
----------------------
As of June 30, 1997, CHI has three series of preferred
stock issued and outstanding (Classes F, G, and H) and one series of common
stock issued and outstanding (Class A). In addition, as of June 30, 1997, CHI
had certain outstanding warrants and options to purchase the common stock of CHI
at prices ranging from $13.50 to $50.00.
1. SERIES F PREFERRED STOCK AND SERIES G PREFERRED STOCK
Series F Preferred Stock and Series G Preferred Stock,
were sold to MS Leveraged Equity and Madison Group, L.P. ("Madison") as part of
a recapitalization of CHI in March 1992. MS Leveraged Equity and Madison
purchased 55,000 shares of Series F
16
Preferred Stock, 55,000 shares of Series G Preferred Stock and certain warrants
to purchase common stock for an aggregate purchase price of $110 million. At all
times since March 1992, substantially all of the Series F Preferred Stock and
Series G Preferred Stock have been owned by MS Leveraged Equity and Madison.
The Series F Preferred Stock and the Series G Preferred
Stock are convertible into Class A Common Stock, subject to certain specified
conditions, at the option of the holder, through March 25, 2007, at a per share
rate equivalent to the liquidation preference ($1,000) divided by the conversion
price (initially $40 per share, subject to adjustment). Dividends on the Series
F Preferred Stock and the Series G Preferred Stock are cumulative (amounting to
approximately $50.8 million at June 30, 1997) and are payable annually in
arrears upon declaration by CHI's Board of Directors. The cumulative undeclared
dividends in arrears per share as of June 30, 1997, was $413.33 for the original
55,000 shares of Series F Preferred Stock and $107.11 for the 1,279 shares of
Series F Preferred Stock issued subsequently, and $508.92 for the original
55,000 shares of Series G Preferred Stock and $131.88 for the 1,279 shares of
Series G Preferred Stock issued subsequently. The Series F Preferred Stock
liquidation preference, as of June 30, 1997, of $1,413.33 per share for the
original 55,000 shares and $1,107.11 for the 1,279 shares issued subsequently,
is senior to the Series G Preferred Stock liquidation preference of $1,508.92
per share for the original 55,000 shares and $1,131.88 for the 1,279 shares
issued subsequently.
2. SERIES H PREFERRED STOCK
The Series H Preferred Stock was sold to public
investors in connection with the June 1993 refinancing and the sale of the
Senior Discount Notes. The Series H Preferred Stock ranks senior to all classes
of common stock and the Series G Preferred Stock and junior to the Series F
Preferred Stock. The Series H Preferred Stock is mandatorily redeemable on
December 31, 2003, at $1000 per share, plus accrued and unpaid dividends. It may
be redeemed, at the Company's option, however, at any time after June 30, 1998,
in whole or in part, at the then current liquidation preference plus all accrued
and unpaid dividends. The initial liquidation preference of the Series H
Preferred Stock was $513.32 per share at issuance on June 22, 1993, and, as of
June 30, 1997, the liquidation preference was $875.67 per share. The liquidation
preference will be increased as a form of payment for declared dividends
required quarterly in arrears, computed based on the then current liquidation
preference, until increasing the liquidation preference to $1,000 per share on
June 30, 1998, after which time the dividends will become payable in cash from
legally available funds.
At all times since June 1993, there have been 136,950
shares of Series H Preferred Stock issued and outstanding. Some of the members
of the Unofficial Bondholders's Committee hold Series H Preferred Stock.
17
3. COMMON STOCK
There are two series of CHI common stock. Class A Common
Stock and the Class B Common Stock. As of June 30, 1997, there are 1,285,762
shares of Class A Common Stock issued and outstanding. As of June 30, 1997,
there are no issued and outstanding shares of Class B Common Stock.
D. MORGAN STANLEY
--------------
As of June 30, 1997, MS Leveraged Equity owns
approximately 78.0% of each of the Series F Preferred Stock and Series G
Preferred Stock which currently has 25 votes per share and which would, if
converted, currently represent approximately 48.8% of the Class A Common Stock
on a fully diluted basis (exclusive of cumulative undeclared dividends). The
general partner of MS Leveraged Equity is a wholly owned subsidiary of the
Morgan Stanley, Dean Witter, Discover & Co. ("MS DWD"), and two of the directors
of the Company are officers of Morgan Stanley, another wholly-owned subsidiary
of MS DWD. As a result of these relationships, Morgan Stanley and its affiliates
have significant influence over the management policies and corporate affairs of
the Company. In addition, as of June 30, 1997, Morgan Stanley owns approximately
36.2% of the Senior Discount Notes, and approximately 32.4% of the Series H
Preferred Stock. Assuming the Plan is confirmed, Morgan Stanley will continue to
have significant influence over the management and policies of the Company after
the Effective Date.
IV.
FACTORS LEADING TO THE COMMENCEMENT OF
THE CHAPTER 11 CASE AND NEW BUSINESS STRATEGY
---------------------------------------------
A. THE CHANGING HYDRO BUSINESS
---------------------------
CHI's initial strategy assumed continuation of a
regulated, noncompetitive utility industry in which small power producers would
be entitled to produce and be paid for power under PURPA, and that renewable
technologies such as hydro would receive preferential treatment. The Company
(along with many electric industry observers in the mid-1980's) anticipated that
purchased power rates would continue to rise, or at least, not decline
significantly. On the basis of these assumptions, CHI expected that its
hydroelectric projects would be able to provide sufficient revenue to cover
operating expenses and debt service, after which time it was contemplated the
hydroelectric projects would provide substantial unencumbered cash revenues to
CHI.
Similarly, the Company anticipated successful
development of its Summit and other pumped storage projects (which were not QFs)
based on a utility industry structure and
18
business climate that would motivate utilities to offer long-term (30 year)
contracts for the output from these projects.
Certain trends in the power industry gradually developed
that are at odds with CHI's initial perception and strategy:
o Increasing environmental regulation of hydroelectric
development and operation, creating additional costs
and making new hydro development in the U.S. extremely
rare.
o Increasing deregulation and restructuring of
utilities, leading to a climate of
uncertainty throughout the power industry
and a growing belief by utilities that
long-term commitments for purchased power,
such as from the Company's pumped storage
projects, were neither desirable nor
necessary.
o Increasing competitive bidding for assets,
combined with the increasing domination of
the independent power industry by utility
affiliates and other larger,
well-capitalized companies, leading to lower
project returns and reducing the number of
attractive acquisition opportunities
available to CHI.
o Decreasing wholesale prices for electricity
as a result of increasing competition,
surplus generating capacity, more efficient
generating technology, and the emergence of
natural gas-fired power plants as a
preferred resource due primarily to the
decline of natural gas prices in real terms.
o Increasing criticism of PURPA as an
impediment to a market-based, competitive
industry, due to the fact that many existing
QF power sales contracts provide for rates
in excess of current market prices for
electricity.
o Attempts by certain utilities (such as
Niagara Mohawk Power Corporation) to
significantly modify the provisions of
long-term QF power sales contracts to obtain
rates far lower than those specified in the
contract, accompanied in some cases by
threats to abrogate these contracts.
The foregoing conditions contributed to the Company not
achieving its cash flow projections over the past few years. Although the
Company believes that future cash flow will be sufficient to satisfy all of the
project-level obligations, such cash flow will not
19
achieve the levels that are projected to be necessary to satisfy CHI's corporate
debt and equity obligations in the future.
B. CASH DIVIDENDS AND CASH INTEREST DUE IN 1998-1999
-------------------------------------------------
The Company is highly leveraged, primarily as a result
of the 1992 recapitalization, the refinancing of debt and capital in 1993 and
the limited recourse and non-recourse debt financing of the acquisitions of its
conventional hydroelectric power plants. As of March 31, 1997, the Company's
total liabilities were $425 million, including $110.2 million of mandatorily
redeemable preferred stock, its total assets were $245 million and its
stockholders' deficit was $180 million.
The Company expects that, through calendar 1998, it will
generate sufficient cash flow from existing operations to meet its capital
expenditure and working capital requirements. Commencing on September 30, 1998,
however, cash dividends become payable on the Series H Preferred Stock and on
January 15, 1999, cash interest becomes payable on the Senior Discount Notes.
Without the reorganization contemplated by the Plan, the Company does not
believe it will be able to meet such obligations when due. In addition, the
Company anticipates that it will need to obtain financing to make the principal
payments on the Senior Discount Notes at their maturity in 2003 and to redeem
the Series H Preferred Stock in 2003.
C. NEW BUSINESS STRATEGY
---------------------
In light of the foregoing, the Company began an internal
reorganization and cost cutting program aimed at streamlining operations and
reducing general and administrative (G&A) expenses. The existing hydro portfolio
was evaluated for potential opportunities to reduce operating costs or make
cost-effective improvements. Certain assets were targeted for divestiture for
the purposes of eliminating marginally-performing facilities and improving
overall efficiency. In addition, major overhead cost reductions were made,
including reduction of salaries and other compensation of certain senior
management personnel, relocation of the corporate headquarters office, and
achieving significant savings on insurance costs.
To respond to the trends in the hydroelectric business,
as discussed above, CHI decided in 1995 to diversify from its "hydro-only"
focus. As an initial step, CHI hired James T. Stewart as president and chief
executive officer of CHI Power (a new subsidiary), based in Houston, Texas. Mr.
Stewart had previously been president of CRSS, a successful independent power
developer specializing in the development, acquisition, and financing of
industrial energy assets. CRSS had been the first company to project finance
such assets on a requirement basis, rather than a "take or pay" contract. In
establishing CHI Power, CHI's goal was to reduce dependence on hydro and to
create additional opportunities for profitable
20
growth based on Mr. Stewart's experience and reputation combined with existing
CHI capabilities, many of which are transferable to the new industrial energy
business.
CHI's Industrial Infrastructure Business is strongly
related to energy production, but is not traditional cogeneration or independent
power plant development. In the traditional cogeneration model, a developer
finances and builds a power plant at an industrial facility, typically producing
electricity that is sold at wholesale to the local electric utility and steam
that is sold at retail to the industrial company. In contrast, CHI's industrial
business can involve a wide range of capital-intensive "utility" infrastructure
assets, such as steam generators, air compressors, storage facilities, water
management systems, and chemical recovery boilers. The transaction may, but need
not necessarily, include electricity generation. The customer may seek to
receive cash for, or "monetize," such assets if already existing, or to
construct such assets, either new or as an upgrade or expansion of existing
facilities. CHI will acquire or develop the assets, operate and manage them, and
sell back the resulting product (steam, chilled water, compressed air,
electricity, etc.) to the customers under a long-term contract, generally at
retail, although individual project circumstances may include the sale of
electricity to utilities.
CHI's principal value-creation in such a transaction is
in the following areas:
o CHI's technical and management capabilities
that cover a wide range of technologies and
industrial assets, which enhance reliability
and reduce production costs.
o The financial structure that CHI provides to
the customer, offering lower-cost capital,
than would be available if the customer were
to invest in the assets directly, due to the
Company's ability to provide financing with
a high percentage of debt relative to
equity.
o CHI can structure the transaction so that it
may be project financed based on the
production expectations of the individual
manufacturing plant or mill.
o When based on "requirements" rather than a
"take or pay" contract, this structure
achieves off-balance sheet treatment of the
transaction for the customer, avoiding a
long-term debt obligation or its equivalent
at the corporate level and creating a
potential credit enhancement opportunity.
CHI's business development efforts in the industrial
energy and infrastructure area are focused primarily on companies in industrial
sectors characterized by high energy consumption and capital-intensive
manufacturing operations. The potential market for such business in North
America is represented by a total of more than $40 billion in annual
21
energy-related expenditures and $50 billion in annual capital spending among
such industries as pulp and paper, petroleum refining, chemicals, textiles, and
other energy-intensive manufacturers. By capturing even a small fraction of this
market, CHI will realize significant annual growth in total revenue, cash flow,
and other financial criteria.
Another key ingredient in CHI's transformation into a
multi-product energy company was an organizational restructuring. Under its new
Chairman and Chief Executive Officer, James T. Stewart, management has put into
effect key aspects of the new organization, including the following elements:
o Appointment of a President/Chief Operating Officer,
Edward M. Stern, responsible for company-wide
administration and project operations. Reporting to
the President and Chief Operating Officer are the
Chief Financial Officer and the heads of U.S. hydro
operations, U.S. industrial operations, and Canadian
operations.
o Creation of an integrated Business
Development unit, reporting directly to the
Chairman/CEO, responsible for all growth
activities Company- wide. These include
sales, marketing, and communications related
to development, acquisitions, and major O&M
contracts for both industrial and
hydroelectric projects in the United States,
Canada and elsewhere.
The purpose of this organizational structure is to
promote full integration of the industrial and hydroelectric areas of the
Company, while at the same time encouraging all members of senior management to
focus on their own established areas of special skill and expertise.
Despite the Company's efforts to develop the Industrial
Infrastructure Business, the Company's overleveraged capital structure and
substantial cash requirements commencing in 1998 have made it difficult for CHI
to establish the creditworthiness necessary to consummate industrial
infrastructure projects. In order to capitalize on the expertise that it
believes it has in the hydro and industrial businesses and thereby maximize the
value of the Company, the Company determined that it was necessary to deleverage
its capital structure. To that end, the Company entered into discussions with
substantial holders of the Senior Discount Notes and Old Preferred Stock in an
effort to restructure the Company's significant financial obligations. By
addressing its financial disadvantages (as discussed above) as early as
practicable, CHI hopes to create significant additional value through new
business growth. The Company believes that with the proper business and
financial structure in place, it can take advantage of near-term opportunities
in the marketplace.
22
D. THE 1996-97 PREPETITION NEGOTIATIONS
------------------------------------
In the fall of 1996, CHI retained Weil, Gotshal & Manges
LLP and Houlihan Lokey Howard & Zukin Inc. ("Houlihan Lokey"), as its legal
advisor and financial advisor, respectively, to provide advice concerning such a
restructuring. In April, 1997, the Unofficial Bondholders' Committee, whose
membership includes four institutions controlling approximately 89.2% of the
Senior Discount Notes, was organized. Those institutions are:
Morgan Stanley & Co., Incorporated (through
representatives of its Fixed Income Division)
Swiss Bank Corporation
Merrill Lynch Asset Management
Stonehill Investment Corp.
The Unofficial Bondholders' Committee retained Wachtell,
Lipton, Rosen & Katz to advise the committee in connection with a possible
financial restructuring.
Over a period of several months, CHI negotiated the
terms of a financial restructuring with the Unofficial Bondholders' Committee
and concurrently negotiated with the holders of a majority of each series of the
Old Preferred Stock. On June 4, 1997, the parties ultimately reached an
agreement in principle on the terms of a financial restructuring to be
accomplished pursuant to the Plan under chapter 11 of the Bankruptcy Code.
V.
ANTICIPATED EVENTS DURING THE CHAPTER 11 CASE
---------------------------------------------
A. COMMENCEMENT OF THE CHAPTER 11 CASE
-----------------------------------
If the solicitation occurring pursuant to this
Disclosure Statement results in the acceptance of the Plan by holders of the
requisite number of Claims and Equity Interests, CHI intends to commence the
Chapter 11 Case. Following the Commencement Date, CHI will continue to operate
its business and manage its properties as a Debtor in Possession pursuant to
sections 1107 and 1108 of the Bankruptcy Code.
B. ADMINISTRATION OF THE CHAPTER 11 CASE
-------------------------------------
o OPERATIONAL MATTERS. On the Commencement Date, CHI
will request that the Bankruptcy Court enter a series of orders designed to
minimize any disruption of business operations and to facilitate its
reorganization.
23
o PAYMENT OF DEBT INCURRED IN THE ORDINARY COURSE OF
BUSINESS. The objective of the Chapter 11 Case is to restructure the outstanding
indebtedness to institutional creditors holding the Senior Discount Notes and
the Old Preferred Stock held by institutional equity security holders. It is
essential to the Plan that relationships with trade vendors and other holders of
debt incurred in the ordinary course of business, and relationships with
employees and consultants, not be disrupted or impaired. In that connection, CHI
will request that the Bankruptcy Court enter an order authorizing CHI to pay, in
its discretion, all undisputed indebtedness and obligations (other than the
indebtedness or liabilities that are impaired and to be restructured under the
Plan) incurred in the ordinary course of business as such indebtedness and
obligations mature in accordance with their terms, and to pay salaries, wages,
benefits and other amounts owed to employees and consultants. These include
obligations that were, or may have been, incurred prior to the Commencement
Date.
o CASH MANAGEMENT. CHI will request that the Bankruptcy
Court enter an order authorizing CHI to continue its current cash management
system. The order would allow CHI to fund the Company's day to day obligations,
such as payroll, taxes, employee benefits and insurance, and to allocate and
collect a share of such costs from the various Nondebtor Subsidiaries.
C. CREDITORS' COMMITTEE
--------------------
Pursuant to section 1102 of the Bankruptcy Code, the
United States Trustee is required to appoint a committee of Creditors holding
unsecured claims. In light of the prepackaged chapter 11 plan, the existence and
likely continued functioning of the Unofficial Bondholders' Committee, and CHI's
request for an order authorizing it to pay prepetition ordinary course
liabilities (with certain exceptions), it is possible that the United States
Trustee may elect in the exercise of its discretion not to appoint a statutory
committee of unsecured creditors.
D. CONFIRMATION HEARING
--------------------
CHI anticipates that as soon as practicable after
commencing the Chapter 11 Case, it will seek an order of the Bankruptcy Court
scheduling the hearing to consider confirmation of the Plan. CHI anticipates
that notice of the hearing will be published in the Wall Street Journal
(National Edition) and the New York Times, and will be mailed to all known
holders of claims and equity interests, at least twenty-five days before the
date by which objections must be filed with the Bankruptcy Court. See Section
VIII.A, below, entitled "CONFIRMATION OF THE PLAN -- Confirmation Hearing."
E. BAR DATE
--------
In accordance with the provisions of the Bankruptcy Code
and Bankruptcy Rules, CHI will request that the Bankruptcy Court enter an order
(the "Bar Date Order")
24
establishing the last date and time by which proofs of claims (other than claims
of governmental authorities) against, and proofs of equity interests (other than
equity interests of holders of Old Common Stock) in, CHI must be filed (the "Bar
Date"). Additionally, CHI expects it will request that the Bar Date Order
provide that, unless otherwise ordered by the Bankruptcy Court, claims arising
from the rejection of executory contracts and unexpired leases subsequent to the
Bar Date are to be filed no later than thirty (30) days after the latest to
occur of (a) notice of entry of an order approving such rejection or (b) notice
of entry of the Confirmation Order. CHI anticipates that a notice of the Bar
Date will be published in Wall Street Journal (National Edition) and the New
York Times, and that a proof of claim form or proof of equity interest form, as
the case may be, and instructions for its completion will be mailed to all known
holders of claims and equity interests subject to the Bar Date Order, at least
twenty days before the Bar Date.
Since holders of Old Common Stock are to receive no
distributions under the Plan, CHI will request that the Bar Date Order exclude
the holders of such equity interests from the requirement to file proofs of
equity interests.
VI.
THE PLAN OF REORGANIZATION
--------------------------
A. INTRODUCTION
The Plan provides for a major restructuring of CHI's
financial obligations. In essence, the Plan (i) exchanges $202 million in face
amount of the Senior Discount Notes for 100% of the New Common Stock (subject to
dilution from the exercise of the New Warrants and the Management Options) and
$15 million plus the Unofficial Bondholders' Committee Expenses in Cash, (ii)
issues New Series B Warrants and New Series C Warrants to purchase up to 12.5%
of the New Common Stock in exchange for all of the Old Preferred Stock, (iii)
cancels the Old Common Stock and (iv) provides for the issuance of the
Management Options under the Management Option Plan. The New Common Stock and
New Warrants are described in detail in Section VI.E, below, entitled
"Securities to Be Issued Pursuant to the Plan." The result of the restructuring
will be that Reorganized CHI will have no significant debt obligations, other
than the New Working Capital Facility to be entered into as of the Effective
Date. CHI believes that such a deleveraging is necessary to permit the Company
to compete effectively in today's economic environment.
CHI believes that the Plan will (i) enable the Company
to more effectively pursue its business strategy including the development of
the Industrial Infrastructure Business and (ii) provide the best opportunity for
recoveries for the holders of the Senior Discount Notes and the Old Preferred
Stock. CHI believes that creditors and equity interest
25
holders will receive at least as much, if not more, in value under the Plan than
they would receive in a chapter 7 liquidation.
In order to reach a substantially consensual plan and
with the consent of the members of the Unofficial Bondholders' Committee, a
portion of the value that might otherwise have been distributed to the holders
of the Senior Discount Note Claims (Class 3) if the absolute priority rule was
enforced, has been allocated to holders of Equity Interests in Classes 7, 8 and
9 on a Pro Rata basis. In the event that Class 8 rejects the Plan, however, CHI
will ask the Bankruptcy Court to confirm the Plan under section 1129(b) of the
Bankruptcy Code as to Classes 8, 9 and 10 and provide for the alternative
treatments for Classes 7 and 9, as described below. The treatment provided for
the holders of Equity Interests in Class 8 will not change regardless of whether
such Class votes to accept or reject the Plan.
The Plan is attached as Exhibit A to this Disclosure
Statement and forms a part of this Disclosure Statement. The following is a
summary of the Plan.
B. ADMINISTRATIVE EXPENSES
-----------------------
Administrative expenses are the actual and necessary
costs and expenses of the Chapter 11 Case that are allowed under sections 503(b)
and 507(a)(1) of the Bankruptcy Code. Those expenses will include the
postpetition salaries and other benefits for CHI's employees, postpetition rent
for its headquarters, amounts owed to vendors providing goods and services to
CHI during its chapter 11 case, tax obligations incurred after the Commencement
Date, and certain statutory fees and charges assessed under section 1930,
chapter 123, title 28, United States Code. Other administrative expenses include
the actual, reasonable fees and expenses of CHI's advisors and the advisors to
any official committees appointed in, and incurred during, the chapter 11 case.
Administrative expenses representing liabilities
incurred in the ordinary course of business by CHI, consistent with past
practice, will be paid by CHI in accordance with the terms and conditions of the
particular transaction and any related agreements and instruments. All other
Administrative Expenses Claims will be paid, in full, in Cash, on the Effective
Date or as soon thereafter as is practicable, or on such other terms to which
CHI and the holder of such administrative expense claim agree.
CHI, which is a holding company, has relatively few
direct operating expenses, other than payroll. Accordingly, CHI anticipates that
most of the Administrative Expense Claims will be paid as they come due during
the Chapter 11 Case and that the administrative expenses to be paid on the
Effective Date will, for the most part, comprise the allowed fees and expenses
incurred by professionals retained in the case and the costs attendant to CHI's
assumption of executory contracts and unexpired leases under the Plan.
26
CHI estimates that the Allowed Administrative Expense Claims for professional
fees and expenses will be approximately $750,000.
All payments to professionals for compensation and
reimbursement of expenses and all payments to reimburse expenses of members of
statutory committees will be made in accordance with the procedures established
by the Bankruptcy Court and Bankruptcy Rules relating to the payment of interim
and final compensation and expenses. The Bankruptcy Court will review and
determine all such requests.
C. PRIORITY TAX CLAIMS
-------------------
Priority Tax Claims are unsecured Claims asserted by
federal and state governmental authorities for taxes specified in section
507(a)(8) of the Bankruptcy Code, such as certain income taxes, property taxes,
excise taxes, and employment and withholding taxes. These unsecured claims are
given a statutory priority in right of payment. CHI estimates that on the
Effective Date, the Allowed amount of such claims will aggregate $110,000.
Except to the extent that a holder of an Allowed
Priority Tax Claim has been paid by CHI prior to the Effective Date or agrees to
a different treatment, each holder of an Allowed Priority Tax Claim will be
paid, at the sole discretion of Reorganized CHI, (i) in full by Reorganized CHI
in the ordinary course of business in accordance with the terms and conditions
of any law, regulation, agreement, instrument or other document relating to such
claims or (ii) deferred Cash, having a value as of the Effective Date equal to
such Allowed Priority Tax Claim, over a period not exceeding six years after the
date of assessment of such Allowed Priority Tax Claim.
D. CLASSIFICATION AND TREATMENT OF CLAIMS AND EQUITY INTERESTS
-----------------------------------------------------------
1. Class 1 -- Other Priority Claims - Other Priority Claims
--------------------------------
are Claims which are entitled to priority in accordance
with section 507(a) of the Bankruptcy Code.
Pursuant to the Plan, to the extent unpaid prior to the
Effective Date and except to the extent that a holder of
an Allowed Other Priority Claim agrees to a different
treatment, each Allowed Other Priority Claim will be
rendered unimpaired or reinstated in accordance with
section 1124 of the Bankruptcy Code.
CHI estimates that there will not be any unpaid Allowed
Other Priority Claims.
27
2. Class 2 -- Secured Claims - Class 2 consists of the
-------------------------
allowed Secured Claims against CHI. Secured Claims
consist of all Claims that are secured by a lien,
pledge or security interest in CHI's real or personal
property. CHI is aware of approximately four Secured
Claims. The Secured Claims include claims relating to
security deposits held by landlords pursuant to leases
of CHI's corporate offices in Stamford, Connecticut;
Andover, Massachusetts; and Houston, Texas.
Pursuant to the Plan, except to the extent that a holder
of an Allowed Secured Claim agrees to a different
treatment, each Allowed Secured Claim will be rendered
unimpaired or reinstated in accordance with section 1124
of the Bankruptcy Code, notwithstanding any contractual
provision or applicable nonbankruptcy law that entitles
the holder of an Allowed Secured Claim to demand or
receive payment of such Allowed Secured Claim prior to
the stated maturity of such Allowed Secured Claim from
and after the occurrence of a default.
CHI estimates that the Secured Claims will aggregate
$150,000.
3. Class 3 -- Senior Discount Note Claims - Class 3
--------------------------------------
consists of the Allowed Claims of the holders of the
Senior Discount Notes.
Pursuant to the Plan, each holder of an Allowed Senior
Discount Note Claim will receive, in full satisfaction
of such Allowed Senior Discount Note Claim, its Pro Rata
Share of (i) 10,000,000 shares of New Common Stock and
(ii) $15 million plus the Unofficial Bondholders'
Committee Expenses in Cash distributed as follows:
(A) $10,000,000 plus the
Unofficial Bond-
holders' Committee
Expenses on the
Effective Date;
(B) up to $5,000,000
payable out of
Excess Cash and the
proceeds of the
Working Capital
Facility (to the
extent permitted by
the lender under the
Working Capital
Facility) on or
before December 31,
1997; and
(C) if the payment set
forth in subsection
(B) is not made in
full by December 31,
1997, the balance of
the $5,000,000
payment on or before
March 31, 1998, with
interest thereon at
the Prime Rate from
December 31, 1997,
until the date the
balance is paid in
full.
28
All distributions to holders of Allowed Senior Discount
Note Claims will be allocated first to the original
principal amount of such Claim (as determined for
federal income tax purposes) and then, to the extent the
consideration exceeds such amount, to the remainder of
such Claims.
CHI estimates that the aggregate Claims in Class 3, as
of the Commencement Date, will be approximately $184.5
million (assuming a Commencement Date of September 30,
1997), which amount is computed by compounding the
original principal amount of the Senior Discount Notes
semi-annually at 12% per year through the Commencement
Date. The original principal amount was approximately
$112 million. The difference between the face amount of
the Senior Discount Notes and the accreted value as of
the Commencement Date represents unmatured interest,
which pursuant to section 502 of the Bankruptcy Code, is
not allowed.
For a discussion of the New Common Stock, see subsection
VI.E.1, below, entitled "Securities to Be Issued
Pursuant to the Plan -- New Common Stock," and Article
XIII, below, entitled "VALUATION".
4. Class 4 -- DnB Claims - Class 4 consists of the Allowed
---------------------
Claims of DnB. The DnB Claims relate to a letter of
credit facility which expires on June 30, 1998.
Pursuant to the Plan, except to the extent that DnB
agrees to a different treatment, the DnB Claims will be
rendered unimpaired or reinstated in accordance with
section 1124 of the Bankruptcy Code, notwithstanding any
contractual provision or applicable nonbankruptcy law
that entitles DnB to demand or receive payment of the
DnB Claims prior to the stated maturity of such Claims
from and after the occurrence of a default.
CHI estimates that on the Commencement Date, the Claims
in Class 4 will approximate $2 million.
5. Class 5 -- General Unsecured Claims - Class 5 consists
-----------------------------------
of Allowed General Unsecured Claims which may include
the Claims of trade creditors for goods and services
provided to CHI prior to the Commencement Date, Claims
for breach of contract, damages Claims from the
rejection of unexpired leases and executory contracts
and certain tax indemnity Claims.
Pursuant to the Plan, to the extent unpaid prior to the
Effective Date and except to the extent that a holder of
an Allowed General Unsecured Claim agrees to a different
treatment, each Allowed General Unsecured Claim will be
rendered unimpaired or reinstated in accordance with
section 1124 of the Bankruptcy Code.
29
CHI estimates that on the Commencement Date, Allowed
Claims in Class 5 will aggregate no more than $170,000.
6. Class 6 -- Intercompany Claims - Class 6 consists of the
------------------------------
General Unsecured Claims of any entity which is a direct
or indirect subsidiary of CHI or is controlled by CHI.
The Class 6 Claims primarily result from CHI's
centralized cash management system and the
recapitalizations of CHI.
Pursuant to the Plan, to the extent unpaid prior to the
Effective Date and except to the extent that a holder of
an Allowed Intercompany Claim agrees to a different
treatment, each Allowed Intercompany Claim will be
rendered unimpaired or reinstated in accordance with
section 1124 of the Bankruptcy Code.
CHI estimates that on the Commencement Date, Allowed
Claims in Class 6 will aggregate approximately $332
million.
7. Class 7 -- Series F Equity Interests - Class 7 consists
------------------------------------
of Allowed Equity Interests evidenced by Series F
Preferred Stock.
Pursuant to the Plan, on the Effective Date, each holder
of an Allowed Series F Equity Interest as of the
Distribution Record Date will receive, in full
satisfaction of such Allowed Equity Interest either:
(i) if Class 8 votes to accept the Plan, such
holder's Pro Rata Share of the Series F
Distribution; or
(ii) if Class 8 votes to reject the Plan, such
holder's Pro Rata Share of (x) the Series F
Distribution and (y) the Series G
Distribution.
The Series F Distribution is determined by calculating
the percentage that the preferred liquidation preference
of the Series F Preferred Stock (as increased by the
aggregate liquidation preference of all accrued and
unpaid dividends, whether declared or not) is of the
aggregate liquidation preferences and applicable
dividends of all of the Old Preferred Stock, and
multiplying that percentage by the aggregate number of
New Series B Warrants and New Series C Warrants to be
distributed to all holders Old Preferred Stock under the
Plan. The Series G Distribution is determined by a
similar calculation which is discussed in Section VI.D.9
below. Based on the foregoing calculations, if Class 8
votes to accept the Plan it is estimated that each
holder of an Allowed Series F Equity Interest will be
entitled to its Pro Rata Share of 224,387 New Series B
Warrants and 145,655 New Series C Warrants. In the event
that Class 8 votes to reject the Plan, it is estimated
that each holder of
30
an Allowed Series F Equity Interest will be entitled to
its Pro Rata Share of 464,286 New Series B Warrants and
301,379 New Series C Warrants.
CHI estimates that the aggregate liquidation preference
of the Equity Interests in Class 7, as of the
Commencement Date, will be approximately $80.3 million.
For a discussion of the New Series B Warrants and New
Series C Warrants, see subsections VI.E.2 and VI.E.3,
below, entitled "Securities to Be Issued Pursuant to the
Plan -- New Series B Warrants" and "Securities to Be
Issued Pursuant to the Plan -- New Series C Warrants,"
respectively.
8. Class 8 -- Series H Equity Interests - Class 8 consists
------------------------------------
of Allowed Equity Interests evidenced by Series H
Preferred Stock.
Pursuant to the Plan and regardless of whether Class 8
votes to accept or reject the Plan, on the Effective
Date, each holder of an Allowed Series H Equity Interest
as of the Distribution Record Date will receive, in full
satisfaction of such Allowed Equity Interest, such
holder's Pro Rata Share of the Series H Distribution.
The Series H Distribution is determined by calculating
the percentage that the preferred liquidation preference
of the Series H Preferred Stock (as increased by the
aggregate liquidation preference of (x) all pay-in-kind
dividends declared and paid and (y) all accrued and
unpaid dividends, whether declared or not) is of the
aggregate liquidation preferences and applicable
dividends of all of the Old Preferred Stock, and
multiplying that percentage by the aggregate number of
New Series B Warrants and New Series C Warrants to be
distributed to all holders of the Old Preferred Stock
under the Plan. Based on the foregoing calculations, it
is estimated that each holder of an Allowed Series H
Equity Interest will be entitled to its Pro Rata Share
of 346,525 New Series B Warrants and 224,937 New Series
C Warrants.
The treatment provided to the holders of Equity
Interests in Class 8 is unaffected by the acceptance or
rejection of the Plan by holders of such Equity
Interests.
CHI estimates that the aggregate liquidation preference
of the Equity Interests in Class 8, as of the
Commencement Date, will be approximately $124.0 million.
For a discussion of the New Series B Warrants and New
Series C Warrants, see subsections VI.E.2 and VI.E.3,
below, entitled "Securities to Be Issued
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Pursuant to the Plan -- New Series B Warrants" and
"Securities to Be Issued Pursuant to the Plan -- New
Series C Warrants," respectively.
9. Class 9 -- Series G Equity Interests - Class 9 consists
------------------------------------
of Allowed Equity Interests evidenced by Series G
Preferred Stock.
Pursuant to the Plan, on the Effective Date, each holder
of an Allowed Series G Equity Interest as of the
Distribution Record Date will receive, in full
satisfaction of such Allowed Equity Interest, either:
(i) if Class 8 votes to accept the Plan, such
holder's Pro Rata Share of the Series G
Distribution; or
(ii) if Class 8 votes to reject the Plan, the
holders of Allowed Series G Equity Interests
will not receive any distribution on account
of such Equity Interests.
The Series G Distribution is determined by calculating
the percentage that the preferred liquidation preference
of the Series G Preferred Stock (as increased by the
aggregate liquidation preference of all accrued and
unpaid dividends, whether declared or not) is of the
aggregate liquidation preferences and applicable
dividends of all of the Old Preferred Stock, and
multiplying that percentage by the aggregate number of
New Series B Warrants and New Series C Warrants to be
distributed to all holders of the Old Preferred Stock
under the Plan. Based on the foregoing calculations, it
is estimated that if Class 8 votes to accept the Plan,
each holder of an Allowed Series G Equity Interest will
be entitled to its Pro Rata Share of 239,899 New Series
B Warrants and 155,724 New Series C Warrants.
CHI estimates that the aggregate liquidation preference
of the Equity Interests in Class 9, as of the
Commencement Date, will be approximately $85.8 million.
For a discussion of the New Series B Warrants and New
Series C Warrants, see subsections VI.E.2 and VI.E.3,
below, entitled "Securities to Be Issued Pursuant to the
Plan -- New Series B Warrants" and "Securities to Be
Issued Pursuant to the Plan -- New Series C Warrants,"
respectively.
10. Class 10 -- Old Common Stock Equity Interests - Class 10
---------------------------------------------
consists of equity interests evidenced by Old Common
Stock, which includes Old Options, Old Warrants and any
other right, contractual or otherwise, to acquire any
common stock of CHI, existing prior to the Commencement
Date.
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Pursuant to the Plan, the holders of Old Common Stock
Equity Interests will not receive any distributions on
account of such Equity Interests. On the Confirmation
Date, and in accordance with Section 9.1 of the Plan,
the Old Common Stock certificates and any rights
relating thereto will be cancelled without further
action under any applicable agreement, law, regulation,
order or rule, and the Old Common Stock evidenced
thereby will be extinguished.
E. SECURITIES TO BE ISSUED PURSUANT TO THE PLAN
--------------------------------------------
THE NEW COMMON STOCK ISSUED PURSUANT TO THE PLAN AND THE
NEW COMMON STOCK OBTAINED UPON THE EXERCISE OF THE NEW SERIES B WARRANTS, NEW
SERIES C WARRANTS AND THE MANAGEMENT OPTIONS, AND THE RIGHTS OF ANY HOLDER
THEREOF ARE SUBJECT TO AND LIMITED BY THE PROVISIONS OF THE STOCKHOLDERS'
AGREEMENT, DATED AS OF THE EFFECTIVE DATE, BY AND AMONG CHI ENERGY, INC. AND
EACH OF THE STOCKHOLDERS OF CHI ENERGY, INC. (THE "STOCKHOLDERS' AGREEMENT").
FOR A DISCUSSION OF THE STOCKHOLDERS' AGREEMENT, SEE SECTION XI.D. BELOW,
ENTITLED "STOCKHOLDERS' AGREEMENT."
1. NEW COMMON STOCK
Pursuant to the Plan, on the Effective Date, 20 million
shares of New Common Stock will be authorized as follows: 9,085,517 shares of
New Class A Common Stock, 914,483 shares of New Class B Common Stock and
10,000,000 additional shares of New Common Stock which may be issued as either
New Class A Common Stock or New Class B Common Stock, as applicable. Of the
10,000,000 shares of New Common Stock which are being authorized on the
Effective Date but not issued, 1,337,127 shares will be reserved for issuance
if, as and when the holders of the New Series B Warrants and New Series C
Warrants exercise such warrants.
a. NEW CLASS A COMMON STOCK
Pursuant to the Plan, on the Effective Date, 9,085,517
shares of New Class A Common Stock will be issued and distributed to
substantially all of the holders of Allowed Claims in Class 3 and 810,811 shares
of New Class A Common Stock will be reserved to satisfy the obligation of
Reorganized CHI under the Management Options. For a discussion of the Management
Options, see Section IX.C below, entitled "Management Option Plan."
Each share of New Class A Common Stock will entitle its
holder to one vote. Holders of New Class A Common Stock will have the right to
participate proportionately in dividends, if any, distributed by Reorganized
CHI.
33
b. NEW CLASS B COMMON STOCK
Pursuant to the Plan, on the Effective Date, 914,483
shares of New Class B Common Stock will be issued and distributed to a holder of
Allowed Class 3 Claims.
Each share of New Class B Common Stock will entitle its
holder to a one- hundredth (1/100) of one vote. Holders of New Class B Common
Stock will have the right to participate proportionately in dividends, if any,
distributed by Reorganized CHI.
The New Class B Common Stock is being issued to a holder
of Allowed Class 3 Claims, at such holder's request, to provide to such holder
reduced voting rights in Reorganized CHI. Upon any transfer of shares of New
Class B Common Stock, the shares of New Class B Common Stock automatically
convert into an equal number of shares of New Class A Common Stock.
2. NEW SERIES B WARRANTS
The New Series B Warrants, which will be issued to the
Holders of Allowed Claims in Classes 7, 8 and 9 on the Effective Date and expire
on the sixth anniversary of the Effective Date, entitle such holders to
subscribe for the purchase of up to an aggregate of 7.5% of the New Common
Stock, subject to dilution due to the issuance by Reorganized CHI of shares of
New Common Stock pursuant to the exercise of the New Series C Warrants and the
Management Options by the holders thereof. The New Series B Warrants are
exercisable for up to 1% of the New Common Stock of Reorganized CHI if, as and
when the total capital (debt and equity) invested in industrial infrastructure
projects that either (i) close within 3 years from the Effective Date or (ii)
are subject to Definitive Agreements (as such term is defined in the Series B
Warrant Agreement) within such 3 year period and thereafter close within the
term of the warrants, equals $60 million. The additional New Series B Warrants
exercisable for the remaining 6.5% of the New Common Stock vest incrementally
if, as and when the total capital invested in industrial infrastructure projects
increases from $60 million to $450 million within the time periods set forth
above. The exercise price per share of the New Common Stock subject to the New
Series B Warrants will be $10. The New Series B Warrants will have customary
antidilution provisions, and protections against Extraordinary Distributions (as
such term is defined in the Series B Warrant Agreement).
3. NEW SERIES C WARRANTS
The New Series C Warrants, which will be issued to the
Holders of Allowed Claims in Classes 7, 8 and 9 on the Effective Date and expire
on the eighth anniversary thereof, entitle such holders to subscribe for the
purchase of up to an aggregate of 5.0% of the New Common Stock, subject to
dilution due to the issuance by Reorganized CHI of shares of New Common Stock
pursuant to the exercise of the New Series B Warrants and the Management Options
by the holders thereof. The exercise price per share of the New
34
Common Stock subject to the New Series C Warrants will be determined by
reference to the accreted value of the Senior Discount Notes as of the
Commencement Date, which is approximately $185 million. The exercise price per
share of the New Series C Warrants will be approximately $18.45 (assuming a
Commencement Date of September 30, 1997) and such warrants will have the benefit
of customary antidilution provisions, and protections against Extraordinary
Distributions (as such term is defined in the Series C Warrant Agreement).
4. MANAGEMENT OPTIONS
The Management Options, which will be issued to certain
members of CHI's management on the Effective Date pursuant to the Management
Option Plan (as such term is defined herein) and expire on the seventh
anniversary thereof, will be exercisable for the purchase of up to an aggregate
of 7.5% of the New Class A Common Stock, subject to dilution due to the issuance
by Reorganized CHI of shares of New Common Stock pursuant to the exercise of the
New Series B Warrants and the New Series C Warrants by the holders thereof. The
Management Options will have the benefit of customary antidilution provisions,
and protections against Extraordinary Distributions (as such term is defined in
the Management Option Plan).
For a more detailed discussion of the Management
Options, see Section IX.C, below, entitled "Management Option Plan."
F. EXECUTORY CONTRACTS AND UNEXPIRED LEASES
----------------------------------------
1. GENERAL
Pursuant to sections 365(a), 365(f) and 1123(b)(2) of
the Bankruptcy Code, all executory contracts and unexpired leases that exist
between CHI and any person shall be deemed assumed by Reorganized CHI, other
than those executory contracts and unexpired leases (i) which have been assumed
pursuant to an order of the Bankruptcy Court entered prior to the Confirmation
Date, (ii) which have been rejected pursuant to an order of the Bankruptcy Court
entered prior to the Confirmation Date, (iii) as to which a motion for approval
of the rejection of such contracts or leases has been filed and served prior to
the Confirmation Date, or (iv) which are set forth in Schedule 7.1 to the Plan.
Entry by the Clerk of the Bankruptcy Court of the Confirmation Order will
constitute approval, pursuant to section 365(a) of the Bankruptcy Code, of such
rejections and assumptions by CHI pursuant to the Plan.
The Plan requires that all Claims for damages, if any,
arising from the rejection of an executory contract or unexpired lease be
evidenced by a proof of claim that is filed with the Bankruptcy Court and served
upon attorneys for CHI no later than thirty (30) days after the later of (i)
notice of entry of an order approving the rejection of such contract
35
or lease and (ii) notice of entry of the Confirmation Order. Failure to file a
timely proof of claim will result in such Claim being forever barred.
2. INSURANCE POLICIES
For purposes of the Plan, each of CHI's insurance
policies and any agreements, documents or instruments relating thereto are
treated as executory contracts under the Plan. Notwithstanding the foregoing,
distributions under the Plan to any holder of a Claim covered by any of such
insurance policies and related agreements, documents or instruments that are
assumed hereunder, will be in accordance with the treatment provided under
Article VII of the Plan. Nothing contained in Section 7.6 of the Plan will
constitute or be deemed a waiver of any claim, right or cause of action that CHI
may hold against the insurer under any policy of insurance, or against the
holder of a Claim covered by insurance policies.
3. INDEMNIFICATION OBLIGATIONS
Pursuant to the Plan, the obligations of CHI to defend,
indemnify, reimburse or limit the liability of present and former directors,
officers or employees who were directors, officers or employees, respectively,
on or after the Commencement Date against any Claims or obligations pursuant to
CHI's certificates of incorporation or by-laws, applicable state law or specific
agreement, or any combination of the foregoing, will survive confirmation of the
Plan, remain unaffected thereby, and not be discharged irrespective of whether
indemnification, defense, reimbursement or limitation is owed in connection with
an event occurring before, on or after the Commencement Date. As of the date
hereof, to the knowledge of CHI, no Claims giving rise to a right of
indemnification have been asserted against any director, officer, general
partner, partner, employee, or consultant who provides management personnel or
who serves as a member of management of CHI.
4. COMPENSATION AND BENEFIT PROGRAMS
Except as provided in Section 7.1 of the Plan and unless
otherwise modified, terminated or rejected prior to the Effective Date, all
employment, consulting and severance practices and policies, and all
compensation and benefit plans, policies, and programs of CHI applicable to its
directors, officers, employees, consultants or independent contractors,
including, without limitation, all savings plans, retirement plans, health care
plans, severance benefit plans, incentive plans, workers' compensation programs
and life, disability and other insurance plans are treated as executory
contracts under the Plan and are assumed pursuant to sections 365(a) and
1123(b)(2) of the Bankruptcy Code.
36
5. RETIREE BENEFITS
Payments, if any, due to any person for the purpose of
providing or reimbursing payments for retired employees and their spouses and
dependents for medical, surgical, or hospital care benefits, or benefits in the
event of sickness, accident, disability, or death under any plan, fund, or
program (through the purchase of insurance or otherwise) maintained or
established in whole or in part by CHI prior to the Commencement Date will be
continued for the duration of the period CHI has obligated itself to provide
such benefits, subject to the terms of such plan, fund or program, including any
reservation of rights to amend or otherwise modify such plan, fund or program.
For a discussion of the Company's retirement plans and
pension plans, reference is made to Note 14 "Employee Equity Programs, Directors
Compensation and 401(K) Plans" to Item 8 "Financial Statements" and to Item 10
"Directors and Executive Officers of the Registrant" in the Annual Report on
Form 10-K annexed as Exhibit B to this Disclosure Statement.
6. REJECTION OF CERTAIN PUT AND CALL AGREEMENTS
Pursuant to the Plan, the Put and Call Agreements
between (i) CHI and SES Partners, L.P. I and (ii) CHI and SES Partners, L.P. II,
are treated as executory contracts and, pursuant to sections 365(a) and
1123(b)(2) of the Bankruptcy Code, are rejected as of the Effective Date.
G. IMPLEMENTATION OF THE PLAN
1. CANCELLATION OF CERTAIN SECURITIES
On the Effective Date, (i) all Old Common Stock then
issued and outstanding or held in CHI's treasury and (ii) if Class 8 votes to
reject the Plan, all Series G Preferred Stock, will be cancelled and
extinguished, and no consideration will be paid or delivered with respect
thereto, in all events without any action on the part of CHI, Reorganized CHI or
any other entity. The share certificates or any other instruments evidencing any
Old Common Stock Equity Interest or Series G Stock Equity Interest, if Class 8
votes to reject the Plan, will be deemed cancelled without further action under
any applicable agreement, law, regulation, order or rule and the obligations of
CHI under any agreement or certificate of designation governing such Equity
Interests will be discharged.
2. ISSUANCE OR RESERVATION OF NEW SECURITIES
a. NEW COMMON STOCK. The issuance of 10,000,000
shares of New Common Stock as follows by
Reorganized CHI is authorized without
further act or action under applicable law,
regulation, order or rule:
37
(1) 9,085,517 shares of New Class A Common
Stock to be issued to substantially
all of the holders of the Senior
Discount Notes; and
(2) 914,483 shares of New Class B
Common Stock to be issued to a
holder of the Senior Discount
Notes.
b. NEW COMMON STOCK ISSUABLE PURSUANT TO NEW
WARRANTS AND MANAGEMENT OPTIONS. 2,147,938
shares of New Common Stock issuable pursuant
to the New Series B Warrant Agreement, New
Series C Warrant Agreement and Management
Option Plan, as applicable, are reserved for
issuance by Reorganized CHI without further
act or action under applicable law,
regulation, order or rule and reserved as
follows:
(1) 810,811 shares of New Common Stock,
to be reserved for the New Series B
Warrants;
(2) 526,316 shares of New Common Stock to
be reserved for the New Series C
Warrants; and
(3) 810,811 shares of New Class A Common
Stock to be reserved
for Management Options.
c. NEW WARRANTS AND MANAGEMENT OPTIONS. The
issuance of New Series B Warrants, New
Series C Warrants and Management Options as
follows by Reorganized CHI is authorized
without further act or action under
applicable law, regulation, order or rule:
(1) 810,811 New Series B Warrants;
(2) 526,316 New Series C Warrants; and
(3) 810,811 Management Options.
In addition to providing for the issuance of the New
Common Stock, the restated certificate of incorporation of Reorganized CHI will
authorize 10 million shares of preferred stock, par value $0.01. After the
Effective Date, the Board of Directors of Reorganized CHI may authorize the
issuance of one or more series of such preferred stock for such corporate
purposes as the Board of Directors of Reorganized CHI may deem appropriate, and
fix the voting powers, designations, preferences, and other rights to the full
extent permitted by law.
38
3. REGISTRATION RIGHTS
Each person or entity receiving a distribution of New
Common Stock, New Warrants or New Common Stock issued upon the exercise of the
New Warrants or the Management Options pursuant to the Plan, will be entitled to
become a party to the Registration Rights Agreement. For a more detailed
discussion of the Registration Rights, see Section XI.C, below, entitled
"SECURITIES LAW MATTERS -- Registration Rights; Listing."
4. EFFECTUATING DOCUMENTS AND FURTHER TRANSACTIONS
CHI or Reorganized CHI is authorized to execute,
deliver, file or record such contracts, instruments, releases, indentures and
other agreements or documents and take such actions as may be necessary or
appropriate to effectuate and further evidence the terms and conditions of the
Plan and any notes or securities issued pursuant to the Plan.
5. CORPORATE ACTION
On the Effective Date, all matters provided for under
the Plan that would otherwise require approval of the shareholders or directors
of CHI or Reorganized CHI, including, without limitation, the issuance of New
Common Stock, the New Warrants and the Management Options, the effectiveness of
the Restated CHI Certificate of Incorporation and the Amended CHI By-laws, the
election or appointment, as the case may be, of directors and officers of
Reorganized CHI pursuant to the Plan and the authorization and approval of the
Management Option Plan, the Registration Rights Agreement, the Stockholders'
Agreement and the Employment Agreements will be deemed to have occurred and will
be in effect from and after the Effective Date pursuant to the applicable
general corporation law of the state of Delaware, without any requirement of
further action by the shareholders or directors of CHI or Reorganized CHI. On
the Effective Date or as soon thereafter as is practicable, Reorganized CHI
will, if required, file its Restated CHI Certificate of Incorporation with the
Secretary of State of Delaware, in accordance with the applicable general
corporation law of the state of Delaware. As of the Effective Date, CHI will
change its corporate name from "Consolidated Hydro, Inc." to "CHI Energy, Inc."
H. METHOD OF DISTRIBUTIONS UNDER THE PLAN
1. DATE AND DELIVERY OF DISTRIBUTIONS
Except as otherwise ordered by the Bankruptcy Court or
provided in the Plan, distributions to be made on a specified date will be
deemed to have been made on that date if actually made on the later of that date
or the date on which such Administrative Expense Claim, Claim or Equity Interest
is Allowed, or as soon thereafter as practicable.
39
Cash payments to be made by Reorganized CHI will, at
Reorganized CHI's option, be made by check drawn on a domestic bank or by wire
transfer from a domestic bank.
Subject to Bankruptcy Rule 9010, all distributions will
be made to the addresses set forth on the Schedules unless superseded by the
proofs of claims or equity interests filed by such holders (or at the last known
addresses of such holders if no proof of claim or equity interest is filed or if
CHI has been notified in writing of a change of address).
No payment of Cash less than one hundred dollars
($100.00) will be made by Reorganized CHI to any holder of a Claim unless a
request therefor is made in writing to Reorganized CHI. Any Claim in respect of
unclaimed property distributable under the Plan must be made before the first
anniversary of the Effective Date. After such date, all Claims in respect of
such unclaimed property will, pursuant to section 347(b) of the Bankruptcy Code,
be discharged and forever barred from assertion against Reorganized CHI and its
property.
2. NO FRACTIONAL SHARES
No fractional shares of New Common Stock or fractional
New Warrants or Cash in lieu thereof will be distributed under the Plan. When
any distribution on account of an Allowed Claim or Allowed Equity Interest
pursuant to the Plan would otherwise result in the issuance of a number of
shares of New Common Stock or New Warrants that is not a whole number, the
actual distribution of shares of New Common Stock or New Warrants will be
rounded as follows: (i) fractions of 1/2 or greater will be rounded to the next
higher whole number and (ii) fractions of less than 1/2 will be rounded to the
next lower whole number. The total number of shares of New Common Stock or New
Warrants to be distributed to a Class of Claims or Equity Interests, as the case
may be, will be adjusted as necessary to account for the rounding provided in
Section 5.1(e) of the Plan.
3. DISTRIBUTIONS TO HOLDERS AS OF THE DISTRIBUTION RECORD DATE
As at the close of business on the Distribution Record
Date, the claims register (for Claims) and the transfer ledgers (for Old
Preferred Stock) will be closed, and there will be no further changes in the
record holders of any Claims or Old Preferred Stock. CHI and Reorganized CHI
will have no obligation to recognize any transfer of any Claims or Old Preferred
Stock occurring after the Distribution Record Date. CHI and Reorganized CHI will
instead be entitled to recognize and deal for all purposes under the Plan with
only those record holders stated on the claims register (for Claims) and
transfer ledgers (for Old Preferred Stock) as of the close of business on the
Distribution Record Date.
40
4. SURRENDER OF EXISTING SECURITIES AND AGREEMENTS
Each holder of a share certificate, bond or other
instrument evidencing a Claim or Old Preferred Stock shall surrender such share
certificate, bond or similar instrument to Reorganized CHI, unless such
requirement is waived by Reorganized CHI. No distribution of property hereunder
will be made to or on behalf of any such holders unless and until such share
certificate, bond or similar instrument is received by Reorganized CHI or the
unavailability of such share certificate, bond or similar instrument is
established to the reasonable satisfaction of Reorganized CHI or such
requirement is waived by Reorganized CHI. Reorganized CHI may require any holder
that is unable to surrender or cause to be surrendered any such share
certificates, bonds or similar instruments to deliver an affidavit of loss and
indemnity and/or furnish a bond in form and substance (including, without
limitation, with respect to amount) reasonably satisfactory to Reorganized CHI.
Any holder that fails within the later of one year after the Confirmation Date
and the date of Allowance of its Claim or Old Preferred Stock Equity Interest
(i) if possible, to surrender or cause to be surrendered such share certificate,
bond or instrument, (ii) if requested, to execute and deliver an affidavit of
loss and indemnity reasonably satisfactory to Reorganized CHI and (iii) if
requested, to furnish a bond reasonably satisfactory to Reorganized CHI, will be
deemed to have forfeited all rights, claims and causes of action against CHI and
Reorganized CHI and will not participate in any distribution hereunder.
5. HART-SCOTT-RODINO ACT FILING REQUIREMENTS
The Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), requires the parties to certain business
combination, acquisition, and/or change- in-control related transactions to
provide the United States Federal Trade Commission and Antitrust Division of the
Department of Justice with certain information about the business of the parties
involved and the proposed transaction. Any entity which will receive a
distribution of New Common Stock under the Plan that satisfies the tests
outlined below may be required, prior to the receipt of such shares, to file a
Premerger Notification and report pursuant to the HSR Act. In general, in the
absence of an available exemption, if (i) an entity entitled to a distribution
of New Common Stock under the Plan would own, at the Effective Date, New Common
Stock that exceeds $15 million in value (i.e., the statutory size of transaction
threshold), and (ii) certain jurisdictional tests are satisfied relating to the
amount of sales or assets (i.e., the size) of the acquiring person, the HSR Act
would require that such entity file a Premerger Notification and Report Form and
delay completion of the acquisition of New Common Stock pursuant to the Plan
until the expiration of the applicable waiting periods under the HSR Act. The
staff of the Premerger Notification Office of the Federal Trade Commission has
taken the position that the "debt workout" exemption to the HSR Act, codified at
16 C.F.R. ss. 802.63(a), is not available to entities who desire to exchange
debt claims for voting securities of an issuer if such entities acquired the
debt claims after the issuer has filed for bankruptcy or after it otherwise
becomes virtually certain that the debt of the issuer would be converted into
voting securities. Accordingly, such
41
exemption would not apply to such entities and such entities may be required to
observe the notification and waiting period requirements of the HSR Act. If such
waiting periods have not expired or been terminated as of the Effective Date,
Reorganized CHI may retain, or be required to deliver such entities' shares of
New Common Stock into an escrow account, pending the expiration or termination
of such waiting period. Holders of the Senior Discount Notes are urged to
consult with their legal counsel to determine whether the requirements of the
HSR Act will apply to the distribution to such entities of shares of New Common
Stock under the Plan.
6. WAIVER OF ENFORCEMENT OF PRIORITY
Generally, the Plan does not take into account relative
priority of the Equity Interests in Classes 7, 8 and 9 as set forth in the
Restated Certificate of Incorporation of Consolidated Hydro, Inc. and any
subordination provisions relating thereto. Pursuant to the Plan and if Class 8
votes to accept the Plan, (i) on the Effective Date, (a) all holders of Class 7
Equity Interests will be deemed to have waived any and all priority and
subordination rights that they may have with respect to distributions to holders
of Class 8 Equity Interests and Class 9 Equity Interests pursuant to the Plan,
and (b) all holders of Class 8 Equity Interests will be deemed to have waived
any and all priority and subordination rights that they may have with respect to
distributions to holders of Class 9 Equity Interests; and (ii) the confirmation
of the Plan will permanently enjoin, effective as of the Effective Date, (x) all
holders of Class 7 Equity Interests from enforcing or attempting to enforce any
such rights with respect to the distributions under the Plan to the holders of
Class 8 Equity Interests and Class 9 Equity Interests, and (y) all holders of
Class 8 Equity Interests from enforcing or attempting to enforce any such rights
with respect to the distributions under the Plan to the holders of Class 9
Equity Interests. Notwithstanding the foregoing provision, if Class 8 votes to
reject the Plan, such provision will not apply, and will be of no effect, to the
holders of Class 8 Equity Interests.
I. PROCEDURES FOR TREATING DISPUTED CLAIMS AND EQUITY INTERESTS
Unless otherwise ordered by the Bankruptcy Court after
notice and hearing, CHI or Reorganized CHI will have the exclusive right (except
as to applications for allowances of compensation and reimbursement of expenses
under sections 330 and 503 of the Bankruptcy Code) to make and file objections
to proofs of Administrative Expense Claims, Claims, and Equity Interests. CHI or
Reorganized CHI shall serve a copy of each objection upon the holder of the
Administrative Expense Claim, Claim, or Equity Interest to which the objection
is made as soon as practicable, but in no event later than thirty (30) days
after the Effective Date.
Notwithstanding any other provision of the Plan, if any
portion of a Claim or Equity Interest is Disputed, no payment or distribution
provided under the Plan will be made
42
on account of any of such Claim or Equity Interest, unless and until such
Disputed Claim or Disputed Equity Interest becomes Allowed.
Payments and distributions to each holder of a Claim or
Equity Interest that is Disputed, or is not Allowed, to the extent that such
Claim or Equity Interest ultimately becomes Allowed, will be made in accordance
with the provisions of the Plan governing the class of Claims or Equity
Interests in which such Claim or Equity Interest is classified. As soon as
practicable after the date that the order or judgment of the Bankruptcy Court
Allowing any Disputed Claim or Disputed Equity Interest, or any other Claim or
Equity Interest that was not previously Allowed becomes a Final Order,
Reorganized CHI will distribute to the holder of such Claim or Equity Interest
any payment or property that would have been distributed to such holder if the
Claim or Equity Interest had been Allowed as of the Effective Date, without any
interest on such payment or property.
J. OTHER PLAN PROVISIONS
1. EXCULPATION
None of CHI, Reorganized CHI, the members of any
official committee of unsecured creditors appointed in the Chapter 11 Case, the
Unofficial Bondholders' Committee, Morgan Stanley, and their respective members,
officers, directors, employees, attorneys, advisors, agents, general partners,
partners of any of the foregoing, or consultants who provide management
personnel or who serve as members of management of CHI, shall have or incur any
liability to any holder of an Administrative Expense Claim, Claim or Equity
Interest for any act or omission in connection with, or arising out of, the
formulation and negotiation of the Plan, the pursuit of confirmation of the
Plan, the consummation of the Plan, or the administration of the Plan or the
property to be distributed under the Plan, except for willful misconduct or
gross negligence, and, in all respects, CHI, Reorganized CHI, the members of any
official committee of unsecured creditors appointed in the chapter 11 case, the
Unofficial Bondholders' Committee, Morgan Stanley, and each of their respective
members, officers, directors, employees, attorneys, advisors, agents, general
partners, partners, and consultants who provide management personnel or who
serve as members of management of CHI, shall be entitled to rely upon the advice
of attorneys and other professional advisors with respect to their duties and
responsibilities under the Plan.
2. EXEMPTION FROM TRANSFER TAXES
Pursuant to section 1146(c) of the Bankruptcy Code, the
issuance, transfer, or exchange of notes or equity securities under the Plan,
the creation of any mortgage, deed of trust, or other security interest, the
making or assignment of any lease or sublease, or the making or delivery of any
deed or other instrument of transfer under, in furtherance of, or in connection
with, the Plan, including any merger agreements or agreements of consolidation,
deeds, bills of sale, or assignments executed in connection with any of the
transactions
43
contemplated under the Plan shall not be subject to any stamp, real estate
transfer, mortgage recording, or other similar tax.
3. LIMITED RELEASES
a. RELEASEES. All present and former officers
and directors of CHI and any other persons who serve or served as members of
management of CHI, all members of the Unofficial Bondholders' Committee, all
present and former officers, directors and other persons who serve or served as
members of the management of any member of such committee, and all advisors or
consultants of, or to, CHI and the Unofficial Bondholders' Committee.
b. LIMITED RELEASES OF RELEASEES AND OTHER PARTIES.
Except as otherwise provided in the Plan, as of the Effective Date, each of CHI,
the Debtor in Possession and each holder of a Claim against, or Equity Interest
in, CHI or the Debtor in Possession releases all Releasees, the lenders under
the DnB Facility, the holders of the Senior Discount Notes, the holders of the
Old Preferred Stock and the holders of the Old Common Stock, from claims,
obligations, rights, causes of action and liabilities held by CHI, the Debtor in
Possession or such holder against such individuals and entities, whether known
or unknown, existing or hereafter arising, based in whole or in part upon any
act or omission or other event occurring prior to the Commencement Date or
during the course of the Chapter 11 Case, including through the Effective Date,
in any way relating to CHI, the Debtor in Possession, the Chapter 11 Case, the
Plan, the DnB Facility Agreement, the Senior Discount Notes, the Old Preferred
Stock and the Old Common Stock, and the ownership, management and operation of
CHI.
c. LIMITED RELEASE BY RELEASEES AND OTHER PARTIES.
Except as otherwise provided in the Plan, as of the Effective Date, each of the
Releasees, the lenders under the DnB Facility, the holders of the Senior
Discount Notes, the holders of the Old Preferred Stock and the holders of the
Old Common Stock, releases each of CHI, the Debtor in Possession, and each
holder of a Claim against or Equity Interest in CHI or the Debtor in Possession,
in each case in any capacity, from claims, obligations, rights, causes of action
and liabilities held by such Releasee, the lenders under the DnB Facility, the
holders of the Senior Discount Notes, the holders of the Old Preferred Stock and
the holders of the Old Common Stock against CHI, the Debtor in Possession or any
such Releasee or holder, whether known or unknown, existing or hereafter
arising, based in whole or in part upon any act or omission or other event
occurring prior to the Commencement Date or during the course of the Chapter 11
Case, including through the Effective Date, in any way relating to CHI, the
Debtor in Possession, the Chapter 11 Case, the Plan, the DnB Facility Agreement,
the Senior Discount Notes, the Old Preferred Stock and the Old Common Stock, and
the ownership, management and operation of CHI.
44
d. BINDING EFFECT OF RELEASES. On the Effective
Date, each Releasee and each holder of a Claim and each holder of an Equity
Interest will be deemed to have agreed to the provisions of Section 8.1 and 8.2
of the Plan, and will be bound thereby for all purposes whatsoever.
4. DISSOLUTION OF COMMITTEE
Any statutory committee(s) appointed in CHI's chapter
11 case will be dissolved on the Effective Date.
5. COMPLIANCE WITH TAX REQUIREMENTS
CHI and Reorganized CHI will comply with all withholding
and reporting requirements imposed by any taxing authority of appropriate
jurisdiction, and all distributions hereunder will be subject to such
requirements.
6. VESTING AND LIENS
On the Effective Date, Reorganized CHI will be vested
with the assets of CHI, free and clear of all Claims, liens, security interests,
and Equity Interests, subject only to outstanding Claims, liens, and security
interests that are authorized under the Plan. On the Effective Date, all liens
against, and security interests in, any assets and properties of CHI, except to
the limited extent provided in the Plan, will be extinguished.
7. DISCHARGE OF CHI
The rights afforded in the Plan and the treatment of all
Claims and Equity Interests in the Plan will be in exchange for and in complete
satisfaction, discharge and release of Claims and Equity Interests of any nature
whatsoever, including any interest accrued on such Claims from and after the
Commencement Date, against CHI and the Debtor in Possession, or any of its
assets or properties. Except as otherwise provided herein, (i) on the Effective
Date, all such Claims against, and Equity Interests in, CHI will be satisfied,
discharged and released in full, and (ii) all persons will be precluded from
asserting against Reorganized CHI or its assets or properties any other or
further Claims or Equity Interests based upon any act or omission, transaction
or other activity of any kind or nature that occurred prior to the Confirmation
Date.
8. PERMANENT INJUNCTION
Except as otherwise expressly provided in the Plan or
the Confirmation Order, all entities who have held, hold or may hold Claims
against, or Equity Interests in, CHI will be permanently enjoined, on and after
the Effective Date, from (i) commencing or continuing in any manner any action
or other proceeding of any kind with respect to any such Claim or
45
Equity Interest, (ii) the enforcement, attachment, collection or recovery by any
manner or means of any judgment, award, decree or order against CHI on account
of any such Claim or Equity Interest, (iii) creating, perfecting or enforcing
any encumbrance of any kind against CHI or against the property or interests in
property of CHI on account of any such Claim or Equity Interest and (iv)
asserting any right of setoff, subrogation or recoupment of any kind against any
obligation due from CHI or against the property or interests in property of CHI
on account of any such Claim or Equity Interest. Such injunction will extend to
successors of CHI (including, without limitation, Reorganized CHI) and its
respective properties and interests in property.
9. RETENTION OF JURISDICTION
The Bankruptcy Court will retain jurisdiction over CHI's
chapter 11 case for, among other things, the purpose of determining all disputes
relating to Claims, Equity Interests, and other issues presented by or arising
under the interpretation, implementation, or enforcement of the Plan, and to
determine matters pending on the Effective Date.
10. AMENDMENT OR MODIFICATION OF THE PLAN
CHI may alter, amend, or modify the treatment of Claims
or Equity Interests provided for under the Plan to the extent provided in the
Bankruptcy Code, or as agreed or consented to by the holders of such Claims or
Equity Interests.
A holder of a Claim or Equity Interest that has accepted
the Plan will be deemed to have accepted the Plan as modified if the proposed
modification does not adversely change the treatment of such claim or equity
interest.
CHI reserves the right to revoke and withdraw the Plan
at any time prior to entry of the order confirming the Plan, in which event it
will be deemed null and void in all respects.
11. VOTES SOLICITED IN GOOD FAITH
The Plan provides that upon entry of the Confirmation
Order, CHI will be deemed to have solicited votes on the Plan in good faith and
in compliance with the Bankruptcy Code, and, pursuant to section 1125(e) of the
Bankruptcy Code, CHI, the members of the Unofficial Bondholders' Committee, and
each of their respective affiliates, agents, officers, directors, employees,
advisors, and attorneys will be deemed to have participated in good faith and in
compliance with the Bankruptcy Code in the offer, issuance, sale, and purchase
of securities offered and sold under the Plan, and therefore, will have no
liability for the violation of any applicable law, rule, or regulation governing
the solicitation of votes on the Plan or the offer, issuance, sale or purchase
of the securities offered and sold under the Plan.
46
VII.
VOTING PROCEDURES AND REQUIREMENTS
----------------------------------
A. VOTING DEADLINE
---------------
IT IS IMPORTANT THAT THE HOLDERS OF CLAIMS IN CLASS 3,
AND THE HOLDERS OF EQUITY INTERESTS IN CLASSES 7, 8 AND 9 EXERCISE THEIR RIGHT
TO VOTE TO ACCEPT OR REJECT THE PLAN. All known holders of
Claims and Equity Interests entitled to vote on the Plan have been sent a Ballot
together with this Disclosure Statement. Such holders should read the Ballot
carefully and follow the instructions contained therein. Please use only the
Ballot that accompanies this Disclosure Statement.
CHI has engaged The Altman Group, Inc. as its Voting
Agent to assist in the transmission of voting materials and in the tabulation of
votes with respect to the Plan. FOR YOUR VOTE TO COUNT, YOUR BALLOT MUST BE
RECEIVED AT THE FOLLOWING ADDRESS NO LATER THAN THE VOTING DEADLINE OF 5:00
P.M., EASTERN TIME, ON SEPTEMBER 9, 1997:
CONSOLIDATED HYDRO, INC.
C/O THE ALTMAN GROUP, INC.
60 EAST 42ND STREET
NEW YORK, NEW YORK 10165
(212) 681-9600
IF YOU MUST RETURN YOUR BALLOT TO YOUR BROKER, OR
THE AGENT FOR YOUR BROKER, YOU MUST RETURN YOUR BALLOT TO
THEM IN SUFFICIENT TIME FOR THEM TO PROCESS IT AND RETURN IT TO
THE ABOVE-ADDRESS BY THE VOTING DEADLINE.
IF A BALLOT IS DAMAGED OR LOST, YOU MAY CONTACT CHI'S
VOTING AGENT, THE ALTMAN GROUP, INC., TO REQUEST A REPLACEMENT BALLOT. ANY
BALLOT WHICH IS EXECUTED AND RETURNED BUT WHICH DOES NOT INDICATE AN ACCEPTANCE
OR REJECTION OF THE PLAN WILL BE DEEMED AN ACCEPTANCE OF THE PLAN. IF YOU HAVE
ANY QUESTIONS CONCERNING VOTING PROCEDURES, YOU MAY CONTACT THE VOTING AGENT AT
THE ADDRESS SPECIFIED ABOVE OR BY TELEPHONING: (212) 681- 9600.
47
Additional copies of this Disclosure Statement are
available upon request made to the Voting Agent:
The Altman Group, Inc.
60 East 42nd Street
New York, New York 10165
(212) 681-9600
B. HOLDERS OF CLAIMS AND EQUITY INTERESTS ENTITLED TO VOTE
-------------------------------------------------------
The Claims and Equity Interests in the following Classes
are impaired under the Plan and entitled to receive a distribution;
consequently, each holder of such claim or equity interest, as of the AUGUST 8,
1997 VOTING RECORD DATE established by CHI for purposes of this solicitation,
may vote to accept or reject the Plan:
Class 3 -- Senior Discount Note Claims
Class 7 -- Series F Equity Interests
Class 8 -- Series H Equity Interests
Class 9 -- Series G Equity Interests
Each holder of a Claim in Class 3 should vote the face
amount of the Senior Discount Notes it holds. Notwithstanding the use of the
face amount of the Senior Discount Notes for voting purposes, for allowance
purposes, only the accreted value of the Notes, as of the Commencement Date,
will be Allowed. Pursuant to section 502(b)(2) of the Bankruptcy Code, any Claim
for unmatured interest will not be Allowed.
C. VOTE REQUIRED FOR ACCEPTANCE BY A CLASS
---------------------------------------
The Bankruptcy Code defines acceptance of a plan by a
class of claims as acceptance by holders of at least two-thirds in dollar amount
and more than one-half in number of the claims of that class which cast ballots
for acceptance or rejection of the plan. Thus, acceptance by a class of claims
occurs only if at least two-thirds in dollar amount and a majority in number of
the holders of claims voting cast their Ballots in favor of the Plan.
The Bankruptcy Code defines acceptance of a plan by a
class of equity interests as acceptance by holders of at least two-thirds in
amount of interests of that class which cast ballots for acceptance or rejection
of the plan. Thus, acceptance by a class of equity interests occurs only if the
holders of at least two-thirds in amount of equity interests voting cast their
Ballots in favor of the Plan.
A vote may be disregarded if the Bankruptcy Court
determines, after notice and a hearing, that such acceptance or rejection was
not solicited or procured in good faith or in accordance with the provisions of
the Bankruptcy Code.
48
D. VOTING PROCEDURES
-----------------
CHI is providing copies of this Disclosure Statement,
Ballots, and where appropriate, Master Ballots, to all registered holders (AS OF
THE AUGUST 8, 1997 VOTING RECORD DATE) of Senior Discount Note Claims in Class
3, Series F Equity Interests in Class 7, Series H Equity Interests in Class 8
and Series G Preferred Equity Interests in Class 9. Registered holders may
include brokers, banks and other nominees. If such registered holders do not
hold for their own accounts, they or their agents (collectively with such
registered holders, "Nominees") should provide copies of this Disclosure
Statement and appropriate Ballots to their customers and to beneficial owners.
Any beneficial owner who has not received a Ballot should contact his or her
Nominee, or the Voting Agent.
1. HOLDERS OF CLAIMS IN CLASS 3 AND EQUITY INTERESTS IN CLASSES
7, 8 AND 9
a. BENEFICIAL OWNERS
Any beneficial owner, as of the Voting Record Date, of
Senior Discount Notes, Series F Preferred Stock, Series G Preferred Stock, or
Series H Preferred Stock in his, her, or its own name can vote by completing and
signing the enclosed Ballot and returning it directly to the Voting Agent (using
the enclosed pre-addressed postage-paid envelope) so as to be received by the
Voting Agent before the Voting Deadline. If no envelope was enclosed, contact
the Voting Agent for instructions.
Any beneficial owner holding, as of the Voting Record
Date, Senior Discount Notes, Series F Preferred Stock, Series G Preferred Stock,
or Series H Preferred Stock in "street name" through a Nominee can vote by
completing and signing the Ballot (unless the Ballot has already been signed, or
"prevalidated," by the Nominee), and returning it to the Nominee in sufficient
time for the Nominee to then forward the vote so as to be received by the Voting
Agent before the Voting Deadline of 5:00 p.m. (Eastern Time) on September 9,
1997. Any Ballot submitted to a Nominee will not be counted until such Nominee
properly completes and timely delivers a corresponding Master Ballot to the
Voting Agent. IF YOUR BALLOT HAS ALREADY BEEN SIGNED (OR "PREVALIDATED") BY YOUR
NOMINEE, YOU MUST RETURN THE BALLOT DIRECTLY TO THE VOTING AGENT SO THAT IT IS
RECEIVED BY THE VOTING AGENT BEFORE THE VOTING DEADLINE.
b. NOMINEES.
A Nominee which, on the Voting Record Date, is the
registered holder of Senior Discount Notes, Series F Preferred Stock, Series G
Preferred Stock, or Series H Preferred Stock for a beneficial owner, can obtain
the votes of the beneficial owners of such securities, consistent with customary
practices for obtaining the votes of securities held in "street name," in one of
the following two ways:
49
The Nominee may "prevalidate" a Ballot by (i) signing
the Ballot, (ii) indicating on the Ballot the name of the registered
holder, the amount of securities held by the Nominee for the
beneficial owner, and the numbers of the accounts in which such
securities are held by the Nominee, and (iii) forwarding such
Ballot, together with the Disclosure Statement, return envelope, and
other materials requested to be forwarded, to the beneficial owner
for voting. The beneficial owner must then complete the information
requested in Item 3 of the Ballot, if appropriate, and return the
Ballot directly to the Voting Agent in the pre-addressed,
postage-paid envelope so that it is received by the Voting Agent
before the Voting Deadline. A list of the beneficial owners to whom
"prevalidated" Ballots were delivered should be maintained by the
Nominee for inspection for at least one year from the Voting
Deadline.
OR
If the Nominee elects not to prevalidate Ballots, the
Nominee may obtain the votes of beneficial owners by forwarding to
the beneficial owners the unsigned Ballots, together with the
Disclosure Statement, a return envelope provided by, and addressed
to, the Nominee, and other materials requested to be forwarded. Each
such beneficial owner must then indicate his or her vote on the
Ballot, complete the information requested in Item 3 of the Ballot,
if appropriate, EXECUTE the Ballot, and return the Ballot to the
Nominee. After collecting the Ballots, the Nominee should, in turn,
complete a Master Ballot compiling the votes and other information
from the Ballots, execute the Master Ballot, and deliver the Master
Ballot to the Voting Agent so that it is received by the Voting
Agent before the Voting Deadline. All Ballots returned by beneficial
owners should be retained by Nominees for inspection for at least
one year from the Voting Deadline. PLEASE NOTE: The Nominee should
advise the beneficial owner to return his or her ballot to the
Nominee by a date calculated by the Nominee to allow it to prepare
and return the Master Ballot to the Voting Agent so that it is
received by the Voting Agent before the Voting Deadline.
c. SECURITIES CLEARING AGENCIES.
CHI expects that each of The Depository Trust Company
and the Philadelphia Depository Trust Company, as the nominee holder of Senior
Discount Notes, Series F Preferred Stock, Series G Preferred Stock, or Series H
Preferred Stock will arrange for its respective participants to vote by
executing an omnibus proxy in favor of such participants. As a result of the
omnibus proxy, such participant will be authorized to vote its Voting Record
Date positions held in the name of such securities clearing agencies.
50
d. OTHER.
If a Ballot is signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations, or
others acting in a fiduciary or representative capacity, such persons should
indicate such capacity when signing, and unless otherwise determined by CHI,
must submit proper evidence satisfactory to CHI of their authority to so act.
For purposes of voting to accept or reject the Plan, the
beneficial owners of such securities will be deemed to be the "holders" of such
claims or equity interests, as the case may be, represented by such securities.
Unless otherwise ordered by the Bankruptcy Court, Ballots or Master Ballots
which are signed, dated, and timely received, but on which a vote to accept or
reject the Plan has not been indicated, will be deemed to be votes accepting the
Plan. In the event that any Ballots or Master Ballots are received which are not
properly executed, CHI, in its discretion, may request that the Voting Agent
attempt to contact such holders or Nominees to cure any such defects in their
Ballots or Master Ballots.
Except as provided below, unless the Ballot or Master
Ballot being furnished is timely submitted to the Voting Agent before the Voting
Deadline together with any other documents required by such Ballot or Master
Ballot, CHI may, in its sole discretion, reject such Ballot or Master Ballot as
invalid, and therefore, decline to utilize it in connection with seeking
confirmation of the Plan by the Bankruptcy Court.
In the event of a dispute with respect to a Claim or
Equity Interest, any vote to accept or reject the Plan cast with respect to such
claim or equity interest will not be counted for purposes of determining whether
the Plan has been accepted or rejected, unless the Bankruptcy Court orders
otherwise.
CHI IS NOT AT THIS TIME REQUESTING THE DELIVERY OF, AND
NEITHER CHI NOR THE VOTING AGENT WILL ACCEPT, CERTIFICATES REPRESENTING ANY
NOTES OR EQUITY SECURITIES. PRIOR TO THE EFFECTIVE DATE, CHI WILL FURNISH ALL
SUCH HOLDERS WITH APPROPRIATE LETTERS OF TRANSMITTAL TO BE USED TO REMIT SUCH
SECURITIES IN EXCHANGE FOR THE DISTRIBUTION UNDER THE PLAN. INFORMATION
REGARDING SUCH REMITTANCE PROCEDURE (TOGETHER WITH ALL APPROPRIATE MATERIALS)
WILL BE DISTRIBUTED BY CHI AFTER THE COMMENCEMENT DATE.
2. WITHDRAWAL OF BALLOT OR MASTER BALLOT
Any holder of a Claim or Equity Interest entitled to
vote who has delivered a valid Ballot or Master Ballot may withdraw its vote by
delivering a written notice of withdrawal to the Voting Agent before the Voting
Deadline. To be valid, the notice of withdrawal must (a) describe the Claim or
Equity Interest to which it relates, (b) be signed by the party who signed the
Ballot or Master Ballot to be revoked, and (c) be received by the
51
Voting Agent prior to the Voting Deadline. CHI may contest the validity of any
withdrawals.
Any holder who has delivered a valid Ballot or Master
Ballot may change its vote by delivering to the Voting Agent a properly
completed subsequent Ballot or Master Ballot so as to be received before the
Voting Deadline. In the case where more than one timely, properly completed
Ballot or Master Ballot is received, only the Ballot or Master Ballot that bears
the latest date will be counted.
VIII.
CONFIRMATION OF THE PLAN
------------------------
A. CONFIRMATION HEARING
Section 1128(a) of the Bankruptcy Code requires the
Bankruptcy Court, after notice, to hold a hearing on confirmation of a plan. As
promptly as practicable after the commencement by CHI of its Chapter 11 Case,
CHI will request the Bankruptcy Court to schedule the Confirmation Hearing.
Notice of the Confirmation Hearing will be provided to all creditors and equity
holders or their representatives. 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 or any
subsequent adjourned Confirmation Hearing.
Section 1128(b) of the Bankruptcy Code provides that any
party in interest may object to confirmation of a plan. Any objection to
confirmation of the Plan must be in writing, must conform to the Bankruptcy
Rules, must set forth the name of the objectant, the nature and amount of Claims
or Equity Interests held or asserted by the objectant against CHI's estate or
property, the basis for the objection and the specific grounds therefor, and
must be filed with the Bankruptcy Court, with a copy to Chambers, together with
proof of service thereof, and served upon (i) Weil, Gotshal & Manges LLP,
Attorneys for CHI, 767 Fifth Avenue, New York, New York 10153, Attention: Lori
R. Fife, Esq. and Larren M. Nashelsky, Esq., (ii) Richards, Layton & Finger,
Attorneys for CHI, One Rodney Square, Wilmington, Delaware 19899, Attention:
Thomas L. Ambro, Esq., (iii) United States Department of Justice, Office of the
United States Trustee, Eastern District of Pennsylvania, District of Delaware,
601 Walnut Street, Curtis Center, Suite 950 West, Philadelphia, Pennsylvania
19106, Attention: Assistant United States Trustee, and (iv) Wachtell, Lipton,
Rosen & Katz, Attorneys for the Unofficial Bondholders' Committee, 51 West 52nd
Street, New York, New York 10019, Attention: Chaim J. Fortgang, Esq., so as to
be received no later than the date and time designated in the notice of the
Confirmation Hearing.
52
Objections to confirmation of the Plan are governed by
Bankruptcy Rule 9014. UNLESS AN OBJECTION TO CONFIRMATION IS TIMELY SERVED AND
FILED, IT MAY NOT BE CONSIDERED BY THE BANKRUPTCY COURT.
B. REQUIREMENTS FOR CONFIRMATION OF THE PLAN
1. STATUTORY REQUIREMENTS
At the Confirmation Hearing, the Bankruptcy Court will
determine whether the following confirmation requirements specified in section
1129 of the Bankruptcy Code have been satisfied:
o The Plan complies with the
applicable provisions of the Bankruptcy Code.
o CHI has complied with the
applicable provisions of the Bankruptcy Code.
o The Plan has been proposed
in good faith and not by any means proscribed by law.
o Any payment made or promised
by CHI or by a person
issuing securities or acquiring property under the Plan
for services or for costs and expenses in, or in
connection with, the chapter 11 case, or in connection
with the Plan and incident to the chapter 11 case, has
been disclosed to the Bankruptcy Court, and any such
payment made before confirmation of the Plan is
reasonable, or if such payment is to be fixed after
confirmation of the Plan, such payment is subject to the
approval of the Bankruptcy Court as reasonable.
o CHI has disclosed the
identity and affiliations of any
individual proposed to serve, after confirmation of the
Plan, as a director, officer, or voting trustee of CHI,
or a successor to CHI under the Plan, and the
appointment to, or continuance in, such office of such
individual is consistent with the interests of creditors
and equity holders and with public policy, and CHI has
disclosed the identity of any insider that will be
employed or retained by CHI, and the nature of any
compensation for such insider.
o With respect to each Class
of Claims or Equity Interests,
each holder of an impaired Claim or impaired Equity
Interest either has accepted the Plan or will receive or
retain under the Plan on account of such holder's claim
or equity interest, property of a value, as of the
Effective Date of the Plan, that is not less than the
amount such holder would receive or
53
retain if CHI were liquidated on the Effective Date
under chapter 7 of the Bankruptcy Code. See discussion
of "Best Interests Test," below.
o Except to the extent the Plan
meets the "Nonconsensual Confirmation" standards
discussed below, each Class of Claims or Equity
Interests has either accepted the Plan or is not
impaired under the Plan.
o Except to the extent that the
holder of a particular claim has agreed to a different
treatment of such claim, the Plan provides that
Administrative Expenses and Other
Priority Claims will be paid in full on the Effective
Date and that Priority Tax Claims will be either paid in
full on the Effective Date or will receive on account of
such claims deferred cash payments, over a period not
exceeding six years after the date of assessment of such
claims, of a value, as of the Effective Date, equal to
the allowed amount of such claims.
o At least one Class of
impaired Claims has accepted the Plan, determined
without including any acceptance of the
Plan by any insider holding a Claim in such Class.
o Confirmation of the Plan is
not likely to be followed by the liquidation or the need
for further financial reorganization of CHI or any
successor to CHI under the Plan, unless such liquidation
or reorganization is proposed in the Plan. See
discussion of "Feasibility," below.
o All fees payable under
section 1930 of title 28 have been paid on or prior to
the Effective Date.
o The Plan provides for the
continuation after the Effective Date of payment of all
Retiree Benefits without modification by the Plan,
thereby complying with section 1114(e)(1) of the
Bankruptcy Code.
CHI believes that each of the foregoing elements will be
satisfied.
2. UNFAIR DISCRIMINATION AND FAIR AND EQUITABLE TESTS
Since the holders of the Old Common Stock are deemed to
reject the Plan, CHI is moving for confirmation of the Plan under section
1129(b) of the Bankruptcy Code as to Class 10. If Class 8 votes to reject the
Plan, CHI will also move for confirmation of the Plan under section 1129(b) of
the Bankruptcy Code as to Classes 8 and 9. To obtain such confirmation, it must
be demonstrated to the Bankruptcy Court that the Plan "does not discriminate
unfairly" and is "fair and equitable" with respect to each class that rejects
the Plan.
54
A plan of reorganization "does not discriminate
unfairly" if (i) the legal rights of a rejecting class are treated in a manner
that is consistent with the treatment of other classes whose legal rights are
related to the legal rights of the rejecting class, and (ii) no class receives
payments in excess of that which it is legally entitled to receive for its
Claims or Equity Interests. CHI believes that under the Plan all impaired
Classes of Claims and Equity Interests are treated in a manner that is
consistent with the treatment of other classes of Claims and Equity Interests to
which their legal rights are related, if any, and no Class of Claims or Equity
Interests will receive payments or property with an aggregate value greater than
the aggregate value of the Allowed Claims and Allowed Equity Interests in such
class. Accordingly, CHI believes that the Plan does not discriminate unfairly as
to any impaired Class of Claims or Equity Interests.
The Bankruptcy Code establishes different "fair and
equitable" tests for secured creditors, unsecured creditors and equity interest
holders as follows:
o Secured Creditors - Either (i) each impaired
secured creditor retains its liens securing its secured claim and it receives on
account of its secured claim deferred cash payments having a present value equal
to the amount of its allowed secured claim, (ii) each impaired secured creditor
realizes the indubitable equivalent of its allowed secured claim, or (iii) the
property securing the claim is sold free and clear of liens, with such liens to
attach to the proceeds and the treatment of such liens on proceeds as provided
in clause (i) or (ii) of this subparagraph.
o Unsecured Creditors - Either (i) each impaired
unsecured creditor receives or retains under the plan property of a value equal
to the amount of its allowed claim or (ii) the holders of claims and interests
that are junior to the claims of the dissenting class will not receive any
property under the plan of reorganization, subject to the applicability of the
judicial doctrine of contributing new value.
o Equity Interest Holders - Either (i) each equity
interest holder will receive or retain under the plan of reorganization property
of a value equal to the greater of (a) the fixed liquidation preference or
redemption price, if any, of such stock or (b) the value of the stock or (ii)
the holders of interests that are junior to the stock will not receive any
property under the plan of reorganization, subject to the applicability of the
judicial doctrine of contributing new value.
CHI believes that the Plan can be confirmed on a
non-consensual basis. CHI will show at the Confirmation Hearing that the Plan
provides recoveries to the holders of Allowed Claims and Allowed Equity
Interests that satisfy the conditions of section 1129(b) of the Bankruptcy Code.
55
3. FEASIBILITY
The Bankruptcy Code conditions confirmation of a plan of
reorganization on, among other things, a finding that it is not likely to be
followed by the liquidation or the need for further financial reorganization of
a debtor. For purposes of determining whether the Plan satisfies this condition,
CHI has analyzed the capacity of Reorganized CHI to service its obligations
following the Effective Date. As part of this analysis, CHI has prepared
projections of their financial performance for each of the five fiscal years in
the period ending December 31, 2002 (the "Projection Period"). These
projections, and the significant assumptions on which they are based, are
included in Exhibit D to the Disclosure Statement, entitled "Projected Financial
Information." Based upon its analysis of such projections, CHI believes that
Reorganized CHI will be able to make all payments required to be made under the
Plan, and therefore, that confirmation of the Plan is not likely to be followed
by liquidation or the need for further reorganization. CHI further believes that
it will be able to repay or refinance any of the then-outstanding indebtedness
under the Plan at or prior to the maturity of such indebtedness.
The financial information and projections appended to
this Disclosure Statement include for the five fiscal years of the Projection
Period:
o Pro Forma Consolidated Balance Sheet of
Reorganized CHI as of December 31, 1997,
December 31, 1998, December 31, 1999,
December 31, 2000, December 31, 2001 and
December 31, 2002;
o Projected Consolidated Statement of
Operations of CHI for the 26 week period
ending December 31, 1997, including
confirmation adjustments, and Projected
Consolidated Statement of Operations of
Reorganized CHI for each of the five fiscal
years in the period ending December 31,
2002;
o Projected Consolidated Statement of Cash
Flows of CHI for the 26 week period ending
December 31, 1997, including confirmation
adjustments, and Projected Consolidated
Statement of Cash Flows of Reorganized CHI
for each of the five fiscal years in the
period ending December 31, 2002; and
THE PRO FORMA FINANCIAL INFORMATION AND THE PROJECTIONS
ARE BASED ON THE ASSUMPTION THAT THE PLAN WILL BE CONFIRMED BY THE BANKRUPTCY
COURT AND, FOR PROJECTION PURPOSES, THAT THE EFFECTIVE DATE UNDER THE PLAN AND
DISTRIBUTIONS THEREUNDER OCCUR ON OR ABOUT DECEMBER 31, 1997. CHI HAS PREPARED
THE PROJECTIONS BASED UPON CERTAIN ASSUMPTIONS THAT IT BELIEVES TO BE REASONABLE
UNDER THE CIRCUMSTANCES. THE PROJECTIONS HAVE NOT BEEN EXAMINED OR COMPILED BY
INDEPENDENT ACCOUNTANTS. CHI MAKES NO REPRESENTATION AS TO THE ACCURACY OF THE
PROJECTIONS OR THE ABILITY OF REORGANIZED CHI TO
56
ACHIEVE THE PROJECTED RESULTS. MANY OF THE ASSUMPTIONS ON WHICH THE PROJECTIONS
ARE BASED ARE SUBJECT TO SIGNIFICANT UNCERTAINTIES. INEVITABLY, SOME ASSUMPTIONS
WILL NOT MATERIALIZE AND UNANTICIPATED EVENTS AND CIRCUMSTANCES MAY AFFECT THE
ACTUAL FINANCIAL RESULTS. THEREFORE, THE ACTUAL RESULTS ACHIEVED MAY VARY FROM
THE PROJECTED RESULTS AND THE VARIATIONS MAY BE MATERIAL. IT IS URGED THAT ALL
OF THE ASSUMPTIONS BE EXAMINED CAREFULLY IN EVALUATING THE PLAN.
4. BEST INTERESTS TEST
As described above, the Bankruptcy Code requires that
each holder of an impaired Claim or Equity Interest either (a) accepts the Plan
or (b) receives or retains under the Plan property of a value, as of the
Effective Date, that is not less than the value such holder would receive or
retain if CHI were liquidated under chapter 7 of the Bankruptcy Code on the
Effective Date.
The first step in meeting this test is to determine the
dollar amount that would be generated from the liquidation of CHI's assets and
properties, including limited partnership interests in the context of a chapter
7 liquidation case. In order to dispose of CHI's assets and properties in the
most time efficient and orderly process, the stock of the direct primary
subsidiaries of CHI would be sold with the project debt at those entities and
their subsidiaries or partnerships being assumed in the transaction(s). The
total cash available would be the sum of the proceeds of the disposition of the
stock of these direct primary subsidiaries and the net unrestricted cash held by
CHI at the time of the distribution of the proceeds in the chapter 7 case. The
next step is to reduce that total by the amount of any Claims secured by such
assets (excluding any obligations at the subsidiaries which were assumed in the
sale such as project financings, capital leases and leveraged leases), the costs
and expenses of the liquidation, and such additional administrative expenses and
priority claims that may result from the termination of CHI's business (i.e.
senior management severance expenses during the sale period) and the use of
chapter 7 for the purposes of liquidation. Next, any remaining Cash would be
allocated to creditors and preferred and common shareholders in strict priority
in accordance with section 726 of the Bankruptcy Code. Finally, the present
value of such allocation (taking into account the time necessary to accomplish
the liquidation) is compared to the value of the property that is proposed to be
distributed under the Plan on the Effective Date.
CHI's costs of liquidation under chapter 7 would include
the fees payable to a trustee in bankruptcy as well as those which might be
payable to attorneys and other professionals that such a trustee may engage,
including a financial advisor to market the portfolio of hydroelectric assets
for sale, plus any unpaid expenses incurred by CHI during a chapter 11 case and
allowed in the chapter 7 case, such as compensation of attorneys, financial
advisors, appraisers, accountants and other professionals, and costs and
expenses of members of any statutory committee on unsecured creditors appointed
by the United States Trustee pursuant to section 1102 of the Bankruptcy Code and
any other committee so
57
appointed as well as accrued payables for goods and other services including
damages from the breach or rejection of obligations incurred and executory
contracts entered into by CHI both prior to, and during the pendency of, the
chapter 11 case.
The foregoing types of Claims, costs, expenses, and fees
and such other Claims which may arise in a liquidation case or result from a
pending chapter 11 case must be paid in full from the liquidation proceeds
before the balance of those proceeds would be made available to pay pre-chapter
11 priority and unsecured Claims.
In applying the "best interests test", it is possible
that Claims and Equity Interests in the chapter 7 case may not be classified
according to the seniority of such Claims and Equity Interests as provided in
the Plan. In the absence of a contrary determination by the Bankruptcy Court,
all pre-chapter 11 unsecured Claims which have the same rights upon liquidation
would be treated as one class for purposes of determining the potential
distribution of the liquidation proceeds resulting from CHI's chapter 7 case.
The distributions from the liquidation proceeds would be calculated ratably
according to the amount of the Claim held by each creditor. Section 510 of the
Bankruptcy Code specifies that contractual subordination provisions are
enforceable in a chapter 7 liquidation case. Thus, the distributions from the
liquidation proceeds will be made in accordance with contractual subordination
provisions.
The distribution of proceeds from a liquidation is
governed by the Bankruptcy Code which establishes an order of priority pursuant
to the Bankruptcy Code, no junior creditor receives any distribution until all
senior creditors are paid in full, with interest, and no equity holder receives
any distribution until all creditors are paid in full with interest.
Consequently, and because the creditors of CHI are structurally subordinated to
the prior payment of the obligations owed by CHI's subsidiaries, CHI believes
that in a chapter 7 case, holders of the Series F Preferred Stock, Series G
Preferred Stock, Series H Preferred Stock, and Old Common Stock would receive no
distributions from the bankruptcy estate.
After consideration of the effects that a chapter 7
liquidation would have on the ultimate proceeds available for distribution to
creditors in a chapter 11 case, including (i) the increased costs and expenses
of a liquidation under a chapter 7 arising from fees payable to a trustee in
bankruptcy and professional advisors to such trustee, (ii) the erosion in value
of core hydroelectric assets in a chapter 7 case in the context of the
accelerated liquidation required under chapter 7 and the "forced sale"
atmosphere that would prevail, (iii) the loss of any potential value realizable
from the Industrial Infrastructure Business currently being pursued by
management, (iv) the adverse effects on the salability of the Company as a
result of the departure of key employees, and (v) substantial increases in
claims which would be satisfied on a priority basis or on parity with creditors
in a chapter 11 case, CHI has concluded that confirmation and implementation of
the Plan will provide each creditor and equity holder with a recovery that is
not less than it would receive pursuant to a liquidation of CHI under chapter 7
of the Bankruptcy Code.
58
Moreover, any distributions in a chapter 7 case may not
occur for a substantial period of time, particularly in light of the length of
time required to receive the regulatory approvals that may be necessary to sell
the assets of the bankruptcy estate, including the stock of the direct primary
subsidiaries of CHI. In this regard, it is possible that distribution of the
proceeds of the liquidation could be delayed for a year or more after the
completion of such liquidation in order to resolve the claims, receive
regulatory approvals, and prepare for distributions. In the event litigation
were necessary to resolve claims asserted in the chapter 7 case, including,
potentially, those from customers, the delay could be further extended.
THE LIQUIDATION ANALYSIS ANNEXED AS EXHIBIT E TO THIS
DISCLOSURE STATEMENT IS AN ESTIMATE OF THE PROCEEDS THAT MAY BE GENERATED AS A
RESULT OF A HYPOTHETICAL CHAPTER 7 LIQUIDATION OF THE ASSETS OF CHI WHICH
CONSIST OF THE STOCK OF ITS SUBSIDIARIES AND CERTAIN GENERAL PARTNERSHIP
INTERESTS. THE ANALYSIS IS BASED UPON A NUMBER OF SIGNIFICANT ASSUMPTIONS WHICH
ARE DESCRIBED, INCLUDING EFFECTUATING THE LIQUIDATION THROUGH A SALE OF THE
STOCK OF THE 13 DIRECT PRIMARY SUBSIDIARIES OF CHI. THE LIQUIDATION ANALYSIS
DOES NOT PURPORT TO BE A VALUATION OF THE COMPANY'S ASSETS AND IS NOT
NECESSARILY INDICATIVE OF THE VALUES THAT MAY BE REALIZED IN AN ACTUAL
LIQUIDATION.
C. EFFECTIVENESS OF THE PLAN
1. CONDITIONS PRECEDENT TO EFFECTIVENESS
The Plan will be consummated, and the Effective Date
will occur, on the first Business Day (or as soon thereafter as is practicable)
after the date on which the following conditions have been satisfied or waived:
a. CONFIRMATION ORDER. The Confirmation Order, in form
and substance reasonably acceptable to CHI, the Unofficial Bondholders'
Committee and the Creditors' Committee, if any, shall have been signed by the
Bankruptcy Judge, and there shall not be a stay or injunction in effect with
respect thereto;
b. WORKING CAPITAL FACILITY. Reorganized CHI shall
have credit availability under a working capital facility, in amount, form and
substance acceptable to CHI and the Unofficial Bondholders' Committee, to
provide Reorganized CHI with (i) access to letters of credit for projects, (ii)
working capital to meet ordinary and peak requirements and (iii) additional
borrowings to support future projects;
c. EXECUTION AND DELIVERY OF CERTAIN AGREEMENTS. The
following agreements, in form satisfactory to CHI, the Unofficial Bondholders'
Committee and the Creditors' Committee, if any, shall have been executed and
delivered, and all conditions precedent thereto shall have been satisfied:
(1) Amended CHI By-Laws;
59
(2) Restated CHI Certificate of Incorporation;
(3) Employment Agreements;
(4) New Series B Warrant Agreement;
(5) New Series C Warrant Agreement;
(6) Management Option Plan and Management
Option Agreements;
(7) Registration Rights Agreement; and
(8) Stockholders' Agreement.
d. DOCUMENTATION. All actions, documents and agreements
necessary to implement the Plan shall have been effected or executed.
CHI and the Unofficial Bondholders' Committee may waive
one or more of the foregoing conditions to effectiveness, by a writing signed by
an authorized representative of each and filed with the Bankruptcy Court.
2. EFFECT OF FAILURE OF CONDITIONS
Pursuant to the Plan, if each of the conditions
precedent to effectiveness has not been satisfied or duly waived by CHI and the
Unofficial Bondholders' Committee before the first Business Day that is more
than sixty (60) days after the Confirmation Date, or such later date as is
proposed and approved, the Bankruptcy Court may, after notice and a hearing,
vacate the order confirming the Plan. In such event, 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 against, or Equity Interests in, CHI or (b)
prejudice in any manner the rights of CHI and the holders of Claims or Equity
Interests. If, however, the conditions precedent to effectiveness are satisfied
or duly waived prior to entry of such order of vacatur, then notwithstanding the
filing of a motion therefor, the Confirmation Order shall not be vacated.
3. EFFECT OF CONFIRMATION
Except as otherwise provided in the Plan or in the
Confirmation Order, the rights afforded in the Plan and the treatment of all
creditors and equity holders thereunder will be in complete satisfaction,
discharge, and release of all Claims and Equity Interests of any nature
whatsoever, including any interest accrued thereon from and after the
Commencement Date, against CHI, its estate, its assets, and its properties and
interests in property. Except as otherwise provided in the Plan, on the
Effective Date, all such Claims against, and Equity Interests in, CHI will be
deemed satisfied, discharged, and released in
60
full. All entities will be precluded from asserting against CHI, its successors,
or its assets or properties, any other or further Claims or Equity Interests
based upon any act or omission, transaction, or other activity of any kind or
nature that occurred prior to the Confirmation Date.
As of the Effective Date, all persons and entities will
be permanently enjoined and precluded from asserting against CHI, Reorganized
CHI, and their respective assets and properties, any other Claims based upon any
act or omission, transaction, or other activity of any kind or nature that
occurred prior to the Effective Date. Upon confirmation of the Plan, its
provisions will bind CHI and its creditors and equity interest holders, whether
or not they have filed proofs of Claims or Equity Interests, have accepted the
Plan, or are entitled to receive distributions thereunder.
CHI's property will revest in Reorganized CHI on the
Effective Date, and will be free and clear of all liens, claims and interests of
holders of Claims and Equity Interests, except as provided in the Plan. From and
after the Effective Date, Reorganized CHI may operate its business, and may use,
acquire and dispose of property free of any restrictions imposed under the
Bankruptcy Code. All injunctions of stays provided for in the Chapter 11 Case
under sections 105 or 362 of the Bankruptcy Code, or otherwise, and in existence
on the Confirmation Date, shall remain in full force and effect until the
Effective Date. From and after the Effective Date, any "50-percent shareholder"
of Reorganized CHI within the meaning of section 382(g)(4)(D) of the Internal
Revenue Code of 1986, as amended, will be permanently enjoined from claiming a
worthless stock deduction with respect to its Equity Interest for any taxable
year of such shareholder ending prior to the Effective Date.
IX.
GOVERNANCE AND MANAGEMENT OF REORGANIZED CHI
--------------------------------------------
A. GOVERNANCE AND MANAGEMENT OF REORGANIZED CHI
--------------------------------------------
1. GENERAL
On the Effective Date, the management, control and
operation of Reorganized CHI will become the general responsibility of the Board
of Directors of Reorganized CHI.
2. BOARD OF DIRECTORS OF REORGANIZED CHI
The Board of Directors of Reorganized CHI will consist
of seven (7) directors as follows: Morgan Stanley will have the right to
designate two (2) directors; SBC will have the right to designate two (2)
directors; management of Reorganized CHI will have the right to designate two
(2) directors; and there will be one (1) independent director designated by
61
the remaining members of the Board of Directors. Procedures governing the
nomination and election of members of the Board of Directors are subject to the
Stockholders' Agreement. The initial Board of Directors of Reorganized CHI will
only have five (5) directors, with Morgan Stanley and SBC each reserving one (1)
of their two (2) designations at this time. The initial members of the Board of
Directors of Reorganized CHI will be as follows: James T. Stewart (Chairman and
CEO), Edward M. Stern (President and COO), Michael Petrick (a Morgan Stanley
designee), James DuPlessie (a SBC designee) and an independent director. The
identity of the independent director and the compensation to be paid to the
non-management members of the Board of Directors of Reorganized CHI will be
disclosed at, or immediately prior to, the Confirmation Hearing.
3. EXECUTIVE OFFICERS OF REORGANIZED CHI
The executive officers of CHI on the Confirmation Date
will continue to serve as the executive officers of Reorganized CHI. The
identity and cash compensation of the executive officers of Reorganized CHI for
fiscal year 1997 and post-Effective Date are as follows:
====================================================================================================================================
NAME AGE CURRENT FISCAL 1997 CASH POST-EFFECTIVE
POSITION COMPENSATION DATE BASE
COMPENSATION11
- - - ------------------------------------------------------------------------------------------------------------------------------------
James T. Stewart12 49 Chairman & Chief Executive $300,000 - Salary $325,000
Officer $250,000 - Other
- - - ------------------------------------------------------------------------------------------------------------------------------------
Edward M. Stern13 38 President, Chief Operating $231,762 - Salary $250,000
Officer & Secretary $171,270 - Other
- - - ------------------------------------------------------------------------------------------------------------------------------------
Michael I. Storch 45 Executive Vice President $244,408 - Salary $250,000
$ 73,525 - Other
- - - ------------------------------------------------------------------------------------------------------------------------------------
Pascal J. Brun 48 Senior Vice President $120,524 - Salary $129,000
$ 58,012 - Other
- - - ------------------------------------------------------------------------------------------------------------------------------------
Mary V. Gilbert14 35 Senior Vice President & $124,615 - Salary $180,000
Chief Financial Officer $ 52,500 - Other
- - - ------------------------------------------------------------------------------------------------------------------------------------
All Executive Officers as a N/A N/A N/A $2.3 million
group, including the above
referenced persons (16
persons)
====================================================================================================================================
<FN>
11. In addition to base compensation, the executive officers of Reorganized CHI
will be eligible for (i) an annual bonus of up to 150% of base salary (depending
on each executive's compensation arrangement) and (ii) Management Options. For a
discussion of the Management Options, see Section IX.C, below, entitled
"Governance and Management of Reorganized CHI -- Management Option Plan".
12. Mr Stewart was elected Chief Executive Officer and a Director of CHI as of
July 1, 1996.
13. Mr. Stern was elected President and Chief Operating Officer of CHI in
September, 1996.
14. Ms. Gilbert was elected Senior Vice President and Chief Financial Officer
of CHI in January, 1997.
</FN>
62
The business experience of CHI's current officers and
directors is set forth in Item 10 "Directors and Officers of the Registrant" in
the Annual Report on Form 10-K, annexed as Exhibit B to this Disclosure
Statement.
4. EMPLOYMENT AGREEMENTS OF EXECUTIVE OFFICERS OF REORGANIZED CHI
On the Effective Date, Reorganized CHI is entering into
employment agreements with the following four (4) executive officers: James T.
Stewart, Edward M. Stern, Michael I. Storch and Mary V. Gilbert. The respective
terms of the employment agreements are between two and three years.
Post-Effective Date base compensation for each of the executive officers
executing employment agreements is set forth in the chart above. Each such
executive officer is also entitled to (i) incentive compensation, (ii)
Management Options, (iii) participation in benefit plans, (iv) severance and (v)
disability and death benefits, and is subject to non-compete restrictions. A
form of the Employment Agreements is annexed to the Plan as Exhibit C.
5. RESTATED CERTIFICATE OF INCORPORATION AND AMENDED
BY-LAWS OF REORGANIZED CHI
The Amended CHI By-Laws and the Restated CHI Certificate
of Incorporation will become effective as of the Effective Date and will, among
other things, (a) prohibit the issuance of non-voting equity securities as
required by section 1123(a)(6) of the Bankruptcy Code, (b) effectuate the
provisions of the Plan and (c) provide that the corporate name of CHI will be
changed to CHI Energy, Inc.
B. OWNERSHIP OF REORGANIZED CHI
The following list sets forth those entities which, to CHI's
knowledge, based on the ownership of the Senior Discount Notes as of August 1,
1997, will own beneficially or have investment discretion with respect to more
than five percent (5%) of the New Common Stock (subject to dilution from the New
Warrants and the Management Options), as of the Effective Date:
Name of Estimated Amount of Estimated Percentage
Beneficial Holder Beneficial Ownership of Beneficial Ownership
- - - ----------------- -------------------- -----------------------
Morgan Stanley & Co. 3,610,000 shares of New 36.1%
Class A Common Stock
Swiss Bank Corporation 3,136,000 shares of New 31.4%
and affiliates Class A Common Stock
63
Merrill Lynch Asset 1,520,000 shares of New 15.2%
Management Common Stock
Stonehill Investment 656,000 shares of New 6.6%
Corp. Class A Common Stock
Gem Capital 605,000 shares of New 6.1%
Class A Common Stock
C. MANAGEMENT OPTION PLAN
1. GENERAL
Approval of the Plan will be deemed an approval or
ratification, as the case may be, of a stock option plan, substantially in the
form annexed to the Plan as Exhibit D (the "Management Option Plan") pursuant to
which the Management Options will be granted. The Management Option Plan is
intended to provide incentives that will retain and motivate those highly
competent individuals that are key employees of Reorganized CHI. The Management
Option Plan is also intended to align the interests of such employees with those
of Reorganized CHI's stockholders. The Management Option Plan will be adopted
prior to the Effective Date by the Board of Directors of CHI, although no
options will be granted until the Effective Date. Up to 810,811 shares of New
Class A Common Stock may be granted under the Management Option Plan.
THE SOLICITATION OF THE HOLDERS OF NEW COMMON STOCK
WILL BE DEEMED A SOLICITATION FOR APPROVAL OF THE MANAGEMENT OPTION PLAN. CHI
BELIEVES THAT THE ORDER CONFIRMING THE PLAN SHOULD CONSTITUTE SUCH APPROVAL OF
THE MANAGEMENT OPTION PLAN FOR PURPOSES OF SECTIONS 422 AND 162(M) OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "TAX CODE"). THERE CAN BE NO
ASSURANCE, HOWEVER, THAT THE INTERNAL REVENUE SERVICE WILL AGREE WITH SUCH
POSITION.
As of the Effective Date, Management Options to acquire
New Class A Common Stock at an exercise price of $10 per share of New Class A
Common Stock are being granted pursuant to the Management Option Plan to
twenty-four (24) CHI employees, including each of the named executive officers.
The Management Options entitle such holders to purchase up to an aggregate of
7.5% of the New Class A Common Stock, subject to dilution due to the issuance by
Reorganized CHI of shares of New Common Stock
64
pursuant to the exercise of the New Series B Warrants and the New Series C
Warrants by the holders thereof. The Management Options will vest and become
exercisable as follows:
Effective Date 33 1/3% of the Management Options
First Anniversary thereof 22 2/9% of the Management Options
Second Anniversary thereof 22 2/9% of the Management Options
Third Anniversary thereof 22 2/9% of the Management Options
The Management Options will also become vested and
exercisable upon a change in control of Reorganized CHI. The Management Options
granted as of the Effective Date will terminate on the seventh (7th) anniversary
of the Effective Date unless terminated at an earlier date following termination
of an optionee's employment. No employee of Reorganized CHI will be eligible
under the Management Option Plan to be granted Management Options to purchase
more than 350,000 shares of New Class A Common Stock.
2. TAX CONSEQUENCES
A. MANAGEMENT OPTIONS
The Management Options granted as of the Effective Date
under the Management Option Plan will be either "incentive stock options" under
Section 422(b) of the Tax Code or non qualified stock options. In that regard, a
vote in favor the Plan is intended to be treated as a vote by the holders of the
New Common Stock in favor of the Management Option Plan for purposes of Section
422(b) of the Tax Code. In order to qualify as an incentive stock option, a
stock option must have an exercise price that is not less than the fair market
value of the underlying stock at the time of grant.
An employee who exercises a Management Option qualifying
as an incentive stock option by delivering shares previously acquired pursuant
to the exercise of a Management Option is treated as making a "disqualifying
disposition" of such shares if the employee delivers such shares before the
expiration of the applicable holding period (as specified in Section 422 of the
Tax Code) with respect to such shares. Upon the exercise of a Management Option
with previously acquired shares as to which no disqualifying disposition occurs,
it would appear that the employee would not recognize gain or loss with respect
to such previously acquired shares.
A deduction will not be allowed to Reorganized CHI or
any of its subsidiaries for federal income tax purposes with respect to the
grant or exercise of a Management Option qualifying as an incentive stock option
or the disposition, after the applicable holding period, of the shares of New
Class A Common Stock acquired upon exercise of such Management Option. In the
event of a disqualifying disposition, a federal income tax deduction will be
allowed to Reorganized CHI in an amount equal to the ordinary income included in
gross income by the optionee, provided that such amount constitutes an ordinary
and
65
necessary business expense to Reorganized CHI and is reasonable and the
limitations of Sections 162(m) and 280G of the Tax Code (discussed below) do not
apply.
B. NON-QUALIFIED STOCK OPTIONS ("NQSO")
A NQSO is an option that does not qualify as an
"incentive stock option" under Section 422(b) of the Tax Code. An individual who
receives a NQSO will not recognize any taxable income upon the grant of such
NQSO. Generally, upon exercise of a NQSO, an individual will be treated as
having received ordinary income in an amount equal to the excess of the fair
market value of the shares of stock at the time of exercise over the exercise
price.
The ordinary income recognized with respect to the
transfer of shares of New Class A Common Stock upon exercise of a NQSO under the
Management Option Plan will be subject to both wage withholding and employment
taxes. In addition to the customary methods of satisfying the withholding tax
liabilities that arise upon the exercise of a NQSO, if permitted by the
compensation committee of the Board of Directors of Reorganized CHI, an
individual may satisfy the liability in whole or in part by tendering other
shares of New Class A Common Stock owned by the individual, which will be valued
at their fair market value as of the date that the tax obligation arises.
A deduction for federal income tax purposes will be
allowed to Reorganized CHI or a subsidiary thereof in an amount equal to the
ordinary income included in gross income by the individual in connection with
the exercise of such option, provided that such amount constitutes an ordinary
and necessary business expense and is reasonable and the limitations of Sections
162(m) and 280G of the Tax Code do not apply.
C. CHANGE IN CONTROL
Upon a "change in control" of Reorganized CHI, the then
outstanding options under the Management Option Plan shall become fully
exercisable. In general, if the total amount of payments to optionees that are
contingent upon a "change of control" of Reorganized CHI (as determined for
purposes of Section 280G of the Tax Code), including payments upon the exercise
of options under the Management Option Plan that vest upon a "change in
control," equals or exceeds three times the recipient's "base amount"
(generally, such recipient's average annual compensation for the five years
preceding the change in control), then, subject to certain exceptions, the
payments may be treated as "parachute payments" under the Tax Code, in which
case a portion of such payments would be non-deductible to Reorganized CHI and
the recipient would be subject to a 20% excise tax on such portion of the
payments. No assurance can be given that the Management Options granted under
the Management Option Plan will not be subject to Section 280G of the Tax Code.
66
D. CERTAIN LIMITATIONS ON DEDUCTIBILITY OF EXECUTIVE
COMPENSATION
With certain exceptions, Section 162(m) of the Tax Code
denies a deduction to publicly held corporations for compensation paid to
certain executive officers in excess of $1 million per executive per taxable
year (including, in some cases, any deduction with respect to the exercise of a
NQSO or the disqualifying disposition of stock purchased pursuant to a
Management Option). An exception to Section 162(m) of the Tax Code applies to
certain compensation paid pursuant to plans in existence while a company is
privately held. The Management Option Plan is expected to be adopted by the
Board of Directors of CHI prior to the effective date of the Plan. It is
intended that compensation payable under the Management Option Plan will qualify
for an exception to the Section 162(m) limitations. However, no assurance can be
given that compensation under the Management Option Plan will qualify for any
such exception.
X.
RISK FACTORS
------------
HOLDERS OF CLAIMS AGAINST, AND EQUITY INTERESTS IN, CHI
SHOULD CAREFULLY READ AND CONSIDER THE FACTORS SET FORTH BELOW, AS WELL AS THE
OTHER INFORMATION SET FORTH IN THIS DISCLOSURE STATEMENT (AND THE DOCUMENTS
DELIVERED TOGETHER HEREWITH AND/OR INCORPORATED BY REFERENCE), PRIOR TO VOTING
TO ACCEPT OR REJECT THE PLAN. THESE RISK FACTORS SHOULD NOT, HOWEVER, BE
REGARDED AS CONSTITUTING THE ONLY RISKS INVOLVED IN CONNECTION WITH THE PLAN AND
ITS IMPLEMENTATION.
A. CERTAIN BANKRUPTCY LAW CONSIDERATIONS
1. FAILURE TO SATISFY VOTE REQUIREMENT
If votes are received in number and amount sufficient to
enable a Bankruptcy Court to confirm the Plan, CHI intends to file a voluntary
petition for reorganization under chapter 11 of the Bankruptcy Code and to seek,
as promptly as practicable thereafter, confirmation of the Plan. In the event
that sufficient votes are not received, CHI may nevertheless file a petition for
relief under chapter 11 of the Bankruptcy Code. In such event, CHI may seek to
accomplish an alternative restructuring of its capitalization and its
obligations to creditors and equity holders. There can be no assurance that the
terms of any such alternative restructuring would be similar to or as favorable
to the holders of Senior Discount Notes, other creditors, and holders of Old
Preferred Stock, as those proposed in the Plan.
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2. RISK OF NON-CONFIRMATION OF THE PLAN
Although CHI believes that the Plan will satisfy all
requirements necessary for confirmation by the Bankruptcy Court, there can be no
assurance that the Bankruptcy Court will reach the same conclusion. Moreover,
there can be no assurance that modifications of the Plan will not be required
for confirmation or that such modifications would not necessitate the
resolicitation of votes.
3. RISK OF NON-OCCURRENCE OF THE EFFECTIVE DATE
Although CHI believes that the Effective Date may occur
soon after the Confirmation Date, there can be no assurances as to such timing.
Moreover, if the conditions precedent to the Effective Date have not occurred or
been waived within sixty (60) days after the Confirmation Date, the Bankruptcy
Court may vacate the order confirming the Plan, in which event, the Plan would
be deemed null and void, and CHI may propose to solicit votes on an alternative
plan of reorganization that may not be as favorable to parties in interest as
the Plan.
4. EFFECT OF CHI'S CHAPTER 11 CASE ON ITS SUBSIDIARIES
CHI does not anticipate the commencement of a chapter 11
case for any of its operating subsidiaries, and affiliated entities which own
the hydroelectric projects set forth in Schedule 1 to this Disclosure Statement.
CHI does not believe that the commencement of the Chapter 11 Case will adversely
affect the businesses of such entities. Nevertheless, if there is a protracted
chapter 11 case, the possibility of adverse effects on such entities may
increase. Although CHI does not believe that creditors or customers of
substantially all, if not all, of its subsidiaries, and affiliated entities
which own the hydroelectric projects have the right to assert that they have the
legal right to take actions with respect to such entities due to the
commencement of a case by CHI, certain of such creditors or customers may
attempt to take certain actions nonetheless. In the event such creditors or
customers seek to do so, the subsidiaries and related entities will not have the
benefit of the "automatic stay." Although there can be no assurance, CHI
believes that such actions would not have a material adverse effect on the
business or financial condition of CHI.
B. FACTORS AFFECTING THE VALUE OF THE
SECURITIES TO BE ISSUED UNDER THE PLAN
1. THE INDUSTRIAL INFRASTRUCTURE BUSINESS
CHI's entry into a new business -- the Industrial
Infrastructure Business -- has certain risks which are inherent in developing
any new business. In addition, CHI may be disadvantaged by its small size, short
history in this market, and lack of recognition and stature by potential
customers in the Industrial Infrastructure Business. Several potential
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competitors have recently emerged who have indicated their intention to focus on
providing services to the industrial energy market. CHI's competition includes
CRSS, independent power producers and cogenerators (such as Destec or Enron),
utility affiliates (such as Southern Electric or Duke Energy), utility and
independent power producer partnerships (such as a unit of American Electric
Power and Cogentrix) and regulated utilities.
The Industrial Infrastructure Business requires numerous
permits, approvals and certificates from appropriate federal, state and local
governmental agencies as well as compliance with certain environmental
protection legislation and the EPA. While the Company believes that it will be
able to obtain the requisite approvals for its future industrial projects, there
is no assurance that the Company will be successful in obtaining such approvals.
There is also no assurance that the Company will be able to raise development
capital, obtain satisfactory project development agreements, construction
contracts, energy, sales and services agreements, licenses and permits or
financing commitments with respect to the industrial projects currently in
development or any industrial projects that may be developed in the future.
Despite efforts over the last six to twelve months, CHI
has not been able to consummate any industrial infrastructure business. If CHI
continues to be unsuccessful in developing the Industrial Infrastructure
Business, the value of securities issued by Reorganized CHI will be adversely
and significantly affected. In addition, pursuant to the vesting requirements
set forth in the Series B Warrant Agreement, some or all of the Series B
Warrants distributed to the holders of Equity Interests in Classes 7, 8 and 9,
may not vest.
2. THE HYDROELECTRIC BUSINESS
A. COMPETITIVE CONDITIONS
The hydroelectric industry is highly competitive and
includes a number of participants with aggregate sales and financial resources
greater than those of CHI and its subsidiaries. The Company encounters
competition for the operation and acquisition of additional conventional
hydroelectric projects from subsidiaries of utilities, contractors and other
independent energy producers.
B. PRECIPITATION, WATER FLOW AND SEASONALITY
For hydroelectric facilities, the amount of energy
generated at any particular facility depends upon the quantity of water flow at
the site of the facility. Dry periods reduce water flow at particular sites
below historical averages, particularly if the facility has low storage
capacity. Excessive water flow may result from prolonged periods of higher than
normal precipitation or sudden melting of snow packs, possibly causing flooding
of facilities and/or a reduction of generation at such sites until water flows
return to normal. In cases of reduced or excess water flow, energy generation at
such sites may be diminished. The
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amount of water flow in any given period will have a direct effect on the
Company's production, revenues and cash flow.
C. CHANGES IN APPLICABLE RATES, ENERGY PRICE DECLINES
By the year 2004, rates paid to the Company pursuant to
current power purchase agreements representing approximately 37% of the
Company's average power sales revenue for fiscal year 1997, will be affected by
changes from scheduled rates to rates based on the applicable utilities' then
avoided cost. Consequently, the Company's revenue at such time will be adversely
affected if the then current utility avoided cost is lower than the scheduled
rate previously in effect. Recently, several public utilities, including
customers of the Company (most notably Niagara Mohawk), have approached
independent power producers to renegotiate specified rates in their power
purchase agreements because in some instances these agreements force the
utilities to purchase power from independent power producers at higher rates
than their current avoided cost, resulting in higher rates to consumers.
Although the Company believes that its power purchase agreements are valid,
binding and enforceable contracts, and economic when analyzed over the life of
such contracts, there can be no assurance that attempts by utilities to
renegotiate or terminate such contracts will not in some cases be successful and
that the consequences will not have a material adverse effect on the Company's
future revenues.
D. DEPENDENCE ON CERTAIN CUSTOMERS
Although no customer accounts for more than 21% of the
Company's sales for the fiscal year ended June 30, 1997, the loss of certain
customers could have a material adverse effect on sales. A substantial portion
of the Company's power is sold to three customers pursuant to various long-term
power purchase agreements. Sales to Commonwealth Electric Company, Niagara
Mohawk Corporation and New England Power Company, represented approximately 21%,
20% and 12%, respectively, of the consolidated revenues of the Company for
fiscal year 1997. Although the ratings of the debt securities of a substantial
majority of the utilities which presently purchase power from the Company are
currently investment grade, there can be no assurance of their, or any other
customer's long-term creditworthiness.
3. CAPITAL REQUIREMENTS
The business of Reorganized CHI and its subsidiaries,
including development of the Industrial Infrastructure Business, is expected to
have significant capital needs. While CHI's projections assume that the Company
will generate funds and have sufficient borrowings to meet its capital needs for
the foreseeable future, the Company's ability to gain access to additional
capital, if needed, cannot be assured, particularly in view of competitive
factors and industry conditions.
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4. VARIANCES FROM PROJECTIONS
The fundamental premise of the Plan is the deleveraging
of CHI and the implementation and realization of CHI's business plan, as
reflected in the projections attached to this Disclosure Statement. The
projections reflect numerous assumptions concerning the anticipated future
performance of Reorganized CHI and its subsidiaries, some of which may not
materialize. Such assumptions include, among other items, assumptions concerning
the general economy, the ability to make necessary capital expenditures, the
ability to establish market strength for the Industrial Infrastructure Business,
the ability to raise capital for the Industrial Infrastructure Business, and
utilities honoring the Power Purchase Agreements they have entered into with the
Company. CHI believes that the assumptions underlying the projections are
reasonable. However, unanticipated events and circumstances occurring subsequent
to the preparation of the projections may affect the actual financial results of
Reorganized CHI. Therefore, the actual results achieved throughout the periods
covered by the projections necessarily will vary from the projected results, and
such variations may be material and adverse.
5. LACK OF TRADING MARKET
Reorganized CHI will not seek the listing of the New
Common Stock on a national securities exchange or quotation in the national
market system of the National Association of Securities' Dealers Automated
Quotation System. Accordingly, there can be no assurance that any such
securities would ever be listed or included, or that an active trading market
for the New Common Stock or the New Warrants would develop and continue. In
addition, there can be no assurance as to the degree of price volatility in the
market for any of the new securities that does develop. Accordingly, no
assurance can be given that a holder of New Common Stock or New Warrants 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 securities could trade at
prices higher or lower than the value ascribed to them in this Disclosure
Statement, depending upon many factors, including prevailing interest rates,
markets for similar securities, industry conditions, and the performance of, and
investor expectations for, Reorganized CHI and its subsidiaries.
6. DIVIDEND POLICIES
CHI does not anticipate that any dividends will be paid
on the New Common Stock in the foreseeable future. In addition, the covenants in
the new Working Capital Facility may limit the ability of Reorganized CHI to pay
dividends. Certain institutional investors may only invest in dividend-paying
equity securities or may operate under other restrictions which may prohibit
their ability to invest in New Common Stock.
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7. SIGNIFICANT HOLDERS
As of the Effective Date, certain holders of the Senior
Discount Notes will receive distributions of the New Common Stock representing
in excess of five percent (5%) of the outstanding shares of the New Common
Stock. For a list of such holders, see Section IX.B, below, entitled "Management
and Governance of Reorganized CHI -- Ownership of Reorganized CHI." If holders
of significant numbers of shares of New Common Stock were to act as a group,
such holders could be in a position to control the outcome of actions requiring
stockholder approval. This concentration of ownership could also facilitate or
hinder a negotiated change of control of Reorganized CHI and, consequently, have
an impact upon the value of the New Common Stock. In that regard, all holders of
New Common Stock will be subject to the Stockholders' Agreement, which agreement
includes certain "drag along" and "tag along" rights. For a discussion of the
Stockholders' Agreement and its rights and obligations, see Article XI.D.,
below, entitled "Securities Law Matters -- Stockholders' Agreement."
C. CERTAIN TAX MATTERS
For risks associated with certain federal income tax
consequences of the Plan to holders of Claims and Equity Interests and to CHI,
see Article XII, below, entitled "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE
PLAN."
XI.
SECURITIES LAW MATTERS
A. THE SOLICITATION
CHI is relying on Section 3(a)(9) of the Securities Act
of 1933 (the "1933 Act") to exempt from the registration requirements of such
act (and of any equivalent state securities or "blue sky" laws) the offer of New
Common Stock, New Series B Warrants and New Series C Warrants, which may be
deemed to be made by CHI pursuant to its solicitation of votes on the Plan.
CHI has no contract, arrangement, or understanding
relating to, and will not, directly or indirectly, pay any commission or other
remuneration to any broker, dealer, salesperson, agent, or any other person for
soliciting votes to accept or reject the Plan or for soliciting any exchanges of
the Senior Discount Notes, the Series F Preferred Stock, the Series G Preferred
Stock or the Series H Preferred Stock. CHI has received assurances that no
person will provide any information to holders of the Senior Discount Notes, the
Series F Preferred Stock, the Series G Preferred Stock or the Series H Preferred
Stock relating to the
72
solicitation or the Plan other than to refer the holders of such securities to
the information contained in this Disclosure Statement and in the Ballots
delivered with it. In addition, none of the financial advisors to CHI or the
Unofficial Bondholders' Committee, the Voting Agent, and no broker, dealer,
salesperson, agent, or any other person, is engaged or authorized to express any
statement, opinion, recommendation, or judgment with respect to the relative
merits and risks of the solicitation, the value and terms of the New Common
Stock, New Series B Warrants, New Series C Warrants and Management Options, or
the Plan (and the transactions contemplated thereby).
B. ISSUANCE OF NEW SECURITIES UNDER THE PLAN
Section 1145 of the Bankruptcy Code exempts from such
registration the offer or sale of a debtor's securities under a chapter 11 plan
if such securities are offered or sold in exchange for a claim against, or
equity interest in, or a claim for an administrative expense in a case
concerning, such debtor. In reliance upon this exemption, the New Common Stock,
New Series B Warrants and the New Series C Warrants to be issued on the
Effective Date as provided in the Plan, generally will be exempt from the
registration requirements of the 1933 Act and state and local securities laws.
Accordingly, such securities may be resold without registration under the 1933
Act or other federal securities laws pursuant to the exemption provided by
Section 4(l) of the 1933 Act, unless the holder is an "underwriter" with respect
to such securities, within the meaning of Section 1145(b) of the Bankruptcy
Code. In addition, such securities generally may be resold without registration
under state securities laws pursuant to various exemptions provided by the
respective laws of the several states. However, recipients of securities issued
under the Plan are advised to consult with their own counsel as to the
availability of any such exemption from registration under state law in any
given instance and as to any applicable requirements or conditions to such
availability.
Section 1145(b) of the Bankruptcy Code defines
"underwriter" for purposes of the 1933 Act as one who (a) purchases a claim with
a view to distribution of any security to be received in exchange for the claim,
or (b) offers to sell securities issued under a plan for the holders of such
securities, or (c) offers to buy securities issued under a plan from persons
receiving such securities, if the offer to buy is made with a view to
distribution, or (d) is a control person of the issuer of the securities.
Notwithstanding the foregoing, statutory underwriters
may be able to sell securities without registration pursuant to the resale
limitations of Rule 144 under the 1933 Act which, in effect, permits the resale
of securities received by statutory underwriters pursuant to a chapter 11 plan,
subject to applicable volume limitations, notice and manner of sale
requirements, and certain other conditions. Parties which believe they may be
statutory underwriters as defined in section 1145 of the Bankruptcy Code are
advised to consult with their own counsel as to the availability of the
exemption provided by Rule 144.
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C. REGISTRATION RIGHTS
The Plan contemplates that Reorganized CHI will enter
into, on the Effective Date, a registration rights agreement in the form of
Exhibit H to the Plan (the "Registration Rights Agreement"). Under the
Registration Rights Agreement, holders of the New Common Stock and New Warrants
(including shares of New Common Stock issued upon the exercise thereof) will be
entitled to certain demand and incidental (or "piggyback") registration rights,
and holders of the Management Options will be entitled to certain incidental (or
"piggyback") registration rights with respect to shares of New Class A Common
Stock issued upon the exercise thereof. The Registration Rights Agreement will
contain customary suspension, "hold back", indemnification/contribution and
priority provisions. It is anticipated that Reorganized CHI will maintain its
status as a reporting company under the Exchange Act.
D. STOCKHOLDERS' AGREEMENT
Under the terms of the Plan, each holder (including each
original recipient and transferee of an original recipient or other transferee)
of the New Common Stock, and the New Common Stock issued upon exercise of the
New Warrants and Management Options (collectively, the "New Securities") is
bound by the Stockholders' Agreement attached as Exhibit I to the Plan. The
Stockholders' Agreement provides for a seven member board of directors and sets
forth certain procedures governing the nomination and election of directors. The
board will consist of two members of the Company's management, one independent
outside director, two directors designated by SBC and two directors designated
by Morgan Stanley. On the Effective Date, Morgan Stanley and SBC will each
designate one of their two directors. At anytime thereafter, either or both may
designate their second director and cause such person to be elected by the board
or shareholder vote. In addition, the Stockholders' Agreement provides that each
holder of New Common Stock is entitled to participate on a pro rata basis in any
sale of 50% or more of the outstanding New Common Stock and that each holder of
New Securities (including, in certain circumstances, holders of New Warrants and
Management Stock Options) may be required to sell their New Securities in any
sale of 66-2/3% or more of the New Common Stock. For a complete description of
the terms and conditions of the Stockholders' Agreement, please review Exhibit I
to the Plan.
XII.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
The following discussion summarizes certain federal
income tax consequences of the implementation of the Plan to CHI and its
subsidiaries and certain holders of Claims and Equity Interests. The following
summary does not address the federal income tax consequences to holders whose
Claims are entitled to reinstatement or payment in full in cash
74
under the Plan (e.g., holders of Other Priority Claims, Secured Claims, General
Unsecured Claims, or Intercompany Claims).
The following summary is based on the Tax Code, Treasury
regulations promulgated and proposed thereunder, judicial decisions and
published administrative rules and pronouncements of the Internal Revenue
Service ("IRS") as in effect on the date hereof. Changes in such rules or new
interpretations thereof may have retroactive effect and could significantly
affect the federal income tax consequences described below.
The federal income tax consequences of the Plan are
complex and are subject to significant uncertainties. CHI has not requested a
ruling from the IRS or an opinion of counsel with respect to any of the tax
aspects of the Plan. Thus, no assurance can be given as to the interpretation
that the IRS will adopt. In addition, this summary does not address foreign,
state or local tax consequences of the Plan, nor does it purport to address the
federal income tax consequences of the Plan to special classes of taxpayers
(such as foreign taxpayers, broker-dealers, banks, mutual funds, insurance
companies, financial institutions, small business investment companies,
regulated investment companies, tax-exempt organizations, and investors in
pass-through entities).
ACCORDINGLY, THE FOLLOWING SUMMARY OF CERTAIN FEDERAL
INCOME TAX CONSEQUENCES IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT A
SUBSTITUTE FOR CAREFUL TAX PLANNING AND ADVICE BASED UPON THE INDIVIDUAL
CIRCUMSTANCES PERTAINING TO A HOLDER OF A CLAIM OR EQUITY INTEREST. ALL HOLDERS
OF CLAIMS OR EQUITY INTERESTS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS FOR
THE FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES APPLICABLE UNDER THE PLAN.
A. CONSEQUENCES TO CHI
The Company expects to report consolidated net operating
loss ("NOL") carryforwards for federal income tax purposes of approximately $65
million for its taxable year ended June 30, 1997, approximately $45 million of
which are attributable to CHI. A minor portion of the Company's NOL
carryforwards is subject to certain prior limitations. See Item 8, "Financial
Statements" in the Annual Report on Form 10-K, annexed as Exhibit B to this
Disclosure Statement, Note 15 (Income Taxes). The Company's NOL carryforwards
remain subject to examination by the IRS and thus subject to possible reduction.
Moreover, as discussed below, such NOL carryforwards (and possibly certain other
tax attributes of the Company) may be reduced or subject to limitation upon the
implementation of the Plan.
1. CANCELLATION OF DEBT
In general, the Tax Code provides that a debtor in a
bankruptcy case must reduce certain of its tax attributes (such as its NOL
carryforwards and possibly tax basis in
75
assets) by the amount of any cancellation of debt ("COD"), that is, the amount
by which the debt discharged exceeds any consideration given in exchange
therefor. Under current law, any reduction in tax attributes generally occurs on
a separate company basis, even though the debtor files a consolidated federal
income tax return.
As a result of the discharge of the Allowed Senior
Discount Note Claims pursuant to the Plan, CHI may suffer COD and attribute
reduction, except to the extent that the payment of the cancelled debt would
have given rise to a tax deduction.
Due to the application of the high yield discount
obligation (HYDO) rules of the Tax Code, CHI has not deducted for federal income
tax purposes any of the original issue discount ("OID") in respect of the
Allowed Senior Discount Note Claims, pending the payment of such amount in cash.
Thus, CHI should not incur any COD or attribute reduction in respect of the
cancellation of the OID portion of such Claims. Accordingly, the amount of COD,
if any, that would be incurred by CHI depends upon, among other things, the
allocation, for federal income tax purposes, of the consideration to be
distributed in respect of the Allowed Senior Discount Note Claims to the
"principal" (non-OID) portion of such Claims. Pursuant to the Plan, all
distributions in respect of the Allowed Senior Discount Note Claims will be
allocated first to the original principal amount of such Claims as determined
for federal income tax purposes (i.e., approximately $112 million), with the
excess, if any, allocated to the remainder (OID) portion of such Claims. Given
such allocation, and assuming the New Common Stock has a reorganization value of
approximately $81 million (see Section XIII.B., below, entitled "Reorganization
Value"), CHI believes that it would recognize approximately $16 million of COD
and attribute reduction in respect of the discharge of the Senior Note Discount
Claims. Nevertheless, there is no assurance that the IRS would respect such
allocation for federal income tax purposes. In the event that such allocation
were successfully challenged, it is possible that any NOL carryforwards of CHI
(but not its subsidiaries) remaining as of the end of the taxable year in which
the discharge occurs could be eliminated, and that CHI's tax basis in its assets
could be significantly reduced, due to the resulting COD and attribute
reduction.
2. LIMITATIONS ON NOL CARRYFORWARDS AND OTHER TAX ATTRIBUTES
Following the implementation of the Plan, any
consolidated NOLs (and carryforwards thereof) and certain other tax attributes
of the Company allocable to periods prior to the Effective Date will be subject
to the limitations imposed by section 382 of the Tax Code.
Under section 382, if a corporation undergoes an
"ownership change," the amount of its pre-change losses that may be utilized to
offset future taxable income is, in general, subject to an annual limitation.
Such limitation also may apply to certain losses or deductions which are
"built-in" (i.e., economically accrued but unrecognized) as of the date of the
ownership change that are subsequently recognized. The issuance of New Common
Stock
76
pursuant to the Plan will constitute an ownership change of the Company. The
following discussion is based on the section 382 rules as applied to ownership
changes pursuant to a confirmed chapter 11 plan.
The amount of the annual limitation to which the Company
would be subject generally should be equal to the product of (i) the lesser of
the value of the equity of Reorganized CHI immediately after the ownership
change or the value of CHI's gross assets immediately before such change (with
certain adjustments) and (ii) the "long-term tax exempt rate" in effect for the
month in which the ownership change occurs (5.64% for ownership changes
occurring in August 1997). However, if the Company does not continue its
historic business or use a significant portion of its assets in a new business
for two years after the ownership change, the annual limitation would be zero.
As indicated above, section 382 also can operate to
limit built-in losses recognized subsequent to the date of the ownership change.
If a loss corporation has a net unrealized built-in loss at the time of an
ownership change (taking into account most assets and all items of "built-in"
income and deductions), then any built-in losses recognized during the following
five years (up to the amount of the original net built-in loss) generally will
be treated as a pre-change loss and similarly will be subject to the annual
limitation. Conversely, if the loss corporation has a net unrealized built-in
gain at the time of an ownership change, any built-in gains recognized during
the following five years (up to the amount of the original net built-in gain)
generally will increase the annual limitation in the year recognized, such that
the loss corporation would be permitted to use its pre-change losses against
such built-in gain income in addition to its regular annual allowance. In
general, a loss corporation's net unrealized built-in gain or loss will be
deemed to be zero unless it is greater than the lesser of (i) $10 million or
(ii) 15% of the fair market value of its assets (with certain adjustments)
before the ownership change. It is not known whether the Company will be in a
net unrealized built-in gain or a net unrealized built-in loss position on the
Effective Date.
An exception to the foregoing annual limitation (and
built-in gain and loss) rules generally applies where qualified (so-called "old
and cold") creditors of the debtor receive at least 50% of the vote and value of
the stock of the reorganized debtor pursuant to a confirmed chapter 11 plan.
Under this exception, a debtor's pre-change losses are not limited on an annual
basis but are reduced by the amount of any interest deductions claimed during
the three taxable years preceding the date of the reorganization, and during the
part of the taxable year prior to and including the reorganization, in respect
of the debt converted into stock in the reorganization. Moreover, if this
exception applies, any further ownership change of the debtor within a two-year
period will preclude the debtor's utilization of any pre-change losses at the
time of the subsequent ownership change against future taxable income.
An old and cold creditor includes a creditor who has
held its debt for at least 18 months prior to the chapter 11 case. In addition,
any stock received by a creditor who does not become a direct or indirect
5-percent shareholder of the reorganized debtor generally
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will be treated as received by an old and cold creditor, other than in the case
of any creditor whose participation in the plan makes evident to the debtor that
the creditor has not owned the debt for the requisite period.
Subject to any subsequent trading in the Senior Discount
Note Claims, CHI anticipates that it would qualify for this exception. However,
if CHI so desires it may elect not to apply this exception and instead remain
subject to the annual limitation and built-in gain and loss rules described
above. Because no interest deductions have been claimed by the Company in
respect of the Senior Discount Notes, there would be no reduction in the amount
of the Company's NOL carryforwards required by this exception (except to the
extent of any interest deductions claimed upon satisfaction of the Senior
Discount Note Claims pursuant to the Plan). The statute does not address whether
this exception can be applied on a consolidated basis or only on a separate
company basis to the debtor. Although not free from doubt, CHI believes that, if
the exception were applied on a separate company basis, the pre- change losses
of the Company attributable to subsidiaries would be subject to the annual
limitation (and built-in gain and loss) rules as described above, rather than
the annual limitation rules generally applicable to corporations outside
bankruptcy.
3. ALTERNATIVE MINIMUM TAX
In general, an alternative minimum tax ("AMT") is
imposed on a corporation's alternative minimum taxable income at a 20% rate to
the extent such tax exceeds the corporation's regular federal income tax. For
purposes of computing taxable income for AMT purposes, certain tax deductions
and other beneficial allowances are modified or eliminated. In particular, even
though a corporation otherwise might be able to offset all of its taxable income
for regular tax purposes by available NOL carryforwards, only 90% of a
corporation's taxable income for AMT purposes may be offset by available NOL
carryforwards (as recomputed for AMT purposes).
In addition, if a corporation undergoes an "ownership
change" within the meaning of section 382 and is in a net unrealized built-in
loss position (as determined for AMT purposes) on the date of the ownership
change, the corporation's aggregate tax basis in its assets would be reduced for
certain AMT purposes to reflect the fair market value of such assets as of the
change date.
Any AMT that a corporation pays generally will be
allowed as a nonrefundable credit against its regular federal income tax
liability in future taxable years when the corporation is no longer subject to
the AMT.
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B. CONSEQUENCES TO HOLDERS OF SENIOR DISCOUNT NOTE CLAIMS
Pursuant to the Plan, holders of Senior Discount Note
Claims will receive, in discharge of their allowed claims, a combination of (i)
$15 million of cash (up to $5,000,000 after the Effective Date, but on or before
March 31, 1998), without taking into account the Unofficial Bondholders'
Committee Expenses, and (ii) New Common Stock.
The federal income tax consequences of the Plan to a
holder of a Senior Discount Note Claim depends, in part, on whether such Claims
constitute "securities" for federal income tax purposes. The term "security" is
not defined in the Tax Code or in the regulations issued thereunder and has not
been clearly defined by judicial decisions. The determination of whether a
particular debt constitutes a "security" depends upon an overall evaluation of
the nature of the debt. One of the most significant factors considered in
determining whether a particular debt is a security is its original term. In
general, debt obligations issued with a weighted average maturity at issuance of
five years or less (e.g., trade debt and revolving credit obligations) do not
constitute securities, whereas debt obligations with a weighted average maturity
at issuance of 10 years or more constitute securities. The following discussion
assumes that the Senior Discount Note Claims constitute "securities" for federal
income tax purposes. However, each holder is urged to consult its tax advisor
regarding the status of such Claims.
1. GAIN OR LOSS
In general, each holder of a Senior Discount Note Claim
will not recognize any loss upon implementation of the Plan, and will recognize
any gain realized (computed as described below) to the extent of any cash
received (other than any portion treated as imputed interest). The amount of a
holder's gain realized generally will equal the excess, if any, of (i) the sum
of the fair market value of the New Common Stock and the amount of cash received
in respect of its Claim (excluding any amount treated as imputed interest, and
possibly any amount received in respect of the portion of such Claim
representing accrued OID) and (ii) the tax basis in its Claim (other than
possibly the portion of such Claim representing accrued OID). See "Distributions
in Discharge of Accrued OID", below. Each holder should consult its tax advisor
regarding the potential application of the installment sale provisions of the
Tax Code in the event post-Effective Date cash distributions are made in
overlapping taxable years.
The Plan provides that interest will not accrue on any
post-Effective Date cash distribution for the period through December 31, 1997,
and will accrue at the prime rate for the period thereafter. Accordingly, any
post-Effective Date cash distribution will be subject to the imputed interest
rules under section 1281 et seq. of the Tax Code. Such provisions apply to,
among others, accrual basis taxpayers and banks. Pursuant to such provisions, a
portion of any post-Effective Date cash distribution will be treated as imputed
interest.
79
The character of any gain or loss recognized by a holder
in respect of its Claim as long-term or short-term capital gain or loss or as
ordinary income or loss will be determined by a number of factors, including the
tax status of the holder, whether the Claim constitutes a capital asset in the
hands of the holder, whether the Claim has been held for more than one year at
the time of the Effective Date or was purchased at a discount, and whether and
to what extent the holder has previously claimed a bad debt deduction. In this
regard, section 582(c) of the Tax Code provides that the sale or exchange of a
bond, debenture, note, certificate, or other evidence of indebtedness by certain
financial institutions shall be considered the sale or exchange of a non-capital
asset. Accordingly, any gain or loss recognized by such financial institutions
as a result of the implementation of the Plan will be ordinary gain or loss,
regardless of the nature of their Claims.
A holder's aggregate tax basis in the New Common Stock
received in satisfaction of its Claim will equal the holder's adjusted tax basis
in its Claim (including any claim representing accrued OID), decreased by the
amount of cash received, and increased by any gain or interest income recognized
in respect of its Claim. In general, the holder's holding period for the New
Common Stock received will include the holder's holding period for the Claim
(except possibly to the extent the New Common Stock was issued in respect of the
portion of the Claim representing accrued OID).
2. DISTRIBUTIONS IN DISCHARGE OF ACCRUED OID
Pursuant to the Plan, all distributions in respect of
Allowed Senior Discount Note Claims will be allocated first to the original
principal amount of such Claims as determined for federal income tax purposes
(i.e., approximately $112 million), with any excess allocated to the remainder
(OID) portion of such Claims. However, there is no assurance that such
allocation would be respected by the IRS for federal income tax purposes.
In general, to the extent any amount received (whether
stock, cash or other property) by a holder of a debt is received in satisfaction
of accrued interest or OID during its holding period such amount will be taxable
to the holder as interest income (if not previously included in the holder's
gross income). Conversely, a holder generally recognizes a deductible loss to
the extent any accrued interest claimed was previously included in its gross
income and is not paid in full. However, the IRS has privately ruled that a
holder of a security, in an otherwise tax-free exchange for stock, could not
claim a current deduction with respect to any unpaid OID. Accordingly, it is
unclear whether a holder of an Allowed Senior Discount Note Claim would be
entitled to a current deduction to the extent of the unpaid OID portion of its
Claim.
Each holder of a Senior Discount Note Claim is urged to
consult its tax advisor regarding the allocation of consideration and the
deductibility of unpaid OID for tax purposes.
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3. SUBSEQUENT SALE OF NEW COMMON STOCK
Any gain recognized by a holder upon a subsequent
taxable disposition of New Common Stock received pursuant to the Plan in
satisfaction of a Claim (or any stock or other property received for it in a
later tax-free exchange) will be treated as ordinary income to the extent of (i)
any bad debt deductions (or additions to a bad debt reserve) claimed with
respect to its Claim and any ordinary loss deduction incurred upon satisfaction
of its Claim, less any income (other than interest income) recognized by the
holder upon satisfaction of its Claim, and (ii) with respect to a cash-basis
holder, also any amounts which would have been included in its gross income if
the holder's Claim had been satisfied in full but which was not included by
reason of the cash method of accounting.
In addition, the Treasury Department is expected to
promulgate regulations that will provide that any accrued "market discount" not
treated as ordinary income upon a tax-free exchange of market discount bonds
would carry over to the nonrecognition property received in the exchange. If
such regulations are promulgated and applicable to the Plan, any holder of a
Senior Discount Note Claim which has accrued market discount would carry over
such accrued market discount to the New Common Stock received pursuant to the
Plan, such that any gain recognized by the holder upon a subsequent disposition
of such New Common Stock also would be treated as ordinary income to the extent
of any accrued market discount not previously included in income. In general, a
Claim will have accrued "market discount" if such claim was acquired after its
original issuance at a discount to its adjusted issue price.
4. WITHHOLDING
All distributions to holders of allowed claims under the
Plan are subject to any applicable withholding (including employment tax
withholding). Under federal income tax law, interest, dividends, and other
reportable payments may, under certain circumstances, be subject to "backup
withholding" at a 31% rate. Backup withholding generally applies if the holder
(a) fails to furnish its social security number or other taxpayer identification
number ("TIN"), (b) furnishes an incorrect TIN, (c) fails properly to report
interest or dividends, or (d) under certain circumstances, fails to provide a
certified statement, signed under penalty of perjury, that the TIN provided is
its correct number and that it is not subject to backup withholding. Backup
withholding is not an additional tax but merely an advance payment, which may be
refunded to the extent it results in an overpayment of tax. Certain persons are
exempt from backup withholding, including, in certain circumstances,
corporations and financial institutions.
C. CONSEQUENCES TO HOLDERS OF OLD PREFERRED STOCK
Pursuant to the Plan, holders of Old Preferred Stock
will receive, in discharge of their Allowed Equity Interests, New Warrants
(unless Class 8 votes to reject the Plan, in which event Old Series G Preferred
Stock could be extinguished for no consideration). Under
81
current law, the exchange of Old Preferred Stock for New Warrants will be
treated as a taxable event, with the consequences described below. If the Series
G Preferred Stock is extinguished for no consideration, the federal income tax
consequences to the holders of the Series G Preferred Stock will be the same as
that discussed below with respect to the Old Common Stock.
1. POTENTIAL DIVIDEND CHARACTERIZATION
An exchange of Old Preferred Stock for New Warrants will
be treated as a dividend to the extent of the Company's current or accumulated
earnings and profits, unless the redemption is "substantially disproportionate"
with respect to the shareholder under section 302(b)(2) of the Tax Code, or is
"not essentially equivalent to a dividend" with respect to the shareholder under
section 302(b)(1) of the Tax Code. In determining whether any of these tests
have been met, the shareholder must take into account not only stock it actually
owns (including any stock acquired pursuant to the Plan, such as in respect of
any Senior Discount Note Claims), but also stock constructively owned within the
meaning of section 318 of the Tax Code. Under section 318(a)(4), if a person has
an option to acquire stock, such stock shall be considered as owned by such
person. Warrants are treated as options for this purpose.
A distribution to a shareholder will be "not essentially
equivalent to a dividend" if it results in a "meaningful reduction" in the
shareholder's interest in the Company. If, as a result of a redemption of the
Old Preferred Stock in exchange for New Warrants, a shareholder of the Company
whose relative stock interest in the Company is minimal and who exercises no
control over corporate affairs suffers a reduction in his proportionate interest
in the Company (after taking into account any ownership of New Common Stock
received as a result of being a holder of Senior Discount Notes and any stock
constructively owned as a result of receiving the New Warrants), that
shareholder should be regarded as having suffered a meaningful reduction in his
interest in the Company.
Dividends received by corporate shareholders will be
eligible for the 70% dividends-received deduction, subject to certain holding
period and debt financing limitations under the Tax Code. Furthermore, section
1059 of the Tax Code requires a corporate shareholder to reduce its basis (but
not below zero) in any New Common Stock owned immediately after the exchange
(ignoring any stock constructively owned) by the "nontaxed portion" of any
"extraordinary dividend" if the holder has not held its stock for more than two
years as of the date the amount or payment of such dividend is announced,
declared or agreed to. Generally, the nontaxed portion of an extraordinary
dividend is the amount of the dividends-received deduction. Under the Taxpayer
Relief Act of 1997, the extent (if any) by which the nontaxed portion of an
extraordinary dividend exceeds the holder's tax basis in its stock would be
treated as current gain from the sale or exchange of such stock. Also, in the
case of any redemption of stock which would not have been treated (in whole or
in part) as a dividend if any options had not been taken into account under
section 318(a)(4), any amount
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treated as a dividend with respect to such redemption would be treated as an
extraordinary dividend without regard to the period the taxpayer held such
stock.
2. SALE OR EXCHANGE TREATMENT
In general, if the redemption is not treated as a
distribution taxable as a dividend, the redemption of the Old Preferred Stock
for New Warrants would result in taxable gain or loss (subject to the "wash sale
rule" discussed below) in an amount equal to the difference between (i) the fair
market value of the New Warrants received by such holder and (ii) the tax basis
in its Old Preferred Stock. The character of any gain or loss recognized as
long-term or short-term capital gain or loss or as ordinary income or loss will
be determined by a number of factors, including the tax status of the holder,
whether the Old Preferred Stock constitutes a capital asset in the hands of the
holder, and whether the Old Preferred Stock has been held for more than one year
at the time of the Effective Date.
To the extent a loss would otherwise be recognizable on
the exchange, such loss may be deferred under the "wash sale" rules of the Tax
Code. Section 1091(a) of the Tax Code provides for the disallowance of a loss on
the sale or other disposition of shares of stock or securities where it appears
that, within a period beginning 30 days before the date of such sale or
disposition and ending 30 days after such date, the holder acquired, or has
entered into a contract or option to acquire, substantially identical stock or
securities. If the Old Preferred Stock and the New Common Stock receivable upon
exercise of the New Warrants are considered "substantially identical" and the
exchange of Old Preferred Stock for the New Warrants results in a loss to the
holder, such loss may be disallowed and added to the tax basis of the New
Warrants received. The extent to which such loss would be disallowed is unclear.
Holders of Old Preferred Stock should consult their tax advisors.
3. PROPOSED REGULATIONS
Regulations have been proposed which could change the
federal income tax treatment of New Warrants received in reorganization
exchanges. It is unclear how such regulations would apply to an exchange in
which warrants are the sole consideration received. Moreover, it is not clear
whether the proposed regulations will be finalized in their current form or
whether they would be effective with respect to the exchanges occurring pursuant
to the Plan.
Due to the highly factual nature of the section 302
tests and the proposed regulations, each holder of Old Preferred Stock should
consult its tax advisor as to the tax consequences of an exchange of Old
Preferred Stock for New Warrants pursuant to the Plan.
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D. CONSEQUENCES TO HOLDERS OF OLD COMMON STOCK
A holder of Old Common Stock will recognize a loss as of
the Effective Date for federal income tax purposes in an amount equal to such
holder's adjusted tax basis in its stock at such time. Any such loss normally
will be a capital loss, and will be either a short-term or long-term capital
loss, depending upon whether such holder has a holding period in such stock of
more than one year at the time of the Effective Date.
With respect to taxpayers other than corporate
taxpayers, capital losses for a particular tax year are allowed as a deduction
for federal income tax purposes to the extent of such taxpayer's capital gains
for such tax year, plus $3,000. A noncorporate taxpayer is allowed to carry over
excess capital losses for use in succeeding tax years. With respect to corporate
taxpayers, capital losses may be deducted only to the extent of capital gains.
Corporate taxpayers generally may carry back net capital losses to each of the
three years preceding the year in which such capital losses arise; any excess
capital losses may be carried forward by a corporate taxpayer to the five years
following the tax year in which such capital losses arise.
THE FOREGOING SUMMARY HAS BEEN PROVIDED FOR
INFORMATIONAL PURPOSES ONLY. ALL HOLDERS OF CLAIMS AND EQUITY INTERESTS ARE
URGED TO CONSULT THEIR TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL, AND
OTHER TAX CONSEQUENCES APPLICABLE UNDER THE PLAN.
XIII.
VALUATION
A. ESTIMATED LIQUIDATION VALUE OF ASSETS
As a condition to confirmation of the Plan, section
1129(a)(7)(A)(ii) of the Bankruptcy Code requires that each holder of a Claim or
Equity Interest in an impaired class of Claims or Equity Interests that has not
voted to accept the Plan must be distributed on account of such Claim or Equity
Interest consideration of a value not less than that which it would receive if
CHI was liquidated under chapter 7 of the Bankruptcy Code on the Effective Date.
The information contained in Exhibit E attached to this Disclosure Statement
provides a summary of the liquidation values of CHI's properties and interests
in property, on a consolidated basis, assuming a chapter 7 liquidation in which
a trustee appointed by the Bankruptcy Court would liquidate the properties and
interests in property of CHI. Reference should be made to the Liquidation
Analysis annexed as Exhibit E to this Disclosure Statement for a complete
discussion and presentation of such liquidation analysis. The Liquidation
Analysis was prepared by the Company and Houlihan Lokey.
84
Underlying the Liquidation Analysis are a number of
estimates and assumptions that, although developed and considered reasonable by
management of CHI, are inherently subject to significant economic and
competitive uncertainties and contingencies beyond the control of CHI and
management. The Liquidation Analysis is also based upon assumptions with regard
to liquidation decisions that are subject to change. Accordingly, the values
reflected may not be realized if CHI was actually to be the subject of such a
liquidation. The chapter 7 liquidation period is assumed to be a period of
twenty-four months following the operations of CHI in its Chapter 11 Case for
three months. This period would allow for the collection of receivables, sale of
properties and interests in property, and the winding down of operations.
B. REORGANIZATION VALUE
CHI has been advised by Houlihan Lokey with respect to
the value of Reorganized CHI. Houlihan Lokey has undertaken its valuation
analysis for the purpose of determining the value available to distribute to
creditors and Equity Interest holders pursuant to the Plan and to analyze the
relative recoveries to creditors and Equity Interest holders thereunder. The
analysis is based on the financial projections as well as current market
conditions and statistics. The values are as of an assumed Effective Date of
December 31, 1997 and are based upon information available to and analyses
undertaken by Houlihan Lokey in May and June, 1997 and as updated in July 1997.
The value of Reorganized CHI reflects the enterprise value of Reorganized CHI,
the holding company, or effectively the residual equity value in all of the
subsidiary projects of CHI after all project-related debt and expenses of the
holding company. The range of reorganization values for Reorganized CHI includes
(i) the going concern value of CHI's business, (ii) the $15,000,000 in Cash that
will be distributed under the Plan and the projected remaining excess
unrestricted cash available to the Company on the Effective Date, and (iii) the
projected value of the net operating losses of Reorganized CHI as of the
Effective Date and excludes the cash required to pay administrative expenses.
Based upon the foregoing assumptions, the reorganization value of Reorganized
CHI is assumed for purposes of the Plan by CHI, based on advice from Houlihan
Lokey, to be approximately $85.8 million to $114.9 million, with a mid-point
value of $100.1 million. The going concern value of CHI's business after the
distribution under the Plan of the $15,000,000 cash payment to the holders of
Allowed Claims in Class 3 is assumed for purposes of the Plan to range from
approximately $70.8 million to $99.9 million, with a mid-point of $85.1 million.
Since the going concern value of CHI's business was
determined after all subsidiary and project debt obligations and it is assumed
no borrowings will be outstanding under the New Working Capital Facility on the
Effective Date, CHI had employed an assumed range of equity values for
Reorganized CHI of approximately $70.8 million to $99.9 million, with a midpoint
of $85.1 million. The assumed equity values for Reorganized CHI were then
reduced by approximately $2.5 million to $5.1 million, with a mid-point of $3.7
million to adjust for the issuance of the New Warrants to purchase approximately
12.5% of
85
the New Common Stock and the Management Options to purchase approximately 7.5%
of the New Class A Common Stock. See Section XIII.C., below, entitled "Valuation
- - - -- Warrant and Management Option Values." Based on the adjusted range of equity
values (after deducting the value of the New Warrants and Management Options)
for Reorganized CHI of $68.3 million to $94.8 million, with a midpoint of $81.4
million, and the distribution of 10,000,000 shares of New Common Stock, the
value per share of the New Common Stock is estimated to range from $6.83 to
$9.48, with a mid-point of $8.14.
Houlihan Lokey used a discounted cash flow analysis to
arrive at the going concern value of CHI's business. These valuation techniques
reflect the longer-term focus on the intrinsic value of the cash flow
projections in CHI's business plan. The discount rates used by Houlihan Lokey to
arrive at the going concern value of CHI's business were based on methodologies
employed by Houlihan Lokey in estimating the required rates of return on
alternative investments as well as the judgment of Houlihan Lokey and its
experience in valuing businesses of similar financial and operating risks. The
foregoing valuations also are based on a number of additional assumptions,
including a successful reorganization of CHI's business and finances in a timely
manner, the probability of achievement of the forecasts reflected in the
financial projections, the projected amount of available unrestricted cash at
the Effective Date, the availability of certain tax attributes, the continuation
of current market conditions through the Effective Date and the Plan becoming
effective in accordance with its terms.
Estimates of value do not purport to be appraisals or
necessarily reflect the values that may be realized if assets are sold through a
formal sales process. The estimates of value represent hypothetical
reorganization values of Reorganized CHI as the continuing owner and operator of
its business and assets. Such estimates reflect computations of the estimated
reorganization value of Reorganized CHI 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 than the amounts set forth herein. The value of an
operating business such as the Company's business is subject to uncertainties
and contingencies that are difficult to predict and will fluctuate with changes
in factors affecting the financial condition and prospects of such a business.
AS A RESULT, THE ESTIMATE OF THE RANGE OF REORGANIZATION VALUES AND THE GOING
CONCERN VALUE OF CHI'S BUSINESS 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 ESTIMATE IS INHERENTLY SUBJECT TO UNCERTAINTIES,
NEITHER CHI, HOULIHAN LOKEY, NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR ITS
ACCURACY. IN ADDITION, THE VALUATION OF NEWLY-ISSUED SECURITIES SUCH AS THE NEW
COMMON STOCK AND THE NEW WARRANTS 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
86
things, prevailing interest rates, conditions in the financial markets, the
anticipated initial securities holdings 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. It
should be noted that there is presently no trading market for the New Common
Stock and the New Warrants and there can be no assurance that such a trading
market will develop.
In preparing a range of the estimated reorganization
value of Reorganized CHI and the going concern value of CHI's business, Houlihan
Lokey: (i) reviewed certain historical financial information of CHI for recent
years and interim periods, (ii) reviewed certain internal financial and
operating data of CHI, including financial projections provided by management
relating to its business and prospects, (iii) met with certain members of senior
management of CHI to discuss operations and future prospects, (iv) reviewed
publicly available financial data and considered the market values of public
companies deemed generally comparable to the operating business of CHI, (v)
reviewed the financial terms to the extent publicly available of certain
acquisitions of companies that Houlihan Lokey believes are comparable to the
operating business of CHI, (vi) considered certain economic and industry
information relevant to the operating business, and (vii) conducted such other
analyses as Houlihan Lokey deemed appropriate. Although Houlihan Lokey conducted
a review and analysis of CHI's business, operating assets and liabilities and
business plans, Houlihan Lokey assumed and relied on the accuracy and
completeness of all financial and other information furnished to it by CHI and
publicly available information. In addition, Houlihan Lokey did not
independently verify management's projections in connection with such valuation
and, other than with respect to certain real property, no independent
evaluations or appraisals of CHI's assets were sought or were obtained in
connection therewith.
C. NEW WARRANTS AND MANAGEMENT OPTIONS VALUES
As a result of Plan negotiations, the Plan contemplates
the distribution of the New Warrants to holders of Old Preferred Stock and the
Management Options to certain key executives of Reorganized CHI. The exercise
price of the New Series B Warrants and the Management Options is $10.00 per
share which is greater than the estimated mid-point equity value per share of
New Common Stock. The exercise price of the New Series C Warrants is estimated
to be $18.45 per share assuming a commencement date of September 30, 1997, which
is greater than the estimated mid-point equity value per share of New Common
Stock. The exercise of the New Warrants and the Management Options requires the
payment to Reorganized CHI of Cash in the amount of the exercise price. For
purposes of this analysis it is assumed that all New Warrants and Management
Options are issued as of the Effective Date. While warrants may be valued using
complex mathematical computations, these computations are based upon highly
subjective assumptions, including, among others, the estimated trading prices of
the equity securities into which the warrants may be converted and the projected
volatility of price movements of those shares. Based on (i) an assumed trading
87
price equal to the assumed range of unadjusted equity values for Reorganized CHI
of approximately $70.8 million to $99.9 million with a midpoint of $85.1
million, (ii) a distribution of approximately 10,000,000 shares of New Common
Stock and 2,147,938 shares of New Common Stock on account of the New Warrants
and Management Options and (iii) an estimated trading volatility of 30% (based
on observed historical trading volatilities of publicly traded companies that
are comparable to CHI), Houlihan Lokey computed the theoretical value of the New
Warrants, using a variant of a standard computation methodology for the
valuation of warrants (including applying a discount to reflect the vesting
provisions of the New Series B Warrants), to be in a range from $0.7 million to
$1.5 million for the New Series B Warrants and $0.6 million to $1.4 million for
the New Series C Warrants, with an aggregate value in a range from $1.4 million
to $2.9 million. Utilizing the same methodology, but including a discount
associated with the vesting schedule for the Management Options, Houlihan Lokey
computed the theoretical value of the Management Options to be in a range from
$1.1 million to $2.2 million. The aggregate value range for the New Warrants and
the Management Options of $2.5 million to $5.1 million was calculated using the
range of the New Warrant and Management Option values calculated at an estimated
trading volatility of 30% for the assumed range of equity values for Reorganized
CHI outlined above.
THERE CAN BE NO ASSURANCE THAT THE NEW COMMON STOCK
WILL TRADE AT THE ESTIMATED REORGANIZATION EQUITY VALUE PER SHARE, THAT THE
TRADING VOLATILITY OF THE NEW COMMON STOCK WILL BE PERCEIVED TO BE 30%, OR THAT
THE MARKET VALUES OF THE NEW WARRANTS AND THE MANAGEMENT OPTIONS WILL BE IN THE
RANGES DESCRIBED ABOVE. IN ADDITION, THE MATHEMATICAL COMPUTATION METHODOLOGY
USED DOES NOT ACCOUNT FOR THE POTENTIAL DILUTIVE IMPACT OF THE NEW WARRANTS AND
MANAGEMENT OPTIONS. FINALLY, ACTUAL TRADING VALUES FOR THE NEW WARRANTS AND
MANAGEMENT OPTIONS FREQUENTLY DIFFER MATERIALLY FROM THOSE VALUES DERIVED FROM
MATHEMATICAL COMPUTATIONS. ACCORDINGLY, THE FOREGOING COMPUTATION OF VALUE
CANNOT BE RELIED UPON AS A MEASURE OF REALIZABLE VALUE OF THE NEW WARRANTS OR
MANAGEMENT OPTIONS.
THE VALUATIONS HEREIN REPRESENT ESTIMATED
REORGANIZATION VALUES AND NEW WARRANT AND MANAGEMENT OPTION VALUES AND DO NOT
NECESSARILY REFLECT VALUES THAT COULD BE ATTAINABLE IN PUBLIC OR PRIVATE
MARKETS. THE EQUITY VALUES AND WARRANT AND MANAGEMENT OPTION VALUES ASCRIBED IN
THE ANALYSIS DO NOT PURPORT TO BE ESTIMATES OF THE POST-REORGANIZATION MARKET
TRADING VALUES. SUCH TRADING VALUE, IF ANY, MAY BE MATERIALLY DIFFERENT FROM THE
REORGANIZATION EQUITY VALUE AND NEW WARRANT AND MANAGEMENT OPTION VALUE RANGES
ASSOCIATED WITH THE VALUATION ANALYSIS.
88
XIV.
FINANCIAL INFORMATION
A. GENERAL
The audited consolidated balance sheets for the fiscal
years ended June 30, 1996, and June 30, 1995, and the related consolidated
statements of operations, and stockholders' equity/(deficit), and cash flows for
each of the three years ended June 30, 1996, June 30, 1995, and June 30, 1994,
of CHI and its Nondebtor Subsidiaries are contained in the Annual Report on Form
10-K, a copy of which is annexed as Exhibit B to this Disclosure Statement, and
the full text of which is incorporated herein by reference. This financial
information is provided to permit the holders of Claims and Equity Interests to
better understand CHI's historical business performance and the impact of the
Chapter 11 Case on CHI's businesses.
CHI will be required to file monthly operating reports
with the Bankruptcy Court. Such financial information will be on file with the
Bankruptcy Court and publicly available for review.
B. CHANGE IN FISCAL YEAR
On the Effective Date, Reorganized CHI will change its
fiscal year. The old fiscal year commenced on July 1st of each year and ended on
June 30th of the next calendar year. The new fiscal year will commence on
January 1st of each year and end on December 31st of that same calendar year.
Accordingly, the projected financial information set forth on Exhibit D uses
Reorganized CHI's new fiscal year of January 1st through December 31st.
C. SELECTED FINANCIAL DATA
See Item 6 "Selected Financial Data" set forth in the
Annual Report on Form 10-K annexed as Exhibit B to this Disclosure Statement.
D. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For a detailed discussion by management of CHI's
financial condition, most recent results of operations, liquidity, and capital
resources, see Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Annual Report on Form 10-K annexed
as Exhibit B to this Disclosure Statement.
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E. RECENT PERFORMANCE
See the Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1997, annexed as Exhibit C to this Disclosure Statement.
XV.
ALTERNATIVES TO CONFIRMATION
AND CONSUMMATION OF THE PLAN
If the Plan is not confirmed and consummated, the
alternatives to the Plan include (i) liquidation of CHI under chapter 7 of the
Bankruptcy Code and (ii) an alternative plan of reorganization.
A. LIQUIDATION UNDER CHAPTER 7
If no plan can be confirmed, CHI's Chapter 11 Case may
be converted to a case under chapter 7 of the Bankruptcy Code, pursuant to which
a trustee would be elected to liquidate the assets of CHI for distribution in
accordance with the priorities established by the Bankruptcy Code. A discussion
of the effects that a chapter 7 liquidation would have on the recovery of
holders of Claims and Equity Interests and CHI's liquidation analysis are set
forth in Section VIII.B, above, entitled "CONFIRMATION OF THE PLAN --
Requirements for Confirmation of the Plan -- Consensual Confirmation -- Best
Interests Test." CHI believes that liquidation under chapter 7 would result in
(i) smaller distributions being made to creditors than those provided for in the
Plan because of, among other things, (a) the likelihood that the assets of CHI
would have to be sold or otherwise disposed of in a less orderly fashion over a
shorter period of time, (b) the loss of any incremental value that might be
created by the Industrial Infrastructure Business after a reorganization, (c)
additional administrative expenses involved in the appointment of, and the
administration of the chapter 7 case by, a trustee, and (d) additional expenses
and claims, some of which would be entitled to priority, which would be
generated during the liquidation and from the rejection of leases and other
executory contracts in connection with a cessation of CHI's operations, and (ii)
no distributions being made to any holders of Equity Interests.
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B. ALTERNATIVE PLAN OF REORGANIZATION
If the Plan is not confirmed, CHI (or if CHI's exclusive
period in which to file a plan of reorganization has expired, any other party in
interest) could attempt to formulate a different plan. Such a plan might involve
either a reorganization and continuation of CHI's business or an orderly
liquidation of its assets. With respect to an alternative plan, CHI has explored
various alternatives in connection with the formulation and development of the
Plan. CHI believes that its Plan enables creditors and holders of preferred
equity to realize the best value and recovery under the circumstances. In a
liquidation under chapter 11, CHI's assets could be sold in a more orderly
fashion over a more extended period of time than in a liquidation under chapter
7, possibly resulting in somewhat greater (but indeterminate) recoveries than
might be obtained in chapter 7. Further, if a trustee were not appointed,
because such appointment is not required in a chapter 11 case, the expenses for
professional fees most likely would be less than those allowed in a chapter 7
case. Although preferable to a chapter 7 liquidation, CHI believes that any
alternative liquidation under chapter 11 is a less attractive alternative to
creditors and equity holders than the Plan because of the greater return to such
parties in interest pursuant to the Plan.
XVI.
CONCLUSION
CHI believes the Plan is in the best interests of all
creditors and equity holders and urges the holders of impaired Claims and Equity
Interests entitled to vote, to vote to accept the Plan and to evidence such
acceptance by returning their Ballots so they will be received not later than
5:00 p.m. (Eastern Time) on September 9, 1997.
Dated: Stamford, Connecticut
August 8, 1997
CONSOLIDATED HYDRO, INC.
By: /s/Edward M. Stern
----------------------
Name: Edward M. Stern
Title: President
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EXHIBIT A
PLAN OF REORGANIZATION
EXHIBIT B
CONSOLIDATED HYDRO, INC. ANNUAL REPORT ON FORM 10-K
EXHIBIT C
CONSOLIDATED HYDRO, INC. QUARTERLY REPORT ON FORM 10-Q
EXHIBIT D
PROJECTED FINANCIAL INFORMATION
EXHIBIT D
PROJECTED FINANCIAL INFORMATION
This exhibit sets forth the following financial
information and projections for the five fiscal years of the Projection Period:
o Pro Forma Consolidated Balance Sheet of
Reorganized CHI as of December 31, 1997,
December 31, 1998, December 31, 1999,
December 31, 2000, December 31, 2001 and
December 31, 2002;
o Projected Consolidated Statement of
Operations of CHI for the 26 week period
ending December 31, 1997, including
confirmation adjustments, and Projected
Consolidated Statement of Operations of
Reorganized CHI for each of the five fiscal
years in the period ending December 31,
2002;
o Projected Consolidated Statement of Cash
Flows of CHI for the 26 week period ending
December 31, 1997, including confirmation
adjustments, and Projected Consolidated
Statement of Cash Flows of Reorganized CHI
for each of the five fiscal years in the
period ending December 31, 2002; and
GENERAL
The projections set forth below were developed by CHI
and its advisors and are based on a number of significant assumptions, including
the successful reorganization of CHI, an assumed Effective Date of December 31,
1997, and no significant downturn in the specific markets in which the Company
operates.
THE PROJECTIONS, AND THEREFORE, THE VALUATIONS, ARE
BASED UPON A NUMBER OF SIGNIFICANT ASSUMPTIONS. ACTUAL
OPERATING RESULTS AND VALUES MAY VARY.
The financial projections with respect to the estimated
effect of the transactions contemplated by the Plan on the Company's
capitalization, results of operations, and cash flow for the period ending
December 31, 2002. The Company does not, as a matter of course, publicly
disclose projections as to its future revenues, earnings, or cash flow. In
connection with CHI's consideration of the Plan, certain projections of the
future financial performance of the Company's operating businesses were
prepared. Accordingly, after the Effective Date, Reorganized CHI does not intend
to update or otherwise revise the projections to reflect circumstances existing
since their preparation in the first six-months of 1997 to reflect the
occurrence of unanticipated events, even in the event that any or all of the
1
underlying assumptions are shown to be in error. Furthermore, Reorganized CHI
does not intend to update or revise the projections to reflect changes in
general economic or industry conditions. However, Reorganized CHI's regular
quarterly and annual financial statements, and the accompanying discussion and
analysis, contained in Reorganized CHI's Quarterly Reports on Form 10-Q and
Annual Reports on Form 10-K, will contain disclosure concerning Reorganized
CHI's actual financial condition and results of operations during the period
covered by the projections. Significant assumptions underlying the financial
projections are set forth below and should be read (together with the Company's
historical financial information set forth below, in the most recent Annual
Report on Form 10-K and Quarterly Report on Form 10-Q, attached as Exhibits B
and C, respectively, to this Disclosure Statement) in conjunction therewith.
THE PROJECTIONS WERE PREPARED BY CHI TO ASSIST EACH
HOLDER IN DETERMINING WHETHER TO ACCEPT OR REJECT THE PLAN. BECAUSE THE
PROJECTIONS HAVE NOT BEEN COMPILED, OR PREPARED FOR EXAMINATION OR REVIEW, BY
THE COMPANY'S INDEPENDENT AUDITORS (WHO ACCORDINGLY ASSUME NO RESPONSIBILITY FOR
THEM), THE PROJECTIONS WERE NOT PREPARED TO CONFORM TO THE GUIDELINES
ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS REGARDING
FINANCIAL FORECASTS. WHILE PRESENTED WITH NUMERICAL SPECIFICITY, THESE
PROJECTIONS ARE BASED UPON A VARIETY OF ASSUMPTIONS (WHICH THE COMPANY BELIEVES
ARE REASONABLE), AND ARE SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC, AND
COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE
CONTROL OF THE COMPANY. CONSEQUENTLY, THE INCLUSION OF THE PROJECTIONS HEREIN
SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY (OR ANY OTHER PERSON)
THAT THE PROJECTIONS WILL BE REALIZED, AND ACTUAL RESULTS MAY VARY MATERIALLY
FROM THOSE PRESENTED BELOW. DUE TO THE FACT THAT SUCH PROJECTIONS ARE SUBJECT TO
SIGNIFICANT UNCERTAINTY AND ARE BASED UPON ASSUMPTIONS WHICH MAY NOT PROVE TO BE
CORRECT, NEITHER THE COMPANY NOR ANY OTHER PERSON ASSUMES ANY RESPONSIBILITY FOR
THEIR ACCURACY OR COMPLETENESS.
THE ASSUMPTIONS CONTAINED IN THE PROJECTIONS AND
RESULTANT COMPUTATIONS WERE MADE SOLELY FOR PURPOSES OF PREPARING THE
PROJECTIONS. ALTHOUGH CHI EXPECTS TO UTILIZE A CONSISTENT METHODOLOGY, 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.
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EXHIBIT E
LIQUIDATION ANALYSIS
EXHIBIT E
LIQUIDATION ANALYSIS
The following liquidation analysis is an estimate of the
proceeds that may be generated as a result of a hypothetical chapter 7
liquidation of the assets of CHI which consist of the stock of its subsidiaries
and certain general partnership interests. The analysis is based upon a number
of significant assumptions which are described, including effectuating the
liquidation through a sale of the stock of the 13 direct primary subsidiaries of
CHI, the holding company. The liquidation analysis does not purport to be a
valuation of the Company's assets and is not necessarily indicative of the
values that may be realized in an actual liquidation. All dollar amounts are in
millions.
Estimated Disposition Value of the Operating Subsidiaries and
General Partnership Interests of CHI (a) $43.8
Estimated Net Unrestricted Cash (b) $23.6
Gross Liquidation Proceeds $67.4
Less: Chapter 7 Trustee Fees (c) ($2.0)
Less: Other Chapter 7 Administrative Expenses (d) ($3.4)
Less: Chapter 11 Administrative Expenses (e) ($2.8)
------
Net Liquidation Proceeds $59.2
Present Value of Net Liquidation
Proceeds as of Assumed December
31, 1997 Effective Date (f) $46.4
Less: Priority Claims (g) $ 0.0
-----
Net Proceeds Distributable to Holder of
Impaired Claims And Equity Interests $46.4
=====
NOTES TO LIQUIDATION ANALYSIS:
- - - -----------------------------
(a) The Estimated Disposition of the Operating Subsidiaries and General
Partnership Interests of CHI assumes the operations of CHI are sold
as a going-concern and on a
1
consolidated basis through a sale of the 13 direct primary
subsidiaries. The 13 direct primary subsidiaries of CHI are: CHI
Finance, Inc., CHI Acquisitions, Inc., CHI Universal, Inc.,
Littlefield Hydro Company, Inc., Essex Company, Asotin Hydro
Company, Inc., Consolidated Hydro New York, Inc., Consolidated Hydro
Vermont, Inc., Kinneytown Hydro Company, Inc., LaChute Hydro
Company, Inc., Minnewana Hydro Company, Inc., Boot Hydropower, Inc.,
and Aziscohos Hydro Company, Inc. A sale of effectively the entire
operations of CHI through a sale of the direct subsidiaries of the
holding company is the most efficient method of disposing of the
assets of CHI due to, among other things, (i) the extensive
regulatory approvals which would be required by various federal,
state and municipal agencies for each subsidiary if one-off sales
were pursued, and (ii) the extensive time required for individual
subsidiaries to be marketed for sale. The estimated sales proceeds
from a sale of the 13 direct primary subsidiaries of CHI are based
upon the net present value of the projected free cash flow of the
hydroelectric operations of the Company after corporate overhead and
all subsidiary capital expenditure and debt service requirements.
The discount rate utilized in this analysis to derive the net
present value is based upon (i) certain company-specific information
provide by senior management regarding the industry and the
business, (ii) information regarding recent sales by the Company of
certain assets in a non-forced sale environment, (iii) other
relevant company and industry information, and (iv) a liquidation
premium. A liquidation premium in the discount rate takes into
account the effect the liquidation process would have on the
operations of the business, including the impact on employees,
suppliers and customers of the Company and the resulting impact on
sales and cash flow as well as reflecting the forced sale nature of
the sales process.
(b) Reflects the total unrestricted cash accumulated as of the estimated
liquidation date of December 31, 1999. This amount includes free
cash flow earned during the interim period prior to the liquidation
sale but excludes (i) $5.0 million which is assumed to be required
for general working capital and (ii) $4.5 million related to the use
of letters of credit through the New Working Capital Facility which
would not be available in a liquidation scenario. Interest is
assumed to be earned on the cash balances at a rate of 5%.
(c) Section 326 of the Bankruptcy Code limits the Chapter 7 Trustee Fees
to 3% of all monies disbursed or turned over in the case by the
Chapter 7 Trustee to parties in interest, excluding the debtor, but
including holders of secured claims. In this analysis, Chapter 7
Trustee Fees were estimated at the cap imposed by Section 326.
(d) Includes administrative claims for fees for certain accounting,
legal, and other professionals including financial advisors, who
would likely be required to assist the Trustee in case
administration and in the sale process.
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(e) Includes costs associated with the administration of the Chapter 11
prior to its conversion to a Chapter 7, including estimated senior
management severance programs in order to retain management
throughout the sale process.
(f) The Net Liquidation Proceeds have been discounted back to the
Effective Date in order to make the recoveries to unsecured
creditors and equity holders comparable under the Plan and as a
result of a Chapter 7 case.
(g) No priority claims, other than administrative expenses, are assumed.
DISTRIBUTION OF NET PROCEEDS
The following table sets forth an estimated distribution
of the $46.4 million in net proceeds distributable to holders of nonpriority
unsecured claims and equity interests in a hypothetical chapter 7 liquidation of
CHI on the Effective Date and a comparison to estimated recoveries under the
proposed chapter 11 Plan. The distribution in such liquidation gives effect to
strict enforcement of all contractual subordination provisions. All dollar
amounts are in millions.
==========================================================================================================
Class Security Commencement Chapter 7 Liquidation Chapter 11 Plan
Date Claim Value Recovery Value Recovery
- - - ----------------------------------------------------------------------------------------------------------
3 Senior Discount $184.5 $46.4 25.1% $96.4 52.2%
Notes
- - - ----------------------------------------------------------------------------------------------------------
7 Series F 8% Senior $80.3 $0.0 0.0% $0.6 0.7%
Preferred
- - - ----------------------------------------------------------------------------------------------------------
8 Series H Cumulative $124.0 $0.0 0.0% $0.9 0.7%
Preferred
- - - ----------------------------------------------------------------------------------------------------------
9 Series G Junior $85.8 $0.0 0.0% $0.6 0.7%
Preferred
- - - ----------------------------------------------------------------------------------------------------------
10 Old Common Stock N/A $0.0 N/A $0.0 N/A
==========================================================================================================
As illustrated by the foregoing, CHI believes that under the Plan each holder of
an impaired claim in Class 3 and each holder of an impaired equity interest in
Classes 7, 8 and 9 will receive on account of such claim or equity interest,
property of a value, as of the Effective Date, that is more than the value such
holder would receive if CHI were liquidated under chapter 7 of the Bankruptcy
Code on the Effective Date. Accordingly, CHI believes the Plan satisfies the
requirements of the best interests test set forth in section 1129(a)(7) of the
Bankruptcy Code.
3
SCHEDULE 1
CHI'S HYDROELECTRIC PROJECTS