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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): DECEMBER 4, 1998
HEARTLAND WIRELESS COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 0-23694 73-1435149
(State or other jurisdiction (Commission file number) (I.R.S. employer
of incorporation) identification no.)
200 CHISHOLM PLACE, SUITE 200 75075
PLANO, TEXAS (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (972) 423-9494
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ITEM 3. BANKRUPTCY OR RECEIVERSHIP.
On December 4, 1998, Heartland Wireless Communications, Inc., a Delaware
corporation (the "Company"), filed a voluntary petition for reorganization under
Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the
United States Bankruptcy Court for the District of Delaware (In re Heartland
Wireless Communications, Inc., Case No. 98-2692(JJF)). The Company is operating
its business as a debtor-in-possession under the Bankruptcy Code. Attached
hereto as exhibits are (i) the Company's Plan of Reorganization dated
December 4, 1998, (ii) a form of Plan Support Agreement dated October 5, 1998,
(iii) a form of First Amendment to Plan Support Agreement dated November 13,
1998, (iv) the Company's Disclosure Statement filed with the Bankruptcy Court
on December 4, 1998, and (v) the press release issued by the Company on
December 4, 1998 announcing such Chapter 11 filing. Pursuant to the
requirements of the Bankruptcy Code and applicable bankruptcy rules, the
Company will be required to file periodic operating reports with the office of
the United States Trustee. Such reports will be publicly available on file with
the Clerk of the Bankruptcy Court.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) EXHIBITS.
2.1 Plan of Reorganization dated December 4, 1998.
10.1 Form of Plan Support Agreement dated October 5, 1998.
10.2 Form of First Amendment to Plan Support Agreement dated
November 13, 1998.
99.1 Disclosure Statement dated December 4, 1998.
99.2 Press Release dated December 4, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HEARTLAND WIRELESS
COMMUNICATIONS, INC.
Date: December 11, 1998 /s/ J. Curtis Henderson
-----------------------------------------
J. Curtis Henderson
Senior Vice President and General Counsel
3
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
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2.1 Plan of Reorganization dated December 4, 1998.
10.1 Form of Plan Support Agreement dated October 5, 1998.
10.2 Form of First Amendment to Plan Support Agreement dated
November 13, 1998.
99.1 Disclosure Statement dated December 4, 1998.
99.2 Press Release dated December 4, 1998.
</TABLE>
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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
:
In re: :
: CHAPTER 11
HEARTLAND WIRELESS COMMUNICATIONS, :
INC., a Delaware Corporation, : Case No. 98-______
:
Debtor. :
:
DEBTOR'S PLAN OF REORGANIZATION
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
WEIL, GOTSHAL & MANGES LLP RICHARDS, LAYTON & FINGER, P.A.
Co-Attorneys for Heartland Co-Attorneys for Heartland
Wireless Communications, Inc. Wireless Communications, Inc.
100 Crescent Court, Suite 1300 One Rodney Square
Dallas, Texas 75201 P.O. Box 551
(214) 746-7700 Wilmington, Delaware 19899
(302) 658-6541
Dated: December 4, 1998
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TABLE OF CONTENTS
<TABLE>
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SECTION 1. DEFINITIONS AND INTERPRETATION. . . . . . . . . . . . . . . . . . . 1
A. Definitions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
B. Interpretation; Application of Definitions and Rules of
Construction.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2. PROVISIONS FOR PAYMENT OF ADMINISTRATIVE EXPENSE CLAIMS AND
PRIORITY TAX CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . 8
2.1. ADMINISTRATIVE EXPENSE CLAIMS.. . . . . . . . . . . . . . . . . . . . . 8
2.2. PRIORITY TAX CLAIMS.. . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 3. CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS . . . . . . . . . . . 9
SECTION 4. PROVISIONS FOR TREATMENT OF CLAIMS AND EQUITY INTERESTS . . . . . . 10
4.1. PRIORITY NON-TAX CLAIMS (CLASS 1). . . . . . . . . . . . . . . . . . . 10
4.2. SECURED CLAIMS (CLASS 2) . . . . . . . . . . . . . . . . . . . . . . . 10
4.3. OLD SENIOR NOTE CLAIMS AND MISCELLANEOUS UNSECURED CLAIMS
(CLASS 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.4. OLD CONVERTIBLE NOTE CLAIMS (CLASS 4) . . . . . . . . . . . . . . . . 11
4.5. TRADE CLAIMS (CLASS 5) . . . . . . . . . . . . . . . . . . . . . . . . 11
4.6. INDEMNITY CLAIMS (CLASS 6).. . . . . . . . . . . . . . . . . . . . . . 11
4.7. BONDHOLDER LITIGATION CLAIMS (CLASS 7).. . . . . . . . . . . . . . . . 11
4.8. STOCKHOLDER LITIGATION CLAIMS (CLASS 8). . . . . . . . . . . . . . . . 12
4.9. EQUITY INTERESTS (CLASS 9) . . . . . . . . . . . . . . . . . . . . . . 12
4.10. ALTERNATIVE TREATMENT FOR HOLDERS OF ALLOWED CLAIMS. . . . . . . . . . 12
SECTION 5. IDENTIFICATION OF CLASSES OF CLAIMS AND INTERESTS IMPAIRED;
ACCEPTANCE OR REJECTION OF THE PLAN . . . . . . . . . . . . . . . . 12
5.1. HOLDERS OF CLAIMS AND EQUITY INTERESTS ENTITLED TO VOTE . . . . . . . . 12
SECTION 6. MEANS OF IMPLEMENTATION . . . . . . . . . . . . . . . . . . . . . . 13
6.1. DISTRIBUTIONS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.2. AUTHORIZATION OF NEW SECURITIES . . . . . . . . . . . . . . . . . . . . 13
6.3. NEW WARRANT AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.4. ADOPTION OF STOCK OPTION PLAN.. . . . . . . . . . . . . . . . . . . . . 13
6.5. INCENTIVE OPTIONS ON THE EFFECTIVE DATE . . . . . . . . . . . . . . . . 13
6.6. CANCELLATION OF EXISTING SECURITIES AND AGREEMENTS. . . . . . . . . . . 14
6.7. CORPORATE ACTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.8. AMENDED CERTIFICATE OF INCORPORATION. . . . . . . . . . . . . . . . . . 14
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SECTION 7. PROVISIONS GOVERNING DISTRIBUTIONS. . . . . . . . . . . . . . . . . 15
7.1. DATE OF DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . . . . 15
7.2. DISBURSING AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.3. SURRENDER OF INSTRUMENTS . . . . . . . . . . . . . . . . . . . . . . . 15
7.4. COMPENSATION OF PROFESSIONALS. . . . . . . . . . . . . . . . . . . . . 15
7.5. DELIVERY OF DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . . 16
7.6. MANNER OF PAYMENT UNDER THE PLAN . . . . . . . . . . . . . . . . . . . 16
7.7. FRACTIONAL SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.8. SETOFFS AND RECOUPMENT . . . . . . . . . . . . . . . . . . . . . . . . 17
7.9. DISTRIBUTIONS AFTER EFFECTIVE DATE . . . . . . . . . . . . . . . . . . 17
7.10. RIGHTS AND POWERS OF DISBURSING AGENT. . . . . . . . . . . . . . . . . 17
7.11. EXCULPATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.12. ALLOCATION RELATING TO OLD SENIOR NOTES. . . . . . . . . . . . . . . . 18
7.13. VOLUNTARY CANCELLATION OF EQUITY INTERESTS; RETURN OF NEW
COMMON STOCK AND NEW WARRANTS . . . . . . . . . . . . . . . . . . . . 18
SECTION 8. PROCEDURES FOR TREATING DISPUTED CLAIMS UNDER THE PLAN. . . . . . . 18
8.1. DISPUTED CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.2. NO DISTRIBUTIONS PENDING ALLOWANCE. . . . . . . . . . . . . . . . . . . 19
8.3. DISTRIBUTIONS AFTER ALLOWANCE . . . . . . . . . . . . . . . . . . . . . 19
8.4. VOTING RIGHTS OF HOLDERS OF DISPUTED CLAIMS.. . . . . . . . . . . . . . 19
SECTION 9. PROVISIONS GOVERNING EXECUTORY CONTRACTS AND UNEXPIRED
LEASES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.1. ASSUMPTION OR REJECTION OF CONTRACTS AND LEASES. . . . . . . . . . . . . 20
9.2. AMENDMENTS TO SCHEDULE; EFFECT OF AMENDMENTS . . . . . . . . . . . . . . 20
9.3. BAR TO REJECTION DAMAGE CLAIMS . . . . . . . . . . . . . . . . . . . . . 20
9.4. INDEMNIFICATION OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 10. CONDITIONS PRECEDENT TO EFFECTIVE DATE. . . . . . . . . . . . . . . 21
10.1. CONDITIONS PRECEDENT TO EFFECTIVE DATE OF THE PLAN . . . . . . . . . . 21
10.2. WAIVER OF CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . 22
SECTION 11. EFFECT OF CONFIRMATION. . . . . . . . . . . . . . . . . . . . . . . 22
11.1. VESTING OF ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
11.2. BINDING EFFECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
11.3. DISCHARGE OF DEBTOR. . . . . . . . . . . . . . . . . . . . . . . . . . 22
11.4. TERM OF INJUNCTIONS OR STAYS . . . . . . . . . . . . . . . . . . . . . 23
11.5. INDEMNIFICATION OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . 23
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11.6. LIMITED RELEASE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 12. WAIVER OF CLAIMS. . . . . . . . . . . . . . . . . . . . . . . . . . 24
12.1. AVOIDANCE ACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 13. RETENTION OF JURISDICTION . . . . . . . . . . . . . . . . . . . . . 24
SECTION 14. MISCELLANEOUS PROVISIONS. . . . . . . . . . . . . . . . . . . . . . 25
14.1. PAYMENT OF STATUTORY FEES. . . . . . . . . . . . . . . . . . . . . . . 25
14.2. RETIREE BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
14.3. ADMINISTRATIVE EXPENSES INCURRED AFTER THE CONFIRMATION DATE . . . . . 26
14.4. SECTION 1125(e) OF THE BANKRUPTCY CODE . . . . . . . . . . . . . . . . 26
14.5. COMPLIANCE WITH TAX REQUIREMENTS . . . . . . . . . . . . . . . . . . . 26
14.6. SEVERABILITY OF PLAN PROVISIONS. . . . . . . . . . . . . . . . . . . . 26
14.7. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
14.8. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
</TABLE>
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EXHIBITS TO THE PLAN
EXHIBIT 1 -- CHARTER
EXHIBIT 2 -- NEW WARRANT AGREEMENT
EXHIBIT 3 -- REGISTRATION RIGHTS AGREEMENT
EXHIBIT 4 -- STOCK OPTION PLAN
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DEBTOR'S PLAN OF REORGANIZATION
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
Heartland Wireless Communications, Inc. proposes the following chapter
11 Plan of Reorganization, dated as of December 4, 1998, pursuant to section
1121(a) of the Bankruptcy Code:
SECTION 1. DEFINITIONS AND INTERPRETATION
A. DEFINITIONS.
The following terms used herein shall have the respective meanings
defined below:
1.1. AD HOC COMMITTEE means the unofficial committee of certain holders
of Old Senior Notes, the members of which consist of, as of the date hereof,
Aspen Partners, L.P., Condor Partners IV L.L.C.; The Mainstay Funds, on
behalf of its High Yield Corporate Bond Fund Series; Quad-C, Inc.; and Quaker
Capital Management Corp.
1.2. AD HOC COMMITTEE MAJORITY means at any time, the holders of a
majority in principal amount of the Old Senior Notes held in the aggregate by
the members of the Ad Hoc Committee at such time.
1.3. ADMINISTRATIVE EXPENSE CLAIM means any right to payment
constituting a cost or expense of administration of the Chapter 11 Case
allowed under sections 503(b) and 507(a)(1) of the Bankruptcy Code,
including, without limitation, (a) any actual and necessary costs and
expenses of preserving the Debtor's estate, (b) any actual and necessary
costs and expenses of operating the Debtor's business in the ordinary course
of business, (c) any indebtedness or obligations incurred or assumed by the
Debtor in Possession during the Chapter 11 Case in the ordinary course of
business, (d) any allowances of compensation and reimbursement of expenses to
the extent allowed by Final Order under section 330 or 503 of the Bankruptcy
Code, and (e) any fees or charges assessed against the Debtor's estate under
section 1930, title 28, United States Code.
1.4. ALLOWED means, with reference to any Claim or Equity Interest, (a)
any Claim or Equity Interest as to which no objection to allowance has been
interposed on or before the Confirmation Date or such other applicable period
of limitation fixed by the Bankruptcy Code, the Bankruptcy Rules, or the
Bankruptcy Court, or as to which any objection has been determined by a Final
Order to the extent such objection is determined in favor of the respective
holder, (b) any Claim or Equity Interest as to which the liability of the
Debtor and the amount thereof are determined by final order of a court of
competent jurisdiction other than the Bankruptcy Court or (c) any Claim or
Equity Interest expressly allowed hereunder. Unless otherwise specified in
the Plan or in a Final Order of the Bankruptcy Court allowing such claim,
"Allowed" in reference to a Claim shall not include (a)
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interest on the amount of such Claim accruing from and after the Petition
Date, (b) punitive or exemplary damages or (c) any fine, penalty or
forfeiture.
1.5. BANKRUPTCY CODE means title 11, United States Code, as amended from
time to time, as applicable to the Chapter 11 Case.
1.6. BANKRUPTCY COURT means the United States District Court for the
District of Delaware having jurisdiction over the Chapter 11 Case and, to the
extent of any reference made under section 157, title 28, United States Code,
the unit of such District Court having jurisdiction over the Chapter 11 Case
under section 151, title 28, United States Code.
1.7. BANKRUPTCY RULES means the Federal Rules of Bankruptcy Procedure as
promulgated by the United States Supreme Court under section 2075, title 28,
United States Code, as amended from time to time, applicable to the Chapter
11 Case, and any Local Rules of the Bankruptcy Court.
1.8. BONDHOLDER LITIGATION CLAIM means a Claim (a) arising from
rescission of a purchase or sale of a debt security of the Debtor, (b) for
damages arising from the purchase or sale of such a debt security or (c) for
reimbursement or contribution allowed under section 502 of the Bankruptcy
Code on account of a Claim for damages or recision arising out of a purchase
or sale of a debt security of the Debtor.
1.9. BUSINESS DAY means any day other than a Saturday, a Sunday or any
other day on which banking institutions in New York, New York are required or
authorized to close by law or executive order.
1.10. CASH means legal tender of the United States of America.
1.11. CHAPTER 11 CASE means the Debtor's voluntary case filed with the
Bankruptcy Court under Chapter 11 of the Bankruptcy Code.
1.12. CHARTER means the Restated Certificate of Incorporation of
Reorganized Heartland, which shall be in substantially the form annexed
hereto as Exhibit 1.
1.13. CLAIM means (a) any right to payment from the Debtor, whether or
not such right is reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, disputed, undisputed, legal, equitable,
secured, or unsecured, known or unknown, or (b) any right to an equitable
remedy for breach of performance if such breach gives rise to a right of
payment from the Debtor, whether or not such right to an equitable remedy is
reduced to judgment, fixed, contingent, matured, unmatured, disputed,
undisputed, secured, or unsecured, known or unknown.
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1.14. CLASS means any group of substantially similar Claims or Equity
Interests classified by the Plan pursuant to section 1129(a)(1) of the
Bankruptcy Code.
1.15. COLLATERAL means any property or interest in property of the
Debtor's estate subject to a Lien to secure the payment or performance of a
Claim, which Lien is not subject to avoidance under the Bankruptcy Code.
1.16. CONFIRMATION DATE means the date on which the Clerk of the
Bankruptcy Court enters the Confirmation Order on its docket.
1.17. CONFIRMATION HEARING means the hearing to be held by the
Bankruptcy Court regarding confirmation of the Plan, as such hearing may be
adjourned or continued from time to time.
1.18. CONFIRMATION ORDER means the order of the Bankruptcy Court
confirming the Plan, which shall be in a form reasonably acceptable to the
Debtor and an Ad Hoc Committee Majority.
1.19. DEBTOR means Heartland Wireless Communications, Inc., a Delaware
corporation, the debtor in the Chapter 11 Case.
1.20. DEBTOR IN POSSESSION means the Debtor in its capacity as a debtor
in possession in the Chapter 11 Case under sections 1107(a) and 1108 of the
Bankruptcy Code.
1.21. DGCL means the General Corporation Law of the State of Delaware,
as amended from time to time.
1.22. DISALLOWED means, when used with respect to a Claim or Equity
Interest, a Claim or Equity Interest that has been disallowed by Final Order.
1.23. DISBURSING AGENT means any entity in its capacity as a disbursing
agent under section 7.2 hereof.
1.24. DISCLOSURE STATEMENT means the disclosure document relating to the
Plan, including, without limitation, all exhibits and schedules thereto as
approved by the Bankruptcy Court pursuant to section 1125 of the Bankruptcy
Code.
1.25. DISPUTED means, with respect to a Claim or Equity Interest, any
such Claim or Equity Interest proof of which was filed with the Bankruptcy
Court and (a) which has been or hereafter is listed on the Schedules as
unliquidated, disputed or contingent, and which has not been resolved by
written agreement of the parties or an order of the Bankruptcy Court, or (b)
as to which the Debtor or any other party in interest has interposed a timely
objection in accordance with the Bankruptcy
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Code and the Bankruptcy Rules, which objection has not been withdrawn or
determined by a Final Order. Prior to (i) the time an objection has been
filed and (ii) the expiration of the time within which to object to such
Claim or Equity Interest set forth herein or otherwise established by order
of the Bankruptcy Court, a Claim or Equity Interest shall be considered a
Disputed Claim or Disputed Equity Interest to the extent that the amount of
the Claim or Equity Interest specified in a proof of Claim or Equity Interest
exceeds the amount of the Claim or Equity Interest scheduled by the Debtor as
not disputed, contingent or unliquidated.
1.26. EFFECTIVE DATE means the first Business Day on which all the
conditions precedent to the Effective Date specified in section 10.1 hereof
shall have been satisfied or waived as provided in section 10.2 hereof;
PROVIDED, HOWEVER, that if a stay of the Confirmation Order is in effect, the
Effective Date shall be the first Business Day after such stay is no longer
in effect.
1.27. EQUITY DISTRIBUTION POOL means 275,000 New Warrants less the
number of New Warrants, if any, distributable to the holders of Allowed
Bondholder Litigation Claims pursuant to Section 4.7 hereof.
1.28. EQUITY INTEREST means the interest of any holder of equity
securities of the Debtor represented by any issued and outstanding shares of
common or preferred stock or other instrument evidencing a present ownership
interest in the Debtor, whether or not transferable, or any option, warrant
or right, contractual or otherwise, to acquire or in connection with any such
interest.
1.29. FINAL ORDER means an order or judgment of the Bankruptcy Court
entered by the Clerk of the Bankruptcy Court on the docket in the Chapter 11
Case, which has not been reversed, vacated or stayed and as to which (a) the
time to appeal, petition for CERTIORARI or move for a new trial, reargument
or rehearing has expired and as to which no appeal, petition for CERTIORARI
or other proceedings for a new trial, reargument or rehearing shall then be
pending or (b) if an appeal, writ of CERTIORARI, new trial, reargument or
rehearing thereof has been sought, such order or judgment of the Bankruptcy
Court shall have been affirmed by the highest court to which such order was
appealed, or CERTIORARI shall have been denied or a new trial, reargument or
rehearing shall have been denied or resulted in no modification of such
order, and the time to take any further appeal, petition for CERTIORARI or
move for a new trial, reargument or rehearing shall have expired; PROVIDED,
HOWEVER, that the possibility that a motion under Rule 60 of the Federal
Rules of Civil Procedure, or any analogous rule under the Bankruptcy Rules,
may be filed relating to such order, shall not cause such order not to be a
Final Order.
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1.30. INCENTIVE OPTIONS means the options to purchase shares of New
Common Stock pursuant to the Stock Option Plan.
1.31. INDEMNITY CLAIM means a Claim (i) of a director or officer of the
Debtor that was not a director or officer, respectively, at any time on or
after April 25, 1997 or (ii) that is not assumed by the Debtor pursuant to
Section 11.5 of the Plan for any obligations of the Debtor to indemnify
directors or officers against any obligations pursuant to the Debtor's
certificate of incorporation, bylaws, contract, applicable state law, any
combination of the foregoing, or otherwise and including, without limitation,
any such obligations relating to a Bondholder Litigation Claim or a
Stockholder Litigation Claim.
1.32. LIEN means any charge against, encumbrance upon or other interest
in property, the purpose of which is to secure payment of a debt or
performance of an obligation.
1.33. MISCELLANEOUS UNSECURED CLAIM means any Unsecured Claim other than
an Old Convertible Note Claim, an Old Senior Note Claim, a Trade Claim, a
Bondholder Litigation Claim or a Stockholder Litigation Claim.
1.34. NEW COMMON STOCK means the shares of common stock of Reorganized
Heartland to be authorized, issued and outstanding as of the Effective Date.
1.35. NEW WARRANTS means the warrants which are issued pursuant to, and
exercisable in accordance with, the terms and conditions of the New Warrant
Agreement.
1.36. NEW WARRANT AGREEMENT means the warrant agreement governing the
issuance of the New Warrants, which shall be in substantially the form
annexed hereto as Exhibit 2.
1.37. OLD CONVERTIBLE NOTE CLAIM means a Claim arising under or in
connection with the Old Convertible Notes.
1.38. OLD CONVERTIBLE NOTES means those 9% convertible subordinated
discount notes due November 1, 2004 issued by the Debtor under that certain
Note Purchase Agreement, dated November 30, 1994, as amended, between the
Debtor and the purchasers named therein.
1.39. OLD EQUITY PORTION means the ratio (expressed as a percentage)
that the aggregate number of shares of Equity Interests bears to the
aggregate number of shares of Equity Interests represented by Allowed Equity
Interests and Allowed Stockholder Litigation Claims.
1.40. OLD 14% SENIOR NOTES means those 14% senior notes due October 15,
2004 issued by the Debtor under the Old 14% Senior Notes Indenture.
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1.41. OLD 14% SENIOR NOTES INDENTURE means that certain Indenture, dated
as of December 20, 1996, between the Debtor and the Old 14% Senior Notes
Indenture Trustee relating to the Old 14% Senior Notes.
1.42. OLD 14% SENIOR NOTES INDENTURE TRUSTEE means First Trust of New
York, National Association or a successor indenture trustee appointed in
accordance with the Old 14% Senior Notes Indenture.
1.43. OLD INDENTURES means, collectively, the Old 14% Senior Notes
Indenture and the Old 13% Senior Notes Indenture.
1.44. OLD SENIOR NOTE CLAIM means a Claim arising under or in connection
with the Old Senior Notes and the Old Indentures.
1.45. OLD SENIOR NOTES means, collectively, the Old 14% Senior Notes and
the Old 13% Senior Notes.
1.46. OLD 13% SENIOR NOTES means those 13% senior notes due April 15,
2003 issued by the Debtor under the Old 13% Senior Notes Indenture.
1.47. OLD 13% SENIOR NOTES INDENTURE means those certain Indentures,
dated as of April 26, 1995, as amended, and March 28, 1996, as amended,
respectively, between the Debtor and the Old 13% Senior Notes Indenture
Trustee relating to the Old 13% Senior Notes.
1.48. OLD 13% SENIOR NOTES INDENTURE TRUSTEE means First Trust of New
York National Association or a successor indenture trustee appointed in
accordance with the Old 13% Senior Notes Indenture.
1.49. PETITION DATE means December 4, 1998, the date on which the Debtor
commenced the Chapter 11 Case.
1.50. PLAN means this Debtor's Plan of Reorganization Under Chapter 11
of the Bankruptcy Code dated as of December 4, 1998, including, without
limitation, the exhibits and schedules hereto, as the same may be amended or
modified from time to time in accordance with the provisions of the
Bankruptcy Code and the terms hereof.
1.51. PRIORITY NON-TAX CLAIM means any Claim other than an
Administrative Expense Claim or a Priority Tax Claim, entitled to priority in
payment under section 507(a) of the Bankruptcy Code.
1.52. PRIORITY TAX CLAIM means any Claim of a governmental unit of the
kind entitled to priority in payment as specified in sections 502(i) and
507(a)(8) of the Bankruptcy Code.
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1.53. RATABLE PROPORTION means, with reference to any distribution on
account of any Claim or Equity Interest in any Class or subclass, as the case
may be, a distribution equal in amount to the ratio (expressed as a
percentage) that the amount of such Claim or number of shares evidencing such
Equity Interests, as applicable, bears to the aggregate amount of Claims or
aggregate number of outstanding shares of Equity Interests in the same Class,
as applicable.
1.54. REGISTRATION RIGHTS AGREEMENT means the registration rights
agreement relating to the New Common Stock distributed pursuant to the Plan
and New Common Stock issuable upon exercise of New Warrants, to be entered
into as of the Effective Date by Reorganized Heartland, for the benefit of
certain holders of shares of New Common Stock and New Warrants, which
agreement shall be in substantially the form annexed hereto as Exhibit 3.
1.55. REJECTION CLAIM means any Claim against the Debtor arising from
the rejection of any executory contract or unexpired lease, including any
Claim of (a) or lessor for damages resulting from the rejection of a lease of
real property as any such claim shall be calculated in accordance with
section 502(b)(6) of the Bankruptcy Code or (b) an employee for damages
resulting from the rejection of an employment agreement as any such Claim
shall be calculated in accordance with section 502(b)(7) of the Bankruptcy
Code. A Rejection Claim shall constitute a Miscellaneous Unsecured Claim.
1.56. REORGANIZED HEARTLAND means the Debtor, as it will be reorganized
as of the Effective Date in accordance with the Plan.
1.57. SCHEDULES means the schedules of assets and liabilities and the
statement of financial affairs filed by the Debtor under section 521 of the
Bankruptcy Code, Bankruptcy Rule 1007 and the Official Bankruptcy Forms of
the Bankruptcy Rules as such schedules and statements have been or may be
supplemented or amended through the Confirmation Date.
1.58. STOCK OPTION PLAN means the 1999 Heartland Wireless
Communications, Inc. Share Incentive Plan, which shall be in substantially
the form annexed hereto as Exhibit 4.
1.59. SECURED CLAIM means a Claim secured by a Lien on Collateral to the
extent of the value of such Collateral (i) as set forth in the Plan, (ii) as
agreed to by the holder of such Claim and the Debtor or (iii) as determined
by a Final Order in accordance with section 506(a) of the Bankruptcy Code or,
in the event that such Claim is subject to setoff under section 553 of the
Bankruptcy Code, to the extent of such setoff.
1.60. STOCKHOLDER LITIGATION CLAIM means a Claim (a) arising from
rescission of a purchase or sale of a equity security of the Debtor, (b) for
damages arising from the purchase or sale of such an equity security or (c)
for reimbursement or contribution allowed under section 502 of the
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Bankruptcy Code on account of a Claim for damages or recision arising out of
a purchase or sale of an equity security of the Debtor.
1.61. STOCKHOLDER LITIGATION CLAIMS PORTION means the ratio (expressed
as a percentage) that the aggregate number of shares of Equity Interests
represented by Allowed Stockholder Litigation Claims bears to the aggregate
number of shares of Equity Interests represented by Allowed Stockholder
Litigation Claims and Allowed Equity Interests.
1.62. TORT CLAIM means any Claim related to personal injury, property
damage, products liability or other similar Claims against the Debtor. A
Tort Claim shall constitute a Miscellaneous Unsecured Claim (except as
otherwise provided in Section 8.1(b) of the Plan).
1.63. TRADE CLAIM means an Unsecured Claim for (x) goods, materials or
services provided to the Debtor or rendered to the Debtor in the ordinary
course of business prior to the Petition Date and (y) pre and post Petition
Date Claims, as approved by the Bankruptcy Court, for actual fees, charges or
reasonable attorneys' fees incurred in respect of the Old Senior Notes by the
Old 13% Senior Notes Indenture Trustee and the Old 14% Senior Notes Indenture
Trustee. A Trade Claim shall not include an Old Convertible Note Claim, an
Old Senior Note Claim, a Miscellaneous Unsecured Claim, a Rejection Claim, an
Indemnity Claim, a Bondholder Litigation claim, a Stockholder Litigation
Claim or a Tort Claim.
1.64. UNSECURED CLAIM means any Claim against the Debtor that is not an
Administrative Expense Claim, a Priority Non-Tax Claim, a Priority Tax Claim
or a Secured Claim.
B. INTERPRETATION; APPLICATION OF DEFINITIONS AND RULES OF CONSTRUCTION.
Unless otherwise specified, all section, schedule or exhibit references
in the Plan are to the respective section in, article of, or schedule or
exhibit to, the Plan, as the same may be amended, waived or modified from
time to time. The words "herein," "hereof," "hereto," "hereunder" and other
words of similar import refer to the Plan as a whole and not to any
particular section, subsection or clause contained in the Plan. A term used
herein that is not defined herein shall have the meaning assigned to that
term in the Bankruptcy Code. The rules of construction contained in section
102 of the Bankruptcy Code shall apply to the construction of the Plan. The
headings in the Plan are for convenience of reference only and shall not
limit or otherwise affect the provisions hereof.
SECTION 2. PROVISIONS FOR PAYMENT OF ADMINISTRATIVE EXPENSE CLAIMS AND
PRIORITY TAX CLAIMS
2.1. ADMINISTRATIVE EXPENSE CLAIMS.
On the Effective Date, except to the extent that a holder of an Allowed
Administrative Expense Claim agrees to a different treatment of such
Administrative Expense Claim, Reorganized
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Heartland shall pay to each holder of an Allowed Administrative Expense Claim
Cash in an amount equal to such Allowed Administrative Expense Claim;
PROVIDED, HOWEVER, that Allowed Administrative Expense Claims representing
liabilities incurred in the ordinary course of business by the Debtor in
Possession or liabilities arising under loans or advances to or other
obligations incurred by the Debtor in Possession, whether or not incurred in
the ordinary course of business, shall be assumed and paid by Reorganized
Heartland in the ordinary course of business, consistent with past practice
and in accordance with the terms and subject to the conditions of any
agreements governing, instruments evidencing or other documents relating to
such transactions.
2.2. PRIORITY TAX CLAIMS.
On the Effective Date, except to the extent that a holder of an Allowed
Priority Tax Claim agrees to a different treatment of such Allowed Priority
Tax Claim, Reorganized Heartland shall pay to each holder of an Allowed
Priority Tax Claim that is due and payable on or before the Effective Date
Cash in an amount equal to such Allowed Priority Tax Claim. All Allowed
Priority Tax Claims that are not due and payable on or before the Effective
Date shall be paid in the ordinary course of business in accordance with the
terms thereof.
SECTION 3. CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS
Claims against and Equity Interests in the Debtor are divided into the
following Classes:
Class 1 -- Priority Non-Tax Claims
Class 2 -- Secured Claims
Class 3 -- Old Senior Note Claims and Miscellaneous Unsecured Claims
Class 4 -- Old Convertible Note Claims
Class 5 -- Trade Claims
Class 6 -- Indemnity Claims
Class 7 -- Bondholder Litigation Claims
Class 8 -- Stockholder Litigation Claims
Class 9 -- Equity Interests
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SECTION 4. PROVISIONS FOR TREATMENT OF CLAIMS AND EQUITY INTERESTS
4.1. PRIORITY NON-TAX CLAIMS (CLASS 1).
On the Effective Date, except to the extent that a holder of an Allowed
Priority Non-Tax Claim agrees to a different treatment of such Allowed
Priority Non-Tax Claim, each Allowed Priority Non-Tax Claim shall be
unimpaired in accordance with section 1124 of the Bankruptcy Code. All
Allowed Priority Non-Tax Claims which are not due and payable on or before
the Effective Date shall be paid in the ordinary course of business in
accordance with the terms thereof.
4.2. SECURED CLAIMS (CLASS 2).
On the Effective Date, except to the extent that a holder of an Allowed
Secured Claim agrees to a different treatment of such Allowed Secured Claim,
each Allowed Secured Claim shall be reinstated or rendered unimpaired 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. All Allowed Secured Claims
which are not due and payable on or before the Effective Date shall be paid
in the ordinary course of business in accordance with the terms thereof.
4.3. OLD SENIOR NOTE CLAIMS AND MISCELLANEOUS UNSECURED CLAIMS (CLASS 3).
Each Old Senior Note Claim shall be Allowed as of the Petition Date in
the amount of outstanding principal plus accrued and unpaid interest owed in
respect thereof at the Petition Date. On the Effective Date, each holder of
an Allowed Old Senior Note Claim shall receive, in full satisfaction of such
Allowed Old Senior Note Claim, its Ratable Proportion of 9,700,000 shares of
New Common Stock, subject to dilution by the exercise of the New Warrants,
Incentive Options and, if Miscellaneous Unsecured Claims are entitled to
receive shares of New Common Stock, by any such shares issued to such
holders. On the Effective Date, each holder of an Allowed Miscellaneous
Unsecured Claim shall receive, in full satisfaction of such Allowed
Miscellaneous Unsecured Claim, New Common Stock in an amount that will
provide the holder of such Claim the equivalent number of shares of New
Common Stock per dollar of Allowed Claim which such holder would receive if
such Allowed Claim were an Old Senior Note Claim.
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4.4. OLD CONVERTIBLE NOTE CLAIMS (CLASS 4)
Each Old Convertible Note Claim shall be Allowed as of the Petition Date
in the amount of outstanding principal plus accrued and unpaid interest owed
in respect thereof at the Petition Date. On the Effective Date, each holder
of an Allowed Old Convertible Note Claim shall receive, in full satisfaction
of such Allowed Old Convertible Note Claim, its Ratable Proportion of (i)
300,000 shares of New Common Stock, subject to dilution by the exercise of
the New Warrants, Incentive Options and, if Miscellaneous Unsecured Claims
are entitled to receive shares of New Common Stock, by any such shares issued
to such holders and (ii) 825,000 New Warrants.
4.5. TRADE CLAIMS (CLASS 5).
On the Effective Date, except to the extent that a holder of an Allowed
Trade Claim agrees to a different treatment of such Allowed Trade Claim, each
Allowed Trade Claim shall be unimpaired in accordance with section 1124 of
the Bankruptcy Code. All Allowed Trade Claims that are not due and payable
on or before the Effective Date shall be paid in the ordinary course of
business in accordance with the terms thereof.
4.6. INDEMNITY CLAIMS (CLASS 6).
If Class 6 accepts the Plan, following the Effective Date, holders of
Indemnity Claims will be entitled to assert such Claims against the Debtor to
the extent of (i) any available coverage under the Debtor's corporate
liability insurance and (ii) any self-insured retention under such corporate
liability insurance. If Class 6 rejects the Plan, the Debtor will request
the Bankruptcy Court to estimate the Indemnity Claims at zero. If the
Indemnity Claims are estimated at more than zero, such amount, to the extent
such amount exceeds the amount of any corporate liability insurance
(including any self-insured retention under such insurance) available to
satisfy its Claim (taking into account such insurance or self-insured
retention available to Persons covered by Section 11.5 of the Plan), shall,
to the extent such Claim becomes an Allowed Claim, be treated as a
Miscellaneous Unsecured Claim under Class 3 of the Plan.
4.7. BONDHOLDER LITIGATION CLAIMS (CLASS 7).
The Debtor will request the Bankruptcy Court to estimate the Bondholder
Litigation Claims at zero. If the Bondholder Litigation Claims are estimated
at more than zero, each holder of an Allowed Bondholder Litigation Claim
shall receive, in full satisfaction of such Allowed Bondholder Litigation
Claim, its Ratable Proportion of any liability insurance available to satisfy
its Claim remaining after use of such insurance for Allowed Indemnity Claims
and Persons covered by Section 11.5 of the Plan, not to exceed the Allowed
Amount of its Claim, and if liability insurance is insufficient to satisfy
such Claim in full, its Ratable Proportion of up to 275,000 New Warrants but
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not in excess of the number of New Warrants the value of which is sufficient
to satisfy such Claims for purposes of section 1129(b)(a)(B)(i) of the
Bankruptcy Code.
4.8. STOCKHOLDER LITIGATION CLAIMS (CLASS 8).
The Debtor will request the Bankruptcy Court to estimate the Stockholder
Litigation Claims at zero. If the Stockholder Litigation Claims are
estimated at more than zero, each holder of an Allowed Stockholder Litigation
Claim shall receive, in full satisfaction of such Allowed Stockholder
Litigation Claim, its Ratable Proportion of any liability insurance available
to satisfy its Claim remaining after use of such insurance for Allowed
Indemnity Claims, Persons covered by Section 11.5 of the Plan and Allowed
Bondholder Litigation Claims, not to exceed the Allowed Amount of its Claim,
and if liability insurance is insufficient to satisfy such Claim in full, its
Ratable Proportion of the Stockholder Litigation Claims Portion of the Equity
Distribution Pool.
4.9. EQUITY INTERESTS (CLASS 9).
On the Effective Date, the Equity Interests shall be cancelled and each
holder of an Allowed Equity Interest shall receive in full satisfaction of
such Allowed Equity Interest, its Ratable Proportion of the Old Equity
Portion of the Equity Distribution Pool.
4.10. ALTERNATIVE TREATMENT FOR HOLDERS OF ALLOWED CLAIMS
Notwithstanding the treatment provided for holders of Allowed Claims in
this Section 4, Reorganized Heartland and the holder of an Allowed Claim may
agree to other treatment of such Claim, including payment in Cash, provided
that such treatment shall not provide a return having a present value in
excess of the present value of the distribution that otherwise would be made
to such holder under Section 4 hereof.
SECTION 5. IDENTIFICATION OF CLASSES OF CLAIMS AND INTERESTS IMPAIRED;
ACCEPTANCE OR REJECTION OF THE PLAN
5.1. HOLDERS OF CLAIMS AND EQUITY INTERESTS ENTITLED TO VOTE.
Each of Class 1 (Priority Non-Tax Claims), Class 2 (Secured Claims) and
Class 5 (Trade Claims) is unimpaired by the Plan and the holders of Claims in
each of such Classes are conclusively presumed to have accepted the Plan and
are not entitled to vote to accept or reject the Plan.
Each of Class 3 (Old Senior Note Claims and Miscellaneous Unsecured
Claims), Class 4 (Old Convertible Note Claims), Class 6 (Indemnity Claims),
Class 7 (Bondholder Litigation Claims), Class 8 (Stockholder Litigation
Claims) and Class 9 (Equity Interests) is impaired by the Plan and the
holders of Claims or Equity Interests in each of such Classes are entitled to
vote to accept or reject the Plan.
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SECTION 6. MEANS OF IMPLEMENTATION
6.1. DISTRIBUTIONS.
On the Effective Date, Reorganized Heartland shall make or cause to be
made to the holders of Allowed Claims and Allowed Equity Interests the
distributions of New Common Stock, New Warrants and Cash as provided in
Section 4 hereof. Disputed Claims shall be resolved in accordance with
Section 8 hereof and, if a Disputed Claim becomes an Allowed Claim by Final
Order, distributions shall be made on account of such Claims in accordance
with Section 8.3 hereof.
6.2. AUTHORIZATION OF NEW SECURITIES.
The issuance of the following securities by Reorganized Heartland is
hereby authorized without further act or action under applicable law,
regulation, order or rule: (a) 30,000,000 shares of New Common Stock, (b)
the New Warrants, (c) the Incentive Options and (d) 15,000,000 shares of
preferred stock, $.01 par value.
6.3. NEW WARRANT AGREEMENT.
The New Warrant Agreement shall be executed and delivered by Reorganized
Heartland and [Warrant Agent] or any replacement agent reasonably acceptable
to the Debtor and an Ad Hoc Committee Majority.
6.4. ADOPTION OF STOCK OPTION PLAN.
If not theretofore adopted by the Debtor, on the Effective Date,
Reorganized Heartland will adopt the Stock Option Plan.
6.5. INCENTIVE OPTIONS ON THE EFFECTIVE DATE.
Reorganized Heartland is authorized to issue Incentive Options to
purchase 900,000 shares of New Common Stock pursuant and subject to the Stock
Option Plan. Said shares of New Common Stock and Incentive Options not
issued on the Effective Date shall be reserved for issuance thereafter
pursuant to the Stock Option Plan by Reorganized Heartland, on such terms and
conditions consistent with the Stock Option Plan.
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6.6. CANCELLATION OF EXISTING SECURITIES AND AGREEMENTS.
On the Effective Date, the Old Senior Notes, the Old Convertible Notes
and the Equity Interests or commitments, contractual or otherwise, obligating
the Debtor to issue, transfer or sell Equity Interests or any other capital
stock of the Debtor shall (a) be cancelled and (b) have no effect other than
the right to participate in the distributions, if any, provided under the
Plan in respect of Claims and Equity Interests. Except for purposes of
effectuating the distributions under the Plan on the Effective Date, the Old
Indentures shall be cancelled.
6.7. CORPORATE ACTION.
(a) BOARD OF DIRECTORS OF REORGANIZED HEARTLAND. On the Effective Date,
the operation of Reorganized Heartland shall become the general
responsibility of its Board of Directors, subject to, and in accordance with,
the Charter and by-laws. The initial Board of Directors of Reorganized
Heartland shall consist of seven members, at least one of which shall be a
member of the management of Reorganized Heartland. Subject to the
immediately preceding sentence, the initial members and the manner of
selection of the Board of Directors of Reorganized Heartland shall in all
respects be subject to the approval of an Ad Hoc Committee Majority and shall
be disclosed in the Disclosure Statement or an amendment or supplement to the
Disclosure Statement or such other filing as may be made with the Bankruptcy
Court. The directors of the Debtor immediately prior to the Effective Date
shall resign as of the Effective Date and shall be replaced by the Board of
Directors of Reorganized Heartland.
(b) OFFICERS OF REORGANIZED HEARTLAND. The initial officers of
Reorganized Heartland are or shall be disclosed in the Disclosure Statement
or an amendment or supplement to the Disclosure Statement or such other
filing as may be made with the Bankruptcy Court. The selection of officers
of Reorganized Heartland after the Effective Date shall be as provided in its
certificate of incorporation and bylaws.
6.8. AMENDED CERTIFICATE OF INCORPORATION.
On the Effective Date, or as soon thereafter as is practicable,
Reorganized Heartland shall file with the Secretary of State of the State of
Delaware in accordance with section 303 of the DGCL, the Charter which shall,
among other things, prohibit Reorganized Heartland from creating,
designating, authorizing or causing to be issued any class or series of
non-voting stock. On the Effective Date, the Charter shall automatically
become effective, and all other matters provided under this Plan involving
the corporate structure of Reorganized Heartland, or corporate action by it,
shall be deemed to have occurred and shall be in effect from and after the
Effective Date pursuant to section 303 of the DGCL without any requirement of
further action by the stockholders, the directors of Reorganized Heartland or
Reorganized Heartland.
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SECTION 7. PROVISIONS GOVERNING DISTRIBUTIONS
7.1. DATE OF DISTRIBUTIONS.
Unless otherwise provided herein, any distributions and deliveries to be
made hereunder shall be made on the Effective Date or as soon as practicable
thereafter and deemed made on the Effective Date. In the event that any
payment or act under the Plan is required to be made or performed on a date
that is not a Business Day, then the making of such payment or the
performance of such act may be completed on the next succeeding Business Day,
but shall be deemed to have been completed as of the required date.
7.2. DISBURSING AGENT.
All distributions under the Plan shall be made by Reorganized Heartland
as Disbursing Agent or such other entity designated by Reorganized Heartland
as a Disbursing Agent on the Effective Date. A Disbursing Agent shall not be
required to give any bond or surety or other security for the performance of
its duties unless otherwise ordered by the Bankruptcy Court, and, in the
event that a Disbursing Agent is so otherwise ordered, all costs and expenses
of procuring any such bond or surety shall be borne by Reorganized Heartland.
7.3. SURRENDER OF INSTRUMENTS.
As a condition to receiving any distribution under the Plan each holder
of an Old Senior Note, Old Convertible Note and Equity Interest must
surrender such Old Senior Note, Old Convertible Note and Equity Interest to
Reorganized Heartland or its designee. Any holder of an Old Senior Note, Old
Convertible Note or Equity Interest that fails to (a) surrender such
instrument or (b) execute and deliver an affidavit of loss and/or indemnity
reasonably satisfactory to Reorganized Heartland and furnish a bond in form,
substance, and amount reasonably satisfactory to Reorganized Heartland before
the first anniversary of the Effective Date shall be deemed to have forfeited
all rights and claims and may not participate in any distribution under the
Plan.
7.4. COMPENSATION OF PROFESSIONALS.
Each person retained or requesting compensation in the Chapter 11 Case
pursuant to section 330 or 503(b) of the Bankruptcy Code shall be required to
file an application for allowance of final compensation and reimbursement of
expenses in the Chapter 11 Case on or before a date to be determined by the
Bankruptcy Court in the Confirmation Order or any other order of the
Bankruptcy Court. Objections to any application made under this section 7.4
shall be filed on or before a date to be fixed and determined by the
Bankruptcy Court in the Confirmation Order or such other order.
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The Debtor acknowledges that the Ad Hoc Committee has made a substantial
contribution in the Chapter 11 Case and has been of benefit to the Debtor's
bankruptcy estate. The Debtor will not object to the payment of the
reasonable fees and expenses of the Ad Hoc Committee (as determined in
accordance with section 503(b) of the Bankruptcy Code) including, without
limitation, the reasonable fees and expenses of counsel to the Ad Hoc
Committee.
7.5. DELIVERY OF DISTRIBUTIONS.
Subject to Bankruptcy Rule 9010, all distributions to any holder of an
Allowed Claim or an Allowed Equity Interest shall be made at the address of
such holder as set forth on the Schedules filed with the Bankruptcy Court or
on the books and records of the Debtor or its agents, unless the Debtor or
Reorganized Heartland, as applicable, have been notified in writing of a
change of address, including, without limitation, by the filing of a proof of
claim or interest by such holder that contains an address for such holder
different from the address reflected on such Schedules for such holder. In
the event that any distribution to any holder is returned as undeliverable,
the Disbursing Agent shall use reasonable efforts to determine the current
address of such holder, but no distribution to such holder shall be made
unless and until the Disbursing Agent has determined the then current address
of such holder, at which time such distribution shall be made to such holder
without interest; provided that such distributions shall be deemed unclaimed
property under section 347(b) of the Bankruptcy Code at the expiration of one
year from the Effective Date. After such date, all unclaimed property or
interest in property shall revert to Reorganized Heartland, and the claim of
any other holder to such property or interest in property shall be discharged
and forever barred.
7.6. MANNER OF PAYMENT UNDER THE PLAN.
At the option of the Disbursing Agent, any Cash payment to be made
hereunder may be made by a check or wire transfer or as otherwise required or
provided in applicable agreements.
7.7. FRACTIONAL SHARES.
No fractional shares of New Common Stock or New Warrants or Cash in lieu
thereof shall be distributed. No New Warrants shall be issued for fractional
shares of New Common Stock. For purposes of distribution, fractional shares
of New Common Stock and fractional New Warrants shall be rounded down to the
previous whole number.
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7.8. SETOFFS AND RECOUPMENT.
The Debtor may, but shall not be required to, setoff against, or recoup
from, any Claim and the payments to be made pursuant to the Plan in respect
of such Claim, any claims of any nature whatsoever that the Debtor may have
against the claimant, but neither the failure to do so nor the allowance of
any Claim hereunder shall constitute a waiver or release by the Debtor of any
such claim it may have against such claimant.
7.9. DISTRIBUTIONS AFTER EFFECTIVE DATE.
Distributions made after the Effective Date to holders of Disputed
Claims that are not Allowed Claims as of the Effective Date but which later
become Allowed Claims shall be deemed to have been made on the Effective Date.
7.10. RIGHTS AND POWERS OF DISBURSING AGENT.
(a) POWERS OF THE DISBURSING AGENT. The Disbursing Agent shall be
empowered to (i) effect all actions and execute all agreements, instruments
and other documents necessary to perform its duties under the Plan, (ii) make
all distributions contemplated hereby, (iii) employ professionals to
represent it with respect to its responsibilities and (iv) exercise such
other powers as may be vested in the Disbursing Agent by order of the
Bankruptcy Court, pursuant to the Plan, or as deemed by the Disbursing Agent
to be necessary and proper to implement the provisions hereof.
(b) EXPENSES INCURRED ON OR AFTER THE EFFECTIVE DATE. Except as
otherwise ordered by the Bankruptcy Court, the amount of any reasonable fees
and expenses incurred by the Disbursing Agent on or after the Effective Date
(including, without limitation, taxes) and any reasonable compensation and
expense reimbursement claims (including, without limitation, reasonable
attorney fees and expenses) made by the Disbursing Agent shall be paid in
Cash by Reorganized Heartland.
7.11. EXCULPATION.
The Debtor, Reorganized Heartland, each of the members of the Ad Hoc
Committee, any statutory committee, the Old Indenture Trustees and the
Disbursing Agent, and their respective members, partners, officers,
directors, employees and agents (including any attorneys, financial advisors,
investment bankers and other professionals retained by such persons) shall
have no liability to any holder of any Claim or Equity Interest for any act
or omission in connection with, or arising out of, the Disclosure Statement,
the Plan, the solicitation of votes for and 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 as determined by a Final Order of the Bankruptcy Court
and, in all respects, shall be entitled to rely upon the advice of counsel
with respect to their duties and responsibilities under the Plan.
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7.12. ALLOCATION RELATING TO OLD SENIOR NOTES AND OLD CONVERTIBLE NOTES.
All distributions to holders of Old Senior Note Claims and Old
Convertible Note Claims shall be allocated first to the portion of each of
such Claims representing the principal amount of the Old Senior Notes or the
Old Convertible Notes and then, to the extent the consideration exceeds such
amount, to the remainder of such Claim.
7.13. VOLUNTARY CANCELLATION OF EQUITY INTERESTS; RETURN OF NEW COMMON
STOCK AND NEW WARRANTS.
Any holder of an Equity Interest that does not desire to receive any
consideration under the Plan in consideration for the cancellation of its
Equity Interests may send a letter to the Debtor so directing. In such
event, if such holder nevertheless receives its Ratable Proportion New
Warrants in accordance with section 4.9 of the Plan, such holder should
return such Warrants to Reorganized Heartland.
SECTION 8. PROCEDURES FOR TREATING DISPUTED CLAIMS UNDER THE PLAN
8.1. DISPUTED CLAIMS.
(a) PROCESS. Except as to applications for allowances of compensation
and reimbursement of expenses under sections 330 and 503 of the Bankruptcy
Code, the Debtor or Reorganized Heartland shall have the exclusive right to
make and file objections to Administrative Expense Claims, Claims and Equity
Interests subsequent to the Confirmation Date. All objections shall be
litigated to Final Order; PROVIDED, HOWEVER, that Reorganized Heartland shall
have the authority to compromise, settle, otherwise resolve or withdraw any
objections, without approval of the Bankruptcy Court. Unless otherwise
ordered by the Bankruptcy Court, the Debtor or Reorganized Heartland shall
file all objections to Administrative Expense Claims that are the subject of
proofs of claim or requests for payment filed with the Bankruptcy Court
(other than applications for allowances of compensation and reimbursement of
expenses), Claims and Equity Interests and serve such objections upon the
holder of the Administrative Expense Claim, Claim or Equity Interest as to
which the objection is made as soon as is practicable, but in no event later
than (a) ninety (90) days after the Effective Date or the date on which a
proof of claim or request for payment is filed with the Bankruptcy Court or
(b) such later date as may be approved by the Bankruptcy Court.
(b) TORT CLAIMS. All Tort Claims are Disputed Claims. Any Tort Claim as
to which a proof of claim was timely filed that is not otherwise settled or
resolved pursuant to subsection 8.1(a) above shall be determined and
liquidated in the administrative or judicial tribunal in which it is pending
on the Confirmation Date or, if no such action was pending on the
Confirmation Date, in any
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administrative or judicial tribunal of appropriate jurisdiction. Pursuant to
section 11.4 hereof, the automatic stay arising pursuant to section 362 of
the Bankruptcy Code shall be vacated as of the Effective Date as to all Tort
Claims. Any Tort Claim determined and liquidated pursuant to a judgment
obtained in accordance with this subsection 8.1(b) and applicable
non-bankruptcy law that is no longer subject to appeal or other review shall
only to the extent there exists no available coverage under the Debtor's
liability insurance (including any self-insured retention under such
liability insurance), be deemed to be an Allowed Miscellaneous Unsecured
Claim in Class 3 of the Plan in such liquidated amount and satisfied in
accordance with the Plan; PROVIDED, HOWEVER, that such Allowed Claim shall
not include punitive or exemplary damages. Nothing contained in this
subsection 8.1(b) shall constitute or be deemed a waiver of any claim, right
or cause of action that the Debtor or Reorganized Heartland may have against
any person in connection with or arising out of any Tort Claim, including,
without limitation, any rights under section 157(b) of title 28, United
States Code.
8.2. NO DISTRIBUTIONS PENDING ALLOWANCE.
Notwithstanding any other provision hereof, if any portion of a Claim is
a Disputed Claim, no payment or distribution provided hereunder shall be made
on account of such Claim unless and until such Disputed Claim becomes an
Allowed Claim.
8.3. DISTRIBUTIONS AFTER ALLOWANCE.
To the extent that a Disputed Claim or Disputed Equity Interest
ultimately becomes an Allowed Claim or Allowed Equity Interest, a
distribution shall be made to the holder of such Allowed Claim or Allowed
Equity Interest in accordance with the provisions of the Plan. As soon as
practicable after the date that the order or judgment of the Bankruptcy Court
allowing any Disputed Claim or Disputed Equity Interest becomes a Final
Order, the Disbursing Agent shall provide to the holder of such Claim or
Equity Interest the distribution to which such holder is entitled under the
Plan.
8.4. VOTING RIGHTS OF HOLDERS OF DISPUTED CLAIMS.
Pursuant to Bankruptcy Rule 3018(a), a Disputed Claim will not be
counted for purposes of voting on the Plan to the extent it is disputed,
unless an order of the Bankruptcy Court is entered after notice and a hearing
temporarily allowing the Disputed Claim for voting purposes under Bankruptcy
Rule 3018(a). Such disallowance for voting purposes is without prejudice to
the claimant's right to seek to have its Disputed Claim allowed for purposes
of distribution under the Plan.
SECTION 9. PROVISIONS GOVERNING EXECUTORY CONTRACTS AND UNEXPIRED LEASES
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9.1. ASSUMPTION OR REJECTION OF CONTRACTS AND LEASES.
This Plan constitutes a motion by the Debtor to assume, as of the
Effective Date, all executory contracts and unexpired leases to which the
Debtor is a party, except for an executory contract or unexpired lease that
(a) has been assumed or rejected pursuant to Final Order of the Bankruptcy
Court, (b) is specifically rejected on Schedule 9.1 hereto filed by the
Debtor on or before the commencement of the hearing on approval of the
Disclosure Statement or such later date as may be fixed by the Bankruptcy
Court, (c) is the subject of a separate motion filed under section 365 of the
Bankruptcy Code by the Debtor prior to the filing of the schedule described
in section 9.1(b) hereof or (d) is otherwise assumed hereunder. For purposes
hereof, each executory contract and unexpired lease listed on Schedule 9.1
hereto that relates to the use or occupancy of real property shall include
(i) modifications, amendments, supplements, restatements, or other agreements
made directly or indirectly by any agreement, instrument, or other document
that in any manner affects such executory contract or unexpired lease,
without regard to whether such agreement, instrument or other document is
listed on Schedule 9.1 hereto and (ii) executory contracts or unexpired
leases appurtenant to the premises listed on Schedule 9.1 hereto including
all easements, licenses, permits, rights, privileges, immunities, options,
rights of first refusal, powers, uses, usufructs, reciprocal easement
agreements, vault, tunnel or bridge agreements or franchises, and any other
interests in real estate or rights IN REM relating to such premises to the
extent any of the foregoing are executory contracts or unexpired leases,
unless any of the foregoing agreements are assumed.
9.2. AMENDMENTS TO SCHEDULE; EFFECT OF AMENDMENTS.
The Debtor shall assume each of the executory contracts and unexpired
leases not listed on Schedule 9.1 hereto; provided, that the Debtor may at
any time on or before the first Business Day before the date of the
commencement of the Confirmation Hearing amend Schedule 9.1 hereto to delete
or add any executory contract or unexpired lease thereto, in which event such
executory contract or unexpired lease shall be deemed to be, respectively,
assumed and, if applicable, assigned as provided therein, or rejected. The
Debtor shall provide notice of any amendments to Schedule 9.1 hereto to the
parties to the executory contracts or unexpired leases affected thereby. The
fact that any contract or lease is scheduled on Schedule 9.1 hereto shall not
constitute or be construed to constitute an admission by the Debtor that the
Debtor has any liability thereunder.
9.3. BAR TO REJECTION DAMAGE CLAIMS.
In the event that the rejection of an executory contract or unexpired
lease by the Debtor results in damages to the other party or parties to such
contract or lease, a Claim for such damages, if not heretofore evidenced by a
filed proof of claim, shall be forever barred and shall not be enforceable
against the Debtor, or its properties or interests in property as agents,
successors, or assigns, unless a proof of claim is filed with the Bankruptcy
Court and served upon counsel for the
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Debtor on or before 30 days after the earlier to occur of (a) the giving of
notice to such party under section 9.1 or 9.2 hereof and (b) the entry of an
order by the Bankruptcy Court authorizing rejection of a particular executory
contract or lease.
9.4. INDEMNIFICATION OBLIGATIONS.
The obligations of the Debtor to indemnify its directors and officers
that were not directors or officers, respectively, on or after April 25, 1997
pursuant to certificate of articles of incorporation, bylaws, contract,
applicable state law or otherwise shall be deemed to be, and shall be treated
as though they are, executory contracts that are rejected under the Plan.
Any Claims arising from such rejection shall be treated as Indemnity Claims
under Section 4.7 hereof.
SECTION 10. CONDITIONS PRECEDENT TO EFFECTIVE DATE
10.1. CONDITIONS PRECEDENT TO EFFECTIVE DATE OF THE PLAN.
The occurrence of the Effective Date of the Plan is subject to
satisfaction of the following conditions precedent:
(a) CONFIRMATION ORDER. The Confirmation Order, in form and substance
reasonably acceptable to the Debtor and an Ad Hoc Committee Majority shall
have been entered by the Clerk of the Bankruptcy Court and there shall not
be a stay or injunction in effect with respect thereto.
(b) All Trade Claims shall have become Allowed Claims, Disallowed
Claims or estimated for distribution purposes under the Plan by Final
Order(s) or by operation of law and the aggregate amount of all such
Allowed Trade Claims and estimated Trade Claims, if any, shall not exceed
$7,000,000.
(c) NEW WARRANT AGREEMENT. The New Warrant Agreement shall have been
executed and delivered.
(d) The Debtor shall have received approval from the Federal
Communications Commission ("FCC") of all of the Debtor's transfer of
control applications requesting FCC approval of the transfer of the basic
trading areas authorizations and channel licenses held directly or
indirectly by the Debtor (or its affiliates).
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(e) [The Debtor or Reorganized Heartland shall have filed a shelf
registration statement for the benefit of certain holders of New Common
Stock with the Securities and Exchange Commission.]
(f) EXECUTION AND DELIVERY OF OTHER DOCUMENTS. All other actions and
all agreements, instruments or other documents necessary to implement the
terms and provisions hereof shall have been effected.
10.2. WAIVER OF CONDITIONS PRECEDENT.
Each of the conditions precedent in section 10.1 hereof may be waived,
in whole or in part, by the Debtor, with the prior written consent of an Ad
Hoc Committee Majority. Any such waivers of a condition precedent in section
10.1 hereof may be effected at any time, without notice, without leave or
order of the Bankruptcy Court and without any formal action (other than by
the Debtor and an Ad Hoc Committee Majority).
SECTION 11. EFFECT OF CONFIRMATION
11.1. VESTING OF ASSETS.
On the Effective Date, the Debtor, its properties and interests in
property and its operations shall be released from the custody and
jurisdiction of the Bankruptcy Court, and the estate of the Debtor shall vest
in Reorganized Heartland. From and after the Effective Date, Reorganized
Heartland may operate its business and may use, acquire and dispose of
property free of any restrictions of the Bankruptcy Code or the Bankruptcy
Rules, subject to the terms and conditions of the Plan.
11.2. BINDING EFFECT.
Except as otherwise provided in section 1141(d)(3) of the Bankruptcy
Code and subject to the occurrence of the Effective Date, on and after the
Confirmation Date, the provisions of the Plan shall bind any holder of a
Claim against, or Equity Interest in, the Debtor and such holder's respective
successors and assigns, whether or not the Claim or Equity Interest of such
holder is impaired under the Plan and whether or not such holder has accepted
the Plan.
11.3. DISCHARGE OF DEBTOR.
Except to the extent otherwise provided herein, the treatment of all
Claims against or Equity Interests in the Debtor hereunder shall be in
exchange for and in complete satisfaction, discharge and release of all
Claims against or Equity Interests in the Debtor of any nature whatsoever,
known or unknown, including, without limitation, any interest accrued or
expenses incurred thereon from and
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<PAGE>
after the Petition Date, or against its estate or properties or interests in
property. Except as otherwise provided herein, upon the Effective Date, all
Claims against and Equity Interests in the Debtor will be satisfied,
discharged and released in full exchange for the consideration provided
hereunder. Except as otherwise provided herein, all entities shall be
precluded from asserting against the Debtor or Reorganized Heartland or their
respective properties or interests in property, 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.
11.4. TERM OF INJUNCTIONS OR STAYS.
Unless otherwise provided, all injunctions or stays arising under or
entered during the Chapter 11 Case under section 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.
11.5. INDEMNIFICATION OBLIGATIONS.
Subject to the occurrence of the Effective Date, the obligations of the
Debtor, only to the extent permitted under the laws of the State of Delaware,
to indemnify, defend, reimburse or limit the liability of directors or
officers who were or are directors or officers of the Debtor on or after
April 25, 1997, respectively, against any claims or causes of action as
provided in the Debtor's certificate of incorporation, bylaws, applicable
state law or contract shall survive confirmation of the Plan, remain
unaffected thereby and not be discharged except with respect to any such
claims or causes of action arising out of acts or omissions occurring, in
whole or in part, before April 25, 1997 where liability as finally
adjudicated by a court of competent jurisdiction is imposed (i) for any
breach of duty of loyalty to the Debtor or its stockholders, (ii) for acts or
omissions not in good faith and not in a manner such director of officer
reasonably believed to be in or not opposed to the best interests of the
Debtor or which involve intentional misconduct, gross negligence or a knowing
violation of law or (iii) for any transaction from which the director or
officer derived any improper personal benefit.
11.6. LIMITED RELEASE.
On the Effective Date, the Debtor, on behalf of itself and its
non-debtor subsidiaries, hereby releases the officers and directors of the
Debtor and its subsidiaries holding office at any time on or after April 25,
1997 (as well as any non-voting representative of Jupiter Partners, L.P.
("Jupiter") appointed pursuant to Section 5.12 of the Note Purchase Agreement
among the Debtor, Jupiter and Thomas R. Haack, executed as of November 30,
1994, who served in such position on or after April 25, 1997) and each of the
members of the Ad Hoc Committee and each of their respective agents,
employees, advisors (including any attorneys, financial advisors, investment
bankers and other professionals retained by such persons or entities),
affiliates and representatives from any and all claims or liabilities arising
from or related to actions taken or omissions occurring in connection with
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<PAGE>
the Plan or otherwise in their capacity as officers, directors, agents,
members, employees, affiliates or advisors of each of the foregoing, as
applicable.
SECTION 12. WAIVER OF CLAIMS
12.1. AVOIDANCE ACTIONS.
Effective as of the Effective Date, the Debtor waives the right to
prosecute any avoidance or recovery actions under section 547 of the
Bankruptcy Code that belong to the Debtor or Debtor in Possession.
SECTION 13. RETENTION OF JURISDICTION
The Bankruptcy Court shall have exclusive jurisdiction of all matters
arising out of, or related to, the Chapter 11 Case and the Plan pursuant to,
and for the purposes of, sections 105(a) and 1142 of the Bankruptcy Code and
for, among other things, the following purposes:
(a) To hear and determine pending applications for the assumption or
rejection of executory contracts or unexpired leases and the allowance of
Claims resulting therefrom.
(b) To determine any and all adversary proceedings, applications and
contested matters, including, without limitation, under sections 544, 545,
548, 549, 550, 551 and 553 of the Bankruptcy Code.
(c) To ensure that distributions to holders of Allowed Claims and
Allowed Equity Interests are accomplished as provided herein.
(d) To hear and determine any timely objections to Administrative
Expense Claims or to proofs of claim and equity interests, including,
without limitation, any objections to the classification of any Claim or
Equity Interest, and to allow or disallow any Disputed Claim or Disputed
Equity Interest, in whole or in part.
(e) To enter and implement such orders as may be appropriate in the
event the Confirmation Order is for any reason stayed, revoked, modified or
vacated.
(f) To issue such orders in aid of execution of the Plan, to the extent
authorized by section 1142 of the Bankruptcy Code.
(g) To consider any amendments to or modifications of the Plan, or to
cure any defect or omission, or reconcile any inconsistency, in any order
of the Bankruptcy Court, including, without limitation, the Confirmation
Order.
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<PAGE>
(h) To hear and determine all applications under sections 330, 331 and
503(b) of the Bankruptcy Code for awards of compensation for services
rendered and reimbursement of expenses incurred prior to the Confirmation
Date.
(i) To hear and determine disputes arising in connection with the
interpretation, implementation or enforcement of the Plan, the Confirmation
Order, any transactions or payments contemplated hereby or any agreement,
instrument or other document governing or relating to any of the foregoing.
(j) To hear and determine matters concerning state, local and federal
taxes in accordance with sections 346, 505 and 1146 of the Bankruptcy Code.
(k) To hear any other matter not inconsistent with the Bankruptcy Code.
(l) To hear and determine all disputes involving the existence, scope
and nature of the discharges granted under section 11.3 hereof.
(m) To issue injunctions and effect any other actions that may be
necessary or desirable to restrain interference by any entity with the
consummation or implementation of the Plan.
(n) To enter a final decree closing the Chapter 11 Case.
SECTION 14. MISCELLANEOUS PROVISIONS
14.1. PAYMENT OF STATUTORY FEES.
All fees payable under section 1930, chapter 123, title 28, United
States Code, as determined by the Bankruptcy Court at the Confirmation
Hearing, shall be paid on the Effective Date. Any such fees accrued after
the Effective Date will constitute an Allowed Administrative Expense Claim
and be treated in accordance with section 2.1 hereof.
14.2. RETIREE BENEFITS.
On and after the Effective Date, pursuant to section 1129(a)(13) of the
Bankruptcy Code, Reorganized Heartland shall continue to pay any retiree
benefits (within the meaning of section 1114 of the Bankruptcy Code), at the
level established in accordance with section 1114 of the Bankruptcy Code, at
any time prior to the Confirmation Date, for the duration of the period for
which the Debtor has obligated itself to provide such benefits.
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<PAGE>
14.3. ADMINISTRATIVE EXPENSES INCURRED AFTER THE CONFIRMATION DATE.
Administrative expenses incurred by the Debtor or Reorganized Heartland
after the Confirmation Date, including (without limitation) Claims for
professionals' fees and expenses, shall not be subject to application and may
be paid by the Debtor or Reorganized Heartland, as the case may be, in the
ordinary course of business and without further Bankruptcy Court approval;
PROVIDED, HOWEVER, that no Claims for professional fees and expenses incurred
after the Confirmation Date shall be paid until after the occurrence of the
Effective Date.
14.4. SECTION 1125(e) OF THE BANKRUPTCY CODE.
As of the Confirmation Date, the Debtor shall be deemed to have
solicited acceptances of the Plan in good faith and in compliance with the
applicable provisions of the Bankruptcy Code. The Debtor and each of the
members of the Ad Hoc Committee (and each of their respective affiliates,
agents, directors, officers, employees, investment bankers, financial
advisors, attorneys and other professionals) have, and shall be deemed to
have, participated in good faith and in compliance with the applicable
provisions of the Bankruptcy Code in the offer and issuance of the securities
under the Plan, and therefore are not, and on account of such offer, issuance
and solicitation will not be, liable at any time for the violation of any
applicable law, rule or regulation governing the solicitation of acceptances
or rejections of the Plan or the offer and issuance of securities under the
Plan.
14.5. COMPLIANCE WITH TAX REQUIREMENTS.
In connection with the consummation of the Plan, the Debtor shall comply
with all withholding and reporting requirements imposed by any taxing
authority, and all distributions hereunder shall be subject to such
withholding and reporting requirements.
14.6. SEVERABILITY OF PLAN PROVISIONS.
In the event that, prior to the Confirmation Date, any term or provision
of the Plan is held by the Bankruptcy Court to be invalid, void or
unenforceable, the Bankruptcy Court shall have the power to alter and
interpret such term or provision to make it valid or enforceable to the
maximum extent practicable, consistent with the original purpose of the term
or provision held to be invalid, void or unenforceable, and such term or
provision shall then be applicable as altered or interpreted.
Notwithstanding any such holding, alteration or interpretation, the remainder
of the terms and provisions hereof shall remain in full force and effect and
shall in no way be affected, impaired or invalidated by such holding,
alteration or interpretation. The Confirmation Order shall constitute a
judicial determination and shall provide that each term and provision hereof,
as it may have been altered or interpreted in accordance with the foregoing,
is valid and enforceable in accordance with its terms. All actions taken
under this section 14.6 shall require the consent of the Debtor and an Ad Hoc
Committee Majority.
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14.7. NOTICES.
All notices, requests, and demands to or upon the Debtor to be effective
shall be in writing (including by facsimile transmission) and, unless
otherwise expressly provided herein, shall be deemed to have been duly given
or made when actually delivered or, in the case of notice by facsimile
transmission, when received and telephonically confirmed, addressed as
follows:
Heartland Wireless Communications, Inc.
200 Chisholm Place, Suite 200
Plano, Texas 75075
Attn: J. Curtis Henderson, Esq.
Senior Vice President and General Counsel
Telephone: (972) 633-4039
Telecopier: (972) 633-0074
and
Weil, Gotshal & Manges LLP
100 Crescent Court, Suite 1300
Dallas, Texas 75201
Attn: Martin A. Sosland, Esq.
Telephone: (214) 746-7700
Telecopier: (214) 746-7777
and
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<PAGE>
Richards, Layton & Finger, P.A.
One Rodney Square
P.O. Box 551
Wilmington, Delaware 19899
Attn: Thomas L. Ambro, Esq.
Telephone: (302) 658-6541
Telecopier: (302) 658-6548
14.8. GOVERNING LAW.
Except to the extent that the Bankruptcy Code or other federal law is
applicable, or to the extent an Exhibit hereto provides otherwise, the
rights, duties and obligations arising under the Plan shall be governed by,
and construed and enforced in accordance with, the laws of the State of
Delaware without giving effect to the principles of conflict of laws thereof.
14.9. BINDING EFFECT.
The Plan shall be binding upon and inure to the benefit of the Debtor,
the holders of Claims and Equity Interests, and their respective successors
and assigns, including, without limitation, Reorganized Heartland.
Dated: December 4, 1998
Respectfully submitted,
Heartland Wireless Communications, Inc.
By: /s/ Marjean Henderson
----------------------------------------------------
Name: Marjean Henderson
Title: Senior Vice President and Chief Financial Officer
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<PAGE>
AGREEMENT
AGREEMENT (the "Agreement"), dated as of October 5, 1998, between
Heartland Wireless Communications, Inc., a Delaware corporation (the
"Company"), and each other signatory party hereto (individually, a "Holder"
and collectively the "Holders" or the "Ad Hoc Committee").
WHEREAS, each of the Holders is a beneficial owner (and/or agent,
advisor, affiliate, manager or other authorized representative of the
beneficial owner(s)) of 13% Senior Notes due April 15, 2003 or 14% Senior
Notes due October 15, 2004 issued by the Company (collectively, the "Senior
Notes;" and the claims evidenced by the Senior Notes and any Senior Notes
acquired by the Holder after the date of this Agreement, the "Senior Note
Claims");
WHEREAS, the Company and the Holders have engaged in negotiations
towards a consensual restructuring/reorganization of the Company's financial
affairs, including the Senior Notes (a "Restructuring");
WHEREAS, on or about September 29, 1998, the Company and the Holders
each approved the terms and conditions of a Restructuring, an agreement
embodying the terms of which is annexed hereto as Exhibit "A" (the
"Restructuring Agreement");
WHEREAS, to implement the Restructuring, the Company intends to commence
a voluntary case (the "Chapter 11 Case") under Chapter 11 of title 11, the
United States Code (the "Bankruptcy Code") and contemporaneously therewith
propose a plan of reorganization ("Plan of Reorganization"), and a disclosure
statement relating thereto ("Disclosure Statement"), which shall incorporate
the terms of, and in all respects be consistent with, the Restructuring
Agreement;
WHEREAS, each Holder intends to support and vote its Senior Note Claims
to accept a Plan of Reorganization consistent with the Restructuring
Agreement;
NOW, THEREFORE, in consideration of the foregoing, the parties hereto
agree as follows:
SECTION 1. VOTE IN FAVOR OF THE PLAN.
(a) So long as no Termination Event (as such term is defined
herein) shall have occurred, each Holder severally (but not jointly or
jointly and severally) agrees (i) unless such Holder shall have transferred
its Senior Note Claims in accordance with Section 2 hereof, to vote its
Senior Note Claims to accept a Plan of Reorganization consistent with the
Restructuring Agreement; and (ii) to the inclusion of a statement in the
Disclosure Statement that such Plan of Reorganization was negotiated with the
Holders and that they intend to vote to accept such Plan of Reorganization.
(b) So long as no Termination Event shall have occurred, each
Holder shall not object to or otherwise commence any proceeding to oppose or
object to confirmation of a Plan of Reorganization consistent with the
Restructuring Agreement.
<PAGE>
SECTION 2. TRANSFER OF SENIOR NOTE CLAIMS.
Each Holder shall not, directly or indirectly, sell, assign,
hypothecate, grant an option on, or otherwise dispose of (collectively,
"Transfer") any of the Senior Note Claims held by such Holder to any other
person (a "Transferee"); provided, however, that each Holder shall be
permitted to Transfer any or all of its Senior Note Claims (i) if such
Transferee agrees in writing to be bound by the terms of this Agreement and
the Holder notifies the Company of the transfer within three (3) business
days of the Transfer or as soon as practicable thereafter; (ii) after the
occurrence of a Termination Event; or (iii) after approval of the Disclosure
Statement and commencement of solicitation pursuant to Section 1125 of the
Bankruptcy Code.
SECTION 3. TERMINATION OF OBLIGATIONS.
The obligations of each Holder hereunder shall terminate and be of no
further force and effect if one of the following termination events (each a
"Termination Event") occurs:
(a) the Company and the Holders shall have failed to reach
agreement in good faith prior to November 10, 1998, or such later date as the
Company and the Holders shall mutually agree, regarding definitive
documentation in respect of the Restructuring Agreement, including the Plan
of Reorganization;
(b) the Company shall not have commenced the Chapter 11 Case and
filed a Plan of Reorganization consistent with the Restructuring Agreement
and Disclosure Statement relating thereto with the United States Bankruptcy
Court (the "Bankruptcy Court") on or before November 13, 1998 (the "Petition
Date"), or such later date as the Company and the Holders shall mutually
agree;
(c) the Bankruptcy Court shall not have approved the Disclosure
Statement on or before 45 days after the Petition Date, or such later date
(on or before 60 days after the Petition Date) as the Company and the Holders
may mutually agree;
(d) the Company shall file with the Bankruptcy Court a Plan of
Reorganization, or an amendment to the Plan of Reorganization, that is
inconsistent with the Restructuring Agreement;
(e) the Bankruptcy Court shall not have confirmed a Plan of
Reorganization consistent with the Restructuring Agreement on or before 100
days after the Petition Date, or
2
<PAGE>
such later date (on or before 115 days after the Petition Date) as the
Company and the Holders may mutually agree;
(f) a Plan of Reorganization consistent with the Restructuring
Agreement shall not have become effective on or before 115 days after the
Petition Date or such later date (on or before 130 days after the Petition
Date) as the Company and the Holders may mutually agree,
(g) the Company shall have filed any motion or other pleading, or
otherwise shall have brought any action or proceeding, challenging or
objecting to the Senior Note Claims of a Holder or otherwise seeking any
recovery from, or injunctive relief against, a Holder (other than with
respect to any alleged or actual breach by a Holder of the terms of this
Agreement);
(h) the Chapter 11 Case shall have been dismissed or converted to
a case under Chapter 7 of the Bankruptcy Code; or
(i) an examiner with enlarged powers relating to the operation of
the Company's business (powers beyond those set forth in Section 1106(a)(3)
and (4) of the Bankruptcy Code) under Section 1106(b) of the Bankruptcy Code,
or a trustee under Section 1104 of the Bankruptcy Code, shall have been
appointed in the Chapter 11 Case.
(j) an occurrence of whatever nature that results in the material
impairment of the ability of (x) the Company to perform its material
obligations under the Restructuring Agreement or (y) the Holders to realize
the material benefits intended to be provided to the Holders under the
Restructuring Agreement.
SECTION 4. HOLDINGS OF SENIOR NOTES.
Each person that executes this Agreement represents that it is the
beneficial owner (and/or agent, advisor, affiliate, manager or other
authorized representative of the beneficial owner(s)) of the principal
amounts of the Senior Notes listed adjacent to its signature to this
Agreement.
3
<PAGE>
SECTION 5. DUE AUTHORIZATION.
Each person who executes this Agreement by or on behalf of each
respective party represents that it has been duly authorized or empowered to
execute and deliver this Agreement on behalf of such party.
SECTION 6. AMENDMENTS.
No modification or amendment of the terms of this Agreement shall be
valid unless such modification or amendment, in writing, has been signed by
each of the signatories party hereto.
SECTION 7. GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of New York, without regard to its conflict of laws
provisions.
SECTION 8. SEVERABILITY OF PROVISIONS.
Any provision of this Agreement which is prohibited or unenforceable in
any jurisdiction or under applicable law shall, as to such jurisdiction or
under such applicable law, be ineffective to the extent of such prohibition
or unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 9. COUNTERPARTS.
This Agreement may be executed by facsimile signature transmission in
one or more counterparts, any one of which need not contain the signature of
more than one party and all of which taken together shall constitute one and
the same agreement.
4
<PAGE>
SECTION 10. HEADINGS.
The Section headings of this Agreement are for convenience of reference
only and shall not, for any purpose, be deemed a part of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered by their respective duly authorized representatives as
of the date first set forth above.
HEARTLAND WIRELESS COMMUNICATIONS, INC.
By:
------------------------------------
Name:
Title:
Name of Holder:
------------------------------------ Principal Amount of 13% Senior Notes due
April 15, 2003 -- $
---------------------
Principal Amount of 14% Senior Notes due
October 15, 2004 -- $
-------------------
By:
------------------------------------
Name:
Title:
5
<PAGE>
FIRST AMENDMENT TO PLAN SUPPORT AGREEMENT
FIRST AMENDMENT TO AGREEMENT (the "First Amendment"), dated as of
November 13, 1998, between Heartland Wireless Communications, Inc., a
Delaware corporation (the "Company"), and each other signatory party hereto.
WHEREAS, the Company and each of the Holders entered into (or is
otherwise bound by the terms of) an Agreement, dated as of October 5, 1998
(the "Plan Support Agreement"), under which, among other things, each Holder
agreed under the terms and conditions described therein to vote its Senior
Note Claims to accept a Plan of Reorganization consistent with the
Restructuring Agreement; and
WHEREAS, the Company and each Holder have agreed to amend the Agreement
to make certain changes thereto.
NOW, THEREFORE, in consideration of the foregoing, the parties hereto
agree as follows:
1. Capitalized terms used (but not defined herein) shall have the
meanings ascribed to such terms in the Plan Support Agreement.
2. Section 3 of the Plan Support Agreement is hereby amended by
deleting Subsections (a) and (b) in their entirety and substituting the
following subsections (a) and (b) in lieu thereof:
(a) the Company and the Holders shall have failed to reach agreement
in good faith prior to December 1, 1998, or such later date as the Company
and the Holders shall mutually agree, regarding definitive documentation
in respect of the Restructuring Agreement, including the Plan of
Reorganization;
(b) the Company shall not have commenced the Chapter 11 Case and filed
a Plan of Reorganization consistent with the Restructuring Agreement and
Disclosure Statement relating thereto with the United States Bankruptcy
Court (the "Bankruptcy Court") on or before December 4, 1998 (the "Petition
Date"), or such later date as the Company and the Holders shall mutually
agree;
3. This First Amendment may be executed by facsimile signature
transmission in one or more counterparts, any one of which need not contain
the signature of more than one party and all of which taken together shall
constitute one and the same agreement.
The parties hereto have caused this First Amendment to be executed and
delivered by their respective duly authorized representatives as of the date
first set forth above.
HEARTLAND WIRELESS NAME OF HOLDER:
COMMUNICATIONS, INC.
----------------------------------
By: By:
------------------------------- -------------------------------
Name: Name:
Title: Title:
<PAGE>
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
- -----------------------------------------
:
In re: :
: CHAPTER 11
HEARTLAND WIRELESS COMMUNICATIONS, :
INC., a Delaware Corporation, : Case No. 98-______
:
Debtor. :
:
- -----------------------------------------
DEBTOR'S DISCLOSURE STATEMENT PURSUANT TO
SECTION 1125 OF THE BANKRUPTCY CODE
WEIL, GOTSHAL & MANGES LLP
100 Crescent Court, Suite 1300
Dallas, Texas 75201
(214) 746-7700
- and -
RICHARDS, LAYTON & FINGER, P.A.
One Rodney Square
P.O. Box 551
Wilmington, Delaware 19899
(302) 658-6541
ATTORNEYS FOR DEBTOR AND DEBTOR IN POSSESSION
Dated: Wilmington, Delaware
December 4, 1998
THIS PROPOSED DISCLOSURE STATEMENT HAS NOT BEEN APPROVED BY THE BANKRUPTCY COURT
FOR USE IN THE SOLICITATION OF ACCEPTANCES OF THE PLAN DISCLOSED PURSUANT TO
SECTION 1125(b) OF THE BANKRUPTCY CODE. ACCORDINGLY, THE FILING AND
DISSEMINATION OF THIS PROPOSED DISCLOSURE STATEMENT IS NOT INTENDED, NOR SHOULD
IT BE CONSTRUED, AS SUCH A SOLICITATION, NOR SHOULD THE INFORMATION CONTAINED
HEREIN BE RELIED UPON FOR ANY PURPOSE PRIOR TO A DETERMINATION BY THE BANKRUPTCY
COURT THAT THE PROPOSED DISCLOSURE STATEMENT CONTAINS ADEQUATE INFORMATION.
DISSEMINATION OF THIS PROPOSED DISCLOSURE STATEMENT IS CONTROLLED BY BANKRUPTCY
RULE 3017.
<PAGE>
TABLE OF CONTENTS
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I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
A. Holders of Claims and Equity Interests Entitled to Vote. . . . . . . . . 2
B. Voting Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
C. Confirmation Hearing . . . . . . . . . . . . . . . . . . . . . . . . . . 4
II. OVERVIEW OF THE PLAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
III. GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
A. Description and History of Business. . . . . . . . . . . . . . . . . . . 11
1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2. History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3. Significant Indebtedness. . . . . . . . . . . . . . . . . . . . . . 12
4. Selected Historical Financial Data. . . . . . . . . . . . . . . . . 15
B. Events Leading to the Commencement of the Chapter 11 Case. . . . . . . . 17
C. Recent Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
IV. ANTICIPATED EVENTS DURING THE CHAPTER 11 CASE . . . . . . . . . . . . . . . . . 18
1. Continuation of Business; Stay of Litigation. . . . . . . . . . . . 18
2. First Day Orders; Scheduling Order. . . . . . . . . . . . . . . . . 19
3. Statutory Committee . . . . . . . . . . . . . . . . . . . . . . . . 19
V. THE PLAN OF REORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
A. Classification and Treatment of Claims and Equity Interests. . . . . . . 20
1. Administrative Expense Claims . . . . . . . . . . . . . . . . . . . 20
2. Priority Tax Claims . . . . . . . . . . . . . . . . . . . . . . . . 21
3. Class 1 - Priority Non-Tax Claims . . . . . . . . . . . . . . . . . 21
4. Class 2 - Secured Claims. . . . . . . . . . . . . . . . . . . . . . 21
5. Class 3 - Old Senior Note Claims. . . . . . . . . . . . . . . . . . 22
6. Class 4 - Old Convertible Note Claims . . . . . . . . . . . . . . . 22
7. Class 5 - Trade Claims. . . . . . . . . . . . . . . . . . . . . . . 23
8. Class 6 - Indemnity Claims. . . . . . . . . . . . . . . . . . . . . 23
9. Class 7 - Bondholder Litigation Claims. . . . . . . . . . . . . . . 24
10. Class 8 - Stockholder Litigation Claims . . . . . . . . . . . . . . 24
11. Class 9 - Equity Interests. . . . . . . . . . . . . . . . . . . . . 25
12. Alternative Treatment for Holders of Allowed Claims.. . . . . . . . 25
B. Securities to be Issued Under the Plan . . . . . . . . . . . . . . . . . 26
1. New Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . 26
2. New Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
C. Means of Implementation. . . . . . . . . . . . . . . . . . . . . . . . . 28
1. Distributions.. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2. Authorization of New Securities.. . . . . . . . . . . . . . . . . . 28
3. New Warrant Agreement.. . . . . . . . . . . . . . . . . . . . . . . 28
4. Adoption of Stock Option Plan.. . . . . . . . . . . . . . . . . . . 28
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5. Incentive Options on the Effective Date.. . . . . . . . . . . . . . 28
6. Cancellation of Existing Securities and Agreements. . . . . . . . . 28
7. Corporate Action. . . . . . . . . . . . . . . . . . . . . . . . . . 29
8. Amended Certificate of Incorporation. . . . . . . . . . . . . . . . 29
C. Provisions Governing Distributions . . . . . . . . . . . . . . . . . . . 29
1. Date of Distributions . . . . . . . . . . . . . . . . . . . . . . . 29
2. Disbursing Agent. . . . . . . . . . . . . . . . . . . . . . . . . . 30
3. Surrender of Instruments. . . . . . . . . . . . . . . . . . . . . . 30
4. Compensation of Professionals . . . . . . . . . . . . . . . . . . . 30
5. Delivery of Distributions . . . . . . . . . . . . . . . . . . . . . 30
6. Manner of Payment Under the Plan. . . . . . . . . . . . . . . . . . 31
7. Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . 31
8. Setoffs and Recoupment. . . . . . . . . . . . . . . . . . . . . . . 31
9. Distributions After Effective Date. . . . . . . . . . . . . . . . . 31
10. Rights and Powers of Disbursing Agent . . . . . . . . . . . . . . . 31
a. Powers of the Disbursing Agent . . . . . . . . . . . . . . . . 31
b. Expenses Incurred on or After the Effective Date . . . . . . . 32
11. Exculpation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
12. Allocation Relating to Old Senior Notes and Old Convertible
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
13. Voluntary Cancellation of Old Common Stock; Return of
Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
D. Resolution of Disputed Claims and Interests. . . . . . . . . . . . . . . 32
E. Executory Contracts and Unexpired Leases . . . . . . . . . . . . . . . . 34
F. Conditions to Confirmation and Effective Date. . . . . . . . . . . . . . 35
G. Effect of Confirmation . . . . . . . . . . . . . . . . . . . . . . . . . 35
1. Vesting of Assets . . . . . . . . . . . . . . . . . . . . . . . . . 35
2. Binding Effect. . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3. Discharge of Debtor . . . . . . . . . . . . . . . . . . . . . . . . 36
4. Term of Injunctions or Stays. . . . . . . . . . . . . . . . . . . . 36
5. Indemnification Obligations . . . . . . . . . . . . . . . . . . . . 36
6. Limited Release . . . . . . . . . . . . . . . . . . . . . . . . . . 37
H. Waiver of Certain Claims . . . . . . . . . . . . . . . . . . . . . . . . 37
I. Retention of Jurisdiction by the Bankruptcy Court. . . . . . . . . . . . 37
J. Recognition of Subordination Rights. . . . . . . . . . . . . . . . . . . 38
K. Summary of Other Provisions of the Plan. . . . . . . . . . . . . . . . . 38
1. Payment of Statutory Fees . . . . . . . . . . . . . . . . . . . . . 38
2. Retiree Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . 39
3. Administrative Expenses Incurred After the Confirmation Date. . . . 39
4. Section 1125(e) of the Bankruptcy Code. . . . . . . . . . . . . . . 39
5. Compliance with Tax Requirements. . . . . . . . . . . . . . . . . . 39
6. Severability of Plan Provisions . . . . . . . . . . . . . . . . . . 39
7. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
VI. CONFIRMATION AND CONSUMMATION PROCEDURE . . . . . . . . . . . . . . . . . . . . 40
A. Solicitation of Votes. . . . . . . . . . . . . . . . . . . . . . . . . . 40
B. The Confirmation Hearing . . . . . . . . . . . . . . . . . . . . . . . . 41
C. Confirmation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
1. Acceptance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
2. Unfair Discrimination and Fair and Equitable Tests. . . . . . . . . 42
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3. Feasibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
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4. Best Interests Test . . . . . . . . . . . . . . . . . . . . . . . . 47
D. Consummation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
VII. MANAGEMENT OF REORGANIZED DEBTOR . . . . . . . . . . . . . . . . . . . . . . . 49
A. Board of Directors and Management. . . . . . . . . . . . . . . . . . . . 49
1. Composition of the Board of Directors . . . . . . . . . . . . . . . 49
2. Identity of Officers. . . . . . . . . . . . . . . . . . . . . . . . 49
B. Compensation of Executive Officers . . . . . . . . . . . . . . . . . . . 51
C. Employment Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . 52
D. Stock Option Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
E. Other Compensation Plans . . . . . . . . . . . . . . . . . . . . . . . . 56
F. Post-Effective Date Security Ownership of Certain Owners . . . . . . . . 57
VIII. APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS
TO THE NEW COMMON STOCK TO BE DISTRIBUTED UNDER THE PLAN . . . . . . . . . 57
A. Section 1145 of the Bankruptcy Code. . . . . . . . . . . . . . . . . . . 57
B. Registration Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . 59
IX. REORGANIZATION VALUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
X. CERTAIN RISK FACTORS TO BE CONSIDERED. . . . . . . . . . . . . . . . . . . . . . 64
A. Overall Risk to Recovery by Holders of Claims. . . . . . . . . . . . . . 64
1. Significant Holders . . . . . . . . . . . . . . . . . . . . . . . . 64
2. Lack of Established Market for New Common Stock . . . . . . . . . . 65
3. Dividend Policies . . . . . . . . . . . . . . . . . . . . . . . . . 65
4. Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 65
5. Projected Financial Information . . . . . . . . . . . . . . . . . . 66
6. Business Factors and Competitive Conditions . . . . . . . . . . . . 66
7. Pending Litigation. . . . . . . . . . . . . . . . . . . . . . . . . 72
8. Corporate Liability Insurance . . . . . . . . . . . . . . . . . . . 73
XI. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN . . . . . . . . . . . . . . 75
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
B. Consequences to Holders of Claims. . . . . . . . . . . . . . . . . . . . 76
1. Holders of Administrative Expense Claims. . . . . . . . . . . . . . 76
2. Holders of Priority Non-Tax Claims (Class 1). . . . . . . . . . . . 76
3. Holders of Secured Claims (Class 2) . . . . . . . . . . . . . . . . 76
4. Holders of Miscellaneous Unsecured Claims (Class 3) . . . . . . . . 77
5. Holders of Old Senior Note Claims and Old Convertible Note
Claims (Class 3 and Class 4). . . . . . . . . . . . . . . . . . . . 77
6. Holders of Trade Claims (Class 5) . . . . . . . . . . . . . . . . . 78
7. Holders of Indemnity Claims (Class 6) . . . . . . . . . . . . . . . 79
8. Holders of Bondholder Litigation and Stockholder Litigation
Claims (Classes 7 and 8). . . . . . . . . . . . . . . . . . . . . . 79
9. Holders of Equity Interests (Class 9) . . . . . . . . . . . . . . . 80
10. Allocation of Consideration to Interest . . . . . . . . . . . . . . 80
11. Market Discount . . . . . . . . . . . . . . . . . . . . . . . . . . 81
C. Consequences to Debtor . . . . . . . . . . . . . . . . . . . . . . . . . 82
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1. Discharge of Indebtedness Income Generally. . . . . . . . . . . . . 82
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2. Attribute Reduction . . . . . . . . . . . . . . . . . . . . . . . . 82
3. Utilization of Net Operating Loss Carryovers. . . . . . . . . . . . 83
D. Information Reporting and Backup Withholding . . . . . . . . . . . . . . 85
XII. ALTERNATIVES TO CONFIRMATION AND
CONSUMMATION OF THE PLAN. . . . . . . . . . . . . . . . . . . . . . . . . . . 85
A. Liquidation Under Chapter 7. . . . . . . . . . . . . . . . . . . . . . . 85
B. Alternative Plan of Reorganization . . . . . . . . . . . . . . . . . . . 86
XIII. CONCLUSION AND RECOMMENDATION . . . . . . . . . . . . . . . . . . . . . . . . 86
</TABLE>
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<PAGE>
INDEX OF EXHIBITS
EXHIBIT A - The Plan
EXHIBIT B - Order of the Bankruptcy Court dated _______________, 1998
among other things, approving this Disclosure Statement and
establishing certain procedures with respect to the
solicitation and tabulation of votes to accept or reject the
Plan
EXHIBIT C - Heartland Wireless Communications, Inc. Form 10-K for the
Year ending December 31, 1997
EXHIBIT D - Heartland Wireless Communications, Inc. Form 10-Q for the
Quarterly Period ended September 30, 1998
EXHIBIT E - Projected Financial Information
EXHIBIT F - Liquidation Analysis
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<PAGE>
GLOSSARY
AD HOC COMMITTEE means the unofficial committee of certain holders
of Old Senior Notes, the members of which consist
of, as of the date hereof, Aspen Partners, L.P.;
Condor Partners IV L.L.C.; The Mainstay Funds, on
behalf of its High Yield Corporate Bond Fund
Series; Quad-C, Inc.; and Quaker Capital
Management Corp.
AD HOC COMMITTEE MAJORITY means at any time, the holders of a majority in
principal amount of the Old Senior Notes held in
the aggregate by the members of the Ad Hoc
Committee at such time.
ADMINISTRATIVE EXPENSE CLAIM means any right to payment constituting a cost or
expense of administration of the Chapter 11 Case
allowed under sections 503(b) and 507(a)(1) of the
Bankruptcy Code, including, without limitation,
(a) any actual and necessary costs and expenses of
preserving the Debtor's estate, (b) any actual and
necessary costs and expenses of operating the
Debtor's business in the ordinary course of
business, (c) any indebtedness or obligations
incurred or assumed by the Debtor in Possession
during the Chapter 11 Case in the ordinary course
of business, (d) any allowances of compensation
and reimbursement of expenses to the extent
allowed by Final Order under section 330 or 503 of
the Bankruptcy Code, and (e) any fees or charges
assessed against the Debtor's estate under section
1930, title 28, United States Code.
ALLOWED means, with reference to any Claim or Equity
Interest, (a) any Claim or Equity Interest as to
which no objection to allowance has been
interposed on or before the Confirmation Date or
such other applicable period of limitation fixed
by the Bankruptcy Code, the Bankruptcy Rules, or
the Bankruptcy Court, or as to which any objection
has been determined by a Final Order to the extent
such objection is determined in favor of the
respective holder, (b) any Claim or Equity
Interest as to which the liability of the Debtor
and the amount thereof are determined by final
order of a court of competent jurisdiction other
than the Bankruptcy Court or (c) any Claim or
Equity Interest expressly allowed hereunder.
Unless otherwise specified in the Plan or in a
Final Order of the Bankruptcy Court allowing such
claim, "Allowed" in reference to a Claim shall not
include (a) interest on the amount of such Claim
accruing from and after the Petition Date,
(b) punitive or exemplary damages or (c) any fine,
penalty or forfeiture.
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BANKRUPTCY CODE means title 11, United States Code, as amended
from time to time, as applicable to the Chapter 11
Case.
BANKRUPTCY COURT means the United States District Court for the
District of Delaware having jurisdiction over the
Chapter 11 Case and, to the extent of any
reference made under section 157, title 28, United
States Code, the unit of such District Court
having jurisdiction over the Chapter 11 Case under
section 151, title 28, United States Code.
BANKRUPTCY RULES means the Federal Rules of Bankruptcy Procedure as
promulgated by the United States Supreme Court
under section 2075, title 28, United States Code,
as amended from time to time, applicable to the
Chapter 11 Case, and any Local Rules of the
Bankruptcy Court.
BONDHOLDER LITIGATION CLAIM means a Claim (a) arising from rescission of a
purchase or sale of a debt security of the Debtor,
(b) for damages arising from the purchase or sale
of such a debt security or (c) for reimbursement
or contribution allowed under section 502 of the
Bankruptcy Code on account of a Claim for damages
or recision arising out of a purchase or sale of a
debt security of the Debtor.
BUSINESS DAY means any day other than a Saturday, a Sunday or
any other day on which banking institutions in New
York, New York are required or authorized to close
by law or executive order.
CASH means legal tender of the United States of
America.
CHAPTER 11 CASE means the Debtor's voluntary case filed with the
Bankruptcy Court under Chapter 11 of the
Bankruptcy Code.
CHARTER means the Restated Certificate of Incorporation of
Reorganized Heartland, which shall be in
substantially the form annexed as Exhibit 1 to the
Plan.
CLAIM means (a) any right to payment from the Debtor,
whether or not such right is reduced to judgment,
liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal,
equitable, secured, or unsecured, known or
unknown, or (b) any right to an equitable remedy
for breach of performance if such breach gives
rise to a right of payment from the Debtor,
whether or not such right to an equitable remedy
is reduced to judgment, fixed, contingent,
matured, unmatured, disputed, undisputed, secured,
or unsecured, known or unknown.
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CLASS means any group of substantially similar Claims or
Equity Interests classified by the Plan pursuant
to section 1129(a)(1) of the Bankruptcy Code.
COLLATERAL means any property or interest in property of the
Debtor's estate subject to a Lien to secure the
payment or performance of a Claim, which Lien is
not subject to avoidance under the Bankruptcy
Code.
CONFIRMATION DATE means the date on which the Clerk of the
Bankruptcy Court enters the Confirmation Order on
its docket.
CONFIRMATION HEARING means the hearing to be held by the Bankruptcy
Court regarding confirmation of the Plan, as such
hearing may be adjourned or continued from time to
time.
CONFIRMATION ORDER means the order of the Bankruptcy Court confirming
the Plan, which shall be in a form reasonably
acceptable to the Debtor and an Ad Hoc Committee
Majority.
DEBTOR means Heartland Wireless Communications, Inc., a
Delaware corporation, the debtor in the Chapter 11
Case.
DEBTOR IN POSSESSION means the Debtor in its capacity as a debtor in
possession in the Chapter 11 Case under sections
1107(a) and 1108 of the Bankruptcy Code.
DGCL means the General Corporation Law of the State of
Delaware, as amended from time to time.
DISALLOWED means, when used with respect to a Claim or Equity
Interest, a Claim or Equity Interest that has been
disallowed by Final Order.
DISBURSING AGENT means any entity in its capacity as a disbursing
agent under Section 7.2 of the Plan.
DISCLOSURE STATEMENT means the disclosure document relating to the
Plan, including, without limitation, all exhibits
and schedules thereto as approved by the
Bankruptcy Court pursuant to section 1125 of the
Bankruptcy Code.
DISPUTED CLAIM means, with respect to a Claim or Equity Interest,
any such Claim or Equity Interest proof of which
was filed with the Bankruptcy Court and (a) which
has been or hereafter is listed on the Schedules
as unliquidated, disputed or contingent, and which
has not been resolved by written agreement of the
parties or an order of the Bankruptcy Court, or
(b) as to which the Debtor or any other party in
interest has interposed a timely objection in
accordance with the Bankruptcy Code and the
Bankruptcy Rules, which objection has not been
withdrawn or
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<PAGE>
determined by a Final Order. Prior to (i) the
time an objection has been filed and (ii) the
expiration of the time within which to object
to such Claim or Equity Interest set forth
herein or otherwise established by order of the
Bankruptcy Court, a Claim or Equity Interest
shall be considered a Disputed Claim or
Disputed Equity Interest to the extent that the
amount of the Claim or Equity Interest
specified in a proof of Claim or Equity
Interest exceeds the amount of the Claim or
Equity Interest scheduled by the Debtor as not
disputed, contingent or unliquidated.
EFFECTIVE DATE means the first Business Day on which all the
conditions precedent to the Effective Date
specified in Section 10.1 of the Plan shall have
been satisfied or waived as provided in Section
10.2 of the Plan; PROVIDED, HOWEVER, that if a
stay of the Confirmation Order is in effect, the
Effective Date shall be the first Business Day
after such stay is no longer in effect.
EQUITY DISTRIBUTION POOL means 275,000 New Warrants less the number of New
Warrants, if any, distributable to the holders of
Allowed Bondholder Litigation Claims pursuant to
Section 4.8 of the Plan.
EQUITY INTEREST means the interest of any holder of equity
securities of the Debtor represented by any issued
and outstanding shares of common or preferred
stock or other instrument evidencing a present
ownership interest in the Debtor, whether or not
transferable, or any option, warrant or right,
contractual or otherwise, to acquire or in
connection with any such interest.
FINAL ORDER means an order or judgment of the Bankruptcy Court
entered by the Clerk of the Bankruptcy Court on
the docket in the Chapter 11 Case, which has not
been reversed, vacated or stayed and as to which
(a) the time to appeal, petition for CERTIORARI or
move for a new trial, reargument or rehearing has
expired and as to which no appeal, petition for
CERTIORARI or other proceedings for a new trial,
reargument or rehearing shall then be pending or
(b) if an appeal, writ of CERTIORARI, new trial,
reargument or rehearing thereof has been sought,
such order or judgment of the Bankruptcy Court
shall have been affirmed by the highest court to
which such order was appealed, or CERTIORARI shall
have been denied or a new trial, reargument or
rehearing shall have been denied or resulted in no
modification of such order, and the time to take
any further appeal, petition for CERTIORARI or
move for a new trial, reargument or rehearing
shall have expired; PROVIDED, HOWEVER, that the
possibility that a motion under Rule 60 of the
Federal Rules of Civil Procedure, or any analogous
rule under the Bankruptcy Rules, may be filed
relating to such order, shall not cause such order
not to be a Final Order.
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INCENTIVE OPTIONS means the options to purchase shares of New Common
Stock pursuant to the Stock Option Plan.
INDEMNITY CLAIM means a Claim (i) of a director or officer of the
Debtor that was not a director or officer,
respectively, at any time on or after April 25,
1997 or (ii) that is not assumed by the Debtor
pursuant to Section 11.5 of the Plan for any
obligations of the Debtor to indemnify directors
or officers against any obligations pursuant to
the Debtor's certificate of incorporation, bylaws,
contract, applicable state law, any combination of
the foregoing, or otherwise and including, without
limitation, any such obligations relating to a
Bondholder Litigation Claim or a Stockholder
Litigation Claim.
LIEN means any charge against, encumbrance upon or
other interest in property, the purpose of which
is to secure payment of a debt or performance of
an obligation.
MISCELLANEOUS UNSECURED means any Unsecured Claim other than an Old
CLAIM Convertible Note Claim, an Old Senior Note Claim,
a Trade Claim, a Bondholder Litigation Claim or a
Stockholder Litigation Claim.
NEW COMMON STOCK means the shares of common stock of Reorganized
Heartland to be issued and outstanding as of the
Effective Date.
NEW WARRANTS means the warrants which are issued pursuant to,
and exercisable in accordance with, the terms and
conditions of the New Warrant Agreement.
NEW WARRANT AGREEMENT means the warrant agreement governing the issuance
of the New Warrants, which shall be in
substantially the form annexed as Exhibit 2 to the
Plan.
OLD CONVERTIBLE NOTE CLAIM means a Claim arising under or in connection with
the Old Convertible Notes.
OLD CONVERTIBLE NOTES means those 9% convertible subordinated discount
notes due November 1, 2004 issued by the Debtor
under that certain Note Purchase Agreement, dated
November 30, 1994, as amended, between the Debtor
and the purchasers named therein.
OLD EQUITY PORTION means the ratio (expressed as a percentage) that
the aggregate number of shares of Equity Interests
bears to the aggregate number of shares of Equity
Interests represented by Allowed Equity Interests
and Allowed Stockholder Litigation Claims.
OLD 14% SENIOR NOTES means those 14% senior notes due October 15, 2004
issued by the Debtor under the Old 14% Senior
Notes Indenture.
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OLD 14% SENIOR NOTES
INDENTURE means that certain Indenture, dated as of December
20, 1996, between the Debtor and the Old 14%
Senior Notes Indenture Trustee relating to the Old
14% Senior Notes.
OLD 14% SENIOR NOTES
INDENTURE TRUSTEE means First Trust of New York, National
Association or a successor indenture trustee
appointed in accordance with the Old 14% Senior
Notes Indenture.
OLD INDENTURES means, collectively, the Old 14% Senior Notes
Indenture and the Old 13% Senior Notes Indenture.
OLD SENIOR NOTE CLAIM means a Claim arising under or in connection with
the Old Senior Notes and the Old Indentures.
OLD SENIOR NOTES means, collectively, the Old 14% Senior Notes and
the Old 13% Senior Notes.
OLD 13% SENIOR NOTES means those 13% senior notes due April 15, 2003
issued by the Debtor under the Old 13% Senior
Notes Indenture.
OLD 13% SENIOR NOTES
INDENTURE means those certain Indentures, dated as of April
26, 1995, as amended, and March 28, 1996, as
amended, respectively, between the Debtor and the
Old 13% Senior Notes Indenture Trustee relating to
the Old 13% Senior Notes.
OLD 13% SENIOR NOTES
INDENTURE TRUSTEE means First Trust of New York National Association
or a successor indenture trustee appointed in
accordance with the Old 13% Senior Notes
Indenture.
PETITION DATE means December 4, 1998, the date on which the
Debtor commenced the Chapter 11 Case.
PLAN means the Debtor's Plan of Reorganization Under
Chapter 11 of the Bankruptcy Code dated as of
December 4, 1998, including, without limitation,
the exhibits and schedules hereto, as the same may
be amended or modified from time to time in
accordance with the provisions of the Bankruptcy
Code and the terms hereof.
PRIORITY NON-TAX CLAIM means any Claim other than an Administrative
Expense Claim or a Priority Tax Claim, entitled to
priority in payment under section 507(a) of the
Bankruptcy Code.
PRIORITY TAX CLAIM means any Claim of a governmental unit of the kind
entitled to priority in payment as specified in
sections 502(i) and 507(a)(8) of the Bankruptcy
Code.
-xiii-
<PAGE>
RATABLE PROPORTION means, with reference to any distribution on
account of any Claim or Equity Interest in any
Class or subclass, as the case may be, a
distribution equal in amount to the ratio
(expressed as a percentage) that the amount of
such Claim or number of shares evidencing such
Equity Interests, as applicable, bears to the
aggregate amount of Claims or aggregate number of
outstanding shares of Equity Interests in the same
Class, as applicable.
REGISTRATION RIGHTS
AGREEMENT means the registration rights agreement relating
to the New Common Stock distributed pursuant to
the Plan and New Common Stock issuable upon
exercise of New Warrants, to be entered into as of
the Effective Date by Reorganized Heartland, for
the benefit of certain holders of shares of New
Common Stock and New Warrants, which agreement
shall be in substantially the form annexed as
Exhibit 3 to the Plan.
REJECTION CLAIM means any Claim against the Debtor arising from
the rejection of any executory contract or
unexpired lease, including any Claim of (a) or
lessor for damages resulting from the rejection of
a lease of real property as any such claim shall
be calculated in accordance with section 502(b)(6)
of the Bankruptcy Code or (b) an employee for
damages resulting from the rejection of an
employment agreement as any such Claim shall be
calculated in accordance with section 502(b)(7) of
the Bankruptcy Code.
REORGANIZED HEARTLAND means the Debtor, as it will be reorganized as of
the Effective Date in accordance with the Plan.
SCHEDULES means the schedules of assets and liabilities and
the statement of financial affairs filed by the
Debtor under section 521 of the Bankruptcy Code,
Bankruptcy Rule 1007 and the Official Bankruptcy
Forms of the Bankruptcy Rules as such schedules
and statements have been or may be supplemented or
amended through the Confirmation Date.
SECURED CLAIM means a Claim secured by a Lien on Collateral to
the extent of the value of such Collateral (i) as
set forth in the Plan, (ii) as agreed to by the
holder of such Claim and the Debtor or (iii) as
determined by a Final Order in accordance with
section 506(a) of the Bankruptcy Code or, in the
event that such Claim is subject to setoff under
section 553 of the Bankruptcy Code, to the extent
of such setoff.
STOCK OPTION PLAN means the 1999 Heartland Wireless Communications,
Inc. Share Incentive Plan, which shall be in
substantially the form annexed as Exhibit 2 to the
Plan.
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<PAGE>
STOCKHOLDER LITIGATION CLAIM means a Claim (a) arising from rescission of a
purchase or sale of a equity security of the
Debtor, (b) for damages arising from the purchase
or sale of such an equity security or (c) for
reimbursement or contribution allowed under
section 502 of the Bankruptcy Code on account of a
Claim for damages or recision arising out of a
purchase or sale of an equity security of the
Debtor.
STOCKHOLDER LITIGATION
CLAIMS PORTION means the ratio (expressed as a percentage) that
the aggregate number of shares of Equity Interests
represented by Allowed Stockholder Litigation
Claims bears to the aggregate number of shares of
Equity Interests represented by Allowed
Stockholder Litigation Claims and Allowed Equity
Interests.
TORT CLAIM means any Claim related to personal injury,
property damage, products liability or other
similar Claims against the Debtor. A Tort Claim
shall constitute a Miscellaneous Unsecured Claim
(except as otherwise provided in Section 8.1(b) of
the Plan).
TRADE CLAIM means an Unsecured Claim for (x) goods, materials
or services provided to the Debtor or rendered to
the Debtor in the ordinary course of business
prior to the Petition Date and (y) pre and post
Petition Date Claims, as approved by the
Bankruptcy Court, for actual fees, charges or
reasonable attorneys' fees incurred in respect of
the Old Senior Notes by the Old 13% Senior Notes
Indenture Trustee and the Old 14% Senior Notes
Indenture Trustee. A Trade Claim shall not
include an Old Convertible Note Claim, an Old
Senior Note Claim, a Miscellaneous Unsecured
Claim, a Rejection Claim, an Indemnity Claim, a
Bondholder Litigation claim, a Stockholder
Litigation Claim or a Tort Claim.
UNSECURED CLAIM means any Claim against the Debtor that is not an
Administrative Expense Claim, a Priority Non-Tax
Claim, a Priority Tax Claim or a Secured Claim.
-xv-
<PAGE>
I. INTRODUCTION
Heartland Wireless Communications, Inc., a Delaware corporation,
("Heartland" or the "Debtor") submits this Disclosure Statement dated
December 4, 1998 (the "Disclosure Statement") pursuant to section 1125 of
title 11 of the United States Code (the "Bankruptcy Code") to holders of
Claims and Equity Interests in the Debtor in connection with (i) the
solicitation of acceptances or rejections of the Debtor's Plan of
Reorganization Under Chapter 11 of the Bankruptcy Code dated December 4, 1998
(the "Plan") filed by the Debtor with the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court") and (ii) the hearing to
consider confirmation of the Plan (the "Confirmation Hearing") scheduled for
_______________, 1999 at ___________ __.m., Eastern Time. Unless otherwise
defined herein, all capitalized terms contained herein have the meanings
ascribed to them in the Plan.
Attached as Exhibits to this Disclosure Statement are copies of the
following:
- The Plan (Exhibit A);
- Order of the Bankruptcy Court dated _______________, 1998 (the
"Disclosure Statement Order"), among other things, approving this
Disclosure Statement and establishing certain procedures with respect
to the solicitation and tabulation of votes to accept or reject the
Plan (Exhibit B);
- Heartland Wireless Communications, Inc. Form 10-K for the Year ending
December 31, 1997 (Exhibit C);
- Heartland Wireless Communications, Inc. Form 10-Q for the quarterly
period ended September 30, 1998 (Exhibit D);
- Projected Financial Information (Exhibit E); and
- Liquidation Analysis (Exhibit F).
In addition, a ballot for the acceptance or rejection of the Plan is enclosed
with the Disclosure Statement submitted to the holders of Claims and Equity
Interests that Heartland believes may be entitled to vote to accept or reject
the Plan.
On ____________, 1998, after notice and a hearing, the Bankruptcy Court
approved this Disclosure Statement as containing adequate information of a
kind and in sufficient detail to enable hypothetical, reasonable investors
typical of the Debtor's creditors and equity interest holders to make an
informed judgment whether to accept or reject the Plan. APPROVAL OF THIS
DISCLOSURE
-1-
<PAGE>
STATEMENT DOES NOT, HOWEVER, CONSTITUTE A DETERMINATION BY THE BANKRUPTCY
COURT AS TO THE FAIRNESS OR MERITS OF THE PLAN.
The Disclosure Statement Order, a copy of which is annexed hereto as
Exhibit B, sets forth in detail the deadlines, procedures and instructions
for voting to accept or reject the Plan and for filing objections to
confirmation of the Plan, the record date for voting purposes, and the
applicable standards for tabulating Ballots. In addition, detailed voting
instructions accompany each Ballot. Each holder of a Claim or an Equity
Interest entitled to vote on the Plan should read the Disclosure Statement,
the Plan, the Disclosure Statement Order and the instructions accompanying
the Ballots in their entirety before voting on the Plan. These documents
contain, among other things, important information concerning the
classification of Claims and Equity Interests for voting purposes and the
tabulation of votes. No solicitation of votes to accept the Plan may be made
except pursuant to section 1125 of the Bankruptcy Code.
A. HOLDERS OF CLAIMS AND EQUITY INTERESTS ENTITLED TO VOTE.
Pursuant to the provisions of the Bankruptcy Code, only holders of
allowed claims or equity interests in classes of claims or equity interests
that are impaired under the terms and provisions of a chapter 11 plan and
that will receive distributions under the chapter 11 plan are entitled to
vote to accept or reject the plan. Classes of claims or equity interests in
which the holders of claims or interests will not receive or retain any
property under a chapter 11 plan are deemed to have rejected the plan and are
not entitled to vote to accept or reject the plan. Classes of claims or
equity interests in which the holders of claims or interests are unimpaired
under a chapter 11 plan are deemed to have accepted the plan and are not
entitled to vote to accept or reject the plan.
Classes 3 (Old Senior Note Claims and Miscellaneous Unsecured Claims), 4
(Old Convertible Note Claims), 6 (Indemnity Claims), 7 (Bondholder Litigation
Claims), 8 (Stockholder Litigation Claims) and 9 (Equity Interests) of the
Plan are impaired and, to the extent such Claims or Equity Interests are
Allowed, the holders of such Claims and Equity Interests will receive
distributions under the Plan. Holders of Claims and Equity Interests in
those Classes are entitled to vote to accept or reject the Plan. Classes 1
(Priority Non-Tax Claims), 2 (Secured Claims) and 5 (Trade Claims) are
unimpaired under the Plan and the holders of Claims in those Classes are
conclusively presumed to have accepted the Plan. Therefore, the Debtor is
soliciting acceptances only from holders of Allowed Claims in Classes 3, 4,
6, 7 and 8 and holders of Allowed Equity Interests in Class 9.
The Bankruptcy Code defines "acceptance" of a plan by a class of claims
as acceptance by creditors in that class that hold at least two-thirds in
dollar amount and more than one-half in number of the claims that cast
ballots for acceptance or rejection of the plan. For a complete description
of the requirements for confirmation of the Plan, see Section VI.,
"Confirmation and Consummation Procedure."
-2-
<PAGE>
If a Class of Claims or Equity Interests rejects the Plan or is deemed
to reject the Plan, the Debtor has the right to request confirmation of the
Plan pursuant to section 1129(b) of the Bankruptcy Code. Section 1129(b)
permits the confirmation of a plan notwithstanding the nonacceptance of such
plan by one or more impaired classes of claims or equity interests. Under
that section, a plan may be confirmed by a bankruptcy court if it does not
"discriminate unfairly" and is "fair and equitable" with respect to each
nonaccepting class. For a more detailed description of the requirements for
confirmation of a nonconsensual plan, see Section VI.C.2., "Confirmation and
Consummation Procedure -- Unfair Discrimination and Fair and Equitable Tests."
If one or more of the Classes entitled to vote on the Plan votes to
reject the Plan, the Debtor will request confirmation of the Plan over the
rejection of the Plan by such Class or Classes. The determination as to
whether to seek confirmation of the Plan under such circumstances will be
announced before or at the Confirmation Hearing.
B. VOTING PROCEDURES.
If you are entitled to vote to accept or reject the Plan, a Ballot is
enclosed for the purpose of voting on the Plan. If you hold Claims in more
than one Class and you are entitled to vote Claims in more than one Class,
you will receive separate Ballots which must be used for each separate Class
of Claims. Please vote and return your Ballot(s) to:
HEARTLAND WIRELESS COMMUNICATIONS, INC.
c/o THE ALTMAN GROUP, INC.
60 EAST 42ND STREET
NEW YORK, NEW YORK 10165
TELEPHONE: (212) 681-9600
DO NOT RETURN YOUR NOTES OR SECURITIES WITH YOUR BALLOT.
TO BE COUNTED, YOUR BALLOT INDICATING ACCEPTANCE OR REJECTION OF THE
PLAN MUST BE RECEIVED NO LATER THAN 4:00 P.M., EASTERN TIME, ON _______,
1999. ANY EXECUTED BALLOT RECEIVED THAT DOES NOT INDICATE EITHER AN
ACCEPTANCE OR REJECTION OF THE PLAN SHALL BE DEEMED TO CONSTITUTE AN
ACCEPTANCE OF THE PLAN.
Any Claim or Equity Interest in an impaired Class as to which an
objection or request for estimation is pending or which is scheduled by the
Debtor as unliquidated, disputed or contingent is not entitled to vote unless
the holder of such Claim or Equity Interest has obtained an order of the
Bankruptcy Court temporarily allowing such Claim or Equity Interest for the
purpose of voting on the Plan.
-3-
<PAGE>
Pursuant to the Disclosure Statement Order, the Bankruptcy Court set
_______, 1999 as the record date for voting on the Plan. Accordingly, only
holders of record as of ______, 1998 that are otherwise entitled to vote
under the Plan will receive a Ballot and may vote on the Plan.
If you are a holder of a Claim or 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 concerning the Disclosure Statement, the
Plan or the procedures for voting on the Plan, please call The Altman Group
at (212) 681-9600.
C. CONFIRMATION HEARING.
Pursuant to section 1128 of the Bankruptcy Code, the Confirmation
Hearing will be held on _________, 199_ at __:__ _.m. Eastern Time, before
the Honorable ____________, United States ______________ Judge, at the United
States Bankruptcy Court, 824 Market Street, 5th Floor, Wilmington, Delaware
19801. The Bankruptcy Court has directed that objections, if any, to
confirmation of the Plan be served and filed so that they are received on or
before _______, 199_ at 4:00 p.m. Eastern Time, in the manner described
below in Section VI.B., "Confirmation and Consummation Procedure -- The
Confirmation Hearing." The Confirmation Hearing may be adjourned from time
to time by the Bankruptcy Court without further notice except for the
announcement of the adjournment date made at the Confirmation Hearing or at
any subsequent adjourned Confirmation Hearing.
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, INCLUDING THE PLAN, 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
THE DISCLOSURE STATEMENT, THE TERMS OF THE PLAN ARE CONTROLLING. THE
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 THE DEBTOR OR ANY OTHER PARTY, OR BE
DEEMED CONCLUSIVE EVIDENCE OF THE TAX OR OTHER LEGAL EFFECTS OF THE PLAN ON
THE DEBTOR OR HOLDERS OF CLAIMS OR EQUITY INTERESTS. CERTAIN OF THE
STATEMENTS CONTAINED IN THIS
-4-
<PAGE>
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 SECTION X. OF THIS DISCLOSURE
STATEMENT, "CERTAIN RISK FACTORS TO BE CONSIDERED," 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 OF THE
APPLICABLE AGREEMENT, INCLUDING THE DEFINITIONS OF TERMS CONTAINED IN SUCH
AGREEMENT.
THE DEBTOR BELIEVES THAT THE PLAN WILL ENABLE IT TO SUCCESSFULLY
REORGANIZE AND ACCOMPLISH THE OBJECTIVES OF CHAPTER 11 AND THAT ACCEPTANCE OF
THE PLAN IS IN THE BEST INTERESTS OF THE DEBTOR AND ITS CREDITORS AND EQUITY
INTEREST HOLDERS. THE DEBTOR URGES THAT CREDITORS AND EQUITY INTEREST
HOLDERS VOTE TO ACCEPT THE PLAN.
After carefully reviewing this Disclosure Statement, including the
Exhibits, each holder of an Allowed Claim in Classes 3, 4, 6, 7 and 8 and
each holder of an Allowed Equity Interest in Class 9 should vote on the Plan.
PRIOR TO THE PETITION DATE, THE HOLDERS OF MORE THAN TWO-THIRDS IN
AGGREGATE PRINCIPAL AMOUNT OF THE 13% SENIOR NOTES AND 14% SENIOR NOTES
FORMED A COMMITTEE (THE "AD HOC COMMITTEE") FOR THE PURPOSE OF NEGOTIATING
THE SUBSTANTIVE TERMS OF THE PLAN WITH HEARTLAND. THE MEMBERS OF THE AD HOC
COMMITTEE PARTICIPATING IN THE NEGOTIATIONS WERE ASPEN PARTNERS, L.P.; CONDOR
PARTNERS IV L.L.C.; THE MAINSTAY FUNDS, ON BEHALF OF ITS HIGH YIELD CORPORATE
BOND FUND SERIES; QUAD-C, INC.; AND QUAKER CAPITAL MANAGEMENT CORP. HOLDERS
OF MORE THAN 73% OF AGGREGATE PRINCIPAL AMOUNT OF THE SENIOR NOTES HAVE
INDICATED TO HEARTLAND THEY WILL CAST BALLOTS ACCEPTING THE PLAN.
II. OVERVIEW OF THE PLAN
The following table briefly summarizes the classification and treatment
of Claims and Equity Interests under the Plan. The recoveries set forth
below are merely estimated recoveries based upon various assumptions. The
estimated recoveries assume that approximately 10,000,000 shares of New
Common Stock having an approximate aggregate value of $144 million, and
1,100,000 New Warrants
-5-
<PAGE>
having an approximate aggregate value of $7 million, will be issued under the
Plan. For a discussion of the valuation of the New Common Stock and the New
Warrants, see Section IX., "Reorganization Values." There is no assurance
that the New Common Stock and the New Warrants issued under the Plan will
actually trade at the projected reorganization value or that any trading
market in the New Common Stock and the New Warrants will develop or be
sustained. For a complete description of the risks associated with the
recoveries provided under the Plan, see Section X., "Certain Risk Factors To
Be Considered."
SUMMARY OF CLASSIFICATION AND TREATMENT
OF CLAIMS AND EQUITY INTERESTS UNDER THE PLAN (1)
<TABLE>
<CAPTION>
Type of Claim or Estimated
Class Equity Interest Treatment Recovery
----- ----------------------- ---------------------------------------------- ---------
<S> <C> <C> <C>
-- Administrative Expense Paid in full, in Cash, or in accordance with 100%
Claims the terms and conditions of transactions or
agreements relating to obligations incurred
in the ordinary course of business during
the pendency of the Chapter 11 Case or
assumed by the Debtor in Possession.
-- Priority Tax Claims Reorganized Heartland shall pay to each 100%
holder of an Allowed Priority Tax Claim that
is due and payable on or before the
Effective Date Cash in an amount equal to
such Allowed Priority Tax Claim. All
Allowed Priority Tax Claims which are not
due and payable on or before the Effective
Date shall be paid in the ordinary course of
business in accordance with the terms
thereof.
- ---------------------
(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.
-6-
<PAGE>
<CAPTION>
Type of Claim or Estimated
Class Equity Interest Treatment Recovery
----- ----------------------- ---------------------------------------------- ---------
<S> <C> <C> <C>
1 Priority Non-Tax Unimpaired; each Allowed Priority Non-Tax 100%
Claims (to be paid Claim shall be unimpaired in accordance with
in the ordinary course section 1124 of the Bankruptcy Code. All
of business) Allowed Priority Non-Tax Claims which are
not due and payable on or before the
Effective Date shall be paid in the ordinary
course of business in accordance with the
terms thereof.
2 Secured Claims Unimpaired; reinstated or rendered 100%
(estimated at unimpaired in accordance with section 1124
$-0-; to be paid in of the Bankruptcy Code, notwithstanding any
the ordinary course of contractual provision or applicable
business) 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
Claim from and after the occurrence of a
default. All Allowed Secured Claims which
are not due and payable on or before the
Effective Date shall be paid in the ordinary
course of business in accordance with the
terms thereof.
-7-
<PAGE>
<CAPTION>
Type of Claim or Estimated
Class Equity Interest Treatment Recovery
----- ----------------------- ---------------------------------------------- ---------
<S> <C> <C> <C>
3 Old Senior Note Claims Impaired; each holder of an Allowed Old 52.2%
and Miscellaneous Senior Note Claim shall receive, in full
Unsecured Claims (Old satisfaction of such Allowed Claim, its
Senior Note Claims Ratable Proportion of 9,700,000 shares of
estimated at $268.0 New Common Stock (representing 97.0% of the
million; Miscellaneous initial shares of New Common Stock), subject
Unsecured Claims-- to dilution by the exercise of the New
Disputed) Warrants, Incentive Options and, if holders
of Miscellaneous Unsecured Claims are
entitled to receive shares of New Common
Stock, by any such shares issued to such
holders. Each holder of an Allowed
Miscellaneous Unsecured Claim shall receive,
in full satisfaction of such Allowed Claim,
New Common Stock in an amount that will
provide the holder of such Claim the
equivalent number of shares of New Common
Stock per dollar of Allowed Claim which such
holder would receive if such Allowed Claim
were an Old Senior Note Claim.
4 Old Convertible Note Impaired; each holder of an Allowed Old 16.8%
Claims (estimated at Convertible Note Claim shall receive, in
$57.1 million) full satisfaction of such Allowed Claim, its
Ratable Proportion of (i) 300,000 shares of
New Common Stock (representing 3.0% of the
initial shares of New Common Stock), subject
to dilution by the exercise of the New
Warrants, Incentive Options and, if holders
of Miscellaneous Unsecured Claims are
entitled to receive shares of New Common
Stock, by any such shares issued to such
holders and (ii) 825,000 New Warrants.
-8-
<PAGE>
<CAPTION>
Type of Claim or Estimated
Class Equity Interest Treatment Recovery
----- ----------------------- ---------------------------------------------- ---------
<S> <C> <C> <C>
5 Trade Claims (to be Unimpaired; each Allowed Trade Claim shall 100%
paid in the ordinary be unimpaired in accordance with section
course of business) 1124 of the Bankruptcy Code. All Allowed
Trade Claims which are not due and payable
on or before the Effective Date shall be
paid in the ordinary course of business in
accordance with the terms thereof.
6 Indemnity Claims Impaired; If Class 6 accepts the Plan, N/A
(Disputed) following the Effective Date, holders of
Indemnity Claims will be entitled to assert
such Claims against the Debtor to the extent
of (i) any available coverage under the
Debtor's corporate liability insurance and
(ii) any self-insured retention under such
corporate liability insurance. If Class 6
rejects the Plan, the Debtor will request
the Bankruptcy Court to estimate the
Indemnity Claims at zero. If the Indemnity
Claims are estimated at more than zero, such
amount, to the extent such amount exceeds
the amount of any corporate liability
insurance (including any self-insured
retention under such insurance) available to
satisfy its Claim, (taking into account such
insurance or self-insured retention
available to Persons covered by Section 11.5
of the Plan), shall be treated as a
Miscellaneous Unsecured Claim under Class 3
of the Plan.
-9-
<PAGE>
<CAPTION>
Type of Claim or Estimated
Class Equity Interest Treatment Recovery
----- ----------------------- ---------------------------------------------- ---------
<S> <C> <C> <C>
7 Bondholder Litigation Impaired; The Debtor will request the N/A
Claims (Disputed) Bankruptcy Court to estimate the Bondholder
Litigation Claims at zero. If the
Bondholder Litigation Claims are estimated
at more than zero, each holder of an Allowed
Bondholder Litigation Claim shall receive,
in full satisfaction of such Allowed
Bondholder Litigation Claim, its Ratable
Proportion of any liability insurance
available to satisfy its Claim remaining
after use of such insurance for Allowed
Indemnity Claims and Persons covered by
section 11.5 of the Plan, not to exceed the
Allowed Amount of its Claim, and if
liability insurance is insufficient to
satisfy such Claim in full, its Ratable
Proportion of up to 275,000 New Warrants but
not in excess of the number of New Warrants
the value of which is sufficient to satisfy
such Claim for purposes of section
1129(b)(2)(B)(i) of the Bankruptcy Code.
-10-
<PAGE>
<CAPTION>
Type of Claim or Estimated
Class Equity Interest Treatment Recovery
----- ----------------------- ---------------------------------------------- ---------
<S> <C> <C> <C>
8 Stockholder Litigation Impaired; The Debtor will request the N/A
Claims (Disputed) Bankruptcy Court to estimate the Stockholder
Litigation Claims at zero. If the
Stockholder Litigation Claims are estimated
at more than zero, each holder of an Allowed
Stockholder Litigation Claim shall receive,
in full satisfaction of such Allowed
Stockholder Litigation Claim, its Ratable
Proportion of any liability insurance
available to satisfy its Claim remaining
after use of such insurance for Allowed
Indemnity Claims, Persons covered by Section
11.5 of the Plan and Allowed Bondholder
Litigation Claims, not to exceed the Allowed
Amount of its Claim, and if liability
insurance is insufficient to satisfy such
Claim in full, its Ratable Proportion of the
Stockholder Litigation Claims Portion of the
Equity Distribution Pool.
9 Equity Interests Impaired; The Equity Interests shall be $-0- to $0.08
cancelled and each holder of an Allowed per share
Equity Interest will receive a Ratable
Portion of the Old Equity Portion of the
Equity Distribution Pool.
</TABLE>
III. GENERAL INFORMATION
A. DESCRIPTION AND HISTORY OF BUSINESS.
1. BUSINESS.
Heartland is a Delaware corporation with its principal place of
business at 200 Chisholm Place, Suite 200, Plano, Texas 75075. Heartland is
the largest operator of wireless cable television systems, in terms of
subscribers, in the United States. Heartland owns and operates wireless
cable television systems in 57 small to mid-size markets in the central
United States, and owns or leases channel rights in an additional 33 markets.
At September 30, 1998, Heartland provided wireless cable television to
approximately 165,000 subscribers. Heartland also provides high-speed
Internet access to one developmental market.
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<PAGE>
Wireless cable transmissions are sent and received through the air
via microwave frequencies from a transmission facility to a receiving antenna
at each subscriber's location, which generally requires a direct,
unobstructed line-of-sight from the transmission facility to the subscriber's
receiving antenna, by utilizing up to 198 megahertz ("MHz") of radio spectrum
allocated by the Federal Communications Commission ("FCC") for Multichannel
Multipoint Distribution Service ("MMDS"), Multichannel Distribution Service
("MDS") and Instructional Television Fixed Service ("ITFS"), all of which
comprise the spectrum for wireless cable video, data and telephony service.
"MMDS" is the vernacular term used to describe all of these services and
references herein to MMDS will include such services.
Heartland currently offers its subscribers local off-air VHF/UHF
channels from ABC, NBC, CBS and Fox affiliates and other local independent
broadcast stations, as well as premium and basic cable television programming
channels such as HBO, HBO2, Cinemax, Showtime, Disney, ESPN, CNN, USA, WGN,
WTBS, TNT, Nickelodeon, Turner Classic Movies, The Weather Channel, Fox
Sports, Discovery, the Nashville Network, A&E and other popular cable
television networks. The channels that Heartland offers in each market will
vary depending upon the channel rights secured in such market.
Additionally, Heartland currently offers programming packages from
DIRECTV, Inc. ("DIRECTV") to certain residential multiple dwelling unit
("MDU") and to single family unit ("SFU") subscribers in 50 markets. In June
1998, Heartland launched a developmental one-way high-speed Internet access
business in Sherman, Texas utilizing MMDS spectrum. With the FCC's recent
approval of two-way, fixed flexible use of MMDS spectrum, Heartland intends
to expand its long-term business strategy from traditional analog video to
incorporate additional applications such as high-speed two-way Internet
access and fixed wireless local-loop telephony. See Section VI.C.3.
Heartland recently divested its 36% equity ownership in CS Wireless
Systems, Inc. ("CS Wireless"). Heartland owns 20% of the outstanding common
stock of Wireless One, Inc. ("Wireless One"). For a description of the
transaction involving Heartland and CS Wireless, see Section III.C., "Recent
Transactions."
2. HISTORY.
Heartland was formed in October 1993 as the successor to Wireless
Communications, Inc., an Oklahoma corporation formed in September 1990 to own
and operate wireless cable television systems. In April 1994, Heartland made
an initial public offering of 2.1 million shares of common stock at an
offering price of $10.50 per share. Over the next three years, Heartland
launched or acquired operating wireless cable television systems in over 50
markets.
3. SIGNIFICANT INDEBTEDNESS.
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<PAGE>
CONVERTIBLE NOTES
On November 30, 1994, Heartland consummated the private placement
of $40.2 million in gross proceeds of Old Convertible Notes. The Old
Convertible Notes accrete at a rate of 9% compounded semiannually, to an
aggregate principal amount of $62.4 million at November 30, 1999.
Thereafter, interest accrues at the rate of 9% per annum and is payable
semiannually from November 30, 1999 or earlier upon the occurrence of a
material default (as defined in the Note Purchase Agreement). The Old
Convertible Notes mature on November 1, 2004 and are subordinated as to all
existing and future indebtedness of Heartland other than indebtedness that is
expressly subordinated to the Old Convertible Notes.
At the option of the holders, the Old Convertible Notes are
convertible into common stock of Heartland at $15.34 per share (the
"Conversion Price"). The Old Convertible Notes are redeemable at the option
of Heartland at any time on or after November 30, 1999 at 100% of the
principal amount at maturity plus accrued and unpaid interest. However, such
redemption right is only available if the market price of Heartland's common
stock exceeds 150% of the Conversion Price for a specified trading period.
OLD 13% SENIOR NOTES
In April 1995, Heartland consummated a private placement of $100.0
million aggregate principal amount of original 13% senior notes due 2003 (the
"Original 13% Senior Notes") and 600,000 warrants to purchase an equal number
of shares of common stock at an exercise price of $19.525 per share. The
warrants are exercisable beginning April 1996 and terminate in April 2000.
On February 23, 1996, Heartland consummated an exchange offer pursuant to
which $100.0 million principal amount of Old 13% Senior Notes were issued in
exchange for an equal principal amount of Original 13% Senior Notes, all of
which were cancelled. The terms of the Old 13% Senior Notes and the Original
13% Senior Notes are identical in all material respects except that the
outstanding Old 13% Senior Notes have been registered under the Securities
Act of 1933, as amended (the "Securities Act") and therefore do not have
legends restricting their transfer.
In March 1996, Heartland consummated a private placement of an
additional $15.0 million aggregate principal amount of Original 13% Senior
Notes. On January 27, 1997, Heartland consummated an exchange offer pursuant
to which $15.0 million principal amount of Old 13% Senior Notes were issued
in exchange for an equal principal amount of Original 13% Senior Notes, all
of which were cancelled. The terms of the Old 13% Senior Notes and the
Original 13% Senior Notes are identical in all material respects except that
the outstanding Old 13% Senior Notes have been registered under the
Securities Act and therefore do not have legends restricting their transfer.
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The Old 13% Senior Notes are redeemable, in whole or in part, at
the option of Heartland at any time on or after April 15, 1999 at redemption
prices ranging from 105.6% to 100% of par. Interest on the Old 13% Senior
Notes is payable semiannually on April 15 and October 15 of each year.
In October 1995, by consent of certain bondholders and through the
execution of a supplemental indenture, certain provisions, definitions and
covenants were amended to permit Heartland to consummate certain acquisitions
and contributions of assets. Heartland paid an aggregate of $955,000 to
consenting holders in October 1995.
In December 1996, by consent of certain bondholders and through the
execution of a supplemental indenture, certain covenants and definitions were
amended to provide for the issuance of the Old 14% Senior Notes discussed
below. Heartland paid an aggregate of $6.3 million to consenting holders in
December 1996. Two interest payments on the Old 13% Notes of $7.5 million
each, which were due on April 15, 1998 and October 15, 1998, respectively,
remain accrued and unpaid.
OLD 14% SENIOR NOTES
In December 1996, Heartland consummated a private placement of
$125.0 million aggregate principal amount of 14% senior notes due 2004 (the
"Original 14% Senior Notes"). On April 10, 1997, Heartland consummated an
exchange offer pursuant to which $125.0 million principal amount of Old 14%
Senior Notes were issued in exchange for an equal principal amount of
Original 14% Senior Notes, all of which were cancelled. The terms of the Old
14% Senior Notes and the cancelled notes are identical in all material
respects except that the Old 14% Senior Notes have been registered under the
Securities Act and therefore do not have legends restricting their transfer.
The Old 14% Senior Notes are redeemable, in whole or in part, at
the option of Heartland at any time on or after October 15, 2002 at
redemption prices ranging from 102.3% to 100% of par. Interest on the 14%
Senior Notes is payable semiannually on April 15 and October 15 of each year.
Heartland placed $22.0 million of the net proceeds realized from the sale of
the 14% Senior Notes into an escrow account for the payment of the first
three interest payments on the 14% Senior Notes. As of September 30, 1998,
no amount remained in the escrow account. An interest payment on the Old 14%
Notes of $8.75 million, which was due on October 15, 1998, remains accrued
and unpaid.
OTHER NOTES PAYABLE
Other notes payable at September 30, 1998 include $15.4 million
relating to the acquisition of certain basic trading areas ("BTAs") and held
in Heartland Wireless Commercial
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Channels, Inc. ("HWCC"), a wholly-owned subsidiary of Heartland, and $1.4
million relating to capital leases and other notes payable. In March 1996,
the FCC concluded an auction (the "BTA Auction") for the award of initial
commercial wireless cable licenses for BTAs. HWCC acquired 93 BTAs for
approximately $19.8 million. HWCC remitted a $1.0 million deposit at the
commencement of the BTA Auction and qualified as a "small business" for
purposes of the BTA Auction. Subsequently, 20% of the total committed
amount, or approximately $3.0 million, after credit for the $1.0 million
deposit, was remitted. The remaining 80% of the committed amount, or
approximately $15.8 million, bears interest at 9.5% to be paid over a 10-year
period that began in the fourth quarter of 1996. HWCC was required to make
quarterly interest only payments for the first two years. Quarterly
principal and interest payments over the remaining eight years begin in
November 1998.
Heartland and CS Wireless are parties to a lease and purchase
option agreement for 10 BTAs and portions of four additional BTAs
(collectively, the "Leased BTAs") that were awarded to HWCC in the BTA
Auction. Under this agreement, CS Wireless has reimbursed Heartland, and
will continue to reimburse Heartland, for all amounts paid by Heartland to
the FCC for the Leased BTAs. As of September 30, 1998, CS Wireless has
reimbursed Heartland approximately $1.3 million. The remaining amount owed
to Heartland of $3.5 million has been included in the investment in
affiliates balance at September 30, 1998.
4. SELECTED HISTORICAL FINANCIAL DATA.
The selected historical financial information set forth below for
the years ended December 31, 1997 and December 31, 1996 have been derived
from the audited financial statements of Heartland. The financial data for
the nine-month periods ended September 30, 1998 and 1997 were derived from
unaudited financial statements. The unaudited financial statements include
all adjustments, consisting only of normal recurring adjustments, which
Heartland considers necessary for a fair presentation of the financial
position and the results of operations for the periods. Operating results
for the nine-month period ended September 30, 1998 are not necessarily
indicative of the results that might be expected for the entire year ending
December 31, 1998. The data should be read in conjunction with the
historical consolidated financial statements of Heartland, and the related
notes thereto, set forth in the exhibits hereto.
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<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30 SEPTEMBER 30
------------------------ ----------------------- -----------------------
1997 1996 1998 1997 1998 1997
--------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Statement of operations data:
Revenues . . . . . . . . . . . . . . . $ 78,792 $ 56,017 $ 18,213 $ 19,890 $ 55,934 $ 58,816
Operating expenses:
Systems operations . . . . . . . . 39,596 21,255 8,787 10,686 27,071 29,923
Selling, general and
administrative . . . . . . . . . 42,255 42,435 10,432 10,002 27,774 32,230
Depreciation and amortization 65,112 39,323 12,228 24,255 34,681 51,881
Reorganization Costs . . . . . . . --- --- 596 --- 1,242 ---
Impairment of license and leased
license investment. . . . . . . . --- --- 88,095 --- 105,791 ---
--------- -------- -------- -------- -------- --------
Total operating expenses 146,963 103,013 120,138 44,943 196,559 114,034
--------- -------- -------- -------- -------- --------
Operating loss . . . . . . . . . . . . (68,171) (46,996) (101,925) (25,053) (140,625) (55,218)
Interest expense, net . . . . . . . . (34,321) (18,166) (9,394) (8,586) (27,868) (25,225)
Equity in losses of
affiliates . . . . . . . . . . . . . (32,037) (18,612) (11,681) (8,172) (30,340) (24,746)
Other income (expense) . . . . . . . . (54) 4,981 --- (36) (10) (22)
Income tax benefit . . . . . . . . . . --- 28,156 --- --- --- ---
--------- -------- -------- -------- -------- --------
Loss before extraordinary
item . . . . . . . . . . . . . . . . (134,583) (50,637) (123,000) (41,847) (198,843) (105,211)
Extraordinary item, net of tax
benefit . . . . . . . . . . . . . . --- (10,424) --- --- --- ---
--------- -------- -------- -------- -------- --------
Net loss . . . . . . . . . . . . . . . $(134,583) $(61,061) $(123,000) $(41,847) $(198,843) $(105,211)
--------- -------- -------- -------- -------- --------
--------- -------- -------- -------- -------- --------
Loss per basic and dilutive share $(6.85) $(2.74) $(6.24) $(2.13) $(10.09) $(5.36)
Loss before extraordinary
item . . . . . . . . . . . . . . . . --- (0.57) --- --- --- ---
--------- -------- -------- -------- -------- --------
Extraordinary item . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . $(6.85) $(3.31) $(6.24) $(2.13) $(10.09) $(5.36)
--------- -------- -------- -------- -------- --------
--------- -------- -------- -------- -------- --------
Weighted average number of
basic and dilutive common
shares outstanding . . . . . . . . . 19,649 18,473 19,721 19,677 19,714 19,636
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
---------------------- ----------------------
1997 1996 1998 1997
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Balance sheet data:
Cash and cash equivalents . . . . . . . $42,821 $79,596 $34,595 $52,851
Total assets . . . . . . . . . . . . . 372,134 515,364 194,235 408,604
Long-term debt, including current
portion . . . . . . . . . . . . . . 308,196 303,538 310,677 306,861
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Total stockholders' equity . . . . . . 46,408 180,847 (152,337) 75,074
</TABLE>
B. EVENTS LEADING TO THE COMMENCEMENT OF THE CHAPTER 11 CASE.
In the second quarter of 1997, in an effort to conserve capital
resources, Heartland suspended new system launches and decreased marketing
efforts, while it undertook a revision of its business plan. In January
1998, the Board of Directors of Heartland (the "Board") directed management
to explore alternatives that would enable Heartland to preserve enterprise
value and implement a long-term business strategy. In the first quarter of
1998, Heartland prepared a new business strategy that projected moderate SFU
subscriber growth through traditional analog subscription video service, a
cooperative marketing alliance with DIRECTV for MDU growth, developing and
testing high-speed Internet access service to small and mid-size businesses
in several markets, launching several new markets, and pursuing financing or
restructuring opportunities. Also in the first quarter of 1998, Heartland
retained Wasserstein Perella & Co., Inc. ("WP&Co.") as its financial advisor
to analyze all options available to finance Heartland's business plan and
service its debt. These options included the sale or exchange of debt or
equity securities, borrowings under secured or unsecured loan arrangements,
sales of nonstrategic assets, and a recapitalization or restructuring of the
company.
In early March 1998, WP&Co. gave the Board a detailed presentation on
valuation issues, industry trends and financial projections for Heartland,
including debt service. In early April 1998, WP&Co. gave the Board another
detailed presentation, with slightly revised valuation scenarios. In
consultation with WP&Co., Heartland announced on April 15, 1998 that it would
not make a semiannual interest payment of $7.5 million due on that date to
the holders of the Old 13% Senior Notes. Heartland made an interest payment
of $8.75 million on that date to the holders of the Old 14% Notes from an
interest escrow account.
In May 1998, management met with several holders of the Old Senior
Notes. In June 1998, holders of at least 66 2/3% in principal amount of the
Old Senior Notes formed the Ad Hoc Committee. The Ad Hoc Committee retained
Jefferies & Company, Inc. as financial advisor and Andrews & Kurth L.L.P. as
legal counsel. In late June 1998, after another detailed presentation from
WP&Co., the Board authorized management to submit an initial financial
restructuring proposal to the Ad Hoc Committee. Management and the Ad Hoc
Committee then engaged in continued negotiations through September 1998.
Between October 6, 1998 and December 3, 1998, Heartland reached agreement
with the holders of more than two-thirds in principal amount of the Old
Senior Notes to support the Plan. Heartland subsequently commenced the
Chapter 11 Case and filed the Plan and Disclosure Statement on December 4,
1998.
C. RECENT TRANSACTIONS.
Heartland, CAI Wireless Systems, Inc. ("CAI") and CS Wireless are
parties to a Master Agreement dated as of December 2, 1998. Pursuant to the
Master Agreement, on December 2, 1998 (the "Stage I Closing"), among other
things, (1) CAI purchased Heartland's 36% equity
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interest in CS Wireless; (2) CS Wireless agreed to assign to Heartland (a)
MDS-1 channels in Austin, Corpus Christi, El Paso and Killeen, Texas, (b)
Wireless Communications Service (WCS) frequencies (2.3 GHz) in 19 markets in
which Heartland owns or leases MMDS channel rights, (c) an operating wireless
cable television system in Radcliffe, Iowa, (the "CS Wireless FCC Assets");
(3) Heartland agreed to assign to CS Wireless certain channel rights in the
Portsmouth, New Hampshire market (the "Heartland FCC Assets"); (4) CS
Wireless paid to Heartland certain cash consideration (5) CS Wireless
conveyed to Heartland certain wireless cable subscriber equipment; (6)
Heartland and CS Wireless agreed to cooperate in an expeditious manner to
agree upon and implement a comprehensive two-way frequency utilization plan
in adjacent markets; and (7) Heartland, CAI and CS Wireless exchanged
comprehensive mutual releases of certain claims. In addition, pursuant to
the Master Agreement, CS Wireless and Heartland will promptly seek FCC
approval of the assignment and transfer of the CS Wireless FCC Assets and the
Heartland FCC Assets, respectively, to the other, which transfers will occur
following FCC approval (the "Stage II Closing"). At the Stage II Closing, CS
Wireless will also pay to Heartland cash consideration, and Heartland will
cancel a certain promissory note issued by CS Wireless and held by Heartland,
the balance of which, immediately prior to the Stage I Closing, was
approximately $2.3 million. Confirmation of the Plan will constitute the
assumption by Heartland of the Master Agreement and its remaining obligations
thereunder.
IV. ANTICIPATED EVENTS DURING THE CHAPTER 11 CASE
On December 4, 1998 Heartland commenced the Chapter 11 Case in the
Bankruptcy Court. Heartland continues to operate its business and manage its
properties as a debtor in possession pursuant to sections 1107 and 1108 of
the Bankruptcy Code.
1. CONTINUATION OF BUSINESS; STAY OF LITIGATION.
Following the commencement of the bankruptcy case, Heartland
intends to continue to operate as a debtor in possession with the protection
of the Bankruptcy Court. The Bankruptcy Court will have certain supervisory
powers over Heartland's operations during the pendency of the bankruptcy
case. Heartland will operate in the ordinary course of business; any
transactions that are outside the ordinary course of business will require
Bankruptcy Court approval.
An immediate effect of the filing of a bankruptcy case is the
imposition of the automatic stay under the Bankruptcy Code which, with
limited exceptions, enjoins the commencement or continuation of all
litigation against Heartland. This injunction will remain in effect until
the Effective Date unless modified or lifted by the order of the Bankruptcy
Court.
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<PAGE>
2. FIRST DAY ORDERS; SCHEDULING ORDER.
On the Petition Date, Heartland anticipates submitting to the
Bankruptcy Court, simultaneously with the filing of its Plan, a number of "first
day orders," along with supporting applications and affidavits. These first day
orders will include, among others, (i) an order authorizing the retention of
Weil, Gotshal & Manges LLP and Richards, Layton & Finger, P.A. as co-attorneys
to Heartland; (ii) an order authorizing the retention of WP&Co. as financial
advisor to Heartland; (iii) an order authorizing the maintenance of business
forms and bank accounts; (iv) an order to pay prepetition wages, reimbursable
employee expenses and employee benefits; (v) an order to maintain utility
services to Heartland; (vi) an order for payment of prepetition trade creditors;
and (vii) an order authorizing Heartland to honor certain prepetition customer
obligations.
On the Petition Date, Heartland also anticipates submitting an order
(the "Scheduling Order") to the Bankruptcy Court which will set the time, date
and place of a hearing to consider approval of this Disclosure Statement and
confirmation of the Plan. See Section VI.B., "Confirmation and Consummation
Procedure -- The Confirmation Hearing." Heartland intends to request that the
Bankruptcy Court enter the first day orders and the Scheduling Order on the
Petition Date.
3. STATUTORY COMMITTEE.
Heartland anticipates that the U.S. Trustee will appoint a statutory
committee as soon as practicable after the Petition Date, pursuant to section
1102 of the Bankruptcy Code. Heartland also anticipates that the statutory
committee will consist of some or all the members of the Ad Hoc Committee.
Ordinarily, one committee is appointed to represent unsecured creditors, but the
U.S. Trustee may appoint additional committees to represent Equity Interest
holders and/or creditors if deemed necessary to assure adequate representation
of creditors or Equity Interest holders. A creditors' committee will ordinarily
consist of those creditors willing to serve who hold the seven largest Claims
against Heartland of those Claims to be represented by the committee, or such
other number of creditors as are appointed by the U.S. Trustee. The fees and
expenses of such committees, including those of legal counsel and financial
advisors, are paid for from Heartland's assets. Any committee, including the Ad
Hoc Committee, organized prior to the Petition Date may seek to be appointed to
serve as an official committee during Heartland's Chapter 11 Case if the U.S.
Trustee determines that the committee's members were fairly chosen and
representative of the Claims or Equity Interests to be represented, and the
committee's members indicate their willingness to serve. Holders of Interests
are not ordinarily represented by an official committee, but such a committee
may be appointed if the U.S. Trustee or if the Bankruptcy Court determines such
an official committee to be necessary to assure the adequate representation of
Interest holders. Committees appointed by the U.S. Trustee would be considered
parties in interest and would have a right to be heard on all matters concerning
the Chapter 11 Case, including the confirmation of the Plan, and, additionally,
would be entitled to consult with Heartland concerning the administration
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of the Chapter 11 Case and perform such other functions and services that
would further the interests of those creditors or Interest holders they
represent.
V. THE PLAN OF REORGANIZATION
Heartland believes that (i) through the Plan, creditors will obtain a
substantially greater recovery from the estate of Heartland than the recovery
which would be available if the assets of Heartland were liquidated under
chapter 7 of the Bankruptcy Code and (ii) the Plan will afford Heartland the
opportunity and ability to continue in business as a viable going concern.
The Plan is annexed hereto as Exhibit A and forms a part of this Disclosure
Statement. The summary of the Plan set forth below is qualified in its entirety
by reference to the more detailed provisions set forth in the Plan.
A. CLASSIFICATION AND TREATMENT OF CLAIMS AND EQUITY INTERESTS.
1. ADMINISTRATIVE EXPENSE CLAIMS.
Administrative Expense Claims are Claims constituting a cost or
expense of administration of the Chapter 11 Case allowed under section 503(b) of
the Bankruptcy Code. Such claims include any actual and necessary costs and
expenses of preserving the estate of the Debtor, any actual and necessary costs
and expenses of operating the business of the Debtor in Possession, any
indebtedness or obligations incurred or assumed by the Debtor in Possession in
connection with the conduct of its business or the acquisition or lease of
property or the rendition of services, any allowance of compensation and
reimbursement of expenses to the extent allowed by a Final Order under section
330 of the Bankruptcy Code, and fees or charges assessed against the Debtor's
estate under section 1930 of title 28 of the United States Code.
All payments to professionals for compensation and reimbursement of
expenses and all payments to reimburse expenses of members of the Creditors'
Committee will be made in accordance with the procedures established by the
Bankruptcy Code, the Bankruptcy Rules and the Bankruptcy Court relating to the
payment of interim and final compensation and expenses. The Bankruptcy Court
will review and determine all requests for compensation and reimbursement of
expenses.
In addition to the foregoing, section 503(b) of the Bankruptcy Code
provides for payment of compensation to creditors, indenture trustees and other
persons making a "substantial contribution" to a reorganization case, and to
attorneys for and other professional advisors to such persons. The amounts, if
any, which may be sought by entities for such compensation are not known by
Heartland at this time. Requests for compensation must be approved by the
Bankruptcy
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<PAGE>
Court after a hearing on notice at which Heartland and other parties in
interest may participate and, if appropriate, object to the allowance of any
compensation and reimbursement of expenses.
2. PRIORITY TAX CLAIMS.
Priority Tax Claims are those Claims for taxes entitled to priority in
payment under section 507(a)(8) of the Bankruptcy Code. On the Effective Date,
except to the extent that a holder of an Allowed Priority Tax Claim agrees to a
different treatment of such Allowed Priority Tax Claim, Reorganized Heartland
shall pay to each holder of an Allowed Priority Tax Claim Cash in an amount
equal to such Allowed Priority Tax Claim. All Allowed Priority Tax Claims which
are not due and payable on or before the Effective Date shall be paid in the
ordinary course of business in accordance with the terms thereof.
3. CLASS 1 - PRIORITY NON-TAX CLAIMS.
The Priority Non-Tax Claims are Claims which are entitled to priority
in accordance with section 507(a) of the Bankruptcy Code (other than
Administrative Expense Claims and Priority Tax Claims). Such Claims include (i)
unsecured claims for accrued employee compensation earned within ninety days
prior to commencement of the Chapter 11 Case to the extent of $4,300 per
employee and (ii) contributions to employee benefit plans arising from services
rendered within 180 days prior to the commencement of the Chapter 11 Case but
only for each such plan to the extent of (x) the number of employees covered by
such plan multiplied by $4,300, less (y) the aggregate amount paid to such
employees from the estate for wages, salaries or commissions. Heartland
believes that there are no Other Priority Claims.
Pursuant to the Plan, on the Effective Date, except to the extent that
a holder of an Allowed Priority Non-Tax Claim agrees to a different treatment of
such Allowed Priority Non-Tax Claim, each Allowed Priority Non-Tax Claim shall
be unimpaired in accordance with section 1124 of the Bankruptcy Code. All
Allowed Priority Non-Tax Claims which are not due and payable on or before the
Effective Date shall be paid in the ordinary course of business in accordance
with the terms thereof.
4. CLASS 2 - SECURED CLAIMS.
Class 2 consists of any Secured Claim. Heartland does not believe
that the amounts of such Claims are material.
Pursuant to the Plan, Secured Claims will be reinstated or rendered
unimpaired 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
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<PAGE>
Secured Claim from and after the occurrence of a default. All Allowed
Secured Claims which are not due and payable on or before the Effective Date
shall be paid in the ordinary course of business in accordance with the terms
thereof.
5. CLASS 3 - OLD SENIOR NOTE CLAIMS AND MISCELLANEOUS UNSECURED CLAIMS.
Class 3 consists of the Allowed Claims of the holders of Old Senior
Notes and Miscellaneous Unsecured Claims. The Plan provides that each Old
Senior Note Claim shall be Allowed as of the Petition Date in the amount of
outstanding principal plus accrued and unpaid interest owed in respect thereof
as of the Petition Date. On the Effective Date, each holder of an Allowed Old
Senior Note Claim shall receive, in full satisfaction of such allowed Old Senior
Note Claim, its Ratable Proportion of 9,700,000 shares of New Common Stock
(representing 97.0% of the initial shares of such New Common Stock), subject to
dilution by the exercise of the New Warrants, Incentive Options and, if holders
of Miscellaneous Unsecured Claims are entitled to receive shares of New Common
Stock, by any such shares issued to such holders. On the Effective Date, each
holder of an Allowed Miscellaneous Unsecured Claim shall receive, in full
satisfaction of such Allowed Miscellaneous Unsecured Claim, New Common Stock in
an amount that will provide the holder of such Claim the equivalent number of
shares of New Common Stock per dollar of Allowed Claim which such holder would
receive if such Allowed Claim were an Old Senior Note Claim.
The recovery for the holders of Old Senior Notes and Miscellaneous
Unsecured Claims in Class 3 depends on the value of the New Common Stock on the
Effective Date. Heartland estimates that the overall recovery for Class 3 will
be approximately 52.2% under the Plan, assuming that the Old Senior Notes
represent Claims in the aggregate amount of $268.0 million and no reduction to
the value of the New Common Stock to take into account the issuance of the New
Warrants and Incentive Options. Heartland estimates that holders of Old Senior
Note Claims in Class 3 will receive New Common Stock valued at $139,777,000
(based on an estimated value of approximately $14.41 per share). For
illustrative purposes, based on such treatment, for each $1,000 in principal and
accrued interest of Old Senior Notes and Allowed Miscellaneous Unsecured Claims,
the holder thereof will receive approximately 36.19 shares of New Common Stock.
For a discussion of the value of the New Common Stock, see Section IX.,
"Reorganization Values."
6. CLASS 4 - OLD CONVERTIBLE NOTE CLAIMS.
Class 4 consists of the Allowed Claims of the holders of Old
Convertible Notes. The Plan provides that each Old Convertible Note Claim shall
be Allowed as of the Petition Date in the amount of outstanding principal plus
accrued and unpaid interest owed in respect thereof as of the Petition Date. On
the Effective Date, each holder of an Allowed Old Convertible Note Claim shall
receive, in full satisfaction of such Allowed Old Convertible Note Claim, its
Ratable Proportion of (i) 300,000 shares of New Common Stock (representing 3.0%
of the initial shares of New Common
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Stock), subject to dilution by the exercise of the New Warrants, Incentive
Options and, if holders of Miscellaneous Unsecured Claims are entitled to
receive shares of New Common Stock, by any such shares issued to such holders
and (ii) 825,000 New Warrants.
The recovery for the holders of Old Convertible Notes in Class 4
depends on the value of the New Common Stock and the New Warrants on the
Effective Date. Heartland estimates that the overall recovery for Class 4 will
be approximately 16.8% under the Plan, assuming that the Old Convertible Notes
represent Claims in the aggregate amount of $57.1 million and there is no
reduction to the value of the New Common Stock to take into account the issuance
of the New Warrants and Incentive Options. Heartland estimates that Class 4
will receive New Common Stock valued at $4,323,000 (based on an estimated value
of approximately $14.41 per share) and New Warrants valued at approximately
$5,251,000 (based on an estimated value of approximately $6.36 per warrant).
For illustrative purposes, based on such treatment, for each $1,000 in principal
amount of Old Convertible Notes, the holder thereof will receive approximately
5.25 shares of New Common Stock and approximately 14.44 New Warrants. For a
discussion of the values of the New Common Stock and the New Warrants, see
Section IX., "Reorganization Values."
7. CLASS 5 - TRADE CLAIMS.
Class 5 consists of Allowed Trade Claims, which include claims for (i)
goods, materials or services provided to the Debtor or rendered to the Debtor in
the ordinary course of business prior to the Petition Date and (ii) pre and post
Petition Date Claims, as approved by the Bankruptcy Court, for actual fees,
charges or reasonable attorneys' fees incurred in respect of the Old Senior
Notes by the Old 13% Senior Notes Indenture Trustee and the Old 14% Senior Notes
Indenture Trustee (to the extent not paid pursuant to orders of the Bankruptcy
Court prior to the Effective Date).
Assuming the Bankruptcy Court authorizes Heartland to pay trade
creditors and other suppliers of goods and services in the normal course of its
business as and when such obligations become due and owing during the pendency
of the Chapter 11 Case, Heartland does not expect to have any material amount of
prepetition claims of this nature unpaid as of the Effective Date.
On the Effective Date, each Allowed Trade Claim shall be unimpaired in
accordance with section 1124 of the Bankruptcy Code. All Allowed Trade Claims
that are not due and payable on or before the Effective Date shall be paid in
the ordinary course of business in accordance with the terms thereof.
8. CLASS 6 - INDEMNITY CLAIMS.
Class 6 consists of the Allowed Claims of the holders of Indemnity
Claims. If Class 6 accepts the Plan, following the Effective Date, holders of
Indemnity Claims will be entitled to
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assert such Claims against the Debtor to the extent of (i) any available
coverage under the Debtor's corporate liability insurance and (ii) any
self-insured retention under such corporate liability insurance. If Class 6
rejects the Plan, the Debtor will request the Bankruptcy Court to estimate
the Indemnity Claims at zero. If the Indemnity Claims are estimated at more
than zero, such amount, to the extent such amount exceeds the amount of any
corporate liability insurance (including any self-insured retention under
such insurance) available to satisfy its Claim (taking into account such
insurance or self-insured retention available to Persons covered by Section
11.5 of the Plan), shall be treated as a Miscellaneous Unsecured Claim under
Class 3 of the Plan.
The recovery for the holders of Indemnity Claims depends on insurance
recoveries and, depending on the outcome of an estimation proceeding if Class 6
rejects the Plan, the value of the New Common Stock. For a discussion of the
values of the New Common Stock, see Section IX., "Reorganization Values." For a
discussion of the Debtor's corporate liability insurance, see Section X.A.8.,
"Certain Risk Factors To Be Considered --Corporate Liability Insurance."
9. CLASS 7 - BONDHOLDER LITIGATION CLAIMS.
Class 7 consists of the Allowed Claims of the holders of Bondholder
Litigation Claims. The Debtor believes the Bondholder Litigation Claims have no
merit and accordingly will request the Bankruptcy Court to estimate the
Bondholder Litigation Claims at zero. If the Bondholder Litigation Claims are
estimated at more than zero, each holder of an Allowed Bondholder Litigation
Claim shall receive, in full satisfaction of such Allowed Bondholder Litigation
Claim, its Ratable Proportion of any liability insurance available to satisfy
its Claim after use of such insurance for Allowed Indemnity Claims and Persons
covered by Section 11.5 of the Plan, not to exceed the Allowed Amount of such
Claim, and if corporate liability insurance is insufficient to satisfy such
Claim in full, its Ratable Proportion of up to 275,000 New Warrants (valued at
$1,749,000 based on an estimated value of approximately $6.36 per warrant), but
not in excess of the number of New Warrants, the value of which is sufficient to
satisfy such Claims for purposes of section 1129(b)(2)(B)(i) of the Bankruptcy
Code.
The recovery for the holders of Bondholder Litigation Claims in Class
7 depends on insurance recoveries, if any, and the value of the New Warrants.
For a discussion of the value of the New Warrants, see Section IX.,
"Reorganization Values." For a discussion of the Debtor's corporate liability
insurance, see Section X.A.8., "Certain Risk Factors To Be Considered --
Corporate Liability Insurance."
10. CLASS 8 - STOCKHOLDER LITIGATION CLAIMS
Class 8 consists of the Allowed Claims of the holders of Stockholder
Litigation Claims. The Debtor believes the Stockholder Litigation Claims are
without merit and accordingly will request the Bankruptcy Court to estimate the
Stockholder Litigation Claims at zero. If the
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Stockholder Litigation Claims are estimated at more than zero, each holder of
an Allowed Stockholder Litigation Claim shall receive, in full satisfaction
of such Allowed Stockholder Litigation Claim, its Ratable Proportion of any
liability insurance available to satisfy its Claim remaining after use of
such insurance for Allowed Indemnity Claims, Persons covered by Section 11.5
of the Plan and Allowed Bondholder Litigation Claims, not to exceed the
Allowed Amount of its Claim, and if liability insurance is insufficient to
satisfy such Claim in full, its Ratable Proportion of the Stockholders
Litigation Claims Portion of the Equity Distribution Pool.
The recovery for the holders of Stockholder Litigation Claims in Class
8 depends on insurance recoveries, if any, and the value of the New Warrants.
Moreover, the number of New Warrants to be distributed to holders of Stockholder
Litigation Claims will be reduced by the number of New Warrants distributed to
holders of Bondholder Litigation Claims, which, depending on the amount of
Allowed Bondholder Litigation Claims, may reduce the recovery to holders of
Stockholder Litigation Claims to zero. For a discussion of the value of the New
Warrants, see Section IX., "Reorganization Values." For a discussion of the
Debtor's corporate liability insurance, see Section X.A.8., "Certain Risk
Factors To Considered -- Corporate Liability Insurance."
11. CLASS 9 - EQUITY INTERESTS
Class 9 consists of the Equity Interests. The Equity Interests shall
be cancelled and each holder of an Allowed Equity Interest will receive a
Ratable Proportion of the Old Equity Portion of the Equity Distribution Pool.
The recovery for the holders of Old Common Stock Interests depends on
the Allowed Amount of Bondholder Litigation Claims and Stockholder Litigation
Claims and the amount of New Warrants, if any, to which such Claims may be
entitled under the Plan. The number of New Warrants to be distributed to
holders of Equity Interests will be reduced by the number of New Warrants
distributed to holders of Bondholder Litigation Claims and Stockholder
Litigation Claims, which, depending on the amount of Allowed Bondholder
Litigation Claims, may reduce the recovery to holders of Old Common Stock
Interests to zero. For a discussion of the value of the New Warrants, see
Section IX., "Reorganization Values."
12. ALTERNATIVE TREATMENT FOR HOLDERS OF ALLOWED CLAIMS.
Notwithstanding the treatment provided for holders of Allowed Claims
in Section 4 of the Plan, Reorganized Heartland and the holder of an Allowed
Claim may agree to other treatment of such Claim, including payment in Cash,
provided that such treatment shall not provide a return having a present value
in excess of the present value of the distribution that otherwise would be made
to such holder under Section 4 of the Plan.
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B. SECURITIES TO BE ISSUED UNDER THE PLAN.
1. NEW COMMON STOCK.
Pursuant to the Plan, on the Effective Date, all Equity Interests will
be cancelled. Commencing on the Effective Date, Reorganized Heartland will
distribute New Common Stock to holders of Allowed Old Senior Note Claims and
holders of Allowed Old Convertible Note Claims. Pursuant to the Plan,
Reorganized Heartland is authorized to issue 30 million shares of New Common
Stock and 15 million shares of preferred stock, par value $0.001 per share
("Preferred Stock"), of which an aggregate of 10 million shares of New Common
Stock will be issued to holders of Allowed Old Senior Note Claims and holders of
Allowed Old Convertible Note Claims and the number, if any, of shares of New
Common Stock necessary to treat holders of Miscellaneous Unsecured Claims under
Class 3 of the Plan will be issued to such holders.
Holders of the New Common Stock will be entitled to one vote per share
on all matters to be voted upon by the stockholders. Holders of a plurality of
the shares voting for the election of directors can elect all of the directors
since the holders of the New Common Stock will not have cumulative voting
rights. For a more detailed description of the process by which Reorganized
Heartland will elect its Board of Directors, see Section VII.A, "Management of
Reorganized Debtor -- Board of Directors and Management."
2. NEW WARRANTS.
On the Effective Date, Reorganized Heartland will issue, pursuant to
Sections 4.4, 4.7, 4.8 and 4.9 of the Plan, New Warrants to purchase 1,100,000
shares of New Common Stock, at an exercise price (the "Exercise Price") of
$27.63 per share of New Common Stock, subject to adjustment in certain
circumstances as described below. The New Warrants will be exercisable until
5:00 p.m., New York City time, on the date that is eight and one-half years
after the Effective Date (or, if such date is not a Business Day, the next
succeeding Business Day). The New Warrants will have no voting rights, will not
be entitled to receive dividends or other distributions declared on the New
Common Stock and will not be entitled to share in any of the assets of
Reorganized Heartland upon any liquidation, dissolution or winding-up of
Reorganized Heartland.
The number of shares of New Common Stock for which a New Warrant will
be exercisable and the exercise price of the New Warrants will be subject to
adjustment upon the occurrence of certain events, including (i) stock dividends,
subdivisions and combinations affecting the New Common Stock and (ii)
reclassifications and recapitalizations involving Reorganized Heartland. In the
event of a merger or sale in which another entity acquires for Cash or for Cash
and evidences of indebtedness (collectively referred to as "Cash" for purposes
of this Section V.B.2.), through such transaction, all or substantially all of
the issued and outstanding stock or
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assets of Reorganized Heartland, the exercise price of the Warrants will be
adjusted according to the following schedule:
Time Period Relative to Effective Date Exercise Price
-------------------------------------- --------------
from the Effective Date until its first
anniversary $12.37
from the first anniversary until the
second anniversary $15.46
from the second anniversary until the
third anniversary $18.57
from the third anniversary until the
fourth anniversary $21.65
from the fourth anniversary until the
fifth anniversary $24.74
thereafter Exercise Price
In the event of a sale in which another entity acquires for a
combination of Cash and equity securities all or substantially all of the issued
and outstanding stock or assets of Reorganized Heartland, each outstanding New
Warrant shall be deemed divided into two warrants (for convenience of reference,
an "A Warrant" and a "B Warrant"). The A Warrant will be a warrant evidencing
the right to purchase the total number of shares of New Common Stock which might
have been purchased under such warrant being divided immediately prior to the
effectiveness of such agreement, multiplied by a fraction of which the numerator
shall be the Cash component of the purchase price of the proposed transaction,
and the denominator shall be the sum of such Cash portion and the value of the
equity securities and/or other property comprising the balance of such purchase
price. The B Warrant will be a warrant evidencing the right to purchase a
number of shares equal to the excess of the total number of shares which might
have been purchased under such warrant being divided immediately prior to the
effectiveness of such agreement over the number of shares obtainable upon
exercise of the A Warrant. The Exercise Price in respect of each A Warrant
shall be adjusted as provided in Subsection 10.1(g) of the New Warrant
Agreement, and the Warrant Price in respect of each B Warrant shall be adjusted
as provided in Section 10.5 of the New Warrant Agreement.
A complete description of the terms and provisions governing the New
Warrants is set forth in the New Warrant Agreement, which shall be in
substantially the form annexed as Exhibit 2 to the Plan.
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C. MEANS OF IMPLEMENTATION.
1. DISTRIBUTIONS.
On the Effective Date, Reorganized Heartland shall make or cause to be
made to the holders of Allowed Claims and Allowed Equity Interests the
distributions of New Common Stock, New Warrants and Cash as provided in Section
4 of the Plan. Disputed Claims shall be resolved in accordance with Section 8
of the Plan and, if a Disputed Claim becomes an Allowed Claim by Final Order,
distributions shall be made on account of such Claims in accordance with Section
8.3 of the Plan.
2. AUTHORIZATION OF NEW SECURITIES.
The issuance of the following securities by Reorganized Heartland is
authorized under the Plan without further act or action under applicable law,
regulation, order or rule: (a) 30,000,000 shares of New Common Stock, (b) the
New Warrants, (c) the Incentive Options and (d) 15,000,000 shares of Preferred
Stock.
3. NEW WARRANT AGREEMENT.
The New Warrant Agreement shall be executed and delivered by
Reorganized Heartland and the warrant agent or any replacement agent reasonably
acceptable to the Debtor and an Ad Hoc Committee Majority.
4. ADOPTION OF STOCK OPTION PLAN.
If not theretofore adopted by the Debtor, on the Effective Date,
Reorganized Heartland will adopt the Stock Option Plan.
5. INCENTIVE OPTIONS ON THE EFFECTIVE DATE.
Reorganized Heartland is authorized under the Plan to issue Incentive
Options to purchase 900,000 shares of New Common Stock pursuant and subject to
the Stock Option Plan. Said shares of New Common Stock and Incentive Options
not issued on the Effective Date shall be reserved for issuance thereafter
pursuant to the Stock Option Plan by Reorganized Heartland, on such terms and
conditions consistent with the Stock Option Plan.
6. CANCELLATION OF EXISTING SECURITIES AND AGREEMENTS.
On the Effective Date, the Old Senior Notes, the Old Convertible Notes
and the Equity Interests or commitments, contractual or otherwise, obligating
the Debtor to issue, transfer
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or sell Equity Interests or any other capital stock of the Debtor shall (a)
be cancelled and (b) have no effect other than the right to participate in
the distributions, if any, provided under the Plan in respect of Claims and
Equity Interests. Except for purposes of effectuating the distributions
under the Plan on the Effective Date, the Old Indentures shall be cancelled.
7. CORPORATE ACTION.
BOARD OF DIRECTORS OF REORGANIZED HEARTLAND. On the Effective Date,
the operation of Reorganized Heartland shall become the general responsibility
of its Board of Directors, subject to, and in accordance with, the Charter and
By-laws. The initial Board of Directors of Reorganized Heartland shall consist
of seven members, at least one of which shall be a member of the management of
Reorganized Heartland. Subject to the immediately preceding sentence, the
initial members and the manner of selection of the Board of Directors of
Reorganized Heartland shall in all respects be subject to the approval of an Ad
Hoc Committee Majority and shall be disclosed in the Disclosure Statement or an
amendment or supplement to the Disclosure Statement or such other filing as may
be made with the Bankruptcy Court. The directors of the Debtor immediately
prior to the Effective Date shall resign as of the Effective Date and shall be
replaced by the Board of Directors of Reorganized Heartland.
OFFICERS OF REORGANIZED HEARTLAND. The initial officers of
Reorganized Heartland are or shall be disclosed in the Disclosure Statement or
an amendment or supplement to the Disclosure Statement or such other filing as
may be made with the Bankruptcy Court. The selection of officers of Reorganized
Heartland after the Effective Date shall be as provided in its certificate of
incorporation and bylaws.
8. AMENDED CERTIFICATE OF INCORPORATION.
On the Effective Date, or as soon thereafter as is practicable,
Reorganized Heartland shall file with the Secretary of State of the State of
Delaware in accordance with section 303 of the DGCL, the Charter which shall,
among other things, prohibit Reorganized Heartland from creating, designating,
authorizing or causing to be issued any class or series of non-voting stock. On
the Effective Date, the Charter shall automatically become effective, and all
other matters provided under this Plan involving the corporate structure of
Reorganized Heartland, or corporate action by it, shall be deemed to have
occurred and shall be in effect from and after the Effective Date pursuant to
section 303 of the DGCL without any requirement of further action by the
stockholders, the directors of Reorganized Heartland or Reorganized Heartland.
C. PROVISIONS GOVERNING DISTRIBUTIONS.
1. DATE OF DISTRIBUTIONS.
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Any distributions and deliveries to be made under the Plan shall be
made on the Effective Date or as soon as practicable thereafter and deemed made
on the Effective Date. In the event that any payment or act under the Plan is
required to be made or performed on a date that is not a Business Day, then the
making of such payment or the performance of such act may be completed on the
next succeeding Business Day, but shall be deemed to have been completed as of
the required date.
2. DISBURSING AGENT.
All distributions under the Plan shall be made by Reorganized
Heartland as Disbursing Agent or such other entity designated by Reorganized
Heartland as a Disbursing Agent on the Effective Date. A Disbursing Agent shall
not be required to give any bond or surety or other security for the performance
of its duties unless otherwise ordered by the Bankruptcy Court; and, in the
event that a Disbursing Agent is so otherwise ordered, all costs and expenses of
procuring any such bond or surety shall be borne by Reorganized Heartland.
3. SURRENDER OF INSTRUMENTS.
As a condition to receiving any distribution under the Plan, each
holder of an Old Senior Note, Old Convertible Note and Old Common Stock Interest
must surrender such Old Senior Note, Old Convertible Note and Old Common Stock
Interest to Reorganized Heartland or its designee. Any holder of an Old Senior
Note, Old Convertible Note or Old Common Stock Interest that fails to (a)
surrender such instrument or (b) execute and deliver an affidavit of loss and/or
indemnity reasonably satisfactory to Reorganized Heartland and furnish a bond in
form, substance, and amount reasonably satisfactory to Reorganized Heartland
before the first anniversary of the Effective Date shall be deemed to have
forfeited all rights and claims and may not participate in any distribution
under the Plan.
4. COMPENSATION OF PROFESSIONALS.
Each person retained or requesting compensation in the Chapter 11 Case
pursuant to section 330 or 503(b) of the Bankruptcy Code shall be required to
file an application for allowance of final compensation and reimbursement of
expenses in the Chapter 11 Case on or before a date to be determined by the
Bankruptcy Court in the Confirmation Order or any other order of the Bankruptcy
Court. Objections to any such application shall be filed on or before a date to
be fixed and determined by the Bankruptcy Court in the Confirmation Order or
such other order.
5. DELIVERY OF DISTRIBUTIONS.
Subject to Bankruptcy Rule 9010, all distributions to any holder of an
Allowed Claim or an Allowed Equity Interest shall be made at the address of such
holder as set forth on the
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Schedules filed with the Bankruptcy Court or on the books and records of the
Debtor or its agents, unless the Debtor or Reorganized Heartland, as
applicable, has been notified in writing of a change of address, including,
without limitation, by the filing of a proof of claim or interest by such
holder that contains an address for such holder different from the address
reflected on such Schedules for such holder. In the event that any
distribution to any holder is returned as undeliverable, the Disbursing Agent
shall use reasonable efforts to determine the current address of such holder,
but no distribution to such holder shall be made unless and until the
Disbursing Agent has determined the then current address of such holder, at
which time such distribution shall be made to such holder without interest;
provided that such distributions shall be deemed unclaimed property under
section 347(b) of the Bankruptcy Code at the expiration of one year from the
Effective Date. After such date, all unclaimed property or interest in
property shall revert to Reorganized Heartland, and the claim of any other
holder to such property or interest in property shall be discharged and
forever barred.
6. MANNER OF PAYMENT UNDER THE PLAN.
At the option of the Disbursing Agent, any Cash payment to be made
under the Plan may be made by a check or wire transfer or as otherwise required
or provided in applicable agreements.
7. FRACTIONAL SHARES.
No fractional shares of New Common Stock or New Warrants or Cash in
lieu thereof shall be distributed. No New Warrants shall be issued for
fractional shares of New Common Stock. For purposes of distribution, fractional
shares of New Common Stock and fractional New Warrants shall be rounded down to
the previous whole number.
8. SETOFFS AND RECOUPMENT.
The Debtor may, but shall not be required to, setoff against, or
recoup from, any Claim and the payments to be made pursuant to the Plan in
respect of such Claim (other than Senior Note Claims), any claims of any nature
whatsoever that the Debtor may have against the claimant; but neither the
failure to do so nor the allowance of any Claim hereunder shall constitute a
waiver or release by the Debtor of any such claim it may have against such
claimant.
9. DISTRIBUTIONS AFTER EFFECTIVE DATE.
Distributions made after the Effective Date to holders of Disputed
Claims that are not Allowed Claims as of the Effective Date but which later
become Allowed Claims shall be deemed to have been made on the Effective Date.
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10. RIGHTS AND POWERS OF DISBURSING AGENT.
a. POWERS OF THE DISBURSING AGENT. The Disbursing Agent shall be
empowered to (i) effect all actions and execute all agreements, instruments and
other documents necessary to perform its duties under the Plan, (ii) make all
distributions contemplated hereby, (iii) employ professionals to represent it
with respect to its responsibilities and (iv) exercise such other powers as may
be vested in the Disbursing Agent by order of the Bankruptcy Court, pursuant to
the Plan, or as deemed by the Disbursing Agent to be necessary and proper to
implement the provisions of the Plan.
b. EXPENSES INCURRED ON OR AFTER THE EFFECTIVE DATE. Except as
otherwise ordered by the Bankruptcy Court, the amount of any reasonable fees and
expenses incurred by the Disbursing Agent on or after the Effective Date
(including, without limitation, taxes) and any reasonable compensation and
expense reimbursement claims (including, without limitation, reasonable attorney
fees and expenses) made by the Disbursing Agent shall be paid in Cash by
Reorganized Heartland.
11. EXCULPATION.
The Debtor, Reorganized Heartland, each of the members of the Ad Hoc
Committee, the Old Indenture Trustees and the Disbursing Agent, and their
respective members, partners, officers, directors, employees and agents
(including any attorneys, financial advisors, investment bankers and other
professionals retained by such persons) shall have no liability to any holder of
any Claim or Equity Interest for any act or omission in connection with, or
arising out of, the Disclosure Statement, the Plan, the solicitation of votes
for and 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 as determined by a Final
Order of the Bankruptcy Court and, in all respects, shall be entitled to rely
upon the advice of counsel with respect to their duties and responsibilities
under the Plan.
12. ALLOCATION RELATING TO OLD SENIOR NOTES AND OLD CONVERTIBLE NOTES.
All distributions to holders of Old Senior Note Claims and Old
Convertible Notes shall be allocated first to the portion of each of such Claims
representing the principal amount of the Old Senior Notes or the Old Convertible
Notes and then, to the extent the consideration exceeds such amount, to the
remainder of such Claim.
13. VOLUNTARY CANCELLATION OF OLD COMMON STOCK; RETURN OF WARRANTS.
Any holder of an Equity Interest that does not desire to receive any
consideration under the Plan in consideration for the cancellation of its Equity
Interests may send a letter to the Debtor so directing. In such event, if such
holder nevertheless receives its Ratable Proportion of
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New Warrants in accordance with section 4.9 of the Plan, such holder should
return such New Warrants to Reorganized Heartland.
D. RESOLUTION OF DISPUTED CLAIMS AND INTERESTS.
Except as to applications for allowances of compensation and reimbursement
of expenses under sections 330 and 503 of the Bankruptcy Code, the Debtor or
Reorganized Heartland shall have the exclusive right to make and file objections
to Administrative Expense Claims, Claims and Equity Interests subsequent to the
Confirmation Date. All objections shall be litigated to Final Order; PROVIDED,
HOWEVER, that Reorganized Heartland shall have the authority to compromise,
settle, otherwise resolve or withdraw any objections, without approval of the
Bankruptcy Court. Unless otherwise ordered by the Bankruptcy Court, the Debtor
or Reorganized Heartland shall file all objections to Administrative Expense
Claims that are the subject of proofs of claim or requests for payment filed
with the Bankruptcy Court (other than applications for allowances of
compensation and reimbursement of expenses), Claims and Equity Interests and
serve such objections upon the holder of the Administrative Expense Claim, Claim
or Equity Interest as to which the objection is made as soon as is practicable,
but in no event later than (a) 120 days after the Effective Date or the date on
which a proof of claim or request for payment is filed with the Bankruptcy Court
or (b) such later date as may be approved by the Bankruptcy Court.
All Tort Claims are Disputed Claims. Any Tort Claim that is not otherwise
settled or resolved pursuant to subsection 8.1(a) of the Plan shall be
determined and liquidated in the administrative or judicial tribunal in which it
is pending on the Confirmation Date or, if no such action was pending on the
Confirmation Date, in any administrative or judicial tribunal of appropriate
jurisdiction. Pursuant to section 11.4 of the Plan, the automatic stay arising
pursuant to section 362 of the Bankruptcy Code shall be vacated as of the
Effective Date as to all Tort Claims. Any Tort Claim determined and liquidated
pursuant to a judgment obtained in accordance with subsection 8.1(b) of the Plan
and applicable non-bankruptcy law that is no longer subject to appeal or other
review shall be deemed to be an Allowed Claim in Class 5 in such liquidated
amount and satisfied in accordance with the Plan. Nothing contained in the Plan
shall constitute or be deemed a waiver of any claim, right or cause of action
that the Debtor or Reorganized Heartland may have against any person in
connection with or arising out of any Tort Claim, including, without limitation,
any rights under section 157(b) of title 28, United States Code.
Notwithstanding any provision of the Plan, if any portion of a Claim is a
Disputed Claim, no payment or distribution provided thereunder shall be made on
account of such Claim unless and until such Disputed Claim becomes an Allowed
Claim. To the extent that a Disputed Claim or Disputed Equity Interest
ultimately becomes an Allowed Claim or Allowed Equity Interest, a distribution
shall be made to the holder of such Allowed Claim or Allowed Equity Interest in
accordance with the provisions of the Plan.
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Pursuant to Bankruptcy Rule 3018(a), a Disputed Claim will not be counted
for purposes of voting on the Plan to the extent it is disputed, unless an order
of the Bankruptcy Court is entered after notice and a hearing temporarily
allowing the Disputed Claim for voting purposes under Bankruptcy Rule 3018(a).
Such disallowance for voting purposes is without prejudice to the claimant's
right to seek to have its Disputed Claim allowed for purposes of distribution
under the Plan.
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E. EXECUTORY CONTRACTS AND UNEXPIRED LEASES.
a. ASSUMPTION AND REJECTION OF EXECUTORY CONTRACTS AND UNEXPIRED
LEASES. The Plan constitutes a motion by the Debtor to assume, as of the
Effective Date, all executory contracts and unexpired leases to which the Debtor
is a party, except for an executory contract or unexpired lease that (i) has
been assumed or rejected pursuant to Final Order of the Bankruptcy Court, (ii)
is specifically rejected on Schedule 9.1 to the Plan filed by the Debtor on or
before the commencement of the hearing on approval of the Disclosure Statement
or such later date as may be fixed by the Bankruptcy Court, (iii) is the subject
of a separate motion filed under section 365 of the Bankruptcy Code by the
Debtor prior to the filing of Schedule 9.1(b) to the Plan or (iv) is otherwise
assumed pursuant to the Plan. Each executory contract and unexpired lease
listed on Schedule 9.1 to the Plan that relates to the use or occupancy of real
property shall include (i) modifications, amendments, supplements, restatements,
or other agreements made directly or indirectly by any agreement, instrument, or
other document that in any manner affects such executory contract or unexpired
lease, without regard to whether such agreement, instrument or other document is
listed on Schedule 9.1 to the Plan and (ii) executory contracts or unexpired
leases appurtenant to the premises listed on Schedule 9.1 to the Plan including
all easements, licenses, permits, rights, privileges, immunities, options,
rights of first refusal, powers, uses, usufructs, reciprocal easement
agreements, vault, tunnel or bridge agreements or franchises, and any other
interests in real estate or rights IN REM relating to such premises to the
extent any of the foregoing are executory contracts or unexpired leases, unless
any of the foregoing agreements are assumed.
b. AMENDMENTS TO SCHEDULE; EFFECT OF AMENDMENTS. The Debtor shall
assume each of the executory contracts and unexpired leases not listed on
Schedule 9.1 to the Plan; provided, that the Debtor may at any time on or before
the first Business Day before the date of the commencement of the Confirmation
Hearing amend Schedule 9.1 to the Plan to delete or add any executory contract
or unexpired lease thereto, in which event such executory contract or unexpired
lease shall be deemed to be, respectively, assumed and, if applicable, assigned
as provided therein, or rejected. The Debtor shall provide notice of any
amendments to Schedule 9.1 to the Plan to the parties to the executory contracts
or unexpired leases affected thereby. The fact that any contract or lease is
scheduled on Schedule 9.1 to the Plan shall not constitute or be construed to
constitute an admission by the Debtor that the Debtor has any liability
thereunder.
c. BAR TO REJECTION DAMAGE CLAIMS. In the event that the rejection
of an executory contract or unexpired lease by the Debtor results in damages to
the other party or parties to such contract or lease, a Claim for such damages,
if not evidenced by a filed proof of claim, shall be forever barred and shall
not be enforceable against the Debtor, or its properties or interests in
property as agents, successors, or assigns, unless a proof of claim is filed
with the Bankruptcy Court and served upon counsel for the Debtor on or before 30
days after the earlier to occur of (i) the giving of notice to such party under
Section 9.1 or 9.2 of the Plan and (ii) the entry of an order by the Bankruptcy
Court authorizing rejection of a particular executory contract or lease.
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d. CERTAIN INDEMNIFICATION OBLIGATIONS. The obligations of the
Debtor to indemnify its directors and officers that were not directors or
officers, respectively, on or after April 25, 1997 pursuant to certificate or
articles of incorporation, bylaws, contract, applicable state law or otherwise
shall be deemed to be, and shall be treated as though they are, executory
contracts that are rejected under the Plan. Any Claims arising from such
rejection shall be treated as Indemnity Claims under Section 4.6 of the Plan.
F. CONDITIONS TO CONFIRMATION AND EFFECTIVE DATE. The Plan shall not become
effective unless and until the following conditions shall have been satisfied in
full or waived in accordance with the provisions specified below:
a. The Confirmation Order, in form and substance reasonably acceptable
to the Debtor and the Ad Hoc Committee shall have been entered by the Clerk of
the Bankruptcy Court and there shall not be a stay or injunction in effect with
respect thereto.
b. All Trade Claims shall have become Allowed Claims, Disallowed
Claims or estimated for distribution purposes under the Plan by Final Order(s)
or by operation of law and the aggregate amount of all such Allowed Trade Claims
and estimated Trade Claims, if any, shall not exceed $7 million.
c. The New Warrant Agreement shall have been executed and delivered.
d. The Debtor shall have received approval from the FCC of all of
Heartland's FCC Applications (as defined in Section X.A.6.f. hereof).
e. All other actions and all agreements, instruments or other
documents necessary to implement the terms and provisions of the Plan shall have
been effected.
Each of the conditions specified above may be waived, in whole or in part,
by the Debtor, with the prior written consent of an Ad Hoc Committee Majority.
Any such waivers of a condition precedent may be effected at any time, without
notice, without leave or order of the Bankruptcy Court and without any formal
action (other than by the Debtor and an Ad Hoc Committee Majority).
G. EFFECT OF CONFIRMATION.
1. VESTING OF ASSETS.
On the Effective Date, the Debtor, its properties and interests in
property and its operations shall be released from the custody and jurisdiction
of the Bankruptcy Court, and the estate of the Debtor shall vest in Reorganized
Heartland. From and after the Effective Date, Reorganized Heartland may operate
its business and may use, acquire and dispose of property free
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of any restrictions of the Bankruptcy Code or the Bankruptcy Rules, subject
to the terms and conditions of the Plan.
2. BINDING EFFECT.
Except as otherwise provided in section 1141(d)(3) of the Bankruptcy
Code and subject to the occurrence of the Effective Date, on and after the
Confirmation Date, the provisions of the Plan shall bind any holder of a Claim
against, or Equity Interest in, the Debtor and such holder's respective
successors and assigns, whether or not the Claim or Equity Interest of such
holder is impaired under the Plan and whether or not such holder has accepted
the Plan.
3. DISCHARGE OF DEBTOR.
Except to the extent otherwise provided in the Plan, the treatment of
all Claims against or Equity Interests in the Debtor under the Plan shall be in
exchange for and in complete satisfaction, discharge and release of all Claims
against or Equity Interests in the Debtor of any nature whatsoever, known or
unknown, including, without limitation, any interest accrued or expenses
incurred thereon from and after the Petition Date, or against its estate or
properties or interests in property. Except as otherwise provided in the Plan,
upon the Effective Date, all Claims against and Equity Interests in the Debtor
will be satisfied, discharged and released in full exchange for the
consideration provided under the Plan. Except as otherwise provided in the
Plan, all entities shall be precluded from asserting against the Debtor or
Reorganized Heartland or their respective properties or interests in property,
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.
4. TERM OF INJUNCTIONS OR STAYS.
Unless otherwise provided, all injunctions or stays arising under or
entered during the Chapter 11 Case under section 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.
5. INDEMNIFICATION OBLIGATIONS.
Subject to the occurrence of the Effective Date, the obligations of
the Debtor, only to the extent permitted under the laws of the State of
Delaware, to indemnify, defend, reimburse or limit the liability of directors or
officers who were or are directors or officers of the Debtor on or after April
25, 1997, respectively, against any claims or causes of action as provided in
the Debtor's certificate of incorporation, bylaws, applicable state law or
contract shall survive confirmation of the Plan, remain unaffected thereby and
not be discharged except with respect to any such claims or causes of action
arising out of acts or omissions occurring, in whole or in part, before April
25, 1997 where liability as finally adjudicated by a court of competent
jurisdiction is imposed (i) for any breach of duty of loyalty to the Debtor or
its stockholders, (ii) for acts or omissions not in good faith
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and not in a manner such director of officer reasonably believed to be in or
not opposed to the best interests of the Debtor or which involve intentional
misconduct, gross negligence or a knowing violation of law or (iii) for any
transaction from which the director or officer derived any improper personal
benefit.
6. LIMITED RELEASE.
On the Effective Date, the Debtor, on behalf of itself and its
non-debtor subsidiaries, hereby releases the officers and directors of the
Debtor and its subsidiaries holding office at any time on or after April 25,
1997 (as well as any non-voting representative of Jupiter Partners, L.P.
("Jupiter") appointed pursuant to Section 5.12 of the Note Purchase Agreement
among the Debtor, Jupiter and Thomas R. Haack, executed as of November 30, 1994,
who served in such position on or after April 25, 1997) and each of the members
of the Ad Hoc Committee and each of their respective agents, employees, advisors
(including any attorneys, financial advisors, investment bankers and other
professionals retained by such persons or entities), affiliates and
representatives from any and all claims or liabilities arising from or related
to actions taken or omissions occurring in connection with the Plan or otherwise
in their capacity as officers, directors, agents, members, employees, affiliates
or advisors of each of the foregoing, as applicable.
H. WAIVER OF CERTAIN CLAIMS.
Effective as of the Effective Date, the Debtor waives the right to
prosecute any avoidance or recovery actions under section 547 of the Bankruptcy
Code that belong to the Debtor or Debtor in Possession. The Debtor is not aware
of any avoidance actions the pursuit and recovery of which would benefit its
chapter 11 estate.
I. RETENTION OF JURISDICTION BY THE BANKRUPTCY COURT.
Under the terms of the Plan, the Bankruptcy Court will retain jurisdiction
in the following instances, notwithstanding entry of the Confirmation Order or
the occurrence of the effective Date. The Bankruptcy Court will retain
jurisdiction over the Chapter 11 Case for the purposes of Sections 105(a) and
1142 of the Bankruptcy code and for, among other things, the following purposes:
(i) to hear and determine pending applications for the assumption or rejection
of executory contracts or unexpired leases and the allowance of Claims resulting
therefrom; (ii) to determine any and all adversary proceedings, applications and
contested matters, including, without limitation, under sections 544, 545, 548,
549, 550, 551 and 553 of the Bankruptcy Code.; (iii) to ensure that
distributions to holders of Allowed Claims and Allowed Equity Interests are
accomplished as provided therein; (iv) to hear and determine any timely
objections to Administrative Expense Claims or to proofs of claim and equity
interests, including, without limitation, any objections to the classification
of any Claim or Equity Interest, and to allow or disallow any Disputed Claim or
Disputed Equity Interest, in whole or in part; (v) to enter and implement such
orders as may be appropriate in the event the Confirmation Order is for any
reason stayed, revoked, modified or
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vacated; (vi) to issue such orders in aid of execution of the Plan to the
extent authorized by section 1142 of the Bankruptcy Code; (vii) to consider
any amendments to or modifications of the Plan or to cure any defect or
omission, or reconcile any inconsistency, in any order of the Bankruptcy
Court, including, without limitation, the Confirmation Order; (viii) to hear
and determine all applications under sections 330, 331 and 503(b) of the
Bankruptcy Code for awards of compensation for services rendered and
reimbursement of expenses incurred prior to the Confirmation Date; (ix) to
hear and determine disputes arising in connection with the interpretation,
implementation or enforcement of the Plan, the Confirmation Order, any
transactions or payments contemplated thereby or any agreement, instrument or
other document governing or relating to any of the foregoing; (x) to hear and
determine matters concerning state, local and federal taxes in accordance
with sections 346, 505 and 1146 of the Bankruptcy Code; (xi) to hear any
other matter not inconsistent with the Bankruptcy Code; (xii) to hear and
determine all disputes involving the existence, scope and nature of the
discharges granted under the Plan; (xiii) to issue injunctions and effect any
other actions that may be necessary or desirable to restrain interference by
any entity with the consummation or implementation of the Plan; and (xiv) to
enter a final decree closing the Chapter 11 Case.
J. RECOGNITION OF SUBORDINATION RIGHTS.
The distributions on account of the Old Convertible Note Claims will not be
subject to levy, garnishment, attachment or other legal process by any holder of
Senior Indebtedness (as such term is defined in the instrument governing the Old
Convertible Note Claims) by reason of claimed subordination rights and, on the
Effective Date, all holders of Claims will be deemed to have waived any and all
contractual subordination rights which they may have relating to such
distributions, and the Bankruptcy Court in the Confirmation Order will
permanently enjoin, effective as of the Effective Date, all holders of Senior
Indebtedness from enforcing or attempting to enforce any such rights with
respect to such distribution to the holders of the Old Convertible Note Claims.
K. SUMMARY OF OTHER PROVISIONS OF THE PLAN.
The following paragraphs summarize certain other significant provisions of
the Plan. The Plan should be referred to for the complete text of these and
other provisions of the Plan.
1. PAYMENT OF STATUTORY FEES.
All fees payable under section 1930, chapter 123, title 28, United
States Code, as determined by the Bankruptcy Court at the Confirmation Hearing,
shall be paid on the Effective Date. Any such fees accrued after the Effective
Date will constitute an Allowed Administrative Expense Claim and be treated in
accordance with Section 2.1 of the Plan.
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2. RETIREE BENEFITS.
Section 1129(a)(13) of the Bankruptcy Code requires a debtor to
continue to pay any retiree benefits (within the meaning of section 1114 of the
Bankruptcy Code), at the level established in accordance with section 1114 of
the Bankruptcy Code, at any time prior to the Confirmation Date, for the
duration of the period for which the debtor has obligated itself to provide any
such benefits. The Debtor does not have any obligations for any such retiree
benefits.
3. ADMINISTRATIVE EXPENSES INCURRED AFTER THE CONFIRMATION DATE.
Administrative expenses incurred by the Debtor or Reorganized
Heartland after the Confirmation Date, including (without limitation) claims for
professionals' fees and expenses, shall not be subject to application and may be
paid by the Debtor or Reorganized Heartland, as the case may be, in the ordinary
course of business and without further Bankruptcy Court approval; PROVIDED,
HOWEVER, that no claims for professional fees and expenses incurred after the
Confirmation Date shall be paid until after the occurrence of the Effective
Date.
4. SECTION 1125(e) OF THE BANKRUPTCY CODE.
As of the Confirmation Date, the Debtor shall be deemed to have
solicited acceptances of the Plan in good faith and in compliance with the
applicable provisions of the Bankruptcy Code. The Debtor and each of the
members of the Ad Hoc Committee (and each of their respective affiliates,
agents, directors, officers, employees, investment bankers, financial advisors,
attorneys and other professionals) have, and shall be deemed to have,
participated in good faith and in compliance with the applicable provisions of
the Bankruptcy Code in the offer and issuance of the securities under the Plan,
and therefore are not, and on account of such offer, issuance and solicitation
will not be, liable at any time for the violation of any applicable law, rule or
regulation governing the solicitation of acceptances or rejections of the Plan
or the offer and issuance of securities under the Plan.
5. COMPLIANCE WITH TAX REQUIREMENTS.
In connection with the consummation of the Plan, the Debtor shall
comply with all withholding and reporting requirements imposed by any taxing
authority, and all distributions hereunder shall be subject to such withholding
and reporting requirements.
6. SEVERABILITY OF PLAN PROVISIONS.
In the event that, prior to the Confirmation Date, any term or
provision of the Plan is held by the Bankruptcy Court to be invalid, void or
unenforceable, the Bankruptcy Court shall have the power to alter and interpret
such term or provision to make it valid or enforceable to the maximum extent
practicable, consistent with the original purpose of the term or provision held
to
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be invalid, void or unenforceable, and such term or provision shall then be
applicable as altered or interpreted. Notwithstanding any such holding,
alteration or interpretation, the remainder of the terms and provisions of
the Plan shall remain in full force and effect and shall in no way be
affected, impaired or invalidated by such holding, alteration or
interpretation. The Confirmation Order shall constitute a judicial
determination and shall provide that each term and provision of the Plan, as
it may have been altered or interpreted in accordance with the foregoing, is
valid and enforceable in accordance with its terms. All actions taken under
Section 14.6 of the Plan shall require the consent of the Debtor and a
Committee Majority.
7. GOVERNING LAW.
Except to the extent that the Bankruptcy Code or other federal law is
applicable, or to the extent an Exhibit hereto provides otherwise, the rights,
duties and obligations arising under the Plan shall be governed by, and
construed and enforced in accordance with, the laws of the State of Delaware
without giving effect to the principles of conflict of laws thereof.
VI. CONFIRMATION AND CONSUMMATION PROCEDURE
Under the Bankruptcy Code, the following steps must be taken to confirm the
Plan:
A. SOLICITATION OF VOTES.
In accordance with sections 1126 and 1129 of the Bankruptcy Code, the
Claims in Classes 3 (Old Senior Note Claims and Miscellaneous Unsecured Claims),
4 (Old Convertible Note Claims), 6 (Indemnity Claims), 7 (Bondholder Litigation
Claims) and 8 (Stockholder Litigation Claims) and the Equity Interests in
Class 9 are impaired and the holders of Allowed Claims and Allowed Equity
Interests in each of such Classes are entitled to vote to accept or reject the
Plan. Claims in Classes 1 (Priority Non-Tax Claims), 2 (Secured Claims) and 5
(Trade Claims) are unimpaired and the holders of Allowed Claims in each of such
Classes are conclusively presumed to have accepted the Plan and the solicitation
of acceptances with respect to such Class is not required under section 1126(f)
of the Bankruptcy Code.
As to classes of claims entitled to vote on a plan, the Bankruptcy Code
defines acceptance of a plan by a class of creditors 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 that have timely voted to accept or reject a plan. As to
classes of equity interests entitled to vote on a plan, the Bankruptcy Code
defines acceptance of a plan by a class of equity interests as acceptance by at
least two-thirds of the allowed equity interests that have timely voted to
accept or reject a 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.
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B. THE CONFIRMATION HEARING.
The Bankruptcy Code requires the Bankruptcy Court, after notice, to hold a
confirmation hearing. The Confirmation Hearing in respect of the Plan has been
scheduled for ____________, 1998 at ___________ __.m., Eastern Time, before the
Honorable _______________, United States ___________ Judge, at the United States
Bankruptcy Court, 824 Market Street, 5th Floor, Wilmington, Delaware 19801. The
Confirmation Hearing may be adjourned from time to time by the Bankruptcy Court
without further notice except for an announcement of the adjourned date made at
the Confirmation Hearing. Any objection to confirmation must be made in writing
and specify in detail the name and address of the objector, all grounds for the
objection and the amount of the Claim or number of shares of stock of the Debtor
held by the objector. Any such objection must be filed with the Bankruptcy
Court and served so that it is received by the Bankruptcy Court and the
following parties on or before ___________, 1998 at ________________, Eastern
Time:
Heartland Wireless Communications, Inc.
200 Chisholm Place, Suite 200
Plano, Texas 75075
Attn: J. Curtis Henderson, Esq.
Weil, Gotshal & Manges LLP
Attorneys for the Debtor
100 Crescent Court, Suite 1300
Dallas, Texas 75201
Attn: Martin A. Sosland, Esq.
Richards, Layton & Finger, P.A.
Attorneys for the Debtor
One Rodney Square
P.O. Box 551
Wilmington, Delaware 19899
Attn: Thomas L. Ambro, Esq.
Mark D. Collins, Esq.
Objections to confirmation of the Plan are governed by Bankruptcy Rule 9014.
C. CONFIRMATION.
At the Confirmation Hearing, the Bankruptcy Court will confirm the Plan
only if all of the requirements of section 1129 of the Bankruptcy Code are met.
Among the requirements for confirmation of a plan are that the plan is (i)
accepted by all impaired classes of claims and equity interests or, if rejected
by an impaired class, that the plan "does not discriminate unfairly" and is
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"fair and equitable" as to such class, (ii) feasible and (iii) in the "best
interests" of creditors and stockholders which are impaired under the plan.
1. ACCEPTANCE.
Classes 3, 4, 6, 7, 8 and 9 of the Plan are impaired under the Plan
and are entitled to vote to accept or reject the Plan. The Debtor reserves the
right to seek nonconsensual confirmation of the Plan with respect to any Class
of Claims or Equity Interests that is entitled to vote to accept or reject the
Plan if such Class rejects the Plan.
2. UNFAIR DISCRIMINATION AND FAIR AND EQUITABLE TESTS.
To obtain nonconsensual confirmation of the Plan, it must be
demonstrated to the Bankruptcy Court that the Plan "does not discriminate
unfairly" and is "fair and equitable" with respect to each impaired,
nonaccepting Class. The Bankruptcy Code provides a non-exclusive definition of
the phrase "fair and equitable." The Bankruptcy Code establishes "cram down"
tests for secured creditors, unsecured creditors and equity holders, as follows:
a. SECURED CREDITORS. Either (i) each impaired secured creditor
retains its liens securing its secured claim and 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 of the sale and the treatment of such liens on proceeds is provided
in clause (i) or (ii) of this subparagraph.
b. 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.
c. EQUITY INTERESTS. Either (i) each holder of an equity interest
will receive or retain under the Plan property of a value equal to the greatest
of the fixed liquidation preference to which such holder is entitled, the fixed
redemption price to which such holder is entitled or the value of the interest
or (ii) the holder of an interest that is junior to the nonaccepting class will
not receive or retain any property under the Plan.
The Debtor believes that the Plan and the treatment of all Classes of
Claims and Equity Interests under the Plan satisfy the foregoing requirements
for nonconsensual confirmation of the Plan.
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3. FEASIBILITY.
The Bankruptcy Code requires that confirmation of a plan is not likely
to be followed by liquidation or the need for further financial reorganization.
For purposes of determining whether the Plan meets this requirement, Heartland
has analyzed its ability to meet its obligations under the Plan. As part of
this analysis, Heartland has prepared projections of its financial performance
for each of the three fiscal years following the year of confirmation of the
Plan (the "Projection Period"). These projections, and the assumptions on which
they are based, are included in the Projected Financial Information annexed
hereto as Exhibit E. Based upon such projections, the Debtor believes that it
will be able to make all payments required pursuant to the Plan and, therefore,
that confirmation of the Plan is not likely to be followed by liquidation or the
need for further reorganization.
The financial information and projections appended to the Disclosure
Statement include for nine months ended December 31, 1999 and each of the three
years ending December 31, 2000 through 2002:
- Pro Forma Balance Sheet of Reorganized Heartland as of March 31,
1999;
- Projected Balance Sheets of Reorganized Heartland for each of the
years December 31, 1999 through 2002;
- Projected Income Statements of Reorganized Heartland for the nine
months ended December 31, 1999 and for each of the years ending
December 31, 2000 through 2002; and
- Projected Cash Flow Statements of Reorganized Heartland for the
nine months ended December 31, 1999 and for each of the years
ending December 31, 2000 through 2002.
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 the initial
distributions thereunder take place as of April 1, 1999.
Heartland has prepared these financial projections based upon certain
assumptions which it believes to be reasonable under the circumstances. Those
assumptions considered to be significant are described in the Projected
Financial Information, annexed hereto as Exhibit E. The Financial Projections
have not been examined or compiled by independent accountants. Heartland makes
no representation as to the accuracy of the projections or its ability to
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
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throughout the Projection Period may vary from the projected results and the
variations may be material. All holders of Claims and Equity Interests that are
entitled to vote to accept or reject the Plan are urged to examine carefully all
of the assumptions on which the Financial Projections are based in evaluating
the Plan.
a. Business Strategy - Overview
Heartland's long-term business strategy is to maximize the value of
its broadband spectrum by the delivery of video, data and voice transmission
services. Since its formation, Heartland has focused primarily on the
development and operation of MMDS analog subscription television systems in
small to mid-size markets in the central United States. Heartland currently has
an infrastructure in place for this business in 57 markets, and MMDS channel
rights in an additional 33 markets. With the consummation of marketing
alliances with DIRECTV for digital video products in both SFU and MDU markets,
the launch of a one-way high speed Internet access business in Sherman, Texas
and the FCC's recent approval of two-way, fixed flexible use of MMDS spectrum,
Heartland's business strategy expands its traditional analog video business to
incorporate additional applications.
b. Subscription Video.
In the second half of 1997 and during 1998, Heartland has focused on
improving operating results of its core video business. While overall
subscriber numbers have declined, average revenue per subscriber has steadily
increased as lower-priced packages are replaced with upgraded offerings.
Additionally, Heartland believes that the improvements in operations that have
led to decreases in bad debt expense ratios, churn and service call expense from
historical figures have positioned the company to grow its core video business
at acceptable margins. Heartland's business plan continues to include
analog-based delivery systems. Although analog subscription television
systems necessarily have limited channel capacity, Heartland has determined
for the foreseeable future that conversion of its infrastructure to digital
capacity is not economically feasible, especially in light of its digital
programming marketing alliances with DIRECTV for SFU and MDU markets.
Heartland expects its SFU alliance with DIRECTV to mitigate historical
competitive disadvantages of limited channel capacity in the SFU marketplace.
The five-year SFU agreement, signed in April 1998, allows Heartland to offer up
to 185 channels of DIRECTV digital programming to SFU subscribers, either alone
or with Heartland's local and premium MMDS programming. This agreement provides
for a commission to be paid to Heartland for each SFU subscriber to whom
Heartland sells a DIRECTV programming package, as well as equipment and
marketing subsidies that Heartland believes could materially reduce the capital
expenditure costs required for such new subscribers. In late August 1998,
Heartland launched its DIRECTV SFU offering in 41 markets. Additionally,
Heartland recently concluded a two-year agreement on similar terms with an
exclusive sub-distributor of DIRECTV programming to allow Heartland to add nine
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additional SFU markets for a total of 50 markets, and is in discussions with
other sub-distributors to include additional Heartland markets.
Heartland's business strategy also contemplates expanding its
penetration of the residential MDU marketplace and improving margins on existing
MDU contracts by offering DIRECTV digital programming in addition to Heartland's
local and premium MMDS channels. Heartland believes the additional programming
offering will allow it to target higher income properties and renegotiate
existing and renewing contracts with more advantageous economic terms.
Heartland currently offers DIRECTV programming to residential MDUs in 50
markets. DIRECTV is a registered trademark of DIRECTV, Inc., a unit of Hughes
Electronics Corp.
c. High-Speed Data/Internet.
Heartland believes that MMDS spectrum and technology present a viable
option to traditional telephony providers as a "pipeline" through which Internet
and commercial on-line services can be carried, especially for small to
medium-sized businesses who seek a cost-effective means of accessing such
on-line services at high speeds.
In September 1998, the FCC issued a Report and Order (the "Two-Way
Order"), which amended the FCC's existing rules to allow for the use of MMDS
frequencies for fixed, two-way digital voice, video and data communications.
Under the proposed regulatory scheme, the FCC will (a) permit MMDS licensees to
provide two-way services on a regular basis, (b) permit the use of cellularized
design systems, (c) allow increased flexibility in spectrum use and
channelization, including combining multiple channels to accommodate wider
bandwidths, dividing 6 MHz channels into smaller bandwidths, and channel
swapping, (d) provide a number of technical parameters to mitigate the potential
of interference among service providers and to ensure interference protection
for existing MMDS services, and (e) simplify and streamline the licensing
process.
A two-way broadband MMDS system allows operators to transmit data
upstream at speeds of up to 1.1 mbps, or nearly 38 times faster than traditional
telephony speeds of 28.8 kbps, and over 8 times faster than Integrated Services
Digital Network ("ISDN") speeds of 128 kbps. This two-way broadband system
allows operators to transmit data downstream at speeds of up to 7.2 mbps, or
nearly 250 times faster than traditional telephony, 56 times faster than ISDN
and over four times faster than T-1 equivalent speeds of 1.544 mbps.
In July 1998, Heartland entered its first test market in Sherman,
Texas as a business retail Internet service provider ("ISP"). Heartland
currently offers a variety of Internet services in this market for small to
mid-size businesses and home offices. These services include downstream
Internet access at speeds from 768 kbps burstable to 1.544 mbps for multiple
business users, to 56 kbps burstable to 1.544 mbps for less data-intensive
users. Other services include technical support, e-mail, Web design and
hosting, domain name registration and maintenance and domain name changes.
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Heartland currently provides Internet customers with one-way service
via a roof-mounted antenna connected to a piece of coaxial cable and a cable
modem/router. The cable modem/router interfaces to the customer's personal
computer via an Ethernet card connection or to a network via an Ethernet hub.
Upstream communication currently is available via a standard telephone line or
ISDN connection. Downstream transmission is provided over one of Heartland's
existing 6 MHz MMDS channels. With the issuance of the FCC's recent Two-Way
Order, Heartland intends to offer high-speed two-way ISP services utilizing
existing 4 MHz or 6 MHz channels for both upstream and downstream transmissions.
The current business plan includes a high-speed two-way ISP offering in as many
as 20 markets by 2001. Heartland currently is unable to predict the exact
impact that two-way flexibility will have on its business strategy, but expects
that any impact likely will be positive.
Except as discussed above, Heartland has not conducted one-way or
two-way Internet access or service trials in any of its markets, and there
can be no assurance that Heartland will successfully implement its plans to
launch such systems on a commercial basis in 1998 or thereafter.
d. New Markets.
Heartland's business plan currently does not include the launch of any
new subscription video markets, except to the extent necessary for channel
maintenance and preservation of existing channel rights in unlaunched markets by
building out of transmission facilities in accordance with FCC license
perfection regulations, as well as renegotiation of spectrum leases when and as
such leases mature. Moreover, Heartland may determine not to expend additional
capital on certain nonstrategic channel leases and/or channel and BTA licenses
where Heartland has not aggregated sufficient channel capacity or the area does
not have sufficient line-of-sight households or businesses to provide an
acceptable return on investment, thereby subjecting such leases and licenses to
forfeiture. The launch of new markets is contingent on, among other things,
additional financing opportunities and regulatory and interference issues,
including the grant of pending applications for new licenses or for modification
of existing licenses and the grant of applications for new licenses and license
modification applications that have not yet been filed with the FCC.
e. Telephony.
Heartland believes that to fully exploit the value of its assets in
the future, it will be required to implement a telephony application for its
MMDS spectrum in selected markets. The most logical application is the use of a
part of its spectrum as the transmission path for the loop between the local
telephone exchange and the subscriber on the fixed public switched telephone
network, or "wireless local loop," in selected markets. To date Heartland has
not conducted tests involving wireless local loop telephony and there can be no
assurance that Heartland will successfully implement such an application on a
commercial basis.
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f. Additional Financing.
As noted above, the Financial Projections annexed hereto as
Exhibit E include no new subscription video markets. Heartland's business plan
does, however, include the launch of a high-speed two-way ISP business in 20
markets by 2001. Heartland does not expect to generate sufficient cash flow to
implement this business plan or develop alternative spectrum applications such
as wireless local loop without additional financing. Accordingly, Heartland is
evaluating and will continue to evaluate additional sources of capital after the
Effective Date. There can be no assurance that Heartland will be able to access
additional capital in a timely manner or on satisfactory terms and conditions.
4. BEST INTERESTS TEST.
With respect to each impaired Class of Claims and Equity Interests,
confirmation of the Plan requires that each holder of a Claim or Equity Interest
either (i) accept the Plan or (ii) receive or retain 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 the Debtor was liquidated under chapter 7 of the
Bankruptcy Code. To determine what holders of Claims and Equity Interests of
each impaired Class would receive if the Debtor was liquidated under chapter 7,
the Bankruptcy Court must determine the dollar amount that would be generated
from the liquidation of the Debtor's assets and properties in the context of a
chapter 7 liquidation case. The Cash amount which would be available for
satisfaction of Unsecured Claims and Equity Interests would consist of the
proceeds resulting from the disposition of the unencumbered assets of the
Debtor, augmented by the unencumbered Cash held by the Debtor at the time of the
commencement of the liquidation case. Such Cash amount would be reduced by the
amount of the costs and expenses of the liquidation and by such additional
administrative and priority claims that may result from the termination of the
Debtor's business and the use of chapter 7 for the purposes of liquidation.
The Debtor'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. In
addition, claims would arise by reason of the breach or rejection of obligations
incurred and leases and executory contracts assumed or entered into by the
Debtor in Possession during the pendency of the Chapter 11 Case. The foregoing
types of claims and other claims which may arise in a liquidation case or result
from the pending Chapter 11 Case, including any unpaid expenses incurred by the
Debtor in Possession during the Chapter 11 Case such as compensation for
attorneys, financial advisors and accountants, would be paid in full from the
liquidation proceeds before the balance of those proceeds would be made
available to pay prepetition Unsecured Claims.
To determine if the Plan is in the best interests of each impaired
class, the present value of the distributions from the proceeds of the
liquidation of the Debtor's unencumbered assets
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and properties, after subtracting the amounts attributable to the foregoing
Claims, are then compared with the value of the property offered to such
Classes of Claims and Equity Interests under the Plan.
After considering 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
chapter 7 arising from fees payable to a trustee in bankruptcy and professional
advisors to such trustee, (ii) the erosion in value of assets in a chapter 7
case in the context of the expeditious liquidation required under chapter 7 and
the "forced sale" atmosphere that would prevail and (iii) the substantial
increases in claims which would be satisfied on a priority basis or on parity
with creditors in the Chapter 11 Case, the Debtor has determined that
confirmation of the Plan will provide each holder of an Allowed Claim or Equity
Interest with a recovery that is not less than such holder would receive
pursuant to liquidation of the Debtor under chapter 7 liquidation.
The Debtor also believes that the value of any distributions to each
class of Allowed Claims in a chapter 7 case, including all Secured Claims, would
be less than the value of distributions under the Plan because such
distributions in a chapter 7 case would not occur for a substantial period of
time. It is likely that distribution of the proceeds of the liquidation could
be delayed after the completion of such liquidation in order to resolve claims
and prepare for distributions. In the likely event litigation was necessary to
resolve claims asserted in the chapter 7 case, the delay could be prolonged.
The Debtor's Liquidation Analysis is attached hereto as Exhibit F.
The information set forth in Exhibit F provides a summary of the liquidation
values of the Debtor's assets assuming a chapter 7 liquidation in which a
trustee appointed by the Bankruptcy Court would liquidate the assets of the
Debtor's estate. Reference should be made to the Liquidation Analysis for a
complete discussion and presentation of the Liquidation Analysis. The
Liquidation Analysis was prepared by management of Heartland.
Underlying the Liquidation Analysis are a number of estimates and
assumptions that, although developed and considered reasonable by management,
are inherently subject to significant economic and competitive uncertainties and
contingencies beyond the control of the Debtor 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 the Debtor was, in fact, to undergo such a liquidation. The chapter
7 liquidation period is assumed to be a period of at least six months allowing
for the (i) discontinuation of operations, (ii) selling of assets, and
(iii) collection of receivables.
D. CONSUMMATION.
The Plan will be consummated on the Effective Date. The Effective Date of
the Plan is the first Business Day following the date on which the conditions
precedent to the effectiveness of the
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<PAGE>
Plan, as set forth in Section 10.1 thereof, are satisfied or waived. For a
more detailed discussion of the conditions precedent to the Plan and the
impact of the failure to meet such conditions, see Section V.F., "The Plan of
Reorganization -- Conditions to Confirmation and Effective Date."
The Plan is to be implemented pursuant to the provisions of the Bankruptcy
Code.
VII. MANAGEMENT OF REORGANIZED DEBTOR
As of the Effective Date, the management, control and operation of the
Reorganized Debtor will become the general responsibility of its Board of
Directors.
A. BOARD OF DIRECTORS AND MANAGEMENT.
1. COMPOSITION OF THE BOARD OF DIRECTORS.
The initial Board of Directors of Reorganized Heartland will consist
of seven members, at least one of which shall be a member of the management of
Reorganized Heartland, whose names and affiliations will be disclosed at or
prior to the Confirmation Hearing. Each of the members of such initial Board of
Directors shall serve until the first annual meeting of stockholders of
Reorganized Heartland or their earlier resignation or removal in accordance with
the Restated Certificate or Restated Bylaws, as the same may be amended from
time to time.
2. IDENTITY OF OFFICERS.
Each of the officers of the Debtor immediately prior to the Effective
Date will continue in their then current positions as the officers of the
Reorganized Debtor. Set forth below is the name, age and position with
Heartland of each such officer, together with a description of each officer's
employment history:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Carroll D. McHenry . . . . . . 55 Chairman of the Board, President, and
Chief Executive Officer
Marjean Henderson. . . . . . . 47 Senior Vice President and Chief
Financial Officer
Alex Padilla . . . . . . . . . 56 Senior Vice President -- Business
Development
J. Curtis Henderson. . . . . . 36 Senior Vice President, General Counsel
and Secretary
Frank H. Hosea . . . . . . . . 48 Senior Vice President - Video Operations
Christopher P. Dailledouze . . 40 Vice President -- Technical Services
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<PAGE>
Candice A. Farley. . . . . . . 45 Vice President -- Human Resources
Randall C. May . . . . . . . . 37 Vice President -- Operations
Wayne M. Taylor. . . . . . . . 53 Vice President -- Administration
</TABLE>
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<PAGE>
CARROLL D. MCHENRY joined Heartland as Chairman of the Board, President,
Chief Executive Officer and Acting Chief Financial Officer in April 1997. Mr.
McHenry currently serves as Chairman of the Board, President and Chief Executive
Officer. Prior to assuming his positions at Heartland, Mr. McHenry was a senior
executive at Alltel, Inc., a national communications holding company, most
recently serving as President of Alltel's Communications Services Group, and
serving as President of Alltel Mobile Communications, Inc. from July 1992 to May
1995. From 1991 to 1992, Mr. McHenry was Vice President of Cellular Business
Development at Qualcomm, Inc. From 1989 to 1991, Mr. McHenry was President,
Chief Executive Officer and Chairman of the Board of Celluland, Inc., a
franchisor of cellular telephone stores. From 1980 to 1989, Mr. McHenry served
in various capacities with Mobile Communications Corporation of America ("MCCA")
and as President and Chief Executive Officer of American Cellular
Communications, a joint venture between MCCA and BellSouth. Mr. McHenry
currently is a director of Wireless One, Inc. ("Wireless One") and CS Wireless.
MARJEAN HENDERSON joined Heartland in August 1997 as Senior Vice President
and Chief Financial Officer. Ms. Henderson was appointed Assistant Secretary in
December 1997. From April 1996 to April 1997, Ms. Henderson served as Senior
Vice President and Chief Financial Officer for Panda Energy International, Inc.,
a global energy concern. From December 1993 to October 1995, Ms. Henderson
served as Senior Vice President and Chief Financial Officer for Nest
Entertainment, Inc., a home video and movies concern. From October 1987 to
December 1993, Ms. Henderson served as Vice President, Chief Financial Officer
and Treasurer for RCL Enterprises, the Lyons Group, Lyrick Studios and Big Feet
Productions. Ms. Henderson currently is a director of Wireless One and CS
Wireless.
ALEX R. PADILLA joined Heartland in July 1998 as Senior Vice President -
Business Development. Mr. Padilla was Manager of Business Development for
KPMG-Peat Marwick's Enterprise Integration Services Group. Previous to KPMG,
Mr. Padilla served as Director of Sales for Pinpoint Communications and was
Vice President of Sales for Image Data Corporation, both start-up
organizations in the communications industry. From 1970 through 1986, Mr.
Padilla held various sales and marketing management positions at two computer
companies, Datapoint Corporation and IBM Corporation.
J. CURTIS HENDERSON joined Heartland in May 1996 as Vice President, General
Counsel and Secretary and was named Sr. Vice President in September 1998. From
July 1994 to April 1996, Mr. Henderson was Senior Vice President, General
Counsel and Secretary of ZuZu, Inc., a restaurant and franchising company in
Dallas, Texas. Prior to his employment at ZuZu, Mr. Henderson was an associate
with the Dallas law firm of Locke Purnell Rain Harrell.
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<PAGE>
FRANK H. HOSEA joined Heartland in November 1998 as Senior Vice President
- -- Video Operations. Prior to joining Heartland, Mr. Hosea served in various
executive positions, including Senior Vice President and Chief Operating
Officer with CS Wireless for two years. Before CS Wireless, Mr. Hosea served as
Vice President of Sales Field Marketing for KBLCOM, Inc., a division of Houston
Industries and Time Warner, for six years. Prior to KBLCOM, Mr. Hosea served as
Corporate Director of Field Operations for Warner Communications for two years.
CHRISTOPHER P. DAILLEDOUZE joined Heartland in March 1996 as Director of
Engineering and was appointed Vice President-Technical Services in April 1997.
From March 1992 to March 1996, Mr. Dailledouze was Director of Engineering for
American Wireless Systems, Inc. From April 1988 to March 1992, Mr. Dailledouze
was Chief Engineer for Galaxy Cablevision, Inc.
CANDICE A. FARLEY joined Heartland in November 1997 as Vice President -
Human Resources. Prior to joining Heartland, Ms. Farley was Director of Human
Resources for Heritage Media Corporation, a broadcasting and marketing company,
from September 1995 to November 1997. Ms. Farley was Director of Human
Resources for Pizza Inn, Inc. from July 1993 through September 1995 and was Vice
President-Compensation and Benefits for American Federal Bank from July 1992
through July 1993.
RANDALL C. MAY joined Heartland in October 1994 as a Regional Manager. Mr.
May was appointed Director of System Development in March 1995 and Vice
President - Operations in February 1996. From December 1988 to October 1994,
Mr. May worked for Post-Newsweek Cable, most recently serving as General Manager
of certain cable television and radio properties. From 1983 to 1988, Mr. May
served as Vice President -Area Manager for Sooner Cable Television Inc., an
independent cable television company.
WAYNE M. TAYLOR joined Heartland in February 1996 as Vice President -
Administration. From May 1989 to February 1996, Mr. Taylor was a Group
Controller at Borden, Inc. From 1972 to 1989 Mr. Taylor was employed by Frito
Lay, most recently as a Group Manager-Finance.
B. COMPENSATION OF EXECUTIVE OFFICERS.
1997 COMPENSATION. The following table sets forth all Cash compensation
earned in fiscal year 1997 by each of the five most highly compensated officers
of Heartland and to all executive officers as a group, for services rendered in
all of their respective capacities in fiscal year 1997:
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<PAGE>
<TABLE>
<CAPTION>
Name of Individual Capacities in which Served Cash Compensation
- ------------------ -------------------------- -----------------
<S> <C> <C>
Carroll D. McHenry Chairman, Chief Executive Officer and $ 360,094(1)
President
Marjean Henderson Senior Vice President, Chief Financial $ 80,923(2)
Officer and Assistant Secretary
J. Curtis Henderson Vice President, General Counsel and $ 138,861(3)
Secretary
Randall C. May Vice President - Operations $ 128,919(4)
Wayne M. Taylor Vice President - Administration $ 118,965(5)
All current executive $ 1,055,670
officers as a group
(seven persons)
</TABLE>
- -------------------------------
(1) Mr. McHenry joined Heartland in April 1997 at an annual base salary of
$300,000. The compensation listed in the above table includes base salary of
$205,768, and 1997 performance bonus of $154,326. Mr. McHenry also received a
signing bonus of $50,000 and a relocation expense payment of $53,347 in
connection with his hiring in April 1997.
(2) Ms. Henderson joined Heartland in August 1997 at an annual base salary of
$180,000. The compensation listed in the above table includes a 1997
performance bonus of $20,000.
(3) Includes base salary of $114,392 and a 1997 performance bonus of $24,469.
(4) Includes base salary of $106,782 and a 1997 performance bonus of $22,137.
(5) Includes base salary of $97,499 and a 1997 performance bonus of $21,466.
C. EMPLOYMENT AGREEMENTS.
Heartland entered into an Employment Agreement with Carroll D. McHenry for
a term of three years, beginning on March 6, 1998. Under the Employment
Agreement, Heartland has agreed to pay Mr. McHenry an annual base salary of not
less than $300,000. On each anniversary of the effective date, the term is
automatically extended for one additional year; provided, however, that either
Heartland or Mr. McHenry may terminate any such one-year extension by giving
notice to the other party at least 90 days before the applicable anniversary of
the effective date. Additionally, if Mr. McHenry's employment is terminated by
Heartland other than for cause (as defined in the
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<PAGE>
Employment Agreement) or on account of Mr. McHenry's death or permanent
disability, or if Mr. McHenry resigns for good reason (as defined in the
Employment Agreement), then Heartland has agreed to pay Mr. McHenry a
severance payment equal to his then-current annual base salary (excluding any
bonuses) for the balance of the term of Employment Agreement.
In addition, Heartland entered into Employment Agreements with Marjean
Henderson, Christopher P. Dailledouze, Candice A. Farley, J. Curtis
Henderson, Randall C. May and Wayne M. Taylor, effective April 8, 1998, Alex R.
Padilla, effective July 13, 1998 and Frank H. Hosea, effective November 3, 1998.
These officers are collectively referred to as the "Officers" and individually
as an "Officer." The Employment Agreements for Ms. Henderson, Mr. Padilla, Mr.
Henderson and Mr. Hosea each are for a term of two years. The Employment
Agreements for Messrs. Dailledouze, May, Taylor and Ms. Farley each are for a
term of one year. Under the Employment Agreements, Heartland has agreed to pay
each Officer an annual base salary equal to the following: Ms. Henderson -
$200,000; Mr. Padilla - $175,000; Mr. Henderson - $158,000; Mr. Hosea -
$150,000; Mr. May - $125,000; Mr. Taylor - $108,000; Ms. Farley - $96,000; and
Mr. Dailledouze - $90,000. On each anniversary of the effective date of each
Employment Agreement, the term is automatically extended for one additional
year; provided, however, that either Heartland or the respective Officer may
terminate any such one-year extension by giving notice to the other party at
least 90 days before any such anniversary of the effective date. Additionally,
if an Officer's employment is terminated by Heartland other than for cause (as
defined in each Employment Agreement) or on account of the Officer's death or
permanent disability, or if the Officer resigns for good reason (as defined in
each Employment Agreement), then Heartland is required to pay the Officer a
severance payment equal to his or her then-current annual base salary (excluding
any bonuses) for the balance of the term of the applicable Employment Agreement.
None of the employment agreements discussed above provide for a bonus
payment in addition to the Officer's annual base salary. The Officers are or
will be eligible, independent of the employment agreements, to participate in
and receive bonuses or awards under, Heartland's Performance Incentive
Compensation Plan, Stock Option Plan and Employee Retention Program (except for
Mr. McHenry, who is not eligible to receive a bonus under the Employee Retention
Program).
D. STOCK OPTION PLAN.
In connection with the Plan, Heartland or Reorganized Heartland will adopt
a Share Incentive Plan (the "Stock Option Plan"), that is intended to provide
incentives to attract, retain and motivate highly competent persons as
non-employee directors, officers and key employees of, and consultants to,
Reorganized Heartland by providing such persons with options ("Incentive
Options") to acquire shares of New Common Stock of Reorganized Heartland.
Additionally, the Stock Option Plan is intended to assist in further aligning
the interests of Reorganized Heartland's directors, officers, key employees
and consultants to those of its stockholders.
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<PAGE>
The Stock Option Plan will be administered by a committee (the
"Compensation Committee") appointed by the Board of Directors of the
Reorganized Heartland from among its members and shall be comprised, unless
otherwise determined by the Board of Directors, of not less than two members
who shall be (i) "Non-Employee Directors" within the meaning of Rule
16b-3(b)(3) (or any successor rule) promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and (ii) "outside directors"
within the meaning of Treasury Regulation Section 1.162-27(e)(3) under
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code").
Under the Stock Option Plan, a total of 900,000 shares of New Common
Stock of Reorganized Heartland will be reserved for issuance. Approval of
the Plan will also constitute approval of the Stock Option Plan. The Stock
Option Plan may be adopted before the Effective Date by the Board of
Directors of Heartland, but no Incentive Options will be granted before the
Effective Date.
The Incentive Options to be granted in connection with the restructuring
to Mr. McHenry, Ms. Henderson and Mr. Henderson will expire seven years after
the date of grant and will vest and become exercisable according to the
following schedule:
a. 33.4% will vest on the date of grant.
b. 6.66% will vest automatically on each anniversary of the date
of grant for five years after the date of grant (totalling 33.3% after such
five years).
c. Up to 33.3% will vest upon the attainment of certain average
stock price performance objectives set by the Board of Directors and/or the
Compensation Committee (such portion referred to as the "Senior Executive
Contingent Portion"). If the average closing sales price of the New Common
Stock equals or exceeds the target amount set forth below for any 20
consecutive trading days during the period indicated the percentage of the
Senior Executive Contingent Portion set forth opposite such target amount
will vest on such 20th trading day:
<TABLE>
<CAPTION>
Percent of Senior
Per Share Executive Contingent
Measurement Period Stock Price Portion Vesting
------------------ ----------- --------------------
<S> <C> <C>
Date of grant until first anniversary $16.50 20%
Date of Grant until second anniversary $20.80 40%
Date of grant until third anniversary $25.00 60%
Date of grant until fourth anniversary $28.61 80%
Date of grant until fifth anniversary $31.10 100%
</TABLE>
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<PAGE>
The Incentive Options to be granted in connection with the restructuring
to other key employees of Heartland will expire seven years after the date of
grant and will vest and become exercisable according to the following
schedule:
a. 10% will vest automatically on each anniversary of the date of
grant for five years after the date of grant (totalling 50% after such five
years).
b. Up to fifty percent will best upon the attainment of certain
average stock price performance objectives set by the Board of Directors
and/or the Compensation Committee. If the average closing sales price of the
New Common Stock equals or exceeds the target amount set forth below for any
20 consecutive trading days during the period indicated, the percentage of
the Key Employee Contingent Portion set forth opposite such target amount
will vest on such 20th trading day:
<TABLE>
<CAPTION>
Percent of Senior
Per Share Executive Contingent
Measurement Period Stock Price Portion Vesting
------------------ ----------- --------------------
<S> <C> <C>
Date of grant until first anniversary $16.50 20%
Date of grant until second anniversary $20.80 40%
Date of grant until third anniversary $25.00 60%
Date of grant until fourth anniversary $28.61 80%
Date of grant until fifth anniversary $31.10 100%
</TABLE>
The exercise price of Incentive Options granted as of the Effective Date
will be $12.50 per share of New Common Stock. Incentive Options granted
under the Stock Option Plan after the Effective Date will be exercisable at a
minimum of 100% of the fair market value of the New Common Stock of
Reorganized Heartland on the date of grant.
The Incentive Options will immediately vest and become exercisable upon
a Change in Control. A "Change in Control" will be deemed to have occurred
upon any of the following events:
(i) Any "person" (as such term is used Section 13(d) and 14(d)(2)
of the Exchange Act but excluding any employee benefit plan of the Company)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) directly or indirectly, of securities of the Company
representing more than 50% of the combined voting power of the Company's
outstanding securities then entitled ordinarily (and apart from rights
accruing under special circumstances) to vote for the election of directors;
(ii) During any period of two (2) consecutive years, the
individuals who at the beginning of such period constitute Reorganized
Heartland's Board of Directors or any individuals
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who would be "Continuing Directors" (as hereinafter defined) cease for any
reason to constitute at least a majority thereof; or
(iii) Reorganized Heartland's Stockholders shall approve a sale of
all or substantially all of the assets of Reorganized Heartland; or
(iv) Reorganized Heartland's Stockholders shall approve any
merger, consolidation, or like business combination or reorganization of
Reorganized Heartland, the consummation of which would result in the
occurrence of any event described in clauses (i) or (ii) above, and such
transaction shall have been consummated.
"Continuing Directors" shall mean (x) the directors of the Company in
office on the Effective Date and (y) any successor to any such director and
any additional director who after the Effective Date was nominated or
selected by a majority of the Continuing Directors in office at the time of
his or her nomination or selection.
The Compensation Committee, in its discretion, may determine that, upon
the occurrence of a Change in Control of the Company, each Incentive Option
outstanding under the Stock Option Plan shall terminate within a specified
number of days after notice to the holder, and such holder shall receive with
respect to each share of New Common Stock that is subject to an Incentive
Option an amount equal to the excess of the fair market value of such share
of New Common Stock immediately prior to the occurrence of such Change in
Control over the exercise price per share of such Incentive Option; such
amount to be payable in cash, in one or more kinds of property (including the
property, if any, payable in the transaction) or in combination thereof, as
the Compensation Committee, in its discretion, shall determine. The
provisions contained in the preceding sentence shall be inapplicable to an
Incentive Option or other benefit granted within six months before the
occurrence of a Change in Control if the holder of such option or other
benefit is subject to the reporting requirements of section 16(a) of the
Exchange Act and no exception from liability under section 16(b) of the
Exchange Act is otherwise available to such holder.
E. OTHER COMPENSATION PLANS.
PERFORMANCE INCENTIVE COMPENSATION PLAN
Effective January 1, 1998, Heartland adopted a Performance Incentive
Compensation Plan (the "ICP"). The ICP provides incentive compensation
opportunities to Heartland's executive officers and other key employees based
solely on achievement of predetermined financial goals (such as consolidated
earnings before interest, taxes, depreciation and amortization ("EBITDA")) as
well as quantitative individual objectives, such as improvements in churn,
collections and service calls. Not more than 50% of a target award may be
based on individual objectives. Under the ICP, target awards for the Chief
Executive Officer may range from 25% to 75% of his or her annual salary,
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and between 12.5% and 52.5% of other executive officers' salaries. ICP
bonuses are in addition to any amounts paid under the Employee Retention
Program described below.
EMPLOYEE RETENTION PROGRAM
Effective April 8, 1998, the Board approved an employee retention
program (the "ERP") for executive officers and other key employees as
designated by the Chief Executive Officer. Under the ERP, the Board
authorized Heartland to offer a retention bonus of between 15% and 25% of a
participant's annual base salary if such individual remained in Heartland's
employment through April 30, 1999.
F. POST-EFFECTIVE DATE SECURITY OWNERSHIP OF CERTAIN OWNERS.
The following table sets forth those entities which, to the knowledge of
the Debtor based upon Heartland's analysis of the holdings of Old Senior
Notes as of November 18, 1998, will own beneficially more than five percent
of the New Common Stock as of the Effective Date.
<TABLE>
<CAPTION>
Name of Owner Estimated Percentage of Ownership
------------- ---------------------------------
<S> <C>
Quad-C, Inc. [19.28%]
Quaker Capital Management Corporation [16.04%]
The Mainstay Funds, on behalf of its
High Yield Corporate Bond Fund Series [10.42%]
Aspen Partners, L.P. [ 6.27%]
Cargill Financial Services Corporation [ %]
Northstar Investment Management Corporation [ %]
</TABLE>
A number of parties may actively trade in claims during the Chapter 11
Case. It is possible that certain of these parties may beneficially acquire
more than five percent of the New Common Stock following distributions under
the Plan. SEE Section X.A.1., "Certain Risk Factors To Be Considered --
Overall Risk To Recovery By Holders of Claims -- Significant Holders."
VIII. APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS
TO THE NEW COMMON STOCK TO BE DISTRIBUTED UNDER THE PLAN
A. SECTION 1145 OF THE BANKRUPTCY CODE.
In reliance upon an exemption from the registration requirements of the
Securities Act of 1933, as amended (the "1933 Act"), and state securities and
"blue sky" laws afforded by section
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1145 of the Bankruptcy Code, the New Common Stock and/or New Warrants to be
issued on the Effective Date to holders of Allowed Claims in Classes 3, 4, 7
and 8 and to holders of Allowed Equity Interests in Class 9 pursuant to the
Plan, will not require registration under the 1933 Act or any state
securities or "blue sky" laws. Accordingly, shares of New Common Stock
issued to holders of Allowed Claims in such Classes pursuant to the Plan may
be resold by any holder without registration under the 1933 Act or other
Federal securities laws pursuant to the exemption provided by section 4(1) of
the 1933 Act, unless the holder is an "underwriter" with respect to such
securities, as that term is defined in the Bankruptcy Code (a "Statutory
Underwriter"). In addition, such securities generally may be resold by the
recipients thereof without registration on the state level pursuant to
various exemptions provided by the respective laws of the several states.
However, recipients of securities issued to holders of Allowed Claims and
Allowed Equity Interests under the Plan are advised to consult with their own
counsel as to the availability of any such exemption from registration under
Federal or state law in any given instance and as to any applicable
requirements or conditions to the availability thereof.
Section 1145(b) of the Bankruptcy Code defines a Statutory Underwriter
for purposes of the 1933 Act as one who (i) purchases a claim with a view to
distribution of any security to be received in exchange for the claim, (ii)
offers to sell securities issued under a plan for the holders of such
securities, (iii) 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 of such securities or (iv) is a controlling person of the issuer
of the securities, in this case, Reorganized Heartland.
Entities deemed to be Statutory Underwriters may be able to sell
securities without registration pursuant to the provisions of Rule 144 under
the 1933 Act which, in effect, permit the public sale of securities received
pursuant to the Plan by Statutory Underwriters subject to the availability of
public information concerning Reorganized Heartland, volume limitations,
holding periods and certain other conditions. Entities who believe they may
be Statutory Underwriters under the definition contained in section 1145 of
the Bankruptcy Code are advised to consult their own counsel with respect to
the availability of the exemption provided by such Rule.
Pursuant to the Plan, certificates evidencing shares of New Common Stock
received by holders of at least ten percent (without regard to shares of New
Common Stock held by Reorganized Heartland) of the outstanding New Common
Stock will bear a legend substantially in the form below:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE OR
OTHER JURISDICTION AND MAY NOT BE SOLD, OFFERED FOR SALE OR
OTHERWISE TRANSFERRED UNLESS REGISTERED OR QUALIFIED UNDER
SAID ACT AND APPLICABLE STATE
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<PAGE>
SECURITIES LAWS OR UNLESS HEARTLAND RECEIVES AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO IT THAT SUCH REGISTRATION
OR QUALIFICATION IS NOT REQUIRED.
B. REGISTRATION RIGHTS.
Reorganized Heartland and certain holders of shares of New Common
Stock will enter into a Registration Rights Agreement (the "Registration
Rights Agreement") on or before the Effective Date. Pursuant to the
Registration Rights Agreement, Reorganized Heartland will agree to file with
the Securities and Exchange Commission ("SEC") as soon as commercially
practicable, but no later than the Effective Date, a registration statement
(the "Shelf Registration Statement") on an appropriate form under the
Securities Act relating to the Registrable Securities. Reorganized Heartland
will use commercially reasonable efforts to cause the registration statement
to be declared effective by the SEC as soon as practicable after filing with
the SEC.
Under the Registration Rights Agreement, "Registrable Securities"
means the New Common Stock, and shares of New Common Stock of Reorganized
Heartland issuable on exercise of New Warrants ("Warrant Shares") and any
other securities issued or issuable with respect to such New Common Stock or
Warrant Shares by way or dividend or stock split or in connection with any
combination of shares of New Common Stock or Warrant Shares, or
recapitalization, exchange, merger, consolidation or reorganization;
provided, that any Registrable Security shall cease to be a registrable
Security when (i) a registration statement covering such Registrable Security
has been declared effective by the SEC and it has been disposed of pursuant
to such effective registration statement, (ii) it is sold under circumstances
in which all of the applicable conditions of Rule 144 (or any similar
provision then in force) under the 1933 Act are met or (iii) (x) it has been
otherwise transferred, (y) Reorganized Heartland has delivered a new
certificate or other evidence of ownership for it not bearing a legend
restricting further transfer and (z) it may be resold without subsequent
registration under the Securities Act.
Reorganized Heartland will use its best efforts to keep the Shelf
Registration Statement effective for three years from the date of its
effectiveness, subject to extension to accommodate suspensions of
availability of use of the Shelf Registration Statement for post-effective
amendments.
The Registration Rights Agreement contains certain other provisions
applicable to the Shelf Registration Statement. Reorganized Heartland is
required to pay specified expenses in connection with the Shelf Registration
Statement and is required to indemnify certain selling stockholders against
certain liabilities, including liabilities under the Securities Act. The
Registration Rights Agreement shall be in substantially the form annexed to
the Plan as Exhibit 4.
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IX. REORGANIZATION VALUES
The Debtor has been advised by WP&Co. with respect to the value of
Reorganized Heartland. The reorganization value of Reorganized Heartland
before distributions of Cash in the Plan was calculated for purposes of the
Plan by Heartland, based on advice from WP&Co., to be approximately $135
million to $185 million as of an assumed Effective Date of March 31, 1999.
Such assumed reorganization value represents the range of values prepared by
WP&Co. during November 1998 in respect of the business and assets of
Reorganized Heartland. Based upon the assumed reorganization value of
Reorganized Heartland and giving effect to distributions under the Plan, the
Debtor has employed an assumed range of equity values for Reorganized
Heartland of approximately $119 million to $169 million or approximately
$11.90 per share to $16.90 per share of New Common Stock based upon a
distribution of approximately 10 million shares of New Common Stock estimated
by Reorganized Debtor on the Effective Date to be issued to the holders of
Claims under the Plan and 900,000 shares reserved for issuance under the
Stock Option Plan. Based upon the assumed reorganization value of
Reorganized Heartland and giving effect to distributions under the Plan, and
using the Black-Scholes pricing model, which is a common valuation
methodology, the Debtor has employed an assumed value of the New Warrants of
$7 million or approximately $6.36 per New Warrant. The foregoing valuations
are based on a number of assumptions, including a successful reorganization
of Debtor's business and finances in a timely manner, the achievement of the
forecasts reflected in the financial projections, 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 which may be realized if assets are sold. The estimates
of value represent hypothetical reorganization values of Reorganized
Heartland as the continuing owner and operator of its business and assets.
Such estimates reflect computations of the estimated reorganization value of
Reorganized Heartland 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 Heartland's is subject to uncertainties and contingencies
which are difficult to predict and will fluctuate with changes in factors
affecting the financial conditions and prospects of such a business. AS A
RESULT, THE ESTIMATE OF THE RANGE OF REORGANIZATION VALUES SET FORTH HEREIN
IS NOT NECESSARILY INDICATIVE OF ACTUAL OUTCOMES, WHICH MAY BE SIGNIFICANTLY
MORE OR LESS FAVORABLE THAN THOSE SET FORTH THEREIN. BECAUSE SUCH ESTIMATE
IS INHERENTLY SUBJECT TO UNCERTAINTIES, NEITHER HEARTLAND, WP&CO. NOR ANY
OTHER PERSON ASSUMES RESPONSIBILITY FOR ITS ACCURACY. IN ADDITION, THE
VALUATION OF NEWLY-ISSUED SECURITIES SUCH AS THE NEW COMMON STOCK IS SUBJECT
TO ADDITIONAL UNCERTAINTIES AND CONTINGENCIES, ALL OF WHICH ARE DIFFICULT TO
PREDICT. Actual market prices of such securities at issuance will depend
upon, among other things, prevailing interest rates,
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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
which generally influence the prices of securities. It should be noted that
there is presently no trading market for the New Common Stock and there can
be no assurance that such a trading market will develop.
WP&Co. has undertaken its valuation analysis for purposes of determining
the value available to distribute to creditors pursuant to the Plan and
analyzing relative recoveries to creditors thereunder. The analysis is based
on the projections as well as current market conditions and statistics. The
values were prepared as of November 8, 1998. WP&Co. used the comparable
public company, discounted cash flow, comparable acquisition and liquidation
methodologies to value Heartland's business. These valuation techniques
reflect both the market's current view of Heartland's value as well as a
longer-term focus on the intrinsic value of the cash flow projections in the
Business Plan. The overall range for the reorganization value of Reorganized
Heartland's business after Cash distributions in the Plan is from $135
million to $185 million with an assumed reorganization value of $160 million.
In preparing a range of the estimated reorganization value of
Reorganized Debtor, WP&Co. (i) reviewed certain historical financial
information of Heartland for recent years and interim periods, (ii) reviewed
certain internal financial and operating data of Heartland including
financial projections provided by management relating to its business and
prospects, (iii) met with certain members of senior management of Heartland
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 Heartland, (v) considered
certain economic and industry information relevant to the operating business,
and conducted such other analyses as WP&Co. deemed appropriate. Although
WP&Co. conducted a review and analysis of Heartland's business, operating
assets and liabilities and business plans, WP&Co. assumed and relied on the
accuracy and completeness of all (i) financial and other information
furnished to it by Heartland and by other firms retained by Heartland and
(ii) publicly available information. In addition, WP&Co. did not
independently verify management's projections in connection with such
valuation and no independent evaluations or appraisals of the Debtor's assets
were sought or were obtained in connection therewith.
METHODOLOGY
In preparing its valuation, WP&Co. performed a variety of analyses and
considered a variety of factors. The following summary of the analyses and
factors does not purport to be a complete description of the analyses and
factors considered.
In determining Heartland's indicated enterprise value range, WP&Co.
placed various weights on each of the analyses and factors and made
judgements as to the significance and relevance of each analysis and factor.
WP&Co. did not consider any one analysis or factor to the exclusion of any
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other analysis or factor. Accordingly, WP&Co. believes that its valuations
must be considered as a whole and that selecting portions of its analyses,
without considering all such analyses, could create a misleading or
incomplete view of the processes underlying the preparation of its findings
and conclusions. In its analyses, WP&Co. made numerous assumptions with
respect to Heartland, industry performance, general business, regulatory,
economic, market and financial conditions and other matters, many of which
are beyond Heartland's control. In addition, analyses relating to the value
of the business or securities do not purport to be appraisals or to reflect
the prices at which such business or securities will trade.
WP&Co. has employed several generally accepted valuation techniques in
estimating Heartland's enterprise value. The three methodologies on which
WP&Co. primarily relied are: comparable public company analysis, discounted
cash flow analysis and comparable acquisition analysis.
COMPARABLE PUBLIC COMPANY ANALYSIS
In a comparable public company analysis, a subject company is valued by
comparing it with publicly-held companies in reasonably similar lines of
business. The comparable public companies are chosen based on, among other
attributes, their similarity to the subject company's size, profitability,
market presence, geographical concentration and leverage. The price that an
investor is willing to pay in the public markets for each company's publicly
traded securities represents Heartland's current and future prospects as well
as the rate of return required on the investment.
After analyzing Heartland, a selected list of comparable companies was
compiled from various sources, including discussions with management. In
this analysis, the following five comparable companies were chosen: American
Telecasting, Inc., CAI Wireless Systems, Inc., CS Wireless, People's Choice
T.V. Corp. and Wireless One. Publicly-held corporations differ in terms of
markets, size, financial structure, organization and corporate strategies;
however, these companies were deemed to be the most comparable to Heartland.
The analytical work performed included, among other things, a detailed
financial comparison of each company's income statement, balance sheet and
cash flow statement. Each company's performance, profitability, market
presence, leverage and business strategy were examined. Based on certain
analyses, numerous financial multiples and ratios were developed to measure
each company's valuation and relative performance. One specific analysis
entailed comparing the enterprise value (defined as market value of equity
plus debt minus excess Cash) for each of the comparable public companies to
its gross line of sight households. This multiple was then applied to
Heartland to determine its implied enterprise value.
The comparable public company analysis produces a "minority" valuation
which is generally lower than the control valuations of the discounted cash
flow and comparable acquisition approaches.
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DISCOUNTED CASH FLOW ("DCF") ANALYSIS
The second common valuation methodology which was used to determine the
enterprise value of Heartland was the discounted cash flow. The discounted
cash flow represents the present value of unlevered, after-tax cash flows to
all providers of capital using an appropriate discount rate. The DCF
approach takes into account the projected operating strategy of Heartland by
using company projections as the basis for the financial model. The
underlying concept of the DCF approach is that debt-free, after-tax cash
flows are estimated for a projection period and a terminal value is estimated
to determine the going concern value of Heartland from the end of the
projection period forward. These cash flows are then discounted at a
appropriate weighted average cost of capital determined by calculating the
average cost of debt and equity for the other participants throughout the
industry.
Heartland's projections, as shown in this Disclosure Statement, reflect
significant assumptions made by Heartland's management concerning anticipated
results. The assumptions and judgments used in the projections may or may
not prove correct, and there can be no assurance that projected results are
attainable or will be realized. Actual future results may vary significantly
from the forecasts. WP&Co. cannot and does not make any representations or
warranties as to the accuracy or completeness of Heartland's projections.
COMPARABLE ACQUISITION ANALYSIS
The comparable acquisition analysis was the third valuation methodology
used to determine an enterprise value for Heartland. This approach entails
calculating multiples based upon the purchase price (including any debt
assumed and equity purchased) of mergers and acquisitions activity of similar
companies to Heartland. These multiples are then applied to the subject
company to determine the implied enterprise value. Unlike the comparable
public company analysis, the valuation in this methodology includes a
"control" premium, which represents the purchase of the majority of a
company's assets. As a result, this approach generally produces higher
valuations than the comparable public company methodology.
WP&Co. evaluated certain transactions in the wireless cable industry
between 1996 and 1998. The seven transactions that WP&Co. considered are:
Bellsouth's acquisition of wireless cable systems in New Orleans, Atlanta and
other Georgia markets, Miami and other Florida markets; People's Choice TV
Corp.'s acquisition of wireless cable channel rights in Salt Lake City and
other Utah markets; and CS Wireless' acquisition of wireless cable channel
rights in Kansas City.
THE VALUATIONS REPRESENT THE DEBTOR'S ESTIMATED REORGANIZATION VALUES
AND DO NOT NECESSARILY REFLECT VALUES THAT COULD BE ATTAINABLE IN PUBLIC OR
PRIVATE MARKETS. THE EQUITY VALUE ASCRIBED IN THE ANALYSIS DOES NOT PURPORT
TO BE AN ESTIMATE OF THE POST-REORGANIZATION MARKET TRADING VALUE. SUCH
TRADING VALUE, IF ANY, MAY
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BE MATERIALLY DIFFERENT FROM THE REORGANIZATION EQUITY VALUE RANGES
ASSOCIATED WITH THE VALUATION ANALYSIS.
X. CERTAIN RISK FACTORS TO BE CONSIDERED
HOLDERS OF CLAIMS AGAINST THE DEBTOR SHOULD READ AND CONSIDER CAREFULLY
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. OVERALL RISK TO RECOVERY BY HOLDERS OF CLAIMS.
The ultimate recoveries under the Plan to holders of Claims (other than
those holders who are paid in Cash under the Plan) depend upon the realizable
value of the New Common Stock. The securities to be issued pursuant to the
Plan are subject to a number of material risks, including, but not limited
to, those specified below. The factors specified below assume that the Plan
is approved by the Bankruptcy Court and that the Effective Date occurs on or
about April 1, 1999. Prior to voting on the Plan, each holder of a Claim
should carefully consider the risk factors specified or referred to below,
including the Exhibits annexed hereto, as well as all of the information
contained in the Plan.
1. SIGNIFICANT HOLDERS.
Upon the consummation of the Plan, certain holders of Claims will
receive distributions of shares of the New Common Stock representing in
excess of five percent of the outstanding shares of the New Common Stock.
SEE Section VII.F., "Management of Reorganized Debtor -- Post-Effective Date
Security Ownership of Certain Owners." If holders of significant numbers of
shares of New Common Stock were to act as a group, such holders may be in a
position to control the outcome of actions requiring stockholder approval,
including the election of directors. This concentration of ownership could
also facilitate or hinder a negotiated change of control of Reorganized
Heartland and, consequently, impact upon the value of the New Common Stock.
Further, the possibility that one or more of the holders of significant
numbers of shares of New Common Stock may determine to sell all or a large
portion of their shares of New Common Stock in a short period of time may
adversely affect the market price of the New Common Stock.
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2. LACK OF ESTABLISHED MARKET FOR NEW COMMON STOCK.
Reorganized Heartland will use reasonable commercial efforts to file
an application for the New Common Stock to be included for quotation in the
NASDAQ National Market System and to comply with applicable state securities and
"blue sky" laws. There can be no assurance that an application will be
approved.
The New Common Stock will be issued to pre-Commencement Date
creditors, some of whom may prefer to liquidate their investment rather than to
hold it on a long-term basis. There is currently no trading market for the New
Common Stock (such as The Nasdaq Stock Market or a national or regional stock
exchange) nor is it known whether or when one would develop. There can be no
assurance that an active market will develop therefor. Further, there can be no
assurance to the degree of price volatility in any such particular market.
While the Plan was developed based on an assumed reorganization value of $14.41
per share of the New Common Stock, such valuation is not an estimate of the
price at which the New Common Stock may trade in the market. The Debtor has not
attempted to make any such estimate in connection with the development of the
Plan. No assurance can be given as to the market prices that will prevail
following the Effective Date.
3. DIVIDEND POLICIES.
Reorganized Heartland does not anticipate paying any dividends on the
New Common Stock in the foreseeable future. In addition, the covenants in any
future financing facility to which Reorganized Heartland may be a party may
limit the ability of Reorganized Heartland to pay dividends. Certain
institutional investors may only invest in dividend-paying equity securities or
may operate under other restrictions which may prohibit or limit their ability
to invest in New Common Stock.
4. PREFERRED STOCK.
Until such time (if any) as the Board of Directors of Reorganized
Heartland determines that Reorganized Heartland should issue Preferred Stock and
establishes the respective rights of the holders of one or more series thereof,
it is not possible to state the actual effect of authorization of the Preferred
Stock upon the right of holders of New Common Stock. The effects of such
issuance could include, however: (i) reduction of the amount of Cash otherwise
available for payment of dividends on New Common Stock if dividends are also
payable on the Preferred Stock, (ii) restrictions on dividends on New Common
Stock if dividends on the Preferred Stock are in arrears, (iii) dilution of the
voting power of New Common Stock (if the Preferred Stock has voting rights
(including, without limitation, votes pertaining to the removal of directors))
and (iv) restriction of the rights of holders of New Common Stock to share in
Reorganized Heartland's assets upon liquidation until satisfaction of any
liquidation preference granted to the holders of Preferred Stock. In addition,
so called "blank check" preferred stock (such as the Preferred Stock) may be
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viewed as having possible anti-takeover effects, if it were used to make a third
party's attempt to gain control of Reorganized Heartland more difficult, time
consuming or costly.
Heartland has no current plans pursuant to which Preferred Stock would
be issued as an anti-takeover device or otherwise.
5. PROJECTED FINANCIAL INFORMATION.
The Projected Financial Information included in this Disclosure
Statement is dependent upon the successful implementation of the Business Plan
and the validity of the other assumptions contained therein. These projections
reflect numerous assumptions, including confirmation and consummation of the
Plan in accordance with its terms, the anticipated future performance of
Heartland's subscription video and other businesses, certain assumptions with
respect to competitors of Heartland's general business and economic conditions
and other matters, many of which are beyond the control of Heartland. In
addition, unanticipated events and circumstances occurring subsequent to the
preparation of the projections may affect the actual financial results of
Heartland. Although Heartland believes that the projections are reasonably
attainable, some or all of the estimates will vary and variations between the
actual financial results and those projected may be material.
THE PROJECTIONS WERE NOT PREPARED WITH A VIEW TOWARD COMPLIANCE WITH
THE GUIDELINES ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS ("AICPA") OR THE FINANCIAL ACCOUNTING STANDARDS BOARD ("FASB").
FURTHERMORE, THE PROJECTIONS HAVE NOT BEEN AUDITED OR REVIEWED BY HEARTLAND'S
INDEPENDENT ACCOUNTANTS. WHILE PRESENTED WITH NUMERICAL SPECIFICITY, THE
PROJECTIONS ARE BASED UPON A VARIETY OF ESTIMATES AND ASSUMPTIONS, WHICH,
ALTHOUGH DEVELOPED AND CONSIDERED REASONABLE BY MANAGEMENT, MAY NOT BE REALIZED
AND ARE SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE UNCERTAINTIES
AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF REORGANIZED HEARTLAND
AND ITS MANAGEMENT. CONSEQUENTLY, THE PROJECTIONS SHOULD NOT BE REGARDED AS A
REPRESENTATION OR WARRANTY BY HEARTLAND, OR ANY OTHER PERSON, AS TO THE ACCURACY
OF THE PROJECTIONS OR THAT THE PROJECTIONS WILL BE REALIZED. ACTUAL RESULTS MAY
VARY MATERIALLY FROM THOSE PRESENTED IN THE PROJECTIONS.
6. BUSINESS FACTORS AND COMPETITIVE CONDITIONS.
a. Subscription Video Competition.
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The subscription television business is highly competitive, and
includes many operators with significantly greater resources and channel
capacity than Heartland. Heartland's principal subscription video competitors
in each market are traditional hard-wire or franchised cable operators, direct
to home ("DTH") satellite providers including direct broadcast satellite
("DBS"), and private cable ("SMATV") operators. According to a report issued by
the FCC in January 1998, approximately 73.6 million households subscribed to
multichannel video programming distribution ("MVPD") services as of June 1997.
According to the report, Heartland's primary competitors had the following
market share at such time: traditional hard-wire cable systems - 87%; DTH/DBS -
9.8%; and SMATV - 1.6%. Wireless cable or MMDS service providers had a 1.5%
share of national MVPD subscribers.
In addition to the above services, premium movie services offered by
Heartland also have encountered significant competition from the video cassette
industry, which provides feature films similar to those distributed by Heartland
on premium channels and through pay-per-view services. The FCC estimates that
88% of U.S. television households have a video cassette recorder. Finally,
local off-air VHF/UHF broadcast television stations (such as ABC, NBC, CBS and
Fox) continue to be a primary source of video programming for the public, and
the FCC estimates that 23% of all television households receive television
programming entirely through off-air reception.
b. Subscription Video Technologies.
New and advanced technologies for the subscription television
industry, such as digital compression, fiber optic networks, DBS transmission,
video dialtone, and LMDS are in various stages of development of commercial
deployment. These technologies are being developed and supported by entities,
such as hard-wire cable companies and Regional Bell Operating Companies
("RBOCs"), that have significantly greater financial and other resources that
Heartland. These new technologies could have a material adverse effect on the
demand for MMDS subscription television services. There can be no assurance
that Heartland will be able to compete successfully with existing competitors or
new entrants in the market for subscription television services.
c. High Speed Data/Internet Competition.
To the extent that Heartland enters the Internet access market to
provide a retail Internet access market to business and/or MDU customers,
Heartland will experience competition from multiple service providers, including
traditional ISPs, inter-exchange carriers, local telephone companies and
hard-wire cable television companies.
The competition for Internet access service to small to mid-size
businesses generally falls into three categories: national, regional and local
competitors. National competitors include inter-exchange carriers such as AT&T,
MCI and Sprint, and national ISPs such as Digex, PSINet and UUNet. The services
offered by national competitors generally range from dial-up 14.4 bps to a
dedicated DS-3 (45 mbps) connection. Some competitors have added Asynchronous
Digital
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Subscriber Lines ("ADSL") to their service offering. ADSL can achieve higher
data speeds over existing copper wire infrastructure (1.5 mbps to 8.4 mbps)
than previously possible. Regional competitors include RBOCs and regional
ISPs that generally offer services that range from dial-up 14.4 kbps to
dedicated T-I (1.5 mbps) connections. Local competitors include local
exchange carriers, multi-system hard-wire cable operators and local ISPs.
The services offered by local competitors generally range from dial-up 14.4
kbps to a dedicated T-I connection. Local providers generally aggregate or
over-subscribe local traffic onto access lines which are connected to a
regional or national provider. Accordingly, these local providers typically
target consumers, as opposed to businesses.
Heartland also will face intense competition from other providers of
data and telephony transmission services if Heartland implements, on a
commercial basis, such services. Such competition is increased due to the fact
that MMDS spectrum has not traditionally been utilized to deliver such
alternative services, and consumer acceptance of such services delivered via
MMDS technology is unknown at this time. Many of the existing providers of data
transmission and telephony services, such as long distance and regional
telephone companies, have significantly greater financial and other resources
that Heartland. In addition, there can be no assurance that there will be
consumer demand for alternative uses of the MMDS spectrum such as data
transmission, including Internet access services, and telephony delivery
services, that Heartland will be able to compete successfully against other
providers of such services, or that Heartland will be able to achieve
profitability from such services in future years.
d. Dependence on Channel Leases and Licenses; Need for License
Extensions.
Heartland is dependent upon leases of transmission capacity from
various third-party license holders for much of its channel rights. MMDS and
ITFS licenses generally are granted for a term of ten years and are subject to
renewal by the FCC. FCC licenses also specify construction deadlines which, if
not met, could result in the loss of the license. Requests for additional time
construct a channel may be filed and are subject to review pursuant to FCC
rules. Certain of Heartland's MMDS and ITFS channel rights are subject to
pending extension requests and it is anticipated that additional extensions will
be required. There can be no assurance that the FCC will grant any particular
extension request or license renewal request.
Heartland's channel leases typically cover four ITFS channels and/or
one to four MMDs channels each. Under the rules of the FCC, the term of leases
for ITFS channels, which generally constitute 20 of the 33 available wireless
channels within any major wireless cable market, may not exceed 10 years.
Heartland leases the majority of its wireless cable channels. The terms of such
leases typically expire five to 10 years from the license grant date, ranging
from years 1998 to 2007. The majority of such leases provide for (i) an
automatic renewal (or renewal upon notice) of the lease of five to 10 years if
such automatic renewals are then permitted by the FCC, (ii) a right of first
refusal to purchase the channels after the expiration of the lease if FCC rules
and regulations so permit, and/or (iii) an agreement to negotiate a lease
renewal in good faith. Although Heartland
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does not believe that the termination of or failure to renew a single channel
lease would adversely affect the company, several of such terminations or
failures in one or more markets could have a material adverse effect on the
company.
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All ITFS and MMDS channel leases are dependent upon the continued
validity of the corresponding FCC license. Heartland anticipates that upon the
expiration of the current license terms, all such FCC licenses will be renewed
following completion of the FCC review process, although there is no assurance
that the FCC will grant these renewal applications. The termination of or
failure to renew a channel license or lease (due to a breach by Heartland or its
lessor, cancellation of the license held by a third party lessor for failure to
timely construct an authorized station), could result in Heartland being unable
to deliver services on such channel(s) unless it were able to lease excess
capacity from a successor license holder. Such a termination or failure in a
market which Heartland actively serves could have a material adverse effect on
Reorganized Heartland and its operations.
e. New Business Strategy.
Providing high-speed data and telephone services over MMDS spectrum is
a new and untested business strategy. Accordingly, Reorganized Heartland will
face a number of the difficulties and uncertainties generally associated with
new businesses, such as lack of consumer acceptance, difficulty in obtaining
financing, increasing competition, advances in competing technologies and
changes in laws and regulations. Additionally, although equipment for
high-speed two-way data and voice transmissions is being tested, this
equipment is not yet commercially available.
f. FCC Approval; Transfer of Control Applications.
The FCC is required to grant prior approval of any assignment or
transfer of control involving an entity that holds an FCC license. Because the
restructuring of Heartland's capital structure contemplated by the Plan involves
the transfer of ownership of more than 50% of Heartland's voting securities,
Heartland will be required to file "long form" transfer of control applications
(the "FCC Applications") requesting FCC approval of the transfer of the BTA
authorizations and channel licenses held directly or indirectly by Heartland.
Heartland intends to file the FCC Applications no later than 10 days after the
Petition Date.
Once the FCC Applications are filed and accepted for filing by the
FCC, there is a 30-day public notice period, during which time interested
parties may file comments on or petitions to deny the FCC Applications. During
the approval process, the FCC will examine the FCC Applications to determine,
among other things, whether the prospective owners of the licensed entity are
qualified to hold an attributable interest or control the authorizations at
issue. During this process, the FCC will place particular emphasis on
determining the existence of any issues relating to alien ownership and cable
cross-ownership. Generally, long form applications are granted within two to
three months of filing. Because of the inherent uncertainties in the
application process (E.G., a challenge to the FCC Applications and composition
of ownership of voting securities), there can be no assurance that the FCC
Applications will be granted within two to three months of their filing or at
all.
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g. BTA Authorizations; Repayment of Bidding Credit and BTA Notes.
Heartland acquired authorizations for 93 BTAs in the FCC's auction
that concluded in March 1996 at a cost of approximately $19.8 million, including
the Bidding Credit discussed below. SEE Section III.A.3, "General
Information--Description and History of Business -- Significant Indebtedness
- -- Other Notes Payable." In the auction, Heartland qualified as a "small
business" under the FCC's regulations and therefore was entitled to (a)
receive a bidding credit ("Bidding Credit") of 15% of the total cost of the
BTAs, and (b) finance the payment for the BTAs under 10-year installment
promissory notes with 9% annual interest (the "BTA Notes"). The total
Bidding Credit was approximately $3.5 million. The transfer of control
resulting from the restructuring of Heartland's capital structure under the
Plan will require Heartland to demonstrate to the FCC that Reorganized
Heartland also will qualify as a "small business" in order to preserve
Heartland's Bidding Credit and installment payment benefits. If Reorganized
Heartland does not qualify as a small business, the FCC will require as a
condition of its approval of the transfer of the BTA authorizations that
Reorganized Heartland (a) reimburse the FCC for up to 75% of the Bidding
Credit plus interest, and (b) make full payment of all unpaid principal and
interest accrued under the BTA Notes as of the date of the transfer of
control.
Applicable FCC regulations define a small business as an entity that
TOGETHER WITH ITS AFFILIATES has average annual gross revenues that are not more
than $40 million for the preceding three calendar years, excluding increases in
gross revenues that result from operations, business development and expanded
service. An entity would be considered an "affiliate" of Reorganized Heartland
if it (a) directly or indirectly controls or has the power to control
Reorganized Heartland, (b) is directly or indirectly controlled by Reorganized
Heartland, (c) is directly indirectly controlled by a third party or parties
that also controls or has the power to control Reorganized Heartland, or (d) has
an identity of interest with Reorganized Heartland that is sufficient to
constitute control. In determining the issue of control, the FCC will examine,
among other things, voting stock and other securities ownership (50% of voting
securities is deemed to constitute control), occupancy of director, officer or
key employee positions, contractual relationships such as voting trusts or
voting agreements and the identity of interests between and among persons, such
as members of the same family and persons with common investments. If an entity
is deemed to be an "affiliate" of Reorganized Heartland, the average annual
gross revenues of such entity will be aggregated with those of Heartland in
determining whether the $40 million threshold is exceeded.
Heartland currently expects that ownership of the New Common Stock
will be dispersed among a sufficient number of separate and independent entities
to prevent any one or more entities from being deemed to "control" Heartland
under FCC regulations. Additionally, although the Plan contemplates that the
initial Board of Directors will be appointed by the holders of the Old Senior
Notes, such persons are expected to be unaffiliated with one another, subsequent
members of the Board of Directors will be elected by all stockholders at annual
meetings and day to day operations of the business will be run by management.
Accordingly, Heartland does not believe that it will be required to aggregate
the revenues of any purported "affiliate." However, Heartland is
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unable to predict with absolute certainty the composition of the ownership of
the New Common Stock at the time of filing the applications or thereafter and
accordingly, there can be no assurance that Reorganized Heartland will not be
required to refund a significant amount of its Bidding Credit and pay in full
the BTA Notes.
h. Changes in Technology.
The subscription television and telecommunications services industries
in general are subject to rapid and significant changes in technology. These
changes may increase competitive pressures on Reorganized Heartland or require
capital investments by Reorganized Heartland (to remain competitive) in excess
of its available resources. Because of the rapid and high level of
technological change in the industry, the effect of technological changes on
Reorganized Heartland's businesses of cannot be predicted with any certainty.
i. Need for Additional Financing.
Reorganized Heartland's business plan will require one or more
substantial investments to finance projected capital expenditures and operating
expenses for system development. These activities may be financed in whole or
in part by Reorganized Heartland through debt or equity financing, secured or
unsecured credit facilities, joint ventures, or other arrangements. There are
no assurances, however, that the financing necessary to fund the business plan
will be available on satisfactory terms and conditions, if at all. Additional
debt could result in a substantial portion of Reorganized Heartland's cash flow
from operations being dedicated to the payment of principal and interest on such
indebtedness and may render Reorganized Heartland more vulnerable to competitive
pressures and economic downturns. The failure to obtain additional financing
could adversely affect the growth of Reorganized Heartland and its ability to
compete successfully in the subscription television and telecommunications
services industries.
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7. PENDING LITIGATION.
a. General Litigation
In the ordinary course of its business, Heartland is party to lawsuits
involving, among other things, allegations of personal injury, property damage
and employment disputes. The potential exposure to Heartland from such
litigation is not considered to be significant. Such a conclusion is based upon
an analysis of the nature of the litigation, amounts claimed, insurance coverage
and reserves reflected in Heartland's financial statements.
b. Securities Litigation
Heartland is a co-defendant in one shareholder action pending in
federal court in the Northern District of Texas styled COATES, ET AL. V.
HEARTLAND WIRELESS COMMUNICATIONS, INC., ET AL. (3-98CV0452-D) (the "Coates
Action"), and one purported class action pending in State District Court in
Kleburg County, Texas styled THOMPSON, ET AL. V. HEARTLAND WIRELESS
COMMUNICATIONS, INC., ET AL. (98-371-D) (the "Thompson Action"). Fourteen
current and former Heartland directors, officers and/or employees are defendants
in a purported securities class action filed in the Northern District of Texas
styled SHEHADI, ET AL. V. DAVID E. WEBB, ET AL. (3-98CV2660-H) (the "Shehadi
Action").
The Coates Action consists of federal securities claims brought by two
Heartland shareholders against Heartland and six individual officers and/or
directors. The complaint alleges that during a period beginning on November 14,
1996 and ending on March 20, 1997, defendants allegedly misstated material facts
concerning Heartland's subscriber base and allegedly omitted to disclose the
need for a material write-down of accounts receivable relating to that
subscriber base. The complaint asserts claims under Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934. On November 2, 1998, the court issued an
opinion granting a Motion to Dismiss the complaint filed by defendants. The
court granted the plaintiffs permission to replead. If the plaintiffs choose to
replead (which Heartland expects), they must file an amended complaint on or
before December 2, 1998.
The Thompson Action involves allegations of state securities law
violations, misrepresentation, and civil conspiracy claims against Heartland and
three individual defendants. The Thompson Action relies on many of the same
underlying factual allegations asserted in the Coates Action. The principal
difference is that the Thompson Action relies on alleged misrepresentations
occurring over a longer time period than the Coates Action. The purported class
consists of all persons who acquired Heartland securities between November 15,
1995 and March 20, 1997. The defendants filed a Motion to Transfer the case to
Collin County, Texas.
The Shehadi Action consists of federal and state securities and
misrepresentation claims that rely on many of the same underlying factual
allegations asserted in the Coates and
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Thompson Actions. The principal difference is that the Shehadi Action relies
on alleged misrepresentations occurring over a longer time period than the
Coates and Thompson Actions. The purported class consists of all persons who
acquired Heartland securities between November 15, 1995 and August 14, 1998.
Moreover, unlike the Thompson Action, the purported class is limited to
individuals who purchased Heartland securities on the open market. Heartland
has not been named as a defendant in this action.
c. Late Fee Litigation.
Heartland is a party to two purported class action lawsuits filed in
May 1998 and pending in State District Court in Brooks and Grayson Counties,
Texas, respectively. The lawsuits are styled GARCIA, ET AL. V. HEARTLAND
WIRELESS COMMUNICATIONS, INC. D/B/A HEARTLAND CABLE TELEVISION (98-60898-1) and
WARREN, ET. AL. V. HEARTLAND WIRELESS COMMUNICATIONS, INC. (98-0715) (the "Late
Fee Actions"). The Late Fee Actions allege that the late fees charged by
Heartland are not reasonably related to the costs incurred by Heartland as a
result of late payment of accounts. The plaintiffs seek to certify a class to
represent all persons currently receiving cable service from Heartland or who
have been charged a late fee in the past by Heartland. The plaintiffs seek a
declaration that any contractual provisions for Heartland's late fees are void
or usurious, and seek money damages, interest, attorneys' fees and costs.
8. CORPORATE LIABILITY INSURANCE
a. Primary D&O Coverage -- National Union.
1) Relevant Policies.
Heartland has two primary D&O policies that are relevant to the
COATES and THOMPSON actions: (1) National Union Fire Insurance Company of
Pittsburgh, Pennsylvania ("National Union") policy number 484-92-45, which
covers the period February 23, 1997 through February 23, 1998, and (2)
National Union policy number 861-16-57, which covers the period February 23,
1998 through February 23, 1999. The scope of coverage, liability limits, and
retention terms of the National Union policies are substantially the same.
2) Scope of Coverage.
The National Union policies provide both D&O and entity coverage:
Coverage A insures Heartland's directors and officers against losses arising
from claims made against them during the policy period. Coverage B covers
Heartland's losses arising from (i) a "securities claim" first made against the
Company, and (ii) a claim first made against Heartland's directors or officers
to the extent that Heartland is obligated to indemnify its directors or officers
pursuant to law (common or statutory), contract, or the charter or by-laws of
Heartland duly effective under such
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law governing indemnification rights. The policies define a "securities
claim" as a claim (including a civil lawsuit or criminal proceeding brought
by the SEC) alleging a violation of any law, regulation, or rule (statutory
or common law) relating to (1) the purchase, sale, and/or solicitation of
Heartland's stock, or (2) an action by a securities holder (whether
individually, by class, or derivatively on behalf of the Company) alleging a
breach of duty or other wrongful act of the insureds.
With respect to Heartland's directors or officers, the policies cover
claims arising from any breach of duty, neglect, error, misstatement, misleading
statement, or omission or act by the directors or officers in their respective
capacities, or any matter claimed against them solely by reason of their status
as directors or officers of the Company. The policies also cover claims against
Heartland arising out of securities claims involving any breach of duty,
neglect, error, misstatement, misleading statement, or omission or act by the
Company.
Both policies cover defense costs; however, the policies expressly
disclaim any duty to defend. The policies define defense costs as reasonable
and necessary fees, costs, and expenses resulting solely from the investigation,
adjustment, defense, and appeal of a covered claim against Heartland and/or its
officers and directors. The policies also cover punitive damages imposed on
Heartland in connection with a securities claim.
b. Liability Limits and Retention.
The aggregate limit of liability under both policies is $10,000,000
for Coverage A and Coverage B combined (including defense costs). Thus, any
claims paid under Coverage A (including defense costs) will reduce any amount
available to Heartland under Coverage B.
With respect to securities claims, the policies do not impose any
retention for judgments, settlements, and defense costs for non-indemnifiable
losses. The policies provide for a $500,000 retention for defense costs
relating to (1) securities claims made against Heartland under Coverage B and
(2) indemnifiable losses. For all other claims, the policies provide for a
$250,000 retention for judgments, settlements, and defense costs that are
indemnifiable.
For claims that are subject to these retention provisions, the
policies cover the amount of loss which is in excess of the retention amounts.
However, with respect to a securities claim, upon (i) a determination of "no
liability" for all insureds, or (ii) a dismissal or stipulation to dismiss the
claim without prejudice and without the payment of any consideration by any
insured, the retention is reimbursed.
c. Excess D&O Coverage: Lloyd's and Chubb
Heartland has two excess D&O policies applicable to the COATES and
THOMPSON actions: (1) Lloyd's of London ("Lloyd's") policy number 501/NB97ACM1,
which was in effect
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from February 23, 1997 through February 23, 1998, and (2) Federal Insurance
Company ("Chubb") policy number 8151-43-52, which is in effect from February
23, 1998 through February 23, 1999.
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1) Lloyd's Policy.
The Lloyd's policy provides an aggregate of $10,000,000 of excess
coverage over and above the limit of the primary policy plus the applicable
deductible or retention. The Lloyd's policy expressly provides excess
coverage for claims made against Heartland's officers or directors.
2) Chubb Policy.
The Chubb policy similarly provides an aggregate of $10,000,000 of
excess coverage. The policy incorporates the terms of the primary policy,
and expressly provides coverage for any insured covered by the primary policy.
XI. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
A. INTRODUCTION.
THE FOLLOWING DISCUSSION IS A SUMMARY OF CERTAIN OF THE SIGNIFICANT
FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN TO THE DEBTOR AND TO HOLDERS OF
CLAIMS AND EQUITY INTERESTS AND 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 (THE "IRS") AS IN EFFECT ON THE DATE OF THIS DISCLOSURE STATEMENT.
CHANGES IN, OR NEW INTERPRETATIONS OF, SUCH RULES COULD THEREFORE
SIGNIFICANTLY AFFECT THE TAX CONSEQUENCES DESCRIBED BELOW. NO RULINGS HAVE
BEEN REQUESTED FROM THE IRS AND NO LEGAL OPINIONS HAVE BEEN REQUESTED FROM
COUNSEL WITH RESPECT TO ANY OF THE TAX ASPECTS OF THE PLAN.
THE FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES OF THE PLAN TO THE
HOLDERS OF CLAIMS AND EQUITY INTERESTS MAY VARY BASED UPON THE INDIVIDUAL
CIRCUMSTANCES OF EACH HOLDER. IN ADDITION, THIS DISCUSSION DOES NOT COVER
ALL ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO THE DEBTOR OR
TO HOLDERS OF ALLOWED CLAIMS OR EQUITY INTERESTS, NOR DOES THE DISCUSSION
DEAL WITH TAX ISSUES PECULIAR TO CERTAIN TYPES OF TAXPAYERS (SUCH AS DEALERS
IN SECURITIES, S CORPORATIONS, LIFE INSURANCE COMPANIES, FINANCIAL
INSTITUTIONS, TAX EXEMPT ORGANIZATIONS AND FOREIGN TAXPAYERS). NO ASPECT OF
FOREIGN, STATE, LOCAL OR ESTATE AND GIFT TAXATION IS ADDRESSED.
THEREFORE, THE FOLLOWING SUMMARY IS NOT A SUBSTITUTE FOR CAREFUL TAX
PLANNING AND ADVICE BASED UPON THE INDIVIDUAL CIRCUMSTANCES OF
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EACH HOLDER OF A CLAIM OR AN EQUITY INTEREST. HOLDERS OF A CLAIM OR AN
EQUITY INTEREST ARE URGED TO CONSULT THEIR OWN TAX ADVISORS FOR FEDERAL,
STATE, LOCAL AND OTHER TAX CONSEQUENCES PECULIAR TO THEM UNDER THE PLAN.
B. CONSEQUENCES TO HOLDERS OF CLAIMS.
1. HOLDERS OF ADMINISTRATIVE EXPENSE CLAIMS.
Holders of Allowed Administrative Expense Claims generally will be
paid in full in Cash in the ordinary course of business. These holders must
include such amounts in their gross income in the taxable year in which such
amounts are actually or constructively received by them. Amounts of income
tax and employment tax will be withheld from such payments as required by law.
2. HOLDERS OF PRIORITY NON-TAX CLAIMS (CLASS 1).
Except to the extent that a holder of an Allowed Priority Non-Tax
Claim agrees to a different treatment of such Claim, each Allowed Priority
Non-Tax Claim shall be unimpaired in accordance with section 1124 of the
Bankruptcy Code and will be paid in full in Cash on the Effective Date. All
Allowed Priority Non-Tax Claims which are not due and payable on or before
the Effective Date shall be paid in the ordinary course of business in
accordance with the terms of such Claim. These holders must include such
amounts in their gross income in the taxable year in which such amounts are
actually or constructively received by them. Amounts of income tax and
employment tax will be withheld from such payments as required by law.
3. HOLDERS OF SECURED CLAIMS (CLASS 2).
Except to the extent that a holder of an Allowed Secured Claim
agrees to a different treatment of such Claim, each Allowed Secured Claim
shall be unimpaired in accordance with section 1124 of the Bankruptcy Code
and will be paid in full in Cash on the Effective Date. All Allowed Secured
Claims which are not due and payable on or before the Effective Date shall be
paid in the ordinary course of business in accordance with the terms of such
Claim. The tax consequences of the satisfaction of an Allowed Secured Claim
will depend upon the nature of such Claim. Holders of such Claims should
consult their own tax advisors.
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4. HOLDERS OF MISCELLANEOUS UNSECURED CLAIMS (CLASS 3)
Each holder of an Allowed Miscellaneous Unsecured Claim shall
receive, in full satisfaction of such Allowed Miscellaneous Unsecured Claim,
New Common Stock equal to the Ratable Proportion of New Common Stock to be
received by holders of Old Senior Note Claims also in Class 3 of the Plan.
However, the Reorganized Debtor and a holder of an Allowed Miscellaneous
Unsecured Claim may agree to other treatment, including payment in Cash,
provided that such treatment shall not provide a return having a present
value in excess of the present value that otherwise would be made to such
holder.
This class is comprised of holders of various Unsecured Claims not
otherwise classified under the Plan and may include litigation claims (other
than Bondholder Litigation Claims and Stockholder Litigation Claims) to the
extent not covered by applicable insurance and Indemnity Claims for which the
corporate liability insurance was insufficient to pay their claims. The tax
consequences to holders of an Allowed Miscellaneous Unsecured Claim (other
than an Indemnity Claim) will depend upon the origin and nature of such
Claim. Holders of such Claims should consult their own tax advisors. A
distribution made to a holder of an Allowed Miscellaneous Unsecured Claim
relating to an Indemnity Claim is to reimburse such holder for payments it
may make as a result of pending lawsuits filed against it in its capacity as
officer or director of the Reorganized Debtor. Such holders should not
recognize taxable income upon either the receipt of Cash or New Common Stock.
If such holder receives New Common stock, its tax basis in the New Common
Stock will equal the fair market value of such New Common Stock on the date
of receipt.
5. HOLDERS OF OLD SENIOR NOTE CLAIMS AND OLD CONVERTIBLE NOTE CLAIMS
(CLASS 3 AND CLASS 4).
Each holder of an Allowed Old Senior Note Claim or an Allowed Old
Convertible Note Claim shall receive, in full satisfaction of such Claim, its
Ratable Proportion of New Common Stock, subject to dilution by the exercise
of the New Warrants, Incentive Options and, if holders of Miscellaneous
Unsecured Claims are entitled to receive shares of New Common Stock, by any
such shares issued to such holders. A holder of an Allowed Old Convertible
Note Claim shall receive, in addition to New Common Stock, its Ratable
Proportion of New Warrants. Whether a holder of an Allowed Old Senior Note
Claim or an Allowed Old Convertible Note Claim will recognize gain or loss
will depend in part upon whether such exchange qualifies as a
recapitalization or other "reorganization" as defined in the Tax Code, which
in turn may depend upon whether the Claim exchanged is classified as a
"security" for federal income tax purposes. The term "security" is not
defined in the Tax Code or in the regulations. One of the most significant
factors in determining whether a particular debt instrument is a security is
the original term thereof. In general, the longer the term of an instrument,
the greater the likelihood that it will be considered a security. As a
general rule, a debt instrument having an original term of 10 years or more
will be classified as a security, and a debt instrument having an original
term of fewer than five years will not. Debt instruments having a term of at
least five years but less than ten years are likely to be treated as
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securities, but may not be, depending upon their resemblance to ordinary
promissory notes, whether they are publicly traded, whether the instruments
are secured, whether such instruments are convertible into stock, the
financial condition of the debtor at the time the debt instruments are issued
and other factors.
The Debtor believes that the Old Convertible Note Claims constitute
"securities," and, while not free from doubt, the Debtor believes that the
Old Senior Note Claims constitute "securities" for federal income tax
purposes. Additionally, the Debtor believes that the New Common Stock and New
Warrants constitute "stock or securities." Consequently, the holders of
either Allowed Old Senior Note Claims or Allowed Old Convertible Note Claims
should not recognize gain or loss upon the exchange of such Claims for New
Common Stock and, in the case of the Allowed Old Convertible Note Claims, New
Warrants. An Allowed Old Senior Note holder's basis in its New Common Stock
received will be equal to such holder's basis in its Allowed Old Senior Note
Claim. For a holder of an Allowed Old Convertible Note Claim, the holder's
basis in such Claim shall be allocated between the New Common Stock and the
New Warrants in proportion to their relative fair market values. Because the
original term of the Old Senior Notes is between five and ten years, the
Claims relating to such Notes may not constitute "securities" for federal
income tax purposes. If these Claims are not "securities" (although the
Debtor believes the contrary to be true), then a holder of an Allowed Old
Senior Note Claim will recognize taxable income or loss upon satisfaction of
its claim in an amount equal to the difference between (i) the fair market
value of the New Common Stock received by such holder in respect of its Claim
(excluding any New Common Stock received in respect of a Claim for accrued
but unpaid interest), and (ii) the holder's adjusted tax basis in the Claim
exchanged therefor (other than basis attributable to accrued but unpaid
interest previously included in the holder's taxable income). SEE Section
XI.B.10, "Certain Federal Income Tax Consequences of the Plan; Allocation of
Consideration to Interest." The characterization of either income or loss as
capital or ordinary will depend upon a number of factors, including, without
limitation, the tax status of the holder, whether the Claim constitutes a
capital asset in the hands of the holder, the amount of time the holder has
held the Claim, and whether and to what extent the holder has previously
claimed a loss or bad debt deduction with respect to such Claim.
6. HOLDERS OF TRADE CLAIMS (CLASS 5).
On the Effective Date, except to the extent that a holder of an
Allowed Trade Claim agrees to a different treatment of such Allowed Trade
Claim, each Allowed Trade Claim shall be unimpaired in accordance with
section 1124 of the Bankruptcy Code. The Debtor does not expect to have any
prepetition claims of this nature unpaid as of the Effective Date. However,
all Allowed Trade Claims that are not due and payable on or before the
Effective Date shall be paid in the ordinary course of business. In general,
holders of Allowed Trade Claims who receive distributions under the Plan will
realize gain or loss in an amount equal to the difference between (a) the
holder's adjusted basis in the Allowed Trade Claim and (b) the amount of Cash
received.
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7. HOLDERS OF INDEMNITY CLAIMS (CLASS 6).
If Class 6 accepts the Plan, following the Effective Date, holders
of Indemnity Claims will be entitled to assert such Claims against the Debtor
to the extent of (i) any available coverage under the Debtor's corporate
liability insurance and (ii) any self-insured retention under such corporate
liability insurance. If Class 6 rejects the Plan, the Debtor will request
the Bankruptcy Court to estimate the Indemnity Claims at zero. If the
Indemnity Claims are estimated at more than zero, such amount, to the extent
such amount exceeds the amount of any corporate liability insurance
(including any self-insured retention under such insurance) available to
satisfy its Claim, shall be treated as a Miscellaneous Unsecured Claim under
Class 3 of the Plan. Any distribution made to holders of Allowed Indemnity
Claims will be to reimburse such holders for payments they may make as a
result of pending lawsuits filed against them in their capacity as officers
or directors of the Debtor. The holders of an Allowed Indemnity Claim will
not recognize taxable income upon the receipt of the Cash and new Common
Stock and will have a tax basis in the New Common Stock equal to the fair
market value of such New Common Stock on the date of receipt.
8. HOLDERS OF BONDHOLDER LITIGATION AND STOCKHOLDER LITIGATION CLAIMS
(CLASSES 7 AND 8).
The Debtor estimates that both the Bondholder and the Stockholder
Litigation Claims equal zero. If the Bondholder Litigation Claims are
allowed at more than zero, each holder of an Allowed Bondholder Litigation
Claim shall receive, in full satisfaction of such Allowed Bondholder
Litigation Claim, its Ratable Proportion of any liability insurance available
to satisfy its Claim remaining after use of such insurance for Allowed
Indemnity Claims, not to exceed the Allowed Amount of its Claim, and if
liability insurance is insufficient to satisfy such Claim in full, its
Ratable Proportion of up to 275,000 New Warrants, but not in excess of the
number of New Warrants the value of which is sufficient to satisfy such Claim
for purposes of Section 1129(b)(2)(B)(i) of the Bankruptcy Code. If the
Stockholder Litigation Claims are allowed at more than zero, each holder of
an Allowed Stockholder Litigation Claim shall receive, in full satisfaction
of such Allowed Stockholder Litigation Claims, its Ratable Proportion of any
liability insurance available to satisfy its Claim remaining after use of
such insurance for Allowed Indemnity Claims and Allowed Bondholder Litigation
Claims, not to exceed the Allowed Amount of its Claim, and if liability
insurance is insufficient to satisfy such Claim in full, its Ratable
Proportion of the Stockholder Litigation Claims Portion of the Equity
Distribution Pool (which is comprised of New Warrants).
The distributions to holders of Allowed Bondholder Litigation
Claims or Stockholder Litigation Claims are to compensate the holders for the
economic loss or diminution in value previously sustained by such holders
upon the purchase or sale of the Debtor's debt or equity securities. If the
holder of a Bondholder Litigation Claim or a Stockholder Litigation Claim
previously sold or otherwise disposed of the securities that are the basis
for the holder's Claim, the holder of such a Claim will recognize taxable
income in an amount equal to the sum of the amount of Cash and the fair
market value of any New Warrants received in exchange for such Claim. The
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character of any such income generally will be determined by reference to the
character of the prior allowable tax loss previously claimed by the holder.
Although not free from doubt, if a holder of a Bondholder Litigation Claim
still owns the securities that are the basis for the holder's Claim, such
holder should (i) not recognize taxable gain (except to the extent of any
Cash received) or loss upon the receipt of the New Warrants in satisfaction
of such Claim in accordance with the Plan, (ii) be required to reduce its tax
basis in the securities that are the basis of the holder's Claim by an amount
equal to the sum of the amount of Cash and fair market value of the New
Warrants received in satisfaction thereof on the date of receipt thereof, and
(iii) have a tax basis in the New Warrants equal to the fair market value of
such New Warrants received in satisfaction thereof on the date of receipt
thereof. Holders of such Claims should consult their own tax advisors. For
holders of Stockholder Litigation Claims who still own the stock that is the
basis of their Claims, the tax consequences upon receipt of the New Warrants
will be the same as discussed below. SEE Section XI.B.9., "Certain Federal
Income Tax Consequences of the Plan -- Holders of Equity Interests."
9. HOLDERS OF EQUITY INTERESTS (CLASS 9).
The Equity Interests shall be canceled and each holder of an
Allowed Equity Interest will receive a Ratable Portion of the Old Equity
Portion of the Equity Distribution Pool. The number of New Warrants to be
distributed to holders of Equity Interests will be reduced by the number of
New Warrants distributed to holders of Bondholder Litigation Claims and
Stockholder Litigation Claims (if any), which, depending upon the amount of
Allowed Bondholder Litigation Claims, may reduce recovery to holders of
Allowed Equity Interests to zero.
A holder of an Allowed Equity Interest will realize and recognize
gain or loss, if any, equal to the difference between (i) the fair market
value of the New Warrants received and (ii) the holder's adjusted tax basis
in the Allowed Equity Interest exchanged therefor. A holder's tax basis in
the New Warrants received by such holder will be equal to the respective fair
market values. The holding period for any New Warrants will begin on the day
after the exchange. Under the wash sale rules of section 1091 of the Tax
Code, a holder's gain or loss may be disallowed to the extent a holder
exercises New Warrants, or a portion thereof, within 30 days after their
receipt.
10. ALLOCATION OF CONSIDERATION TO INTEREST.
The consideration received pursuant to the Plan in exchange for
certain Claims may be allocated between the principal and the accrued, but
unpaid interest, if any. The tax consequences of the receipt of
consideration allocable to accrued but unpaid interest may differ from the
tax consequences of the receipt of consideration allocable to the principal
amount of the Claim. Holders of Claims will recognize ordinary income to the
extent that any consideration received under the Plan in exchange therefor is
allocable to accrued but unpaid interest that has not already been included
in the holder's taxable income. If, on the other hand, amounts of accrued
but unpaid
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interest previously included in the holder's taxable income exceed the amount
of consideration allocable to such interest, the holder generally should be
treated as recognizing ordinary loss.
The proper allocation between principal and interest of amounts
received in exchange for the discharge of a Claim at a discount is unclear
and may be affected by, among other things, the rules in the Tax Code
relating to imputed interest, original issue discount, market discount and
bond insurance premium. The Plan will provide that, for federal income tax
purposes, consideration to be distributed pursuant to the Plan will be
allocated to the principal amount of a Claim first and then, to the extent
the consideration exceeds the principal amount of the Claim, to accrued but
unpaid interest. Generally, amounts allocated to principal will be treated as
recovery of capital and not taxable unless a holder's basis is less than the
principal amount of the Claim. Nevertheless, it is possible that the IRS may
take the position that a pro rata portion of the consideration received by
each holder of an interest-bearing obligation must be allocated to interest
or that consideration must be allocated first to accrued but unpaid interest
and then to principal. In this regard, holders of Claims should consult
their own tax advisors.
11. MARKET DISCOUNT.
Market discount is defined generally in the Tax Code as the excess,
if any, of (i) the "stated redemption price at maturity" of a debt obligation
over (ii) the adjusted basis of the debt obligation in the hands of a holder
immediately after acquisition. In the case of any bond having original issue
discount, which includes the Old Convertible Notes, the stated redemption
price at maturity shall be treated as equal to the revised issue price. The
revised issue price is the sum of (i) the issue price of the bond and (ii)
the aggregate amount of the original issue discount includible in the gross
income of all holders for periods before the acquisition of the bond on the
secondary market. A market discount bond is defined as any bond having market
discount. Debt instruments in the hands of original holders are not market
discount bonds. Moreover, under a DE MINIMIS exception, there is no market
discount if the excess of the stated redemption price at maturity of a debt
instrument over the holder's adjusted basis in the debt instrument is less
than 0.25% of the stated redemption price at maturity multiplied by the
number of complete years after the acquisition date to the date of maturity.
Unless the holder elects otherwise, the accrued market discount for an old
debt instrument generally is the amount calculated by multiplying the market
discount for such debt instrument by a factor, the numerator of which is the
number of days an old debt instrument has been held by the holder and the
denominator of which is the number of days after the acquisition of the old
debt instrument up to and including its maturity date.
Holders of old debt instruments in whose hands such instruments are
market discount bonds will be required to treat as ordinary income any gain
recognized on the exchange of such instrument pursuant to the Plan to the
extent of the market discount accrued during the holder's period of
ownership, unless the holder has elected to include the market discount in
income as it is accrued. Although some of the Debtor's debt instruments may
constitute market discount bonds, the Debtors believe that holders of old
debt instruments should not have to recognize any market
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discount because the exchange of the Old Senior Note Claims and Old
Convertible Note Claims should constitute a tax-free recapitalization. In
such a case, however, a holder of market discount bond must carryover its
accrued market discount to New Common Stock received pursuant to the Plan.
C. CONSEQUENCES TO DEBTOR.
1. DISCHARGE OF INDEBTEDNESS INCOME GENERALLY.
In general, the discharge of a debt obligation by a debtor for an
amount less than the adjusted issue price (usually, the amount received upon
incurring the obligation plus the amount of any previously amortized original
issue discount and less the amount of any previously amortized bond issue
premium) gives rise to cancellation-of-indebtedness ("COD") income which must
be included in a debtor's income for federal income tax purposes, unless, in
accordance with section 108(e)(2) of the Tax Code, payment of the liability
would have given rise to a deduction. A corporate debtor that issues its own
stock in satisfaction of its debt is treated as realizing COD income to the
extent the fair market value of the stock issued is less than the adjusted
issue price of the debt. COD income is not recognized by a taxpayer that is
a debtor in a title 11 (bankruptcy) case if a discharge is granted by the
court or pursuant to a plan approved by the court (the "bankruptcy exclusion
rules").
Pursuant to the Plan, Administrative Expense Claims, Priority Tax
Claims, Priority Non-Tax Claims, Secured Claims and Trade Claims will be paid
in full and, therefore, treatment of such Claims should not give rise to COD
income. With respect to Old Senior Notes and Old Convertible Notes, there
could be COD income if such Claims are not satisfied in full. Based upon
current estimates of value, the Debtor believes that consummation of the Plan
will give rise to approximately $185 million of COD income that will be
excluded from gross income as described above, but will reduce attributes as
described below.
2. ATTRIBUTE REDUCTION.
The relief accorded to COD income by the bankruptcy exclusion rules
is not without cost. If a taxpayer excludes COD income because of the
bankruptcy exclusion rules, it is required to reduce prescribed tax
attributes in the following order and at the following rates: (i) net
operating losses ("NOLs") for the taxable year of the discharge and NOL
carryovers to such taxable year, dollar for dollar; (ii) general business
credit carryovers under Section 38 of the Tax Code, 33-1/3 cents for each
dollar of excluded income; (iii) the minimum tax credit available under
section 53(b) of the Tax Code as of the beginning of the taxable year
immediately following the taxable year of the discharge, 33-1/3 cents for
each dollar of excluded income; (iv) any capital losses for the taxable year
of the discharge on any capital loss carryovers to such taxable year, dollar
for dollar; (v) the basis of the taxpayer's assets (including, without
limitation, deferred intercompany losses) both depreciable and
nondepreciable, dollar for dollar, but the basis cannot be reduced below an
amount
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based on the taxpayer's aggregate liabilities immediately after the
discharge; (vi) passive activity loss or credit carryovers of the taxpayer
under section 469(b) of the Tax Code from the taxable year of the discharge,
dollar for dollar in the case of loss carryovers and 33-1/3 cents for each
dollar of excludible income in the case of any passive activity credit
carryovers; and (vii) foreign tax credit carryovers, 33-1/3 cents for each
dollar of excluded income. However, the taxpayer may elect under section
108(b)(5) of the Tax Code ("Section 108(b)(5) Election") to avoid the
prescribed order of attribute reduction and instead reduce the basis of
depreciable property first. The Section 108(b)(5) Election will extend to
and reduce the basis of the stock of a subsidiary if the subsidiary consents
to a concomittant reduction in the basis of its depreciable property. If the
Debtor makes this election, the limitation prohibiting the reduction of asset
basis below the amount of its remaining undischarged liability does not
apply. The Debtor has not yet determined whether it will make the Section
108(b)(5) election. Furthermore, it is unclear how attribute reduction must
be made in a consolidated group such as this in which only the parent is
filing for bankruptcy protection. The Debtor intends to resolve these issues
prior to the due date, including extensions, of its corporate tax returns.
While the resolution of these issues may affect the timing and amount of the
pre-bankruptcy tax attributes, the Debtor does not believe that the
unresolved nature of these items will have a material impact on the Projected
Financial Information contained herein.
3. UTILIZATION OF NET OPERATING LOSS CARRYOVERS.
Under section 382 of the Tax Code, whenever there is more than a
50% ownership change of a corporation during a three-year testing period, the
ability of the loss corporation to utilize its NOLs generally is limited on
an annual basis to the product of the fair market value of the corporate
equity immediately before the ownership change and the "long-term tax-exempt
rate," which is published monthly by the IRS. The long-term tax-exempt rate
as of the date of this Disclosure Statement is 4.80%. In addition to
limiting the utilization of net operating losses, the annual limitation may
be increased by certain built-in gains realized after, but accruing
economically before, the ownership change and the carryover of unused section
382 limitations from prior years. The Debtor does not believe it will have
any built-in gains. Alternatively, if the Debtor has a net unrealized
built-in loss, the recognized built-in loss for any recognition period
taxable year shall be subject to the annual limitation. The term recognized
built-in loss means any loss recognized during the recognition period on the
disposition of any asset except to the extent that it is established that (i)
such asset was not held immediately before the change date, or (ii) such loss
exceeds the excess (if any) of the adjusted basis of such asset on the change
date, over the fair market value of such asset on the change date. The
recognition period is the five-year period beginning on the change date.
Additionally, any amount which it is allowable as a deduction during the
recognition period but which is attributable to periods before the change
date shall be treated as a recognized built-in loss for the taxable year for
which it is allowable as a deduction. The annual limitation on recognized
built-in losses for any recognition period taxable year shall apply only to
the extent that such losses do not exceed "the net unrealized built-in loss"
(as defined in section 382(h) of the Tax Code) immediately before the change
date, reduced by recognized built-in losses for prior taxable years ending in
the recognition period. If the amount of the net unrealized built-in loss is
not greater
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than the lesser of $10 million or 15 percent of the fair market value of the
corporation immediately before the change date, then the net unrealized
built-in loss of the Debtor is presumed to be zero. The Debtor believes it
may have a built-in loss, the magnitude of which is uncertain. Moreover, the
Debtor may be entitled to take deductions for some of the distributions it
makes pursuant to the Plan. Such deductions may constitute built-in losses.
The harsh effects of the ownership change rules can be ameliorated
by an exception that applies in the case of reorganizations under the
Bankruptcy Code. Under the so-called "Section 382(l)(5) bankruptcy
exception" to section 382 of the Tax Code, if the reorganization results in
an exchange by qualifying creditors and stockholders of their claims and
interests for at least 50% of the debtor's stock (in vote and value), then
the general ownership change rules will not apply. Instead, the debtor will
be subject to a different tax regime under which the NOL is not limited on an
annual basis but is reduced by the amount of 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 the section 382(l)(5) bankruptcy exception
applies, any further ownership change of the debtor within a two-year period
will result in forfeiture of all of the debtor's NOLs incurred prior to the
date of the second ownership change.
If the debtor would otherwise qualify for the section 382(l)(5)
bankruptcy exception, but the NOL reduction rules mandated thereby would
greatly reduce the NOL, the debtor may elect under section 382(l)(6) of the
Tax Code to be subject to the annual limitation rules of section 382 of the
Tax Code. This election permits the debtor to value the equity of the
corporation for purposes of applying the formula by using the value
immediately after the ownership change (by increasing the value of the old
loss corporation to reflect any surrender or cancellation of creditors'
claims) instead of immediately before the ownership change (the "Section
382(l)(6) limitation"). Alternatively, if the debtor does not qualify for
the section 382(l)(5) exception, the utility of the NOL would automatically
be governed by the section 382(l)(6) limitation.
The Debtor has not determined whether it is eligible for the
Section 382(l)(5) bankruptcy exception. However, the Debtor believes that
the interest deductions which it took during the three taxable years
preceding the Effective Date should substantially reduce, or possibly
eliminate its NOL if the Section 382(l)(5) bankruptcy exception applied.
Consequently, the Debtor expects to elect to be governed by the Section
382(l)(6) limitation.
Based on their returns as filed and upon estimates for the current
taxable year, the Debtor believes it will have an NOL of approximately $230
million. However, the amount of the NOL could be reduced or eliminated by
(i) any audit adjustments by the IRS that result from current examinations of
the Debtor's returns or (ii) unless the Debtor makes the Section 108(b)(5)
Election, its COD income of approximately $185 million, resulting in an NOL
of $45 million. SEE Section XI.C.2, "Certain Federal Income Tax Consequences
of the Plan -- Attribute Reduction."
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Holders of Claims should note, however, that the amount of NOLs
available to the Debtor is based on factual and legal issues with regard to
which there can be no certainty. The actual annual utility of the NOL
carryovers will be determined by actual market value and the actual long-term
tax exempt rate at the Effective Date and may be different from amounts
described herein.
D. INFORMATION REPORTING AND BACKUP WITHHOLDING.
Under the backup withholding rules of the Tax Code, holders of Claims
may be subject to backup withholding at a rate of 31% with respect to
distributions or payments made pursuant to the Plan, unless such holder (i)
comes within certain exempt categories (generally including corporations)
and, when required, demonstrates this fact, or (ii) provides a correct
taxpayer identification number and certifies under penalty of perjury that
the taxpayer identification number is correct and that the holder is not
subject to backup withholding because of a failure to report all dividend and
interest income. Backup withholding is not an additional tax, but is merely
an advance payment, which may be refunded to the extent it results in an
overpayment of tax. Holders of Claims may be required to establish exemption
from backup withholding or to make arrangements with respect to the payment
of backup withholding.
THE FOREGOING IS INTENDED ONLY AS A SUMMARY OF CERTAIN FEDERAL INCOME
TAX ASPECTS OF THE PLAN AND IS NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING AND
ADVICE BASED UPON INDIVIDUAL CIRCUMSTANCES OF EACH HOLDER OF AN ALLOWED CLAIM
OR EQUITY INTEREST.
XII. ALTERNATIVES TO CONFIRMATION AND
CONSUMMATION OF THE PLAN
If the Plan is not confirmed and consummated, the Debtor's alternatives
include (i) liquidation of the Debtor under chapter 7 of the Bankruptcy Code
and (ii) the preparation and presentation of an alternative plan or plans of
reorganization.
A. LIQUIDATION UNDER CHAPTER 7.
If no chapter 11 plan can be confirmed, the Chapter 11 Case may be
converted to a case under chapter 7 of the Bankruptcy Code in which a trustee
would be elected or appointed to liquidate the assets of the Debtor. A
discussion of the effect that a chapter 7 liquidation would have on the
recovery of holders of Claims and Equity Interests is set forth in Section
VI.C.4., "Confirmation and Consummation Procedure -- Best Interests Test."
The Debtor 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 the additional administrative expenses involved in the
appointment of a trustee and attorneys and other professionals to assist such
trustee, (ii) additional expenses and claims, some of which would be entitled
to priority, which would be generated during the liquidation and from
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the rejection of leases and other executory contracts in connection with a
cessation of the Debtor's operations and (iii) the failure to realize the
greater, going concern value of the Debtor's assets.
B. ALTERNATIVE PLAN OF REORGANIZATION.
If the Plan is not confirmed, the Debtor or any other party in interest
could attempt to formulate a different plan of reorganization. Such a plan
might involve either a reorganization and continuation of the Debtor's
business or an orderly liquidation of its assets. With respect to an
alternative plan, the Debtor has explored various other alternatives in
connection with the extensive negotiation process involved in the formulation
and development of the Plan.
Consequently, the Debtor believes that the Plan enables the Debtor to
successfully and expeditiously emerge from chapter 11, preserves its business
and allows creditors to realize the highest recoveries under the
circumstances. In a liquidation under chapter 11 of the Bankruptcy Code, the
assets of the Debtor would be sold in an orderly fashion over a more extended
period of time than in a liquidation under chapter 7 and a trustee need not
be appointed. Accordingly, creditors would receive greater recoveries than in
a chapter 7 liquidation. Although a chapter 11 liquidation is preferable to
a chapter 7 liquidation, the Debtor believes that a liquidation under chapter
11 is a much less attractive alternative to creditors because a greater
return is provided for in the Plan to creditors.
XIII. CONCLUSION AND RECOMMENDATION
The Debtor believes that confirmation and implementation of the Plan is
preferable to any of the alternatives described above because it will provide
the greatest recoveries to holders of Claims. In addition, other
alternatives would involve significant delay, uncertainty and substantial
additional administrative costs. The Debtor urges holders of impaired Claims
and Equity Interests entitled to vote on the Plan to vote to accept the Plan
and to evidence such acceptance by returning their ballots so that they will
be received not later than 4:00 p.m., Eastern Time, on ________________, 1998.
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Dated: December 4, 1998.
HEARTLAND WIRELESS COMMUNICATIONS, INC., a
Delaware corporation
By: /s/ Marjean Henderson
----------------------------------------
Name: Marjean Henderson
Title: Senior Vice President
and Chief Financial Officer
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FOR IMMEDIATE RELEASE
For further information contact:
Marjean Henderson
Sr. Vice President and CFO
972.633.4035
HEARTLAND FILES PRENEGOTIATED
PLAN OF REORGANIZATION
Dallas, Texas - December 4, 1998 - Heartland Wireless Communications, Inc.,
America's largest wireless cable television company, today announced that it has
filed a prenegotiated plan of reorganization (the "Plan") under Chapter 11 of
the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District
of Delaware in Wilmington, Delaware.
The Company previously had announced that it had executed an agreement with the
holders of a majority in principal amount of the Company's $115 million 13%
Senior Notes due 2003 and $125 million 14% Senior Notes due 2004 (the "Senior
Notes") to support the Plan. The Company announced today that the holders of
more than two-thirds in principal amount of the Senior Notes had agreed to
support the Plan.
Under the Plan, all issued and outstanding common stock and other equity
interests of the Company (the "Old Common Stock") will be canceled. Holders of
the Senior Notes will receive 97% of the issued and outstanding common stock of
the reorganized Company (the "New Common Stock"). Holders of the Company's
$40.2 million 9% Convertible Subordinated Discount Notes and certain litigation
claimants will receive the remaining 3% of the New Common Stock, plus warrants
to purchase up to 7.5% of the New Common Stock on a diluted basis. Holders of
Old Common Stock and certain litigation claimants will receive warrants to
purchase up to 2.5% of the New Common Stock on a diluted basis.
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The Plan provides for continued payment of trade creditors in the ordinary
course of business. The Company does not anticipate any interruption in
service or change in programming to its customers. Additionally, the Plan
provides for uninterrupted payment of all material employee wages and benefits.
The Company noted that although it believes the Plan will be confirmed, there
can be no assurance that this will happen.
* * * *
Wireless cable operators use FCC-licensed microwave frequencies in the 2.1-2.7
GHz range to deliver cable television programming and high-speed Internet
services. Heartland Wireless Communications, Inc. is America's largest wireless
cable television company, servicing approximately 163,000 subscribers in 57
markets. Heartland currently holds wireless cable channel rights in 90 small to
mid-size markets located in the central United States.
The Company invites you to visit its Web site at
http://www.heartlandwireless.com.
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