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UNITED STATES
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
January 19, 1999
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Date of Report (Date of earliest event reported)
Heartland Wireless Communications, Inc.
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(Exact Name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 0-23695 73-1435149
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(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer Identification No.)
of Incorporation)
200 Chisholm Place, Suite 200, Plano, Texas 75075
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(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(972) 423-9494
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(Registrant's Telephone Number, Including Area Code)
N/A
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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ITEM 5. OTHER EVENTS
As previously reported on Form 8-K filed December 11, 1998, on December
4, 1998, Heartland Wireless Communications, Inc. (the "Company") filed a
voluntary petition for reorganization under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court (the "Bankruptcy Court")
for the District of Delaware (In re Heartland Wireless Communications, Inc.,
Case No. 98-2692 (JJF)). On January 19, 1999, the Bankruptcy Court entered an
Order (i) approving the Company's disclosure statement, form of ballots and
proposed solicitation and tabulation procedures, (ii) fixing the date, time and
place for voting on the Company's plan of reorganization, (iii) fixing the date,
time and place for a hearing to consider confirmation of the Company's plan of
reorganization and (iv) prescribing the form and manner of notice thereof.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Exhibits.
Exhibit No. Document Description
2.1 Plan of Reorganization dated January 19, 1999.
99.1 Disclosure Statement dated January 19, 1999.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Current Report to be signed on its behalf by
the undersigned hereunto duly authorized.
HEARTLAND WIRELESS COMMUNICATIONS, INC.
Dated:
February 9, 1999 By: /s/ J. Curtis Henderson
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J. Curtis Henderson
Senior Vice President and General Counsel
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EXHIBIT INDEX
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<CAPTION>
Exhibit
Number Description
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<S> <C>
2.1 Plan of Reorganization dated January 19, 1999.
99.1 Disclosure Statement dated January 19, 1999.
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EXHIBIT 2.1
DEBTOR'S PLAN OF REORGANIZATION
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
Heartland Wireless Communications, Inc. proposes the following Plan of
Reorganization, Under Chapter 11 of the Bankruptcy Code, dated as of January
19, 1999, pursuant to section 1121(a) of the Bankruptcy Code:
1. DEFINITIONS AND INTERPRETATION
A. DEFINITIONS.
The following terms 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 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.
1.3 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.
1.4 Bankruptcy Code means title 11, United States Code, as amended
from time to time, as applicable to the Chapter 11 Case.
1.5 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
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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.
1.6 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.
1.7 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.
1.8 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.
1.9 Cash means legal tender of the United States of America.
1.10 Chapter 11 Case means the Debtor's voluntary case filed with
the Bankruptcy Court under Chapter 11 of the Bankruptcy Code.
1.11 Charter means the Restated Certificate of Incorporation of
Reorganized Heartland, which shall be in substantially the form annexed hereto
as Exhibit 1.
1.12 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.
1.13 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.
1.14 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.
1.15 Confirmation Date means the date on which the Clerk of the
Bankruptcy Court enters the Confirmation Order on its docket.
1.16 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.
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1.17 Confirmation Order means the order of the Bankruptcy Court
confirming the Plan, which shall be in a form reasonably acceptable to the
Debtor and a Creditors' Committee Majority.
1.18 Creditors' Committee means the statutory committee of
unsecured creditors appointed in the Chapter 11 Case pursuant to section 1102
of the Bankruptcy Code.
1.19 Creditors' Committee Majority means, at any time, the
holders of a majority in amount of Claims held in the aggregate by the members
of the Creditors' Committee at such time.
1.20 Debtor means Heartland Wireless Communications, Inc., a
Delaware corporation, the debtor in the Chapter 11 Case.
1.21 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.
1.22 DGCL means the General Corporation Law of the State of
Delaware, as amended from time to time.
1.23 Disallowed means, when used with respect to a Claim or Equity
Interest, a Claim or Equity Interest that has been disallowed by Final Order.
1.24 Disbursing Agent means any entity in its capacity as a
disbursing agent under section 7.2 hereof.
1.25 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.
1.26 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 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.
1.27 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.
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1.28 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.
1.29 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.
1.30 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.
1.31 Incentive Options means the options to purchase shares of New
Common Stock pursuant to the Stock Option Plan.
1.32 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.
1.33 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.
1.34 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.
1.35 New Common Stock means the shares of common stock of
Reorganized Heartland to be authorized, issued and outstanding as of the
Effective Date.
1.36 New Warrants means the warrants which are issued pursuant to,
and exercisable in accordance with, the terms and conditions of the New Warrant
Agreement.
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1.37 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.
1.38 Old Convertible Note Claim means a Claim arising under or in
connection with the Old Convertible Notes.
1.39 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.
1.40 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.
1.41 Old 14% Senior Notes means those 14% senior notes due October
15, 2004 issued by the Debtor under the Old 14% Senior Notes Indenture.
1.42 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.
1.43 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.
1.44 Old Indentures means, collectively, the Old 14% Senior Notes
Indenture and the Old 13% Senior Notes Indenture.
1.45 Old Senior Note Claim means a Claim arising under or in
connection with the Old Senior Notes and the Old Indentures.
1.46 Old Senior Notes means, collectively, the Old 14% Senior Notes
and the Old 13% Senior Notes.
1.47 Old 13% Senior Notes means those 13% senior notes due April
15, 2003 issued by the Debtor under the Old 13% Senior Notes Indenture.
1.48 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.
1.49 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.
1.50 Petition Date means December 4, 1998, the date on which the
Debtor commenced the Chapter 11 Case.
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1.51 Plan means this Debtor's Plan of Reorganization Under Chapter
11 of the Bankruptcy Code dated as of January 19, 1999, 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.
1.52 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.
1.53 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.
1.54 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.
1.55 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 of, and containing provisions not less favorable
than, the form of agreement annexed hereto as Exhibit 3.
1.56 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.
1.57 Reorganized Heartland means the Debtor, as it will be
reorganized as of the Effective Date in accordance with the Plan.
1.58 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.
1.59 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.
1.60 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
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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.
1.61 Stockholder Litigation Claim means a Claim (a) arising from
rescission of a purchase or sale of an 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.
1.62 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.
1.63 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).
1.64 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.
1.65 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.
2. PROVISIONS FOR PAYMENT OF ADMINISTRATIVE EXPENSE CLAIMS AND
PRIORITY TAX CLAIMS
1.66 Administrative Expense Claims.
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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 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.
1.67 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.
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
4. PROVISIONS FOR TREATMENT OF CLAIMS AND EQUITY INTERESTS
1.68 Priority Non-Tax Claims (Class 1).
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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.
1.69 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.
1.70 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.
1.71 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.
1.72 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
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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.
1.73 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.
1.74 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 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.
1.75 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.
1.76 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.
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1.77 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.
5. IDENTIFICATION OF CLASSES OF CLAIMS AND INTERESTS IMPAIRED;
ACCEPTANCE OR REJECTION OF THE PLAN
1.78 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.
6. MEANS OF IMPLEMENTATION
1.79 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.
1.80 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.
1.81 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 a Creditors' Committee Majority.
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1.82 Adoption of Stock Option Plan.
If not theretofore adopted by the Debtor, on the Effective Date,
Reorganized Heartland will adopt the Stock Option Plan.
1.83 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.
1.84 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.
1.85 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 six 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 a Creditors' 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 by-laws.
1.86 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,
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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.
7. PROVISIONS GOVERNING DISTRIBUTIONS
1.87 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.
1.88 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.
1.89 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.
1.90 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.
1.91 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, 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.
1.92 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.
1.93 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.
1.94 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.
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1.95 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.
1.96 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.
1.97 Exculpation.
The Debtor, Reorganized Heartland, each of the members of the Ad Hoc
Committee, the Creditors' 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.
1.98 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.
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1.99 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.
8. PROCEDURES FOR TREATING DISPUTED CLAIMS UNDER THE PLAN
1.100 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.
Notwithstanding Section 8.1(a) above, after the Effective Date, any
Tort Claim for personal injury or wrongful death as to which a proof
of claim was timely filed that is not otherwise settled or
consensually resolved 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. Any Tort Claim determined and liquidated
pursuant to Section 8.1(a) or 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.
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1.101 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.
1.102 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.
1.103 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.
9. PROVISIONS GOVERNING EXECUTORY CONTRACTS AND UNEXPIRED LEASES
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1.104 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 Confirmation Date 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.
1.105 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.
1.106 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 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.
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1.107 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 4.6 hereof.
10. CONDITIONS PRECEDENT TO EFFECTIVE DATE
1.108 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 a Creditors'
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).
(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.
1.109 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 a
Creditors' 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 a Creditors' Committee Majority).
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11. EFFECT OF CONFIRMATION
1.110 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.
1.111 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.
1.112 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 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.
1.113 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.
1.114 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
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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.
1.115 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 the Creditors' 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.
12. WAIVER OF CLAIMS
1.116 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.
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.
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(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.
(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.
14. MISCELLANEOUS PROVISIONS
1.117 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.
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1.118 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.
1.119 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.
1.120 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 the Creditors' 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.
1.121 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.
1.122 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
23
<PAGE> 24
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 a Creditors' Committee
Majority.
1.123 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
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
1.124 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.
24
<PAGE> 25
1.125 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: January 19, 1999
Respectfully submitted,
Heartland Wireless Communications, Inc.
By: /s/ Marjean Henderson
----------------------------------------------
Name: Marjean Henderson
Title: Senior Vice President and Chief
Financial Officer
25
<PAGE> 1
EXHIBIT 99.1
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
:
In re: :
: CHAPTER 11
HEARTLAND WIRELESS COMMUNICATIONS, :
INC., a Delaware Corporation, : Case No. 98-2692 (JJF)
:
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
January 19, 1999
<PAGE> 2
<TABLE>
<S> <C> <C> <C>
I. INTRODUCTION............................................................................................1
A. Holders of Claims and Equity Interests Entitled to Vote........................................2
B. Voting Procedures..............................................................................3
C. Confirmation Hearing...........................................................................3
II. OVERVIEW OF THE PLAN....................................................................................5
III. GENERAL INFORMATION....................................................................................10
A. Description and History of Business...........................................................10
1. Business.............................................................................10
2. History..............................................................................11
3. Significant Indebtedness.............................................................11
4. Selected Historical Financial Data...................................................13
B. Events Leading to the Commencement of the Chapter 11 Case.....................................15
C. Recent Transactions...........................................................................15
IV. EVENTS DURING THE CHAPTER 11 CASE......................................................................16
1. Continuation of Business; Stay of Litigation.........................................16
2. First Day Orders; Scheduling Order...................................................16
3. Statutory Committee..................................................................17
V. THE PLAN OF REORGANIZATION.............................................................................18
A. Classification and Treatment of Claims and Equity Interests...................................18
1. Administrative Expense Claims........................................................18
2. Priority Tax Claims..................................................................19
3. Class 1 - Priority Non-Tax Claims....................................................19
4. Class 2 - Secured Claims.............................................................19
5. Class 3 - Old Senior Note Claims and Miscellaneous Unsecured Claims..................19
6. Class 4 - Old Convertible Note Claims................................................20
7. Class 5 - Trade Claims...............................................................21
8. Class 6 - Indemnity Claims...........................................................21
9. Class 7 - Bondholder Litigation Claims...............................................21
10. Class 8 - Stockholder Litigation Claims..............................................22
11. Class 9 - Equity Interests...........................................................22
12. Alternative Treatment for Holders of Allowed Claims..................................23
B. Securities to be Issued Under the Plan........................................................23
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
1. New Common Stock.....................................................................23
2. New Warrants.........................................................................23
C. Means of Implementation.......................................................................25
1. Distributions........................................................................25
2. Authorization of New Securities......................................................25
3. New Warrant Agreement................................................................25
4. Adoption of Stock Option Plan........................................................25
5. Incentive Options on the Effective Date..............................................25
6. Cancellation of Existing Securities and Agreements...................................25
7. Corporate Action.....................................................................26
8. Amended Certificate of Incorporation.................................................26
D. Provisions Governing Distributions............................................................26
1. Date of Distributions................................................................26
2. Disbursing Agent.....................................................................26
3. Surrender of Instruments.............................................................27
4. Compensation of Professionals........................................................27
5. Delivery of Distributions............................................................27
6. Manner of Payment Under the Plan.....................................................27
7. Fractional Shares....................................................................28
8. Setoffs and Recoupment...............................................................28
9. Distributions After Effective Date...................................................28
10. Rights and Powers of Disbursing Agent................................................28
a. Powers of the Disbursing Agent..............................................28
b. Expenses Incurred on or After the Effective Date............................28
11. Exculpation..........................................................................28
12. Allocation Relating to Old Senior Notes and Old Convertible Notes....................29
13. Voluntary Cancellation of Old Common Stock; Return of Warrants.......................29
E. Resolution of Disputed Claims and Interests...................................................29
F. Executory Contracts and Unexpired Leases......................................................30
G. Conditions to Confirmation and Effective Date.................................................31
H. Effect of Confirmation........................................................................32
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
1. Vesting of Assets....................................................................32
2. Binding Effect.......................................................................32
3. Discharge of Debtor..................................................................32
4. Term of Injunctions or Stays.........................................................32
5. Indemnification Obligations..........................................................32
6. Limited Release......................................................................33
I. Waiver of Certain Claims......................................................................33
J. Retention of Jurisdiction by the Bankruptcy Court.............................................33
K. Recognition of Subordination Rights...........................................................34
L. Summary of Other Provisions of the Plan.......................................................34
1. Payment of Statutory Fees............................................................34
2. Retiree Benefits.....................................................................35
3. Administrative Expenses Incurred After the Confirmation Date.........................35
4. Section 1125(e) of the Bankruptcy Code...............................................35
5. Compliance with Tax Requirements.....................................................35
6. Severability of Plan Provisions......................................................35
7. Governing Law........................................................................36
VI. CONFIRMATION AND CONSUMMATION PROCEDURE................................................................36
A. Solicitation of Votes.........................................................................36
B. The Confirmation Hearing......................................................................36
C. Confirmation..................................................................................37
1. Acceptance...........................................................................37
2. Unfair Discrimination and Fair and Equitable Tests...................................38
3. Feasibility..........................................................................38
4. Best Interests Test..................................................................42
D. Consummation..................................................................................44
VII. MANAGEMENT OF REORGANIZED DEBTOR.......................................................................44
A. Board of Directors and Management.............................................................44
1. Composition of the Board of Directors................................................44
2. Identity of Officers.................................................................45
B. Compensation of Executive Officers............................................................47
C. Employment Agreements.........................................................................48
D. Stock Option Plan.............................................................................49
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C> <C> <C>
E. Other Compensation Plans......................................................................52
F. Post-Effective Date Security Ownership of Certain Owners......................................53
VIII. APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS TO THE NEW COMMON STOCK TO BE DISTRIBUTED
UNDER THE PLAN.........................................................................................53
A. Section 1145 of the Bankruptcy Code...........................................................53
B. Registration Rights...........................................................................54
IX. REORGANIZATION VALUES..................................................................................55
X. CERTAIN RISK FACTORS TO BE CONSIDERED..................................................................59
A. Overall Risk to Recovery by Holders of Claims.................................................59
1. Significant Holders..................................................................59
2. Lack of Established Market for New Common Stock......................................59
3. Dividend Policies....................................................................60
4. Preferred Stock......................................................................60
5. Projected Financial Information......................................................60
6. Business Factors and Competitive Conditions..........................................61
a. Subscription Video Competition..............................................61
b. Subscription Video Technologies.............................................62
c. High Speed Data/Internet Competition........................................62
d. Dependence on Channel Leases and Licenses; Need for License
Extensions..................................................................63
e. New Business Strategy.......................................................63
f. FCC Approval; Transfer of Control Applications..............................64
g. BTA Authorizations; Repayment of Bidding Credit and BTA Notes...............64
h. Changes in Technology.......................................................65
i. Need for Additional Financing...............................................65
7. Pending Litigation...................................................................66
a. General Litigation..........................................................66
b. Securities Litigation.......................................................66
c. Late Fee Litigation.........................................................67
8. Corporate Liability Insurance........................................................67
a. Primary D&O Coverage -- National Union......................................67
b. Liability Limits and Retention..............................................68
c. Excess D&O Coverage: Lloyd's and Chubb......................................68
</TABLE>
iv
<PAGE> 6
<TABLE>
<S> <C> <C> <C>
XI. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN....................................................69
A. Introduction..................................................................................69
B. Consequences to Holders of Claims.............................................................69
1. Holders of Administrative Expense Claims.............................................69
2. Holders of Priority Non-Tax Claims (Class 1).........................................69
3. Holders of Secured Claims (Class 2)..................................................70
4. Holders of Miscellaneous Unsecured Claims (Class 3)..................................70
5. Holders of Old Senior Note Claims and Old Convertible Note Claims (Class 3 and
Class 4).............................................................................70
6. Holders of Trade Claims (Class 5)....................................................71
7. Holders of Indemnity Claims (Class6).................................................72
8. Holders of Bondholder Litigation and Stockholder Litigation Claims (Classes 7
and 8)...............................................................................72
9. Holders of Equity Interests (Class 9)................................................73
10. Allocation of Consideration to Interest..............................................73
11. Market Discount......................................................................74
C. Consequences to Debtor........................................................................75
1. Discharge of Indebtedness Income Generally...........................................75
2. Attribute Reduction..................................................................75
3. Utilization of Net Operating Loss Carryovers.........................................76
D. Information Reporting and Backup Withholding..................................................77
XII. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN..............................................78
A. Liquidation Under Chapter 7...................................................................78
B. Alternative Plan of Reorganization............................................................78
XIII. CONCLUSION AND RECOMMENDATION..........................................................................79
</TABLE>
v
<PAGE> 7
INDEX OF EXHIBITS
Exhibit A - The Plan
Exhibit B - Order (i) Approving the Debtor's Disclosure
Statement, Form of Ballots and Proposed Solicitation
and Tabulation Procedures, (ii) Fixing the Date, Time
and Place for Voting on the Debtor's Plan of
Reorganization, (iii) Fixing the Date, Time and Place
for a Hearing to Consider Confirmation of the
Debtor's Plan and (iv) Prescribing the Form and
Manner of Notice Thereof
Exhibit C - Heartland Wireless Communications, Inc. Form 10-K
for the Year ended 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
vi
<PAGE> 8
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.
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.
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
vii
<PAGE> 9
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.
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.
viii
<PAGE> 10
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 a
Creditors' Committee Majority.
Creditors' Committee means the statutory committee of unsecured
creditors appointed in the Chapter 11 Case
pursuant to section 1102 of the Bankruptcy
Code.
Creditors' 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
Creditors' Committee at such time.
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 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
ix
<PAGE> 11
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 4.7 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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<PAGE> 12
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, by-laws, 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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<PAGE> 13
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 means First Trust of New York, National
Indenture Trustee 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 means First Trust of New York National
Indenture Trustee 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 January 19, 1999, 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.
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
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<PAGE> 14
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 means the registration rights agreement
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 of, and containing
provisions not less favorable than, the form
of agreement 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 4 to the Plan.
Stockholder Litigation Claim means a Claim (a) arising from rescission of a
purchase or sale of an 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.
xiii
<PAGE> 15
Stockholder Litigation means the ratio (expressed as a percentage)
Claims Portion 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.
xiv
<PAGE> 16
I. INTRODUCTION
Heartland Wireless Communications, Inc., a Delaware corporation,
("Heartland" or the "Debtor") submits this Disclosure Statement dated January
19, 1999 (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 January 19, 1999 (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 March 15, 1999 at 10:00 a.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:
o The Plan (Exhibit A);
o Order of the Bankruptcy Court dated January 19, 1999 (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);
o Heartland Wireless Communications, Inc. Form 10-K for the Year
ended December 31, 1997 (Exhibit C);
o Heartland Wireless Communications, Inc. Form 10-Q for the
quarterly period ended September 30, 1998 (Exhibit D);
o Projected Financial Information (Exhibit E); and
o 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 January 19, 1999, 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 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
1
<PAGE> 17
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."
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
2
<PAGE> 18
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) in the envelope provided.
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 5:00 P.M., EASTERN TIME, ON MARCH 8, 1999.
ANY EXECUTED BALLOT RECEIVED THAT DOES NOT INDICATE EITHER AN ACCEPTANCE OR
REJECTION OF THE PLAN SHALL NOT BE COUNTED.
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.
Pursuant to the Disclosure Statement Order, the Bankruptcy Court set
January 19, 1999 as the record date for voting on the Plan. Accordingly, only
holders of record as of January 19, 1999 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 March 15, 1999 at 10:00 a.m. Eastern Time, before the
Honorable Joseph J. Farnan, Jr., United States District Judge, at the United
States District Court, 844 King Street, 6th 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 March 8,
1999 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
3
<PAGE> 19
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
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
4
<PAGE> 20
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. THE CREDITORS' COMMITTEE
ALSO SUPPORTS THE PLAN AND URGES THAT CREDITORS VOTE TO ACCEPT 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 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."
5
<PAGE> 21
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 Claims Paid in full, in Cash, or in accordance 100%
with 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 Priority Non-Tax Claims Unimpaired; each Allowed Priority 100%
(to be paid in the ordinary Non-Tax Claim shall be unimpaired in
course of business) 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.
</TABLE>
- ----------
(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> 22
<TABLE>
<CAPTION>
Type of Claim or Estimated
Class Equity Interest Treatment Recovery
----- ----------------------------- --------------------------------------- --------
<S> <C> <C> <C>
2 Secured Claims Unimpaired; reinstated or rendered 100%
(estimated at unimpaired in accordance with section
$-0-; to be paid in the 1124 of the Bankruptcy Code,
ordinary course of business) 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 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.
3 Old Senior Note Claims and Impaired; each holder of an Allowed Old 52.2%
Miscellaneous Unsecured Senior Note Claim shall receive, in full
Claims (Old Senior Note satisfaction of such Allowed Claim, its
Claims estimated at $268.0 Ratable Proportion of 9,700,000 shares
million; Miscellaneous of New Common Stock (representing 97.0%
Unsecured Claims--Disputed) 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. 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.
</TABLE>
7
<PAGE> 23
<TABLE>
<CAPTION>
Type of Claim or Estimated
Class Equity Interest Treatment Recovery
----- ----------------------------- --------------------------------------- --------
<S> <C> <C> <C>
4 Old Convertible Note Claims Impaired; each holder of an Allowed Old 16.8%
(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.
5 Trade Claims (to be paid in Unimpaired; each Allowed Trade Claim 100%
the ordinary course of shall be unimpaired in accordance with
business) section 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 (Disputed) Impaired; If Class 6 accepts the Plan, N/A
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.
</TABLE>
8
<PAGE> 24
<TABLE>
<CAPTION>
Type of Claim or Estimated
Class Equity Interest Treatment Recovery
----- ----------------------------- --------------------------------------- --------
<S> <C> <C> <C>
7 Bondholder Litigation Claims Impaired; The Debtor will request the N/A
(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.
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>
9
<PAGE> 25
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 December 31, 1998,
Heartland provided wireless cable television to approximately 160,000
subscribers. Heartland also provides high-speed Internet access to one
developmental market.
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."
10
<PAGE> 26
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.
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
11
<PAGE> 27
13% Senior Notes have been registered under the Securities Act and therefore do
not have legends restricting their transfer.
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 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
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<PAGE> 28
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 began 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> 29
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
Loss before extraordinary item ............ $ (6.85) $ (2.74) $ (6.24) $ (2.13) $ (10.09) $ (5.36)
Extraordinary item ........................ -- (0.57) -- -- -- --
--------- --------- --------- --------- --------- ---------
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
Total stockholders' equity............... 46,408 180,847 (152,337) 75,074
</TABLE>
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<PAGE> 30
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
its plan of reorganization and disclosure statement dated December 4, 1998 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 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, and (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
15
<PAGE> 31
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. 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 has
continued to operate as a debtor in possession with the protection of the
Bankruptcy Court. The Bankruptcy Court has certain supervisory powers over
Heartland's operations during the pendency of the bankruptcy case. Heartland is
operating 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.
2. FIRST DAY ORDERS; SCHEDULING ORDER.
On the Petition Date, Heartland submitted 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
included, 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 submitted an order (the
"Scheduling Order") to the Bankruptcy Court which set the time, date and place
of a hearing to consider approval of
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<PAGE> 32
this Disclosure Statement and confirmation of the Plan. See Section VI.B.,
"Confirmation and Consummation Procedure -- The Confirmation Hearing."
3. STATUTORY COMMITTEE.
On December 21, 1998, the United States Trustee appointed a committee
of unsecured creditors (the "Creditors' Committee"), pursuant to section 1102 of
the Bankruptcy Code, which consists of some of the members of the Ad Hoc
Committee. As the Ad Hoc Committee and as the Creditors' Committee, the members
thereof have consulted with Heartland concerning the Plan and administration of
the Chapter 11 Case. The current members of and the attorneys retained by the
Creditors' Committee are set forth below:
Creditors' Committee
Quaker Capital Management Corporation
Attn: Mark G. Shoeppner, President
401 Wood Street
1300 Arrott Building
Pittsburgh, Pennsylvania 15222-1824
Condor Partners IV L.L.C.
Attn: Neil Subin, President
998 S. Federal Highway, Suite 202
Boca Raton, Florida 33432
Aspen Partners
Attn: Nikos Hecht, Managing Partner
1114 Avenue of the Americas, 38th Floor
New York, New York 10036
The Mainstay Funds, on behalf of its High Yield Corporate
Bond Fund Series
c/o McKay-Shields Financial Corporation, Investment Advisor
Attn: Jeffrey R. Platt, Director
9 West 57th Street
New York, New York 10019
Quad-C Inc.
Attn: Ted R. Weschler, President
230 East High Street
Charlottesville, Virginia 22902
Attorneys
Paul N. Silverstein
Andrews & Kurth L.L.P.
805 Third Avenue
New York, New York 10022
Laura Davis Jones
Young, Conaway, Stargatt & Taylor
11th Floor Rodney Square North
P.O. Box 391
Wilmington, Delaware 19899
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<PAGE> 33
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 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.
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<PAGE> 34
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 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
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<PAGE> 35
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 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."
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<PAGE> 36
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 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
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<PAGE> 37
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 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
22
<PAGE> 38
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.
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
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<PAGE> 39
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 assets of Reorganized Heartland, the exercise price of the Warrants
will be adjusted according to the following schedule:
<TABLE>
<CAPTION>
Time Period Relative to Effective Date Exercise Price
-------------------------------------- --------------
<S> <C>
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
</TABLE>
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 notational 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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<PAGE> 40
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 a Creditors' 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 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.
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<PAGE> 41
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
Reorganized Heartland's by-laws. The initial Board of Directors of Reorganized
Heartland shall consist of six members, at least one of which will 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 a Creditors' 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 by-laws.
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.
D. PROVISIONS GOVERNING DISTRIBUTIONS.
1. DATE OF DISTRIBUTIONS.
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
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<PAGE> 42
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 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.
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<PAGE> 43
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.
10. RIGHTS AND POWERS OF DISBURSING AGENT.
a. 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 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 Creditors' 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
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<PAGE> 44
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 New Warrants in
accordance with section 4.9 of the Plan, such holder should return such New
Warrants to Reorganized Heartland.
E. 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) 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.
All Tort Claims are Disputed Claims. Notwithstanding Section 8.1(a) of the
Plan, after the Effective Date, any Tort Claim for personal injury or wrongful
death that is not otherwise settled or consensually resolved 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.
Any Tort Claim determined and liquidated pursuant to Section 8.1(a) of the Plan
or a judgment obtained in accordance with Section 8.1(b) of the Plan 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 in such liquidated amount and satisfied in accordance with the Plan;
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<PAGE> 45
provided, however, that such Allowed Claim shall not include punitive or
exemplary damages. 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.
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.
F. 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 Confirmation Date 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
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<PAGE> 46
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.
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, by-laws, 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.
G. 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 Creditors' 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 a Creditors' 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 a Creditors' Committee Majority).
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<PAGE> 47
H. 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 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, by-laws, applicable state law or contract
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<PAGE> 48
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.
6. LIMITED RELEASE.
Under the Plan, on the Effective Date, the Debtor, on behalf of itself
and its non-debtor subsidiaries, 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 that the Debtor and its
non-debtor subsidiaries may have 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. The released parties significantly
participated in the negotiation of the Plan. The Debtor is not aware of any
claims or causes of action of the kind it is releasing as to those parties. The
foregoing release is only of any claims or causes of action that the Debtor or
its non-debtor subsidiaries may have against the released parties. Holders of
claims against and Equity Interest in the Debtor or the released parties are
not, by operation of Section 11.6 of the Plan, releasing any claims they may
have against the released parties.
I. 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.
J. 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,
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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 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.
K. 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.
L. 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 the Creditors' 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 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
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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 Creditors' 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 Classes 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.
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 March 15, 1999 at 10:00 a.m., Eastern Time, before the Honorable
Joseph J. Farnan, Jr., United States District Judge, at the United States
District Court, 844 King Street, 6th 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 March 8, 1999 at 4:00 p.m., Eastern Time:
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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.
The Office of the United States Trustee
601 Walnut Street
Curtis Center
Suite 950-W
Philadelphia, Pennsylvania 19106
Attn: Daniel K. Astin, Esq.
Andrews & Kurth L.L.P.
Attorneys for the Creditors' Committee
805 Third Avenue
New York, New York 10022
Attn: Paul N. Silverstein, 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
"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.
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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.
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:
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o Pro Forma Balance Sheet of Reorganized Heartland as of March 31,
1999;
o Projected Balance Sheets of Reorganized Heartland for each of the
years December 31, 1999 through 2002;
o 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
o 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 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
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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
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.
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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.
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
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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.
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
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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 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.
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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 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.G., "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
six members, one of which will be a member of the management of Reorganized
Heartland. 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 Charter or Reorganized
Heartland's by-laws, as the same may be amended from time to time. Set forth
below is the name of each such director, together with a brief biography:
R. Ted Weschler. 37 years old. Mr. Weschler has been an executive
officer of Quad-C, Inc. since its formation in 1989. Quad-C, Inc. is a
Charlottesville, Virginia-based investment firm that primarily engages in the
acquisition of businesses in partnership with company management. Mr. Weschler
is currently a member of the Board of Directors of WSFS Financial Corporation, a
thrift holding company based in Wilmington, Delaware; Deerfield Healthcare
Corporation, a provider of adult day care; Collins & Aikman Floorcoverings, a
manufacturer of commercial carpeting and Virginia National Bank, a national
banking association. Prior to the formation of Quad-C, Inc., Mr. Weschler was
employed by W. R. Grace & Co. as a special projects assistant to both the Vice
Chairman and Chief Executive Officer of Grace, focusing on acquisition and
divestiture activities associated with Grace's restaurant, retailing,
healthcare, natural resources and chemical operations. Mr. Weschler received a
Bachelor of Science degree in Economics with concentrations in Finance and
Accounting from the Wharton School of the University of Pennsylvania in 1983.
Mark G. Schoeppner. 38 years old. Since 1985, Mr. Schoeppner has been
president of Quaker Capital Management Corp., an investment management firm. He
is a chartered financial analyst, a member of the Pittsburgh Society of
Financial Analysts and a member of the Wireless Communications Association. He
currently serves as a director of Quaker Capital Management Corp. and the
Pittsburgh Children's Museum. Mr. Schoeppner graduated magna cum laude with a
Bachelor of Science degree in Economics from the Wharton School, University of
Pennsylvania, in 1983.
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<PAGE> 60
Neil Subin. Mr. Subin is the Managing Director of Trendex Capital
Management, a private hedge fund focusing primarily on distressed and bankrupt
companies. Prior to forming Trendex Capital Management in 1991, Mr. Subin was
affiliated with Oppenheimer & Co. Mr. Subin received a Bachelor of Arts degree
from Brooklyn College in 1985.
Richard B. Gold. Mr. Gold is the President and Chief Executive Officer
of Pacific Monolithics, Inc. ("Pac Mono"), the general manager of a
venture-backed supplier of wireless communications equipment. Mr. Gold has
served in various positions with Pac Mono since 1991. From 1987 to 1991, Mr.
Gold was Executive Director of Massachusetts Microelectronics Center, the
general manager of a non-profit, university-industry-state education and
research consortium with 11 member schools. Prior to that time Mr. Gold held
positions with Adams-Russell Co. as Vice President, Microelectronics Products
and Director of the semiconductor center; with Watkins-Johnson Co. as R&D
Section Head, Solid State Division and Staff Scientist, Solid State Division;
and with Hewlett-Packard Co. as R&D Engineer, Microwave Semiconductor Division.
Terry S. Parker. 53 years old. Mr. Parker became a director of
Heartland in April 1998. Mr. Parker currently is an independent consultant in
the telecommunications industry. From March 1995 to July 1996, Mr. Parker was
President and Chief Operating Officer for CellStar Corporation, a domestic
cellular telecommunications distributor. From October 1993 to March 1995, Mr.
Parker was a Senior Vice President for GTE Corporation ("GTE"), a diversified
telecommunications company, as well as the President of GTE Personal
Communications Services, GTE's cellular telecommunications division. From August
1990 to October 1993, Mr. Parker was President of GTE Telecommunications
Products and Services, a diversified telecommunications services and systems
division of GTE. Mr. Parker currently is a director of CellStar Corporation,
Illinois Super Conductor, Inc. and Highway Master Corporation.
Carroll McHenry. See the biography for Mr. McHenry at Section VII.A.2.
below.
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
Candice A. Farley...................... 45 Vice President -- Human Resources
Randall C. May......................... 37 Vice President -- Operations
Wayne M. Taylor........................ 53 Vice President -- Administration
</TABLE>
45
<PAGE> 61
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").
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.
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.
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
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<PAGE> 62
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:
<TABLE>
<CAPTION>
Name of Individual Capacities in which Served Cash Compensation
- ------------------ -------------------------- -----------------
<S> <C> <C>
Carroll D. McHenry Chairman, Chief Executive Officer and President $ 360,094(1)
Marjean Henderson Senior Vice President, Chief Financial Officer and $ 80,923(2)
Assistant Secretary
J. Curtis Henderson Vice President, General Counsel and Secretary $ 138,861(3)
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>
47
<PAGE> 63
- ----------
(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 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
48
<PAGE> 64
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.
The Stock Option Plan will be administered by a committee (the
"Compensation Committee") appointed by the Board of Directors of 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 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.
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<PAGE> 65
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 (totaling 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>
Percentage 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 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 (totaling 50% after such five years).
b. Up to 50% 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 "Key Employee 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 Key Employee Contingent
Portion set forth opposite such target amount will vest on such 20th trading
day:
<TABLE>
<CAPTION>
Percentage of Key
Per Share Employee 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> 66
Each non-employee director of Heartland who is serving on the Board of
Directors as of the Effective Date will be granted (i) on the Effective Date, an
Incentive Option to acquire 2,000 shares of New Common Stock, and (ii) on each
of the first five anniversaries of the Effective Date (so long as such
non-employee director is still serving on the Board of Directors on such date),
an Incentive Option to acquire 1,000 shares of New Common Stock. All of the
Incentive Options granted to non-employee directors under the Stock Option Plan
will expire on the seventh anniversary of the date of grant and will vest only
upon attainment of the following average stock price performance objectives. 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 Incentive Options set forth opposite such
target amount will vest on such 20th trading day:
<TABLE>
<CAPTION>
Per Share
Measurement Period Stock Price Percentage 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 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 who would be "Continuing Directors" (as hereinafter
defined) cease for any reason to constitute at least a majority thereof;
(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
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<PAGE> 67
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.
In addition, if any of the senior executives, key employees or directors
who are receiving Incentive Options on the Effective Date are still employed by
or serving on the Board of Directors of Reorganized Heartland on the date which
is 30 days immediately prior to the seventh anniversary of the date of grant,
the unvested portion, if any, of the Incentive Options held by such person will
immediately vest and become exercisable on such date.
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, 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.
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<PAGE> 68
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. (2) 19.28%
Quaker Capital Management Corporation 16.04%
The Mainstay Funds, on behalf of its
High Yield Corporate Bond Fund Series 10.42%
Northstar Investment Management Corporation 8.00%
Aspen Partners, L.P. 6.27%
</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 and state securities and "blue sky" laws afforded by section 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 Securities 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 Securities Act or other Federal securities laws pursuant
to the exemption provided by section 4(1) of the Securities 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.
- ----------
(2) On behalf of itself certain affiliated or related persons and entities.
Quad-C, Inc. and such related persons and entities expressly reserve the
right to disclaim beneficial ownership of the New Common Stock under the
Securities Act and the Exchange Act.
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<PAGE> 69
Section 1145(b) of the Bankruptcy Code defines a Statutory Underwriter for
purposes of the Securities 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 Securities
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 New Common Stock who may be "affiliates" or
"underwriters" under the Securities Act (as determined in the reasonable
discretion of the Board of Directors of Reorganized Heartland) 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 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, at its cost, file with the Securities and
Exchange Commission ("SEC") as promptly as commercially practicable on or before
the Effective Date, or such later time as may be agreed with a Creditors'
Committee Majority, 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
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<PAGE> 70
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 Securities 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 3.
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.
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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, 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
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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 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
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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.
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
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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 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.
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
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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-Petition 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
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
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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.
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
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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 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.
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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
to 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 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.
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.
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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 filed the FCC Applications on December 14, 1998.
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.
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
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control Reorganized Heartland, (b) is directly or indirectly controlled by
Reorganized Heartland, (c) is directly or 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 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 originally filed 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"). On December 11,
1998, Heartland removed the Thompson Action to the United States District Court
for the Southern District of Texas. The Federal case number is CV-98-567.
Fourteen current and former Heartland directors, officers and/or employees are
defendants in a purported securities class action filed in federal court 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. The plaintiffs filed an
amended complaint on January 4, 1999.
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 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 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.
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On January 14, 1999, Heartland filed a Motion for preliminary
injunction staying or enjoining the continuation of the above-referenced
securities actions against its current and former officers and directors
pursuant to sections 362(a) and 105(a) of the Bankruptcy Code.
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 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
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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 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.
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.
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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 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
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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.
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
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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 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
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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.
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
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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 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 interest previously included in
the holder's taxable income exceed the
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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 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.
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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 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
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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 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
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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."
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
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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 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.
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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 5:00 p.m., Eastern Time, on March 8, 1999.
Dated: January 19, 1999.
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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EXHIBIT A
Debtor's Plan of Reorganization Under Chapter 11 of the Bankruptcy Code
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EXHIBIT B
Order (i) Approving the Debtor's Disclosure Statement, Form of Ballots
and Proposed Solicitation Procedures, (ii) Fixing the Date, Time and Place for
Voting on the Debtor's Plan of Reorganization, (iii) Fixing
the Date, Time and Place for a Hearing to Consider
Confirmation of the Debtor's Plan
and (iv) Prescribing the Form and Manner of Notice Thereof
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EXHIBIT C
Heartland Wireless Communications, Inc.
Form 10-K for the Year Ended December 31, 1997
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EXHIBIT D
Heartland Wireless Communications, Inc. Form 10-Q
for the Quarterly Period Ended September 30, 1998
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EXHIBIT E
Projected Financial Information
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EXHIBIT F
Liquidation Analysis
85
