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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 ON
SCHEDULE 13E-4/A
ISSUER TENDER OFFER STATEMENT
(PURSUANT TO SECTION 13(e)(1) OF THE SECURITIES EXCHANGE
ACT OF 1934)
Comprehensive Care Corporation
------------------------------
(Name of Issuer)
Comprehensive Care Corporation
------------------------------
(Name of Person(s) Filing Statement)
7 1/2% Convertible Subordinated Debentures due April 15, 2010
-------------------------------------------------------------
(Title of Class of Securities)
204620AA6
---------
(CUSIP Number of Class of Securities)
Chriss W. Street, 350 W. Bay Street, Costa Mesa, CA 92627 (714) 222-2273
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(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of the Person(s) Filing Statement)
Not Applicable
--------------
(Date Tender Offer First Published, Sent or Given
to Security Holders)
Calculation of Filing Fee
<TABLE>
<CAPTION>
Transaction
valuation* Amount of Filing Fee
<S> <C>
$3,173,333 $6,358.67
- ---------- ---------
</TABLE>
* Estimated solely for the purpose of calculating the filing fee, pursuant to
Rule 0-11(a)(4) and 0-11(b)(2), paid on September 14, 1995 upon originally
filing this Schedule 13E-4 (as hereafter from time to time may be amended herein
called the "Schedule") which was equal to one-fiftieth (1/50th) of one percent
of an amount equal to one-third of the value, determined as described below, of
the maximum amount of Debentures to be received by the Issuer (the "Transaction
Value") based on the $9,538,000 outstanding principal amount of Debentures,
which is the maximum to be received, according to their value on the Issuer's
books. The Issuer has an accumulated capital deficit, thereby qualifying to base
the Transaction Value on one-third of the $9,538,000 principal amount pursuant
to Rule 0-11(a)(4).
/ /Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and
identify the filing with which the offsetting fee was previously paid. Identify
the previous filing by registration statement number or the Form or Schedule and
the date of its filing
Amount Previously Paid:
Form or Registration Number:
Filing Party:
Date Filed:
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ITEM 1. SECURITY AND ISSUER
(a) Comprehensive Care Corporation, 350 W. Bay Street, Costa Mesa,
California 92627 (the "Issuer").
(b) For each $1,000 outstanding principal amount (the "face amount")
of the Issuer's 7 1/2% Convertible Subordinated Debentures due
April 15, 2010 ("Debentures") and a waiver of the interest
accrued and unpaid since April 15, 1994 in excess of $80.00, the
Issuer proposes to exchange consideration comprised of the
following: a payment of principal of $500 in cash plus sixteen
(16) shares of the Issuer's authorized and previously unissued
Common Stock, par value $.01 per share ("Common Stock") and an
interest payment of $80 in cash (the "Exchange Offer"). The
combined aggregate of the Issuer's cash and Common Stock
exchangeable per $1,000 face amount of Debentures is called the
"Exchange Consideration." The shares of Common Stock included in
the Exchange Consideration are herein sometimes called the
"Common Shares." Debentures that are tendered (and not
withdrawn) at least five business days prior to the record date
for the payment of interest due, will be accepted for payment
(the "Exchange"). The Debentures were issued pursuant to an
Indenture dated April 25, 1985 (the "Indenture") between the
Issuer and Bank of America National Trust and Savings
Association, as Trustee (including any successors, herein called
the "Trustee").
(c) The Debentures are traded over-the-counter, although trading in
these securities is limited and sporadic. The sections headed
"Price of Securities Prior to Announcement" on page 6 of the
Offering Circular, "Price Range of Debentures" on page 9 thereof
and "Price Range of the Common Shares" on page 17 thereof are
incorporated herein by this reference.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
(a) The Issuer contemplates that the financing available to the
Issuer from its internal sources will be adequate to complete
the Exchange, including payment of the Exchange Consideration in
exchange for the Debentures that are tendered and a
contemporaneous payment of interest that is currently due and
unpaid in respect to all Debentures that are not tendered in
order to effect a rescission of acceleration of the Debentures.
The Issuer believes that its $4.5 million cash reserve would be
adequate to pay the cash portion of the Exchange Consideration
for up to approximately 70% of the amount of Debentures
outstanding and to pay interest required to be paid on the
remaining 30% or more in principal amount that would remain
outstanding after the Exchange. If additional cash funding
becomes necessary, the Issuer may rely on cash proceeds that may
come from internal sources or one or a combination of the
following potential cash sources:
(i) The Issuer has filed amended Federal tax returns for tax
years prior to 1995 to claim refunds of $13.2 million,
and in October 1995, received a tax refund of $9.4
million less $2.5 million retained by the IRS to satisfy
other tax obligations of the Issuer. These refunds and
refund claims have been made under Section 172(f) of the
Internal Revenue Code, an area of the tax law without
significant precedent. There may be substantial
opposition by the IRS to the Issuer's refund claims.
Accordingly, no assurances can be
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made of the Issuer's entitlement to such refunds or the
timing of the receipt thereof or, if received, that such
refunds would be retained.
(ii) In March, 1995 a jury awarded the Issuer approximately
$2.7 million, plus certain legal costs and post-judgment
interest, in damages in a lawsuit against RehabCare
Corporation. The defendant has posted a $3.0 million
bond for the amount of the award and has filed an appeal
of the judgment. Management is unable to predict whether
the proceeds from this judgment will be received in
fiscal 1996.
(iii) The Issuer has received a firm offer from a mutual fund
to purchase in a private placement at least $5.0 million
of 15% fully secured Issuer notes due no earlier than
December 1996 if offered by the Issuer.
(iv) Included in current and non-current assets are four
hospital facilities designated as property and equipment
held for sale with a total carrying value of $6.2
million. The Issuer expects to sell two of these
facilities in fiscal 1996 and may lease a third facility
to an unrelated entity. However, the contracts have not
been fully negotiated, and proceeds from the sale or
lease of such assets are not expected to be available by
the time the Debenture Exchange is expected to occur.
Accordingly, management expects to use such cash
proceeds, if received during fiscal 1996, to fund and
expand the Issuer's operations and implement the
Issuer's restructuring plans. There can be no assurance
that any of the hospitals will be sold or that, if a
sale occurs, the terms of such sale would be sufficient
to discharge encumbrances and obligations arising in
connection with such property and produce any surplus
available for use in connection with the Exchange.
In the event that, under circumstances then prevailing, financing is
unavailable or is available only on terms that are unacceptable in the
Issuer's reasonable judgment, or if other adverse conditions then exist,
the Issuer may elect not to proceed with or effect the Exchange, if the
Issuer reasonably determines that the Exchange is not in the best
interests of the Issuer, or may amend the Exchange Offer, including to
permit the Issuer to accept less than all of the Debentures tendered and
prorate acceptances of the offer among all tendering holders.
In addition, the Issuer's Senior Debt, as defined in the Indenture, is
payable to the extent Senior Debt has matured. Senior Debt generally
includes all indebtedness (whether incurred directly or assumed or
guarantied) for borrowed money, any debt that is evidenced by a note or
similar instrument, or evidenced by a lease in which the Issuer is the
lessee.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE
The Debentures are currently due and payable pursuant to an acceleration
thereof that occurred when Debentureholders who owned an aggregate of at
least 25% of the outstanding principal amount gave notice of
acceleration in February 1995.
The purpose of the tender offer is to rescind the Debenture acceleration
by offering the Exchange Consideration in exchange for each $1,000, or
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integral multiple thereof, in principal amount of up to 100% of the
outstanding Debentures.
The Issuer is a party to a letter agreement dated March 3, 1995 (the
"Letter Agreement") with Mr. Jay H. Lustig, an individual who claimed
that he was representing certain holders of at least 25% of the
outstanding principal amount of Debentures (therein called the
"Participating Securityholders"). The Letter Agreement is filed as
Exhibit (c)(ii) hereto and is incorporated herein by this reference. The
Letter Agreement provided for the Issuer offering an exchange for all of
the Debentures that were outstanding and properly tendered by the
Debentureholders, but such proposed exchange offer was not effected.
Although the Letter Agreement is not binding upon the Issuer because of
the failure on the part of Mr. Lustig to perform under the terms
thereof, the Exchange is being made by the Issuer voluntarily and
includes certain of the concepts of the Letter Agreement as a framework
for the proposed Exchange. See Item 5, "Contracts, Arrangements,
Understandings or Relationships with Respect to the Issuer's Securities"
below.
The Issuer conditions its obligation to accept the tendered Debentures
in the Exchange upon conditions including (A) rescission of the
Debenture acceleration, which requires action by the holders of at least
a majority in principal amount of Debentures outstanding and (B) at
least two-thirds of the principal amount outstanding of Debentures
giving Consent to a waiver of Other Defaults under the Debentures. The
Issuer has reserved $4.5 million in cash, representing an amount that
would be necessary to make full payment of Exchange Consideration for
slightly less than 70% of the Debentures plus interest and default
interest due on the remaining Debentures. The Issuer intends to pay any
additional principal and all costs and expenses incurred to consummate
the Exchange from general corporate funds.
The tender of Debentures also includes the waiver of the accrued
interest that is in excess of $80.
The Debentures received by the Issuer from the tendering
Debentureholders in the Exchange will be held by the Issuer in its
treasury, will be considered outstanding and may be voted by the Issuer.
Debentures which are exchanged for Exchange Consideration will not be
retired until such time as the Issuer has effected the rescission of
acceleration and consented to and ratified the proposals which are being
separately presented to Debentureholders in a Debenture Consent
Solicitation Statement on Schedule 14A, which is incorporated herein by
this reference. The Issuer may retire such Debentures at any time, and
pending retirement, the Issuer's ability to vote or consent as a
Debentureholder could give the Issuer the ability to exercise control of
the rights of the Debentureholders. The Issuer currently intends to
retire the Debentures as soon as practicable after the completion of the
Exchange.
In connection with the proposed Exchange, the Issuer has not taken any
action with the purpose of deregistering Debentures in accordance with
the Securities Exchange Act of 1934, as amended (the "Exchange Act");
provided, that, prior to the Exchange Offer the Debentures have been
held by fewer than 300 record holders. At any given time one or more
record holders may request certificates to be issued in the names of one
or more of the beneficial holders. As of September 19, 1995 there were
approximately 60 record holders, including clearing agencies and
brokers. Based on the Issuer's written communication to brokers believed
to hold Debentures for beneficial holders, brokers hold
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Debentures for an aggregate of 170 beneficial holders. Therefore, the
maximum total number of potential record holders at this time is
approximately 230. The Debentures would have been deregistrable at any
time prior to the Exchange Offer, effective ninety (90) days after
filing with the Commission a certification on Form 15 that there are
fewer than 300 record holders. The Issuer may consider deregistration of
Debentures at some future time if circumstances exist under which the
Debentures will be deregistrable after the Exchange Offer. After the
prescribed 90-day time period, deregistration will affect to some extent
the applicability of certain federal securities laws to the Debentures.
The Issuer has no present intention to retire any Debentures prior to
their original maturity date except pursuant to the Exchange Offer. The
Indenture provides for the Issuer's Board of Directors to be able to
reduce the Debenture conversion price, or to redeem Debentures for cash
equal to their face amount.
Except to the extent indicated in the preceding paragraphs, the Issuer
has no plans or proposals of the type enumerated in Item 3 of Schedule
13E-4.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER
Except as disclosed in Item 5, there have been no transactions in the
Debentures by the Issuer or any of its executive officers, directors,
affiliates, or any associate or subsidiary thereof, during the forty
(40) business days of the Issuer immediately preceding the filing
hereof.
For this purpose, "affiliate" or "associate" is assumed to include
subsidiaries and other entities that are controlled, directly or
indirectly, by the Issuer and the executive officers and directors of
each thereof.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
TO THE ISSUER'S SECURITIES.
The Letter Agreement dated March 3, 1995, which is filed as Exhibit
(c)(ii) hereto, is incorporated herein by this reference. The amount of
the Exchange Consideration was determined according to the Letter
Agreement, an agreement that arose from negotiations between the Issuer
and Mr. Jay H. Lustig, an individual purportedly representing holders of
a $2.5 million portion of the outstanding $9,538,000 principal amount of
Debentures, and purportedly including the persons who had filed an
involuntary petition to commence a bankruptcy liquidation of the Issuer.
The Participating Securityholders supported the dismissal of the
bankruptcy, as provided in the Letter Agreement. The petition was
dismissed on March 6, 1995.
Subsequent to executing the Letter Agreement, the Issuer received copies
of notices of rescission of acceleration purportedly representing 44.1%
of the Debentures in outstanding principal amount. All of the notices
were addressed to the Trustee and the Issuer and purported to notify the
Trustee to rescind acceleration of the Debentures. The Trustee's legal
counsel has described the notices as invalid because, among other
reasons, (1) the Trustee should have directly received originally signed
notices from record holders of Debentures and the representative should
not have faxed or mailed the notices to the Trustee, and (2) the Letter
Agreement did not provide for either the curing of the existing Event of
Default under the Indenture or the waiver of such Event of Default by
all of the holders of Debentures (the waiver of all such holders being
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required under Section 6.04 of the Indenture since the existing Event of
Default consisted of missed interest payments), and such cure or waiver
was a prerequisite under Section 6.02 of the Indenture to a rescission
of acceleration of the Debentures. In addition, such notices and notices
subsequently received were signed by holders of aggregately less than
half of the outstanding principal amount of Debentures, and therefore
the notices would have been insufficient in quantity even if they had
not been deemed to be invalid (a majority of the outstanding principal
amount being necessary to rescind acceleration).
Mr. Lustig undertook sole responsibility on behalf of the Participating
Securityholders for obtaining notices of rescission of acceleration
pursuant to the Letter Agreement. The Issuer knows of no current
activity of Mr. Lustig in regard to solicitation of consent.
The Letter Agreement provided that the Issuer would use its best efforts
to offer the Debentureholders an exchange. For each $1,000 in
outstanding principal amount of Debentures and a waiver of whatever
portion of the accrued interest on such Debentures exceeded $80, the
Issuer was to offer cash of $500 as principal and $80 as interest and a
number of shares of Common Stock calculated based on the reported prices
on the NYSE Composite Tape during a defined trading period (March 6,
1995 through May 19, 1995). The Letter Agreement provided for a manner
of calculation to have been based on the average price of any round-lot
trades (100 shares or more). The $7.50 defined worth per share was
calculated based on the daily closing price, with the average weighted
for daily composite volume. This method is believed to approximate the
Letter Agreement method as well as reasonably possible. The Issuer was
unable to utilize the trading prices during the defined trading period
because such date was not available for the full trading period.
The Letter Agreement provided that the proposed exchange would be
consummated within 180 days; provided, however, the Issuer's promise to
use "best efforts" and its obligation to consummate the Exchange were
expressly conditioned upon the satisfaction of Mr. Lustig's obligations.
Mr. Lustig's efforts, if any, resulted in the delivery of notices of
rescission that were considered invalid by the Trustee and were
insufficient in amount. Management attributes the Issuer's delay beyond
the prescribed 180 days to the failure of Mr. Lustig to cause a
rescission of acceleration and to other factors beyond the Issuer's
control. Management believes that the continuance of the acceleration of
the Debentures has adversely affected the Issuer's ability to perform
its obligation, if any, to make an exchange offer and that the time
expended by the Issuer has been reasonable in the circumstances.
The Letter Agreement required the representative, Mr. Lustig, to use
best efforts to collect from Participating Securityholders as many
notices of rescission of acceleration of Debentures as would comprise a
majority of the aggregate face value outstanding. Mr. Lustig is believed
to have delivered a consent binding on the Debentures registered in his
name. Mr. Lustig, to the Issuer's knowledge, has not further exercised
any consent solicitation efforts.
The Trustee has proposed to make a general mailing to Debentureholders
of written requests that Debentureholders give notice to the Trustee of
rescission of acceleration and any other matters necessary so that the
Exchange Offer proceed. Solicitations of a notice of rescission of
acceleration of the Debentures may result in a rescission of the
acceleration.
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The Issuer's current year auditors have indicated that the acceleration,
among other factors, creates uncertainty as to the Issuer's ability to
continue as a going concern. If effected, thereby removing that
uncertainty, the rescission could improve the Issuer's financial
prospects. In addition to the acceleration, however, other factors
creating uncertainty as to the Issuer's ability to continue as a going
concern include significant recurring losses and negative cash flows
from operations. A rescission of acceleration also could affect the
"creditors' rights" of Debentureholders. The rescission of acceleration
could have the effect of impairing the rights of Debentureholders
relative to any other general creditors or subordinated creditors of the
Issuer.
While the acceleration and any Event of Default continue, the Trustee
also can institute a lawsuit and obtain a judgment against the Issuer
for the full outstanding principal amount of the Debentures plus unpaid
interest and costs, in the judgment of the Trustee or at the instruction
of Debentureholders holding 25 percent or more of the outstanding
principal.
The March 3, 1995 Letter Agreement provided for an agreement in favor of
Mr. Lustig and all of the Debentureholders that the Issuer was not to
pledge the shares of CareUnit, Inc., a Delaware corporation and a
wholly-owned subsidiary of the Issuer, after the date of the Letter
Agreement in order for the Issuer to be prepared to satisfy a future
obligation to pledge those shares for benefit of the Participating
Securityholders, but only if they performed all of their material
obligations (with opportunity for cure if cure were possible) under the
Letter Agreement. Such pledge would have been to secure the Issuer's
obligation to purchase the Debentures on and subject to the terms and
conditions of the Letter Agreement or otherwise. Management believes
that the Issuer's obligations to perform the pledge of CareUnit, Inc.
shares did not arise because Mr. Lustig and the Participating
Securityholders did not use best efforts to provide proper notices of
rescission of acceleration signed by Participating Securityholders. The
Letter Agreement also provided that a disposition of the shares would
have been permitted at any time after approximately August 28, 1995, or
180 days from March 3, 1995, if the Participating Securityholders had
performed all of their material obligations (with opportunity to cure if
cure were possible). The Issuer had honored its covenant not to encumber
the CareUnit shares otherwise than as contemplated by the Letter
Agreement. In the currently proposed Exchange, no pledge of the CareUnit
shares is contemplated.
Pursuant to the Letter Agreement, every holder of Debentures who
tendered them for exchange was to receive interest in an amount of $80
in cash in lieu of receiving the full actual amount of the interest. It
is estimated that the interest (and default interest thereon) accrued
through November 15, 1995 is approximately $117 per $1,000 of face value
of Debentures. To the extent this accrual exceeds the $80 in cash amount
allocated as interest, the tender of Debentures is deemed to be a waiver
of interest. For the reasons set forth above, the Issuer believes that
it is not bound by the Letter Agreement. The Exchange is being made by
the Issuer voluntarily and includes certain of the concepts of the
Letter Agreement as a framework for the proposed Exchange.
According to the Indenture between the Issuer and the Trustee, no
payment may be made to the holders of Debentures if any Senior Debt, as
defined in the Indenture, has matured and is unpaid or if any Senior
Debt, as so defined, is in default and if such default would permit
acceleration of the Senior Debt and if any legal action concerning the
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default is commenced or if the Senior Debt holder gives notice to the
Issuer of such default. To the Issuer's best knowledge, there is no such
default under any Senior Debt.
The Issuer has and in the future may engage investment bankers or
consultants to advise the Issuer and/or to offer, sell, or solicit
offers or other indications of interest in the Issuer's securities, when
and where permitted by law. For purposes of the preceding sentence, the
term securities includes debt securities, non-convertible or convertible
into stock, secured or unsecured by collateral, and subordinated or
unsubordinated.
The Issuer has from time to time engaged and compensated firms for the
purpose of facilitating a placement of securities including, but not
limited to, Chriss Street & Co., an investment banking firm affiliated
with Chriss W. Street, the Chairman, Chief Executive Officer and
President of the Issuer as approved by the Board of Directors. In
addition, from time to time some of the investors introduced to the
Issuer by Mr. Street have discussed follow-on investments with the
Issuer's management. Chriss Street & Co. may receive advisory fees in
connection with such investments if approved by the Board of Directors
in the particular instance.
Item 6 of this Schedule 13E-4 is incorporated herein by this reference.
The "Risk Factors," "Other Factors to Consider," "The Exchange Offer,"
"Interests of Certain Persons," "Principal Stockholders," "Use of
Proceeds," "Dividend Policy," "Capitalization," "Changes in
Accountants," "Description of Debentures" and "Description of Capital
Stock" portions of the Offering Circular are incorporated herein by this
reference.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED
The Exchange Offer is being made by the Issuer in reliance upon the
exemption from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"), afforded by Section 3(a)(9)
thereof. The Issuer, therefore, will not pay any commission or other
remuneration to any broker, dealer, salesman, or other person for
soliciting tenders of the Debentures. Regular employees of the Issuer
and its subsidiaries, who will not receive additional compensation
therefor, may solicit Exchanges from holders of the Debentures.
The Trustee and Continental Stock Transfer & Trust Company (the
"Exchange Agent") will be engaged to perform administrative services and
to provide copies of the Offering Circular and other documents upon
request.
ITEM 7. FINANCIAL INFORMATION
"Selected Financial Data," "Management's Discussion and Analysis," the
financial statements, and the notes thereto, and the auditors reports
thereon, included in the Issuer's Form 10-K/A Amendment No. 2 for the
fiscal year ended May 31, 1995, as filed on September 20, 1995 with the
Securities and Exchange Commission (the "Commission"), found on pages 18
through 61 thereof, are incorporated herein by reference.
The "Condensed Consolidated Financial Statements," and the notes
thereto, included in the Issuer's Form 10-Q/A, Amendment No. 1, for the
fiscal quarter ended August 31, 1995, as filed on or about October 24,
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1995 with the Commission, found on pages 2 through 16 thereof, are
incorporated herein by reference.
The "Condensed Consolidated Financial Statements," and the notes
thereto, included in the Issuer's Form 10-Q for the fiscal quarter ended
November 30, 1995, as filed on January 16, 1996 with the Commission,
found on pages 3 through 11 thereof, are incorporated herein by
reference.
The information in the section of the Offering Circular entitled "Ratio
of Earnings to Fixed Charges," which is located at page 9 thereof, is
incorporated herein by this reference.
The information in the section of the Offering Circular entitled
"Capitalization," which is located at page 43 thereof, is incorporated
herein by this reference.
ITEM 8. ADDITIONAL INFORMATION
The Issuer intends to conduct the Exchange Offer in accordance with
Section 3(a)(9) of the Securities Act, in order that the issuance of
Common Shares in connection with the Exchange will not require
Securities Act registration. The Debentures were originally issued in a
public offering that was registered under the Securities Act; and,
therefore, the Debentures would be treated as unrestricted securities
for purposes of the Securities Act so long as they are held by, or are
traded by and among, Debentureholders who are members of the public.
Debentures that, after the public offering, are acquired by the Issuer,
or any persons deemed affiliates of the Issuer, or any persons deemed
underwriters of the Issuer, would nevertheless be considered to become
restricted for purposes of the Securities Act, and any Debentures
acquired from any such persons in a transaction not involving a public
offering, also would be considered restricted. The Common Shares
exchanged for unrestricted Debentures would also be unrestricted for
Securities Act purposes provided that the Section 3(a)(9) exemption from
Securities Act registration applies.
The Issuer has applied for listing on the NYSE of the Common Shares
forming part of the Exchange Consideration. The NYSE has indicated
approval thereof. The Issuer intends to obtain approval from the NYSE
for listing upon notice of issuance prior to consummation of the
Exchange.
The Issuer has filed a Proxy Statement/Debenture Consent Solicitation
Statement (the "Consent Solicitation"), as amended, with the Commission
pursuant to the Exchange Act, a copy of which is attached hereto as
Exhibit (a)(vii) and incorporated herein by this reference. The purpose
of the Consent Solicitation is to obtain the consent (the "Consent") of
the Debentureholders to the following four proposals:
A. To consent to rescind, and to notify the Trustee of a
rescission of, an acceleration of payments due under the
Debentures (Proposal 1);
B. To consent to waive, and to notify the Trustee of a
waiver of, any other Events of Default under the
Debentures (other than nonpayment of any principal and
interest due) (Proposal 2);
C. To consent to instructions and to instruct the Trustee
not to pursue any remedy under the Debentures or the
Indenture
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upon anything less than future directions given by a
majority in outstanding principal amount of Debentures
(Proposal 3); and
D. To consent to the amendment of the Indenture between the
Company and the Trustee to the extent necessary to
effect Proposals 1, 2 and 3 and the Exchange (Proposal
4).
The Company does not presently contemplate completion of the Exchange
unless the Consents requested in the Consent Solicitation are granted by
the Debentureholders. Under the Indenture, approval of Proposals 1 and 3
requires consent of at least a majority of the outstanding principal
amount of Debentures, and approval of Proposals 2 and 4 requires consent
of the holders of at least 66 2/3% of the outstanding principal amount
of the Debentures.
All other notices given or authorized under the Indenture that the
Trustee and the management and Board of Directors of the Issuer solicit
will be solicited pursuant to a Debentureholder Proxy Statement filed as
a proxy statement and additional proxy materials on Schedule 14A under
the Exchange Act.
Various documents and actions required to be delivered or taken pursuant
to the Indenture are subject to approval by the Trustee under the
Indenture as to proper form and substance and as to compliance with the
Indenture. The Indenture contains terms and provisions regarding, among
other things, defaults and cures which may affect, directly and
indirectly, the Exchange Offer.
"Description of Debentures," "Risk Factors," and "The Exchange Offer --
Conditions of the Exchange Offer," in the Offering Circular are hereby
incorporated herein by reference.
The consummation of the Exchange Offer is intended to be concurrent with
the rescission of the Debenture acceleration. If the Debenture
acceleration is continuing there may be a material adverse effect on
possibilities to consummate the Exchange Offer. If the acceleration is
not rescinded prior to or concurrent with the payment of Exchange
Consideration to tendering Debentureholders and accrued interest to non-
tendering Debentureholders, the Issuer does not intend to consummate the
exchange.
Debentures are tendered by properly executing and delivering a Letter of
Transmittal, with the tendered Debentures, to the Exchange Agent.
The Debentureholders, in order to cause the Issuer to accept the
Debentures for Exchange, are requested to return to the Trustee a letter
submitting notice of rescission of the acceleration of the Debentures;
consenting to the making and completion of the Exchange Offer; and
instructing the Trustee not to pursue collection remedies against the
Issuer during the Exchange Offer in order to permit completion of the
Exchange Offer. Independently, the tender of Debentures pursuant to the
Letter of Transmittal serves as a waiver of the accrued interest in
excess of the $80.00 interest portion of the Exchange Consideration, and
waiver of all other claims under or pursuant to the Debentures, other
than for the payment of the Exchange Consideration. Unless the condition
is waived or modified by the Issuer, none of the Debentures will be
accepted for exchange unless the Debentureholders appropriately consent
to Proposal 1 set forth in the Debenture Consent Solicitation Statement.
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ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
The Exhibit Index attached to this Schedule is incorporated herein by
this reference.
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, correct and complete.
COMPREHENSIVE CARE CORPORATION
KERRI RUPPERT
-------------------------------
Kerri Ruppert
Senior Vice President,
Chief Accounting Officer
Date: February 6, 1996 and Secretary/Treasurer
13
<PAGE> 13
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No.
<S> <C> <C>
99.8 (a) (i) Offering Circular and Cover Letter*
99.9 (ii) Letter of Transmittal*
99.10 (iii) Notice of Rescission of Acceleration*
99.11 (iv) Fourth Notice of Default from Trustee to
Debentureholders*
99.12 (v) Notice to Debentureholders of Interest Payment Date
99.13 (vi) Cover Letter for Debenture Consent Solicitation
Statement*
99.14 (vii) Proxy Statement for solicitation of Debentureholders as
filed by the Issuer on September 15, 1995, and as
amended February __, 1996, pursuant to the Exchange
Act* (incorporated by reference)
99.15 (viii) Script for use by persons answering questions
99.16 (ix) Letter to Brokers (to be filed by amendment)
99.17 (x) Letter to Clients of Brokers and Others (to be filed by
amendment)
99.18 (xi) Notice of Conversion Price Adjustment (to be filed by
amendment)
99.19 (c) (i) Indenture dated April 25, 1985 between the Issuer and
Bank of America National Trust and Savings Association,
is incorporated by reference to Exhibit 4 to the
Issuer's Form S-3 Registration No. 2-97160 filed April
25, 1985 regarding an aggregate $46,000,000 original
principal amount of the Debentures
99.20 (ii) Letter Agreement dated March 3, 1995 between the Issuer
and Mr. Jay H. Lustig, as a representative of certain
holders of Debentures
</TABLE>
- --------------
* To be distributed to Debentureholders.
14
<PAGE> 1
EXHIBIT (a)(i)
[COMPREHENSIVE CARE CORPORATION LETTERHEAD]
February __, 1996
To: Holders of our 7 1/2% Convertible Subordinated
Debentures Due April 15, 2010 ("Debentures")
Comprehensive Care Corporation (the "Company") is offering you, in
exchange for each $1,000 in original principal amount of your Debentures
together with a waiver from you of interest and default interest accrued thereon
from April 15, 1994, an EXCHANGE CONSIDERATION comprised of (a) a cash principal
payment of $500 plus (b) a cash payment of $80 in lieu of interest and (c) a
principal payment of sixteen shares of Common Stock, par value $.01 per share,
of the Company.
If you elect to keep your Debentures, you will not lose the accrual of
any interest payment; provided, however, that continued payment of interest and
ultimately the principal thereof by the Company is subject to prior satisfaction
of conditions to such payment provided in the Indenture and the Company's
ability to pay such interest. Principal and interest due under the Debentures
are unsecured and are subject to the terms, restrictions and subordinations as
provided in the Indenture pursuant to which the Debentures were issued.
The Debentures are currently due and payable in full as a result of
acceleration resulting from past defaults. For the Exchange Offer to be
completed, holders of a majority principal amount of Debenture must give notice
to the Trustee that the acceleration is rescinded and also the Company must cure
all other Events of Default that are not waived, including the payment of all
default interest to non-tendering Debentureholders. Subject to certain
conditions, the Company expects to deliver Exchange Consideration for all
Debentures properly tendered that are accepted by the Company for Exchange. The
Company also intends to resume semi-annual interest payments on untendered
Debentures and does not have any present intention to redeem or otherwise retire
such untendered Debentures before maturity.
The Exchange Offer expires on April 1, 1996, and the Company anticipates
payment of the Exchange Consideration on or before April 15, 1996. Under certain
circumstances, the Company may extend such dates and amend or withdraw the
offer. The enclosed Offering Circular further describes the Exchange Offer.
Existing Debentureholders and their representatives, successors or assigns may
obtain additional copies of the Offering Circular upon request to Kerri Ruppert,
Senior Vice President, Chief Accounting Officer and Secretary/Treasurer,
telephone (800) 678-2273.
You are urged to read the enclosed Offering Circular carefully. The
Offering Circular is accompanied by a Letter of Transmittal, Notice of
Guaranteed Delivery, Letter to Brokers and Letter to Customers for your use in
tendering your Debenture certificates to the Exchange Agent, Continental Stock
Transfer & Trust Company. Also, the Offering Circular is accompanied by a
Debenture Consent Solicitation Statement. One desired effect of the Exchange
Offer is to obtain a rescission of acceleration of the Debentures so that the
Company can resume its former non-default status under the Debentures. If the
acceleration is not rescinded, the Company anticipates that it would not be
1
<PAGE> 2
permitted by holders of its Senior Debt to deliver Exchange Consideration to
the Debentureholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU ACCEPT THE EXCHANGE AND
TENDER YOUR DEBENTURES TO RECEIVE THE EXCHANGE CONSIDERATION DESCRIBED ABOVE.
Cordially,
________________________________________
Kerri Ruppert
Senior Vice President, Chief Accounting
Officer and Secretary/Treasurer
2
<PAGE> 3
OFFERING CIRCULAR
OFFER TO EXCHANGE CASH AND COMMON STOCK FOR ANY AND ALL OUTSTANDING 7 1/2%
CONVERTIBLE SUBORDINATED DEBENTURES DUE APRIL 15, 2010
COMPREHENSIVE CARE CORPORATION
350 W. BAY STREET
COSTA MESA, CA 92627
THE COMPANY OFFERS AN AGGREGATE EXCHANGE CONSIDERATION OF
$500 IN CASH AS PRINCIPAL,
$80 IN CASH AS INTEREST, AND
16 SHARES OF COMMON STOCK
FOR THE SURRENDER OF EACH $1,000 OF OUTSTANDING PRINCIPAL
AMOUNT OF DEBENTURES AND WAIVER AND FORGIVENESS
OF APPROXIMATELY $78.44 EXCESS INTEREST (OVER $80) ACCRUED
SINCE APRIL 15, 1994 TO APRIL 15, 1996 AND ALL OTHER CLAIMS
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON APRIL 1,
1996 UNLESS THE EXCHANGE OFFER IS EXTENDED.
THE DATE OF THIS OFFERING CIRCULAR IS FEBRUARY ___, 1996.
Comprehensive Care Corporation (the "Company") hereby offers, upon the
terms and subject to the conditions set forth in this Offering Circular and in
the accompanying Letter of Transmittal (which together constitute the "Exchange
Offer"), to exchange $500 in cash plus sixteen (16) shares of Common Stock, par
value $.01 per share ("Common Shares"), as a payment of principal, plus $80 in
cash as a payment of interest (the "Exchange Consideration") for each $1,000 of
the outstanding principal amount of its 7 1/2% Convertible Subordinated
Debentures due April 15, 2010 (the "Debentures"), and the waiver by the
Debentureholders of all but such $80 of interest accrued and unpaid as of the
date of the Exchange. (See "The Exchange Offer -- Procedures for Tendering")
THE COMPANY IS CONCURRENTLY SOLICITING FOUR CONSENTS FROM
DEBENTUREHOLDERS PURSUANT TO A DEBENTURE CONSENT SOLICITATION STATEMENT WHICH IS
A DOCUMENT SEPARATE FROM THIS OFFERING CIRCULAR RELATING TO THE FOLLOWING:
Consent (1) to rescind, and to notify the Trustee of a rescission of, an
acceleration of payments due under the Debentures, (2) to waive, and to notify
the Trustee of a waiver of, any other Events of Default under the Debentures
(other than any principal and interest due otherwise than by acceleration), (3)
to instructions and to instruct the Trustee not to pursue any remedy under the
Debentures or the Indenture upon anything less than future directions given by a
majority in outstanding principal amount of Debentures, and (4) to the amendment
of the Indenture between the Company and the Trustee to the extent necessary to
effect the foregoing three proposals and the Exchange.
IF THE CONSENTS ARE OBTAINED, ALL DEBENTURES WHICH REMAIN UNTENDERED AND
OUTSTANDING AT THE EXPIRATION OF THE OFFER WILL BE ENTITLED TO RECEIVE A PAYMENT
OF $158.44 PER $1,000 OF PRINCIPAL BUT THE ACCELERATION WILL HAVE BEEN RESCINDED
BY VIRTUE OF SUCH CONSENT AND PAYMENT.
The Company shall not accept any Debentures submitted for tender at any
time after 2:00 p.m. Los Angeles time and 5:00 p.m. New York time on April 1,
1996 (the "Expiration Date"). The Company will pay or cause to be paid or sent
the Exchange Consideration on or before April 15, 1996 (the "Payment Date"). The
Company also will pay on the Payment Date to the non-tendering Debentureholders
of record on April 2, 1996 (the "Interest Record Date") all unpaid interest,
including default interest, and such outstanding non-tendered
1
<PAGE> 4
Debentures will continue to be convertible into Common Shares at the rate of
$230.81 for each Debenture so converted. The Expiration Date, Interest Record
Date and the Payment Date are subject to extension in the reasonable discretion
of the Company.
The Common Shares have been listed and will be accepted for trading upon
notice of issuance on the New York Stock Exchange ("NYSE"). On January 25, 1996,
the reported closing price of the Common Shares on the NYSE was $8.375 per
share. The Exchange Consideration includes sixteen (16) Common Shares. The
Company's Common Shares are described in "Risk Factors," "Other Factors to
Consider" and "Description of the Capital Stock." See "Summary Comparison of
Terms of Debentures and Exchange Consideration."
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will accept for exchange any and all Debentures properly tendered prior
to the Expiration Date, unless the Exchange Offer is extended from time to time
at the option of the Company. Tenders of Debentures may be withdrawn at any time
prior to 5:00 p.m., New York City time on the Expiration Date. See "The Exchange
Offer -- Withdrawal Rights." The Company will deliver Exchange Consideration
including certificates representing Common Shares as soon as practicable
following the Expiration Date. PROVIDED, if, under circumstances then
prevailing, financing is unavailable or is available only on terms that are
unacceptable in the Company's reasonable judgment, or if other adverse
conditions then exist, the Company may elect not to proceed with or effect the
Exchange, if the Company reasonably determines that the Exchange is not in the
best interests of the Company, or may amend the Exchange Offer, including to
permit the Company to accept less than all of the Debentures tendered and
prorate acceptances of the offer among all tendering holders.
An aggregate of $9,538,000 in principal amount ("face value") of
Debentures was outstanding as of January 31, 1996. The Debentures are traded in
the over-the-counter market, although trading in these securities is limited and
sporadic. On January 25, 1996, the reported bid and asked prices of the
Debentures on the over-the-counter market based on information from one or more
brokers were $600 and $650, respectively, per $1,000 original principal amount.
The existence of a bid price does not indicate an actual trading market exists
or will exist.
The entire outstanding principal amount of Debentures, plus interest and
default interest accrued thereon, is currently due and payable pursuant to
acceleration thereof by holders of 25% or more of the outstanding principal
amount. Interest is unpaid on the Debentures from April 15, 1994. As of April
15, 1996, the amount of interest and default interest will be $158.44
The Exchange Offer is not conditioned upon any minimum principal amount
of Debentures being tendered for exchange, although the obligation of the
Company to complete the exchange is subject to the Company's ability to raise
sufficient funds, the rescission of acceleration of the Debentures, the absence
of certain actions or notices by Senior Debt holders, and certain customary
conditions, all as described under "The Exchange Offer -- Conditions of the
Exchange Offer," certain of which may be waived by the Company.
The Exchange Offer is being made by the Company in reliance upon the
exemption from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), afforded by Section 3(a)(9) thereof. The
Company, therefore, will not pay any commission or other remuneration to any
broker, dealer, salesman, or other person for soliciting tenders of the
Debentures. Regular employees of the Company and its subsidiaries, who will not
receive additional compensation therefor, may solicit exchanges from holders of
the Debentures. This Exchange Offer is directed solely to existing
Debentureholders.
2
<PAGE> 5
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Offering Circular. If given or made, the information or representations
should not be relied upon as having been authorized by the Company. The delivery
of this Offering Circular shall not, under any circumstances, imply that the
information herein is correct as of any time subsequent to its date.
This Offering Circular does not constitute an offer to any person in any
jurisdiction in which any such offer would be unlawful, and the Company will not
accept tenders from holders of Debentures in any jurisdiction in which such
acceptance would not be in compliance with applicable securities or blue sky
laws of such jurisdiction.
This Offering Circular describes private unregistered sales of the
Company's Common Stock and convertible debt. Such shares upon issuance are
restricted pursuant to the Securities Act and may not be resold without
registration under the Securities Act or an appropriate exemption. No offer
thereof, express or implied, is made herein.
ADDITIONAL INFORMATION
Continental Stock Transfer & Trust Company has agreed to provide certain
services as Exchange Agent in connection with the Exchange Offer. The Trustee of
the Debentures is First Trust California, National Association, successor to
Bank of America National Trust and Savings Association. Holders of Debentures
who require assistance may contact the Company, attention Kerri Ruppert, Senior
Vice President, Chief Accounting Officer and Secretary/Treasurer, at 350 W. Bay
Street, Costa Mesa, California 92627, (800) 678-2273; or the Exchange Agent,
Continental Stock Transfer & Trust Company at 2 Broadway, 19th Floor, New York,
New York 10004, (212) 509-4000, Ext. 227; or the Trustee, First Trust
California, National Association, successor to Bank of America National Trust
and Savings Association, Corporate Trust Administration # 8510, 333 South
Beaudry Avenue, 25th Floor, Los Angeles, California 90017, (213) 345-4652,
Attention: Ms. Sandy Chan.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at 500 West Madison Street, Chicago, Illinois
60606 and 7 World Trade Center, New York, New York 10048. Copies of such
material can also be obtained from the Public Reference Section of the
Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.
This Offering Circular does not contain all of the information set forth
in the Schedule 13E-4, as the same from time to time may hereafter be amended,
of which this Offering Circular is a part and which the Company has filed with
the Commission. For further information with respect to the Company and the
securities offered hereby, reference is made to the Schedule 13E-4, including
the exhibits filed as a part thereof, copies of which can be inspected at, or
obtained at prescribed rates from, the Public Reference Section of the
Commission at the address set forth above. Additional updating information
3
<PAGE> 6
with respect to the Company may be provided in the future by means of documents
incorporated by reference herein or other appendices or supplements to this
Offering Circular.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company with the
Commission under the Exchange Act and are incorporated herein by reference:
a. The Company's Annual Report on Form 10-K/A Amendment No. 2 for
the fiscal year ended May 31, 1995 including portions of the
Company's definitive Proxy Statement for the 1995 Annual Meeting
of Stockholders incorporated therein by reference;
b. The Company's Quarterly Report on Form 10-Q/A, Amendment No. 1,
for the fiscal quarter ended August 31, 1995;
c. The Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended November 30, 1995; and
d. The Company's Current Report on Form 8-K and on Form 8-K/A filed
on or about May 22, 1995 and May 25, 1995 reporting under Item 4
certain descriptions and required information regarding the
disassociation of the Company and Arthur Andersen LLP and the
Company's Form 8-K filed on or about July 5, 1995 reporting
under Item 4 thereof the engagement of Ernst & Young LLP.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date of this Offering Circular
and prior to the filing of a post-effective amendment which indicates that all
securities offered have been sold or which deregisters all securities then
remaining unsold, shall be deemed to be incorporated by reference in this
Offering Circular and to be part hereof from the date of filing such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Offering Circular to the extent that a statement contained
herein, or in any other subsequently filed document that also is or is deemed to
be incorporated herein by reference, modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Offering Circular.
The Company will provide, without charge, to each person, including any
beneficial owner, to whom this Offering Circular is delivered, upon written or
oral request of such person, a copy of any and all of the information that has
been incorporated by reference herein (other than exhibits to the information
that is incorporated by reference unless such exhibits are specifically
incorporated by reference into the information this Offering Circular
incorporates). Such requests should be directed to Kerri Ruppert, Senior Vice
President, Chief Accounting Officer and Secretary/Treasurer of the Company, at
(800) 678-2273.
4
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
OFFERING SUMMARY........................................................................... 1
PURPOSE OF THE EXCHANGE OFFER.............................................................. 1
THE EXCHANGE OFFER......................................................................... 1
SUMMARY COMPARISON OF TERMS OF DEBENTURES AND EXCHANGE CONSIDERATION....................... 5
PRICE OF SECURITIES PRIOR TO ANNOUNCEMENT.................................................. 6
THE COMPANY................................................................................ 7
FINANCIAL INFORMATION...................................................................... 7
EXCHANGE OFFER FUNDING REQUIREMENTS AND SOURCES............................................ 7
RATIO OF EARNINGS TO FIXED CHARGES......................................................... 9
RECENT TRANSACTIONS IN SECURITIES OF THE COMPANY........................................... 9
PRICE RANGE OF DEBENTURES.................................................................. 9
THE EXCHANGE OFFER......................................................................... 10
TERMS OF THE EXCHANGE OFFER........................................................ 10
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS............................... 10
THE DEBENTURE ACCELERATION......................................................... 11
PROCEDURES FOR TENDERING........................................................... 12
GUARANTEED DELIVERY PROCEDURE...................................................... 13
CONDITIONS OF THE EXCHANGE OFFER................................................... 14
ACCEPTANCE OF DEBENTURES FOR EXCHANGE; DELIVERY OF NEW DEBENTURES.................. 15
WITHDRAWAL RIGHTS.................................................................. 15
EXCHANGE AGENT..................................................................... 16
PAYMENT OF EXPENSES................................................................ 16
EXCHANGE OF DEBENTURE CERTIFICATES................................................. 17
BOARD OF DIRECTORS' DISCRETION AND RESERVATION OF RIGHTS........................... 17
NO DISSENTER'S RIGHTS.............................................................. 17
OTHER FACTORS TO CONSIDER.................................................................. 17
PRICE RANGE OF THE COMMON SHARES................................................... 17
SHARES ELIGIBLE FOR FUTURE SALE.................................................... 19
POTENTIAL FEDERAL INCOME TAX CONSEQUENCES.................................................. 20
EFFECTS ON THE DEBENTUREHOLDERS.................................................... 21
EFFECTS ON THE COMPANY............................................................. 22
DESCRIPTION OF CAPITAL STOCK............................................................... 23
COMMON STOCK....................................................................... 23
COMMON STOCK PURCHASE RIGHTS....................................................... 23
REGISTRATION RIGHTS................................................................ 24
COMMON STOCK TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND
REGISTRAR................................................................... 24
PREFERRED STOCK.................................................................... 24
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS........................................ 24
DESCRIPTION OF DEBENTURES.................................................................. 25
GENERAL............................................................................ 25
CONVERSION OF DEBENTURES........................................................... 25
OPTIONAL REDEMPTION................................................................ 26
</TABLE>
i
<PAGE> 8
<TABLE>
<S> <C>
SINKING FUND....................................................................... 26
SUBORDINATION OF DEBENTURES................................................................ 27
EVENTS OF DEFAULT AND REMEDIES..................................................... 27
MERGER, CONSOLIDATION, OR SALE OF ASSETS........................................... 28
AMENDMENT, SUPPLEMENT AND WAIVER................................................... 28
TRANSFER AND EXCHANGE.............................................................. 29
CONCERNING THE TRUSTEE............................................................. 29
RISK FACTORS............................................................................... 29
FAILURE TO CONSUMMATE EXCHANGE OFFER............................................... 30
ABILITY OF THE COMPANY TO CONTINUE AS A GOING CONCERN; EXPLANATORY
PARAGRAPH IN AUDITORS' REPORT............................................... 30
PRIORITIES OF SECURITIES AND OTHER CONSIDERATIONS RELATING TO ANY
FUTURE BANKRUPTCY OF THE COMPANY............................................ 31
RELATIVE PRIORITIES OF DEBT CLAIMS AND EQUITY INTERESTS..................... 31
AVOIDABLE PREFERENCES....................................................... 32
BRIEF EXPLANATION OF CHAPTER 11............................................. 32
PROHIBITIONS ON PAYMENT TO DEBENTUREHOLDERS................................. 35
FRAUDULENT CONVEYANCES...................................................... 35
NO FAIRNESS OPINION................................................................ 36
HISTORY OF LOSSES AND ANTICIPATED FUTURE LOSSES; UNCERTAINTY OF
FUTURE PROFITABILITY........................................................ 36
ADDITIONAL RISK FACTORS WITH RESPECT TO HOLDERS OF DEBENTURES NOT
TENDERED IN THE EXCHANGE OFFER.............................................. 36
SUBORDINATION............................................................... 36
REDEMPTION; MATURITY........................................................ 37
SPORADIC TRADING............................................................ 37
UNCERTAINTY OF FUTURE FUNDING...................................................... 37
DISPOSITION OF ASSETS.............................................................. 37
ENGAGEMENT OF ERNST & YOUNG LLP; DELAYS IN SEC FILINGS............................. 38
INVOLUNTARY BANKRUPTCY PETITION; ACCELERATION OF INDEBTEDNESS...................... 38
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS.................................. 38
UNCERTAINTY OF PRICING; HEALTHCARE REFORM AND RELATED MATTERS...................... 39
MANAGEMENT OF EXPANSION............................................................ 39
MANAGEMENT OF TRANSITION........................................................... 39
PRICE VOLATILITY IN PUBLIC MARKET.................................................. 39
THIN TRADING OF DEBENTURES......................................................... 39
CONVERSION PRICE FAR ABOVE SHARE PRICES............................................ 39
TAXES...................................................................................... 39
INTERESTS OF CERTAIN PERSONS............................................................... 40
PRINCIPAL STOCKHOLDERS..................................................................... 40
USE OF PROCEEDS............................................................................ 42
DIVIDEND POLICY............................................................................ 42
CAPITALIZATION............................................................................. 43
CHANGES IN ACCOUNTANTS..................................................................... 44
</TABLE>
ii
<PAGE> 9
OFFERING SUMMARY
The following is a summary of certain features of the Exchange Offer and
other matters, and all statements contained herein are qualified in their
entirety by reference to the more detailed information included elsewhere in
this Offering Circular.
PURPOSE OF THE EXCHANGE OFFER
The Exchange Offer is an integral step in the Company's recapitalization
and offer of compromise to the DebentureHolders in order to eliminate its
default status under the Debenture and to enable the Company to conduct its
affairs and business without the overhanging threats of foreclosure and
bankruptcy, and to attempt to increase the value of the Company's Common Stock
for the benefit of all of the stockholders, including those who receive their
shares in the Exchange. Payment of all amounts due under the Debentures has been
accelerated by a group of Debentureholders, and thus approximately $11 million
is currently due and payable under the Debentures, subject, however, to,
rescission of the acceleration by holders of a majority in principal amount of
the outstanding Debentures. All other continuing Events of Default must be
appropriately cured or waived prior to the rescission becoming effective.
Concurrently with the Exchange, the Company is soliciting the rescission of
acceleration. Holders of Senior Debt (as defined in the subordination provisions
of the Debentures) may be able to prohibit payments by the Company in exchange
for, or otherwise on account of, the Debentures. The issuance of Common Stock
and payment by the Company in cash at a discount to the face amount would
improve the Company's balance sheet and financial outlook. If holders of a
majority in principal amount of the outstanding Debentures notify the Trustee of
rescission of acceleration of the Debentures, the Debentures will be reinstated
and once again will mature on April 15, 2010. If the holders of a majority in
principal amount of Debentures outstanding do not give notice of rescission of
acceleration of the Debentures, the Company will then consider its options, but
has no present intention to consummate the Exchange or to pay any interest
accrued on the Debentures unless the acceleration is rescinded.
THE EXCHANGE OFFER
THE OFFERING........................... The Company is offering to exchange
the Exchange Consideration, as defined
below, for each $1,000 principal
amount of outstanding Debentures
properly tendered and accepted for
exchange in the Exchange Offer. See
"The Exchange Offer--Terms of the
Exchange Offer."
EXCHANGE CONSIDERATION................. The Company is offering a principal
payment of $500 in cash plus 16 shares
of Common Stock representing
approximately $120 worth in defined
value of Common Stock (subject to
payment in cash in lieu of fractional
shares) plus an interest payment of
$80.00 in cash. All Debentureholders
that tender Debentures will be deemed
to have waived accrued interest since
April 15, 1994 (and interest on
default interest since October 15,
1994) to the extent the accrued amount
exceeds the interest payment of $80 in
cash.
EFFECTS OF TENDERING
1
<PAGE> 10
DEBENTURES............................ Tendering Debentureholders will
receive Exchange Consideration for
Debentures and will waive a portion of
the accrued interest. You should
receive a separate proxy statement
relating to Notice of Rescission of
Acceleration and an accompanying
consent form to be submitted by you to
the Trustee.
NOTICE OF RESCISSION
OF ACCELERATION........................ As a condition to the Company's
obligation to consummate the Exchange,
the acceleration of the Debentures
must be rescinded. Rescission of
acceleration will have significant
effects on tendering Debentureholders
if the tendered Debentures are not
accepted for exchange and on all
non-tendering Debentureholders. See
"Risk Factors."
EXPIRATION DATE........................ 5:00 p.m., New York City time, on
April 1, 1996, unless extended by the
Company. See "The Exchange
Offer--Expiration Date; Extensions;
Termination; Amendments."
WITHDRAWAL OF TENDERS.................. Tenders of Debentures may be withdrawn
at any time prior to the Expiration
Date or at any time after April 1,
1996 if not theretofore accepted for
exchange. See "The Exchange Offer --
Withdrawal Rights."
ACCEPTANCE OF DEBENTURES............... The Company will accept for exchange
any and all Debentures which are
properly tendered in the Exchange
Offer prior to 5:00 p.m., New York
City time, on the Expiration Date,
subject to the Company's ability to
extend, amend or terminate the
Exchange. See "The Exchange Offer--
Acceptance of Debentures for
Exchange."
CONDITIONS OF THE EXCHANGE
OFFER................................ The Company's obligation to consummate
the Exchange Offer is not conditioned
upon any minimum principal amount of
Debentures being tendered for
exchange. The Exchange Offer is,
however, subject to the Company's
ability to raise sufficient funds to
purchase all of the Debentures that
are properly tendered, the rescission
of acceleration of the Debentures, the
prior payment of any matured Senior
Debt and the absence of legal actions
or default notices by certain Senior
Debt holders, as well as certain
customary conditions. Certain of the
conditions may be waived by the
Company. See "The Exchange Offer--
Conditions of the Exchange Offer."
PROCEDURES FOR TENDERING
DEBENTURES........................... Each holder of Debentures wishing to
accept the Exchange Offer must
complete and sign the Letter of
Transmittal, in accordance
2
<PAGE> 11
with the instructions contained herein
and therein, and forward or hand
deliver such Letter of Transmittal to
the Exchange Agent at one of the
addresses set forth herein and
therein. Any holder of Debentures
whose Debentures are registered in the
name of a broker, dealer, commercial
bank, trust company or nominee is
urged to contact such registered
holder promptly if such holder wishes
to accept the Exchange Offer. Holders
whose certificates representing their
Debentures are not immediately
available or who cannot deliver their
certificates or any other required
documents to the Exchange Agent prior
to 5:00 p.m., New York City time, on
the Expiration Date may tender their
Debentures pursuant to the guaranteed
delivery procedure set forth herein.
See "The Exchange Offer--Procedures
for Tendering" and "--Guaranteed
Delivery Procedure."
NOTICES OF RESCISSION
OF ACCELERATION...................... The Company's Debentures have been and
are immediately due and payable. The
Company requests that all
Debentureholders submit a Notice of
Rescission of Acceleration to the
Trustee. While the acceleration of
Debentures is continuing, the Trustee
can obtain a judgment against the
Company in the amount of the full face
value of the Debentures, plus interest
and default interest and costs.
SENIOR DEBT............................ All principal or interest of Senior
Debt, as defined in the Indenture,
that has theretofore matured, by
acceleration or otherwise, must be
paid prior to the Company's making any
payment to Debentureholders. Any
Senior Debt holder who commences any
legal proceeding (whether or not the
holder prevails), or gives notice
(whether or not meritorious)
concerning any purported Senior Debt
default that purportedly would permit
the Senior Debt to be accelerated can
effectively prevent or delay payment
to Debentureholders. The Company
believes that it has approximately
$9.5 million of Senior Debt
outstanding.
EFFECTS OF THE RESCISSION
OF ACCELERATION...................... Rescission of acceleration may affect
the rights of Debentureholders
relative to other creditors. The
Company intends to consummate the
Exchange Offer as promptly as legally
practicable following or concurrently
with the effective rescission of
acceleration.
3
<PAGE> 12
INTEREST PAID OR PAYABLE TO
OTHER THAN THE TENDERING
RECORD HOLDER........................ Debentureholders intending to tender
in the Exchange Offer must properly
tender before the Expiration Date, as
the same may be extended from time to
time at the Company's sole discretion.
If Debentures are tendered after the
Expiration Date by a successor or
transferee of the record holder on the
interest payment date, the tendering
Debentureholder will be offered the
Exchange Consideration minus the
interest paid or payable to the
predecessor, unless the predecessor
assigns the interest payable to the
tendering record holder, who
re-assigns the same to the Company on
a form acceptable to the Company and
its legal counsel.
TRADING................................ The Company's Debentures are traded in
the over-the-counter market; however,
trading is sporadic. The Company's
shares of Common Stock are traded on
the New York Stock Exchange ("NYSE")
and the Common Shares included in the
Exchange Consideration have been
approved for listing on the NYSE
subject to notice of issuance.
EXCHANGE AGENT......................... Continental Stock Transfer & Trust
Company. See "The Exchange Offer
--Exchange Agent."
FURTHER INFORMATION.................... For further information, please
contact the Company, attention Kerri
Ruppert, Senior Vice President, Chief
Accounting Officer and
Secretary/Treasurer, at (800) 678-2273
or Continental Stock Transfer & Trust
Company, the Exchange Agent, at (212)
509-4000, Ext. 227.
4
<PAGE> 13
SUMMARY COMPARISON OF TERMS OF DEBENTURES AND EXCHANGE CONSIDERATION
<TABLE>
<CAPTION>
EXCHANGE
THE DEBENTURES CONSIDERATION
<S> <C> <C>
PRINCIPAL.......... While the Debentures are accelerated, $1,000 For each $1,000 in principal amount exchanged, the
is due in cash, interest on the principal (which Debentureholder will receive $500 in cash plus 16
is considered overdue) is payable, along with shares of Common Stock. As of January 25, 1996, the
interest on unpaid interest to the extent closing price of the Common Stock on the NYSE was
lawful. See "Interest" below. If the acceleration 8.375. The rights of holders of Common Stock are
is rescinded, the principal amount will be due in junior to the rights of Debentureholders and all
full April 15, 2010, subject to earlier payment in other creditors. See "Ranking" below.
the Company's discretion.
INTEREST........... 7 1/2% per annum calculated on a 30-day month and $80 in cash. The additional accrued interest that
360 day year basis. Interest has accrued at 7 1/2% will have been waived would aggregate approximately
per annum. Interest has not been paid since $78.44 to April 15, 1996.
April 15, 1994 on the Debentures. Three semi-annual
interest installments are in arrears (October 1994,
April 1995 and October 1995). Debentures earn
interest on default interest at 7 1/2% per annum,
to the extent permitted by law. While the Debentures
are accelerated, interest accrues on the entire
principal amount. Approximately $158.44 aggregately
thereof will have accrued on each $1,000 face value
as of April 15, 1996. If the acceleration is to be
rescinded, the interest required to be paid excludes
the portion of accrued interest due only on account
of the acceleration.
MATURITY........... While the Debentures are accelerated, all principal Upon the Exchange that occurs if and when the
and interest are due and payable immediately. If the Exchange Offer is successfully completed.
acceleration is rescinded, the principal amount will Completion of the Exchange Offer is subject to
mature on April 15, 2010, subject to acceleration in a high degree of risk. See "Risk Factors."
the event of notice by the Trustee or at least 25% in
principal amount of Debentures following the existence
and continuation of a new Event of Default.
</TABLE>
5
<PAGE> 14
<TABLE>
<S> <C> <C>
CONVERSION OR
EXCHANGE........... Each $1,000 in principal amount is convertible into See "Principal" above.
four whole Common Shares (plus a balance of $79.16 in
principal amount of Debentures remaining unconverted)
at the current conversion price of $230.21 per share.
The conversion price is subject to adjustment to
prevent dilution in certain events. The conversion
price adjustments are made generally whenever shares
are sold by the Company at a price below the average
closing price on the NYSE during a specified period.
RANKING............ Unsecured general obligations of the Company Payments received in the Exchange Offer by
subordinate to all existing and future Senior Debt Debentureholders may be subject to claims of
of the Company (as defined). Secured Senior Debt Senior Debt holders or other creditors, and, if
totalled approximately $3.6 million at December 31, competing creditors prevail in asserting their
1995. claims, the Exchange Consideration may be
forfeitable. See "Priorities of Securities and
Other Consideration s Relating to Any Future
Bankruptcy of the Company." Shares of Common
Stock received in the Exchange constitute
"equity" securities, which by their nature are
subordinate to all indebtedness of the Company.
REDEMPTION AT
OPTION OF THE
COMPANY............ Redeemable at any time in whole or in part at the No redemption.
option of the Company at the principal amount,
together with accrued interest.
</TABLE>
PRICE OF SECURITIES PRIOR TO ANNOUNCEMENT
As of March 31, 1995, the date preceding the public announcement of the
intention to make the Exchange Offer, the bid price for Debentures of $1,000
principal amount was $360. On such date, the closing sales price for the
Company's Common Stock reported on the NYSE Composite tape was $5 3/4. As of
January 25, 1996, the bid and asked prices for the Debentures were $600 and
$650, respectively, and the high and low sales prices for the Company's Common
Stock were $8.625 and $8.125, respectively.
6
<PAGE> 15
THE COMPANY
Comprehensive Care Corporation (the "Company") was incorporated in
Delaware in 1969. The Company, directly or through subsidiaries, engages in
providing behavioral health care and substance abuse treatment on a managed-
care or contract basis. The Company owns six freestanding hospital facilities
(four of which are closed and held for sale).
The Company generated losses from its own operations in fiscal 1995 and
relied for its cash requirements on funds generated by its subsidiaries,
principally CareUnit, Inc., a Delaware corporation; the dispositions of
freestanding hospital facilities; $2.67 million of equity private placements, a
convertible debt private placement of $2.0 million, a subsidiary's preferred
equity private placement of $1.0 million; and sale of $3.0 million of assets
held for sale. In addition, in fiscal 1996 the Company received cash generated
by a tax refund for the fiscal 1995 tax year, and a sale of a $1 million
conditionally exchangeable secured promissory note.
The Company could be required to rely for cash financing of the Exchange
Offer solely on its cash reserves, potential cash flow generated by operations,
proceeds from any assets disposed of as currently anticipated, and its available
cash.
At January 31, 1996, the Company's outstanding Debentures (originally
issued pursuant to a public offering), aggregated $9,538,000 in outstanding
principal amount. In the fourth quarter of fiscal 1996, the Company is expecting
to complete the Exchange Offer with respect to the Debentures.
To the extent Debentures are converted into Common Stock of the Company,
the subordinated debt related thereto is retired and some portion of that amount
becomes part of stockholders' equity.
FINANCIAL INFORMATION
The information under the captions "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Consolidated Financial Statements," and "Notes to Consolidated
Financial Statements" included in the Company's Form 10-K/A Amendment No. 2, for
the fiscal year ended May 31, 1995, on pages 18 through 61 thereof, is
incorporated herein by this reference.
The information under the captions "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Consolidated Unaudited
Financial Statements," and "Notes to Consolidated Unaudited Financial
Statements" included on pages 3 through 16 of the Company's Form 10-Q/A,
Amendment No. 1, for the fiscal quarter ended August 31, 1995 and on pages 3
through 20 of the Company's Form 10-Q for the fiscal quarter ended November 30,
1995, are incorporated herein by this reference.
EXCHANGE OFFER FUNDING REQUIREMENTS AND SOURCES
The proposed Exchange Offer will require, if accomplished at all, the
issuance of up to 152,608 shares of the Company's Common Stock to fund the stock
portion of the Exchange. In addition, the Company will require a maximum of
$5,532,040 to pay the cash portion of the Exchange Consideration.
Assuming that a majority in principal amount of Debentures consent to
give notice of rescission of acceleration, then the acceleration will be
rescinded if and only if the Company pays the interest due on the Debentures
7
<PAGE> 16
that are not tendered. The interest accrued includes the three semi-annual
interest installments (interest from approximately April 15, 1994 to October 15,
1995) plus interest on defaulted interest payments accrued and unpaid to the
date that the interest is paid (the "Interest Payment Date").
Accrued interest to the extent of $80 per $1,000 principal amount of
Debentures will be paid on the Debentures that are tendered as represented by an
$80 portion of the aggregate $580 in cash included in Exchange Consideration.
Debentures that are accepted in the Exchange will become the property of
the Company, along with all rights or claims thereunder, including, but not
limited to, the interest in excess of such $80, and the Debentureholder who
surrendered the Debenture will immediately become the holder of a right to
receive the Exchange Consideration.
As set forth above, the Company received a $9.4 million refund in
October 1995 related to its fiscal 1995 Federal tax return. The Company will
utilize such proceeds to provide funds for the Debenture exchange, payoff the
outstanding liabilities to the IRS, and/or additional operating needs. The
statement of operations reflects the recognition of $2.6 million in tax benefits
for this refund. In addition, in November 1995, the Company entered into a
Secured Conditional Exchangeable Note Purchase Agreement for $1.0 million. The
Company also anticipates utilizing one or more of the following potential
sources of cash to provide funds for additional operating needs:
- Included in current and non-current assets are four hospital
facilities designated as property and equipment held for sale
with a total carrying value of $6.2 million. The Company expects
to sell three of these facilities during the current fiscal year
and has entered into a lease agreement on the fourth facility to
an unrelated entity. However, some contracts have not been fully
negotiated and proceeds from the sales or lease of such assets
are not expected to be available by the time the Debenture
exchange is expected to occur. Accordingly, management expects
to use such cash proceeds, if received during fiscal 1996, to
fund and expand the Company's operations and implement the
Company's restructuring plans. There can be no assurance that
any of the hospitals will be sold or that, if a sale occurs, the
terms of such sale would be sufficient to discharge encumbrances
and obligations arising in connection with such property and
produce any surplus available for use in connection with the
Exchange.
- In March 1995, a jury awarded the Company approximately $2.7
million, plus interest, in damages in its lawsuit against
RehabCare Corporation. The defendant has posted a bond for the
amount of the award and has filed an appeal of the judgment.
Management is unable to predict whether any proceeds from this
judgment will be received in fiscal 1996.
- The Company has received a firm commitment from a mutual fund to
purchase in a private placement at least $5.0 million of 15%
fully secured Company notes due no earlier than December 1996 if
offered by the Company. The Company's hospital facilities are
currently encumbered to secure indebtedness aggregating $3.6
million, and no assurance can be made that the Company would
have adequate collateral available if it desires to issue and
sell such secured notes under this Commitment.
All of these potential sources of additional cash in fiscal 1996 are
subject to variation due to business and economic influences outside the
8
<PAGE> 17
Company's control. There can be no assurance that during fiscal 1996 the
Company will complete the transactions required to fund its working capital
deficit. Sell "Risk Factors."
During the first quarter of fiscal 1996, the Company paid the IRS
approximately $2.3 million pursuant to its settlement agreement. In addition,
during the second quarter of fiscal 1996, the Company paid the IRS the remaining
balance, including accrued interest, due on the settlement agreement of
approximately $2.5 million.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges
for the Company for the periods indicated. Adjusted Net Earnings represent
consolidated earnings (loss), before provision (benefit) for income taxes, and
the cumulative effect of accounting charges and before fixed charges (excluding
capitalized interest). Fixed charges consist of interest expense, amortized
issuance cost of debt, and a one-third portion of rental expense which is deemed
representative of the interest factor. The Company has had no Preferred Stock
outstanding.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MAY 31, NOVEMBER 30, 1995
------------------ -----------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Adjusted Net Earnings $(7,274) $ 298 $(9,029) $(5,876) $(9,619) $(2,232)
Total Fixed Charges $ 7,959 $ 4,392 $ 2,183 $ 1,675 $ 1,734 $ 894
Ratio of earnings to
fixed charges (.9):1 .1:1 (4.1):1 (3.5):1 (5.6):1 (2.5):1
</TABLE>
RECENT TRANSACTIONS IN SECURITIES OF THE COMPANY
There have been no transactions in the Debentures by the Company or any
of its executive officers, directors, affiliates or any associate or subsidiary
thereof during the forty (40) business days of the Company immediately preceding
the date of this Offering Circular.
PRICE RANGE OF DEBENTURES
The Debentures are traded in the over-the-counter market; however there
is only sporadic trading. As of January 25, 1996, the reported bid price per
$1,000 face amount was $600 and the reported asked price was $650 according to
one broker as based only on information known to the broker. The existence of a
reported price does not imply that an active trading market exists or in the
future will exist. In the event that a substantial portion of the Debentures are
exchanged by the holders thereof, the trading, if any, may become more sporadic.
9
<PAGE> 18
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions
set forth herein and in the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange the Exchange Consideration for each $1,000 principal
amount of its outstanding Debentures and a waiver of interest accrued thereon to
the extent exceeding $80 at the time of a consummation of the Exchange.
Approximately $158.44 of interest and interest on defaulted interest will have
accrued to and including April 15, 1996.
The Exchange Consideration is comprised of a principal payment of $500
in cash plus 16 shares of Common Stock and an interest payment of $80 in cash.
Accrued interest from April 15, 1994, the day to which interest was paid
on all Debentures, to the Payment Date will not be paid on Debentures exchanged,
except for the interest payment of $80 in cash included in the Exchange
Consideration.
Although the Company has no present intention to do so, if it should
modify the consideration offered for the Debentures in the Exchange Offer, such
modified consideration would be paid with regard to all Debentures accepted in
the Exchange Offer. If the consideration is modified, the Exchange Offer will
remain open at least 10 business days from the date the Company first gives
notice, by public announcement or otherwise, of such modification, when required
by law. The modified consideration also may provide for different alternatives
for Debentureholders, provided that the modified consideration would be paid in
regard to all Debentures electing the alternative that was provided for or
modified.
As of January 31, 1996, $9,538,000 in aggregate principal amount of the
Debentures was outstanding. This Offering Circular, together with the Letter of
Transmittal, is being sent to all record holders of the Debentures and is being
forwarded by certain record holders to beneficial holders. The Company is paying
the costs of distribution and printing of this information. The Company will
reimburse costs of transmitting documents.
The Company reserves the right in its sole discretion to purchase or
make offers for any Debentures that remain outstanding subsequent to the
Expiration Date. The terms of any such purchases or offers could differ from the
terms of the Exchange Offer.
Tendering holders of Debentures will not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of Debentures pursuant
to the Exchange Offer. The Company will pay all charges and expenses, other than
certain applicable taxes, in connection with the Exchange Offer. See "Payment of
Expenses" below.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer will expire at 5:00 p.m., New York City time, on
April 1, 1996, subject to extension by the Company by notice to the Exchange
Agent as herein provided. The Company reserves the right to so extend the
Exchange Offer at its discretion, in which event the term "Expiration Date"
shall mean the time and date on which the Exchange Offer as so extended shall
expire. The Company will notify the Exchange Agent and the Trustee of any
extension by oral or written notice and will make a public announcement thereof,
each prior to 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date.
10
<PAGE> 19
While it does not foresee doing so, the Company reserves the right (i)
to delay accepting any Debentures for exchange and to extend or to terminate the
Exchange Offer and not accept for exchange any Debentures if any of the events
set forth below under the caption "Conditions of the Exchange Offer" shall have
occurred and shall not have been waived by the Company, by giving oral or
written notice of such delay or termination to the Exchange Agent and the
Trustee or (ii) to amend the terms of the Exchange Offer. Any such delay in
acceptance for exchange, extension, termination or amendment will be followed as
promptly as practicable by public announcement thereof. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendment in a manner reasonably
calculated to inform the holders of such amendment, and the Company will extend
the applicable Exchange Offer for a period of five to 10 business days,
depending upon the significance of the amendment and the manner of disclosure to
holders of the Debentures, if the Exchange Offer would otherwise expire during
such five to 10 business-day period. The rights reserved by the Company in this
paragraph are in addition to the Company's rights set forth below under the
caption "Conditions of the Exchange Offer."
THE DEBENTURE ACCELERATION
A group of holders and purported holders of Debentures declared an
acceleration of the principal amount outstanding under the Debentures in the
aggregate amount of $9,538,000 plus interest and default interest, and such
amount became immediately due and payable as of approximately February 10, 1995.
On February 24, 1995 three of such persons filed an involuntary petition in
United States Bankruptcy Court for the Northern District of Texas under Chapter
7 of the U.S. Bankruptcy Code. The petition was dismissed without protest from
the bankruptcy petitioners on March 6, 1995. The representative of this subset
of the Debentureholders agreed and consented to the dismissal of the petition
before any bankruptcy case had commenced against the Company.
Subject to certain limitations, holders of a majority in principal
amount of the outstanding Debentures may direct the Trustee regarding the time,
method and place of exercising any trust or power conferred on it. Therefore, a
majority in interest of the Debentures are entitled to direct the Trustee not to
pursue any remedy that may be requested by less than a majority of
Debentureholders. Their approval of rescission of the acceleration of the
Debentures will be a condition to the Company's offer to exchange any cash or
property (other than capital stock) to Debentureholders.
If the Debentureholders rescind the acceleration and restore the
Debentures to the status before having suffered Events of Default, with the past
due interest paid on non-tendered Debentures or waived as to all tendered
Debentures (except as to the $80.00 included in the Exchange Consideration), the
original terms of the Debentures will be reinstated with principal due in April
2010 and interest payable semi-annually at the rate of 7 1/2% per annum.
The Company is a party to a letter agreement dated March 3, 1995 (the
"Letter Agreement") with Mr. Jay H. Lustig, an individual who represented that
he was a representative of certain holders of at least 25% of the outstanding
principal amount of Debentures (therein called the "Participating
Securityholders"). The Letter Agreement provided for the Company offering an
exchange for all of the Debentures that were outstanding and properly tendered
by the Debentureholders, but such proposed exchange offer was not effected. The
Letter Agreement provided that the Company could condition the proposed exchange
offer on at least $2.5 million in principal amount of Debentures being tendered
by Debentureholders represented by Mr. Lustig. Although the Letter Agreement is
not binding upon the Company because of the failure on the part of Mr. Lustig to
perform under the terms thereof, the Exchange is being made by the Company
voluntarily and includes certain of the concepts of the
11
<PAGE> 20
Letter Agreement as a framework for the proposed Exchange. The Company may
modify or terminate the Exchange Offer and pursue alternative transactions,
subject to rights of Debentureholders.
Each Debentureholder will be requested to sign a Notice of Rescission of
Acceleration and forward it to the Trustee. The Company's management and Board
of Directors requests that each of Debentureholders execute and return a Notice
of Rescission of Acceleration. Pursuant to the Indenture, the rescission may
itself be revoked until the conditions to rescission of acceleration are met,
including that a majority in interest has submitted notices of rescission and
the non-payment of interest accrued since April 16, 1994, and default interest,
have been cured or waived.
PROCEDURES FOR TENDERING
The acceptance of the Exchange Offer by a holder of the Debentures
pursuant to one of the procedures set forth below will constitute an agreement
between such holder and the Company in accordance with the terms and subject to
the conditions set forth herein and in the Letter of Transmittal.
To be tendered effectively, the Debentures in integral multiples of
$1,000, together with the properly completed Letter of Transmittal (or facsimile
thereof), executed by the registered holder thereof, and any other documents
required by the Letter of Transmittal, must be received by the Exchange Agent at
the address set forth below prior to 5:00 p.m., New York City time, on the
Expiration Date, except as otherwise provided below under the caption
"Guaranteed Delivery Procedure." LETTERS OF TRANSMITTAL AND DEBENTURES SHOULD
NOT BE SENT TO THE COMPANY OR THE TRUSTEE.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Debentures tendered pursuant thereto
are tendered (i) by a registered holder of the Debentures who has not completed
the box entitled "Special Issuance and Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be by a firm
that is a member of a registered national securities exchange or a member of the
NASD or by a commercial bank or trust company having an office in the United
States (an "Eligible Institution").
The method of delivery of Debentures and other documents to the Exchange
Agent is at the election and risk of the holder. If such delivery is by mail it
is suggested that the mailing be made sufficiently in advance of the Expiration
Date to permit delivery to the Exchange Agent before the Expiration Date.
The Exchange Agent will make a request to establish accounts with
respect to the Debentures at the Depository Trust Company ("DTC"), the Midwest
Securities Transfer Company ("MSTC") and the Philadelphia Depository Trust
Company ("PHILADEP" and, together with DTC and MSTC, collectively referred to
herein as the "Book-Entry Transfer Facilities") for the purpose of the Exchange
Offer promptly after the date of this Offering Circular.
Any financial institution that is a participant in any of the Book-Entry
Transfer Facilities' systems may make book-entry transfer of the Debentures by
causing DTC, MSTC or PHILADEP to transfer such Debentures into the Exchange
Agent's account in accordance with such Book-Entry Transfer Facility's procedure
for such transfer. Although delivery of Debentures may be effected through
book-entry transfer in the Exchange Agent's account at DTC, MSTC or PHILADEP,
the Letter of Transmittal (or facsimile thereof), with all required signature
guarantees and any other required documents, must, in any case, be
12
<PAGE> 21
transmitted to and received or confirmed by the Exchange Agent at one of its
addresses set forth below prior to 5:00 p.m., New York City time, on the
Expiration Date, except as provided below under the caption "Guaranteed Delivery
Procedure." DELIVERY OF DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY IN
ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.
If the Letter of Transmittal is signed by a person other than a
registered holder of any certificate(s) listed, such certificate(s) must be
endorsed or accompanied by appropriate bond powers, in either case signed
exactly as the name or names of the registered holder or holders appear on the
certificate(s).
If the Letter of Transmittal or Guaranteed Delivery Form or any
certificates or bond powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing, and, unless waived by the Company, proper evidence satisfactory to the
Company of their authority to so act must be submitted.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Debentures will be resolved by
the Company, whose determination will be final and binding. The Company reserves
the absolute right to reject any or all tenders that are not in proper form or
the acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any irregularities or
conditions of tender as to particular Debentures. The Company's interpretation
of the terms and conditions of the Exchange Offer (including the instructions in
the Letter of Transmittal) will be final and binding. Unless waived, any
irregularities in connection with tenders must be cured within such time as the
Company shall determine. Neither the Company nor the Exchange Agent shall be
under any duty to give notification of defects in such tenders or shall incur
liabilities for failure to give such notification. Tenders of Debentures will
not be deemed to have been made until such irregularities have been cured or
waived.
Any Debentures received by the Exchange Agent that are not properly
tendered and as to which the irregularities have not been cured or waived will
be returned by the Exchange Agent to the tendering holder, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
GUARANTEED DELIVERY PROCEDURE
If a holder of the Debentures desires to tender his Debentures and the
certificate(s) representing such Debentures are not immediately available, or
time will not permit such holder's certificate(s) or any other required
documents to reach the Exchange Agent before 5:00 p.m., New York City time, on
the Expiration Date, a tender may be effected if:
(a) The tender is made by or through an Eligible Institution;
(b) Prior to 5:00 p.m., New York City time, on the Expiration Date,
the Exchange Agent receives from such Eligible Institution a
properly completed and duly executed Guaranteed Delivery Form
(by facsimile transmission, mail or hand delivery), setting
forth the name and address of the holder of the Debentures and
the principal amount of the Debentures tendered, stating that
the tender is being made thereby and guaranteeing that, within
three trading days after the Expiration Date, the certificate(s)
representing the Debentures, accompanied by a properly completed
and duly
13
<PAGE> 22
executed Letter of Transmittal and any other documents required
by the Letter of Transmittal, will be deposited by the Eligible
Institution with the Exchange Agent; and
(c) The certificate(s) for all tendered Debentures, or a confirmation
of a book-entry transfer of such Debentures into the Exchange
Agent's applicable account at a Book-Entry Transfer Facility as
described above, as well as a properly completed and duly
executed Letter of Transmittal and all other documents required
by the Letter of Transmittal, are received by the Exchange Agent
within three trading days after the Expiration Date.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will
not be required to accept for exchange, or to exchange the Exchange
Consideration for, any Debentures not theretofore accepted for exchange or
exchanged, and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Debentures, if any of the following conditions
exist:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the
Exchange Offer which, in the reasonable judgment of the Company,
if successful could be reasonably considered likely to materially
impair the ability of the Company to proceed with the Exchange
Offer or have a material adverse effect on the contemplated
benefits of the Exchange Offer to the Company; or
(b) there shall have been approved, adopted or enacted any law,
statute, rule or regulation which, in the reasonable judgment of
the Company, if invoked could reasonably be considered likely to
materially impair the ability of the Company to proceed with the
Exchange Offer or have a material adverse effect on the
contemplated benefits of the Exchange Offer to the Company; or
(c) there shall not have occurred a rescission of the acceleration of
the Debentures; or
(d) there shall not have occurred a waiver of other Events of Default
under the Debentures; or
(e) under then prevailing circumstances, financing is unavailable or
is available only on terms that are unacceptable in the Company's
reasonable judgment, or other adverse conditions then exist, and
the Company elects not to proceed with or effect the Exchange,
and the Company reasonably determines that under such
circumstances the Exchange is not in the best interests of the
Company; or
(f) the Company has determined in its reasonable judgment that, in
the best interests of the Company, the Exchange Offer should be
amended to permit it to limit its obligations and accept less
than all of the Debentures tendered and accordingly to prorate
acceptances of the offer among all tendering holders; or
(g) any Senior Debt, as defined in the Indenture, (i) shall have
matured as to principal or interest and remain unpaid, or (ii)
shall entitle the holder to accelerate its maturity if the holder
gives notice of default or commences a proceeding related
thereto, or (iii) shall threaten to interfere with or regarding
14
<PAGE> 23
payment of the Exchange Consideration to holders of the
Debentures.
The foregoing conditions are for the sole benefit of the Company and may
be asserted by the Company regardless of the circumstances giving rise to such
conditions or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. If the Company waives or amends the
foregoing conditions, the Company will, if required by applicable law, extend
the Exchange Offer for a minimum of five business days from the date that the
Company first gives notice, by public announcement or otherwise, of such waiver
or amendment, if the Exchange Offer would otherwise expire within such five
business-day period. Any determination by the Company concerning the events
described above will be final and binding upon all parties.
ACCEPTANCE OF DEBENTURES FOR EXCHANGE; DELIVERY OF NEW DEBENTURES
Tenders will be accepted only in principal amounts of $1,000 and
integral multiples thereof.
Upon the terms and subject to the conditions of the Exchange Offer,
promptly after the Expiration Date the Company will accept all Debentures
validly tendered and not withdrawn. The Company will deliver the Exchange
Consideration in exchange for Debentures on or prior to the Payment Date.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted validly tendered Debentures when, as and if the Company has given oral
or written notice thereof to the Exchange Agent. The Exchange Agent will act as
agent for the tendering holder of Debentures for the purposes of receiving
Exchange Consideration from the Company. Under no circumstances will interest be
paid by the Company by reason of any delay in making such payment or delivery.
If any tendered Debentures are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Debentures will be returned,
without expense, to the tendering holder thereof (or, in the case of Debentures
tendered by book-entry transfer, to an account maintained at such Book-Entry
Transfer Facility), as promptly as practicable after the expiration or
termination of the Exchange Offer.
WITHDRAWAL RIGHTS
Any registered holder of Debentures who has tendered Debentures may
withdraw the tender at any time prior to 5:00 p.m., New York City time, on the
Expiration Date, and, unless previously accepted for exchange by the Company,
after 5:00 p.m., New York City time, on the day following the Payment Date, by
delivery of written notice of withdrawal to the Exchange Agent.
To be effective, a written, telegraphic, telex or facsimile transmission
notice of withdrawal must (a) be timely received by the Exchange Agent at the
address set forth herein, (b) specify the name of the person having tendered the
Debentures to be withdrawn, (c) indicate the Debentures to which it relates (or
if the tender was by book-entry transfer, information sufficient to enable the
Exchange Agent to identify the Debentures so tendered) and the aggregate
principal amount of Debentures to be withdrawn and (d) be (i) signed by the
holder in the same manner as the original signature on the Letter of Transmittal
(including a guarantee of signature, if required) or (ii) accompanied by
evidence satisfactory to the Company that the holder withdrawing such tender has
succeeded to beneficial ownership of such Debentures. If certificates have been
delivered or otherwise identified to the Exchange Agent, the name of the
registered holder and the serial numbers of
15
<PAGE> 24
the particular certificate(s) evidencing the Debentures withdrawn must also be
so furnished to the Exchange Agent as aforesaid prior to the physical release of
the certificates for the withdrawn Debentures. If Debentures have been tendered
pursuant to the procedures for book-entry transfer as set forth herein, any
notice of withdrawal must also specify the name and number of the account at
DTC, MSTC or PHILADEP to be credited with the withdrawn Debentures. Withdrawals
of tenders of Debentures may not be rescinded, and any Debentures withdrawn will
thereafter be deemed not validly tendered for purposes of the Exchange Offer;
provided, however, that withdrawn Debentures may be re-tendered by again
following one of the procedures described herein at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date.
All questions as to the validity (including time of receipt) of notices
of withdrawal will be determined by the Company, whose determination will be
final and binding. None of the Company, the Exchange Agent nor any other person
will be under any duty to give notification of any defects or irregularities in
any notice of withdrawal or incur any liability for failure to give any such
notification.
EXCHANGE AGENT
Continental Stock Transfer & Trust Company has been appointed as
Exchange Agent for the Exchange Offer. Debentures, Letters of Transmittal, and
any other required documents thereunder, should be sent to the Exchange Agent,
at the addresses set forth on the back cover hereof.
Requests for additional copies of this Offering Circular or the Letter
of Transmittal or for additional information should be directed to Kerri
Ruppert, Senior Vice President, Chief Accounting Officer and Secretary/Treasurer
of the Company, at (800) 678-2273.
LETTERS OF TRANSMITTAL AND DEBENTURES SHOULD NOT BE SENT TO THE COMPANY
OR THE TRUSTEE.
PAYMENT OF EXPENSES
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the Exchange Offer. The Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for reasonable out-of-pocket expenses in
connection therewith. The Company will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Offering Circular and related
documents to the beneficial owners of the Debentures, and in handling or
forwarding tenders for their customers.
The cash expenses to be incurred in connection with the Exchange Offer,
including the fees and expenses of the Exchange Agent and printing, accounting
and legal fees, will be paid by the Company and are estimated at $0.2 million.
The Company will pay all transfer taxes, if any, applicable to the
transfer and sale of Debentures to it or its order pursuant to the Exchange
Offer. If, however, the Exchange Consideration and/or substitute Debentures for
principal amounts not exchanged are to be delivered or paid to, or are to be
registered or issued in the name of, any person other than the registered holder
of the Debentures tendered hereby, or if tendered certificates are registered in
the name of any person other than the person signing the Letter of Transmittal,
or if a transfer tax is imposed for any reason other than the transfer and sale
of Debentures to the Company or its order pursuant to the Exchange Offer, the
amount of any such transfer taxes (whether imposed on the
16
<PAGE> 25
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted herewith, the amount of such transfer taxes will be billed directly to
such tendering holder.
EXCHANGE OF DEBENTURE CERTIFICATES
The Exchange Agent, Continental Stock Transfer & Trust Co., will act for
holders of Debentures in implementing the Exchange of their Debenture
certificates. Do not send Debenture certificates until requested pursuant to the
Company's Offering Circular and Letter of Transmittal, which will be mailed to
each Debentureholder registered in the Trustee's register of holders, including
sufficient copies for the redistribution to each beneficial owner thereof. The
Company reimburses brokers and nominees for the costs of mailing or other
customary commercial delivery charges or fees.
BOARD OF DIRECTORS' DISCRETION AND RESERVATION OF RIGHTS
The Board of Directors reserves the rights, notwithstanding
Debentureholders' approval and without further action by the Debentureholders,
to elect not to proceed with any of the proposed actions in connection with the
Exchange Offer, if at any time prior to the Company's completion thereof the
Board of Directors, in its sole and reasonable discretion, determines that the
proposed action is no longer in the best interests of the Company after
considering advice of an investment banker and such other information or advice
as the Board deems relevant.
Under each of the four Proposals described in the Debenture Consent
Solicitation Statement, the Board reserves the right to delay or defer any
occurrence, action, event or record date, upon notice, for purposes of allowing
the Consent Solicitation period to remain open for any legally required period
or periods of time, subject to the restrictions on such rights that exist under
laws, rules or decisions.
The Board of Directors also retains the authority to take or to
authorize discretionary incidental actions as may be necessary and appropriate
to carry out the purposes and intentions of the four Proposals.
NO DISSENTER'S RIGHTS
Under Delaware law, Debentureholders are not entitled to dissenter's
rights of appraisal with respect to the Exchange Offer. The rights of
Debentureholders include the right to sue on the obligation. The
Debentureholders are referred to the Indenture for a complete statement of such
rights:
OTHER FACTORS TO CONSIDER
PRICE RANGE OF THE COMMON SHARES
The Common Shares are traded on the NYSE. The following table sets forth
the range of reported high and low prices on the NYSE Composite tape for the
Common Shares for the fiscal quarters indicated.
<TABLE>
<CAPTION>
1994 HIGH LOW
---- ---- ---
<S> <C> <C>
First Quarter............................... $11 1/4 $ 6 1/4
Second Quarter.............................. 8 3/4 6 1/4
Third Quarter............................... 12 1/2 5
Fourth Quarter.............................. 8 3/4 5
</TABLE>
17
<PAGE> 26
<TABLE>
<CAPTION>
1995
----
<S> <C> <C>
First Quarter............................... $ 8 3/4 $2 1/2
Second Quarter.............................. 7 3/4 5
Third Quarter............................... 9 3/8 5 1/4
Fourth Quarter.............................. 8 3/4 5
</TABLE>
<TABLE>
<CAPTION>
1996
----
<S> <C> <C>
First Quarter............................... $ 8 7/8 $6
Second Quarter.............................. 10 7 3/4
Through January 25, 1996.................... 9 3/8 8
</TABLE>
On January 25, 1996, the closing sales price per share of the Common Shares as
reported on the NYSE Composite Tape was $8 3/8 ($8.375).
(a) At November 30, 1995, there were 2,214,498 issued and
outstanding shares of Common Stock (calculated as described in
paragraph (c) below), excluding 442,433 fully-paid shares
issuable to satisfy private placement agreements of the
Company, the issuance of which is pending certain stock
registrar and other general administrative matters related to
their issuance. As of November 30, 1995, the Company had 1,868
stockholders of record of Common Stock. These included 571
record holders who have exchanged their old stock certificates
pursuant to the reverse stock split and 1,297 holders who have
not yet surrendered old certificates representing 538,002
shares of old Common Stock, par value $.10 per share, which
entitle the holder to a certificate representing one share of
Common Stock for every 10 old shares surrendered, plus a
payment of cash in lieu of any resultant fraction of a share
of Common Stock.
(b) No cash dividend was declared during any quarter of fiscal
1995, 1994 or 1993, a result of the Company's operating losses
and restrictions contained in the Company's primary loan
agreement and the Debentures. The Company does not expect to
resume payment of cash dividends in the foreseeable future.
(c) On May 16, 1994, the stockholders of the Company authorized
and approved an amendment to the Company's Certificate of
Incorporation to effect a reverse stock split. The
stockholders also approved amendments to the Certificate of
Incorporation reducing the par value of the Company's Common
Stock to $.01 per share and reducing the number of authorized
shares of Common Stock to five times the number of shares
outstanding, reserved or otherwise committed for future
issuance but not less than 12.5 million. The reverse stock
split was authorized to be in any ratio selected by the Board
of Directors; and all of the actions were to become effective
on any date selected by the Board of Directors, provided that
the actions were completed prior to February 16, 1995.
Pursuant to the May 16, 1994 approval, the Board of Directors
effected a one-for-ten reverse stock split effective October
21, 1994. On the effective date of the reverse stock split,
the Certificate of Incorporation was amended to effect the
reverse split, to change the par value of the Common Stock to
$.01 per share and to reduce the number of authorized shares
of Common Stock to 12.5 million. Pursuant to the amendment,
the old Common Stock was converted into a right to receive,
upon surrender of ten old shares, one new share of Common
Stock, and to receive payment in lieu of fractions of a share
of new Common Stock. The share
18
<PAGE> 27
figures contained in this statement reflect the effect of the
reverse stock split, which would be to reduce the number of
shares set forth by a factor of ten, with each stockholder's
proportionate ownership interest remaining constant, subject
to payment in cash in lieu of fractional shares and escheat
laws applicable to unclaimed new stock certificates. The
number of shares outstanding at November 30, 1995 reported
herein includes the 53,800 shares of the Company's Common
Stock, par value $.01 per share, receivable (at a maximum)
upon surrender of stock certificates by all record holders of
certificates that represented 538,002 shares of the Company's
Common Stock, par value $.10 per share, before the October 21,
1994 one-for-ten reverse stock split.
(d) In October 1994, the NYSE notified the Company that it was
below certain quantitative and qualitative listing criteria in
regard to continued listing of the Common Stock for trading on
the NYSE. Continued listing of the Common Stock for trading on
the NYSE is dependent upon factors including the improvement
of the Company's financial condition and results of operations
as well as the level of activity and breadth of the trading in
the shares. No assurance is possible of continued NYSE listing
can be given by the Company whether or not the Exchange is
effected.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public
market could adversely affect prevailing market prices and the liquidity of an
investment in the Common Stock. Lower public market prices may also adversely
affect the Company's ability to raise additional capital in the capital markets
at prices favorable to the Company. Upon completion of the Exchange Offer,
assuming the prior issuance of the 442,433 shares of Common Stock issuable
pending administerial acts and the exchange of all outstanding Debentures on
the terms of the Exchange Offer, the Company will have approximately 3,700,000
shares of Common Stock outstanding. Of these shares, approximately 2,350,000
shares will be unrestricted under the Securities Act of 1933, as amended (the
"Securities Act"), unless the shares were acquired from the Company, an
underwriter or an "affiliate" of the Company in a transaction not involving a
public offering.
The remaining 1,350,000, approximately, then outstanding shares would
be "restricted securities" as defined in Rule 144 under the Securities Act
("Restricted Shares"). Restricted Shares will become eligible for sale (subject
to the provisions of Rule 144) in the public market. In general, under Rule 144
as currently in effect, any person (or persons whose shares would be
aggregated) who has beneficially owned Restricted Shares for at least two years
is entitled to sell, within any three-month period, a number of shares that
does not exceed the greater of two maximum amounts: (i) one percent (1%) of the
then outstanding shares of the Company's Common Stock or (ii) the average
weekly trading volume during the four calendar weeks preceding such a sale. A
person who is not an affiliate of the Company (and has not been an affiliate
within three months prior to the sale) and has beneficially owned the
Restricted Shares for at least three years is entitled to sell such shares
under Rule 144(k) without regard to any of the limitations described above. In
meeting the two-year and three-year holding periods as described above, a
holder of Restricted Shares is not entitled to count the holding period of an
affiliate of the Company who held the Restricted Shares except following a bona
fide pledge or gift, and the holding period commences only when the
consideration payable for the shares has been paid. Moreover, 442,433 shares
then outstanding and approximately 568,862 shares issuable upon exercise of
options and conversion of notes could immediately cease to be
19
<PAGE> 28
Restricted Shares if registered by the Company, at its expense, under the
Securities Act upon demand by any or all of the holders.
In addition, there are approximately 1,250,000 shares of Common Stock
reserved for issuance under employee stock option plans. Options under the
plans relating to approximately 500,000 of such shares have been granted and
have not expired. The Company has filed Forms S-8 under the Securities Act to
register up to 870,000 shares of Common Stock, and intends to file registration
statements on Form S-8 to register 520,000 additional shares of Common Stock
authorized by the stockholders on November 14, 1994 to be reserved for issuance
under its 1988 Incentive Stock Option Plan ("ISO Plan") and 1988 Nonqualified
Stock Option Plan ("NSO Plan"), Directors' Plan (as amended and restated,
"Directors' Plan"), and 1995 Incentive Plan ("Incentive Plan") which would
permit the immediate resale of any shares issued under these plans in the
public market without restriction under the Securities Act.
Although there can be no assurances that the Company will be able to
register shares for purposes of a public offering under the Securities Act, in
the event that there is an opportunity to do so, the Company may sell
substantial amounts of shares for its own account and may register shares held
or purchasable by others, which may further adversely affect the market price
of the Common Stock. Issuance of shares sold in a public offering for cash does
not require stockholder approval pursuant to the NYSE Shareholder Approval
Policy.
<TABLE>
<CAPTION>
When Restrictions Shares Eligible
Lapse for Future Sale Comment
----- --------------- -------
<S> <C> <C>
Upon the Exchange Up to approximately 152,608 shares Freely tradeable in compliance
of Common Stock that may be with Section 3(a)(9) under the
exchanged as a portion of the Securities Act and assuming
Exchange Consideration for the Debentures were freely
Debentures tradeable by their respective
holders
Upon filing registration Up to approximately 1,250,000 Freely tradeable
statements on Form S-8 shares of Common Stock issuable
under the 1988 ISO Plan, the 1988
NSO Plan, the 1994 Directors' Plan,
or the 1995 Incentive Plan
Upon effectiveness of a Up to approximately 1,011,295 Freely tradeable
public offering shares held by or issuable to
holders with registration rights
When Restricted Shares All Restricted Shares Saleable under Rule 144,
have been held for two subject to certain numeric
years or more restrictions
When Restricted Shares All Restricted Shares held by Saleable under Rule 144(k) by
have been held three non-affiliates non-affiliates without numeric
years or more restriction
</TABLE>
POTENTIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material United States federal
income tax aspects of the Exchange Offer to Debentureholders and the Company.
The discussion is a summary for general information only and does not consider
all aspects of United States federal income tax law that may be relevant to a
Debentureholder receiving Exchange Consideration in the Exchange Offer in
20
<PAGE> 29
light of his or her or its personal circumstances. The following discussion
does not describe any tax consequences arising out of the tax laws of any
state, local or foreign jurisdiction. The discussion assumes that the
Debentures are properly classified as indebtedness for federal income tax
purposes and that each Debentureholder holds the Debenture as a capital asset.
In addition, the discussion assumes that the Exchange Offer is consummated
outside of a reorganization under the Bankruptcy Code.
The summary is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), existing and proposed regulations thereunder, and current
administrative rulings and court decisions. All of the foregoing are subject
to change, which change may be retroactive, and any such change could affect
the continuing validity of this discussion.
This discussion is not to be relied upon by any Debentureholder as tax
advice. All Debentureholders are urged to consult their own tax advisors
concerning the federal, state, local and foreign tax consequences of the
Exchange to them in their particular circumstances.
EFFECTS ON THE DEBENTUREHOLDERS
The transaction is taxable for federal income tax purposes, and tax
would be due in the year of the Exchange. The Exchange Consideration specifies
an amount as interest which is less than the actual interest accrued through
the date of the Exchange. The specified interest should be respected as
interest for federal income tax purposes. The accrual or receipt of interest
results in ordinary income. Accrual basis taxpayers should consult their tax
advisors regarding accrued but unpaid interest. Assuming that the Debentures
are held as a capital asset, the Exchange will result in capital gain or loss
to the extent of the difference between (a) the fair market value as of the
date of the Exchange of the Common Shares plus the amount of cash received by
the Debentureholder as Exchange Consideration (excluding any portion treated as
interest for federal income tax purposes) and (b) the Debentureholder's tax
basis in such Debentures. In the event a Debentureholder acquired Debentures
with "Market Discount," the gain recognized on the transaction will be treated
as ordinary income to the extent that the gain does not exceed the accrued
Market Discount on the Debentures. Market Discount is defined as the excess of
a debt instrument's stated redemption price at maturity over its basis
immediately after its acquisition. Such ordinary income (if any) should be
treated as interest by the Debentureholders.
Unless a Debentureholder provides its correct taxpayer identification
number to the Company and certifies that such number is correct, generally
under the federal income tax backup withholding rules an amount equal to 31% of
the fair market value of the Exchange Consideration must be withheld and
remitted to the Internal Revenue Service ("IRS"). Therefore each
Debentureholder should complete and sign the Substitute Form W-9 included in
the Letter of Transmittal, so as to provide the information and certification
necessary to avoid backup withholding. However, corporations and certain other
Debentureholders are not subject to these backup withholding and reporting
requirements. Withholding is not an additional federal income tax. Rather,
the federal income tax liability of a person subject to withholding will be
reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained from the IRS.
21
<PAGE> 30
EFFECTS ON THE COMPANY
In connection with the Exchange Offer, the Company will realize gross
income from the discharge of indebtedness ("DOD Income") to the extent that the
adjusted issue price of the Debentures exceeds the cash (excluding any portion
of the cash treated as interest for federal income tax purposes) and the fair
market value of the Common Shares exchanged for the Debentures in the Exchange
Offer. Such DOD Income will be excluded from taxable income to the extent that
the Company is considered to be insolvent immediately before the Exchange Offer
occurs (the "Insolvency Exclusion"). The Company would be considered insolvent
for purposes of the Insolvency Exclusion to the extent that its liabilities
exceed the fair market value of its assets immediately before the Exchange.
The exclusion of DOD Income based on the Insolvency Exclusion is limited to the
amount of such excess. Section 108(b) of the Code requires the Company to
reduce certain tax attributes (including net operating loss carryovers unless
an election is made to reduce only the adjusted tax basis of depreciable
assets) to the extent of income excluded under the Insolvency Exclusion.
If the Insolvency Exclusion does not apply to the Company, any net
operating losses ("NOLs") of the Company (see discussion below) are available
to offset DOD Income based on certain assumptions made by the Company that it
considers to be reasonable (including, but not limited to, the assumption that
the Company did not have a net unrealized built-in loss at the time the
Exchange Offer is completed and the assumption that the Company's actual net
operating losses will be in excess of the DOD Income, as discussed below). The
Company believes that it will not recognize any DOD Income in excess of
available NOL's as a consequence of the Exchange Offer. The amount of DOD
Income would depend in part upon the deemed issue price of the Common Shares,
which would equal the fair market value thereof on the date the Exchange Offer
is completed.
Section 382 of the Code provides rules limiting the utilization of a
corporation's NOL carryovers following a more than 50% change in ownership of a
corporation's equity by 5% shareholders and certain segregated public groups
(an "ownership change"). Upon the occurrence of an ownership change, the
amount of post-ownership change annual taxable income of the Company and its
affiliated subsidiaries (the "Company Group") that can be offset by the Company
Group's pre-ownership change consolidated NOL carryovers generally cannot
exceed an amount equal to the product of (i) the fair market value of the
Company's stock immediately before the ownership change (subject to various
adjustments) multiplied by (ii) the highest federal long-term tax-exempt rate
in effect for any month in the three-calendar-month period ending with the
calendar month of the ownership change (the "Annual Limitation"). In addition,
in the event that the Company Group has a net unrealized built-in loss at the
time of the ownership change, the deduction of certain built-in losses
recognized during the five-year recognition period following the date of the
ownership change will be subject to the Annual Limitation. In the event of
multiple ownership changes, the applicable Annual Limitation for pre-ownership
change NOLs may result in a lower Annual Limitation.
The Company has a NOL carryover into fiscal and tax year 1996 of
approximately $11.5 million. All of such NOLs may be limited by Section 382 of
the Code (as described above) as a consequence of the occurrence of one or more
ownership changes. The Company believes that, as of the start of fiscal 1996
and before this Exchange Offer, such NOLs were not subject to an Annual
Limitation on their utilization.
As a consequence of the Exchange and other financial restructuring,
there is a substantial risk that the Company will incur an ownership change (as
defined above). In the event that an ownership change occurs, it is
22
<PAGE> 31
likely that the Annual Limitation will materially reduce the amount of annual
taxable income that can be offset with NOLs. At November 1995, the federal
long-term tax-exempt rate was 5.75%.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 12,500,000
shares of Common Stock, $.01 par value per share (the "Common Stock"), and
60,000 shares of Preferred Stock, $50.00 par value per share.
COMMON STOCK
At November 30, 1995, there were 2,214,498 issued and outstanding
shares of Common Stock, excluding 442,433 fully-paid shares issuable to satisfy
private placement agreements of the Company, the issuance of which is pending
stock registrar and other general administrative matters related to their
issuance. As of November 30, 1995, the Company had 1,868 stockholders of record
of Common Stock. These included 1,297 record holders of certificates
representing 538,002 shares of old Common Stock, par value $.10 per share,
which entitle the holder to a certificate representing one share of Common
Stock for every 10 old shares surrendered, plus a payment of cash in lieu of
any resultant fraction of a share of Common Stock.
Holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. The Company's Restated
Certificate of Incorporation grants the Board of Directors express authority to
fix the designations, powers, preferences, rights, qualifications, limitations,
restrictions, dividend rates, and, if any, the redemption rights, liquidation
rights, sinking fund provisions, conversion rights and voting rights of any
future series of Preferred Stock which may be issued. Thus, the Board of
Directors may create one or more series of Preferred Stock which may adversely
affect the holders of shares of Common Stock. Subject to preferences that may
be applicable to the holders of outstanding shares of Preferred Stock, if any,
the holders of Common Stock are entitled to receive such lawful dividends as
may be declared by the Board of Directors. In the event of liquidation,
dissolution or winding up of the Company, and subject to the rights of the
holders of outstanding shares of Preferred Stock, if any, the holders of shares
of Common Stock shall be entitled to receive pro rata all of the remaining
assets of the Company available for distribution to its stockholders. The
holders of Common Stock are entitled to cumulative voting rights in the
election of directors, and one vote per share in all other matters. There are
no redemption or sinking fund provisions applicable to the Common Stock. There
are no preemptive or conversion rights applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
Common Shares to be issued pursuant to this offering shall be fully paid and
nonassessable.
See "Other Factors to Consider -- Price Range of the Common Shares."
COMMON STOCK PURCHASE RIGHTS
On the terms, and subject to the conditions, of the Restated and
Amended Rights Agreement dated April 19, 1988, as restated and amended on
October 21, 1994, between the Company and Continental Stock Transfer & Trust
Company, each share of Common Stock includes a right to purchase an additional
share of Common Stock or shares of any acquiring company at a formula price
generally less than the prevailing price thereof in certain defined events,
such as an acquisition by a third party of a substantial portion of the shares
of Common Stock, unless in each such case the transaction is approved by the
Board of
23
<PAGE> 32
Directors excluding any directors that are affiliated with the acquiring
person.
REGISTRATION RIGHTS
The Company has granted registration rights to certain private
investors. The private placement agreements all provide for demand registration
by the investors and other incidental registration rights. If registration
rights are exercised, any substantial number of shares that are registered at
one time would be likely to have an adverse effect on the market price of the
Common Stock. See "Other Factors to Consider--Shares Eligible for Future
Sale." The Company has not been able to comply with registration provisions,
which could result in claims against the Company for any monetary damages
suffered by the investors.
COMMON STOCK TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The stock transfer agent, dividend disbursing agent and registrar for
the Company's Common Stock is Continental Stock Transfer & Trust Company.
PREFERRED STOCK
No shares of Preferred Stock are outstanding. The Board of Directors
has the authority, without further action by the stockholders, to issue the
shares of Preferred Stock in one or more series and to fix the rights,
preferences and privileges thereof, including voting rights, terms of
redemption, redemption prices, liquidation preferences, number of shares
constituting any series or the designation of such series, without further vote
or action by the stockholders. Although it presently has no intention to do so,
the Board of Directors, without stockholder approval, could issue Preferred
Stock with voting and conversion rights which could adversely affect the voting
power of the holders of Common Stock.
This provision may be deemed to have a potential anti-takeover effect
and the issuance of Preferred Stock in accordance with such provision may delay
or prevent a change of control of the Company.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the
Delaware General Corporation Law and anti-takeover law. In general, the statute
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless either (i) prior to the date at which the person becomes an
interested stockholder, the Board of directors approves such transaction or
business combination, (ii) the stockholder acquires more than 85% of the
outstanding voting stock of the corporation (excluding shares held by directors
who are officers or held in certain employee stock plans) upon consummation of
such transaction, or (iii) the business combination is approved by the Board of
Directors and by two-thirds of the outstanding voting stock of the corporation
(excluding shares held by the interested stockholder) at a meeting of
stockholders (and not by written consent). A "business combination" includes a
merger, asset sale or other transaction resulting in a financial benefit to
such interested stockholder. For purposes of Section 203, "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of the corporation's voting
stock.
The Company's Restated Certificate of Incorporation includes a
provision that allows the Board of Directors to issue Preferred Stock in one or
more
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<PAGE> 33
series with such voting rights and other provisions as the Board of Directors
may determine. This provision may be deemed to have a potential anti-takeover
effect and the issuance of Preferred Stock in accordance with such provisions
may delay or prevent a change of control of the Company. See "Preferred Stock."
DESCRIPTION OF DEBENTURES
An aggregate of $46,000,000 principal amount, at a price of 100% of
face amount plus accrued interest, of the Company's Debentures were issued
under the Indenture between the Company and Bank the Trustee. At August 31,
1995, $9,538,000 in principal amount remained outstanding.
The terms of the Debentures include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939 (the "1939 Act") as in effect on the date of the Indenture. The Debentures
are subject to all such terms, and persons interested in such terms are
referred to the Indenture and the 1939 Act for a statement thereof. This
summary makes use of terms defined in the Indenture and does not purport to be
complete, and is qualified in its entirety by references to the Indenture and
the 1939 Act. All references to "Section," "Article" or "Paragraph" in this
section refer to the applicable Section or Article of the Indenture or the
applicable Paragraph in the form of Debenture included in the Indenture, as the
case may be.
GENERAL
The Debentures represent general unsecured obligations of the Company,
subordinate in right of payment to certain other obligations of the Company as
described below under "Subordination of Debentures." The Debentures are
convertible into the Company's Common Stock as described below under
"Conversion of Debentures." The Debentures are issued in fully registered form
only in denominations of $1,000 or any whole multiple thereof, and will mature
on April 15, 2010. The Debentures are traded in the over-the-counter market.
The Company pays interest on the Debentures at the rate of 7 1/2% per
annum to the persons who are registered holders of Debentures at the close of
business on the April 1 or October 1 next preceding the interest payment date.
Interest is payable semi-annually on April 15 and October 15 of each year.
Interest is computed on the basis of a 360-day year of twelve 30-day months.
The Company may pay principal and interest by its check and may mail interest
checks to a holder's registered address. Principal and premium, if any, will be
payable, and the Debentures may be presented for conversion, registration or
transfer and exchange, without service charge, at the office of the Trustee in
Los Angeles, California.
CONVERSION OF DEBENTURES
The holder of any Debenture will be entitled at any time prior to the
close of business on April 15, 2010, subject to prior redemption, to convert
the Debentures or portions thereof which are $1,000 or whole multiples thereof,
at the principal amount thereof, into shares of Common Stock of the Company, at
the adjusted conversion price of $230.21 per share, subject to further
adjustment as described below. On each semi-annual interest payment date,
interest will be paid to the registered holder as of the record date for
payment. Debentures that are surrendered for conversion after the record date
for the payment of interest would receive the interest payable. (Paragraph 2)
No other payment or adjustment will be made on conversion of any Debenture for
interest accrued thereon or dividends on any Common Stock issued. (Section
10.02) The Company will not issue fractional shares of Common Stock upon
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<PAGE> 34
conversion of Debentures and, in lieu thereof, will pay a cash adjustment based
upon the market price of the Common Stock on the last business day prior to the
date of conversion. (Section 10.03 and Paragraph 8) In the case of Debentures
called for redemption, conversion rights will expire at the close of business
on the redemption date. (Section 3.03 and Paragraph 8)
The conversion price is subject to adjustment as set forth in the
Indenture in certain events, including: the issuance of stock of the Company as
a dividend or distribution on the Common Stock; subdivisions and combinations
of the Common Stock; the issuance of stock of the Company upon certain
reclassifications of its Common Stock; the issuance to all holders of Common
Stock of certain rights or warrants entitling them to subscribe for Common
Stock at less than the current market price (as defined); the distribution to
all holders of Common Stock of debt securities or assets of the Company or
rights or warrants to purchase assets or securities of the Company (excluding
cash dividends or distributions paid out of current or retained earnings); the
issuance of shares of Common Stock (with certain exceptions) for less
consideration than the current market price; and the issuance of securities
convertible into or exchangeable for shares of Common Stock (other than
pursuant to transactions described above and with certain exceptions) for a
consideration per share of Common Stock deliverable on such conversion or
exchange that is less than the current market price of the Common Stock. No
adjustment in the conversion price will be required unless such adjustment
would require a change of at least 1% in the price then in effect; but any
adjustment that would otherwise be required to be made shall be carried forward
and taken into account in any subsequent adjustment. No adjustment need be made
for rights to purchase Common Stock pursuant to a Company dividend or interest
reinvestment plan. In addition, no adjustment need be made if holders of
Debentures are to participate in such transactions on a basis and with notice
that has been determined to be fair and appropriate in light of the basis and
notice on which holders of Common Stock participate in the transaction. The
Company may at any time reduce the conversion price by any amount, provided
that any such reduction must be effective for a minimum period of 15 days. If
the Company consolidates or merges into or transfers or leases all or
substantially all of its assets to any person, the Debentures will become
convertible into the kind and amount of securities, cash or other assets which
the holders of the Debentures would have owned immediately after the
transaction if the holders had converted the Debentures immediately before the
effective date of the transaction. (Sections 10.06-10.18)
If the Company makes a distribution resulting in an adjustment to the
conversion price and such adjustment is considered to result in an increase in
the proportionate interests of the holders of the Debentures in the assets or
earnings and profits of the Company, holders of the Debentures may be viewed as
receiving a "deemed distribution" that is taxable as a dividend under Sections
301 and 305 of the Code.
OPTIONAL REDEMPTION
The Company may, at its option, redeem all or part of the Debentures,
on at least 15 days' but not more than 60 days' notice to each holder of
Debentures to be redeemed at the holder's registered address, at the redemption
price (expressed as a percentage of principal amount) of 100%, plus accrued
interest to the redemption date.
SINKING FUND
The Company is required to redeem, through operation of a sinking
fund, 5% of the aggregate principal amount of Debentures on April 15, 1996, and
on each April 15 thereafter through April 15, 2009, at a redemption price of
100% of principal amount thereof, plus accrued interest to the redemption date.
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<PAGE> 35
Such sinking fund payments are calculated to retire 70% of the Debentures prior
to maturity. The Company may reduce the principal amount of Debentures to be
redeemed by subtracting 100% of the principal amount of any Debentures that
holders of the Debentures have converted on or before such April 15 or any
Debentures that the Company has delivered to the Trustee for cancellation or
that the Company has redeemed other than through operation of the sinking fund
on or before such April 15. (Paragraph 6)
SUBORDINATION OF DEBENTURES
The payment of the principal of, premium, if any, and interest on the
Debentures is subordinated in right of payment, as set forth in the Indenture,
to the prior payment in full of all Senior Debt, as defined in the Indenture,
whether outstanding on the date of the Indenture or thereafter created,
incurred, assumed or guaranteed. Upon (i) the maturity of Senior Debt,
including by acceleration or otherwise, or (ii) any distribution of the assets
of the Company upon any dissolution, winding up, liquidation or reorganization
of the Company, the holders of Senior Debt will be entitled to receive payment
in full before the holders of Debentures are entitled to receive any payment.
(Sections 11.03-11.04)
"Senior Debt" means all defined Debt (present or future) created,
incurred, assumed or guaranteed by the Company (and all renewals, extensions or
refundings thereof), unless the instrument governing such Debt expressly
provides that such Debt is not senior or superior in right of payment to the
Debentures. The principal amount of Senior Debt at August 31, 1995 was
estimated at $6 million.
"Debt" means any indebtedness, contingent or otherwise, in respect of
borrowed money (whether or not the recourse of the lender is to the whole of
the assets of the Company or only to a portion thereof), or evidenced by bonds,
notes, debentures or similar instruments or letters of credit, or representing
obligations of the Company as lessee under leases of real or personal property,
or representing the deferred and unpaid balance of the purchase price of any
property or interest therein, except any such balance that constitutes a trade
payable, if and to the extent such indebtedness would appear as a liability
upon a balance sheet of the Company in accordance with generally accepted
accounting principles. (Section 11.02)
In addition, the claims of third parties to the assets of the
Company's subsidiaries incurring such obligations will be superior to those of
the Company as a stockholder, and, therefore, the Debentures may be deemed to
be effectively subordinated to the claims of such third parties. Certain
substantial operations of the Company are conducted through such subsidiaries,
and the Debentures are effectively subordinated to repayment of the Company's
liabilities arising from those operations. The Indenture does not limit the
amount of additional indebtedness, including Senior Debt, which the Company or
any subsidiary can create, incur, assume or guarantee. As a result of these
subordination provisions, in the event of insolvency, holders of the Debentures
may recover less ratably than other creditors of the Company or its
subsidiaries.
EVENTS OF DEFAULT AND REMEDIES
An Event of Default is: default for 30 days in payment of interest on
the Debentures; default in payment when due of principal and premium, if any,
on the Debentures; failure by the Company for 30 days after notice to comply
with any of its other agreements in the Indenture or the Debentures; and
certain events of bankruptcy or insolvency. (Section 6.01)
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<PAGE> 36
If any Event of Default occurs and is continuing, the Trustee by
notice to the Company, or the holders of at least 25% in the principal amount
of the Debentures then outstanding by notice to the Company and the Trustee,
can accelerate the Debentures and declare all principal and interest under the
Debentures to be due and payable immediately, except that in the case of an
Event of Default arising from certain events of bankruptcy or insolvency, and
subject to applicable law, all outstanding Debentures become due and payable
without further action or notice. (Section 6.02)
If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy to collect the payment of principal or interest on
the Debentures or to enforce the performance of any provision of the Indenture
or the Debentures. A delay or omission by the Trustee or any Debentureholder in
exercising any right or remedy shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. (Section 6.03)
Holders of the Debentures may not enforce the Indenture or the
Debentures except as provided in the Indenture. A holder of Debentures may
enforce a remedy with respect to the Indenture or the Debentures only if the
holder gives notice to the Trustee of a continuing Event of Default, the
holders of at least 25% in principal amount of then outstanding Debentures make
a request to the Trustee to pursue the remedy, such holders offer to the
Trustee an indemnity satisfactory to the Trustee against loss, liability or
expense, the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity, and during such 60-day
period the holders of a majority in principal amount of then outstanding
Debentures do not give the Trustee a direction inconsistent with the request.
(Section 6.06) Subject to certain limitations, holders of a majority in
principal amount of the then outstanding Debentures may direct the Trustee
regarding the time, method and place of exercising any trust or power conferred
on it. (Section 6.05)
The Trustee is required, within 90 days after the occurrence of any
default which is known to the Trustee and continuing, to give the holders of
the Debentures notice of such default. The Trustee may withhold from holders of
the Debentures notice of any continuing Default or Event of Default (except a
Default or Event of Default in payment of principal or interest) if it
determines that withholding notice is in their interest. (Section 7.05) The
Company is required to deliver to the Trustee annually a statement regarding
compliance with the Indenture, and upon becoming aware of any Default or Event
of Default, a statement specifying such Default or Event of Default. (Section
4.03)
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Company may not consolidate or merge into, or transfer all or
substantially all of its assets to, another corporation, person or entity
unless (i) the successor is a United States corporation, (ii) it assumes all
the obligations of the Company under the Debentures and the Indenture, and
(iii) after such transaction no Default or Event of Default exists. (Article 5)
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the Indenture or the Debentures may be
amended or supplemented with the consent of the holders of at least two-thirds
in principal amount of the then outstanding Debentures, and any existing
default or compliance with any provision may be waived with the consent of the
holders of at least two-thirds in principal amount of the then outstanding
Debentures. (Sections 9.02 and 6.04) Without the consent of any holder of the
Debentures, the Company and the Trustee may amend or supplement the Indenture
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<PAGE> 37
or the Debentures to cure any ambiguity, defect or inconsistency, to provide
for uncertificated Debentures in addition to or in place of certificated
Debentures, to provide for the assumption of the Company's obligations to
holders of the Debentures in the case of a merger or acquisition, or to make
any change that does not adversely affect the rights of any holder of the
Debentures. (Section 9.01 and Paragraph 12) Without the consent of each
Debenture holder affected, the Company may not reduce the principal amount of
Debentures, reduce the rate or change the interest payment time of any
Debenture; reduce the principal of or change the fixed maturity of any
Debenture; make any Debenture payable in money other than stated in the
Debenture; make any change in the provisions concerning waiver of Defaults or
Events of Default by holders of the Debentures or rights of holders to receive
payment of principal or interest; or make any change that adversely affects
conversion rights or certain subordination rights. (Section 9.02)
TRANSFER AND EXCHANGE
A holder may transfer or exchange Debentures in accordance with the
Indenture. The Registrar may require a holder, among other things, to furnish
appropriate endorsements and transfer documents, and to pay any taxes and fees
required by law or permitted by the Indenture. The Registrar is not required to
transfer or exchange any Debenture selected for redemption. Also, the Registrar
is not required to transfer or exchange any Debenture for a period of 15 days
before a selection of Debentures to be redeemed. (Section 2.06 and Paragraph
10)
The registered holder of a Debenture may be treated as the owner of it
for all purposes.
CONCERNING THE TRUSTEE
The Trustee acts as Conversion Agent, Paying Agent and Registrar.
(Section 12.10)
The Indenture contains certain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The Trustee is permitted to engage
in other transactions; however, if it acquires any conflicting interest (as
defined) it must eliminate such conflict or resign. (Article 7)
The holders of a majority in principal amount of the then outstanding
Debentures will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee.
The Indenture provides that in case an Event of Default shall occur (which
shall not be cured), the Trustee is required, in the exercise of its power, to
use the degree of care of a prudent man in the conduct of his own affairs. The
Trustee is under no obligation to exercise any of its rights or powers under
the Indenture at the request of any of the holders of the Debentures, unless
they shall have offered to the Trustee security and indemnity satisfactory to
it. (Section 7.01)
RISK FACTORS
In addition to the other information set forth in this Offering
Circular, the following factors should be considered carefully:
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<PAGE> 38
FAILURE TO CONSUMMATE EXCHANGE OFFER
If the Exchange Offer is not consummated, the Company does not
anticipate that it will likely be able to address the acceleration of
Debentures. The Debentureholders may file an involuntary petition to commence a
Chapter 7 liquidation.
The Company believes that any protracted bankruptcy case would have
material adverse effects on the Company possibly including:
(a) disruption of business activities by diverting the attention
of the Company's senior management to the bankruptcy case or
resultant disputes, and eventually terminations, of its
contracts with third parties;
(b) potential for substantial diminution in the value of the
Company's assets and its revenues, earnings and cash flow;
(c) potential adverse impact upon the ability of the Company to
obtain the financing necessary for its future operations;
(d) substantial increase in the cost of restructuring the Company,
including the increase in the expenses of professionals
normally associated with a bankruptcy case commenced without
prior agreement with the Company's major creditors;
(e) uncertainty as to the ability of the Company to effectuate any
such restructuring and, if it is effectuated, the timing
thereof;
(f) interference and delay regarding payments to holders of
Debentures and risks associated with subordinated unsecured
debt;
(g) potential for forced liquidation of some of the Company's
assets at substantially reduced values and the resulting loss
to creditors and others; and
(h) increased uncertainty and suspicions among the Company's
employees and vendors.
In addition, the Company believes that, because of the importance of
continuing stable relations with medical and health professionals and other
service and goods providers in the behavioral treatment industry, the Company
is particularly susceptible to any adverse reactions these highly sought after
constituencies may have to the filing of a bankruptcy petition affecting the
Company.
ABILITY OF THE COMPANY TO CONTINUE AS A GOING CONCERN; EXPLANATORY PARAGRAPH IN
AUDITORS' REPORT
The Company's independent auditors have included an explanatory
paragraph in their report stating that the Consolidated Financial Statements of
the Company have been prepared assuming that the Company will continue as a
going concern and that the Company's financial condition, including the
acceleration of the Debentures, raises substantial doubts about its ability to
continue as a going concern. If the Debentures continue to be accelerated and a
judgment is entered against the Company, the Company could be unable to
continue to operate as a going concern and it may result in the Company, as its
only possible viable alternative, seeking relief under Chapter 11 of the
Bankruptcy Code regardless of the present intentions of the Company's
Management and Board of Directors to take any other action necessary to avoid
commencement of a bankruptcy case.
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<PAGE> 39
PRIORITIES OF SECURITIES AND OTHER CONSIDERATIONS RELATING TO ANY FUTURE
BANKRUPTCY OF THE COMPANY
Implementation of the Exchange Offer will have significant
consequences for the holders of the Company's debt and equity securities in the
event of any future bankruptcy of the Company. Certain of these consequences
are summarized below. Holders of debt and equity securities are encouraged to
seek the advice of their own counsel or advisors with respect to such matters.
RELATIVE PRIORITIES OF DEBT CLAIMS AND EQUITY INTERESTS
The relative rankings of the Company's debt claims and equity
interests (excluding debt of its subsidiaries) both before and after giving
effect to the Exchange for all of the outstanding Debentures (without
reflecting any other transactions) are summarized in the following table. The
relative priority of claims of holders of Debentures who do not tender such
Debentures pursuant to the Exchange Offer may worsen because new debt or
convertible securities, whether secured or unsecured may, in each case, rank
senior to the Debentures. In the event that the Company incurs additional
indebtedness that is senior to the Debentures, the position of the Debentures
relative to the new senior indebtedness will worsen. The relative priority of
claims of holders of Debentures who tender them for acceptance by the Company,
to the extent that such holders receive and retain cash, would improve in
position relative to other creditors; to the extent that they exchange their
Debentures for Common Stock, their relative position may worsen because all
secured and unsecured debt ranks ahead of equity.
<TABLE>
<CAPTION>
Priority Pre-Restructuring Post-Restructuring
- -------------------------------------------------------------------------------------------------------------
Type and Amount Type and Amount
Outstanding Outstanding
<S> <C> <C>
Secured Debt (a)
Senior Secured Debt . . . . . . . . . . . Secured Creditors Secured Creditors
($3,000,000) ($3,000,000)
Subsidiary Secured Debt . . . . . . . . . ($607,000) ($607,000)
Subsidiary Other Liabilities (b) . . . . . Unsecured Creditors Unsecured Creditors
($_________) ($_________)
Subsidiary Senior Equity (c) . . . . . . . $1,000,000 $1,000,000
Unsecured Debt (b)
Senior Debt . . . . . . . . . . . . . . Various Creditors Various Creditors
($200,000) ($200,000)
Subordinated Debt . . . . . . . . . . . . . Debentures Debentures
($9,538,000) ($9,538,000 less
amounts exchanged)
Equity (c) . . . . . . . . . . . . . . . . Common Stock Common Stock
(2,656,931) (2,809,598)
</TABLE>
(a) All "secured debt" ranks ahead of all "equity" and, to the extent of
the value of the security interest securing any such "secured debt,"
all "unsecured debt," except to the extent subordination agreements
among creditors specify otherwise. To the extent any amount of the
"secured debt" is undersecured or becomes unsecured, any such amount
will have the relative priority of other "unsecured debt."
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<PAGE> 40
(b) All "unsecured debt" ranks ahead of all "equity." Debentures rank pari
passu in right of payment with all "unsecured debt," which would
include trade payables and other general creditors of the Company
(except for debts which are, by their terms, subordinated to
indebtedness owed under the Debentures). The term pari passu means
that such securities rank at the same level of priority for
distributions in liquidation and/or bankruptcy, absent other
bankruptcy considerations.
(c) Preferred Stock has priority over Common Stock in right of payment of
dividends and in any distribution upon the liquidation, dissolution or
winding up of the Company. Preferred Stock may be issued with rights
determined by the Board of Directors from time to time.
AVOIDABLE PREFERENCES
If a case were to be commenced by or against the Company under the
Bankruptcy Code following the consummation of the Exchange Offer, a bankruptcy
trustee or the Company, as debtor in possession, could avoid as a preference
any transfer of property made by the Company to or for the benefit of a
creditor which was made on account of an antecedent debt if such transfer (i)
was made within 90 days prior to the date of the commencement of the bankruptcy
case or, if the creditor is found to have been an "insider" (as defined in the
Bankruptcy Code), within one year prior to the date of commencement of the
bankruptcy case; (ii) was made when the Company was insolvent; and (iii)
permitted the creditor to receive more than it would have received in a
liquidation under Chapter 7 of the Bankruptcy Code had the transfer not been
made. Under the Bankruptcy Code, a debtor is presumed to be insolvent during
the 90 days preceding the date of commencement of a bankruptcy case. To
overcome this presumption, it would need to be shown that at the time the
transfers were made, the sum of the Company's debts was less than the fair
market value of all of its assets.
Under the Bankruptcy Code, all or a portion of the property
transferred, including any cash payments, to tendering holders of Debentures,
as well as any subsequent payment to non-tendering holders of Debentures, could
be found to constitute preferences if a bankruptcy case were commenced within
the applicable time period following such payments and if the other elements
discussed above are present. If, following the commencement of a bankruptcy
case within the applicable time period, such transfers were found to be
preferential transfers, transferees could be ordered to return the full value
of such transfers. In such event, transferees would have a general unsecured
claim in the Company's bankruptcy case equal to the value of the property
returned.
BRIEF EXPLANATION OF CHAPTER 11
Despite the dismissal in March 1995 of the involuntary bankruptcy
petition that had been filed against the Company, there is no assurance that
creditors of the Company could or would not file another involuntary petition
in a bankruptcy court.
In the event that the Company does not retire the Debentures or
rescind the acceleration, a majority of Debentureholders by principal amount
can request the Trustee to seek any remedies for non-payment, including
potentially the filing of a bankruptcy petition. The filing of a petition
would not affect the relative priority of creditors. Senior creditors may also
file such a petition, or institute other actions against the Company, in order
to enforce the subordination provisions of the Indenture that prevent the
Debentureholders from collecting on their debts in advance of payment to any
senior creditors.
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<PAGE> 41
A bankruptcy debtor could, after an involuntary petition is filed,
seek voluntary protection under Chapter 11. Chapter 11 is the principal
reorganization chapter of the Bankruptcy Code. Pursuant to Chapter 11, a
debtor in possession attempts to reorganize its business for the benefit of the
debtor, its creditors, and other parties-in-interest.
The commencement of a Chapter 11 case creates an estate comprising all
of the legal and equitable interests of a debtor in property as of the date the
petition is filed. Sections 1101, 1107, and 1108 of the Bankruptcy Code
provide that a debtor may continue to operate its business and remain in
possession of its property as a "debtor in possession" unless the bankruptcy
court orders the appointment of a trustee. The filing of a Chapter 11 petition
also triggers the automatic stay provisions of the Bankruptcy Code. Section
362 of the Bankruptcy Code provides, among other thing, for an automatic stay
of all attempts to collect pre-petition claims from the debtor or otherwise
interfere with its property or business. Except as otherwise ordered by the
bankruptcy court, the automatic stay remains in full force and effect until
confirmation of a plan of reorganization.
The formulation of a plan of reorganization is the principal purpose
of a Chapter 11 case. The plan sets forth the means for satisfying the holders
of claims against and interests in the debtor. Although referred to as a plan
of reorganization, a plan may provide simply for an orderly liquidation of a
debtor's assets. A plan can be proposed by the debtor, however, that does not
provide for the liquidation of the debtors assets, but instead reorganizes the
debtor's capital structure, thereby enabling the debtor to continue operations
as a viable business enterprise.
If the acceleration of principal and interest under the Debentures is
not rescinded and the Debentureholders or the Trustee pursue remedies for
collection of the aggregate of principal and interest due on all outstanding
Debentures, it may result in the Company, as its only viable alternative,
commencing a bankruptcy case. Without a pre-packaged agreement of its major
creditors as to the terms of a reorganization plan, there is a substantial risk
that the bankruptcy case will be protracted and costly and disruptive to the
Company's business and there can be no assurance that a plan favorable to
Debentureholders will be proposed and confirmed. The Company believes that any
protracted bankruptcy case would have a material adverse effect on the Company
including:
1. disruption of business activities by diverting the
attention of the Company's senior management;
2. potential for substantial diminution in the value of
the Company's assets;
3. potential adverse impact upon the ability of the
Company to obtain the financing necessary for its
future operations;
4. substantial increase in the cost of restructuring the
Company, including the increase in the expenses of
professionals normally associated with a bankruptcy
case commenced without prior agreement with the
Company's major creditors;
5. uncertainty as to the ability of the Company to
effectuate any such restructuring and, if it is
effectuated, the timing thereof;
6. interference and delay regarding payments to holders
of Debentures and other creditors;
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<PAGE> 42
7. potential for forced liquidation of some of the
Company's assets at substantially reduced values and
the resulting loss to creditors and others; and
8. increased uncertainty among the Company's employees,
business partners and associates.
In addition, the Company believes that, because of the importance of
continuing stable relations with the health care industry, the Company is
particularly susceptible to any adverse reactions such constituencies may have
to the filing of a bankruptcy petition, particularly if the bankruptcy case is
long in duration. As a result, and for other reasons, any commencement of a
Chapter 11 case could adversely affect the Company's business operations.
There can be no assurance that if the Company were to commence a
Chapter 11 case it would be able to use its cash or cash proceeds of other
assets to operate during the pendency of such Chapter 11 case. The Company
would only be able to use cash that is at such time collateral for senior debt
if it obtains a consent from the holders of secured debt or if the Company
obtains an order of the bankruptcy court. If the Company is forced to seek a
bankruptcy court order authorizing the use of cash collateral, it would
require, among other things, a court determination regarding valuation of the
Company's assets and the provisions for adequate protection for the secured
creditors' interests in the collateral. Failure to obtain a cash collateral
agreement or court order permitting the use of cash collateral or failure to
conclude negotiations on the debtor in possession financing may result in the
Company lacking sufficient cash to operate during the Chapter 11 case and may
result in a liquidation of the Company.
Section 1129 of the Bankruptcy Code, which sets forth the requirements
for confirmation of a plan of reorganization, requires, among other things, a
finding by a bankruptcy court that the confirmation of a plan is not likely to
be followed by the need for further financial reorganization, that all claims
and interests have been classified in compliance with the provisions of Section
1122 of the Bankruptcy Code and that under the plan holders of a claim and
equity interests within impaired classes receive or retain cash or property of
a value, as of the date the plan becomes effective, that is not less than the
value such holders would receive or retain if the debtor were liquidated under
Chapter 7 of the Bankruptcy Code.
To determine what holders in each impaired class of creditors would
receive if the Company were liquidated, one must determine the dollar amount
that would be generated from the liquidation of the Company's assets and
properties in the context of a Chapter 7 liquidation case. Secured claims and
the costs and expenses of the liquidation case would be paid in full from the
liquidation proceeds before the balance of those proceeds would be made
available to pay pre-petition unsecured claims and interests.
Under Chapter 7, absent subordination in accordance with Section 510
of the Bankruptcy Code, the rule of absolute priority of distribution would
apply. Under that rule, no junior creditor would receive any distribution
until the allowed claims of all senior creditors are paid in full, and no
holder of an Interest would receive any distribution until the allowed claims
of all creditors are paid in full.
Approximately $6.5 million of the Company's fixed assets, including
all proceeds thereof, are subject to liens in favor of secured debt aggregating
approximately $3.1 million. In addition, the unsecured senior debt of the
Company is estimated to be at least $.7 million.
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<PAGE> 43
After consideration of the effects that a Chapter 7 liquidation
proceeding would have on the ultimate proceeds available for distribution to
the holders of impaired claims and interest, including (i) the increased costs
and expenses of 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 the context of the expeditious liquidation
required under Chapter 7 and the "forced sale" atmosphere that would prevail,
(iii) the adverse effects on the salability of business segments that could
result from the probable departure of key employees, (iv) the costs
attributable to the time value of money resulting from what is likely to be a
more protracted proceeding that if a pre-packaged plan were confirmed (because
of the time required to liquidate the assets of the Company, resolve claims and
related litigation and prepare for distributions), and (v) the application of
the rule of absolute priority (as described in the immediately preceding
paragraph) to distributions in the Chapter 7 liquidation, the Company believes
that the Exchange Offer will provide each holder of a Debenture with a greater
recovery than such holder would receive pursuant to a liquidation of the assets
of the Company under Chapter 7 of the Bankruptcy Code.
Holders of Debentures are cautioned not to place undue reliance on the
Company's analysis and are advised to consult with their own advisors. In
particular, there can be no assurance regarding the assumptions underlying the
Company's determination.
The Company has not performed any analysis of its liquidation value
and has not obtained an independent valuation of the Company's assets or
liabilities and there can be no assurance that the Company would receive in
liquidation the value for its assets set forth in the Company's unaudited
financial statements as of November 30, 1995, which reflect total current
assets of $13.1 million, current liabilities (excluding Debentures) of $12.9
million, and long-term and other liabilities of $13.6 million, approximately.
Under the Bankruptcy Code, all or a portion of the property
transferred, including any cash payments, to tendering holders of Debentures,
as well as any subsequent payment to non-tendering holders of Debentures, could
be found to constitute preferences if a bankruptcy case were commenced within
the applicable time period following such payments and if the other elements
discussed above are present. If, following the commencement of a bankruptcy
case within the applicable time period, such transfers were found to be
preferential transfers, transferees could be ordered to return the full value
of such transfers. In such event, transferees would have a general unsecured
claim in the Company's bankruptcy case equal to the value of the property
returned.
PROHIBITIONS ON PAYMENT TO DEBENTUREHOLDERS
The payment of cash or property (other than capital stock of the
Company) would be prohibited, and the Company does not intend to make such
payment, if there exists at such time any law, rule or order which would be
violated by such payment or a law would under the circumstances existing at the
time be violated by such payment. The Company cannot determine at this time
whether the payment to Debentureholders will be permitted by law. Certain of
the laws affecting the Company's ability to make such payments are described
under "Fraudulent Conveyances" below.
FRAUDULENT CONVEYANCES
If a court in a lawsuit by or on behalf of an unpaid creditor or a
representative of creditors, such as a bankruptcy trustee, or the Company, as
debtor in possession, were to find that, at the time of consummation of the
Exchange Offer (a) the Company received less than reasonably equivalent value
35
<PAGE> 44
in exchange for the consideration given by the Company for any property
transferred by the tendering holders of Debentures, and (b) the Company (i) was
insolvent or was rendered insolvent as a result of such transfers, (ii) had
unreasonably small remaining assets or capital for its business, or (iii)
intended to incur, or believed or reasonably should have believed it would
incur, debts beyond its ability to pay such debts as they become due, such
court could determine that all or a portion of such transfers were avoidable as
a "constructive" fraudulent transfer and require the transferees to return to
the Company or its bankruptcy trustee the consideration given. The Company
believes that, because of the reduction in the Company's outstanding
indebtedness that will result from each of the other exchanges or transfers
described above, a bankruptcy court should find that the Company received
reasonably equivalent value for the consideration given by the Company. There
can be no assurance, however, that a bankruptcy court would make such a
determination.
NO FAIRNESS OPINION
The Company has not advised Debentureholders on the value of the
Debentures that would be surrendered in the Exchange because, among other
reasons, the Company has not obtained a fairness opinion from any investment
banking firm or an appraisal or any other investigation of the fairness to
Debentureholders from a financial point of view, of the Exchange Consideration.
HISTORY OF LOSSES AND ANTICIPATED FUTURE LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY
As of November 30, 1995, the Company had a stockholders' deficiency of
$4.6 million, a working capital deficiency of approximately $9.1 million and a
current ratio of 1:1.7. The loss from operations for the three months ended
August 31, 1995 was $1.3 million and the net income for the three months ended
November 30, 1995 was $0.7 million.
There can be no assurance that the Company will be able to achieve
profitability and positive cash flows from operations or that profitability and
positive cash flow from operations, if achieved, can be sustained on an ongoing
basis. Moreover, if achieved, the level of that profitability or that positive
cash flow cannot accurately be predicted.
ADDITIONAL RISK FACTORS WITH RESPECT TO HOLDERS OF DEBENTURES NOT TENDERED IN
THE EXCHANGE OFFER
SUBORDINATION
The Debentures represent the subordinated indebtedness of the Company.
The Company may incur indebtedness that is senior to the Debentures in
unlimited amounts. The Debentures are general unsecured obligations
exclusively of the Company. Since a substantial portion of the Company's and
its consolidated subsidiaries' business is conducted through certain of such
subsidiaries, the cash flow and consequent ability of the Company to satisfy
its indebtedness to Debentureholders are dependent, in part, upon the earnings
of such subsidiaries and a distribution of those earnings to the Company. The
Company's subsidiaries are distinct legal entities and have no obligation,
contingent or otherwise, to make any payment on the Debentures or to make funds
therefor available. Any rights of the Company to receive assets of any
subsidiary (and the consequent right of Debentureholders to possibly benefit
from participating therein) in any liquidation or reorganization of the
subsidiary will be effectively subordinated to the creditors of the subsidiary
(including trade creditors) in any liquidation or reorganization of the
subsidiary.
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<PAGE> 45
REDEMPTION; MATURITY
The Indenture permits the Company, at its election, to redeem the
Debentures at 100% of the original principal amount (the "face value") at any
time before maturity. The original maturity date of the Debentures was April
15, 2010. Provided that the acceleration of Debentures is effectively
rescinded, the maturity date will once again become April 15, 2010, subject to
any future conditions affecting maturity. The Company may determine whether or
not to redeem Debentures based on interest rates that prevail at future times
or other economic factors as they affect the Company's interests. See
"Description of Debentures."
SPORADIC TRADING
The Debentures are not listed on any Securities Exchange or quoted on
NASDAQ. The trading, if any, in the Debentures is limited and sporadic.
Presently there are fewer than 50 registered holders of Debentures. Because the
Debentures may be, after consummation of the Exchange Offer, held by a more
limited number of registered holders, the trading market will become even more
limited. These events are likely to have an adverse effect on the overall
liquidity and market value of the Debentures.
UNCERTAINTY OF FUTURE FUNDING
The Company's negative cash flow from operations has consumed
substantial amounts of cash. Also, the retiring of Debentures, which the
Company has agreed to use its best efforts to do, will require substantial
amounts of cash. Issuance of additional equity securities by the Company could
result in substantial dilution to then-existing stockholders. In the event of
a failure to meet these obligations on a timely basis, the Company may become
liable for the entire $9,538,000 principal amount plus accrued interest, and
interest on default interest, from April 15, 1994, estimated at approximately
$1,507,000 to April 15, 1996.
During fiscal 1995 and 1996, a principal source of liquidity has been
the private sale of debt securities convertible into equity. Under the
shareholder policies of the NYSE, the Company may not be able to effect further
sales of equity without shareholder approval; which if not obtained may
adversely affect the Company with respect to future capital formation.
DISPOSITION OF ASSETS
The Company has been required to dispose of various properties in
order to raise working capital, and no assurance can be made that such
dispositions will not have adverse effects on the Company's financial condition
and results of operations or that the Company has sufficient additional assets
that could be disposed of in order to fund its capital requirements.
In connection with the March 3, 1995 Letter Agreement with Mr. Lustig,
the Company agreed to pledge all of the shares of its CareUnit, Inc.
subsidiary. The Letter Agreement provided that "At 150 days after the date of
this Agreement, provided that the Participating Securityholders have in each
material respect performed (with opportunity to cure if a cure is possible)
their obligations required to be performed hereunder on or prior to such date,
and if the Offer has not then been consummated, the Company shall pledge (with
the Trustee, or an alternate acceptable to the Company, to act as pledgeholder
on terms of a written agreement containing standard terms reasonably acceptable
to the Participating Securityholders) all of the Shares as collateral for its
obligation to purchase the Securities pursuant to the Offer or otherwise."
Because of Mr. Lustig's failure to perform his obligations under the Letter
Agreement, the Company believes that the Letter Agreement is
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<PAGE> 46
not binding upon the Company and is using certain concepts from the Letter
Agreement as a framework for the proposed Exchange described in this Offering
Circular. No pledge of the CareUnit shares is contemplated by the Company in
the currently proposed Exchange Offer.
ENGAGEMENT OF ERNST & YOUNG LLP; DELAYS IN SEC FILINGS
The Company engaged Ernst & Young LLP ("EY") to audit the Company's
financial statements for the year ended May 31, 1995 on or about July 5, 1995.
In addition, the Company may request Arthur Andersen LLP ("Andersen"), the
Company's former auditors, to consent to the inclusion of its audit reports for
the 1993 and 1994 fiscal years in various SEC reports or registration
statements. As indicated by Andersen in its letter addressed to the SEC,
Andersen intends to conduct a due diligence review in order to ascertain
whether it believes that its report could be reissued without modifications, or
what modifications of its report and qualifications or uncertainties therein
would be necessary. The consent of Andersen to use such reports, or in lieu
thereof reports of another auditor (requiring another complete audit of such
periods) will be necessary in order to file registration statements to register
shares of Common Stock under the Securities Act. In addition, the Company will
solicit shareholder approval for the issuance of Common Stock pursuant to a
$1.0 million Secured Conditional Exchangeable Note issued by the Company in
fiscal 1995 (the "Note"), and such solicitation may require a proxy statement
that includes financial statements and auditors' consents.
INVOLUNTARY BANKRUPTCY PETITION; ACCELERATION OF INDEBTEDNESS
Despite the dismissal in March 1995 of the involuntary bankruptcy
petition filed against the Company by three purported creditors, no assurance
may be made that such or other persons whom the Company owes any debt could not
file another involuntary petition in bankruptcy court. The Company's 7 1/2%
Convertible Subordinated Debentures continue to be in default, including the
payment default involving interest accruing from April 1994 on approximately
$9.5 million of outstanding face amount, and interest on default interest, and
the Debentures continue to be accelerated, and immediately payable in full. To
rescind the acceleration of the Debentures would require written consent of a
majority of the Debentures and the cure of all existing defaults. The Company
has filed and received SEC comments concerning a Schedule 13E-4 and a Schedule
14A for distribution to the Debentureholders. No assurances can be made that
the holders of Debentures will consent to rescission of the acceleration or
that the defaults can be cured. The Company's ability to solicit consent of
Debentureholders may be subject to Rule 14a under the Exchange Act, which may
require that the Company provide audited and unaudited financial information to
holders. In the event that the Company does not retire the Debentures as and
when contemplated in the March 3, 1995 letter agreement, Debentureholders who
filed the earlier involuntary petition may file another such petition. Other
creditors may also file such a petition, or institute other actions against the
Company, in order to prevent the Debentureholders from collecting on their
debts in advance of payment to themselves.
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS
The Company's ability to succeed in increasing revenues may depend in
part on the extent to which reimbursement of the cost of such treatment will be
available from government health administration authorities, private health
insurers and other organizations. Third-party payors are increasingly
challenging the price of medical products and services. As a result of
reimbursement changes and competitive pressures, the contractual obligations of
the Company have been subject to intense evaluation.
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<PAGE> 47
UNCERTAINTY OF PRICING; HEALTHCARE REFORM AND RELATED MATTERS
The levels of revenues and profitability of healthcare companies may
be affected by the continuing efforts of governmental and third party payors to
contain or reduce the costs of healthcare through various means. In the United
States, there have been, and the Company expects that there will continue to
be, a number of federal and state proposals to implement governmental controls
on the price of healthcare. It is uncertain what legislative proposals will be
adopted or what actions federal, state or private payors for healthcare goods
and services may take in response to any healthcare reform proposals or
legislation. The Company cannot predict the effect healthcare reforms may have
on its business, and assurances cannot be made that any such reforms will not
have material adverse effects on the Company.
MANAGEMENT OF EXPANSION
The Company's anticipated growth and expansion into areas and
activities requiring additional medical and administrative expertise, such as
managed care, are expected to place increased demands on the Company's
resources. These demands are expected to require the retention of current
management and the addition of new management personnel and the development of
additional expertise by existing management personnel. The failure to retain or
acquire such services or to develop such expertise could have a material
adverse effect on the prospects for the Company's success.
MANAGEMENT OF TRANSITION
The Company's prospects for success depend, to a degree, on its
ability to successfully implement its current restructuring plans. The failure
of the Company to successfully transition, or any unanticipated or significant
delays in such transition, could have a material adverse effect on the
Company's business. There can be no assurance that the Company will be able to
achieve its planned transition without disruption to its business or that the
transitioned Company resulting from the planned business transition will be
adequate to sustain future growth by the Company.
PRICE VOLATILITY IN PUBLIC MARKET
The securities markets have from time to time experienced significant
price and volume fluctuations that may be unrelated to the operating
performance of particular companies. Trading prices of securities of companies
in the managed care sector have experienced significant volatility.
THIN TRADING OF DEBENTURES
The trading of Debentures in the over-the-counter market is not
active.
CONVERSION PRICE FAR ABOVE SHARE PRICES
The Debentures are convertible into Common Stock at a price so far in
excess of the current market price of Common Stock as to be unattractive to
Debentureholders in today's market.
TAXES
The Company has recently received a tax refund for fiscal 1995 of $9.4
million ("fiscal 1995 refund") based on federal income tax deductions on
account of specified liability losses defined in Section 172(f) of the Code.
The Company's tax returns in earlier tax years have been amended based on
federal income tax deductions arising from carrybacks of specified liability
losses defined in Section 172(f). The IRS retained approximately $2.5 million
39
<PAGE> 48
of the $9.4 million for amounts currently due and payable pursuant to a
settlement agreement relating to tax years 1984 through 1991. Also, a $1.9
million commission was paid to Deloitte & Touche from the refund proceeds.
Section 172(f) is an area of the federal income tax law without
substantial legal precedent. No assurances can be made that the IRS would not
be successful in challenging the claimed deductions so as to result in the
repayment by the Company of the 1995 refund. In addition, no assurances can be
made that the Company ultimately will receive refunds as a result of the
pre-1995 amended returns. Neither the Company nor the IRS will be foreclosed
from raising other tax issues in regard to any audits of any such returns,
which could also ultimately affect the Company's tax liability.
The Company's ability to use any NOLs may be subject to limitation in
the event that the Company issues or agrees to issue substantial amounts of
additional equity (see "Potential Federal Income Tax Consequences - Effects on
the Company"). The Company monitors the potential for "change of ownership"
and believes that the exchange of the Note as contemplated will not cause a
"change of ownership;" however, no assurances can be made that future events
will not act to limit the Company's tax benefits.
The Company has a carryover of $11.5 million of NOLs into fiscal 1996.
In the event that the Company's tax refunds (as described above) are
disallowed, the disallowed amount of carrybacks of specified liability losses
would be recharacterized as NOLs. The resultant NOLs could increase the NOLs
aggregately to approximately $61.5 million. In the event that a substantial
portion of the $50 million aggregate tax deductions forming the basis for the
Company's tax refund claims shall have been reclassified as NOLs, a change of
ownership (as defined above) would likely have the effect of disallowing the
use of a substantial portion of the Company's NOLs by the Company under any
circumstances during the limited carryover periods applicable thereto.
In addition, the Company may be unable to utilize some or all of its
allowable tax deductions or losses, which depends upon factors including the
availability of sufficient net income from which to deduct such losses during
limited carryback and carryover periods.
INTERESTS OF CERTAIN PERSONS
The directors and executive officers who served the Company since June
1, 1994 have no substantial interest, direct or indirect, by security holdings
or otherwise, in the Exchange Offer and the approval or disapproval of
Rescission of Acceleration, except as holders of Common Stock generally.
PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning beneficial
ownership of Common Stock. Such information is given as of December 31, 1995,
At the record date, 2,214,498 shares of Common Stock were outstanding; entitled
to one vote per share. According to rules adopted by the Commission,
"beneficial ownership" of securities for this purpose is the power to vote them
or to direct their investment. Except as otherwise noted, the indicated owners
have sole voting and investment power with respect to shares beneficially
owned. An asterisk in the percent of class column indicates beneficial
ownership of less than 1% of the outstanding Common Stock.
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<PAGE> 49
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name of Beneficial Owner Beneficial Ownership of Class
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
William H. Boucher 5,000 (9) *
J. Marvin Feigenbaum 5,000 (9) *
Lindner Funds (1) 586,700 20.9
Drew Q. Miller 21,000 (10) *
Ronald G. Hersch, Ph.D. 15,500 (4) *
Moriarty Litigation Group (2) 172,500 7.8
W. James Nicol 5,056 (3) *
Richard C. Perry(5) 200,000 9.0
Kerri Ruppert 23,000 (6) 1.0
Chriss W. Street 88,560 (7) 3.9
All executive officers and
directors as a group (7 persons) 163,116 (8) 6.9
</TABLE>
- -----------------
(1) The mailing address of Lindner Funds is c/o Ryback Management
Corporation, 7711 Carondelet Avenue, Suite 700, St. Louis, Missouri
63105. Includes 250,000 shares issuable pending completion of
administrative matters and approximately 336,700 shares currently
reserved for issuance upon conversion of a Secured Convertible Note
dated January 9, 1995. Lindner Funds, as described in its Schedule
13G, holds the shares and convertible debt in more than one fund.
(2) The mailing address of Moriarty Litigation Group is 1111 Bagbe, Suite
1950, Houston, Texas 77002-2546.
(3) Includes 56 shares held by Mr. Nicol's spouse as custodian for his
three minor children, all of whom reside with Mr. Nicol, and 5,000
shares subject to options that are presently exercisable or
exercisable within 60 days of the date hereof.
(4) Includes 4,000 shares held directly and 11,500 shares subject to
options that are presently exercisable or exercisable within 60 days
of the date hereof.
(5) Mr. Perry is President of Perry & Co., 2635 Century Parkway, N.E.,
Suite 1000, Atlanta, Georgia 30345.
(6) Consists of 23,000 shares subject to options that are presently
exercisable or exercisable within 60 days of the date hereof.
(7) Includes 6,160 shares held directly and 82,500 shares subject to
options that are presently exercisable or exercisable within 60 days
of the date hereof. Also includes 100,000 restricted shares under a
restricted stock under the Company's Incentive Stock Plan.
(8) Includes a total of 152,000 shares subject to outstanding options that
are presently exercisable or exercisable within 60 days of the date
hereof.
(9) Includes 5,000 shares subject to options that are presently
exercisable or exercisable within 60 days of the date hereof.
(10) Includes 1,000 shares held directly and 20,000 shares subject to
options that are presently exercisable or exercisable within 60 days
of the date hereof.
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<PAGE> 50
USE OF PROCEEDS
The Company's negative cash flow from operations has consumed
substantial amounts of cash. The Company's capital requirements will depend on
numerous factors, including the Company's obligations to raise substantial
additional funds to complete the Exchange Offer.
Up to approximately $5,750,000 ($5,550,000 in cash and estimated costs
of $200,000) could be used to retire the outstanding balance of indebtedness
under the Debentures.
There can be no assurance of successful completion of the Exchange
Offer.
DIVIDEND POLICY
The Company anticipates that all future earnings will be retained to
finance future growth. The Company does not anticipate paying any cash
dividends on the Common Stock in the foreseeable future. While the Debentures
are due and unpaid, payments of dividends is prohibited.
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<PAGE> 51
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
November 30, 1995 and as adjusted to give effect to the Exchange for 100% of
the outstanding Debentures and 70% of the outstanding Debentures and without
deducting expenses payable by the Company.
COMPREHENSIVE CARE CORPORATION
Pro Forma Balance Sheet
Period Ending November 30, 1995
<TABLE>
<CAPTION>
Pro Forma
-----------------------
ASSETS Actual 100% 70%
- ------ -------- -------- ---------
<S> <C> <C> <C>
Cash and cash equivalents $ 5,883 $ 351 $ 1,637
Accounts Receivable 2,600 2,600 2,600
Property and Equipment
Held for Sale 3,882 3,882 3,882
Other Current Assets 724 724 724
-------- -------- ---------
Total Current Assets 13,089 7,557 8,843
Property, Plant & Equipment 18,573 18,573 18,573
Less: Accum. Depreciation (8,824) (8,824) (8,824)
-------- -------- ---------
Net Property, Plant
& Equipment 9,749 9,749 9,749
-------- -------- ---------
NC Assets Held For Sale 2,342 2,342 2,342
Other Assets 3,583 3,583 3,583
-------- -------- ---------
Total Other Assets 5,925 5,925 5,925
-------- -------- ---------
TOTAL ASSETS $ 28,763 $ 23,231 $ 24,517
======== ======== =========
LIABILITIES & EQUITY
Accounts Pay/Accrued
Liabilities $ 10,626 $ 9,380 $ 9,380
Long Term Debt in Default 9,538 0 2,862
Current Maturities Long
Term Debt 1,645 1,645 1,645
Income Taxes Payable 344 344 344
-------- -------- ---------
Current Liabilities 22,153 11,369 14,231
-------- -------- ---------
Long Term Debt 2,162 2,162 2,162
Other NC Liabilities 8,040 8,040 8,040
-------- -------- ---------
Total Other Liabilities 10,202 10,202 10,202
-------- -------- ---------
TOTAL LIABILITIES $ 32,355 $ 21,571 $ 24,433
-------- -------- ---------
Minority Interest 1,000 1,000 1,000
EQUITY
Common Stock 27 38 35
Preferred Stock 0 0 0
Additional Paid in Capital 42,487 43,620 43,280
Retained Earnings (47,106) (42,998) (44,231)
-------- -------- ---------
TOTAL EQUITY (4,592) 660 (916)
-------- -------- ---------
TOTAL LIABILITIES & EQUITY $ 28,763 $ 23,231 $ 24,517
======== ======== =========
</TABLE>
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<PAGE> 52
CHANGES IN ACCOUNTANTS
Arthur Andersen LLP ("Arthur Andersen") had been the principal
independent auditors of the financial statements for the Company. On May 22,
1995, that firm advised the Company that the Company did not meet Arthur
Andersen's client profile. In connection with the audits of the fiscal years
ended May 31, 1993 and May 31, 1994, and the subsequent interim period through
the date of resignation (the "Period"), there were no disagreements with Arthur
Andersen on any matter of accounting principles or practices, financial
statement disclosure or audit scope or procedures, which disagreements if not
resolved to their satisfaction would have caused them to make reference in
connection with their audit reports to the subject matter of the disagreement.
The audit reports of Arthur Andersen on the consolidated financial
statements of the Company and subsidiaries as of and for the fiscal years ended
May 31, 1993 and 1994 did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope or
accounting principles, other than that such auditor's reports contained two
separate paragraphs that stated that:
As further discussed in Note 15, the Company is negotiating a
settlement with the Internal Revenue Service (IRS) regarding
assessments of payroll taxes. Management believes that adequate
reserves have been provided for the additional taxes to be assessed by
the IRS. There can be no assurance, however, that such reserves will
be sufficient until a formal settlement is reached.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the
Company has incurred significant recurring losses and negative cash
flows from operations which raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that
might result should the Company be unable to continue as a going
concern.
The uncertainty with respect to the IRS assessment had been resolved
by the Company pursuant to a settlement agreement with the IRS entered into
during the quarterly period ended November 30, 1994.
Arthur Andersen advised the Company that Arthur Andersen might permit
(without commitment) its 1993 and 1994 audit reports to be used in the
Company's filings with the Commission, but the appropriate form that such audit
reports may take, if reissued at a future time, would depend upon the results
of post-audit review procedures that Arthur Andersen would perform as it
considers necessary in the circumstances. Auditors' reports must be included in
all Securities and Exchange Act filings with the Commission, and a consent to
use such report must be included in all Securities Act filings.
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<PAGE> 53
COMPREHENSIVE CARE CORPORATION
THE EXCHANGE AGENT: CONTINENTAL STOCK TRANSFER & TRUST COMPANY
By Mail: By Hand:
CONTINENTAL STOCK TRANSFER & CONTINENTAL STOCK TRANSFER
TRUST COMPANY & TRUST COMPANY
2 BROADWAY 2 BROADWAY, 19TH FLOOR
NEW YORK, NEW YORK 10004 NEW YORK, NEW YORK 10004
Confirm by Telephone:
(212) 509-4000 Ext. 227
REQUESTS FOR ADDITIONAL INFORMATION SHOULD BE DIRECTED TO KERRI RUPPERT,
SECRETARY, COMPREHENSIVE CARE CORPORATION 350 W. BAY STREET,
COSTA MESA, CALIFORNIA 92627, AT (800) 678-2273
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Additional Information . . . . . . . . . . . . . . .
Offering Summary . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . .
The Company . . . . . . . . . . . . . . . . . . . . .
Ratio of Earnings to Fixed Charges . . . . . . . . .
Recent Transactions in the Company's Securities . . .
Price Range of Common Shares and Debentures . . . . .
The Exchange Offer . . . . . . . . . . . . . . . . .
Description of Debentures . . . . . . . . . . . . .
Description of Capital Stock . . . . . . . . . . . .
- --------------------------------------------------------------------------------
45
<PAGE> 1
EXHIBIT (a)(ii)
LETTER OF TRANSMITTAL
FOR
COMPREHENSIVE CARE CORPORATION
OFFER TO EXCHANGE THE EXCHANGE CONSIDERATION
FOR ANY AND ALL OF ITS
7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES
DUE APRIL 15, 2010
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON __________,
1996 UNLESS THE EXCHANGE OFFER IS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF
DEBENTURES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M. ON THE EXPIRATION
DATE.
TO: CONTINENTAL STOCK TRANSFER & TRUST COMPANY, EXCHANGE AGENT
By Mail: By Hand:
CONTINENTAL STOCK TRANSFER & CONTINENTAL STOCK TRANSFER
TRUST COMPANY & TRUST COMPANY
2 BROADWAY 2 BROADWAY, 19TH FLOOR
NEW YORK, NEW YORK 10004 NEW YORK, NEW YORK 10004
Confirm by Telephone:
(212) 509-4000 Ext. 227
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION
VIA TELEGRAM, TELEX OR FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE EXCHANGE CONSIDERATION FOR
THEIR DEBENTURES PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT
WITHDRAW)THEIR DEBENTURES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
By execution hereof, the undersigned acknowledges receipt of the
Offering Circular dated __________, 1996 (the "Offering Circular"), of
Comprehensive Care Corporation, a Delaware corporation (the "Company"), which,
together with this Letter of Transmittal and the instructions hereto (the
"Letter of Transmittal"), constitute the Company's offer (the "Exchange Offer")
to exchange, as principal, $500 in cash plus 16 shares of Common Stock, subject
to payment of cash in lieu of any fractional shares, and, as interest, $80 in
cash (the "Exchange Consideration"), for each $1,000 of original principal
amount of its outstanding 7 1/2% Convertible Subordinated Debentures, due April
15, 2010 (the "Debentures"), and the waiver by the Debentureholder of all but
such $80 of interest accrued and unpaid as of the date of the Exchange, upon
the terms and subject to the conditions set forth in the Exchange Offer.
This Letter of Transmittal is to be used by Holders (as defined below)
if: (i) certificates representing Debentures are to be physically delivered to
the Exchange Agent herewith by Holders; (ii) tender of Debentures is to be made
by book-entry transfer to the Exchange Agent's account at The Depository Trust
Company ("DTC") pursuant to the procedures set forth in the Offering Circular
under "The Exchange Offer -- Procedures for Tendering" by any financial
institution that is a participant in DTC and whose name appears on a security
position listing as the owner of Debentures (such participants, acting on
behalf of Holders are referred to herein, together with such Holders, as
"Acting Holders"); or (iii) tender of Debentures is to be made according to the
guaranteed delivery procedures set forth in the Offering
1
<PAGE> 2
Circular under "The Exchange Offer -- Guaranteed Delivery Procedure." Delivery
of documents to DTC does not constitute delivery to the Exchange Agent.
The term "Holder" with respect to the Exchange Offer means any person:
(i) in whose name Debentures are registered on the books of the Company or any
other person who has obtained a properly completed bond power from the
registered Holder; or (ii) whose Debentures are held of record by DTC who
desires to deliver such Debentures by book-entry transfer at DTC.
The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer. Holders who wish to tender their Debentures must
complete this Letter of Transmittal in its entirety.
All capitalized terms used herein and not defined shall have the
meanings ascribed to them in the Offering Circular.
The instructions included with this Letter of Transmittal must be
followed. Questions and requests for assistance or for additional copies of the
Offering Circular, this Letter of Transmittal and the Notice of Guaranteed
Delivery may be directed to the Exchange Agent. See Instruction 8 herein.
HOLDERS WHO WISH TO ACCEPT THE EXCHANGE OFFER AND TENDER THEIR
DEBENTURES MUST COMPLETE THIS LETTER OF TRANSMITTAL IN ITS ENTIRETY.
2
<PAGE> 3
List below the Debentures to which this Letter of Transmittal relates.
If the space provided below is inadequate, list the certificate numbers and
principal amounts on a separately executed schedule and affix the schedule to
this Letter of Transmittal. Tenders of Debentures will be accepted only in
principal amounts equal to $1,000 or integral multiples thereof.
- --------------------------------------------------------------------------------
DESCRIPTION OF DEBENTURES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CERTIFICATE NUMBER(S)* AGGREGATE
(ATTACH SIGNED PRINCIPAL
LIST IF AMOUNT
NAME(S) AND ADDRESS(ES) OF HOLDER(S) NECESSARY) TENDERED (IF LESS
(PLEASE FILL IN, IF BLANK) THAN ALL)**
<S> <C> <C>
- ------------------------------------ ---------------------- -----------------
- ------------------------------------ ---------------------- -----------------
- ------------------------------------ ---------------------- -----------------
- ------------------------------------ ---------------------- -----------------
- ------------------------------------ ---------------------- -----------------
- ------------------------------------ ---------------------- -----------------
- ------------------------------------ ---------------------- -----------------
- ------------------------------------ ---------------------- -----------------
- --------------------------------------------------------------------------------
TOTAL PRINCIPAL AMOUNT OF DEBENTURES TENDERED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
* Need not be completed by Holders tendering by book-entry transfer.
** Need not be completed by Holders who wish to tender with respect to
all Debentures listed. See Instruction 2.
- --------------------------------------------------------------------------------
/ / CHECK HERE IF TENDERED DEBENTURES ARE BEING DELIVERED BY DTC TO THE
EXCHANGE AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:_________________________________________
DTC Book-Entry Account No.:____________________________________________
If Holders desire to tender Debentures pursuant to the Exchange Offer and (i)
certificates representing such Debentures are not lost but are not immediately
available, (ii) time will not permit this Letter of Transmittal, certificates
representing such Debentures or other required documents to reach the Exchange
Agent prior to the Expiration Date or (iii) the procedures for book-entry
transfer cannot be completed prior to the Expiration Date, then such Holders
may effect a tender of such Debentures in accordance with the guaranteed
delivery procedure set forth in the Offering Circular under "The Exchange Offer
- -- Guaranteed Delivery Procedure."
/ / CHECK HERE IF TENDERED DEBENTURES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE
AGENT AND COMPLETE THE FOLLOWING:
3
<PAGE> 4
Name(s) of Holder(s) of Debentures:____________________________________
Window Ticket No. (if any):____________________________________________
Date of Execution of
Notice of Guaranteed Delivery:_________________________________________
Name of Eligible Institution that Guaranteed Delivery:_________________
If Delivered by Book-Entry Transfer:
Name of Tendering Institution:_________________________________________
DTC Book-Entry Account No.:____________________________________________
4
<PAGE> 5
Subject to the terms of the Exchange Offer, the undersigned hereby
tenders to the Company the principal amount of Debentures indicated above.
Subject to and effective upon the acceptance for exchange of the principal
amount of Debentures tendered in accordance with this Letter of Transmittal,
the undersigned sells, assigns and transfers to the Company all right, title
and interest in and to the Debentures tendered hereby. The undersigned hereby
irrevocably constitutes and appoints the Exchange Agent its agent and
attorney-in-fact (with full knowledge that the Exchange Agent also acts as the
agent of the Company) with respect to the tendered Debentures with full power
of substitution to deliver certificates for such Debentures for cancellation in
accordance with the Indenture for the Debentures, all in accordance with the
terms of the Exchange Offer. The power of attorney granted in this paragraph
shall be deemed irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that he or she has full
power and authority to tender, sell, assign and transfer the Debentures
tendered hereby and that the Company will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances
and not subject to any adverse claim, when the same are acquired by the
Company.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the assignment and transfer of the Debentures tendered
hereby.
For purposes of the Exchange Offer, the Company shall be deemed to
have accepted validly tendered Debentures when the Company has given oral or
written notice thereof to the Exchange Agent. If any tendered Debentures are
not accepted for exchange pursuant to the Exchange Offer for any reason,
certificates for any such unaccepted Debentures will be returned (except as
noted below with respect to tenders through DTC), without expense, to the
undersigned at the address shown below or at a different address shown below or
at a different address as may be indicated under "Special Issuance
Instructions" as promptly as practicable after the Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned and every obligation under this Letter of Transmittal shall be
binding upon the undersigned's heirs, personal representatives, successors and
assigns.
The undersigned understands that tenders of Debentures pursuant to the
procedures described under the caption "The Exchange Offer -- Procedures for
Tendering" in the Offering Circular and in the instructions hereto will
constitute a binding agreement between the undersigned and the Company upon the
terms and subject to the conditions of the Exchange Offer.
Unless otherwise indicated under "Special Issuance Instructions," in
exchange for the Debentures accepted for exchange, please pay the cash portion
of the Exchange Consideration by check made payable in the name(s) of the
undersigned (or in the case of Debentures tendered by DTC, to DTC), and issue
the certificates representing the Common Shares, in the name(s) of the
undersigned (or in the case of Debentures tendered by DTC, by credit to the
account at DTC). Similarly, unless otherwise indicated under "Special Delivery
Instructions," please send the Exchange Consideration in exchange for the
Debentures accepted for exchange and any certificates for Debentures not
tendered or not exchanged (and accompanying documents, as appropriate) to the
undersigned at the address shown below the undersigned's signature(s), unless,
in either event, tender is being made through DTC. In the event that both
"Special Issuance Instructions" and "Special Delivery Instructions" are
5
<PAGE> 6
completed, please pay and issue the Exchange Consideration due in exchange for
the Debentures accepted for exchange and return any Debentures not tendered or
not exchanged in the name(s) of, and send said certificates to, the person(s)
so indicated. The undersigned recognizes that the Company has no obligation
pursuant to the "Special Issuance Instructions" and "Special Delivery
Instructions" to transfer any Debentures from the name of the registered
holder(s) thereof if the Company does not accept for exchange any of the
Debentures so tendered.
6
<PAGE> 7
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS OF
DEBENTURES REGARDLESS OF WHETHER DEBENTURES ARE BEING PHYSICALLY
DELIVERED HEREWITH)
This Letter of Transmittal must be signed by the Holder(s) of
Debentures exactly as their name(s) appear(s) on certificate(s) for Debentures
or, if tendered by a participant in DTC, exactly as such participant's name
appears on a security position listing as the owner of Debentures, or by
person(s) authorized to become registered Holder(s) by endorsements and
documents transmitted with this Letter of Transmittal. If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer or other
person acting in a fiduciary or representative capacity, such person must set
forth his or her full title below under "Capacity" and submit evidence
satisfactory to the Company of such person's authority to so act. See
Instruction 3 herein.
If the signature appearing below is not of the registered Holder(s) of
the Debentures, then the registered Holder(s) must sign a valid proxy.
X _____________________________________ Date:__________________________________
X _____________________________________ Date:__________________________________
Signature(s) of Holder(s) or
Authorized Signatory
Name(s): ______________________________ Address: ______________________________
______________________________ ______________________________
(Please Print) (Including Zip Code)
Capacity: _____________________________ Area Code and Telephone No.:___________
Social Security No.: __________________
PLEASE COMPLETE SUBSTITUTE FORM W-9 HEREIN
SIGNATURE GUARANTEE (SEE INSTRUCTION 3 HEREIN)
CERTAIN SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION
________________________________________________________________________________
(Name of Eligible Institution Guaranteeing Signatures)
________________________________________________________________________________
(Address (including zip code) and Telephone Number
(including area code) of Firm)
________________________________________________________________________________
(Authorized Signature)
________________________________________________________________________________
(Printed Name)
________________________________________________________________________________
(Title)
Date: ____________________________
7
<PAGE> 8
________________________________________________________________________________
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTION 4 HEREIN)
To be completed ONLY if certificates for the Common Shares issued pursuant to
the Exchange Offer or for any principal amount of Debentures not tendered for
exchange are to be issued in the name of someone other than the person or
persons whose signature(s) appear(s) within this Letter of Transmittal or
issued to an address different from that shown in the box entitled "Description
of Debentures" within this Letter of Transmittal, or if Debentures tendered by
book-entry transfer that are not accepted for purchase are to be credited to an
account maintained at DTC.
Name: __________________________________________________________________________
(Please Print)
Address: _______________________________________________________________________
(Please Print)
________________________________________________________________________________
Zip Code
________________________________________________________________________________
Taxpayer Identification or
Social Security Number
(See Substitute Form W-9 herein)
________________________________________________________________________________
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTION 4 HEREIN)
To be completed ONLY if certificates for the Common Shares issued pursuant to
the Exchange Offer or for any principal amount of Debentures not tendered for
exchange are to be sent to someone other than the person or persons whose
signature(s) appear(s) within this Letter of Transmittal or issued to an
address different from that shown in the box entitled "Description of
Debentures" within this Letter of Transmittal.
Name: __________________________________________________________________________
(Please Print)
Address: _______________________________________________________________________
(Please Print)
________________________________________________________________________________
Zip Code
________________________________________________________________________________
Taxpayer Identification or
Social Security Number
(See Substitute Form W-9 herein)
________________________________________________________________________________
8
<PAGE> 9
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER AND THE SOLICITATION
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND DEBENTURES. The
certificates for the tendered Debentures (or a confirmation of a book-entry
transfer into the Exchange Agent's account at DTC of all Debentures delivered
electronically), as well as a properly completed and duly executed copy of this
Letter of Transmittal or facsimile hereof and any other documents required by
this Letter of Transmittal must be received by the Exchange Agent at its
address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. The method of delivery of the tendered Debentures, this Letter
of Transmittal and all other required documents to the Exchange Agent is at the
election and risk of the Holder and, except as otherwise provided below, the
delivery will be deemed made only when actually received by the Exchange Agent.
Instead of delivery by mail, it is recommended that the Holder use an overnight
or hand delivery service. In all cases, sufficient time should be allowed to
assure timely delivery. No Letter of Transmittal or Debentures should be sent
to the Company.
Holders who wish to tender their Debentures and (i) whose Debentures
are not immediately available or (ii) who cannot deliver their Debentures, this
Letter of Transmittal or any other documents required hereby to the Exchange
Agent prior to the Expiration Date must tender their Debentures and follow the
guaranteed delivery procedure set forth in the Offering Circular. Pursuant to
such procedure: (i) such tender must be made by or through an Eligible
Institution; (ii) prior to the Expiration Date, the Exchange Agent must have
received from the Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand
delivery) setting forth the name and address of the Holder of the Debentures,
the certificate number or numbers of such Debentures and the principal amount
of Debentures tendered, stating that the tender is being made thereby and
guaranteeing that, within five business days after the Expiration Date, this
Letter of Transmittal (or facsimile hereof) together with the certificate(s)
representing the Debentures (or a confirmation of electronic delivery of
book-entry delivery into the Exchange Agent's account at DTC) and any required
documents will be deposited by the Eligible Institution with the Exchange
Agent; and (iii) such properly completed and executed Letter of Transmittal (or
facsimile hereof), as well as all other documents required by this Letter of
Transmittal and the certificate(s) representing all tendered Debentures in
proper form for transfer (or a confirmation of electronic mail delivery of
book-entry delivery into the Exchange Agent's account at DTC), must be received
by the Exchange Agent within five business days after the Expiration Date, all
as provided in the Offering Circular under the caption "Guaranteed Delivery
Procedure." Any Holder of Debentures who wishes to tender his Debentures
pursuant to the guaranteed delivery procedure described above must ensure that
the Exchange Agent receives the Notice of Guaranteed Delivery prior to 5:00
p.m., New York City time, on the Expiration Date.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Debentures will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all
Debentures not properly tendered or any Debentures the Company's acceptance of
which would, in the opinion of counsel for the Company, be unlawful. The
Company also reserves the right to waive any irregularities or conditions of
tender as to particular Debentures. The Company's interpretation of the terms
and conditions of the Exchange Offer (including the instructions in this Letter
of Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Debentures
9
<PAGE> 10
must be cured within such time as the Company shall determine. Neither the
Company, the Exchange Agent nor any other person shall be under any duty to
give notification of defects or irregularities with respect to tenders of
Debentures, nor shall any of them incur any liability for failure to give such
notification. Tenders of Debentures will not be deemed to have been made until
such defects or irregularities have been cured or waived. Any Debentures
received by the Exchange Agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned
without cost by the Exchange Agent to the tendering Holders of Debentures,
unless otherwise provided in this Letter of Transmittal, as soon as practicable
following the Expiration Date.
2. PARTIAL TENDERS. Tenders of Debentures will be accepted in all
denominations of $1,000 and integral multiples in excess thereof. If less than
the entire principal amount of any Debentures is tendered, the tendering Holder
should fill in the principal amount tendered in the third column of the chart
entitled "Description of Debentures." The entire principal amount of Debentures
delivered to the Exchange Agent will be deemed to have been tendered unless
otherwise indicated. If the entire principal amount of all Debentures is not
tendered or accepted, a certificate or certificates representing Debentures not
tendered or accepted will be issued and sent to the Holder at his or her
registered address, unless a different address is provided in the appropriate
box on this Letter of Transmittal or unless tender is made through DTC,
promptly after the Debentures are accepted for exchange.
3. SIGNATURES ON THE LETTER OF TRANSMITTAL; BOND POWERS AND
ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal (or
facsimile hereof) is signed by the registered Holder(s) of the Debentures
tendered hereby, the signature must correspond with the name(s) as written on
the face of the Debentures without alteration, enlargement or any change
whatsoever.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered Holder(s) of Debentures tendered and the certificate(s) for Common
Shares issued in exchange therefor is to be issued (or any untendered principal
amount of Debentures is to be reissued) to the registered Holder, such Holder
need not and should not endorse any tendered Debentures, nor provide a separate
bond power. In any other case, such Holder must either properly endorse the
Debentures tendered or transmit a properly completed separate bond power with
this Letter of Transmittal, with the signatures on the endorsement or bond
power guaranteed by an Eligible Institution.
If this Letter of Transmittal (or facsimile hereof) is signed by a
person other than the registered Holder(s) of any Debentures listed, such
Debentures must be endorsed or accompanied by appropriate bond powers signed as
the name of the registered Holder(s) appears on the Debentures.
If this Letter of Transmittal (or facsimile hereof) or any Debentures
or bond powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, or officers of corporations or others acting in a fiduciary
or representative capacity, such persons should so indicate when signing, and
unless waived by the Company, evidence satisfactory to the Company of their
authority to so act must be submitted with this Letter of Transmittal.
Endorsements on Debentures or signatures on bond powers required by
this Instruction 3 must be guaranteed by an Eligible Institution.
Signatures on this Letter of Transmittal (or facsimile hereof) must be
guaranteed by an Eligible Institution unless the Debentures tendered pursuant
thereto are tendered (i) by a registered Holder (including any participant in
DTC whose name appears on a security position listing as the owner of
10
<PAGE> 11
Debentures) who has not completed the box set forth herein entitled "Special
Issuance Instructions" or the box entitled "Special Delivery Instructions" or
(ii) for the account of an Eligible Institution.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering Holders
should indicate, in the applicable spaces, the name and address to which
Debentures or substitute Debentures reissued for principal amounts not tendered
or not accepted for exchange are to be issued or sent, if different from the
name and address of the person signing this Letter of Transmittal (or in the
case of tender of the Debentures through DTC, if different from DTC). In the
case of issuance in a different name, the taxpayer identification or social
security number of the person named must also be indicated.
5. TRANSFER TAXES. The Company will pay all transfer taxes, if
any, applicable to the exchange of Debentures pursuant to the Exchange Offer.
If, however, certificates representing New Debentures or Debentures for
principal amounts not tendered or accepted for exchange are to be delivered to,
or are to be registered or issued in the name of, any person other than the
registered Holder of the Debentures tendered hereby, or if tendered Debentures
are registered in the name of any person other than the person signing this
Letter of Transmittal, or if a transfer tax is imposed for any reason other
than the exchange of Debentures pursuant to the Exchange Offer, then the amount
of any such transfer taxes (whether imposed on the registered Holder or any
other person) will be payable by the tendering Holder. If satisfactory evidence
of payment of such taxes or exemption therefrom is not submitted with this
Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering Holder.
Except as provided in this Instruction 5, it will not be necessary for
transfer tax stamps to be affixed to the Debentures listed in this Letter of
Transmittal.
6. WAIVER OF CONDITIONS. The Company reserves the absolute right
to amend, waive or modify specified conditions in the Exchange Offer in the
case of any Debentures tendered.
7. MUTILATED, LOST, STOLEN OR DESTROYED DEBENTURES. Any tendering
Holder whose Debentures have been mutilated, lost, stolen or destroyed should
contact the Exchange Agent at the address indicated herein for further
instruction.
8. REQUEST FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and
requests for assistance and requests for additional copies of the Offering
Circular or this Letter of Transmittal may be directed to the Exchange Agent at
the address specified in the Offering Circular or to Kerri Ruppert, Senior Vice
President, Chief Accounting Officer and Secretary/Treasurer of the Company, 350
W. Bay Street, Costa Mesa, California 92627, (800) 678-2273.
11
<PAGE> 12
(DO NOT WRITE IN SPACE BELOW)
________________________________________________________________________________
________________________________________________________________________________
CERTIFICATE SURRENDERED Debentures TENDERED Debentures ACCEPTED
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Delivery Prepared by Checked by Date
________________________________________________________________________________
________________________________________________________________________________
IMPORTANT TAX INFORMATION
Under federal income tax laws, a Holder whose tendered Debentures are
accepted pursuant to the Exchange Offer is required to provide the Exchange
Agent (as payer) with such Holder's correct Taxpayer Identification Number
("TIN") or Substitute Form W-9 below or otherwise establish a basis for
exemption from backup withholding. If such Holder is an individual, the TIN is
his social security number. If the Exchange Agent is not provided with the
correct TIN, a $50 penalty may be imposed by the Internal Revenue Service, and
payments made with respect to Debentures purchased pursuant to the Exchange
Offer may be subject to backup withholding.
Certain Holders (including, among others, all corporations and certain
foreign persons) are not subject to these backup withholding and reporting
requirements. Exempt Holders should indicate their exempt status on Substitute
Form W-9. A foreign person may qualify as an exempt recipient by submitting to
the Exchange Agent a properly completed U.S. Treasury Form W-8, signed under
penalties of perjury, attesting to that Holder's exempt status. A Form W-8 can
be obtained from the Exchange Agent. See the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional instructions.
If backup withholding applies, the Exchange Agent is required to
withhold 31% of any payments made to the Holder or other payee. Backup
withholding is not an additional federal income tax. Rather, the federal income
tax liability of persons subject to backup withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained from the Internal Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments made with respect to the
Exchange Offer, the Holder is required to provide the Exchange Agent with
either: (i) the Holder's correct TIN by completing the form below, certifying
that the TIN provided on Substitute Form W-9 is correct (or that such Holder is
awaiting a TIN) and that (A) the Holder has not been notified by the Internal
Revenue Service that the Holder is subject to backup withholding as a
12
<PAGE> 13
result of failure to report all interest or dividends or (B) the Internal
Revenue Service has notified the Holder that the Holder is no longer subject to
backup withholding; or (ii) an adequate basis for exemption.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The Holder is required to give the Exchange Agent the TIN (e.g.,
social security number or employer identification number) of the registered
Holder of the Debentures. If the Debentures are held in more than one name or
are held not in the name of the actual owner, consult the enclosed "Guidelines
for Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional guidance on which number to report.
13
<PAGE> 14
________________________________________________________________________________
SUBSTITUTE PART 1 PLEASE PROVIDE YOUR TIN IN THE BOX AT FORM W-9
RIGHT AND CERTIFY BY SIGNING AND DATING BELOW
_________________________________________________
Social Security Number
OR ______________________________________________
Employer Identification Number
_________________________________________________
PAYER'S REQUEST FOR TAXPAYER PART 2 -- CERTIFICATION -- Under Penalties of
IDENTIFICATION NUMBER (TIN) Perjury, I certifythat:
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE (1) The number shown on this form is my correct
Taxpayer Identification Number (or I am
waiting for a number to be issued to me)
and
(2) I am not subject to backup withholding
because (a) I am exempt from backup
withholding or (b) I have not been notified
by the Internal Revenue Service ("IRS")
that I am currently subject to backup
withholding as a result of failure to
report all interest or dividends, or (c)
the IRS has notified me that I am no longer
subject to backup withholding.
PART 3
Awaiting TIN / /
_________________________________________________
CERTIFICATE INSTRUCTIONS -- You must cross out
item (2) in Part 2 above if you have been
notified by the IRS that you are subject to
backup withholding because of underreporting
interest or dividends on your tax return.
However, if after being notified by the IRS that
you were subject to backup withholding you
received another notification from the IRS
stating that you are no longer subject to backup
withholding, do not cross out item (2).
_________________________________________________
SIGNATURE
_________________________________________________
DATE
________________________________________________________________________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO HOLDERS OF DEBENTURES
PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES
FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM
W-9 FOR ADDITIONAL DETAILS.
14
<PAGE> 15
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN
PART 3 OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (b)
I intend to mail or deliver an application in the near future. I understand
that if I do not provide a taxpayer identification number within 60 days, 31%
of all reportable payments made to me thereafter will be withheld until I
provide a number.
____________________________________ ____________________________________
Signature Date
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THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
By Mail: By Hand:
CONTINENTAL STOCK TRANSFER & CONTINENTAL STOCK TRANSFER &
TRUST COMPANY TRUST COMPANY
2 BROADWAY 2 BROADWAY, 19TH FLOOR
NEW YORK, NEW YORK 10004 NEW YORK, NEW YORK 10004
Confirm by Telephone:
(212) 509-4000 Ext. 227
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Exhibit (a)(iii)
NOTICE OF RESCISSION OF ACCELERATION
THIS NOTICE OF RESCISSION OF ACCELERATION IS SOLICITED BY THE MANAGEMENT AND
BOARD OF DIRECTORS OF COMPREHENSIVE CARE CORPORATION.
___________ ___, 1996
First Trust California, National Association,
successor to
Bank of America National Trust and Savings Association
Corporate Trust Administration #8510
333 South Beaudry Avenue, 25th Floor
Los Angeles, California 90017
Re: Comprehensive Care Corporation 7 1/2%
Convertible Subordinated Debentures Due
April 15, 2010 (herein called the "Securities")
Ladies and Gentlemen:
This Notice of Rescission of Acceleration is delivered pursuant to
Section 6.02 of that certain Indenture dated as of April 25, 1985 (the
"Indenture") between Comprehensive Care Corporation, a Delaware corporation
(the "Company"), and Bank of America National Trust and Savings Association
(the "Trustee"), governing the Securities, as defined in the Indenture.
Pursuant to the written notices delivered to the Trustee and the Company by the
Holders of more than 25% in principal amount of the then outstanding Securities
there was a declaration of the principal and interest of the Debentures to be
due and payable immediately. Capitalized terms not otherwise defined herein
are used as defined in the Indenture. The undersigned Holder hereby notifies
the Trustee that the Holder elects to rescind both the acceleration of the
Securities and also the consequences of such acceleration, such rescission to
be effective immediately upon (1) the Company's cure of the Event of Default
referenced in the Trustee's notice dated November 22, 1994 to the Holders, (2)
the Company's cure of the Event of Default referenced in the Trustee's notice
dated May 23, 1995 to the Holders, (3) the Company's cure of the Event of
Default referenced in the Trustee's notice dated November 24, 1995 to the
Holders, and (4) the Trustee's receipt of Notices of Rescission of Acceleration
from Holders of a majority in principal amount of the outstanding Securities.
This Notice of Rescission of Acceleration shall remain in effect, and
be binding on successors and assigns unless the Trustee is notified in writing
prior thereto that the undersigned Holder has rescinded this Notice of
Rescission of Acceleration.
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Executed by the undersigned as of the date set forth above. (Please
fill in the date on the first page on this Notice of Rescission of
Acceleration.)
NAME OF HOLDER AS LISTED IN THE
TRUSTEE'S SECURITIES REGISTER
(Please Print):
_______________________________________________________
Holder's Tax ID No.:___________________________________
Security No. (if available)____________________________
SIGNATURE LINES FOR HOLDER:
_______________________________________________________
Name (please print):___________________________________
Title (if applicable):_________________________________
_______________________________________________________
Name (please print):___________________________________
Title (if applicable):_________________________________
2
<PAGE> 1
EXHIBIT (a)(iv)
FOURTH NOTICE
TO THE HOLDERS OF
COMPREHENSIVE CARE CORPORATION
7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES
DUE APRIL 15, 2010 (CUSIP NO. 204620AA6)
(THE "SECURITIES")
THIS FOURTH NOTICE IS HEREBY given to the Holders of the
above-referenced Securities, as provided for under the Indenture dated as of
April 25, 1985 (the "Indenture") between Comprehensive Care Corporation, a
Delaware corporation (the "Company"), and Bank of America National Trust and
Savings Association (the "Trustee"), that (1) the Company failed to make its
interest payment on the Securities which was due and payable on October 16,
1995, and, pursuant to Section 6.01 of the Indenture, such failure by the
Company is another Event of Default under the Indenture, effective as of
November 16, 1995; and (2) as more fully described below, certain additional
developments have occurred since the Trustee's last notice to the Holders dated
May 23, 1995. Capitalized terms not otherwise defined herein shall have the
same meanings as set forth in the Indenture.
As the Holders are aware, on November 22, 1994, the Trustee notified
the Holders by mail that an Event of Default had occurred under the Indenture
in that the Company had failed to make its interest payment on the Securities
which was due and payable on October 17, 1994, and had continued to fail to
make such missed interest payment for a period of 30 days. On February 13,
1995, the Trustee notified the Holders by mail that (1) the Holders of at least
25% in principal amount of the then outstanding Securities had, pursuant to
Section 6.02 of the Indenture, by written notice to the Company and the Trustee
declared the principal of and accrued interest on all the Securities to be
immediately due and payable, and (2) the Company had delivered to the Trustee,
and had requested the Trustee to mail to the Holders, both a notice from the
Company and a Notice of Rescission of Acceleration. In order to rescind the
acceleration of the Securities pursuant to Section 6.02 of the Indenture, the
Holders of at least a majority in principal amount of the then outstanding
Securities had to execute and return to the Trustee such Notice of Rescission
of Acceleration by 1:00 p.m., Los Angeles, California time on February 28,
1995. That did not occur. On May 23, 1995, the Trustee notified the Holders by
mail (the "Third Notice") that (a) an additional Event of Default had occurred
under the Indenture in that the Company had failed to make its interest payment
on the Securities which was due and payable on April 17, 1995, and had
continued to fail to make such missed interest payment for a period of 30 days,
and (b) the Company had informed the Trustee that on March 3, 1995, the Company
reached an agreement in principle with an ad hoc committee of Holders
providing, among other things, for the Company to offer to purchase the
outstanding Securities with cash and common stock of the Company and that such
agreement provided that the Company would submit such offer to the Holders and
would complete such offer within 180 days from March 3, 1995. To date, such
offer has not yet been submitted to the Holders.
The Company has informed the Trustee (1) that the Company has
submitted to the United States Securities and Exchange Commission (the
"Commission") preliminary materials with respect to the offer to the Holders
referenced in the next to the last sentence of the preceding paragraph of this
Fourth Notice, (2) that the Company has received comments on these preliminary
materials from the Commission, and (3) that the Company is not responding to
such comments. The Company has informed the Trustee that the Company cannot at
this time specify an exact date by which the foregoing described offer will be
submitted to the Holders.
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The Company has also informed the Trustee, and has issued a press
release announcing, that on October 20, 1995, the Company received a tax refund
from the Internal Revenue Service in the amount of $9,393,382.00 together with
accrued interest thereon in the amount of $80,956.10, that the Internal Revenue
Service offset against such tax refund amount $2,547,618.14, including
interest, then owed by the Company to the Internal Revenue Service pursuant to
a settlement agreement, and that the Company thereby actually received a net
tax refund in the amount of $6,926,719.96 from the Internal Revenue Service.
The Trustee seeks direction from the Holders concerning how the
Holders wish the Trustee to proceed in connection with the delay which has
occurred in submitting the foregoing described offer to the Holders.
The Trustee will continue with its duties under the Indenture and will
monitor developments in this matter and intends to communicate with the Holders
of the Securities as it deems appropriate as it learns of developments
concerning this matter. Any directions or inquiries regarding this matter
should be directed to Ms. Sandy Chan, Trust Officer, First Trust of California,
National Association, as agent for Bank of America National Trust and Savings
Association, Corporate Trust Administration, Department #8510, 333 South
Beaudry Avenue, 25th Floor, Los Angeles, California 90017, telephone: (213)
345-4652.
NOTE: IF YOU ARE A NOMINEE OR A DEPOSITORY AND NOT A BENEFICIAL HOLDER,
PLEASE FORWARD COPIES OF THIS NOTICE IMMEDIATELY TO YOUR CLIENTS WHO
ARE BENEFICIAL HOLDERS OF THE SECURITIES.
Dated: November 24, 1995
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Trustee
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<PAGE> 1
EXHIBIT (a)(v)
[COMPREHENSIVE CARE LETTERHEAD]
To: Holders of Comprehensive Care Corporation 7 1/2% Convertible
Subordinated Debentures Due April 15, 2010 (the "Securities")
NOTICE IS HEREBY given, pursuant to Section 2.12 of that certain Indenture
dated as of April 25, 1985 (the "Indenture"), between Comprehensive Care
Corporation (the "Company") and Bank of America National Trust and Savings
Association (the "Trustee"), that the Company intends to pay on April 15, 1996
(the "Payment Date"), the aggregate amount of three interest payments, and
default interest on each missed payment, plus the regular semi-monthly interest
payment, calculated as follows:
(1) The interest payment on the Securities in the aggregate amount
of $357,675 ($37.50 per each $1,000 of principal amount of a
Security) which was due and payable by the Company on October
17, 1994, together with interest on such missed interest
payment (at the rate of 7 1/2% per annum from and including
October 15, 1994, and to but not including the Payment Date)
in the aggregate amount of $13,413 ($1.41 per each $1,000 of
principal amount of a Security);
(2) The interest payment on the Securities in the aggregate amount
of $357,675 ($37.50 per each $1,000 of principal amount of a
Security) which was due and payable by the Company on April
17, 1995, together with interest on such missed interest
payment (at the rate of 7 1/2% per annum from and including
April 15, 1995, and to but not including the Payment Date) in
the aggregate amount of $13,413 ($1.41 per each $1,000 of
principal amount of a Security);
(3) The interest payment on the Securities in the aggregate amount
of $357,675 ($37.50 per each $1,000 of principal amount of a
Security) which was due and payable by the Company on October
16, 1995, together with interest on such missed interest
payment (at the rate of 7 1/2% per annum from and including
October 15, 1995, and to but not including the Payment Date)
in the aggregate amount of $13,413 ($1.41 per each $1,000 of
principal amount of a Security); and
(4) The interest payment on the securities in the aggregate amount
of $357.675 ($37.50 per each $1,000 principal amount of a
Security) which would become due and payable by the Company on
April 15, 1996.
Such payments by the Company will be made to Holders in whose name a
Security is registered as of April 2, 1996. Such payment by the Company is
conditioned upon the concurrent effectiveness of rescission of the acceleration
of the Securities by Holders of a majority in principal amount of the
outstanding Securities on the Payment Date. The enclosed Offering Circular,
Schedule 13E-4, Debenture Consent Solicitation Statement and other materials
each contains significant information relating to the Debentures with which you
should become familiar.
Dated: February __, 1996 COMPREHENSIVE CARE CORPORATION,
a Delaware corporation
By:_____________________________________
Its:____________________________________
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EXHIBIT (a)(vi)
[COMP-CARE LOGO]
February __, 1996
Dear Holder of Comprehensive Care Corporation 7 1/2% Convertible Subordinated
Debentures Due April 15, 2010 (the "Securities"):
The Board of Directors of Comprehensive Care Corporation solicits
holders of its 7 1/2% Convertible Subordinated Debentures Due April 15, 2010
(collectively called the "Securities") for the following purposes:
(1) For a majority in principal amount of the Securities to give
notice to First Trust California, National Association, successor to Bank of
America National Trust and Savings Association (the "Trustee") to rescind the
acceleration of the Securities ("Proposal 1"); and
(2) For two-thirds in principal amount of the Securities to waive
all of the Events of Default under the Debentures; and
(3) For a majority in principal amount of the Securities to
instruct the Trustee to forebear from effecting any remedy for the Events of
Default to permit completion of an Exchange Offer; and
(4) For two-thirds in principal amount of the Securities to agree
to amend the Indenture to facilitate or effect the Exchange Offer.
Proposals 1, 2, 3 and 4, and the possible advantages and
disadvantages, are described in the enclosed Debenture Consent Solicitation
Statement. Proposals 1, 2, 3 and 4 are recommended by your Board of Directors.
A card (the "Consent") is enclosed for the purpose of giving such a notice to
the Trustee.
The Board of Directors recommends the Proposals because it believes
that the Company's Securityholders would like to accept a proposed exchange
offer (the "Exchange Offer"). The other purposes include to eliminate various
undesirable effects of an acceleration; the existing acceleration of the
Securities as compared with rescission of the acceleration.
(a) An acceleration can impair the Company's business and
financial prospects.
(b) An acceleration could cause defaults under other debts and
obligations of the Company.
(c) An acceleration decreases the Company's attractiveness to
investors.
(d) An acceleration of indebtedness also creates an unfavorable
impression with the Company's vendors and clients.
Although Securityholders will be offered an exchange of cash and
Common Stock for their Securities, a Securityholder is not required to
exchange. The Company will pay the entire amount of interest due on all
non-tendered Debentures, and the Securities will be reinstated. The Company
will accept properly tendered Securities in the Exchange Offer described in the
Offering Circular.
A rescission of acceleration would result in a reinstatement of the
Securities that should result in an immediate improvement in the Company's
business and financial condition, and thus an improvement in its debt-carrying
ability.
<PAGE> 2
Giving Consent will not effectively tender your Debentures. The manner
of tendering Debentures is described in the Letter of Transmittal and the
Offering Circular.
It is each beneficial and record Debentureholder's right to elect to
not tender such holder's Debentures. Nevertheless, there can be no assurance
that the aggregate market value of your Securities after a rescission will be
as great as the aggregate market value of your Securities before a rescission
plus the interest payment. Debentureholders are urged, in addition to
consenting, to carefully consider the Exchange Offer. After the Exchange
Offer, the trading in the Securities may become more thin and sporadic, which
could adversely affect the liquidity of an investment in the Securities.
A rescission of acceleration will not alter rights of Securityholders
to accelerate the Securities upon any future Event of Default.
The Board of Directors is hopeful that a rescission of acceleration of
the Securities will help position the Company for a more successful long-term
future. Please SIGN, DATE and MAIL the enclosed Consent card as soon as
possible.
Sincerely,
Chriss W. Street
Chairman of the Board of
Directors, President & Chief
Executive Officer
2
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EXHIBIT (a)(viii)
SCRIPT --
QUESTIONS AND ANSWERS
1. WHAT IS THE DEBENTURE CONSENT FOR?
All Debentureholders are separately asked to consent to four
proposals, including that the Debenture acceleration be
rescinded. Rescission of Acceleration is a precondition of
consummation of the Exchange, and is the most important
proposal for your consent. Debentureholders holding
aggregately at least a majority of the outstanding principal
amount of Debentures can consent to rescind the acceleration.
The other proposals are intended to facilitate the Exchange.
Depending on the circumstances, the other proposals may not be
essential to a successful exchange. We request
Debentureholders to consider all of the proposals and consent
so that the Exchange can be accomplished.
2. WHAT DO I RECEIVE IN EXCHANGE FOR DEBENTURES THAT I TENDER?
For every $1,000 of principal amount, and a waiver of default
interest and interest accrued on default interest, you will
receive $580 in cash and 16 shares of Common Stock of
Comprehensive Care Corporation. The tax consequences for a
typical holder are described in the Offering Circular.
3. HOW MUCH INTEREST HAS ACCRUED PER $1,000?
If the Debenture acceleration is rescinded, the amount of
interest that would be due prior to April 15, 1996 per $1,000
of principal amount will include the three missed semi-annual
payments of $37.50 each. On April 15, 1996, the fourth
installment of $37.50 will be due. The three installments due
aggregate $112.50, and default interest has accrued on that
interest and will have added another $8.44 as of April 15,
1996, and the total increases by approximately another $.02 or
$.03 per day. This is in addition to the $37.50 normally
coming due on April 15, 1996. $112.50 plus $8.44 plus $37.50
adds up to $158.44. This is the amount that a non-tendering
Debentureholder will receive if the acceleration is rescinded.
If the acceleration is not rescinded, the entire principal
amount is due immediately. The amount of interest that is due
at any time includes a proportional part of the $37.50 that
normally comes due on April 15, 1996, which increases by
approximately another $.21 per day. If the acceleration is
rescinded, all interest accrued from October 15, 1995 on the
principal amount will be included in the semi-annual payment
due on Monday, April 15, 1996.
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4. ARE THE SHARES OF COMMON STOCK ISSUED IN THE EXCHANGE
FREELY-TRADEABLE?
That depends on the Debentures you hold now; if they are
freely tradeable, an exchange should give you freely tradeable
shares. Comprehensive Care is relying on an exception to the
requirement to register the shares that requires that no
commissions be paid by Comprehensive Care to persons for
soliciting holders to exchange. No commissions will be paid
by Comprehensive Care. Employees may solicit exchanges but
will receive no additional compensation for that service.
5. WHAT HAPPENS TO DEBENTURES THAT ARE NOT TENDERED?
If the Exchange does not take place because the acceleration
is not rescinded, you will remain the holder of a Debenture
that is due and payable in full. However, if the Debenture
acceleration is rescinded, Debentures that are not tendered
will be paid the accrued and unpaid interest in full, other
than any amounts due solely by reason of acceleration. A
condition to the Exchange Offer is that the principal and
interest of Debentures will no longer be accelerated. After
rescission of the acceleration, Debentures will accrue
interest at the rate of 7 1/2% per year. Interest payments
will follow the original semi-annual April 15 - October 15
schedule until maturity in 2015, at which time the principal
amount will become due. Debentures exchanged will count as
Debentures redeemed pursuant to sinking fund provisions, and
so Comprehensive Care will not be obligated to redeem any
Debentures before maturity under the sinking fund provisions
of the Debentures. To that extent, the holder will become
more reliant on sale of Debentures to provide liquidity.
However, there will be fewer Debentures outstanding, and if
the Debentures are traded more thinly, there could be a risk
of reduced liquidity of Debentures.
6. HOW CAN I TENDER DEBENTURES?
A. If you wish to tender Debentures that you hold in
your own name, you must complete a Letter of
Transmittal form and submit it to the Exchange Agent.
To obtain the form, give me your name and address. I
will also confirm that you hold your Debentures
directly.
B. If you wish to tender Debentures that you hold
through a broker, nominee or fiduciary, you should
request and instruct that such person tender
Debentures for you.
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<PAGE> 3
7. WHAT ARE THE IMPORTANT ADDRESSES AND PHONE NUMBERS?
TRUSTEE:
First Trust California, National Association,
successor to Bank of America National Trust and
Savings Association
333 South Beaudry Avenue, 25th Floor
Los Angeles, California 90017
Tel: 213-345-4652
EXCHANGE AGENT:
Continental Stock Transfer & Trust Company
2 Broadway, 19th Floor
New York, New York 10004
Tel: 212-509-4000 Ext. 227
8. CAN I CHANGE MY MIND AND WITHDRAW DEBENTURES THAT I TENDERED
OR DIRECTED TO BE TENDERED?
Yes, but only if the notice of withdrawal is received prior to
the expiration date and only if you or your broker gives
written notice.
A. If you are the holder of record (i.e., you are on the
Trustee's official list of registered holders holding
Debentures), you yourself should send a signed and
dated notice of withdrawal to First Trust California,
National Association, 333 South Beaudry, Los Angeles,
California 90017, or to the Exchange Agent,
Continental Stock Transfer & Trust Company, 2
Broadway, New York, New York 10003. The notice must
state the name of the record owner, the principal
amount of Debentures to withdraw from the Offer and
that you are withdrawing Debentures tendered by you
in the exact name of the registered holder.
B. If you are holding Debentures through a broker, then
you are not considered to be a registered holder
yourself and, instead of giving notice yourself, you
should instruct the broker who tendered the
Debentures on your behalf to withdraw them by giving
written notice. You may be interested to know that
you can also re-tender Debentures if you like.
9. HOW CAN I RE-TENDER ANY DEBENTURES I PREVIOUSLY TENDERED AND
THEN WITHDREW?
To re-tender, you must submit another Letter of Transmittal
form. You could obtain another copy of the form or use any
reasonable facsimile of the Letter of Transmittal form.
10. HOW WILL I KNOW THAT MY DEBENTURES HAVE BEEN EXCHANGED?
The Offer Period will expire April 1, 1996. The Company may
keep the Offer open for a longer period of time by making a
public announcement. The Exchange will be consummated at
approximately the same time as the interest payment. The
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Exchange Agent will deliver the Exchange Consideration by U.S.
Mail or recognized delivery service as promptly as practicable
thereafter.
11. WHAT SHOULD I KNOW ABOUT TAXES?
To the extent you want legal advice, you must consult your own
legal counsel. The circumstances of a particular holder
sometimes affect the tax consequences. The tax effects for
typical persons are described in the Offering Circular.
4
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EXHIBIT (c)(ii)
COMPREHENSIVE CARE CORPORATION
4350 Van Karman
Suite 280
Newport Beach, CA 92660
Tel: 714-798-0460
Fax: 714-752-0585
March 3, 1995
HAND DELIVERED
Mr. Jay H. Lustig
Individually and as representative of
the Participating Securityholders (defined below)
Re: Proposed Rescission of Acceleration of Securities
Dear Mr. Lustig:
Based on the various discussions that we have had among or between
Comprehensive Care Corporation (the "Company"), the Trustee of its 7-1/2%
Convertible Subordinated Debentures due April 15, 2010 (the "Securities"), and
you as a representative of certain holders, and individually as a holder, of
certain Securities which we understand aggregate $4.653 million in original
principal amount (the "Participating Securityholders"), certain of whom were
Securityholders who gave notice of acceleration in February, 1995, and our
understanding of the type of transaction that is feasible for rescission of
acceleration and of interest to us, we outline the basis for this proposed
rescission relative to the proposed agreement to pay cash and issue shares to
Participating Securityholders and permitted assigns (collectively, the
"Consideration"). In this regard, we propose the principal terms of an
agreement (the "Agreement") to be as set out in this letter as follows:
1. Voting of Securities; "Lock-Up." Upon the dismissal of the
involuntary Chapter 7 petition filed against the Company, the Participating
Securityholders will give notices of rescission of acceleration reasonably
acceptable and at times as determined by the Trustee and the Company, will vote
in favor of each related proposal to be made to all of the Securityholders of
the Company, including without limitation a proposed supplemental indenture if
necessary, and will tender their securities for exchange for cash and shares as
described herein (the "Offer"). Furthermore the Participating Securityholders
will neither submit any notice or demand of acceleration, nor pursue any
remedies available under the Indenture nor join or participate in any Securities
Exchange Act of 1934 Rule 13(d) group or participate against the Board or
management in any proxy or other solicitation of any of the Securities or Common
Stock of the Company, and the Participating Securityholders agree that they will
give the Company any information they receive about anyone trying to form such a
group. Jay H. Lustig represents that he is authorized to execute and deliver
this Agreement on behalf of and to bind at least $2.5 million in original
principal amount of the Securities and further represents that he shall cause
the holders of at least $2.5 million of the outstanding principal amount of
Securities to rescind acceleration and waive the interest payment defaults,
substantially as provided in the attached Notice of Rescission of Acceleration
on or before March 31, 1995, and use his best efforts to cause holders of an
additional amount of Securities necessary to aggregately comprise more than 50%
of the outstanding principal amount of Securities to rescind such acceleration
and waive such interest payment defaults substantially as provided in such
notice.
2. Rights Non-Assignable. Until the earlier of the expiration of this
Agreement or the completion of the exchange of Securities contemplated
1
<PAGE> 2
herein, nothing contained in this Agreement will permit any Participating
Securityholder to at any time sell or dispose of in any manner the rights or
obligations of the said Participating Securityholder under this Agreement.
However, the Participating Securityholders may transfer their Securities
provided that the recipient, and each subsequent transferee, is irrevocably
bound hereby and so agrees in writing. Until the earlier of the expiration of
this Agreement or the completion of the exchange of Securities contemplated
herein, each Participating Securityholder shall notify the Company of any
private or public sale, and agrees to placement of an appropriate legend on the
Securities bound hereby.
3. Standstill. Until the earlier of the expiration of this
Agreement or the completion of the exchange of Securities contemplated herein,
if any Participating Securityholders, directly or indirectly, acquires
beneficial or record ownership of any Securities or other equity securities of
the Company or interest, such Securities will become and remain subject to this
Agreement.
4. The Offer. The Offer shall incorporate the following features
and specifications upon first being given to Securityholders, subject to
requirements of law:
/ / The Offer shall be made pursuant to Section 3(a)(9) of the
Securities Act of 1933 for up to 100% of the Securities. Shares
issuable pursuant to the Offer are intended to be freely
tradeable under the Securities Act of 1933.
/ / The Board of the Company shall use best efforts to complete
this transaction within 120 days, but shall have a reasonable
period of additional time, ending not later than 180 days after
the date hereof, in order to consummate legal requisites to the
Offer.
/ / The Company shall not, during the term of this Agreement,
pledge or otherwise
dispose of, or issue or commit to issue any additional, capital stock, or any
interest therein, or securities convertible into shares of such stock, of
CareUnit, Inc., a Delaware corporation ("Care Unit"), 100% of whose outstanding
shares (the "Shares") are held beneficially and of record by the Company free of
any other liens or claims. At 150 days after the date of this Agreement,
provided that the Participating Securityholders have in each material respect
performed (with opportunity to cure if a cure is possible) their obligations
required to be performed hereunder on or prior to such date, and if the Offer
has not then been consummated, the Company shall pledge (with the Trustee, or an
alternate acceptable to the Company, to act as pledgeholder on terms of a
written agreement containing standard terms reasonably acceptable to the
Participating Securityholders) all of the Shares as collateral for its
obligation to purchase the Securities pursuant to the Offer or otherwise. Such
pledge may only be foreclosed upon following 180 days after the date hereof at
the request of any Securityholder or the Trustee if the Offer is not consummated
on or prior to such date, provided that the Participating Securityholders have
in each material respect performed (with opportunity to cure if a cure is
possible) their obligations required to be performed hereunder on or prior to
such date. From day 150 through day 180 after the date hereof, or the earlier
consummation of the Offer, the tendered (or all Participating Securityholders'
Securities if the Offer has not been commenced without fault of the
Participating Securityholders) Securities of the Participating Securityholders
shall accrue and be paid upon purchase thereof additional interest at the rate
of 7-1/2% per annum on the original principal amount). Upon consummation of the
Offer, the said pledges shall be released. The Company represents that Care Unit
is the Subsidiary generating operating profits under the CareUnit name, and all
of its other subsidiaries with similar names are substantially inactive.
/ / The Participating Securityholders shall support the proposed
Offer and shall not speak or write publicly against the
proposed Offer. In addition, the Participating Securityholders
will not solicit or support any solicitation of proxies or
consents inconsistent with the purposes or spirit of this
Agreement.
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/ / The Offer shall allow the Securityholders to participate
pro-rata to the amounts tendered, up to 100% of the amount of
Securities outstanding, provided that all tendering
Securityholders also give notice of rescission of acceleration
and consent to any proposals reasonably made by the Company that
are incidental to the Offer.
/ / The tendering Securityholders shall receive, net to the
Securityholder, for each $1,000.00 of original principal amount
tendered, $500.00 in cash, plus $120.00 in shares of Common
Stock of the Company (based on a fair value of the Common Stock
equalling the average round-lot traded price reported on the
NYSE Composite Tape for all trading days during the 75 calendar
days commencing with and as of March 6, 1995). Additionally, for
each $1,000.00 of original principal amount, tendering
Securityholders will receive $80 in cash (approximately 1 year's
interest) representing the amount agreed upon to represent all
interest owning and accrued to the payment date, in return for
which they will waive all other obligations including all
default interest accrued from April 15, 1994 which was due as of
October 17, 1994, and all interest (or interest on interest)
accruing from and after October 15, 1994 through the date on
which the Offer is consummated.
/ / The Offer and the Company's completion of an exchange as
described herein are subject to all relevant conditions provided
in the Indenture relating to the Securities dated as of April
25, 1985 between the Company and the Trustee, as defined
therein, and receipt of all reasonably necessary governmental,
and third-party, consents, filings, or approvals necessary to
consummate the Offer.
/ / The Company may condition the Offer upon a minimum of
tendered Securities of $2.5 million from the Participating
Securityholders.
5. Costs. The Company shall pay legal fees of Weil, Gotshal & Manges
incurred by the accelerating Participating Securityholders from January 1, 1995
to date in the amount of between $35,000 and $40,000. Otherwise, the parties
each will bear their own respective costs.
6. Release. Upon dismissal of the involuntary Chapter 7 case,
referred to further below, the Company shall release each Participating
Securityholder and its officers, employees, agents, representatives, attorneys,
and advisors from any and all claims and causes of action arising or occurring
prior to the date hereof, including without limitation any and all claims or
causes of action arising out of or related to the delivery of the notice of
acceleration of the Securities or the filing of an involuntary Chapter 7
petition against the Company, provided that the effectiveness of the release
shall be conditioned upon and subject only to the execution and delivery by
each respectively released Participating Securityholder of the notice of
rescission or acceleration described in paragraph 1 hereof and each
Participating Securityholder using its best efforts to achieve consummation of
the transactions contemplated herein.
7. News Release. Upon the execution by you and return to us of this
Agreement, the Company shall prepare the news release. Each news release
concerning this Agreement or the Offer shall be in form and substance and at
times reasonably determined by the Company after reasonable notice to you and
reasonable prior consultation with you, with your reasonable cooperation, as
representative of the Participating Securityholders.
8. Bankruptcy Petition. The Participating Securityholders that are
petitioning creditors in the involuntary Chapter 7 bankruptcy petition filed
against the Company shall support and cause their attorneys to execute and
indicate consent to the Order Dismissing Involuntary Petition (the "Order")
attached hereto. The Participating Securityholders that are petitioning
creditors shall support entry of the Order and dismissal of the involuntary
petition at the hearing scheduled for March 7, 1995. If such order is not
entered by the court prior to or on March 8, 1995, the Company thereafter shall
have the option to terminate this Agreement upon written notice and, prior to
such termination, to require additional reasonable cooperation of the
Participating Securityholders for the purpose contemplated in this paragraph.
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9. Survival. If the Offer is consummated, the terms and
provisions of this Agreement shall survive the consummation of the Offer.
If the foregoing meets with your approval, so signify by signing and
returning the enclosed duplicate copy of this letter, whereupon this letter
shall constitute the final agreement between the parties in accordance with
the terms and provisions set forth above. This offer will expire if not
accepted on March 3, 1995. We shall look forward to receiving your prompt
acceptance.
Very truly yours,
COMPREHENSIVE CARE CORPORATION
By: /s/ Chriss W. Street
----------------------------------
Chriss W. Street, Chairman of the
Board, Chief Executive Officer and
President
AGREED AND CONFIRMED:
By: /s/ Jay H. Lustig Dated: March 3, 1995
----------------------
Jay H. Lustig
APPROVED AS TO FORM:
WEIL, GOTSHAL & MANGES
By: /s/ Martin A. Sosland
---------------------
Martin A. Sosland
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