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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 4 ON
SCHEDULE 13E-4/A-4
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, 1111 Bayside Drive, Suite 100, Corona del Mar, CA 92625
(714) 222-2273
(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
Transaction
valuation* Amount of Filing Fee
$3,179,333 $635.87
* 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"). The Issuer has an accumulated capital deficit,
thereby qualifying to base the Transaction Value on one-third of the $9,538,000
outstanding principal amount pursuant to Rule 0-11(a)(4).
/X/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
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<S> <C>
Amount Previously Paid: $635.87
Form or Registration Number: SC 13E-4 (Schedule 13E-4); File No. 005-19482
Filing Party: Comprehensive Care Corporation
Date Filed: September 14, 1995
</TABLE>
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ITEM 1. SECURITY AND ISSUER
(a) Comprehensive Care Corporation (the "Issuer") has its
principal executive office at 1111 Bayside Drive, Suite 100,
Corona del Mar, California 92625.
(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 approximately $208.98 of interest accrued and
unpaid as of November 15, 1996, and all other rights
thereunder, the Issuer proposes to exchange (the "Exchange
Offer")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 plus eight (8) additional shares of Common
Stock. 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 the date the Exchange
Offer terminates (the "Expiration Date"), will be accepted for
payment (the "Exchange"). The Expiration Date will be at least
five (5) business days after the Exchange Offer is or becomes
substantially funded. The Expiration Date, in turn, must occur
at least five business days prior to the record date for the
payment of overdue installments of interest. 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").
The Issuer is seeking to Exchange an aggregate of $5,532,000
in cash and 228,912 Common Shares for up to all of the
Debentures, if tendered and accepted in the Exchange. The
aggregate principal amount of outstanding Debentures is
$9,538,000 as of October 1, 1996.
(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 11
of the Offering Circular, "Price Range of Debentures" on page
11 thereof and "Other Factors to Consider - Price Range of the
Common Shares" on page 25 thereof are incorporated herein by
this reference.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
(a) The section in the Offering Circular entitled "Exchange Offer
Funding Requirements and Sources" is incorporated herein by
this reference. Exhibit 99.25 is incorporated herein by this
reference.
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
purportedly owned of record an aggregate of at least 25% of the
outstanding principal amount gave notice of acceleration on or about
February 10, 1995. The rescission of the acceleration will be solicited
by the Issuer. Exhibit 99.14, the Issuer's Debenture Consent
Solicitation Statement, is incorporated herein by this reference.
The purpose of the tender offer is to rescind the Debenture
acceleration by offering the Exchange Consideration, as defined in Item
1(b), in exchange for each $1,000, or integral multiple thereof, in
principal amount of up to 100% of the outstanding Debentures, provided
that each Debenture accepted in the Exchange be accompanied by the
Consent being solicited from Debentureholders. The information in the
Offering Circular under the heading, "The Debenture Acceleration," is
incorporated herein by this reference.
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The Issuer is a party to a letter agreement dated March 3, 1995 (the
"Letter Agreement") with Mr. Jay H. Lustig, an individual who was
representing certain holders of outstanding Debentures (therein
represented to the Issuer as holding at least 26% of the principal
amount and called the "Participating Securityholders"). The Letter
Agreement is filed as Exhibit 99.20 hereto and is incorporated herein
by this reference. The Letter Agreement provides for the Issuer
offering an exchange for all of the Debentures that were outstanding
and properly tendered by the Debentureholders in the Issuer's second
quarter of fiscal 1996, but such proposed exchange offer was not
effected. Although the Issuer has increased the Exchange consideration
to compensate for delays, the Issuer believes that the provision in the
Letter Agreement requiring the Issuer to complete the exchange in the
second quarter of fiscal year 1996 is not binding upon the Issuer
because of the failure on the part of Participating Securityholders,
believed to represent a 25% portion of the outstanding principal, to
use best efforts, as necessary, to perform their obligations to provide
effective notices of rescission of acceleration, signed by holders of a
majority of the outstanding principal amount of Debentures. The
Exchange Offer is being made by the Issuer as a means to obtain consent
of Debentureholders to rescission of acceleration and includes certain
of the concepts of the Letter Agreement as a framework for the proposed
Exchange. Mr. Jay H. Lustig delivered, and the Issuer received, a
letter dated March 21, 1996 concerning the Letter Agreement. Mr. Lustig
indicated in such letter his opinion in support of the Exchange
Consideration's increase, per $1,000 in principal amount of Debentures,
by $55 in cash or 7 1/3 shares for delays from September 3, 1995 to May
1, 1996. See Exhibit 99.21, "Letter dated March 21, 1996 from Jay H.
Lustig," incorporated herein by this reference.
The Issuer conditions its obligation to accept the tendered Debentures
in the Exchange upon conditions including rescission of the Debenture
acceleration, which requires action by the holders of at least a
majority in principal amount of Debentures outstanding, and which also
requires that the Issuer have paid the interest due on non-tendered
Debentures in order to cure the Events of Default respecting the
aggregate principal amount of Debentures that are not exchanged. The
Issuer estimates that, as of November 15, 1996, approximately $3.1
million in cash would be necessary to make full payment of Exchange
Consideration for a maximum of approximately 30% of the outstanding
Debentures, or any lesser amount that are exchanged, plus interest and
default interest due on the unexchanged 70% of Debentures. Payment of
the Exchange Consideration plus interest in that event would require
approximately $3.1 million in cash. The Issuer intends to pay any and
all costs and expenses incurred to consummate the Exchange from
additional funds from one of the sources referred to above or general
corporate funds.
The tender of Debentures inherently includes the waiver of a portion of
the face value and the accrued interest respecting the tendered
Debentures. The Exchange Consideration is the only portion of the
principal or interest the Debentureholder does not waive in the
Exchange. For an Exchange of $1,000 of principal amount of Debentures,
the Debentureholder would receive $500 in cash and sixteen (16) Common
Shares. To the extent that the $1,000 face value differs from the $500
in cash and 16 shares of Common Stock designated as principal, the
tender of Debentures is a waiver of principal. It is estimated that the
interest (and default interest thereon) accrued through November 15,
1996 would be approximately $209 per $1,000 of principal amount of
Debentures. To the extent this accrual exceeds or differs from the $80
in cash plus the eight (8) shares of Common Stock
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designated as interest, the tender of Debentures is a waiver of
interest accrued and unpaid or accruing to the date of the Exchange.
The Debentures received by the Exchange Agent from the tendering
Debentureholders will be acquired by the Issuer upon consummation of
the Exchange, and once so acquired may neither be voted by the Issuer
nor counted in calculating the amount of consents required. Debentures
which are exchanged for Exchange Consideration will thereafter be
delivered on behalf of the Issuer to the Debenture Registrar for
cancellation as soon as practicable after the completion of the
Exchange. It is planned that the Trustee shall also act as the Exchange
Agent and the paying agent for the interest payable respecting non-
tendered Debentures, in addition to its acting in the capacity of
Registrar.
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 successor record holders. As of May 9, 1996 there were
approximately 42 record holders and the Issuer has no reason to believe
that Debentures were held of record in one "street" name by more than
one beneficial holder in order to avoid the provisions of the Exchange
Act by making the Debentures deregistrable. Record holders, including
clearing agencies and brokers, hold Debentures for one or more
beneficial holders in the ordinary course of their business. Based on
the Issuer's written communication to brokers believed to hold
Debentures for beneficial holders, brokers hold 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 continue to have been deregistrable, 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
continue to 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. In
approximately the past five years, the Issuer has not purchased or
otherwise acquired any Debentures. In accordance with Rules and
Regulations promulgated under the Exchange Act, the Issuer cannot
acquire Debentures otherwise than pursuant to the Exchange Offer before
or during the period the Exchange Offer is open and until at least ten
business days after the termination of the Exchange Offer, provided
that the Company complies with Rule 13e-4(f)(6). Thereafter, the Issuer
may, from time to time, make purchases of Debentures in the open market
or in privately negotiated transactions, either at or with reference to
market prices, or at negotiated prices; in the event that these
purchases take place, either without all of the protections of Section
13(e) of the Exchange Act after an Exchange Act deregistration of
Debentures, or if Rule 13(e) promulgated under the Exchange Act is
otherwise inapplicable pursuant to its existing or future exemptions
and exceptions. The Indenture provides for the Issuer's Board of
Directors to be able either to temporarily reduce the Debenture
conversion price (in order to provide a financial incentive for
Debentureholders to convert Debentures into Common Stock), or to redeem
Debentures for cash equal to their face amount.
The Issuer has elected to subtract from its sinking fund obligations
the approximately $36.5 million principal amount of Debentures
converted by
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Debentureholders in March 1991 and previously cancelled, effectively
removing the sinking fund redemption obligation. The information under
the heading "The Proposals - Proposal No. 4" is incorporated herein by
this reference.
The information in the Offering Circular under the headings "Purpose of
the Exchange Offer," "Exchange Offer Funding Requirements and Sources,"
"Use of Proceeds," "Dividend Policy," "Pro Forma Consolidated Balance
Sheets and Statements of Operations," and "Changes in Accountants" is
incorporated herein by this reference.
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
To the best knowledge of the Issuer, 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 third full paragraph of Item 3 is incorporated herein by this
reference.
The Company has received a firm commitment, expiring in August 1997,
from Lindner Funds to purchase at least $5,000,000 of face amount of
15% fully secured promissory notes that will not be due or callable for
at least 15 months from the date of issue, as set forth in Exhibit
99.25, which is incorporated herein by this reference.
Item 6 of this Schedule 13E-4 is incorporated herein by this reference.
The information presented in the Offering Circular on the "Offering
Circular Cover Page," and under the headings "The Debenture
Acceleration," "Risk Factors," including "Risk Factors-Ability of
Company to Continue as a Going Concern; Explanatory Paragraph in
Auditors' Report,""Other Factors to Consider," "The Exchange Offer,"
including "The Exchange Offer - Terms of the Exchange Offer," "The
Company," "Interests of Certain Persons," "Principal Stockholders,"
"Use of Proceeds," "Dividend Policy," "Pro Forma Balance Sheets and
Statements of Operations Information," "Changes in Accountants,"
"Description of Debentures," "Description of Capital Stock," "Exchange
Offer Funding Requirements and Sources," "Purpose of the Exchange
Offer," and "Conditions of the Exchange Offer," is 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 in the Exchange Offer. Regular
employees, officers and directors of the Issuer and its subsidiaries,
who will not receive additional compensation therefor, may solicit
Exchanges from holders of the Debentures.
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The Trustee, which has been appointed as Exchange Agent for the
Exchange Offer (the "Exchange Agent") and which also serves as the
Debenture Registrar, and Continental Stock Transfer & Trust Company,
serving as the Common Stock Registrar and Transfer Agent, are engaged
to perform administrative services. The Issuer will provide, or will
cause to be provided, copies of the Schedule 13E-4, the Offering
Circular and other documents upon request. The Trustee is available for
appropriate written requests addressed to the Trustee as indicated in
the Offering Circular.
ITEM 7. FINANCIAL INFORMATION
"Selected Financial Data," "Management's Discussion and Analysis," the
Consolidated Financial Statements, and the notes thereto, and the
auditors' reports thereon, included in the Issuer's Form 10-K for the
fiscal year ended May 31, 1996, as filed on August 29, 1996 with the
Securities and Exchange Commission (the "Commission"), found on pages
16 through 64 thereof, are incorporated herein by this reference.
The information in the section of the Offering Circular entitled "Ratio
of Earnings to Fixed Charges," which is located at page 10 thereof, is
incorporated herein by this reference.
The information in the section of the Offering Circular entitled "Pro
Forma Consolidated Balance Sheets and Statements of Operations," which
is located at pages 50 through 54 thereof, is incorporated herein by
this reference.
ITEM 8. ADDITIONAL INFORMATION
The seventh and eighth paragraphs of Item 5 are incorporated herein by
this reference.
The information in the Offering Circular in the seventh, eighth and
tenth paragraphs under "The Exchange Offer" below the heading "Terms of
the Exchange Offer" is incorporated herein by this reference.
The information in the Offering Circular included in the following
"Risk Factors" is incorporated herein by this reference: "Continued
Listing on NYSE," and "Uncertainty of Future Funding."
The Company's Debentures are convertible at a conversion price of
approximately $250 per share of Common Stock. On October 1, 1996, the
Common Stock closing price of $12 7/8 was equal to only 5.15% of the
conversion price.
The Company believes that the Exchange Offer for Debentures, which
involves the Company's acquisition of a technically convertible
security (Debentures) and issuance of shares, is not the kind of
transaction that would constitute a manipulative or deceptive device
or contrivance comprehended within the purpose of Rule 10b-6 under the
1934 Act.
The information presented in the Offering Circular under the headings
"Description of Debentures," "Risk Factors," and "The Exchange Offer --
Conditions of the Exchange Offer," "Purpose of the Exchange Offer," and
"Exchange Offer Funding Requirements and Sources," is hereby
incorporated herein by this reference.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
The Exhibit Index attached to this Schedule is incorporated herein by
this reference.
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
/S/ KERRI RUPPERT
------------------------------------------
Kerri Ruppert
Senior Vice President,
Secretary/Treasurer and Chief
Financial Officer
Date: October 4, 1996
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EXHIBIT INDEX
Exhibit No.
23.3 Consent of Ernst & Young LLP
23.4 Consent of Arthur Andersen LLP
99.8 (a)(i) Offering Circular and Cover Letter*
99.9 (ii) Letter of Transmittal*
99.10 (iii) Guidelines for Certification of Taxpayer Identification
Number on Form W-9*
99.11 (iv) First, Second, Third, Fourth and Fifth Notices of Default
from Trustee to Debentureholders (incorporated by reference
to the Consent Solicitation Statement)*
99.12 (v) Form of Notice to Debentureholders of Interest Payment Date
(incorporated by reference to the Consent Solicitation
Statement)
99.13 (vi) Cover Letter for Debenture Consent Solicitation Statement
(incorporated by reference to the Consent Solicitation
Statement)*
99.14 (vii) Consent Solicitation Statement on Schedule 14A (the "Consent
Solicitation Statement"), for solicitation of
Debentureholders, as filed by the Issuer with the Commission
on September 15, 1995, and as amended through Amendment No.
4 thereof filed with the Commission on or about October 4,
1996, pursuant to the Exchange Act (incorporated herein by
reference)*
99.15 (viii) Script for use by persons answering questions (incorporated
by reference to the Consent Solicitation Statement)
99.16 (ix) Letter to Brokers*
99.17 (x) Letter to Clients of Brokers and Others*
99.18 (xi) Notice of Conversion Price Adjustment (incorporated by
reference to the Consent Solicitation Statement)*
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 (incorporated herein by reference)
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 (incorporated by reference to the Consent
Solicitation Statement)*
99.21 (iii) Letter dated March 21, 1996 from Mr. Jay H. Lustig to the
Issuer concerning the present terms of the Exchange
(incorporated by reference to the Consent Solicitation
Statement)*
99.22 (iv) Letter dated March 1, 1996 from the Trustee to the Issuer
concerning sinking fund provisions of the Indenture
(incorporated by reference to the Consent Solicitation
Statement)*
99.23 (v) Letters dated March 27, 1996 from the Issuer to the Trustee
concerning the Trustee's letter dated March 1, 1996
(incorporated by reference to the Consent Solicitation
Statement)*
99.24 (vi) No-Action Letters regarding the Section 3(a)(9) exemption
under the Securities Act of 1933 for an exchange of
securities (incorporated by reference to the Consent
Solicitation Statement)
99.25 (vii) Mutual Fund's Firm Commitment dated August 8, 1996.
(incorporated by reference to the Consent Solicitation
Statement)
- -------------
* To be distributed to Debentureholders along with this Schedule 13E-4.
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EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Schedule 14A and Schedule 13E-4
of our report dated August 27, 1996 with respect to the consolidated financial
statements of Comprehensive Care Corporation and subsidiaries included in
Comprehensive Care Corporation's Annual Report (Form 10-K) for the year ended
May 31, 1996 filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Orange County, California
September 30, 1996
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EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Schedule 14A and Schedule 13E-4 of our report dated August
22, 1994, included in Comprehensive Care Corporation's Annual Report (Form
10-K) for the year ended May 31, 1996. It should be noted that we have not
audited any financial statements of the Company subsequent to May 31, 1994, or
performed any audit procedures subsequent to the date of our report.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
October 4, 1996
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EXHIBIT 99.8
[COMPREHENSIVE CARE CORPORATION LETTERHEAD]
October 8, 1996
To: Holders of our 7 1/2% Convertible Subordinated
Debentures Due April 15, 2010 ("Debentures")
Comprehensive Care Corporation (the "Company") is offering you, the
Exchange, in which you may surrender each $1,000 in principal amount by you of
your outstanding Debentures, which incidentally includes a surrender of all
interest, comprised of approximately $208.98 of interest accrued by you and
interest on default interest accrued as of November 15, 1996 per $1,000 of
principal amount, in Exchange for an EXCHANGE CONSIDERATION offered to you by
the Company in the Exchange Offer which is comprised of (a) a cash principal
payment of $500, plus (b) a non-cash principal payment of sixteen (16) shares of
Common Stock, par value $.01 per share, of the Company ("Common Stock"), and (c)
a cash interest payment of $80, plus (d) a non-cash interest payment of eight
(8) shares of Common Stock.
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
Debenture acceleration. The Company's non-payment of the October 15, 1994
interest installment and each subsequent semi-annual installment, and continuing
payment defaults result in each Debentureholder being owned by the Company
$1,000 principal amount per $1,000 of face value plus approximately $209.00 of
interest, including interest on default interest as of November 15, 1996. For
the Exchange Offer to be completed, holders of a majority in principal amount of
Debentures must consent for the purpose of giving notice to the Trustee that the
acceleration is rescinded and also the Company must cure the Events of Default.
Interest payments due on non-tendered Debentures are not waived, and all default
interest will be paid to non-tendering Debentureholders. Subject to certain
conditions, the Company expects to deliver Exchange Consideration for all
Debentures properly tendered for Exchange. The Company also intends to resume
semi-annual interest payments on non-tendered Debentures and does not have any
present intention to redeem or otherwise retire any such non-tendered Debentures
except in the Exchange.
The Exchange Offer expires on November 15, 1996, and the Company
anticipates payment of the Exchange Consideration on or before November 30,
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, Secretary/Treasurer and Chief Financial
Officer, 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 Clients of Brokers for
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your use in tendering your Debenture certificates to the Exchange Agent, First
Trust of California, National Association. Also, the Offering Circular is
accompanied by a Debenture Consent Solicitation Statement. Each of these
documents is accompanied by additional documents describing the proposed
transaction. 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 and reinstate the maturity date of April
15, 2010. If the acceleration is not rescinded, the Company anticipates that it
would not be permitted by the Trustee or holders of its Senior Debt to deliver
Exchange Consideration to the tendering Debentureholders.
THE BOARD OF DIRECTORS SOLICITS YOU TO TENDER YOUR DEBENTURES TO
RECEIVE THE EXCHANGE CONSIDERATION DESCRIBED ABOVE.
Cordially,
Kerri Ruppert
Senior Vice President, Secretary/
Treasurer and Chief Financial Officer
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OFFERING CIRCULAR
OFFER BY THE ISSUER TO EXCHANGE CASH AND COMMON STOCK FOR THE SURRENDER OF ALL
PRINCIPAL AND INTEREST DUE ON ANY OR ALL OUTSTANDING 7 1/2% CONVERTIBLE
SUBORDINATED DEBENTURES DUE APRIL 15, 2010 ("DEBENTURES")
COMPREHENSIVE CARE CORPORATION
1111 BAYSIDE DRIVE, SUITE 100
CORONA DEL MAR, CA 92625
THE COMPANY OFFERS AN AGGREGATE EXCHANGE CONSIDERATION OF
$500 IN CASH AND 16 SHARES OF ITS COMMON STOCK AS PRINCIPAL, AND
$80 IN CASH AND 8 SHARES OF ITS COMMON STOCK AS INTEREST,
FOR THE SURRENDER OF EACH $1,000 OF OUTSTANDING PRINCIPAL
AMOUNT OF DEBENTURES
AND WAIVER AND FORGIVENESS
OF ALL CLAIMS THEREUNDER, INCLUDING INTEREST THEREON
ACCRUED OR ACCRUING
FROM APRIL 15, 1994 TO THE DATE OF THE EXCHANGE, WHICH WOULD
BE $208.98 OF INTEREST ACCRUED, INCLUDING ALL INTEREST
ON DEFAULT INTEREST AS OF NOVEMBER 15, 1996
THE EXCHANGE OFFER WILL EXPIRE AT 2:00 P.M. ST. PAUL, MINNESOTA TIME, ON
NOVEMBER 15, 1996 UNLESS THE EXCHANGE OFFER IS EXTENDED.
DEBENTUREHOLDERS WILL BE REQUIRED TO CONSENT PURSUANT TO THE DEBENTUREHOLDER
CONSENT SOLICITATION STATEMENT IN ORDER TO TENDER A DEBENTURE, AND REVOCATION OF
CONSENT WILL DISQUALIFY THE TENDER OF A DEBENTURE, IN EACH CASE UNLESS THE
COMPANY DETERMINES TO WAIVE THIS CONDITION IN ITS OWN DISCRETION BY ACCEPTING
SUCH A DEBENTURE FOR EXCHANGE. THE CONSENT BY A CERTAIN AMOUNT OF DEBENTURES IS
A CONDITION TO THE EXCHANGE. THE EXCHANGE OFFER WILL BE EXTENDED TO AT LEAST THE
FIFTH (5TH) BUSINESS DAY AFTER THE COMPANY OBTAINS CONSENT FOR APPROVAL OF ALL
PROPOSALS.
THE DATE OF THIS OFFERING CIRCULAR IS OCTOBER 8, 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"), designated aggregately as a payment of
principal, plus $80 in cash plus eight (8) Common Shares, designated aggregately
as a payment of interest (the combined total of principal and interest herein
called "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 Debentureholder of all interest accrued and
unpaid on such principal amount as of the date of the Exchange except for such
designated interest payment included in the Exchange Consideration. 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 $9,538,000 of principal due under the Debentures, (2) to waive,
and to notify the Trustee of a waiver of, any defaults or Events of Default
(other than nonpayment of any interest due), (3) to instruct the Trustee not to
pursue any remedy available at law or in equity upon anything
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<PAGE> 4
less than future directions given by a majority in outstanding principal amount
of Debentures during the Consent Solicitation Period, and (4) to the waiver of
formal notice from the Company to the Trustee with respect to the cancellation
under the Indenture of the Company's sinking fund payment obligations.
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 $202.73 PER $1,000 OF PRINCIPAL, PLUS ADDITIONAL INTEREST ACCRUING ON
OVERDUE INTEREST FROM AND AFTER NOVEMBER 15, 1996 TO THE EXCHANGE DATE, BUT THE
ACCELERATION WILL HAVE BEEN RESCINDED BY VIRTUE OF SUCH CONSENT AND INTEREST
PAYMENT.
The Company shall not accept any Debentures submitted for tender at any
time after 2:00 p.m., St. Paul, Minnesota time on November 15, 1996 (the
"Expiration Date") or the business day five business days prior to the Interest
Record Date, as defined below. The Company will pay (concurrently with the
interest payment on all of the Debentures not exchanged in the Exchange Offer)
the Exchange Consideration to the Trustee for the benefit of tendering
Debentureholders, and holders of Senior Debt, and upon the receipt of the
Exchange Consideration by the Trustee, and if at such time such payments to
Debentureholders are permitted by law and only if the Trustee also shall not
have theretofore received a notice of any claim that there has occurred a
prohibited default under, or non-payment of, any Senior Debt, then and in such
case, the payments shall be deemed effectively made as soon as the funds are
held by the Trustee. Thereupon, simultaneously, all Events of Default will be
cured by full payment of interest to every Debentureholder rejecting the
Exchange Offer and waived by every Debentureholder who accepts the Exchange
Offer by tendering and surrendering Debentures in exchange for Exchange
Consideration. The interest due (other than the interest arising only on account
of acceleration) will be paid to all Debentureholders (except as to only the
aforesaid tendered and exchanged Debentures). The scheduled termination date of
the Exchange Offer, subject to extension by the Company, is on or before
November 30, 1996 (the "Exchange Date"). The Company also will, at least fifteen
(15) days in advance, notify all Debentureholders of the record date (the
"Interest Record Date") and the date for payment of such interest ("Interest
Payment Date"). The Expiration Date, Interest Record Date and the Interest
Payment Date are subject to extension in the reasonable discretion of the
Company.
The Common Shares have been accepted for listing upon notice of
issuance on the New York Stock Exchange ("NYSE"). On September 20, 1996, the
reported closing price of the Common Shares on the NYSE was $13 1/4 per share.
The Exchange Consideration includes twenty-four (24) 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." All Debentures are convertible
into Common Shares at the Conversion Price in effect from time to time, whcih
currently is approximately $250 per share of Common Stock. (See the "Notice of
Conversion Price Adjustment".)
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 2:00 p.m., St. Paul, Minnesota 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, the Company may elect not to
proceed with or to 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
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<PAGE> 5
Company to accept less than all of the Debentures tendered and to 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 October 8, 1996. The Debentures are traded in
the over-the-counter market, although trading in these securities is limited and
sporadic. On September 5, 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 $740 and $790, 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 $9,538,000 of Debentures,
plus, through November 15, 1996, interest from April 15, 1994 of approximately
$1,788,375, default interest accrued thereon of approximately $145,306, and
$59,614 due only on account of acceleration, will be due and payable pursuant to
acceleration of the Debentures by holders of 25% or more of the outstanding
principal amount. Interest is unpaid on the Debentures from April 15, 1994. As
of November 15, 1996, the amount of interest and default interest accrued would
be $208.98 per $1,000 of principal amount.
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. According to the
Indenture between the Company 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 any such default is commenced or if the Senior Debt holder
gives notice to the Company of such a default. To the Company's best knowledge,
there is no such default under any Senior Debt. However, no assurance can be
made that no such default exists or may occur in the future.
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. The Trustee will assist administratively in mailing and
receiving tenders, consents and written requests for information, and will
receive and authenticate all tendered Debentures and all Consents for a fee. The
Trustee shall not make recommendations with respect thereto.
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.
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
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<PAGE> 6
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
The Trustee of the Debentures is First Trust of California, National
Association, successor to Bank of America National Trust and Savings
Association. The Trustee has also agreed to provide certain services as Exchange
Agent in connection with the Exchange Offer. Holders of Debentures who require
assistance may contact the Company, attention Kerri Ruppert, Senior Vice
President, Secretary/Treasurer and Chief Financial Officer, at 1111 Bayside
Drive, Suite 100, Corona del Mar, California 92625, (800) 678-2273; or by mail
to the Exchange Agent and Trustee, First Trust of California, National
Association, successor to Bank of America National Trust and Savings
Association, 180 East Fifth Street, Suite 200, St. Paul, Minnesota 55101.
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 (the "Schedule 13E-4"), 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 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:
The Company's Annual Report on Form 10-K for the fiscal year ended May
31, 1996 as filed with the Securities and Exchange Commission on August
29, 1996, and as amended on Form 10-K/A-1 as filed on September 27,
1996.
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
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<PAGE> 7
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, Secretary/Treasurer and Chief Financial Officer of the Company, at
(800) 678-2273.
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<PAGE> 8
TABLE OF CONTENTS
Page
PURPOSE OF THE EXCHANGE OFFER...............................................1
OFFERING SUMMARY............................................................1
SUMMARY COMPARISON OF TERMS OF DEBENTURES AND EXCHANGE CONSIDERATION........4
THE COMPANY.................................................................6
FINANCIAL INFORMATION.......................................................6
EXCHANGE OFFER FUNDING REQUIREMENTS AND SOURCES.............................7
RATIO OF EARNINGS TO FIXED CHARGES..........................................10
RECENT TRANSACTIONS IN SECURITIES OF THE COMPANY............................10
PRICE RANGE OF DEBENTURES...................................................11
PRICE OF SECURITIES PRIOR TO ANNOUNCEMENT...................................11
INTERESTS OF CERTAIN PERSONS................................................11
THE EXCHANGE OFFER..........................................................12
OTHER FACTORS TO CONSIDER...................................................25
PRICE RANGE OF THE COMMON SHARES............................................25
SHARES ELIGIBLE FOR FUTURE SALE.............................................26
POTENTIAL FEDERAL INCOME TAX CONSEQUENCES...................................27
DESCRIPTION OF CAPITAL STOCK................................................30
DESCRIPTION OF DEBENTURES...................................................31
RISK FACTORS................................................................37
PRINCIPAL STOCKHOLDERS......................................................48
USE OF PROCEEDS.............................................................49
DIVIDEND POLICY.............................................................49
PRO FORMA CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS..........50
CHANGES IN ACCOUNTANTS......................................................55
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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 Debentures 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 by the subordination provisions
of the Debentures) or Debentureholders or other creditors may be able to make
claims senior to those of Debentureholders or on a parity therewith. Payments by
the Company in exchange for the Debentures are expected to improve the Company's
financial position. The issuance of Common Shares and payment by the Company in
cash at a discount to the face amount are expected to 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 potential options, but has no
present intention to consummate the Exchange or to pay any interest accrued on
the Debentures unless the acceleration is rescinded. Substantial disclosure
concerning the Exchange Offer's underlying contracts, arrangements,
understandings or relationships is also contained in Item 5, entitled
"Contracts, Arrangements, Understandings or Relationships with respect to the
Issuer's Securities," of the Schedule 13E-4, which is incorporated herein by
this reference.
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.
<TABLE>
<S> <C>
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 for exchange and accepted by the Company in
the Exchange Offer. See "The Exchange Offer--Terms of
the Exchange Offer."
EXCHANGE CONSIDERATION............The Company is offering to exchange, for each $1,000
principal amount of outstanding Debentures, a
principal payment of $500 in cash plus sixteen (16)
shares of Common Stock and additionally an interest
payment of $80 in cash plus eight (8) shares of Common
Stock. 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 aggregate accrued
amount exceeds the aggregate designated interest
payment.
</TABLE>
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<PAGE> 10
<TABLE>
<S> <C>
EFFECTS OF TENDERING
DEBENTURES........................Tendering Debentureholders will receive Exchange
Consideration for Debentures and will waive a portion
of the accrued interest. Debentureholders should
receive a separate proxy statement relating to Notice
of Rescission of Acceleration and an accompanying
consent form to be submitted by them 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 all
non-tendering Debentureholders or any tendering
Debentureholders whose tendered Debentures are not
accepted for exchange. See "Risk Factors." Also see
"Acceptance of Debentures for Exchange; Delivery of
Exchange Consideration."
EXPIRATION DATE...................2:00 p.m., St. Paul, Minnesota time, on November 15,
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
November 25, 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 2:00 p.m., St. Paul, Minnesota 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
(requiring consent of holders of a majority of the
Debentures) and waiver of all existing Events of
Default (requiring two-thirds of the Debentures); the
prior payment of any matured principal and interest or
other charges under any Senior Debt and the absence of
legal actions or default notices by Senior Debt
holders with a right to accelerate the maturity of
Senior Debt, as well as the satisfaction of 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 or a reasonable facsimile, in accordance
with the instructions contained therein, and forward
or hand deliver such Letter of Transmittal to the
Exchange Agent at the address set forth 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 record holder
wishes to tender Debentures in the Exchange Offer.
Holders whose certificates that represent their
Debentures are not immediately available or who cannot
deliver their certificates or any other required
documents to the Exchange Agent prior to 2:00 p.m.,
St. Paul, Minnesota 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."
</TABLE>
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<PAGE> 11
<TABLE>
<S> <C>
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.......................The Debentures are subordinated to all 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 pursuant to the
Indenture. Moreover, it is a condition to the
Exchange Offer that payment be made in full on Senior
Debt that has matured and that no Senior Debt holders
commence proceedings or give notices as stated above.
The Company anticipates being able to make full
payment of approximately $500,000 of matured Senior
Debt and is currently not aware of any such default
under Senior Debt. As of August 31, 1996, the Company
believes that it has approximately $2.0 million of
Senior Debt outstanding and an additional $8.5 million
in the aggregate of other liabilities with priority
over the Debentures.
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. Substantial disclosure is provided in
Schedule 13E-4, Item 8, entitled "Additional
Information" concerning the Exchange Offer's
underlying exemption from the Securities Act of 1933,
NYSE listing approval for shares of Common Stock
issuable in Exchange for Debentures, the
Debentureholder Consent Solicitation Statement, and
intentions of the Company if any Proposal is not
approved.
INTEREST PAYABLE TO THE
NON-TENDERING DEBENTUREHOLDER.....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. The
default interest will not be payable until after
Debentures are tendered at the Expiration Date. The
tendering Debentureholder will be offered the Exchange
Consideration in lieu of all rights under the
Debentures, including among other things, the interest
payable to the non-tendering Debentureholder.
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....................First Trust of California, N.A., 180 East Fifth
Street, Suite 200, St. Paul, Minnesota 55101. See "The
Exchange Offer --Exchange Agent."
FURTHER INFORMATION...............For further information, please contact the Company,
attention Kerri Ruppert, Senior Vice President,
Secretary/Treasurer and Chief Financial Officer, at (800)
678-2273 or First Trust of California, N.A., the Exchange
Agent, at the above address.
</TABLE>
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<PAGE> 12
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
of principal and interest accrued on the exchanged, the Debentureholder will receive
principal to the date of payment is payable, $500 in cash plus 16 shares of Common Stock.
along with interest on unpaid interest to As of October 1, 1996, the closing price
the extent lawful is due and payable in of the Common Stock on the NYSE was $12 7/8.
cash. See "Interest" below. If the The rights of holders of Common Stock are
acceleration is rescinded, the principal junior to the rights of Debentureholders and
amount will be due in full April 15, 2010, all other creditors. See "Ranking" below.
subject to earlier redemption in the
Company's discretion. No sinking fund
payments will be due.
INTEREST Interest accrues at the rate of 7 1/2% per The Exchange Consideration includes, as
annum calculated on a 30-day month and interest, for each $1,000 in principal
360-day year basis. Interest has not been amount exchanged, $80 in cash plus 8 shares
paid since April 15, 1994 on the Debentures. of Common Stock. No additional payment of
Four semi-annual interest installments are Exchange Consideration will be due on
in arrears (October 1994, April 1995, account of interest accruing or accrued or
October 1995 and April 1996), and a any other claim under such Debentures. As of
semi-annual interest installment is due October 1, 1996, the reported closing price
October 15, 1996. Debentures earn interest of the Common Stock on the NYSE Composite
on default interest at 7 1/2% per annum, to Tape was $12 7/8.
the extent permitted by law. While the
Debentures are accelerated, interest accrues
on the entire principal amount.
Approximately $209 of interest in the
aggregate will have accrued on each $1,000
face value to November 15, 1996. If the
acceleration is to be rescinded, the
interest required to be paid would be
approximately $203 per $1,000 face value as
of November 15, 1996, which excludes the
portion of accrued interest due only on
account of the acceleration, comprising a
portion of the semi-annual installment of
interest at the rate of 7 1/2% per year due
April 15, 1997 on the principal amount of
$9,538,000 from October 15, 1996 to April
15, 1996.
MATURITY While the Debentures are accelerated, all Upon the Exchange being completed, the
$9,538,000 of principal and, through tendering Debentureholders will receive
November 15, 1996, an aggregate of Exchange Consideration, and the Debentures
$1,993,294 of interest will be due and tendered and exchanged will be cancelled.
payable immediately. If the acceleration is
rescinded, the principal amount will mature
on April 15, 2010, subject only to optional
redemption by the Company at 100% of face
amount, and also subject to acceleration in
the event of notice by the Trustee or at
least 25% in principal amount of Debentures
following the existence and continuation of
any Event of Default. Because $36,460,000 in
principal amount of the Debentures that were
originally issued had been retired,
comprised of the Debentures converted by
Debentureholders in March 1991, the Company
elected to subtract from the Company's
sinking fund obligations the amount of
retired Debentures. The effect is to cancel
the sinking fund redemption obligation that
otherwise would apply pursuant to the terms
of the Debentures.
CONVERSION Each $1,000 in principal amount is See "Principal" above.
convertible into 4 whole Common shares (and
the Debentureholder will not be entitled to
convert a Debenture in a principal amount
less than $1,000) at the current conversion
price of $248.57 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. See "Risk
Factors--Conversion Price Far Above Share
Prices." See the "Notice of Conversion Price
Adjustment" attached as Exhibit 99.18
hereto.
</TABLE>
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<TABLE>
<S> <C> <C>
RANKING Debentures are unsecured general obligations Payments received in the Exchange Offer by
of the Company subordinate to all existing Debentureholders may be subject to claims of
and future Senior Debt of the Company (as Senior Debt holders or other creditors, and,
defined), are generally on a parity with if competing creditors prevail in asserting
unsecured general credit of the Company, their claims, the Exchange Consideration may
excluding subsidiaries, and may indirectly be forfeitable. See "Priorities of
have claims on the stock owned by the Securities and Other Considerations Relating
Company of its subsidiaries, but only after to Any Future Bankruptcy of the Company."
all of the subsidiaries' creditors have been Shares of Common Stock received in the
paid in full. At August 31, 1996, Senior Exchange constitute "equity" securities of
Debt of the Company totaled approximately the Company, which by their nature are
$2,042,000, other debt of the Company on a subordinate to all indebtedness of the
parity with Debentures totaled approximately Company and any senior "equity."
$1,497,000, excluding subsidiaries, and the
Company's subsidiaries were obligated to pay
approximately $7,006,000 of debt and
contingently obligated to redeem
approximately $1,040,000 of senior equity.
FORFEITURE Payments received generally by Payments received in the Exchange Offer by
Debentureholders may be subject to claims of Debentureholders may be subject to claims of
Senior Debt holders or other creditors, and, Senior Debt holders, and, if competing
if competing creditors prevail in asserting creditors prevail in asserting their claims,
their claims, the payments may be the Exchange Consideration may be
forfeitable. See "Priorities of Securities forfeitable. See "Priorities of Securities
and Other Considerations Relating to Any and Other Considerations Relating to Any
Future Bankruptcy of the Company." Future Bankruptcy of the Company."
REDEMPTION Debentures are redeemable at any time in The Exchange Consideration includes Common
whole or in part at the option of the Stock, which has no redemption rights.
Company at the principal amount, together
with accrued interest.
</TABLE>
5
<PAGE> 14
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 and operates one freestanding hospital
facility, and owns three other freestanding hospital facilities that are closed
and held for sale.
The Company generated losses from operations in fiscal 1996 and relied
for its cash requirements on funds generated by a tax refund in the amount of
$9.4 million (less certain amounts described under "Risk Factors--Taxes" below)
for the fiscal 1995 tax year, and a sale of a $1.0 million Secured Conditional
Exchangeable Note, which was converted into 132,560 shares of the Company's
Common Stock on May 31, 1996. The Company's primary use of available cash
resources is to expand its behavioral medicine managed care and contract
management businesses and fund operations while it seeks to restore
profitability to certain of its freestanding facilities.
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 securities sold or assets disposed of as currently
anticipated, and its available cash.
The Company's outstanding Debentures (originally issued pursuant to a
public offering), aggregate $9,538,000 in outstanding principal amount. In the
second quarter of fiscal 1997, the Company is expecting to complete the Exchange
Offer with respect to the Debentures. Completion of the Exchange Offer is
subject to a high degree of risk. See "Risk Factors."
If effected, the rescission could improve the Company's financial
prospects. The rescission of acceleration could have the effect of impairing the
rights of Debentureholders who do not Exchange relative to any other creditors
of the Company, now or in the future.
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," "Risk Factors," "Consolidated Financial Statements," and "Notes to
Consolidated Financial Statements" included in the Company's Form 10-K, for the
fiscal year ended May 31, 1996, on pages 37 through 64 thereof, as filed August
29, 1996 with the Commission, is incorporated herein by this reference.
6
<PAGE> 15
EXCHANGE OFFER FUNDING REQUIREMENTS AND SOURCES
The proposed Exchange Offer will require, if accomplished at all, a
maximum of $5,532,040 to pay the cash portion of the Exchange Consideration and
the issuance of up to 228,912 shares of the Company's Common Stock to fund the
stock portion of the Exchange Consideration. Debentures that are accepted in the
Exchange will become the property of the Company, along with all rights or
claims thereunder, and each Debentureholder who surrendered the Debenture will
immediately become the holder of a right to receive the Exchange Consideration,
in exchange for cancellation of such principal and interest. Therefore, the
Exchange of all outstanding Debentures would require no additional funding for
interest payments. In the Exchange, the Company offers $500 in cash and sixteen
(16) shares of Common Stock (designated principal portion of the Exchange
Consideration)for each $1,000 of principal amount of Debentures and $80 in cash
plus eight (8) shares of Common Stock per $1,000 principal amount of Debentures
(designated interest portion of the Exchange Consideration) in exchange for all
accrued interest and default interest on such $1,000 of principal amount
(estimated at $208.98 as of November 15, 1996).
Assuming that a majority in principal amount of Debentures consent to
rescission of acceleration, then the acceleration will be rescinded if and only
if the Company's financing is then adequate to complete the Exchange, including
both (i) payment of the Exchange Consideration in exchange for the Debentures
that are tendered, and (ii) payment of interest that is currently due and
unpaid, plus interest accrued on all overdue amounts, in respect to all
Debentures that are not tendered in order to effect a rescission of acceleration
of the Debentures. The Trustee has undertaken to accept the deposit of funds and
thereafter such funds will be held for the benefit of Senior Debt (to the extent
described elsewhere and dealt with specifically), Debentureholders, and
satisfaction of Indenture-related obligations to pay the Trustee's fees and
costs generally. The Company believes that no Senior Debt will mature and be
unpaid. However, such costs or expenses shall be provided for and added to the
amount of funding.
FUNDING
As of September 30, 1996
(in millions)
<TABLE>
<CAPTION>
Requirements Sources Funding (Deficit)
------------ ----------- -----------------
<S> <C> <C> <C>
Cash on hand $ (1.0)(1) $ 2.8 $ 1.8
Cash Consideration (5.6)(2) -- (5.6)
Costs (0.1) -- (0.1)
------------ ----------- -----------------
(6.7)(3) $ 2.8 $ (3.9)
Committed Funding -- $ 5.0 5.0
------------ ----------- -----------------
Total: $ (6.7) $ 7.8 $ 1.1
</TABLE>
(1) The Requirement for cash on hand includes cash to operate and pay all
indebtedness that is or becomes due before the Exchange is consummated
(excluding the Debentures).
(2) The Requirement for Cash Consideration is equal to the cash portion of
the Exchange Consideration for 100% of the outstanding Debentures
($580/$1,000 x $9,538,000 = $5,532,040).
(3) The costs of the Exchange are estimated at approximately $75,000.
The Company, in the case of non-tendered Debentures, will cure the
interest default by payment of interest due and interest on such default
interest, under all of the Debentures that are not tendered (other than interest
due only on account of acceleration). Such interest will include, as of November
15, 1996, five overdue semi-annual interest installments-- (1)interest for the 6
months commencing April 15, 1994 due October 15, 1994, (2) interest for the 6
months commencing October 15, 1994 due April 15, 1995, (3) interest for the 6
months commencing April 15, 1995 due October 15, 1995,
7
<PAGE> 16
(4) interest for the 6 months commencing October 15, 1995 due April 15, 1996,
and (5) interest for the 6 months commencing April 15, 1996 due October 15,
1996--plus interest on defaulted interest payments to the date that the interest
is paid (the "Interest Payment Date"). At November 15, 1996, the aggregate
interest due in order to rescind acceleration will be approximately $1,933,681,
which is approximately $202.73 per $1,000 of principal amount.
In addition, the Company'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 guaranteed) for
borrowed money, any debt that is evidenced by a note or similar instrument, or
evidenced by a lease which appears on the Company's consolidated balance sheets
and in which the Company is the lessee, or evidenced an obligation for deferred
purchase price for property. The Company estimates that the amount of such
Senior Debt that will mature prior to November 30, 1996 is $500,000 or less and
will be satisfied by the Company when due.
At May 31, 1996, the Company had approximately $4.4 million in
short-term cash equivalent investments. The Company estimates that approximately
$3.1 million would be sufficient to Exchange approximately 30% of the
outstanding principal amount of Debentures and pay overdue interest due on the
70% Debentures remaining (calculated as of November 15, 1996). To provide funds
for the Debenture Exchange and/or additional operating needs, in addition to
cash on hand, the Company also anticipates utilizing one or more of the
following potential sources of cash to provide funds for additional needs:
- The Company has received a firm commitment, expiring in August
1997, from Lindner Funds, a mutual fund, to purchase in a
private placement at least $5.0 million of 15% fully secured
Company notes due no earlier than 15 months from the date of
issuance, if offered by the Company.
- The Company filed its fiscal 1995 Federal tax return, and a
Form 1139 "Corporate Application for Tentative Refund" in the
amount of $9.4 million. The Company received the full refund
claim for fiscal 1995 in October 1995. In September 1996, the
Company filed its fiscal 1996 Federal tax return and also
filed a Form 1139. These 1996 filings indicate a refund to the
Company in the amount of $5.5 million. The Company has also
filed amended Federal tax returns for prior years to claim
refunds for an additional $7.7 million. These refund claims
have been made under Section 172(f) of the Internal Revenue
Code, an area of the tax law without guiding legal precedent,
and there may be substantial opposition by the IRS to the
Company's refund claims. The Company is currently under audit
by the IRS regarding its 1995 Federal tax return and the
amended returns for prior years. Accordingly, no assurances
can be made to the Company's entitlement to such refunds or
the timing of the receipt thereof (see Note 5-- "Income
Taxes").
- Included in property and equipment held for sale is one
hospital facility currently under contract to be sold. The
sale of this facility is scheduled to close during the second
quarter of fiscal 1997. The proceeds from the sale are
expected to be $1.3 million.
- Included in assets held for sale (non-current) are two
hospital facilities designated as property and equipment held
for sale with a total carrying value of $4.7 million. The
Company expects to sell these facilities during fiscal 1997.
In addition, the Company sold a non-operating facility during
the first quarter of fiscal 1997. As part of this transaction,
the Company took back a note on the property with provisions
that allow the buyer a discount if the note is paid in the
first six months. In the event the buyer exercises this
option, the proceeds to the Company
8
<PAGE> 17
would be $1.55 million. Proceeds from the sales of such assets
may not be available by the time the Debenture Exchange is
expected to occur. Accordingly, Management expects to use such
cash proceeds, if received during fiscal 1997, to fund
expansion of the Company's operations
- 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 $3.0 million
bond for the amount of the award and has filed an appeal of
the judgment. Management is unable to predict the outcome and
whether any process from this judgment will be received in
fiscal 1996 (see Note 6-- "Commitments and Contingencies").
All of these potential sources of additional cash in fiscal 1997 are
subject to variation due to business and economic influences outside the
Company's control. There can be no assurance that during fiscal 1997 the Company
will complete the transactions required to fund its working capital deficit.
Further, the Exchange will not occur until after the rescission of
acceleration has been funded fully. The Expiration Date of the Exchange Offer is
November 15, 1996, unless extended, and the Exchange Date is scheduled as
November 22, 1996. The rescission of Acceleration will be effective between
October 30, 1996 and November 29, 1996 when Consent is given on the Proposals
and the Company funds the default interest payment and funds the delivery of the
Exchange Consideration. If and only if the Acceleration is successfully
rescinded, the Company will be able to substantially fund an Exchange. The
Exchange Offer will be extended until at least five (5) business days after the
Consent is given and the Company substantially funds the maximum transactions.
See "Risk Factors."
On July 20, 1995, the Company filed its Federal income tax return for
fiscal 1995. On August 4, 1995, the Company filed Form 1139 "Corporate
Application for Tentative Refund" to carry back losses under Section 172(f)
requesting a refund to the Company in the amount of $9.4 million. On August 30,
1995, the Company also filed amended Federal tax returns for several prior years
to carry back losses under Section 172(f). The refunds claimed on the amended
returns are approximately $6.2 million for 1986; $0.4 million for 1985; $0.7
million for 1983 and $0.4 million for 1982. On September 20, 1996, the Company
filed its Federal income tax return for fiscal 1996, and subsequently filed Form
1139 "Corporate Application for Tentative Refund" to carry back losses described
in Section 172(f) requesting a refund to the Company in the amount of $5.5
million. The total refunds applied for are $22.6 million, comprised of $7.7
million for amended prior years' returns, $9.4 million for fiscal year 1995, and
$5.5 million for fiscal year 1996. Section 172(f) is an area of the tax law
without guiding legal precedent. There may be opposition by the Internal Revenue
Service ("IRS") as to the Company's ability to obtain benefits from refunds
claimed under this section. Therefore, no assurances can be made as to the
Company's entitlement to the claimed refunds.
In October 1995, the Company received a $9.4 million refund for fiscal
1995. Of this refund, $2.4 million was recognized as a tax benefit during the
second quarter of fiscal 1996. Receipt of the 1995 Federal tax refund does not
imply IRS approval. Due to the lack of legal precedent regarding Section 172(f),
the remaining amount, $7.0 million, is reflected on the Company's consolidated
balance sheets in unbenefited tax refunds received. In addition, during the
second quarter of fiscal 1996, the Company recorded a tax benefit of $0.2
million, which is related to prior years returns. The Company paid a contingency
fee of $1.9 million related to the 1995 refund. In the event the IRS Appeals
Office determines that the Company is not entitled to all or a portion of the
deductions under Section 172(f), this fee is reimbursable to the Company
proportionately. Of the $1.9 million, the Company expensed $0.5 million during
the second quarter of fiscal 1996, which is the amount of fees
9
<PAGE> 18
related to the tax benefit recognized by the Company. The remaining $1.4 million
is reflected in the Company's financial statements as other receivables.
The Company is currently under audit by the IRS related to its 1995
Federal income tax return and the amended returns for prior years.
The Company currently anticipates that approximately 30% of the
principal amount of Debentures outstanding will be tendered in the Exchange
Offer. If 30% of the Debentures were exchanged and 70% were not exchanged on
November 15, 1996, the Exchange Consideration would include approximately $1.7
million payable in cash, and the interest due on the unexchanged 70% of the
outstanding Debentures would be approximately $1.4 million.
In the event that financing is unavailable or is available only on
terms that are unacceptable in the Company's reasonable judgment, then the
Company may elect not to Exchange, if the Company reasonably determines that the
Exchange is not in the best interests of the Company, or in all likelihood would
amend the Exchange Offer, in order to announce that it will amend the Exchange
Offer in order to seek a maximum of less than 100% of the outstanding
Debentures. This will permit the Company to accept less than all of the
Debentures tendered and prorate acceptances of the offer among all tendering
holders in accordance with Rule 13e-4 under the Securities Exchange Act ("Rule
13e-4"), subject to leaving such amended offer open for at least then (10)
business days, and compliance with all applicable requirements to give notice or
otherwise in accordance with Rule 13e-4.
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 changes 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 no Preferred Stock
outstanding.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Adjusted Net Earnings $ 80 $ )9,222 $ (5,889) $ (9,614) $ (5,045)
Total Fixed Charges $ 4,392 $ 2,183 $ 1,662 $ 1,739 $ 1,675
Ratio of earnings to
fixed charges 0.02:1 (a) (a) (a) (a)
</TABLE>
- -----------------
(a) The difference between Adjusted Net Earnings and Total Fixed Charges
results in deficiencies of $11,405,000, $7,551,000, $11,353,000 and
$6,720,000 for the 1993, 1994, 1995 and 1996 fiscal years,
respectively, which in turn would have resulted in negative ratios of
earnings to fixed charges for such fiscal years.
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.
10
<PAGE> 19
PRICE RANGE OF DEBENTURES
The Debentures are traded over-the-counter. The Debentures are sparsely
or thinly traded. The Debentures are not included in any automated quotation
system. As of September 5, 1996, the reported bid price per $1,000 face amount
was $740 and the reported asked price was $790 according to one broker as based
only on information known to the broker. The following table sets forth the
range of reported high and low bid prices per $1,000 of face amount reported
from the trading records at Merrill Lynch & Co. for the Debentures for the
fiscal quarters indicated.
<TABLE>
<CAPTION>
1995 HIGH LOW
---- ---- ---
<S> <C> <C>
First Quarter ................................ $ 483.10 $ 481.30
Second Quarter ............................... 484.90 483.20
Third Quarter ................................ 486.70 479.30
Fourth Quarter ............................... 487.50 453.80
1996
----
First Quarter ................................ $ 483.40 $ 464.40
Second Quarter ............................... 491.50 457.70
Third Quarter ................................ 487.50 468.40
Fourth Quarter ............................... 496.40 462.10
</TABLE>
The quotations reflected in the high and low bid range were reported to the
Company by Merrill Lynch & Co. The Debenture are not quoted in any automated
quotation system. The high and low bid range information is necessarily based on
a small subset of the actual Debenture transactions. Such over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.
There is only sporadic trading of the Debentures. 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.
PRICE OF SECURITIES PRIOR TO ANNOUNCEMENT
As of March 2, 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
September 5, 1996, the bid and asked prices for the Debentures were $740 and
$790, respectively, as reported by a broker, and as of October 1, 1996 the low
and high sales prices for the Company's Common Stock were $12 1/4 and $12 7/8,
respectively, and the closing price was $12 7/8, as reported on the NYSE
Composite tape.
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.
11
<PAGE> 20
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, including a waiver of the interest accrued
thereon, the interest accrued on default interest, and all other rights, claims
(known or unknown) or interests therein as of the time of a consummation of the
Exchange. The Letter of Transmittal, and the Exchange by Debentureholders
itself, results in Debentureholders' Exchanging all the rights to receive
anything of value in Exchange for designated principal and interest as Exchange
Consideration.
Based on the Exchange of $1,000 in principal amount, a Debentureholder
that takes the Exchange Consideration and surrenders a Debenture in the Exchange
World experience a loss for accounting purposes of $(629) partially offset by
the value of 24 shares of Common Stock. The total value, principal and interest,
that is represented by the Exchange Consideration depends on how the Common
Shares are valued.
EXCHANGE CONSIDERATION
DISCOUNT TO DEBENTURE FACE VALUE
(AMOUNTS ARE PER $1,000 OF FACE VALUE)
<TABLE>
<CAPTION>
Exchange Debentures Net Face
Consideration Cancelled Value
------------- --------------------------------------
Shares Shares
of Common of Common
Cash Stock Face Value Cash Stock
------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Principal $ 500 +16 $(1,000) $ (500) +16
Interest 80 +8 (209)(1) (129) +8
------- ------- ------- ------- -------
Total ... $ 580 +24 $(1,209) $ (629) +24
</TABLE>
(1) Estimated to November 15, 1996.
See also "Potential Federal Income Tax Consequences - Effects on
Debentureholders."
The portion of the principal amount to be waived ($1,000 of principal
amount of Debentures in Exchange for Exchange Consideration principal of $500 in
cash and 16 shares) would be approximately $299, for example based on the
average high and low sales prices of Common Stock on October 1, 1996, or would
be approximately $380, for example, based on an assumed $7.50 value per share.
As of November 15, 1996 the amount of interest waived ($208.98 of interest
Exchanged for Exchange Consideration interest of $80 in cash and 8 shares) would
be $28.48, for example, based on the average high and low sales price of Common
Stock on October 1, 1996, or would be $68.98, for example, based on an assumed
$7.50 value per share. The average of the high and low sales prices of the
Common Stock on October 1, 1996 were $12.563 as reported on the NYSE Composite
tape.
Approximately $1,993,294 of interest and interest on default interest
will have accrued to and including November 15, 1996 on the $9,538,000 principal
amount of Debentures. The total of principal and interest due on account of
acceleration per $1,000 principal amount of Debentures will be, as of November
15, 1996, approximately $208.98.
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
plus 8 shares of Common Stock per $1,000 of principal amount, interest accrued
per $1,000 of principal amount estimated at approximately $209 and every other
value receivable or claimable under the Debentures. Accrued and unpaid interest
will
12
<PAGE> 21
not be paid on Debentures exchanged, except for the above-described designated
interest payment of $80 in cash and 8 shares of Common Stock which is 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, or if the amount of
Debentures sought is changed, 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. Modified consideration may
provide for different alternatives for Debentureholders, provided that the
modified consideration would be paid in regard to all Debentures electing the
alternative.
There is $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 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 other
than the Company or its affiliates or any persons deemed to be underwriters.
Debentures that, after the public offering, are acquired by the Company, or any
persons deemed affiliates of the Company, or any persons deemed underwriters of
the Company, would nevertheless be considered to be 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
until held by a nonaffiliated for three years. 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 Company has applied for listing on the NYSE of the Common Shares
forming part of the Exchange Consideration. The NYSE has indicated approval of
listing 154,584 shares thereof upon official notice of issuance, which was the
maximum number of shares initially proposed to be issuable to tendering
Debentureholders. If required, the Company intends to obtain approval from the
NYSE for listing upon notice of issuance prior to consummation of the Exchange
of the balance of the maximum number of shares issuable.
The Company has filed a Proxy Statement/Debenture Consent Solicitation
Statement (the "Consent Solicitation Statement"), as amended, with the
Commission pursuant to the Exchange Act, which is incorporated by reference
herein. The purpose of the Consent Solicitation Statement 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 $9,538,000 of
principal due under the Debentures and all of the
effects thereof (Proposal 1);
B. To consent to waive, and to notify the Trustee of a
waiver of, the Event of Default (other than
nonpayment of any interest due) that exists, and the
interest payable on it (the "Default Interest Payment
Date") if the Default Interest Payment Date occurs
within 30 calendar days after the termination of the
consent solicitation period (Proposal 2);
13
<PAGE> 22
C. To consent to instruct the Trustee not to pursue any
remedy available at law or in equity upon anything
less than future directions given by a majority in
outstanding principal amount of Debentures during the
consent solicitation period and a period ending at
the close of business on the Default Interest Payment
Date if the Default Interest Payment Date occurs
within 30 calendar days after the termination of the
consent solicitation period (Proposal 3); and
D. To consent to the waiver under the Indenture of
formal notice from the Company to the Trustee with
respect to the cancellation of the Company's sinking
fund payment obligations that the Company was
entitled to reduce (Proposal 4) if the Default
Interest Payment Date occurs within 30 calendar days
after the termination of the Consent Solicitation
Statement period.
The Company does not presently contemplate completion of the Exchange
unless the Consent requested in Proposals No. 1, No. 2, No. 3 and No. 4 in the
Consent Solicitation is granted by the Debentureholders. The Issuer may be able
to proceed with the Exchange notwithstanding that approval is not received on
Proposal No. 2 or No. 3 because Proposal No. 2 waives unknown defaults that in
all likelihood do not exist anyway and Proposal No. 3 instructs the Trustee not
to interfere with the Company which in all likelihood will be unnecessary.
Although the Company does not concede that the Event of Default exists that
Proposal No. 4 would waive, the waiver of this Event of Default is believed by
the Company to be necessary unless the Trustee were to withdraw its notice
declaring this Event of Default. Provided that the rescission of acceleration
can be effected under the circumstances then existing, the Company may waive the
Consent on Proposals No. 2 or No. 3. In the event that the Trustee were to
withdraw the Event of Default relating to the sinking fund, the Company would
also be able to proceed with the Exchange notwithstanding lack of Consent on
Proposal No. 4. Under the Indenture, approval of each of Proposals No. 1 and No.
3 requires consent of at least a majority of the outstanding principal amount of
Debentures, and approval of each of Proposals No. 2 and No. 4 requires consent
of the holders of at least 66 2/3% of the outstanding principal amount of
Debentures.
All other notices given or authorized under the Indenture that the
Trustee and the management and Board of Directors of the Company 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.
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 the Company's ability
to consummate the Exchange Offer. If the acceleration cannot be rescinded with
the payment of Exchange Consideration to tendering Debentureholders and default
interest to non-tendering Debentureholders, the conditions of the Exchange will
be unsatisfied.
Debentures are tendered by properly executing and delivering a Letter
of Transmittal, with the tendered Debentures, and a Consent, to the Exchange
Agent. It is a condition of the Exchange that to tender Debentures requires
approval of the Proposals, as indicated by a Consent.
The Debentureholders, are required to return to the Trustee a Consent
for the purposes of submitting notice of rescission of the acceleration of the
Debentures; waiver of known or unknown defaults (other than nonpayment);
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instructing the Trustee not to pursue collection remedies against the Company
during the Exchange Offer in order to permit completion of the Exchange Offer;
and the reinstatement of April 15, 2010 as the maturity date as to the entire
principal amount of Debentures outstanding after the Exchange.
There is no single record date for purposes of giving a Consent in this
Consent Solicitation. The Indenture provides for each respective waiver and
consent to be made by the record holder of the particular Debenture on the date
of executing the same. See the Debentureholder Consent Solicitation Statement,
page 2, under "Record Date." For the Consent Solicitation, therefore, there is a
Record Date for every Consent, so to speak. The transferee of a record holder
after the commencement of the Consent Solicitation Period can Consent and tender
concurrently with registering the transfer by submitting a Consent, a Letter of
Transmittal and documents evidencing the transfer as customary.
Most transfers are not recorded by the Debenture Registrar. Instead,
transfers are made by book entry in the records of a depository holding for
banks or broker-dealers. The beneficial holders may (and are encouraged to)
instruct the fiduciary or nominee holder to Consent and/or tender Debentures on
behalf of such beneficial holder. This is generally preferable to having
Debentures transferred from street name into the name of the beneficial owner,
although this is acceptable also. Because of delays possibly resulting from
registration of a transfer to the beneficial owner, it is recommended that a
beneficial holder instruct the broker or nominee holder to Consent and to tender
Debentures if the Debentures are already held in street name on behalf of the
beneficial holder. This recommendation would seem to be particularly appropriate
if the Debentures were transferred to the beneficial holder during the Consent
Solicitation Period itself.
Inherently, the tender of Debentures pursuant to the Letter of
Transmittal serves as a waiver of the accrued interest in excess of the 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 Company, in the
Company's discretion, none of the Debentures will be accepted for exchange if
the Debentureholders do not appropriately consent to the Proposals set forth in
the Consent Solicitation Statement.
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 possibly applicable transfer taxes, in connection with the Exchange
Offer. See "Payment of Expenses" below.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer will expire at 2:00 p.m., St. Paul, Minnesota time,
on November 15, 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., St. Paul, Minnesota time, on the next business day
after the previously scheduled Expiration Date.
The Exchange Offer will be extended to at least the fifth (5th)
business day after the Company obtains Consent for approval of all Proposals.
Once Consent is given on all of the Proposals, the Company will commit its funds
to the interest and Exchange consideration payments; and when these amounts are
deposited with the Trustee, acting as a Paying Agent and Exchange Agent, the
Acceleration would be rescinded and the Company would be obligated to accept all
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<PAGE> 24
properly tendered Debentures. The Company will issue a notice, if not previously
given, that the Exchange Offer's Expiration Date will follow in five (5)
business days, or as soon thereafter as possible, and will give notice, if not
previously given, that the Default Interest Payment Record Date will follow in
fifteen (15) calendar days, or as soon thereafter as possible.
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 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 to reduce the amount of
Debentures to be sought, or otherwise, provided that the Exchange Offer remains
open ten (10) business days thereafter. 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. See the termination rights set forth below under the
caption "Conditions of the Exchange Offer."
The Company may be permitted at least 10 business days after the
expiration of the Exchange Offer to purchase or make offers for any Debentures
that remain outstanding subsequent to the Expiration Date. The Company will
comply with Rule 13e-4(f)(6) promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended (the "1934
Act"), which requires among other things that such purchases after the Exchange
Offer only be made at least 10 business days after the expiration of the
Exchange Offer. The Company has no present intention to make an offer for any
Debentures after the Exchange Offer is completed or terminated.
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.
While the acceleration and any Event of Default continue, the Trustee
also can pursue any remedy at law or in equity to recover the full outstanding
principal amount of the Debentures plus unpaid interest and costs, either in the
judgment of the Trustee or at the instruction of Debentureholders holding 25
percent or more of the outstanding principal amount. 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.
The rescission of the acceleration of the Debentures (which requires
both Consent by at least two-thirds of the Debentures and funding sufficient to
consummate the Exchange and the default interest payment under any Debentures
not Exchanged) will be a condition of the Company's offer, as described herein,
to
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<PAGE> 25
Exchange any cash or property (other than capital stock) to Debentureholders
because the Indenture prohibits any payment that does not result in the cure or
waiver of all existing Events of Default.
In order to restore the Debentures to the status before having suffered
Events of Default and acceleration, a majority in principal amount of the
Debentureholders must give notice to rescind the acceleration, and the Company
must cure payment defaults as to any Debentures not tendered in the Exchange
Offer, and the past due interest, along with interest on all overdue
installments of principal and interest, must be paid on non-tendered Debentures.
Debentures tendered in the Exchange Offer will receive Exchange Consideration,
and all payments otherwise due will be waived as to all tendered Debentures
(except as to the designated principal and interest payments included in the
Exchange Consideration) effective upon completion of the Exchange. Upon the cure
or waiver of all Events of Default under the Debentures, assuming a majority in
principal amount has given (and not revoked) notice of rescission of
acceleration, the original terms of the Debentures will be reinstated with all
of the then outstanding principal due April 15, 2010 and interest thereafter
payable semi-annually at the rate of 7 1/2% per annum. The next regular interest
payment, due October 15, 1996, would include interest on the outstanding
principal accruing from April 15, 1996. The Company's future-year sinking fund
obligations will have been effectively extinguished by subtracting a portion of
the principal amount of Debentures converted into Common Stock in 1991.
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.
The amount of the Exchange Consideration was first determined according
to the Letter Agreement, an agreement that arose from negotiations between the
Company 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 Sohail Masoud, purportedly one of the
Debentureholders who had filed an involuntary petition to commence a bankruptcy
liquidation of the Company. The bankruptcy petition was filed on February 24,
1995. The Participating Securityholders supported the dismissal of the
bankruptcy, as provided in the Letter Agreement, by executing a written consent
with advice from their legal counsel on the form and substance of the consent.
The petition was dismissed on March 6, 1995.
The Letter Agreement provided that the Company would offer the
Debentureholders an exchange. The exchange was to have been that, 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 in cash, the
Company was to offer cash of $500 as principal and cash of $80 as interest and a
number of shares of Common Stock calculated based on an average (including every
round-lot trade) of the reported prices on the New York Stock Exchange ("NYSE")
Composite Tape during a defined trading period (March 6, 1995 through May 19,
1995), such that their total defined worth was $120. The Letter Agreement
provided for a manner of calculation to have been based on the average price of
each of the many round-lot trades (100 shares or more) during the entire trading
period. However, the calculation of the number of shares to be paid as a portion
of the amount of the initially proposed exchange consideration was not based on
that kind of average. Instead, a $7.50 defined worth per share was calculated
over the trading period based on the daily closing prices, weighted for daily
composite volume, as reported on the NYSE Composite Tape. The average of $7.47
was rounded up to $7.50, which is the closest even divisor of $120. This method
of assigning worth is believed to approximate the Letter Agreement method as
well
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<PAGE> 26
as reasonably possible. The Company was unable to utilize the trading prices
during the defined trading period because such data was not available for the
full trading period.
In a letter dated March 21, 1996 to Mr. Marvin Feigenbaum, a director
of the Company, Mr. Lustig expressed his opinion that aggregate Exchange
Consideration of $580 in cash and 24 shares of Common Stock would be acceptable
to Debentureholders, assuming the Exchange could be completed by May 1, 1996. To
the Company's knowledge, no subsequent correspondence or other communication has
been received from Mr. Lustig. The Company believes that it is not responsible
for the delay in completing an exchange as contemplated by the Letter Agreement.
However, the Company intends to offer eight (8) shares of Common Stock as
interest in addition to previously proposed Exchange Consideration of $500 in
cash and 16 shares of Common Stock as principal and $80 in cash as interest per
$1,000 in principal amount of the Debentures. The Company may modify or
terminate the Exchange Offer and pursue alternative transactions, subject to
rights of Debentureholders pursuant to the Indenture.
The March 3, 1995 Letter Agreement provided for an agreement in favor
of Mr. Lustig and all of the Debentureholders that the Company was not to pledge
the shares of Comprehensive Care Integration, Inc., formerly called CareUnit,
Inc., a Delaware corporation ("CCI") and a wholly-owned subsidiary of the
Company, after the date of the Letter Agreement in order for the Company to be
prepared to satisfy a future obligation to pledge those shares for the benefit
of Participating Securityholders, but only if the Participating Securityholders
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 Company's obligation to purchase the Debentures on and subject to the terms
and conditions of the Letter Agreement or otherwise. Management believes that
the Company's obligations to perform the pledge of CCI 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 and at least a majority in principal amount of the
outstanding Debentures. The Letter Agreement also provided that a disposition of
pledged CCI shares would have been permitted at any time after approximately
September 3, 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 Company has honored its covenant
not to encumber the CCI shares otherwise than as contemplated by the Letter
Agreement, and no pledge of the CCI shares is contemplated by the Company.
The Letter Agreement provided that the proposed exchange would be
consummated within 180 days; provided, however, the Company's promise to use
"best efforts" and its obligation to consummate the proposed exchange were
expressly conditioned upon the satisfaction of the Participating
Securityholders' obligations, including a best-efforts obligation to cause
notices of rescission of acceleration to be delivered by a majority in principal
amount of the Debentureholders. The efforts, if any, made by or on behalf of the
Participating Securityholders, or otherwise, resulted in the delivery of notices
of rescission that were insufficient in amount. Management attributes the
Company's delay beyond the prescribed 180 days to the failure to cause a
rescission of acceleration. Management believes that the continuance of the
acceleration of the Debentures has adversely affected the Company's ability to
perform its obligation, if any, to make an exchange offer and that the time
expended by the Company has been reasonable in the circumstances.
The Participating Securityholders undertook responsibility for
obtaining notices of rescission of acceleration pursuant to the Letter
Agreement, in the Company's opinion. Subsequent to executing the Letter
Agreement, the Company understands that the Trustee received copies or originals
of notices of rescission of acceleration purportedly executed by
Debentureholders of record representing 44.1% of the Debentures in outstanding
principal amount. All of the notices were addressed to the Trustee and the
Company and purported to notify the Trustee to rescind acceleration of the
Debentures. Such notices were signed (although executed originals were not
always properly delivered) by holders of
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record of less than half of the outstanding principal amount of Debentures, and
therefore were insufficient in quantity (a majority of the outstanding principal
amount being necessary to rescind acceleration); and unless it were sufficient,
the so-called Participating Securityholders would have, and would have had, a
"best efforts" obligation to provide such majority consent evidenced by one or
more written notices to the Trustee and the Company.
CONSENT TO MATTERS DESCRIBED IN CONSENT SOLICITATION STATEMENT
Each Debentureholder will be requested, pursuant to a Debenture Consent
Solicitation Statement, to consent to certain specified proposals related to
rescinding the Debenture acceleration in writing (by signing and dating a
consent card and forwarding it to the Trustee). The Company's management and
Board of Directors requests that each Debentureholder execute and return a
consent card. Pursuant to the Indenture, the consent card may itself be revoked
until all of the conditions to rescission of acceleration are met. The Company's
purpose in requesting Debentureholder consent is to complete the Exchange with
every tendering Debentureholder and cure the Event of Default by paying the
default interest to the non-tendering Debentureholders. In order to tender
Debentures, a Debentureholder must also consent as requested by the Board of
Directors and management pursuant to the Debenture Consent Solicitation
Statement.
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 or 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, as well as the consent card
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 2:00 p.m., St.
Paul, Minnesota 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.
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
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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 transmitted
to and received or confirmed by the Exchange Agent its addresses set forth below
prior to 2:00 p.m., St. Paul, Minnesota 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 2:00 p.m., St. Paul, Minnesota
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 2:00 p.m., St. Paul, Minnesota 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
executed Letter of Transmittal and any other documents
required by the Letter of
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<PAGE> 29
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 the effective cure or waiver of
all then-known Events of Default; or
(e) under then prevailing circumstances, financing is unavailable
or is available only on terms that are unacceptable in the
Company's reasonable judgment, 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) 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 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.
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<PAGE> 30
ACCEPTANCE OF DEBENTURES FOR EXCHANGE; DELIVERY OF EXCHANGE CONSIDERATION
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 on or prior to the Expiration Date. The
Company will deliver the Exchange Consideration in exchange for Debentures
promptly.
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 2:00 p.m., St. Paul, Minnesota time, on
the Expiration Date, and, unless previously accepted for exchange by the
Company, at any time after 2:00 p.m., St. Paul, Minnesota time, November 25,
1996, 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 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 2:00 p.m.,
St. Paul, Minnesota 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.
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EXCHANGE AGENT
First Trust of California, the Trustee, 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.
The Exchange Agent will in turn requisition Common Share certificates
from Continental Stock Transfer & Trust Company (the "Common Stock Registrar").
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, Secretary/Treasurer and Chief Financial Officer
of the Company, at (800) 678-2273.
LETTERS OF TRANSMITTAL AND DEBENTURES SHOULD NOT BE SENT TO THE
COMPANY.
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 Trustee, in its capacity as such and for services as the
Exchange Agent, and the Common Stock Registrar reasonable and customary fees for
its respective 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 to the Exchange Agent.
The cash expenses to be incurred in connection with the Exchange Offer,
including the fees and expenses of the Exchange Agent and the Common Stock
Registrar 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 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 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.
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<PAGE> 32
BOARD OF DIRECTORS' DISCRETION AND RESERVATION OF RIGHTS
The Board of Directors retains the authority to take or to authorize
discretionary incidental actions on behalf of the Company or the Consenting
Debentureholders as may be necessary and appropriate to carry out the purposes
and intentions of the Exchange and Consent received on each 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.
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<PAGE> 33
PRICE RANGE OF THE COMMON SHARES
The Common Shares are traded on the NYSE. See paragraph (d), below.
Listing on the NYSE, upon official notice of issuance, of the Common Shares
issuable in the Exchange has been approved as to 152,860 of the total 228,812
Common Shares that are the maximum issuable in the Exchange. Listing on the
NYSE, upon official notice of issuance, has been approved as to the
approximately 38,152 shares of Common Stock that are the maximum issuable upon
conversion of all outstanding Debentures. 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
1995
----
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
1996
----
First Quarter .................................. $ 9 1/2 $ 5 3/4
Second Quarter ................................. 10 7 3/4
Third Quarter .................................. 10 3/4 8
Fourth Quarter ................................. 10 7 1/4
1997
----
First Quarter .................................. $ 9 3/8 $ 6 7/8
</TABLE>
On October 1, 1996, the closing sales price per share of the Common Shares as
reported on the NYSE Composite Tape was $12 7/8.
(a) At August 26, 1996, there were 2,864,620 issued and
outstanding shares of Common Stock (calculated as described in
paragraph (c) below), and the Company had 1,794 stockholders
of record of Common Stock. These included 559 record holders
who have exchanged their old stock certificates pursuant to
the reverse stock split and 1,235 holders who have not yet
surrendered old certificates representing approximately 45,050
shares of Common Stock (and nominally representing 450,505
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
1996, 1995, 1994 or 1993, as a result of the Company's
operating losses and restrictions contained in the Company's
loan agreements. The Company does not expect to resume payment
of cash dividends in the foreseeable future. Dividend payments
are restricted also, while the acceleration of the Debentures
continues, by the Indenture.
(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
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<PAGE> 34
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 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 (at the rate of $.75 per one-tenth
of one share) and escheat laws applicable to unclaimed new
stock certificates. The number of shares outstanding as
reported herein includes an estimate of the whole shares of
the Company's Common Stock, par value $.01 per share,
represented by old stock certificates nominally representing
shares of the Company's Common Stock, par value $.10 per
share, issued before the effective time of 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. No assurances can be given by the Company, whether or
not the Exchange is effected, of the Company's ability to
improve its financial position sufficiently, or that if
improved, such financial position can be maintained, so as to
satisfy the listing criteria once again and in the future. The
NYSE may, in its discretion, delist the Common Stock. See
"Risk Factors - Continued Listing on NYSE."
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. The Company has issued or committed
approximately 266,000 shares related to business acquisitions, notes convertible
or exchangeable into approximately 566,000 shares, and options or other rights
to purchase approximately 1,409,000 shares and contemplates issuing substantial
additional amounts of equity in private transactions. Issuance of this equity,
and such shares becoming free of restrictions on resale pursuant to Rule 144 or
upon registration thereof pursuant to registration rights granted on almost all
of these shares, and additional sales of equity, could adversely affect the
trading price of the Common Stock. These shares will be restricted initially
under the Securities Act of 1933, as amended (the "Securities Act"), because the
shares were acquired from the Company, an underwriter or an "affiliate" of the
Company in a transaction not involving a public offering. Even restricted shares
may be sold privately; however, restricted shares that become unrestricted can
be resold publicly.
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<PAGE> 35
The foregoing 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 volume limitation and other
provisions of Rule 144 as then in effect) in the public market after certain
holding periods are met. Moreover, certain shares could immediately cease to be
Restricted Shares if registered by the Company, at its expense, under the
Securities Act upon demand by any or all of the holders pursuant to the
Company's previously granted registration rights.
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"), Non-Employee Directors' Stock Option 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 228,912 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 Directors' Plan,
or the 1995 Incentive Plan
Upon effectiveness of a Up to approximately 1,250,000 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, except as otherwise indicated, expresses the
Company's understanding as to all material federal income tax consequences of
the Exchange. This discussion contains information regarding federal income tax
consequences to a typical taxpayer and does not consider all aspects of United
States federal income tax that may be relevant to a Debentureholder receiving
Exchange Consideration in the Exchange Offer in light of his, her or its
particular circumstances. This discussion does not address the tax consequences
to taxpayers subject to special tax treatment under the federal income tax laws
(including dealers in securities, foreign persons, life insurance companies,
tax-exempt organizations, financial institutions and any taxpayers subject to
the alternative minimum tax). The following discussion does not describe any tax
27
<PAGE> 36
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.
The Company is not requesting a tax opinion or a tax ruling from the
Internal Revenue Service ("IRS") on any issue connected with the Exchange. No
assurance can be given that the IRS would agree with any of the tax consequences
described herein. EACH DEBENTUREHOLDER IS URGED TO SEEK HIS, HER OR ITS OWN 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 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.
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
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<PAGE> 37
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 NOLs
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
preownership 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 likely that
the Annual Limitation will materially reduce the amount of annual taxable income
that can be offset with NOLs. At June 28, 1996, the federal long-term tax-exempt
rate was 5.75%.
29
<PAGE> 38
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 May 31, 1996, there were 2,848,685 issued and outstanding shares of
Common Stock, and the Company had 1,794 holders of record of Common Stock. These
included 1,235 record holders of certificates nominally representing 450,505
shares of old Common Stock, par value $.10 per share, which represent one share
of Common Stock for every 10 old shares, plus a payment of cash in lieu of any
resultant fraction of a share of Common Stock at the rate of $.75 per old share.
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 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.
30
<PAGE> 39
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. 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.
These provisions 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.
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 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 the Trustee. At June 15, 1996, $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
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<PAGE> 40
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 $248.57 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 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, which, as adjusted, was $248.57 per share as of
May 31, 1996, 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
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<PAGE> 41
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
Subject to certain conditions, the Company was 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. Such sinking fund payments are calculated to
retire 70% of the Debentures prior to maturity. Provided, however, 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.
Approximately $36 million in principal amount of Debentures was converted by
Debentureholders in 1991, which the Company has elected to utilize to extinguish
the sinking fund obligations at April 15, 1996 and in all subsequent years.
(Paragraph 6) See the Debentureholder Consent Solicitation Statement for further
information.
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 May 31, 1996 was estimated at
$2.5 million.
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"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)
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
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<PAGE> 43
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 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
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<PAGE> 44
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)
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<PAGE> 45
RISK FACTORS
In addition to the other information set forth in this Offering
Circular, the following factors should be considered carefully:
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.
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Offering Circular contains certain forward-looking statements that
are based on current expectations and involve a number of risks and
uncertainties. Factors that may materially affect revenues, expenses or
operating results include, without limitation, the Company's success in (i)
implementing the global restructuring plans, (ii) the consummation of the
Debenture exchange offer and solicitation of consent to rescind acceleration
described herein, (iii) disposing of certain remaining facilities on acceptable
terms, (iv) expanding the behavioral medicine managed care and contract
management portions of the Company's business, (v) securing and retaining
certain refunds from the Internal Revenue Service ("IRS") and certain judgments
from adverse parties in legal proceedings, (vi) maintaining the listing of the
Company's Common Stock on the
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<PAGE> 46
New York Stock Exchange ("NYSE"), and (vii) securing Debentureholder approval
and consent to the Debenture transactions described herein.
The forward-looking statements included herein are based on current
assumptions that the Company will be able to proceed with the proposed Exchange
Offer or otherwise reach a settlement with the debentureholders, that
competitive conditions within the healthcare industry will not change materially
or adversely, that the Company will retain existing key management personnel,
that the Company's forecasts will accurately anticipate market demand for its
services, and that there will be no material adverse change in the Company's
operations or business. Assumptions relating to the foregoing involve judgments
that are difficult to predict accurately and are subject to many factors that
can materially affect results. Budgeting and other management decisions are
subjective in many respects and thus susceptible to interpretations and periodic
revisions based on actual experience and business developments, the impact of
which may cause the Company to alter its budgets, which may in turn affect the
Company's results. In light of the factors that can materially affect the
forward-looking information included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.
GENERAL
In response to continuing changes in the behavioral healthcare
industry, the Company has made significant changes in its operations, including
the divestiture of many freestanding facilities, so that the Company can focus
on its managed care and behavioral medicine contract management operations.
During fiscal 1996, managed care operations experienced a 134 percent growth in
covered lives through internal development and the expansion into new behavioral
health managed care markets and products.
As a result of the Company's continued net losses, the Company has had
difficulty generating sufficient cash flows from operations to meet its
obligations and sustain its operations. During fiscal 1996, the Company has
utilized the proceeds form the sale of assets, tax refunds, litigation
settlements, and the private placement of debt and equity securities to fund its
cash requirements.
During the first quarter of fiscal 1996, the Company settled a claim
with an insurance carrier for $425,000. In addition, the Company sold its
freestanding facility in Kirkland, Washington in October 1995 and closed its
freestanding facility in Costa Mesa, California in November 1995. The closure of
these facilities was consistent with the Company's plan for restructuring and
eliminated the on-going burden of funding the operating losses of these
facilities.
During the third quarter of fiscal 1996, the Company settled two
pending lawsuits. One settlement resulted in a non-operating gain of $860,000
which was received during the third quarter. The other settlement resulted in
the Company paying $550,000 during the third quarter.
During the fourth quarter of fiscal 1996, the Company sold its
freestanding facility in San Diego, California for $2.0 million and effectuated
the exchange of a $1.0 million Secured Conditional Exchangeable Note that had a
due date of March 1997, into 132,560 shares of the Company's Common Stock.
GLOBAL RESTRUCTURING
During fiscal 1995, Management developed a "global restructuring" plan
intended to address the Company's immediate challenges and to return a base of
profitability for future success. Management has achieved all of the stated
objectives in the global restructuring plan except for the restructuring of the
Company's financial obligations represented by the Company's 7 1/2% Convertible
Subordinated Debentures (the "Debentures").
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During the first quarter of fiscal 1996, the Company sold an aggregate
of 155,000 shares of Common Stock to four accredited investors in private
offerings for an aggregate of $930,000 paid in cash. In addition, during the
third quarter of fiscal 1996 there was a sale of an additional 4,000 shares. The
proceeds of such sales were used for working capital and other general corporate
purposes. During the second quarter of fiscal 1996, the Company received a $9.4
million refund from its fiscal 1995 Federal tax return and issued a Secured
Conditional Exchangeable Note for $1.0 million. The exchange of this Note for
132,560 shares of Common Stock occurred in May 1996 (see Note 14-- "Stockholders
Equity"). The majority of the proceeds of these items have been used for working
capital purposes. Remaining proceeds will be applied to the exchange offer to
the holders of Debentures.
Although the Company is seeking to restructure its obligations under
the Debentures, the Company is currently in default as a result of the Company's
failure to make scheduled payments of interest (see Note 10-- "Long-Term Debt
and Short Term Borrowings").
During the fourth quarter of fiscal 1995, the Company entered into a
letter of agreement with a representative of holders of the Debentures. The
agreement provides, among other things, that the Company provide an opportunity
to holders of the Debentures to tender their Debentures to the Company pursuant
to an exchange offer to be made by the Company to the holders of the Debentures.
Although the Company filed documents for an exchange offer with the Securities
and Exchange Commission, there can be no assurance that the exchange offer will
be successfully completed. In connection with the offer, the Company is seeking
to obtain a recession of the Debenture acceleration form the holders of a
majority in principal amount of the Debentures. Due to the longer than
anticipated time frame for implementing the exchange offer, the Company may,
among other things, adjust the terms of the exchange offer. Failure to
consummate the Debenture exchange offer may result in the Company considering
alternative actions including filing for voluntary protection from creditors.
The foregoing is intended to disclose events, and does not constitute an offer
to the holders of the Debentures.
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 Company's history of losses,
consolidated financial position and uncertainties resulting from the Company's
existing default in the terms of its Debentures raise substantial doubt about
its ability to continue as a going concern.
TAXES
On July 20, 1995, the Company filed its Federal income tax return for
fiscal 1995. On August 4, 1995, the Company filed Form 1139 "Corporate
Application for Tentative Refund" to carry back losses under Section 172(f)
requesting a refund to the Company in the amount of $9.4 million. On August 30,
1995, the Company also filed amended Federal tax returns for several prior years
to carry back losses under Section 172(f). The refunds claimed on the amended
returns are approximately $6.2 million for 1986; $0.4 million for 1985; $0.7
million for 1983 and $0.4 million for 1982. On September 20, 1996, the Company
filed its Federal income tax return for fiscal 1996, and subsequently filed Form
1139 "Corporate Application for Tentative Refund" to carry back losses described
in Section 172(f) requesting a refund to the Company in the amount of $5.5
million. The total refunds applied for are $22.6 million, comprised of $7.7
million for amended prior years' returns, $9.4 million for fiscal year 1995, and
$5.5 million for fiscal year 1996. Section 172(f) is an area of the tax law
without guiding legal precedent. There may be opposition by the Internal Revenue
Service ("IRS") as to the Company's ability to obtain benefits from refunds
claimed under this section. Therefore, no assurances can be made as to the
Company's entitlement to the claimed refunds.
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In October 1995, the Company received a $9.4 million refund for fiscal
1995. Of this refund, $2.4 million was recognized as a tax benefit during the
second quarter of fiscal 1996. Receipt of the 1995 Federal tax refund does not
imply IRS approval. Due to the lack of legal precedent regarding Section 172(f),
the remaining amount, $7.0 million, is reflected on the Company's consolidated
balance sheets in unbenefited tax refunds received. In addition, during the
second quarter of fiscal 1996, the Company recorded a tax benefit of $0.2
million, which is related to prior years returns. The Company paid a contingency
fee of $1.9 million related to the 1995 refund. In the event the IRS Appeals
Office determines that the Company is not entitled to all or a portion of the
deductions under Section 172(f), this fee is reimbursable to the Company
proportionately. Of the $1.9 million, the Company expensed $0.5 million during
the second quarter of fiscal 1996, which is the amount of fees related to the
tax benefit recognized by the Company. The remaining $1.4 million is reflected
in the Company's financial statements as other receivables.
The Company is currently under audit by the IRS related to its 1995
Federal income tax return and the amended returns for prior years.
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 presently contemplated private placements of stock and the
recent exchange of an outstanding promissory note for shares of stock 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 had 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.
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
as of August 31, 1996, 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,
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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)
Parent's Secured Creditors................... $ 2,042,000 $2,042,000
Subsidiaries' Secured Creditors ............. $ 368,000 $ 368,000
Subsidiaries' Unsecured Liabilities (b) ....... $ 7,006,000 $7,006,000
Subsidiaries' Senior Equity (c)................ $ 1,040,000 $1,040,000
Parent's Unsecured Debt (b)
General Creditors............................ $ 1,497,000 $1,497,000
Subordinated Debentures...................... $11,186,000 $9,627,000
Equity in Parent (c)
Shares of Common Stock Outstanding .......... 2,864,620 Shares 2,864,620 Shares
</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."
(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.
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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.
POTENTIAL TO BE SUBJECTED TO AUTOMATIC BANKRUPTCY STAY
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.
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.
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.
Involuntary bankruptcy petitions do not result in an immediate Event of
Default and acceleration under the Debentures. During the period beforehand, the
Company would, absent a contrary bankruptcy court order, continue to manage its
own assets, and may incur additional debtor obligations. A voluntary petition,
or the order for relief under an involuntary petition as described above, does
result in an Event of Default and an acceleration under the terms of the
Indenture. A Chapter 11 petition is treated like a voluntary petition under the
Indenture.
The filing of a bankruptcy petition also triggers the automatic stay
provisions of the Bankruptcy Code. Section 362 of the Bankruptcy Code provides,
among other things, 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.
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:
(a) disruption of business activities by diverting the attention
of the Company's senior management;
(b) potential for substantial diminution in the value of the
Company's assets;
(c) potential adverse impact upon the ability of the Company to
obtain the financing necessary for its future operations;
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<PAGE> 51
(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 other creditors;
(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 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
bankruptcy case could adversely affect the Company's business operations.
To determine what holders in each impaired class of creditors would
receive if the Company were liquidated or the least they can receive in a
Chapter 11 reorganization, 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.
The Company has not performed any analysis of its reorganization or
liquidation values 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
financial statements. The Company's financial statements do not include any
adjustments to reflect possible future effects on the recoverability and
classification of assets and liabilities that may result from the outcome of
this uncertainty as to its ability to continue as a going concern.
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 that 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
elsewhere herein.
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<PAGE> 52
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 in
exchange for the consideration given by the Company for property surrendered 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, then 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 May 31, 1996, the Company had a stockholders' deficiency of $6.8
million, a working capital deficiency of approximately $20.2 million and a
negative current ratio (a measure of liquidity comparing current assets to
current liabilities). The net loss for the 12 months ended May 31, 1996 was $4.2
million, and the loss for the same 12-month period in 1995 was $10.5 million. In
the fourth quarter of fiscal 1996, the Company's losses from operations were
$2.5 million; and the Company's results in the first quarter of fiscal 1997 are
expected by Management to be similar. The Company's cash position declined over
the fourth quarter of fiscal 1996 from $4.4 million to $2.8 million. The Company
believes that the increasing role of HMO's, reduced benefits from employers and
indemnity companies, and a shifting to outpatient programs continue to impact
utilization of its facilities and services.
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.
CONTINUED LISTING ON NYSE
In October 1994, the New York Stock Exchange ("NYSE") notified the
Company that it was below certain quantitative and qualitative listing criteria
in regard to net tangible assets available to common stock and three year
average net income among other items. The Listing and Compliance Committee of
the NYSE has determined to monitor the Company's progress toward returning to
continuing listing standards. Management anticipates success in "global
restructuring" (see Note 2 to the Company's Condensed Consolidated Financial
Statements filed with its Quarterly Report on Form 10-Q for the quarter ended
February 29, 1996, incorporated herein by reference) will be necessary in order
to satisfy the Committee of the Company's progress. The Company met with
representatives of the NYSE during the third quarter of fiscal 1995 and during
the first and fourth quarters of fiscal 1996, to discuss the Company's financial
condition and intention to issue shares without seeking approval of shareholders
pursuant to the exception to the NYSE policy for financially distressed
companies.
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<PAGE> 53
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.
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."
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.
INVOLUNTARY BANKRUPTCY PETITION; ACCELERATION OF INDEBTEDNESS
Despite the dismissal on March 6, 1995 of the involuntary bankruptcy
petition filed against the Company on February 24, 1995 by or on behalf of three
Debentureholders, 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
all overdue installments, 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. 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. Debentureholders who filed the
earlier involuntary petition on February 24, 1995 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.
SPORADIC TRADING
The Debentures are not listed on any securities exchange or quoted on
NASDAQ or any other automated quotation system. The trading, if any, in the
Debentures is limited and sporadic. Presently
45
<PAGE> 54
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. The Company is liable for
the entire $9,538,000 principal amount plus approximately, as of November 15,
1996, $1,788,375 of overdue semi-annual interest installments, $145,306 of
interest on default interest, and $59,614 of interest due only on account of
acceleration of the April 15, 1997 interest installment, which will aggregate
approximately $1,993,294 at November 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 current or future capital requirements.
A $2.0 million secured promissory note has been issued by the Company,
the collateral for which constitutes two of the remaining freestanding
facilities of the Company.
In connection with the March 3, 1995 Letter Agreement with Mr. Lustig,
the Company conditionally 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." No
pledge of the CareUnit shares is contemplated by the Company in the currently
proposed Exchange Offer, because, in the Company's view, the particular
provision of the Letter Agreement related thereto is not binding upon the
Company because of the failure on the part of the other parties thereto to
perform under the conditions thereof. However, the Company is using certain
concepts from the Letter Agreement as a framework for the proposed Exchange
described in this Offering Circular.
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 the treatment provided
by the Company 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
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<PAGE> 55
of reimbursement changes and competitive pressures, the contractual obligations
of the Company have been subject to intense evaluation.
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
behavioral medicine managed care, are expected to place increased demands on the
Company's resources. These demands are expected to require the retention of some
or all of current management and the addition of new management personnel and
the development of additional expertise by some or all existing and new
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.
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<PAGE> 56
PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning beneficial
ownership of Common Stock. Such information is given as of September 25, 1996
(the "reporting date"). A total of 2,928,682 shares of Common Stock were
outstanding, entitled to one vote per one whole 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, and includes the right
to acquire beneficial ownership within 60 days. 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.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name of Beneficial Owner Beneficial Ownership of Class
- ------------------------ -------------------- --------
<S> <C> <C>
William H. Boucher 12,500 (1) *
J. Marvin Feigenbaum 24,166 (2) *
Stuart J. Ghertner, Ph.D. 5,000 (3) *
Lindner Funds (4) 586,700 (4) 18.1
Ronald G. Hersch, Ph.D. 48,667 (5) 1.6
Drew Q. Miller 0 (6) *
W. James Nicol 12,612 (7) *
Kerri Ruppert 42,250 (8) 1.4
Chriss W. Street 179,060 (9) 5.8
All executive officers and
directors as a group (8 persons) 324,255 (10) 10.0
</TABLE>
- ----------------
(1) Includes 12,500 shares subject to options that are presently
exercisable or exercisable within 60 days after the reporting date.
(2) Includes 24,166 shares subject to options that are presently
exercisable or exercisable within 60 days after the reporting date.
(3) Includes 5,000 shares subject to options that are presently exercisable
or exercisable within 60 days after the reporting date. Dr. Ghertner
was appointed Interim Chief Operating Officer of the Company on August
15, 1996; and on September 3, 1996, was named Interim President of the
Company's majority-owned subsidiary, Comprehensive Behavioral, Inc.
(4) The mailing address of Lindner Funds is c/o Ryback Management
Corporation, 7711 Carondelet Avenue, Suite 700, St. Louis, Missouri
63105. Includes 336,700 shares currently reserved for issuance upon
conversion of a Secured Convertible Note dated January 9, 1995 and
250,000 shares sold under an Amended Common Stock Purchase Agreement
dated June 29, 1995 that are issuable on approval of listing on the
NYSE and completion of administerial matters. Lindner Funds, as
described in its Schedule 13G, holds the shares and convertible debt in
more than one fund.
(5) Includes 8,334 shares held directly and 40,333 shares subject to
options that are presently exercisable or exercisable within 60 days
after the reporting date. On September 3, 1996, Dr. Hersch was named
Vice President - Strategic Planning and Development for the Company.
(6) Mr. Drew Miller was an executive officer of the Company as of the end
of the 1996 fiscal year and until August 14, 1996, at which time he
resigned as Senior Vice President and Chief Operating Officer. Mr.
Miller's mailing address is 775 Oakwood Street, Orange, California
92669.
(7) Includes 56 shares held by Mr. Nicol's spouse as custodian for his
three minor children, all of whom reside with Mr. Nicol, and 12,556
shares subject to options that are presently exercisable or exercisable
within 60 days after the reporting date.
(8) Consists of 42,250 shares subject to options that are presently
exercisable or exercisable within 60 days after the reporting date.
(9) Includes 6,560 shares held directly and 72,500 shares subject to
options that are presently exercisable or exercisable within 60 days
after the reporting date. Also includes 5,000 vested shares and 95,000
restricted shares under a restricted stock agreement over which the
holder has sole voting power, the issuance of which is pending
administerial matters.
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<PAGE> 57
(10) Includes a total of 209,305 shares subject to outstanding options that
are presently exercisable or exercisable within 60 days after the
reporting date and 95,000 restricted shares over which the holder has
sole voting power, the issuance of which is pending administerial
matters.
USE OF PROCEEDS
Up to approximately $5,607,000 ($5,532,000 in cash and estimated costs
of $75,000) could be used to retire 100% of the outstanding balance of
indebtedness under the Debentures. See "Exchange Offering Funding Requirements
and Sources." The Company's negative cash flow from operations has consumed
substantial amounts of cash. The Company's capital requirements will depend on
numerous factors. 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 in cash or property to holders of capital stock is
prohibited.
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<PAGE> 58
PRO FORMA CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS
The following tables set forth (1) the pro forma consolidated balance
sheets of the Company as of May 31, 1996, which give effect to the Exchange for
100% of the outstanding Debentures and 30% of the outstanding Debentures,
respectively, after adding the non-recurring gains attributable to the Exchange
and deducting the Company's estimated expenses; and (2) the pro forma
consolidated statements of operations of the Company for the fiscal year ended
May 31, 1996, which give effect, as of the beginning of the fiscal year, to the
Exchange for 100% of the outstanding Debentures and 30% of the outstanding
Debentures, respectively, and reports only in the notes thereunder, and does not
include in the Pro Forma Statements of Operations, the pro forma results of the
Exchange in terms of earnings after the effect of the non-recurring gains to be
recognized upon such Exchange.
For purposes of the presentation in the following pro forma financial
statements, an assumed value of $7.50 per share ("Assumed Value Per Share") has
been assigned to the Company's Common Stock to be issued and delivered to
Debentureholders in the Exchange. The Assumed Value Per Share is not intended to
reflect any opinion or prediction as to the actual fair market value of the
Common Stock at any particular date.
These pro forma consolidated financial statements do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. The consolidated financial statements and notes
to consolidated financial statements included in the Form 10-K for the fiscal
year ended May 31, 1996 as filed with the Securities and Exchange Commission on
August 29, 1996, provide additional disclosures and a further description of
accounting policies.
The Company's pro forma financial statements are presented on the basis
that it is a going concern which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company
incurred significant losses from operations in fiscal 1995 and continued to
report operating losses for fiscal 1996. The continuation of the Company's
business is dependent upon the resolution of operating and short-term liquidity
problems and the realization of the Company's plan of operations, and the
consolidated financial statements do not include any adjustments that might
result from an unfavorable outcome of this uncertainty.
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<PAGE> 59
COMPREHENSIVE CARE CORPORATION
Pro Forma Consolidated Balance Sheets
As of May 31, 1996
(Dollars in Thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma (Unaudited)
May 31, 1996
(Audited) Adjustments 100% Adjustments 30%
--------- ----------- -------- ----------- ------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 4,433 $ (5,532)(1) $(1,099) $ (2,813)(6) $ 1,620
Accounts receivable, less allowance
for doubtful accounts of $877.............. 2,476 -- 2,476 -- 2,476
Other receivables............................ 1,478 -- 1,478 -- 1,478
Property and equipment held for sale......... 1,233 -- 1,233 -- 1,233
Other current assets......................... 352 -- 352 -- 352
-------- -------- -------- -------- -------
Total current assets........................... 9,972 (5,532) 4,440 (2,813) 7,159
-------- -------- -------- -------- -------
Property and equipment ........................ 9,863 -- 9,863 -- 9,863
Less accumulated depreciation and amortization. (3,590) -- (3,590) -- (3,590)
-------- -------- -------- -------- -------
Net property and equipment..................... 6,273 -- 6,273 -- 6,273
-------- -------- -------- -------- -------
Property and equipment held for sale........... 6,915 -- 6,915 -- 6,915
Other assets................................... 1,958 -- 1,958 -- 1,958
-------- -------- -------- -------- -------
Total assets................................... $ 25,118 (5,532) $ 19,586 (2,813) $22,305
======== ======== ======== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.... $ 10,714 $ (1,573)(2) $ 9,141 $ (1,573)(7) $ 9,141
Long-term debt in default................... 9,538 (9,538)(3) -- (9,538)(8) --
Current maturities of long-term debt........ 2,464 -- 2,464 -- 2,464
Unbenefited tax refund received............. 7,018 -- 7,018 -- 7,018
Income taxes payable........................ 410 -- 410 -- 410
-------- -------- -------- -------- -------
Total current liabilities...................... 30,144 (11,111) 19,033 (11,111) 19,033
-------- -------- -------- -------- -------
Long-term debt, excluding current maturities... 24 -- 24 6,677 (9) 6,701
Other liabilities.............................. 749 -- 749 -- 749
Minority interest.............................. 1,000 -- 1,000 -- 1,000
COMMITMENTS AND CONTINGENCIES
(See Note 15 to the Company's Consolidated
Financial Statements included in its Annual
Report on Form 10-K for the fiscal year ended
May 31, 1996, incorporated herein by this
reference)
Stockholders' equity:
Preferred stock, $50.00 par value;
authorized 60,000 shares.................. -- -- -- -- --
Common stock, $.01 par value;
authorized 12,500,000 shares;
issued and outstanding 2,848,685.......... 28 2 (4) 30 1 (10) 29
Additional paid-in capital.................. 43,931 1,715 (4) 45,646 514 (10) 44,445
Accumulated deficit......................... (50,758) 3,862 (5) (46,896) 1,106 (11) (49,652)
-------- -------- -------- -------- -------
Total stockholders' equity (deficit)........... (6,799) 5,579 (1,220) 1,621 (5,178)
-------- -------- -------- -------- -------
Total liabilities and stockholders' equity..... $ 25,118 $ (5,532) $ 19,586 $ (2,813) $22,305
======== ======== ======== ======== =======
</TABLE>
(footnotes begin on following page)
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<PAGE> 60
- -------------------------------------
(1) Represents payment of $4,769,000 in principal ($500 payable in cash per
$1,000 of principal amount) and $763,000 in interest ($80 payable in
cash per $1,000 of principal amount).
(2) Represents cancellation of $1,550,000 in accrued interest and $98,000
in default interest, each at the rate of 7 1/2% per year, partially
offset by the accrual of $75,000 in related filing expenses.
(3) Represents Debenture payoff of $4,768,000 in cash, the issuance of
$1,716,000 in common stock, and the realization of $3,054,000 of
cancellation of debt (non-recurring gain).
(4) Using the $7.50 Assumed Value Per Share, less the $.01 par value per
share of common stock: (a) the aggregate par value is computed by
multiplying 228,912 shares of common stock by the $.01 par value per
share; and (b) the additional paid in capital is derived by multiplying
the remaining $7.49 per share ($7.50 less $.01) by 228,912 shares.
(5) Represents non-recurring gains of $3,052,000, $787,0000, and $98,000 in
the exchange of Exchange Consideration for principal, interest and
default interest, respectively, partially offset by the accrual of
$75,000 in related filing expenses.
(6) Represents payment of $1,431,000 in principal ($500 payable in cash per
$1,000 of principal amount), $1,313,000 in interest, plus $69,000 in
default interest (the sum of $80 payable in cash per $1,000 of
principal amount plus the interest on 70% of the principal amount at
the rate of 7 1/2% per year from April 15, 1994 to June 1, 1995 plus
interest on default interest at the same rate of 7 1/2%).
(7) Represents cancellation of $1,550,000 accrued interest and $98,000 in
default interest, each at the rate of 7 1/2% per year, partially offset
by the accrual of $75,000 in related filing expenses.
(8) Represents Debenture payoff of $1,431,000 in cash, $514,000 in common
stock (at the $7.50 Assumed Value Per Share), and $916,000 forgiveness
of debt (non-recurring gain), and reclassification of $6,677,000 from a
long-term debt in default to a long-term debt.
(9) Reclassification of $6,677,000 unexchanged Debentures from a long-term
debt in default to a long-term debt.
(10) Additional paid-in capital of $7.49 (at the $7.50 Assumed Value Per
Share less the $0.01 par value per share) multiplied by 68,674 shares
of common stock = $514,368. Aggregate par value of 68,674 shares of
common stock multiplied by $.01 per share = $687.
(11) Represents non-recurring gains of $916,000, $236,000, and $29,000 in
the exchange of Exchange Consideration for principal, interest and
default interest, respectively, partially offset by the accrual of
$75,000 in related filing expenses.
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<PAGE> 61
COMPREHENSIVE CARE CORPORATION
Pro Forma Consolidated Statements of Operations
Fiscal Year Ended May 31, 1996
(Dollars in Thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma (Unaudited)
-------------------------------------------
May 31, 1996
(Audited) Adjustments 100% Adjustments 30%
--------- ----------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Operating revenues............................. $ 32,488 $ -- $ 32,488 $ -- $ 32,488
Costs and expenses:
Direct healthcare operating expenses........... 29,208 -- 29,208 -- 29,208
General and administrative expenses............ 7,632 75(1) 7,707 75(1) 7,707
Provision for doubtful accounts................ 934 -- 934 -- 934
Depreciation and amortization.................. 2,099 -- 2,099 -- 2,099
Write-down of assets........................... -- -- -- -- --
Restructuring expenses......................... 94 -- 94 -- 94
Equity in loss of unconsolidated affiliates.... 191 -- 191 -- 191
--------- ---------- -------- -------- ---------
Total Costs and Expenses ........................ 40,158 75 40,233 75 40,233
--------- ---------- -------- -------- ---------
Loss from operations ............................ (7,670) (75) (7,745) (75) (7,745)
--------- ---------- -------- -------- ---------
Gain on sale of assets......................... 1,336 -- 1,336 -- 1,336
Loss on sale of assets......................... (82) -- (82) -- (82)
Non-operating gain............................. 860 -- 860 -- 860
Interest expense............................... (1,374) 791(2) (583) 237(3) (1,137)
Interest income................................ 210 -- 210 -- 210
--------- ---------- -------- -------- ---------
Loss before income taxes......................... (6,720) 716 (6,004) 162 (6,558)
Benefit for income taxes....................... 2,478 -- 2,478 -- 2,478
--------- ---------- -------- -------- ---------
Loss before extraordinary item................. $ (4,242) $ 716 $ (3,526) $ 162 $ (4,080)
========= ========== ======== ======== =========
Loss per common share:
Loss before extraordinary item................. $ (1.60) $ 0.27 $ (1.33) $ 0.06 $ (1.54)
========= ========== ======== ======== =========
</TABLE>
- ----------------------------
(1) Represents legal, accounting, printing, distribution and filing fees
related to the Exchange.
(2) Represents $715,000 of Debenture interest accruing at 7 1/2% on
$9,538,000 of principal amount and $76,000 of default interest which is
calculated at an interest rate of 7 1/2% of unpaid interest and would
not have accrued assuming the Exchange occurred effective June 1, 1995.
(3) Represents $214,000 of Debenture interest accruing at 7 1/2% on
$9,538,000 of principal amount and $23,000 of default interest which is
calculated at an interest rate of 7 1/2% of unpaid interest and would
not have accrued assuming the Exchange occurred effective June 1, 1995.
The Pro Forma Consolidated Statements of Operations do not reflect the
non-recurring gain resulting from the Debenture Exchange, which is estimated to
be approximately $3,862,000 and $1,106,000, respectively, before taxes, on a
100% or 30% Exchange of the outstanding $9,538,000 in principal amount of
Debentures.
Assuming 100% of the Debentures are converted, the portion of the gain
attributable to unpaid principal and interest is $3,052,000 and $885,000,
respectively. The principal gain is computed by subtracting from the $9,538,000
of outstanding principal, $4,769,000 of cash ($500 per $1,000 of outstanding
principal) and the issuance of $1,717,000 of common stock (24 shares per $1,000
of outstanding principal multiplied by the $7.50 Assumed Value Per Share). The
interest gain is computed by multiplying 7 1/2% by the principal amount
outstanding for the period from April 1, 1994 to May 31, 1996 plus interest at 7
1/2% on the unpaid default interest amount for the period
53
<PAGE> 62
from October 1, 1994 to May 31, 1996 based on an increasing default balance as
additional payments became due less $80 per $1,000 of $9,538,000 (100% of
outstanding principal amount).
Assuming 30% of the Debentures are converted, the portion of gain
attributable to unpaid principal and interest is $915,000 and $266,000,
respectively. The principal gain is computed by subtracting from the 30% of the
$9,538,000 of outstanding principal equaling $2,861,00, $1,431,000 of cash ($500
per $1,000 of 30% outstanding principal) and the issuance of $515,000 of common
stock (24 shares per $1,000 of 30% outstanding principal multiplied by the $7.50
Assumed Value Per Share). The interest gain is computed by multiplying 7 1/2% by
the 30% principal amount outstanding for the period of April 1, 1994 to May 31,
1996 plus interest of 7 1/2% on the unpaid default interest amount for the
period from October 1, 1994 to May 31, 1996 based on an increasing default
balance as additional payments became due less $80 per $1,000 of $2,861,000 (30%
of outstanding principal).
54
<PAGE> 63
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 year
ended 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 report to the subject matter of the disagreement.
Arthur Andersen advised the Company that Arthur Andersen might permit
(without commitment) its 1994 audit report to be used in the Company's filings
with the Commission, but the appropriate form that such audit report 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. An auditor's report 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.
The audit reports of Ernst & Young, LLP, the independent auditors of
the Company, on the consolidated financial statements of the Company and
subsidiaries as of and for the fiscal years ended May 31, 1995 and 1996 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 a paragraph that stated that:
The accompanying consolidated financial statements for the years ended
May 31, 1996 and 1995 have been prepared assuming the Company will
continue as a going concern. As more fully described in Note 2, the
Company has reported annual net losses for each of the last five fiscal
years and has working capital deficiencies of $20.2 million and $15.3
million and deficits in total stockholders' equity of $6.8 million and
$4.9 million as of May 31, 1996 and May 31, 1995, respectively.
Approximately $9.5 million of the working capital deficiency at May 31,
1996, arises from presentation of the Company's convertible
subordinated debentures as currently payable due to default in the
payment of interest on this obligation commencing October 1994, and an
additional $1.6 million of the working capital deficiency results from
accrued unpaid interest on this obligation. The Company is seeking to
remedy this default through the debenture exchange offer described in
Note 10. Among other terms this proposed transaction requires the
holders of a majority of the debentures to give their approval to
rescind the debt acceleration, and the Company to obtain and expend up
to $5.5 million in cash during fiscal 1997 over and above cash required
to fund other financing, operating and investing needs. No assurance
can be given that the debenture exchange will be successfully
accomplished, and the failure to reach a settlement with the holders of
the Company's debentures through the debenture exchange or otherwise
may cause the debenture holders to pursue the involuntary bankruptcy of
the Company and/or the Company to take alternative actions including
filing for voluntary protection from creditors. These conditions raise
substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are described in
Note 2. The 1996 and 1995 consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
55
<PAGE> 64
COMPREHENSIVE CARE CORPORATION
THE EXCHANGE AGENT: FIRST TRUST OF CALIFORNIA, NATIONAL ASSOCIATION
By Mail: By Hand:
FIRST TRUST OF CALIFORNIA, N.A. FIRST TRUST OF CALIFORNIA, N.A.
180 EAST FIFTH STREET, SUITE 200 180 EAST FIFTH STREET, SUITE 200
ST. PAUL, MINNESOTA 55101 ST. PAUL, MINNESOTA 55101
REQUESTS FOR ADDITIONAL INFORMATION SHOULD BE DIRECTED TO KERRI RUPPERT,
SENIOR VICE PRESIDENT, SECRETARY/TREASURER AND CHIEF FINANCIAL OFFICER,
COMPREHENSIVE CARE CORPORATION 1111 BAYSIDE DR., SUITE 100,
CORONA DEL MAR, CALIFORNIA 92625, AT (800) 678-2273
TABLE OF CONTENTS
<TABLE>
<S> <C>
PURPOSE OF THE EXCHANGE OFFER........................................... 1
OFFERING SUMMARY ....................................................... 1
SUMMARY COMPARISON OF TERMS OF DEBENTURES AND EXCHANGE
CONSIDERATION................................ 4
THE COMPANY ............................................................ 6
FINANCIAL INFORMATION .................................................. 6
EXCHANGE OFFER FUNDING REQUIREMENTS AND SOURCES......................... 7
RATIO OF EARNINGS TO FIXED CHARGES...................................... 10
RECENT TRANSACTIONS IN SECURITIES OF THE COMPANY........................ 10
PRICE RANGE OF DEBENTURES ............................................. 11
PRICE OF SECURITIES PRIOR TO ANNOUNCEMENT............................... 11
INTERESTS OF CERTAIN PERSONS............................................ 11
THE EXCHANGE OFFER ..................................................... 12
OTHER FACTORS TO CONSIDER ............................................. 25
POTENTIAL FEDERAL INCOME TAX CONSEQUENCES............................... 27
DESCRIPTION OF CAPITAL STOCK............................................ 30
DESCRIPTION OF DEBENTURES ............................................. 31
RISK FACTORS ........................................................... 37
PRINCIPAL STOCKHOLDERS ................................................. 48
USE OF PROCEEDS ........................................................ 49
DIVIDEND POLICY ........................................................ 49
PRO FORMA CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF
OPERATIONS................................... 50
CHANGES IN ACCOUNTANTS ............................................. 55
</TABLE>
56
<PAGE> 1
EXHIBIT 99.9
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 2:00 P.M., ST. PAUL, MINNESOTA TIME, ON
NOVEMBER 15, 1996 UNLESS THE EXCHANGE OFFER IS EXTENDED (THE "EXPIRATION DATE").
TENDERS OF DEBENTURES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 2:00 P.M. ON THE
EXPIRATION DATE OR AFTER 2:00 P.M., ST. PAUL, MINNESOTA TIME, ON NOVEMBER 25,
1996, IF NOT PREVIOUSLY EXCHANGED.
TO: FIRST TRUST OF CALIFORNIA, NATIONAL ASSOCIATION, EXCHANGE AGENT
By Mail: By Hand:
FIRST TRUST OF CALIFORNIA, N.A. FIRST TRUST OF CALIFORNIA, N.A.
180 EAST FIFTH STREET, SUITE 200 180 EAST FIFTH STREET, SUITE 200
ST. PAUL, MINNESOTA 55101 ST. PAUL, MINNESOTA 55101
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.
DEBENTUREHOLDERS WILL BE REQUIRED TO CONSENT PURSUANT TO THE
DEBENTUREHOLDER CONSENT SOLICITATION STATEMENT IN ORDER TO TENDER A DEBENTURE,
AND REVOCATION OF CONSENT WILL DISQUALIFY THE TENDER OF A DEBENTURE, IN EACH
CASE UNLESS THE ISSUER DETERMINES TO WAIVE THIS CONDITION IN ITS OWN DISCRETION
BY ACCEPTING SUCH A DEBENTURE FOR EXCHANGE. THE CONSENT BY A CERTAIN AMOUNT OF
DEBENTURES IS A CONDITION TO THE EXCHANGE.
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 October 8, 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 plus 8 shares of Common Stock (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 interest accrued and unpaid as of the date of the
Exchange in excess of such designated interest payment included in the Exchange
Consideration, 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 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.
1
<PAGE> 2
HOLDERS WHO WISH TO ACCEPT THE EXCHANGE OFFER AND TENDER THEIR
DEBENTURES MUST COMPLETE THIS LETTER OF TRANSMITTAL IN ITS ENTIRETY.
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 AGGREGATE
NUMBER(S)* PRINCIPAL
(ATTACH SIGNED AMOUNT
NAME(S) AND ADDRESS(ES) OF HOLDER(S) LIST IF TENDERED (IF LESS
(PLEASE FILL IN, IF BLANK) NECESSARY) 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:
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.:
-------------------------------------------
2
<PAGE> 3
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
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.
3
<PAGE> 4
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:
-----------------------
4
<PAGE> 5
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)
5
<PAGE> 6
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 2:00 p.m., St. Paul, Minnesota 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 2:00
p.m., St. Paul, Minnesota 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 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.
6
<PAGE> 7
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
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, Secretary/Treasurer and Chief Financial Officer of the
Company, 1111 Bayside Drive, Suite 100, Corona del Mar, California 92625,
(800) 678-2273.
(DO NOT WRITE IN SPACE BELOW)
________________________________________________________________________________
________________________________________________________________________________
CERTIFICATE SURRENDERED Debentures TENDERED Debentures ACCEPTED
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Delivery Prepared by Checked by Date
________________________________________________________________________________
________________________________________________________________________________
7
<PAGE> 8
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 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.
8
<PAGE> 9
SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX AT
FORM W-9 RIGHT AND CERTIFY BY SIGNING AND DATING BELOW
DEPARTMENT OF THE TREASURY _______________________________________________
INTERNAL REVENUE SERVICE Social Security Number
OR_____________________________________________
Employer Identification Number
_______________________________________________
PAYER'S REQUEST FOR TAXPAYER PART 2 -- CERTIFICATION -- Under penalties of
IDENTIFICATION NUMBER (TIN) perjury, I certify that:
(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
_______________________________________________
NAME (PLEASE PRINT)
_______________________________________________
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.
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
9
<PAGE> 10
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
FIRST TRUST OF CALIFORNIA, NATIONAL ASSOCIATION
By Mail: By Hand:
FIRST TRUST OF CALIFORNIA, N.A. FIRST TRUST OF CALIFORNIA, N.A.
180 EAST FIFTH STREET, SUITE 200 180 EAST FIFTH STREET, SUITE 200
ST. PAUL, MINNESOTA 55101 ST. PAUL, MINNESOTA 55101
10
<PAGE> 1
EXHIBIT 99.10
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYOR --
Social Security numbers have nine digits separated by two hyphens: i.e.
000-00-0000. Employer identification numbers have nine digits separated by one
hyphen: i.e. 00-0000000. The table below will help determine the number to give
the payor.
- --------------------------------------------------------------------------------
FOR THIS TYPE OF ACCOUNT: GIVE THE
SOCIAL SECURITY
NUMBER OF --
- --------------------------------------------------------------------------------
1. An individual's account The individual
2. Two or more individuals (joint The actual owner of the
account) account or, if combined funds,
the first individual on the
account(1)
3. Custodian account of a minor The minor(2)
(Uniform Gift to Minors Act)
4a. The usual revocable savings trust The grantor-trustee(1)
account (grantor is also trustee)
b. So-called trust account that is not The actual owner(1)
a legal or valid trust under State
Law
5. Sole proprietorship account The owner(3)
- --------------------------------------------------------------------------------
FOR THIS TYPE OF ACCOUNT: GIVE THE EMPLOYER
IDENTIFICATION
NUMBER OF --
- --------------------------------------------------------------------------------
6. A valid trust, estate, or pension The legal entity (Do not
trust furnish the identifying number
of the personal representative
or trustee unless the legal
entity itself is not
designated in the account
title)(4)
7. Corporate account The corporation
8. Association, club, religious, The organization
charitable, educational or other
tax-exempt organization
9. Partnership account The partnership
10. A broker or registered nominee The broker or nominee
11. Account with the Department of The public entity
Agriculture in the name of a public
entity (such as a State or local
government, school district or
prison) that receives agricultural
program payments
- --------------------------------------------------------------------------------
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Show the name of the owner.
(4) List first and circle the name of the valid trust, estate, or pension
trust.
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
1
<PAGE> 2
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER (TIN) ON SUBSTITUTE FORM W-9
(SECTION REFERENCES ARE TO THE INTERNAL REVENUE CODE)
Page 2
NAME -- If you are an individual, generally provide the name shown on your
social security card. However, if you have changed your last name, for instance,
due to marriage, without informing the Social Security Administration of the
name change, please enter your first name and both the last name shown on your
social security card and your new last name.
OBTAINING A NUMBER -- If you don't have a taxpayer identification number
("TIN"), apply for one immediately. To apply, obtain Form SS-5, Application for
a Social Security Number Card, or Form SS-4, Application for Employer
Identification Number, at the local office of the Social Security Administration
or the Internal Revenue Service (the "IRS").
PAYEES AND PAYMENTS EXEMPT FROM BACKUP WITHHOLDING -- The following is a list of
payees exempt from backup withholding and for which no information reporting is
required. For interest and dividends, all listed payees are exempt except item
(9). For broker transactions, payees listed in (1) through (13), and a person
registered under the Investment Advisors Act of 1940 who regularly acts as a
broker are exempt. Payments subject to reporting under sections 6041 and 6041A
are generally exempt from backup withholding only if made to payees described in
items (1) through (7), except that a corporation that provides medical and
health care services or bills and collects payments for such services is not
exempt from backup withholding or information reporting.
(1) A corporation.
(2) An organization exempt from tax under section 501(a), or an individual
retirement plan ("IRA"), or a custodial account under section 403(b)(7).
(3) The United States or any agencies or instrumentalities.
(4) A state, the District of Columbia, a possession of the United States, or
any of their political subdivisions or instrumentalities.
(5) A foreign government or any of its political subdivisions, agencies or
instrumentalities.
(6) An international organization or any of its agencies or instrumentalities.
(7) A foreign central bank of issue.
(8) A dealer in securities or commodities required to register in the U.S. or a
possession of the U.S.
(9) A futures commission merchant registered with the Commodity Futures Trading
Commission.
(10) A real estate investment trust.
(11) An entity registered at all times during the tax year under the Investment
Company Act of 1940.
(12) A common trust fund operated by a bank under section 584(a).
(13) A financial institution.
(14) A middleman known in the investment community as a nominee or listed in the
most recent publication of the American Society of Corporate Secretaries, Inc.
Nominee List.
(15) A trust exempt from tax under Section 664 or described in section 4947.
2
<PAGE> 3
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER (TIN) ON SUBSTITUTE FORM W-9
(SECTION REFERENCES ARE TO THE INTERNAL REVENUE CODE)
Page 3
Payments of dividends generally not subject to backup withholding also include
the following:
- Payments to nonresident aliens subject to withholding under section 1441.
- Payments to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident partner.
- Payments made by certain foreign organizations.
Payments of interest generally not subject to backup withholding include the
following:
- Payments of interest on obligations issued by individuals.
NOTE: YOU MAY BE SUBJECT TO BACKUP WITHHOLDING IF THIS INTEREST IS $600 OR
MORE AND IS PAID IN THE COURSE OF THE PAYOR'S TRADE OR BUSINESS AND YOU HAVE NOT
PROVIDED YOUR CORRECT TIN TO THE PAYOR.
- Payments of tax-exempt interest (including exempt-interest dividends under
section 852).
- Payments described in section 6049(b)(5) to nonresident aliens.
- Payments on tax-free covenant bonds under section 1451.
- Payments made by certain foreign organizations.
- Mortgage interest paid by you.
Payments that are not subject to information reporting are also not subject to
backup withholding. For details, see sections 6041, 6041A, 6042, 6044, 6045,
6049, 6050A, and 6050N, and the regulations under those sections.
PRIVACY ACT NOTICE. -- Section 6109 requires you to furnish your correct TIN
to persons who must file information returns with the IRS to report interest,
dividends, and certain other income paid to you, mortgage interest you paid, the
acquisition or abandonment of secured property, or contributions you made to an
IRA. The IRS uses the numbers for identification purposes and to help verify the
accuracy of your tax return. You must provide your TIN whether or not you are
qualified to file a tax return. Payors must generally withhold 31% of taxable
interest, dividend, and certain other payments to a payee who does not furnish a
TIN to a payor. Certain penalties may also apply.
PENALTIES
(1) FAILURE TO FURNISH TIN. -- If you fail to furnish your correct TIN to a
payor, you are subject to a penalty of $50 for each such failure unless your
failure is due to reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you
make a false statement with no reasonable basis that results in no imposition of
backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Willfully falsifying
certifications or affirmations may subject you to criminal penalties including
fines and/or imprisonment.
FOR ADDITIONAL INFORMATION
CONTACT YOUR TAX CONSULTANT OR THE IRS
3
<PAGE> 1
EXHIBIT 99.16
NOTICE OF EXCHANGE OFFER FOR
ANY AND ALL OF THE OUTSTANDING
7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES
OF
COMPREHENSIVE CARE CORPORATION
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 2:00 P.M.,
ST. PAUL, MINNESOTA TIME, ON FRIDAY, NOVEMBER 15, 1996,
UNLESS EXTENDED BY THE COMPANY.
October 8, 1996
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
We are enclosing the material listed below relating to the offer by
Comprehensive Care Corporation (the "Company"), upon the terms and subject to
the conditions set forth in the enclosed Offering Circular dated October 8, 1996
and Letter of Transmittal and related documents (the "Exchange Offer"), to
exchange for aggregate Exchange Consideration (defined below) all Debentures
(defined below) that are properly tendered and exchanged from the date of the
Offer through 2:00 p.m., St. Paul, Minnesota time, on Friday, November 15, 1996,
unless extended (the "Offer Period"). A holder of Debentures who elects to
exchange during the Offer Period will receive the aggregate exchange
consideration comprised of $500 in cash and 16 shares of the Company's Common
Stock, $.01 par value per share (the "Common Stock") as principal plus $80 in
cash and 8 shares of Common Stock as interest (the "Exchange Consideration") for
the surrender of each $1,000 of outstanding principal amount of the Company's 7
1/2% Convertible Subordinated Debentures Due April 15, 2010 (the "Debentures")
and waiver and forgiveness of excess interest (over $80 in cash and the fair
value of 8 shares of Common Stock) accrued since April 15, 1994 and all other
claims. The payment of the exchange consideration in the Exchange Offer will be
treated by the Company for accounting and tax purposes as principal to the
extent of $500 plus the fair value of 16 shares of Common Stock and as interest
to the extent of $80 plus the fair value of 8 shares of Common Stock.
Accordingly for most taxpayers, the aggregate amount of principal payments, less
tax basis, will be gain or loss to the holder, and the aggregate amount of
interest payments will be ordinary income. At November 15, 1996, the aggregate
amount of interest accrued, including interest on overdue installments, will be
$208.98 per $1,000 of outstanding principal amount of Debentures. The Debentures
are currently due and payable in full on account of acceleration resulting from
payment defaults. The purpose of the Exchange Offer is to provide incentive to
rescind the Debenture acceleration. CompCare is concurrently soliciting
Debentureholders for the purpose of rescinding the acceleration. Through
November 15, 1996, $202.73 will be payable per $1,000 principal amount of
Debentures prior to rescission of acceleration, comprised of $187.50 of overdue
interest (5 semi-annual installments) plus $15.23 of interest on these overdue
installments. Debentureholders can either receive accrued amounts and retain the
balance due under Debentures or can exchange them for $580 in cash plus 24
shares of Common Stock. The Company does not intend to complete the Exchange
unless the acceleration is rescinded. Immediately before the Debenture
acceleration is rescinded, the Company will accept all of the Debentures
tendered in the Exchange and as to all non-tendered Debentures will pay accrued
interest, including interest on all overdue installments thereon, as required
under the Debentures. The Company will thereafter make semi-annual interest
payments (April 15 -- October 15) until maturity of the outstanding Debentures
on April 15, 2010. At the conclusion of the Offer Period, a holder of Debentures
who did not exchange those Debentures in the Exchange Offer will no longer be
entitled to the Exchange Consideration.
The Company will pay no commission or other consideration to solicit
exchanges of Debentures so that the Common Stock issuable in the Exchange will
be exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act") under Section 3(a)(9) of the Securities Act, and be exempt
from qualification or registration under applicable U.S. state securities laws.
The Common Shares to be issued upon exchange of the Debentures pursuant to this
offer by the holders thereof should be freely tradeable to the same extent that
tendered and exchanged Debentures were freely tradeable. Comprehensive Care
Corporation Common Stock to be issued in the Exchange Offer has been approved
for listing upon notice of issuance on the New York Stock Exchange.
Holders of Debentures who elect to tender and exchange their Debentures
pursuant to the Exchange Offer will not receive future, regular principal or
interest payments with respect to the Debentures, including any amount in
respect of periods since October 15, 1996, the last record date prior to the
date hereof for payment of regularly scheduled interest payments.
The offer is made on the terms and subject to the conditions set forth
in the enclosed Offering Circular and any supplements or amendments thereto (the
"Offering Circular"), in the related Letter of Transmittal and in the related
documents (which together constitute the "Exchange Offer").
For your information and for forwarding to your clients who hold
Debentures, whether registered in your name, in the name of your nominee, or in
their own names, we are enclosing the following documents:
1. The Offering Circular;
1
<PAGE> 2
2. The Letter of Transmittal to be used by holders of Debentures in
accepting the Exchange Offer (facsimile copies of the Letter of
Transmittal may be used to tender Debentures for exchange);
3. Notice of Guaranteed Delivery to be used to accept the Exchange
Offer if any Debentures to be tendered are represented by
certificates and those certificates are not immediately
available;
4. A suggested form of letter that may be sent to your clients for
whose accounts you hold Debentures in your name or in the name of
a nominee, with space provided for obtaining the clients'
instructions about the Exchange Offer;
5. Guidelines of the Internal Revenue Service for Certification of
Taxpayer Identification Number on Substitute Form W-9;
6. A return envelope addressed to First Trust of California, the
Exchange Agent; and
7. The Company's Annual Report on Form 10-K for the Fiscal Year
Ended May 31, 1996.
WE URGE YOU TO CONTACT YOUR CLIENTS PROMPTLY. PLEASE NOTE THAT THE
OFFER PERIOD EXPIRES AT 2:00 P.M., ST. PAUL, MINNESOTA TIME, ON FRIDAY, NOVEMBER
15, 1996, UNLESS EXTENDED BY THE COMPANY.
No fees or commissions will be payable to brokers, dealers or other
persons for soliciting tenders of Debentures pursuant to the Exchange Offer.
However, the Company will, upon request, reimburse brokers, dealers, commercial
banks and trust companies for reasonable and necessary costs incurred by them in
forwarding the Offering Circular and the related documents to the beneficial
owners of Debentures held by them as nominee or in a fiduciary capacity. The
Company will pay all transfer taxes, if any, on the exchange of the Debentures,
other than those resulting from a request to issue Common Stock to a person
other than the registered holder of the Debentures.
Any questions or requests for assistance or additional copies of the
enclosed materials may be obtained from the Company, the Trustee or the Exchange
Agent at the addresses set forth in the Offering Circular.
Very truly yours,
COMPREHENSIVE CARE CORPORATION
Kerri Ruppert,
Senior Vice President, Secretary/
Treasurer and Chief Financial Officer
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE
YOU OR ANY PERSON AS AN AGENT OF THE COMPANY, ANY AFFILIATE OF THE COMPANY, OR
THE EXCHANGE AGENT OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENTS
ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE EXCHANGE OFFER EXCEPT FOR
STATEMENTS EXPRESSLY MADE IN THE OFFERING CIRCULAR AND THE RELATED DOCUMENTS.
2
<PAGE> 1
EXHIBIT 99.17
NOTICE OF EXCHANGE OFFER FOR
ANY AND ALL OF THE OUTSTANDING
7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES
OF
COMPREHENSIVE CARE CORPORATION
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 2:00 P.M.,
ST. PAUL, MINNESOTA TIME, ON FRIDAY, NOVEMBER 15, 1996,
UNLESS EXTENDED BY THE COMPANY.
October 8, 1996
To Our Clients:
Enclosed for your consideration is a copy of the Offering Circular of
Comprehensive Care Corporation (the "Company") dated October 8, 1996, with
respect to the offer by the Company upon the terms and subject to the conditions
set forth in the Offering Circular to pay aggregate exchange consideration for
each $1,000 principal amount of the Company's 7 1/2% Convertible Subordinated
Debentures Due April 15, 2010 (the "Debentures") that is properly tendered for
exchange from the date of the Offering Circular through 2:00 p.m., St. Paul,
Minnesota time, on Friday, November 15, 1996, unless extended (the "Offer
Period"). A holder of Debentures who elects to exchange during the Offer Period
will receive aggregate exchange consideration comprised of $500 in cash and 16
shares of the Company's Common Stock, $.01 par value per share (the "Common
Stock") as principal plus $80 in cash and 8 shares of Common Stock as interest
(the "Exchange Consideration") for the surrender of each $1,000 of outstanding
principal amount of Debentures and waiver and forgiveness of excess interest
(over $80 in cash plus the fair value of 8 shares of Common Stock) accrued since
April 15, 1994 and all other claims. At November 15, 1996, the amount of
interest, and interest on overdue installments, that will have accrued is
$208.98 per $1,000 of outstanding principal amount of Debentures. At the
conclusion of the Offer Period, a holder of Debentures who did not tender
Debentures for exchange during the Offer Period will no longer be entitled to
the Exchange Consideration.
The Company will pay no commission or other consideration to solicit
exchanges of Debentures so that the Common Stock issuable in the Exchange will
be exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act") under Section 3(a)(9) of the Securities Act, and be exempt
from qualification or registration under applicable U.S. state securities laws.
The Common Shares to be issued upon exchange of the Debentures pursuant to this
offer by the holders thereof should be freely tradeable to the same extent that
tendered and exchanged Debentures were freely tradeable. Comprehensive Care
Corporation Common Stock to be issued in the Exchange Offer has been approved
for listing upon notice of issuance on the New York Stock Exchange.
Holders of Debentures who elect to tender Debentures for exchange
pursuant to the Exchange Offer will not receive future, regular interest
payments with respect to the Debentures, including any amount in respect of
periods since April 15, 1996, the last record date prior to the date hereof for
payment of regularly scheduled interest payments.
Assuming all of the outstanding Debentures are exchanged during the
Offer Period, the holders of Debentures will receive an aggregate of
approximately 228,912 shares of Common Stock and $5,532,040 in cash.
THE ENCLOSED OFFERING CIRCULAR AND LETTER OF TRANSMITTAL AND RELATED
DOCUMENTS, TOGETHER WITH THE INFORMATION INCORPORATED BY REFERENCE THEREIN,
CONSTITUTE THE COMPANY'S OFFER AND DISCLOSURE MATERIALS AND SHOULD BE REVIEWED
BY YOU IN THEIR ENTIRETY.
We are the record owner of Debentures held by us for your account, and
the Offering Circular and related materials are being forwarded to you as the
beneficial owner of those Debentures. The exchange of those Debentures can be
made only by us as the holder of record and pursuant to your instructions. The
enclosed Letter of Transmittal is furnished to you for your information only and
cannot be used by you to exchange Debentures held by us for your account.
We request your instructions as to whether you wish us to exchange on
your behalf any or all the principal amount of Debentures held by us for your
account, pursuant to the terms and subject to the conditions of the Offering
Circular.
Your attention is called to the following:
1. Pursuant to the Exchange Offer, the Exchange Consideration will
be paid by the Company for each $1,000 principal amount of
Debentures exchanged during the Offer Period.
2. The Exchange Offer is being made for all of the outstanding
Debentures. The Exchange Offer is not conditioned upon any
minimum amount of Debentures being tendered.
3. The Offer Period commenced as of Tuesday, October 8, 1996, and
will remain in effect until and will expire at 2:00 p.m., St.
Paul, Minnesota time, on Friday, December 6, 1996, unless
terminated sooner by the Company.
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4. Holders electing to exchange Debentures pursuant to the Exchange
Offer will not be obligated to pay brokerage fees or commissions.
5. Holders of Debentures may convert less than the entire stated
principal amount represented by surrendered Debenture
certificates provided they appropriately indicate this fact on
the Instructions with Respect to the Exchange Offer by
Comprehensive Care Corporation attached hereto.
If you wish us to exchange any or all of your Debentures, please so
instruct us by completing, executing, and returning to us the form attached
hereto entitled Instructions with respect to the Exchange Offer by Comprehensive
Care Corporation. If you authorize an exchange of your Debentures, the total
principal amount of your Debentures will be tendered for exchange unless
otherwise indicated. If you do not instruct us to exchange your Debentures, they
will not be tendered for exchange. The Exchange Offer is not being made, nor
will deliveries of Debentures for exchange pursuant to the Exchange Offer be
accepted from or on behalf of, holders of Debentures residing in any
jurisdiction in which the making of the Exchange Offer or the acceptance thereof
would not be in compliance with the laws of such jurisdiction. YOUR INSTRUCTIONS
SHOULD BE FORWARDED TO US IN AMPLE TIME TO PERMIT US TO SUBMIT A LETTER OF
TRANSMITTAL ON YOUR BEHALF TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION OF THE
OFFER PERIOD.
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INSTRUCTIONS
WITH RESPECT TO THE
EXCHANGE OFFER
BY
COMPREHENSIVE CARE CORPORATION
The undersigned acknowledge(s) receipt of your letter, dated October 8,
1996, and the Offering Circular, in connection with the Exchange Offer by
Comprehensive Care Corporation, a Delaware corporation (the "Company") to pay
the Exchange Consideration for each $1,000 principal amount of the Company's 7
1/2% Convertible Subordinated Debentures (the "Debentures") that are tendered
for exchange from the date of the Offering Circular through 2:00 p.m., St. Paul,
Minnesota time, on Friday, November 15, 1996, unless extended (the "Offer
Period").
You are hereby instructed to deliver to the Exchange Agent for exchange
pursuant to the Exchange Offer the principal amount of Debentures indicated
below (or, if no number is indicated below, all Debentures) which are held by
you for the account of the undersigned, upon the terms and subject to the
conditions set forth in the Offering Circular.
Dated __________________, 1996
___________________________________________
___________________________________________
___________________________________________
___________________________________________
Please print name(s) here
Principal Amount of 7 1/2%
Convertible Subordinated
Debentures to be exchanged
pursuant to the Exchange Offer*
_________________________________ ___________________________________________
___________________________________________
Address(es)
(_________)________________________________
Area Code and Day Telephone Number
___________________________________________
Tax Identification or Social Security No(s).
_________________
* If the principal amount of Debentures is not indicated, the total
number of Debentures held by us for your account will be delivered for
conversion pursuant to the Exchange Offer.
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