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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14A INFORMATION
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Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
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AMENDMENT NO. 3 TO
PRELIMINARY SCHEDULE 14A
ON SCHEDULE PRER14A/A-3)
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Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/Preliminary Proxy Statement
/ /Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ /Definitive Proxy Statement
/ /Definitive Additional Materials
/ /Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
COMPREHENSIVE CARE CORPORATION
(Name of Registrant as Specified in its Charter)
COMPREHENSIVE CARE CORPORATION
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/ /$125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item
22(a)(2) of Schedule 14A.
/ /$500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/X/Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1.Title of each class of securities to which transaction applies:
7 1/2% Convertible Subordinated Debentures Due April 15, 2010
2.Aggregate number of securities to which transaction applies:
$9,538,000 in principal amount of Debentures
3.Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined): Estimated solely for the purpose
of calculating the filing fee, pursuant to Rules 0-11(a)(4) and 0-11(b)(2),
equal to one-fiftieth (1/50th) of one percent of the market value of the maximum
amount of Debentures to be acquired by the Issuer (the "Transaction Value"). The
average of the bid and asked prices of the Debentures as of a trading date
within the five trading days prior to the date of this filing by the Issuer, was
not known or reasonably available. The Issuer has an accumulated capital
deficit, thereby calculating this filing fee based on one-third of the
$9,538,000 outstanding principal amount of Debentures as provided in Rule
0-11(a)(4).
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4.Proposed maximum aggregate value of transaction:
$3,179,333 in principal amount of Debentures
/X/Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1.Amount Previously Paid:
$6,358.67
2.Form, Schedule or Registration Statement No.:
SC13E4: FILE NO. 005-19482
3.Filing Party:
COMPREHENSIVE CARE CORPORATION
4.Date Filed:
SEPTEMBER 14, 1995
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[COMPCARE LOGO]
July __, 1996
Dear Holders of Comprehensive Care Corporation's 7 1/2% Convertible Subordinated
Debentures Due April 15, 2010:
On behalf of the Board of Directors and Management of your Company, I
respectfully request that each of you, as holders of the Company's 7 1/2%
Convertible Subordinated Debentures due April 15, 2010 (the "Securities" or
"Debentures"), currently due and payable in full on account of acceleration,
consent in writing ("Consent") to the actions described in the accompanying
Debenture Consent Solicitation Statement. The principal purpose of the Consents
is to facilitate the exchange or reinstatement of the Company's outstanding
Debentures, which have been in default since the Company failed to make interest
payments commencing October 17, 1994, under the proposals RECOMMENDED BY
MANAGEMENT to (1) rescind the existing acceleration of payments due under the
Debentures; (2) waive any defaults or Events of Default (other than nonpayment
of any principal or interest due) that exist at the time of the Company's
payment of default interest, and the interest payable on it (the "Default
Interest Payment Date") if the same occurs within 30 calendar days after the
termination of the Consent Solicitation Period; (3) instruct the Trustee not to
pursue remedies otherwise available on account of defaults or existing Events of
Default during the Consent Solicitation Period and 30 calendar days thereafter;
and (4) consent to the waiver of a notice provision in the Indenture under which
the Debentures were issued relating to the cancellation of sinking fund payment
obligations. The enclosed Debenture Consent Solicitation Statement explains in
more detail the reasons for, and the effects of, your Consent to the proposals
recommended by the Board of Directors and Management. Please read the Statement
carefully. Your Consent to the proposals is critical to your Company. A consent
card is enclosed for the purpose of giving Consent.
THE BOARD OF DIRECTORS OF THE COMPANY HAS APPROVED THE PROPOSED ACTIONS AND
REQUESTS THAT THE DEBENTUREHOLDERS CONSENT TO EACH OF PROPOSALS (1), (2), (3)
AND (4).
YOUR CONSENT IS IMPORTANT. Consents of the holders of at least a majority in
principal amount of the outstanding Debentures are necessary to approve and
adopt each of Proposals (1) and (3). Consent of at least 66 2/3% in principal
amount of the outstanding Debentures is necessary to approve and adopt each of
Proposals (2) and (4).
The Board of Directors is hopeful that a rescission of acceleration of the
Securities will help position the Company for a more successful long-term
future. Please SIGN, DATE and MAIL the enclosed Consent card as soon as possible
in the enclosed prepaid envelope. Your consent may be withdrawn as to each of
the Proposals at any time prior to ____________, 1996 or thereafter until the
Company's receipt of Consents sufficient to approve the Proposal or any earlier
termination of the Consent Solicitation Period. Your prompt cooperation will be
greatly appreciated.
Sincerely,
Chriss W. Street
Chairman of the Board,
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President and Chief Executive Officer
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COMPREHENSIVE CARE CORPORATION
NOTICE OF DEBENTURE CONSENT SOLICITATION
TO THE DEBENTUREHOLDERS:
The Board of Directors of Comprehensive Care Corporation (the "Company")
hereby requests your consent in writing for the following purposes as described
in the accompanying Debenture Consent Solicitation Statement:
1. Proposal No. 1, to consent to rescind the acceleration, and to notify
First Trust of California, National Association, as successor to Bank
of America National Trust and Savings Association (the "Trustee"), of a
rescission of the acceleration, of all principal and interest due under
the Company's 7 1/2% Convertible Subordinated Debentures Due April 15,
2010 (the "Debentures"), and all of the effects thereof.
2. Proposal No. 2, to consent to waive, and to notify the Trustee of a
waiver of, any defaults or Events of Default (other than nonpayment of
any principal or interest due) that exist at the time of the Company's
payment of default interest, and the interest payable on it (the
"Default Interest Payment Date") if the same occurs within 30 calendar
days after the termination of the Consent Solicitation Period.
3. Proposal No. 3, 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
same occurs within 30 calendar days after the termination of the
Consent Solicitation Period.
4. Proposal No. 4, to consent to the waiver of a notice provision in the
Indenture dated April 25, 1985 (the "Indenture") between the Company
and the Trustee relating to the cancellation of sinking fund payment
obligations.
MANAGEMENT AND THE BOARD OF DIRECTORS RECOMMEND YOUR CONSENT AND APPROVAL
IN ORDER TO FACILITATE THE DEFAULT INTEREST PAYMENT DESCRIBED IN THE ATTACHED
DEBENTURE CONSENT SOLICITATION STATEMENT.
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Each registered Debentureholder is urged to SIGN, DATE and MAIL the enclosed
Consent card as promptly as possible. Only Debentureholders, as registered on
the Registrar's List of Debentureholders, are entitled to Consent. The broker or
other nominee holding Debentures in "street name" for a beneficial holder will
seek instruction from the beneficial holder and will Consent on behalf of a
beneficial holder, if appropriately instructed.
By Order of the Board of Directors,
Kerri Ruppert
Secretary
July __, 1996
Corona del Mar, California
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YOUR CONSENT IS IMPORTANT
TO ENSURE EVERY CONSENT BEING COUNTED, ANY REGISTERED HOLDERS ARE REQUESTED TO
COMPLETE, SIGN AND DATE THE ENCLOSED CONSENT CARD AS PROMPTLY AS POSSIBLE AND TO
MAIL IT IN THE ENCLOSED SELF-ADDRESSED ENVELOPE TO FIRST TRUST OF CALIFORNIA,
NATIONAL ASSOCIATION, 180 E. FIFTH STREET, SUITE 200, ST. PAUL, MINNESOTA 55101.
ANY BENEFICIAL HOLDERS (OF DEBENTURES REGISTERED IN A BROKER'S OR OTHER
NOMINEE'S NAME) SHOULD PROVIDE A COMPLETE, SIGNED AND DATED CONSENT CARD
DIRECTLY TO THE BROKER OR OTHER NOMINEE WHO ACTS AS THE REGISTERED HOLDER, AND
THE REGISTERED NOMINEE HOLDER SHOULD IN TURN COMPLETE, SIGN AND DATE A CONSENT
CARD AND SEND IT TO THE TRUSTEE AT THE ADDRESS ABOVE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
DEBENTURE CONSENT SOLICITATION STATEMENT........................................................................ 1
GENERAL .............................................................................................. 1
REQUIRED VOTE OR CONSENT............................................................................... 1
RECORD DATE............................................................................................ 2
CONSENTS AND TRANSFERS................................................................................. 2
CONSENTS AND TENDERS................................................................................... 2
CONSENT SOLICITATION PERIOD............................................................................ 2
REVOCABILITY OF CONSENTS............................................................................... 2
VOTING OR CONSENTING................................................................................... 3
INFORMATION AND SOLICITATION........................................................................... 3
INTENTIONS OF THE COMPANY IF PROPOSALS 2, 3 OR 4 NOT APPROVED.......................................... 4
BOARD OF DIRECTORS' DISCRETION AND RESERVATION OF RIGHTS............................................... 4
NO DISSENTERS' RIGHTS.................................................................................. 4
CONSENTS EXPECTED...................................................................................... 4
SPECIAL RISK FACTORS............................................................................................ 5
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND
ASSOCIATED RISKS.............................................................................. 5
EFFECTS OF REINSTATING NON-DEFAULT STATUS.............................................................. 5
SUMMARY COMPARISON OF TERMS OF DEBENTURES WITH AND WITHOUT
ACCELERATION.................................................................................. 7
POTENTIAL EFFECTS OF SENIOR DEBT....................................................................... 8
POTENTIAL EFFECTS OF FAILURE TO RESCIND ACCELERATION................................................... 8
ABILITY OF THE COMPANY TO CONTINUE AS A GOING CONCERN; EXPLANATORY
PARAGRAPH IN AUDITORS' REPORT................................................................. 9
PRIORITIES OF SECURITIES AND OTHER RELATED CONSIDERATIONS RELATING
TO ANY FUTURE BANKRUPTCY OF THE COMPANY....................................................... 9
DEBT CLAIMS VS. EQUITY INTERESTS.............................................................. 10
AVOIDABLE PREFERENCES......................................................................... 11
POTENTIAL TO BE SUBJECTED TO AUTOMATIC BANKRUPTCY STAY................................................. 11
PROHIBITIONS ON PAYMENT TO DEBENTUREHOLDERS................................................... 13
FRAUDULENT CONVEYANCES........................................................................ 13
DETERMINATION OF TERMS OF EXCHANGE OFFER............................................................... 14
HISTORY OF LOSSES AND ANTICIPATED FUTURE LOSSES; UNCERTAINTY OF
FUTURE PROFITABILITY.......................................................................... 14
ADDITIONAL RISK FACTORS WITH RESPECT TO HOLDERS OF DEBENTURES NOT
TENDERED IN THE EXCHANGE OFFER................................................................ 15
SUBORDINATION................................................................................. 15
REDEMPTION; MATURITY.......................................................................... 15
SPORADIC TRADING.............................................................................. 15
CONVERSION PRICE FAR ABOVE SHARE PRICES....................................................... 15
NEED FOR ADDITIONAL FUNDS; UNCERTAINTY OF FUTURE FUNDING............................................... 15
DISPOSITION OF ASSETS.................................................................................. 16
INVOLUNTARY BANKRUPTCY PETITION; ACCELERATION OF INDEBTEDNESS.......................................... 16
TAX MATTERS............................................................................................ 17
THE PROPOSALS................................................................................................... 19
PROPOSAL NO. 1......................................................................................... 19
PROPOSAL NO. 2......................................................................................... 21
PROPOSAL NO. 3......................................................................................... 22
</TABLE>
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<TABLE>
<S> <C>
PROPOSAL NO. 4......................................................................................... 22
INTERESTS OF CERTAIN PERSONS.................................................................................... 24
PRINCIPAL DEBENTUREHOLDERS...................................................................................... 24
PRINCIPAL STOCKHOLDERS.......................................................................................... 25
THE PROPOSED EXCHANGE........................................................................................... 26
.............................................................................................. 27
PRO FORMA CAPITALIZATION AND INCOME STATEMENT INFORMATION....................................................... 27
BACKGROUND............................................................................................. 35
DEFAULT ON DEBENTURES......................................................................... 35
AGREEMENT OF PARTICIPATING SECURITYHOLDERS.................................................... 35
DIFFERENCES BETWEEN THE EXCHANGE OFFER AND THE LETTER
AGREEMENT'S CONTEMPLATED EXCHANGE.................................................... 36
PRICE OF DEBENTURES AND COMMON STOCK PRIOR TO ANNOUNCEMENT.................................... 38
EXCHANGE OFFER FUNDING REQUIREMENTS AND SOURCES........................................................ 38
SUMMARY COMPARISON OF TERMS OF DEBENTURES AND EXCHANGE
CONSIDERATION................................................................................. 39
POTENTIAL FEDERAL INCOME TAX CONSEQUENCES.............................................................. 41
EFFECTS ON THE DEBENTUREHOLDERS............................................................... 41
EFFECTS ON THE COMPANY........................................................................ 42
NO FAIRNESS OPINION.................................................................................... 43
DESCRIPTION OF DEBENTURES....................................................................................... 43
GENERAL .............................................................................................. 43
CONVERSION OF DEBENTURES............................................................................... 44
OPTIONAL REDEMPTION.................................................................................... 45
SINKING FUND........................................................................................... 45
SUBORDINATION OF DEBENTURES............................................................................ 45
EVENTS OF DEFAULT AND REMEDIES......................................................................... 46
MERGER, CONSOLIDATION, OR SALE OF ASSETS............................................................... 47
AMENDMENT, SUPPLEMENT AND WAIVER....................................................................... 47
TRANSFER AND EXCHANGE.................................................................................. 47
CONCERNING THE TRUSTEE................................................................................. 48
INCORPORATION BY REFERENCE...................................................................................... 48
</TABLE>
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COMPREHENSIVE CARE CORPORATION
DEBENTURE CONSENT SOLICITATION STATEMENT
GENERAL
The Board of Directors hereby requests the holders of the $9,538,000 in
principal amount outstanding of the 7 1/2% Convertible Subordinated Debentures
due April 15, 2010 (herein called either the "Securities" or the "Debentures"),
currently due and payable in full on account of acceleration, issued by
Comprehensive Care Corporation, a Delaware corporation (the "Company"), (1) to
notify First Trust of California, National Association, successor to Bank of
America National Trust and Savings Association (the "Trustee"), of rescission of
the acceleration of the Securities; (2) to waive every continuing Event of
Default (other than nonpayment of any principal and interest due) that exist at
the time of the Company's payment of default interest, and the interest payable
on it (the "Default Interest Payment Date"), if the same occurs within 30
calendar days after the termination of the Consent Solicitation Period; (3) to
instruct the Trustee not to pursue remedies for any defaults or continuing
Events of Default during the Consent Solicitation Period and for a period of 30
calendar days thereafter pending the acceleration being rescinded upon anything
less than future directions given by a majority in outstanding principal amount
of Debentures; and (4) to consent to the waiver of a notice provision in the
Indenture dated April 25, 1985 between the Company and the Trustee pursuant to
which the Debentures were issued (the "Indenture") relating to the cancellation
of sinking fund payment obligations.
REGISTERED HOLDERS ARE REQUESTED to please Consent on every Proposal by
signing, dating and mailing the Consent Card, or a facsimile thereof, to the
Trustee using the pre-addressed envelope provided for your convenience. The
Trustee's address is First Trust of California, National Association, 180 E.
Fifth Street, Suite 200, St. Paul, Minnesota 55101.
BENEFICIAL HOLDERS WHOSE DEBENTURES ARE REGISTERED IN "STREET NAME" ARE
REQUESTED to please sign, date and mail the Consent Card to the broker or other
nominee holder of the Debentures, who should in turn sign, date and mail a
Consent Card to the Trustee at the above address.
These materials were first given or mailed to Securityholders on or
about July __, 1996.
Requests for information or documents may be directed to the attention
of Kerri Ruppert, Senior Vice President, Secretary and Chief Accounting Officer
of the Company, at the principal executive office of the Company located at 1111
Bayside Drive, Suite 100, Corona del Mar, California 92625.
SEE "SPECIAL RISK FACTORS" COMMENCING ON PAGE 6.
REQUIRED VOTE OR CONSENT
Under the Indenture, approval of Proposals No. 1 and 3 each requires
Consent of at least a majority of the outstanding principal amount of
Debentures, and approval of Proposals No. 2 and 4 each requires Consent of the
holders of at least 66 2/3% of the outstanding principal amount of the
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Debentures. Approval of each of Proposals No. 2 and No. 4 is contingent upon
approval of Proposal No. 1.
As set forth below under "Consents Expected," the Company presently
contemplates that the Consent requested herein will be granted by the
Debentureholders as to Proposals No. 1, No. 2, No. 3 and No. 4. As set forth
below under "The Proposed Exchange," the Company also requires that any
Debentureholder tendering Debentures in the Exchange also Consent on each
Proposal.
The Company does not presently contemplate making the default interest
payment that is due unless the Consent requested herein is granted by the
Debentureholders as to Proposals No. 1, No. 2, No. 3 and No. 4, but the Company
may elect under some circumstances to complete the Exchange without Consent on
Proposals No. 2, No. 3 and No. 4. See "Intentions of the Company If Proposals 2,
3 or 4 Not Approved" below.
RECORD DATE
Debentureholders of record (excluding the Company or an Affiliate, as
defined in the Indenture) at the close of business on the date a Consent is
executed are entitled to give Consents to the actions proposed, and to bind all
successors and assigns of all or a portion of such Debentures unless and until
Consent is properly revoked. See "Revocability of Consents" below. At June 15,
1996, an aggregate of $9,538,000 principal amount of the Debentures were
outstanding, and none of such Debentures were held by the Company.
CONSENTS AND TRANSFERS
Any Consent signed and dated by the registered Debentureholder will
bind all beneficial owners and all transferees of either registered or
beneficial owners. A transferee, being bound until a Consent is properly revoked
by the registered Debentureholder, should consult the transferor and the
registered Debentureholder (if the transferor is a beneficial holder) concerning
whether there were pre-transfer Consents.
CONSENTS AND TENDERS
All Debentureholders tendering in the Exchange must Consent on
Proposals No. 1, No. 2, No. 3 and No. 4 and revoking the Consent after having
tendered Debentures will be considered a concurrent withdrawal (for the purposes
of the Exchange Offer) of the tendered Debentures. Debentures tendered by a
Debentureholder failing to Consent or revoking such Consent will not be accepted
for the Exchange. Although each Debentureholder that Consents will be offered an
exchange of cash and Common Stock for its Debentures, a Debentureholder is not
required to tender Debentures in order to Consent, and a Consent does not
indicate an intention to tender. See "The Proposed Exchange."
CONSENT SOLICITATION PERIOD
Consents will be effective as to each respective proposal if Consents
from registered holders of a sufficient principal amount of the Debentures on
such proposal have been received, and not revoked, at any time after the close
of business on __________, 1996, or any date thereafter which is within the
60-day period immediately following the first-dated Consent received. The
Consent Solicitation Period, if not earlier terminated, shall end on or prior
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to such 60th day, if it is a business day, or on the last business day prior to
such day.
REVOCABILITY OF CONSENTS
The Company will not use Consents received from the Debentureholders
for a minimum period of 20 business days (approximately 30 calendar days) (the
"Consent Solicitation Period") after the date of commencing this solicitation.
Thereafter, the Consent Solicitation Period as to all Proposals shall end at
5:00 o'clock p.m., St. Paul, Minnesota time, on the earlier of (a) the 60th
calendar day after the first-dated Consent or (b) the first date on which the
Consents are sufficient independently to effect the respective Proposal. The
Company in its discretion may not require Consent on Proposals No. 2, No. 3 or
No. 4. See "Intentions of the Company if Proposals 2, 3 or 4 Not Approved"
below. A Consent becomes effective as to each Proposal independently in
accordance with its terms, and the Consent on such Proposal thereafter binds all
Debentureholders of the Company.
Any Consent given is revocable, at any time before it becomes effective
as to a Proposal, by the registered Debentureholder giving it (or by any
registered successor Debentureholder) as to all or any portion of the same
Debenture. If prior to the date the Consent becomes effective as to a Proposal,
the Trustee receives a written notice of revocation of a Consent, or a duly
executed Consent bearing a later date, from a registered Debentureholder, any
earlier-dated Consent will be revoked as to such Proposal.
VOTING OR CONSENTING
"Approving" on a Proposal is counted as a Consent on the Proposal.
"Disapproving" or "abstaining" on a Proposal, and brokers indicating a "non-
vote" in the customary manner, all have the same effect, and none is counted as
a Consent on such Proposal. If a preference is not indicated as to Proposal No.
1, No. 2, No. 3 or No. 4 on a signed and dated Consent delivered by a
Debentureholder, the Consent will be counted as an APPROVE on each such
Proposal.
Only registered holders may give a Consent. The Consent card provided
may be executed by the registered holder or pursuant to authority given by the
record holder. Beneficial holders must instruct the broker or other nominee
holder to Consent.
INFORMATION AND SOLICITATION
The Company is required to undertake to reimburse, and does reimburse,
brokerage firms and other persons representing beneficial owners of securities
for their expenses in forwarding solicitation materials to such beneficial
owners.
The Trustee will mail, or cause to be mailed, at the Company's cost and
expense, copies of this Debenture Consent Solicitation Statement (and any other
documents contemplated hereby). The Trustee, acting as Registrar, will also
collect and tabulate the Consents. The Trustee also will provide required and
optional notices to registered Debentureholders in addition to its continuing to
provide customary services as Trustee. The Trustee will not advise
Debentureholders concerning the request for Consent. Appropriate written
questions or comments may be addressed to First Trust of California National
Association, successor of Bank of America National Trust and Savings
Association, 180 E. Fifth Street, Suite 200, St. Paul, Minnesota 55101.
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The above-described fees, costs and expenses, in addition to costs of
administrative matters related to distribution of this statement and related
documents, will be borne by the Company.
Consents may be solicited personally or by telephone, telegram or fax
by certain of the Company's directors, officers and regular employees, without
additional compensation.
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INTENTIONS OF THE COMPANY IF PROPOSALS 2, 3 OR 4 NOT APPROVED
The Company is not aware of any requirement under the Debentures or the
Indenture, or any applicable law, that Debentureholders approve Proposals No. 2,
3 or 4 in order for rescission of the acceleration of the Debentures to take
effect, unless:
(1) Proposal No. 2 is not approved, and some other default or Event of
Default under the Indenture exists and is continuing, that cannot be
cured by the Company by payment of default interest, and interest
thereon, due and by completion of the Exchange; or
(2) Proposal No. 3 is not approved, and the Trustee has pursued a
remedy at law or in equity that interferes with the Company's ability
to proceed to cure, or to obtain the waiver of, all continuing Events
of Default; or
(3) Proposal No. 4 is not approved, and the Trustee claims that, in
connection with this solicitation, the rescission of acceleration, or
the Exchange Offer as contemplated, the notice provision in the
Indenture relating to the cancellation of sinking fund payments must be
waived in order to proceed as contemplated.
If the Company is able to proceed without approval of Proposals No. 2,
3 or 4, in the circumstances that then exist, the Company intends (at the
earliest practicable date) to consummate the payments and other things necessary
in order to rescind acceleration provided that Proposal No. 1 is approved.
BOARD OF DIRECTORS' DISCRETION AND RESERVATION OF RIGHTS
The Board of Directors reserves the right, notwithstanding
Debentureholders' approval and without further action by the Debentureholders,
to elect not to proceed with any of the proposed actions in connection with one
or more of the Proposals, if at any time prior to the Company's completion
thereof the Board of Directors, in its sole discretion, determines that the
proposed action is no longer in the best interests of the Company.
Under each of the Proposals, the Board reserves the right to delay or
defer any occurrence, action, event or record date, upon notice, for purposes of
allowing the Consent Solicitation Period to remain open for any legally required
or permitted period or periods of time.
NO DISSENTERS' RIGHTS
Under Delaware law, Debentureholders are not entitled to dissenters'
rights of appraisal with respect to the Proposals or the Exchange Offer.
CONSENTS EXPECTED
The rescission of the acceleration of the Debentures, and its effects,
requires Consent by a majority in principal amount of the Debentures. The
Company anticipates Consent will be given by the Participating Securityholders,
which are estimated to comprise approximately 25% of the outstanding principal
amount of Debentures. The Company has also received informal, unsolicited
indications that enough additional holders of Debentures intend to Consent in
order to effect the rescission of acceleration upon the Company's payment of the
interest due.
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SPECIAL RISK FACTORS
In addition to the other information set forth herein, the following
factors should be considered carefully by the Debentureholders in deciding
whether or not to grant the Consents requested by the Company:
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Debenture Consent Solicitation Statement 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 and operating results include, without limitation, the Company's
success in (i) implementing its Debenture restructuring plans, (ii) resolving
issues with its former auditors and timely filing documents with the Securities
and Exchange Commission ("Commission") that may be requisite to the consummation
of the private placement and Debenture exchange transactions described below,
(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
the legal proceedings described below, (vi) maintaining the listing of the
Company's Common Stock on the New York Stock Exchange ("NYSE"), (vii) securing
any requisite stockholder and Debentureholder approval and consent, as the case
may be, to the transactions described below, and (viii) relicensing facilities
to provide psychiatric treatment.
The forward-looking statements included herein are based on current
assumptions that the Company will be able to proceed with the proposed Debenture
exchange offer or otherwise reach a settlement with the Debenture holders, 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.
EFFECTS OF REINSTATING NON-DEFAULT STATUS
At present, unless there is a rescission of acceleration of the
Debentures (the "Acceleration"), the Company is unable to cure the continuing
Events of Default under the Debentures without paying all principal and
interest, which the Company estimates will aggregate approximately $11.25
million as of July 15, 1996 ($9.53 million principal and $1.72 million default
interest and interest thereon accrued as of July 15, 1996), plus the Trustee's
fees and costs, estimated at less than $0.1 million.
The Company expects to be able to cure the Events of Default, which
must be cured in order to rescind the Acceleration. After rescission of the
Acceleration, and at least while no subsequent Events of Default occur, the
Trustee will have only those certain rights specified in the Indenture, and
shall not have the right to seek immediate payments of Debenture principal.
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The Indenture does not limit the Company in the amount of Senior Debt which may
be issued or in regard to dividends on stock or securities. The Trustee's and
the Debentureholders' influence over the Company, however, at present, which is
a time of continuing Events of Default, is at its greatest. The Trustee is
empowered, for instance, to sue for a judgment for the total amount owing under
the Debentures and the Indenture; and the right to seek any available remedy
against the Company gives rise to various considerations that tend to influence
the Company and its other financial and business dealings.
The Company has many practical limitations on its ability to incur
additional Senior Debt, and to make distributions, including its limited assets
and excessive liabilities. The Indenture does not impose any limit expressly on
Senior Debt or distributions. The practical implications of continuing Events of
Default include that other creditors are deterred from extending credit.
Further, with a continuing Event of Default, the Indenture prohibits the Company
from distributing anything of value to holders of Common Stock, other than
shares of capital stock. The Indenture does not restrict the Company after
rescission of the Acceleration. The renewed non-default status would eliminate
the present ability of Debentureholders to instruct the Trustee to claim the
full amount due and to seek any remedy to recover payment.
Management believes that the Company's financial strategy depends in
material part upon rescission of the Acceleration. The effect of rescinding
Acceleration is that the amount immediately due and payable of approximately
$11.25 million will no longer be immediately due, provided that the Company
shall have paid about $1.72 million, the amount of interest that would have come
due in any case even if the Acceleration had not occurred (i.e., $37.50 per
$1,000 of principal on October 15, 1994, April 15, 1995, October 15, 1995, and
April 15, 1996, plus interest on the overdue installments of default interest,
which is estimated at $11.25 per $1000 of principal as of July 15, 1996), plus
fees and costs of the Trustee, estimated at less than $0.1 million.
Holders of debt and equity securities are encouraged to read the
following Sections of this Debenture Consent Solicitation Statement and to seek
the advice of their own counsel or advisors with respect to such matters.
7
<PAGE> 16
SUMMARY COMPARISON OF TERMS OF DEBENTURES WITH AND WITHOUT ACCELERATION
ACCELERATED ACCELERATION RESCINDED
- ----------- ----------------------
PRINCIPAL...... While the Debentures are If the acceleration is
accelerated, $1,000 of principal rescinded, the principal
and interest accrued on the amount will be due in full
principal to the date of payment April 15, 2010, subject to
is payable, along with interest earlier redemption in the
on unpaid interest to the extent Company's discretion.
lawful is due and payable in
cash. See "Interest" below.
INTEREST....... Interest accrues at the rate of If the acceleration is to
7 1/2% per annum calculated on a be rescinded, the interest
30-day month and 360 day year required to be paid
basis. Interest has not been excludes the portion of
paid since the payment that was accrued interest due only
made on April 15, 1994 on the on account of the
Debentures. Four semi-annual acceleration, comprised of
interest installments are in interest on the principal
arrears (October 1994, April amount from and after April
1995, October 1995 and April 15, 1996.
1996). Debentures earn interest
on default interest at 7 1/2%
per annum, to the extent
permitted by law. Approximately
$180.00 of interest in the
aggregate will have accrued on
each $1,000 face value to July
15, 1996.
MATURITY....... While the Debentures are If the acceleration is
accelerated, all principal and rescinded, the principal
interest is due and payable amount will mature on April
immediately. The Company elected 15, 2010, subject to
to subtract from the Company's optional redemption at
sinking fund obligations the 100.00% of face amount, and
$36,460,000 principal amount of also subject to
Debentures converted by acceleration in the event
Debentureholders in March 1991 of notice by the Trustee or
and previously cancelled, at least 25% in principal
effectively removing the sinking amount of Debentures
fund redemption obligation. See following the existence and
"The Proposals-- Proposal No. continuation of an Event of
4." Default.
CONVERSION..... Each $1,000 in principal amount Same.
is 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
"Additional Risk
Factors--Conversion Price Far
Above Share Prices" below. See
"Notice of Conversion Price
Adjustment" attached as Exhibit
99.18.
8
<PAGE> 17
RANKING........ Unsecured general obligations of
the Company subordinate to all
existing and future Senior Debt
of the Company (as defined).
Secured Senior Debt totalled
approximately $2.0 million at
July __, 1996. Payments received
by Debentureholders may be
subject to claims of Senior Debt
holders or other creditors, and,
if competing creditors prevail
in asserting their claims, the
payment may be forfeitable. See
"Priorities of Securities and
Other Considerations Relating to
Any Future Bankruptcy of the
Company."If the acceleration is
rescinded, the ranking of the
Debentures will not be directly
affected; however, the
non-default status of the
Debentures may increase the
Company's debt-carrying ability
and, hence, the Company may
incur greater amounts of Senior
Debt or other obligations.
REDEMPTION..... Not applicable. Redeemable at any time in
whole or in part at the
option of the Company at
the principal amount,
together with accrued
interest. No sinking fund
redemption payments will be
due. See "The Proposals--
Proposal No. 4."
POTENTIAL EFFECTS OF SENIOR DEBT
Payment of Exchange Consideration in the proposed Exchange Offer may be
subject to restrictions contained in the Indenture. The Company is restricted
from paying, directly or through paying agents, any amount in cash or property
(other than capital stock of the Company) if any Senior Debt that has matured on
or before the date on which the Company intends to make payment is not
previously paid to the extent of the full amount of principal or interest due.
As of July __, 1996, the Company believes that it has approximately $2.1 million
of Senior Debt outstanding and an additional estimated $8.5 million in the
aggregate of other liabilities (including debt and senior equity of the
subsidiaries of the Company) with priority over the Debentures and approximately
$13.1 million of obligations represented by the Debentures themselves or that
are on a parity with the Debentures. The amount, including principal and
interest, of the Company's Senior Debt that will become due on or prior to
August 31, 1996 is estimated to be approximately $500,000. If any Senior Debt is
in default and if the holder gives the Company proper notice or institutes any
proceeding related to such default, and such Senior Debt provides for a right of
acceleration on default, the holder of Senior Debt in default must consent in
advance to the payment to Debentureholders of any cash or other property (other
than capital stock of the Company) before such payment may be made to
Debentureholders. As of the date of the Offering Circular describing the
proposed Exchange Offer, no holder of Senior Debt had given such notice or
instituted such proceedings to the Company's knowledge. No assurance can be made
that a default under the Company's Senior Debt has not or will not occur. The
Company anticipates being able to make full and timely payment to each holder of
Senior Debt as such Senior Debt matures as to principal or interest in the
immediate future.
POTENTIAL EFFECTS OF FAILURE TO RESCIND ACCELERATION
In the event of a failure to accomplish the proposed rescission of
acceleration of the Debentures, the Company would continue to be immediately
liable for the entire $9,538,000 principal amount plus accrued interest and
default interest from April 15, 1994, estimated at approximately $1.72 million
9
<PAGE> 18
to July 15, 1996, plus certain other costs. In such event, the Company believes
that it probably would not be able to pay the $9,538,000 of principal amount,
plus accrued interest and costs, that would remain immediately due under the
outstanding Debentures. Generally, unpaid creditors could file to commence a
Chapter 7 liquidation. The Company believes that any protracted bankruptcy case
would have material adverse effects on the Company. See "Brief Explanation of
Chapter 11" below.
ABILITY OF THE COMPANY TO CONTINUE AS A GOING CONCERN; EXPLANATORY PARAGRAPH
IN AUDITORS' REPORT
The Company's independent auditors have included an explanatory
paragraph in their report stating that the Consolidated Financial Statements of
the Company have been prepared assuming that the Company will continue as a
going concern and that the Company's financial condition, including the
acceleration of the Debentures, raises substantial doubts about its ability to
continue as a going concern. If the Debentures continue to be accelerated and a
judgment is entered against the Company, the Company could be unable to continue
to operate as a going concern and it may result in the Company, as its only
possible viable alternative, seeking relief under Chapter 11 of the Bankruptcy
Code regardless of the present intentions of the Company's Management and Board
of Directors to take any other action necessary to avoid commencement of a
bankruptcy case.
PRIORITIES OF SECURITIES AND OTHER RELATED CONSIDERATIONS RELATING TO ANY
FUTURE BANKRUPTCY OF THE COMPANY
Implementation of the rescission of acceleration 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 risks are
summarized below.
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<PAGE> 19
DEBT CLAIMS VS. EQUITY INTERESTS
The relative rankings of the Company's debt claims and equity interests
as of July __, 1996, both before and after giving effect to the rescission of
acceleration 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 may worsen as a result of the issuance of new
debt or convertible securities, whether secured or unsecured, which may, in each
case, rank senior to the Debentures or on a parity with them. In the event the
Company incurs additional indebtedness that is senior to the Debentures or
issues any preferred equity evidenced by a note, bond or similar instrument, or
in the event that the Company permits or authorizes its subsidiaries to incur
any indebtedness, liability, cause of action or claim, of any kind, to issue
senior securities, or to become or agree to be liable for other obligation
whatsoever, the position of the Debentures relative to the new indebtedness or
equity will worsen. In the event the Company, independently of its subsidiaries,
incurs obligations on a parity with the Debentures, Debentures will share on a
prorated basis, in available proceeds, thus reducing the Debentureholders'
share. Rescission of acceleration may again make it possible for the Company to
pay dividends on shares of capital stock so long as no Event of Default exists
and is continuing.
<TABLE>
<CAPTION>
RESCINDED ACCELERATED ACCELERATION
<S> <C> <C>
Secured Debt (a)
Parent Secured Debt.......................... Secured Creditors Secured Creditors
($2,072,000) ($2,072,000)
Subsidiary Secured Debt...................... ($413,000) ($413,000)
Subsidiary Other Liabilities (b)............... Unsecured Creditors Unsecured Creditors
($7,071,000) ($7,071,000)
Subsidiary Senior Equity (c)................... $1,000,000 $1,000,000
Parent Unsecured Debt (b)
General Creditors ........................... Unsecured Creditors Unsecured Creditors
($2,000,000) ($2,000,000)
Subordinated Debt............................ Debentures Debentures
($11,117,000) ($9,538,000 less
amounts exchanged)
Deferred Tax Credit............................ $8,818,000 $8,818,000
Equity (c)..................................... Common Stock Common Stock
(2,660,931) (2,889,843)
</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." See "The
Proposed Exchange--Exchange Offering Funding and Sources"
(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
11
<PAGE> 20
winding up of the Company. Preferred Stock may be issued with rights
determined by the Board of Directors from time to time. See "The
Proposed Exchange--Exchange Offer Funding and Sources."
12
<PAGE> 21
AVOIDABLE PREFERENCES
If a case were to be commenced by or against the Company under the
Bankruptcy Code following the consummation of the Exchange Offer, a bankruptcy
trustee or the Company, as debtor in possession, could avoid as a preference any
transfer of property made by the Company to or for the benefit of a creditor
which was made on account of an antecedent debt if such transfer (i) was made
within 90 days prior to the date of the commencement of the bankruptcy case or,
if the creditor is found to have been an "insider" (as defined in the Bankruptcy
Code), within one year prior to the date of commencement of the bankruptcy case;
(ii) was made when the Company was insolvent; and (iii) permitted the creditor
to receive more than it would have received in a liquidation under Chapter 7 of
the Bankruptcy Code had the transfer not been made. Under the Bankruptcy Code, a
debtor is presumed to be insolvent during the 90 days preceding the date of
commencement of a bankruptcy case. To overcome this presumption, it would need
to be shown that at the time the transfers were made, the sum of the Company's
debts was less than the fair market value of all of its assets.
Under the Bankruptcy Code, all or a portion of the property
transferred, including any cash payments, to tendering holders of Debentures, as
well as any subsequent payment to non-tendering holders of Debentures, could be
found to constitute preferences if a bankruptcy case were commenced within the
applicable time period following such payments and if the other elements
discussed above are present. If, following the commencement of a bankruptcy case
within the applicable time period, such transfers were found to be preferential
transfers, transferees could be ordered to return the full value of such
transfers. In such event, transferees would have a general unsecured claim in
the Company's bankruptcy case equal to the value of the property returned.
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 creditor.
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.
13
<PAGE> 22
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 a bankruptcy case will be protracted
and costly and disruptive to the Company's business. There can be no assurance
that a pre-packaged agreement favorable to Debentureholders will be proposed or
reached or that a plan favorable to Debentureholders will be proposed and
confirmed in the bankruptcy court. 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;
(d) substantial increase in the cost of liquidating or
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 liquidation or restructuring and,
if it is effectuated, the timing thereof;
(f) interference and delay regarding payments to
creditors;
(g) potential for forced liquidation of some or all of
the Company's assets, erosion in value of assets in
the context of a liquidation and the "forced sale"
atmosphere that would prevail, the adverse effects on
the salability of a business that could result from
the probable departure of key employees, and the
costs attributable to the time value of money
resulting from what is likely to be a protracted
proceeding, 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
14
<PAGE> 23
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. 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 pursuant to the Indenture, 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 pursuant
to the proposed Exchange Offer described below will be permitted by law. Certain
of the laws affecting the Company's ability to make such payments are described
elsewhere herein.
Moreover, 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.
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, 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 which will result from each
of the other exchanges or transfers
15
<PAGE> 24
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.
DETERMINATION OF TERMS OF EXCHANGE OFFER
The Company is seeking the Consent as part of a voluntary arrangement
with Debentureholders. While the Trustee is empowered to pursue any remedy at
law or in equity to obtain payment of the Debentures, the Trustee has forborne
from seeking remedies. The Company believes that a voluntary resolution will
best assure that Debentureholders receive value. The Trustee's acquiescence does
not necessarily indicate any position by the Trustee with regard to the subject
of whether to sign, date, and return a Consent card. Nothing herein should be
interpreted as a basis to infer that the Trustee or any Debentureholder is in
any way whatsoever responsible for directing or examining the terms of the
Consent and the Exchange Offer or in any way related to the past, present or
future conduct of the Company's financial or business affairs.
The Company has not performed any analysis of its liquidation or
reorganization value and has not obtained an independent valuation of the
Company's assets or liabilities and there can be no assurance whether the
Debentureholders would receive more or less in a liquidation, a reorganization,
or a voluntary arrangement. Holders of Debentures are cautioned to consult with
their own advisors. In particular, there can be no assurance regarding the
assumptions underlying the Company's determination that failure to obtain
Consent or to accomplish the Debenture Exchange, or, in the alternative, a
failure of the Company and the Debentureholders to otherwise reach a settlement,
may cause the Debentureholders to pursue an involuntary bankruptcy of the
Company and/or the Company to take alternative actions that may include filing
for voluntary protection from creditors. The Company's consolidated financial
statements do not include any adjustments to reflect possible future effects on
the recoverability and classification of assets or the amount and classification
of liabilities that may result from the outcome of the uncertainty of the
Company's ability to continue as a going concern. The Company believes that the
Debentureholders will receive less if they seek a liquidation of the Company
than if they pursue the voluntary arrangements described in this Debenture
Consent Solicitation Statement.
HISTORY OF LOSSES AND ANTICIPATED FUTURE LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY
As of February 29, 1996, the Company had a stockholders' deficiency of
$5.7 million, a working capital deficiency of approximately $10.9 million, and a
negative current ratio (a measure of liquidity) of approximately 1:2. The loss
from operations for the three months ended August 31, 1995 was $0.8 million, the
net income for the three months ended November 30, 1995 was $0.7 million (see
"Tax Matters" below), and the loss from operations for the three months ended
February 29, 1996 was $1.8 million.
There can be no assurance that the Company will be able to achieve
profitability and positive cash flows from operations or that profitability and
positive cash flow from operations, if achieved, can be sustained on an ongoing
basis. Moreover, if achieved, the level of that profitability or that positive
cash flow cannot accurately be predicted.
The Company's lack of profitability results also in its failing to
satisfy listing standards of the NYSE. No assurance can be made that the Common
Stock will continue to trade on the NYSE or that the Company can
16
<PAGE> 25
satisfy the comparable requirements of any other stock exchange or the Nasdaq
Stock Market.
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 which 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 business is conducted by
the Company's subsidiaries, the cash flow and consequent ability of the Company
to satisfy the Company's 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."
SPORADIC TRADING
The Debentures are not listed on any securities exchange or quoted on
the Nasdaq Stock Market. The trading, if any, in the Debentures is limited and
sporadic. Presently there are fewer than 50 registered holders of Debentures.
Because the Debentures may be, after consummation of the Exchange Offer
described below, held by a more extremely 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.
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.
NEED FOR ADDITIONAL FUNDS; UNCERTAINTY OF FUTURE FUNDING
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<PAGE> 26
The Company's negative cash flow from operations has consumed
substantial amounts of cash. Retirement of the Debentures would require
approximately $11.25 million as of July 15, 1996, if paid in full at such date,
or approximately $5.53 million in cash, if 100% of the outstanding principal
amount were tendered pursuant to the Exchange Offer described below (in addition
to 228,912 shares of Common Stock). Also, the proposed rescission of
acceleration of the Debentures will require substantial amounts of cash,
including payment of approximately $1.72 million of default interest.
Additional investment in the Company could result in impairment of the
Debentureholders' eventual receipt of payment or recovery. Issuance of
additional debt by the Company could result in substantial obligations senior to
Debentures.
During fiscal 1995 and 1996, a principal source of liquidity has been
the private sale of equity securities and debt securities convertible into
equity. Under the shareholder policies of the NYSE, the Company may not be able
to effect large placements of equity without shareholder approval, which, if not
obtained, may adversely affect the Company with respect to future capital
formation.
The Company has received a tax refund for fiscal 1995 in the amount of
$9.4 million based on loss carrybacks under Section 172(f) of the Internal
Revenue Code (the "Code"). However, the IRS payment of such refund did not
follow confirmation of the validity thereof by the IRS, and Section 172(f) is an
area of tax law without any guiding legal precedents. Any IRS claim for return
of all or any portion thereof could have a material adverse effect on the
Company's cash flows. See "Tax Matters" below.
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 is comprised of two of the four remaining freestanding facilities of
the Company.
In connection with the March 3, 1995 Letter Agreement with Mr. Jay H.
Lustig (described under "The Proposed Exchange--Background--Agreement of
Participating Securityholders" below), the Company agreed to pledge all of the
shares of its CareUnit, Inc. subsidiary. The Letter Agreement provided that "At
150 days after the date of this Agreement, provided that the Participating
Securityholders have in each material respect performed (with opportunity to
cure if a cure is possible) their obligations required to be performed hereunder
on or prior to such date, and if the Offer has not then been consummated, the
Company shall pledge (with the Trustee, or an alternate acceptable to the
Company, to act as pledgeholder on terms of a written agreement containing
standard terms reasonably acceptable to the Participating Securityholders) all
of the Shares as collateral for its obligation to purchase the Securities
pursuant to the Offer or otherwise." The Company has not pledged, and does not
intend to pledge, the shares of CareUnit, Inc. No assurances can be made that
the Participating Securityholders will not demand
18
<PAGE> 27
a pledge of such shares or that the Company will not be required to perform such
agreement, or otherwise satisfy its obligations to Debentureholders. However,
the Company believes that the Letter Agreement is not binding upon the Company,
and no pledge of the CareUnit shares is contemplated by the Company in the
currently proposed Exchange.
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 Securities Exchange Act of 1934, as amended (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.
TAX MATTERS
On July 20, 1995, the Company filed its Federal tax return for fiscal
1995. On August 4, 1995, the Company filed Form 1139 "Corporate Application for
Tentative Refund" to carry back losses described in Section 172(f) of the Code
requesting a refund 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 $11.7 million for 1986; $0.4 million for 1985; $0.7 million for
1983 and $0.4 million for 1982. The total refunds applied for are $22.6 million,
$13.2 million for amended prior years' returns and $9.4 million for fiscal year
1995. Assurances cannot be made as to the Company's entitlement to all of these
claims. Consequently, a valuation allowance has been established against $20.0
million of this potential tax benefit.
In October 1995, the Company received a $9.4 million refund for fiscal
1995 ("fiscal 1995 refund"). Although this tentative refund has been received,
the IRS has the ability to disallow this refund (i.e., assess a deficiency to
the extent of the refund claimed). Of this refund, $2.4 million was recognized
as a tax benefit during the second quarter of fiscal 1996. 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 sheet in non-current income
taxes payable. In addition, during the second quarter of fiscal 1996 the Company
reflected a tax benefit of $0.2 million, which is related to prior years'
returns. The Company paid a commission to Deloitte & Touche from the refund
proceeds of $1.9 million related to the fiscal 1995 refund. In the event the IRS
determines that the Company is not entitled to all or a portion of the
deductions under Section 172(f), this commission is
19
<PAGE> 28
reimbursable to the Company. Of the $1.9 million, the Company expensed $0.5
million during the second quarter of fiscal 1996, which is the amount relevant
to the tax benefit recognized by the Company. The remaining $1.2 million is
reflected in the Company's financial statements as a non-current note
receivable.
Specified liability losses include deductions for liabilities arising
out of tort or federal or state laws relating to acts occurring at least three
years before the beginning of the tax year, including related expenses. In
particular, these deductions include amounts with respect to the Company's IRS
FICA tax settlement, liability for sales tax, and litigation expenses related to
tort claims. The IRS retained approximately $2.5 million of the fiscal 1995
refund for amounts currently due and payable pursuant to a settlement agreement
relating to tax years 1984 through 1991.
Section 172(f) is an area of the federal income tax law without
substantial legal precedent. There may be opposition by the IRS as to the
Company's ability to carry back such a major portion of losses. No assurances
can be made that the IRS would not be successful in challenging the claimed
deductions so as to result in the repayment by the Company of the fiscal 1995
refund until such claims are reviewed by the IRS. In addition, no assurances can
be made that the Company ultimately will receive refunds as a result of the
pre-1995 amended returns. Neither the Company nor the IRS will be foreclosed
from raising other tax issues in regard to any audits of any such returns, which
could also ultimately affect the Company's tax liability. The Company believes
that it is entitled to the claimed deductions under Section 172(f), although
there is no guiding legal precedent for or against its position.
The Company's ability to use any net operating losses ("NOLs") may be
subject to limitation in the event that the Company issues or agrees to issue
substantial amounts of additional equity (see "The Proposed Exchange --
Potential Federal Income Tax Consequences - Effects on the Company"). The
Company monitors the potential for "change of ownership" and believes that
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 depend upon factors including the
availability of sufficient net income from which to deduct such losses during
limited carryback and carryover periods.
20
<PAGE> 29
THE PROPOSALS
PROPOSAL NO. 1
Debentureholders are asked to Consent on Proposal No. 1 in order to
rescind the acceleration of payment of principal and interest under the
Debentures, and its effects.
Acceleration was declared by the Trustee on or about February 13, 1995
after the Trustee received acceleration notices from a group of
Debentureholders. An Event of Default existed because of the inability of the
Company to pay the installment of Debenture interest that became payable on
October 17, 1994. Subsequently, the Company has failed to pay three semi-annual
interest installments, in addition to that first missed payment giving rise to
acceleration.
As described further under "The Proposed Exchange--Background" below, a
group of Debentureholders purporting to hold an aggregate of approximately 25%
in principal amount of outstanding Debentures elected on or about February 10,
1995 to accelerate payment of principal and interest under the Debentures.
Section 6.02 of the Indenture (entitled, "Acceleration") provides in
part as follows: ". . . The Holders of a majority in principal amount of the
then outstanding Securities by notice to the Trustee may rescind an acceleration
and its consequences if the rescission would not conflict with any judgment or
decree and if any existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of the
acceleration."
If the Consent of the holders of more than 50% in principal amount of
the Debentures is obtained for Proposal No. 1, the Company will pay to
Debentureholders for all Debentures (except those tendered and exchanged in the
proposed Exchange) all default interest due, without acceleration, through April
15, 1996, the immediately prior semi-annual interest payment date, plus interest
on all overdue installments accrued or accruing thereafter to the payment date,
and the Company's obligation to the Debentureholders will return to a
non-accelerated, non-default status. At July 15, 1996, the amounts that will
have become due, otherwise than on account of acceleration, will be $1,716,840
of interest. At July 15, 1996, the aggregate of all principal and interest due
under the Debentures will be $11,254,840. The Company will set a record date and
a payment date for this interest payment. The Company will send a notice stating
the amount of interest to be paid at least 15 days before the record date.
Following acceleration, and its effects, having been rescinded, the
Debentures (except those tendered and exchanged) will remain outstanding and
will become a long-term debt of the Company. The Company will be obligated to
make all future payments of principal and interest when due. The scheduled
maturity on April 15, 2010 will continue to be subject to the future occurrence
of an Event of Default, if any, and an acceleration of principal otherwise due
at maturity of the Debentures in the event of future declaration thereof under
the Debentures; and a Debentureholder will until maturity be unable to demand
immediately full payment of all principal and accrued interest on account of
past defaults, but may be able to achieve liquidity only through the sale or
other disposition of the Debentures in the over-the-counter market, if the
Debentures are so traded, or in a private financing or other transaction or
exchange. Debentures that are not tendered in the "Exchange" described below
will be fully subject to the risks of the Company's future as a going concern.
See "Special Risk Factors" above.
21
<PAGE> 30
The Company will have no obligation to redeem Debentures prior to
maturity.
Under the terms of the Debentures and the Indenture, scheduled sinking
fund payments are reduced by the original principal amount of Debentures that
are converted by Debentureholders, that are delivered to the Trustee for
cancellation or that otherwise are redeemed by the Company, at the Company's
election. Debentureholders converted an aggregate of $36,460,000 of Debentures
in March 1991, which exceeded the Company's sinking fund obligations. The
Company has given notice to the Trustee to subtract such amounts from the
sinking fund obligations effective as to all sinking fund redemption
obligations. However, as described further under "Proposal No. 4" below, the
Company's belief that it timely provided adequate notice to the Trustee is not
free from doubt, and the Company, therefore, is also seeking consent to the
waiver of such notice provisions.
If the Consent to Proposal No. 1 is not granted by a sufficient
principal amount, the Debentureholders will continue to be entitled to receive
immediate payment of all principal and accrued interest due under the
Debentures. At July 15, 1996, the aggregate of all principal and interest due
under the Debentures will be $11,254,840.
The purposes of the Consent on Proposal No. 1 include elimination of
the various undesirable effects on the Company of an acceleration, such as:
(a) An acceleration of indebtedness could impair the Company's
business and financial prospects.
(b) An acceleration of indebtedness could result in defaults under
other debts and obligations of the Company.
(c) An acceleration of indebtedness decreases the Company's
attractiveness to investors.
(d) An acceleration of indebtedness also creates an unfavorable
impression with the Company's vendors and clients.
If the Company fails, or is unable, to make the payments resulting from
the Debenture acceleration, all creditors of the Company, including the Trustee
or the Debentureholders, may seek any remedies available at law or in equity,
including but not limited to remedies under bankruptcy or other similar laws
governing or affecting creditors' rights. Debentures are general unsecured
obligations of the Company, independently from its subsidiaries. The Company
will pay the entire amount of interest due on all non-tendered Debentures other
than those exchanged, so that the non-accelerated status of the Debentures will
be reinstated.
Payment of principal and interest under the Debentures is expressly
subordinated to the prior payment of Senior Debt of the Company that has matured
or, in certain circumstances, has the right to accelerate its maturity. Senior
Debt is defined in Section 11.02 of the Indenture to encompass generally all
debt other than trade payables to the extent that such debt does not by its
terms negate its status as Senior Debt. See "Special Risk Factors -- Priorities
of Securities and Other Considerations Relating to Any Future Bankruptcy of the
Company" above and "Description of Debentures -- Subordination of Debentures"
below. In any bankruptcy or similar proceeding, the indebtedness evidenced by
the Debenture may be paid or accounted for only according to its ranking as
subordinated debt. Section 11.04 of the Indenture, "Default on Senior Debt"
provides in part as follows:
22
<PAGE> 31
"Upon the maturity of any Senior Debt by lapse of time,
acceleration or otherwise, all such Senior Debt shall first be paid in
full, or such payment duly provided for in cash or in a manner
satisfactory to the holders of such Senior Debt, before any payment is
made by the Company or any person acting on behalf of the Company on
account of the principal or interest on the Securities.
"The Company may not pay principal of or interest on the
Securities and may not acquire any Securities for cash or property
other than capital stock of the Company if:
"(1) a default on Senior Debt occurs and is
continuing that permits holders of such Senior Debt to
accelerate its maturity, . . . ."
The Company does not know of any Senior Debt currently in default whose
holder on account thereof has a right to accelerate it and has instituted any
proceeding or given notice in writing addressed to the Company; provided,
however, no assurance can be made that such default under any Senior Debt, or
other senior claims on the Company's assets, incurred any time, before or after
this Statement, has not and will not occur.
PROPOSAL NO. 2
Debentureholders are asked to Consent to waive any other Events of
Default under the Debentures (other than principal and interest due otherwise
than by acceleration).
Proposal No. 2 is dependent on Proposal No. 1. Section 6.02 quoted
under Proposal No. 1 above indicates that to effect a rescission of
acceleration, all Events of Default must have been "cured or waived." The
Company does not know of any Event of Default, other than interest nonpayment,
but asks that the Debentureholders approve Proposal No. 2 in order to eliminate
the possibility of a technical breach defeating the will of the holders of
outstanding Debentures consenting to Proposal No. 1. The Board of Directors
recommends that Debentureholders waive all other defaults, if any.
If the Consent of the holders of more than 66 2/3% in principal amount
of the Debentures is obtained for Proposal No. 2, the Company will not be deemed
to be in default with respect to technical defaults that potentially could make
the Company subject to demands for accelerated payment or, potentially, subject
it to claims that the proposed rescission of acceleration is not effective.
Proposal No. 2 relates only to technical defaults. Proposal No. 2 does not waive
the existing defaults in payment of interest which were due on October 15, 1994;
April 15, 1995; October 15, 1995; and April 15, 1996; and it is not a waiver of
the interest on each overdue interest installment to the date of payment.
Accrued interest will in either event be due and payable in accordance with the
terms of the Debentures, unless waived by the individual Debentureholder
affected. Such waiver only would be effected pursuant to tendering the
Debentures in the Exchange Offer. Non-tendered Debentures will entitle the
Debentureholder to the interest payment and such interest must be paid to the
rescission of the Debentures' acceleration. Debentures tendered in the Exchange
will be entitled to receive a specified amount as principal plus a specified
amount as accrued interest, and will waive the balance of principal and interest
by making, and not withdrawing, such tender, with such waiver only becoming
effective upon the surrender of Debentures and completion of the Exchange.
If Proposal No. 1 and 2 are approved by the Debentureholders, the
restored non-accelerated status of the Debentures will be maintained
23
<PAGE> 32
notwithstanding any defaults waived so long as past-due payments are made and
the Debentureholders are paid each of the future semi-annual interest
installments until maturity of principal on April 15, 2010, and if the Company
otherwise does not commit any Events of Default resulting in a future
acceleration thereof.
PROPOSAL NO. 3
Debentureholders are asked to Consent to the giving of directions to
the Trustee under the Indenture to the effect that the Trustee shall not, during
the Consent Solicitation Period and for a period of 30 calendar days thereafter,
pursue any available remedy under or in accordance with the Debentures or
Indenture unless directions to do so are given by the holders of not less than
50% of the outstanding principal amount of Debentures.
If Proposal No. 3 is adopted, instructions to the Trustee to pursue
remedies on account of defaults will be effected only if authorized by a
majority of the Debentureholders, rather than 25% in principal amount of
Debentures as provided in the Indenture. If Proposal No. 3 is adopted, it will
become more difficult for the Debentureholders to institute collection or other
proceedings against the Company pending completion of the periods described
above. Approval of a majority in principal amount of outstanding Debentures is
necessary to effect Proposal No. 3. The Company has determined to limit the
Consent Solicitation Period to 60 days after the first-dated Consent received.
Adoption of Proposal No. 3 will limit any remedy under the Debentures during the
Consent Solicitation Period and up to 30 calendar days thereafter unless a
majority in principal amount of Debentures instructs the Trustee to pursue any
such remedy at such time.
PROPOSAL NO. 4
Debentureholders are asked to Consent to the waiver of the notice
required to be given by the Company to the Trustee under a provision of the
Indenture that applies only if and when the Company intends to exercise its
rights to reduce its sinking fund payment obligations under the Indenture. The
Company exercised its right to reduce and eliminate sinking fund obligations,
although the timing and sufficiency of the notice was questioned by the Trustee.
As a result of the surrender and cancellation in 1991 of approximately $36
million in principal amount of Debentures, the Company was entitled to reduce
the amount, to zero, that otherwise would be payable on specified sinking fund
payment dates that would commence April 15, 1996 and continue annually through
April 15, 2009. The Consent of two-thirds in principal amount of currently
outstanding Debentures is necessary to approve this Proposal No. 4.
The Indenture requires notice by the Company to the Trustee that the
Company intends to reduce its obligation to make a sinking fund payment, or
payments. The Company has previously accepted approximately $36 million dollars
in principal amount of Debentures, all of which were surrendered in March 1991
by the holders thereof, who at that time converted their Debentures into Common
Stock. The Company, which thereafter delivered such Debentures to the Trustee
for cancellation, is entitled to reduce its sinking fund obligations under the
Indenture by the aggregate amount of Debentures theretofore cancelled. The
purpose of Proposal No. 4 is to provide a waiver of the notice provision in the
Indenture relating to the provisions for sinking fund payments.
The consent of two-thirds of outstanding principal amount of Debentures
is necessary to waive an Event of Default under the Indenture. However, the
Company is not required to obtain a waiver of the failure to give notice,
because when the Company received notice from the Trustee, the Company
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<PAGE> 33
promptly cured the failure to give notice. The failure to give notice did not
continue long enough to be considered an Event of Default under the Indenture.
Although the Company had provided the Debentures to the Trustee for
cancellation and there were sufficient Debentures cancelled in order for the
Company to eliminate all of the sinking fund obligations under the Indenture and
the Debentures, the notice provision has arguably not been satisfied by the
Company. The Company believes that it satisfied the notice provision; however,
out of an abundance of caution, the Company desires to further obtain the waiver
of Notice in order to assure that claims will not be made against the Company
with respect to the sinking fund provisions based on a failure to properly give
notice in a timely fashion as required.
The Trustee, whose interpretation of the notice provision is not
necessarily a definitive interpretation, informed the Company that the Company
had not provided timely notice of its intentions regarding the sinking fund
payment due April 15, 1996. The Company responded by letters dated March 27,
1996, that it believed that it had provided adequate notice to the Trustee and
that the notice provision was not yet applicable. The notice from the Trustee
and the response letters from the Company are provided as Exhibits 99.22 and
99.23, respectively, hereto, and are incorporated herein by reference.
The Indenture provides that a provision may be waived by two-thirds in
outstanding principal amount of Debentures. Without conceding that the notice
provision was applicable or that the time for providing such notice had passed
prior to the giving of such notice, the Company is seeking consent on Proposal
No. 4 so that, if necessary, the requirement of notice will have been waived by
the Debentureholders. The effect of such waiver of notice would be to eliminate
claims that a sinking fund payment was due at April 15, 1996. All other
conditions to the elimination of such payment obligation were met, other than
the giving of notice, which the Company believes it also has met.
The sinking fund payment due April 15, 1996 would be an obligation to
redeem a portion of the aggregate principal amount of Debentures equal to five
percent thereof. The amount of Debentures outstanding at such date was
$9,538,000; five percent of $9,538,000 is $476,900. However, the aggregate
principal amount, as such term is used in the sinking fund provisions of the
Indenture, is not free of ambiguity. Such term might refer to the originally
outstanding $46 million in principal amount of Debentures; in that case, five
percent would represent $2,300,000 in principal amount of Debentures.
Sinking fund payments would be applied to the redemption, pro rata, of
a portion of all of the outstanding Debentures. Debentures that are redeemed
are, to the extent redeemed, cancelled and retired. Although Debentures that are
redeemed are paid the full 100% of the principal amount thereof, once paid, such
Debentures no longer bear interest.
Although, arguably, by waiving the notice provision, Debentureholders
may be waiving their rights to claim the April 15, 1996 sinking fund payment,
the Company has no intention whatsoever of making such sinking fund payment in
any event, as it believes that the notice provision was completely satisfied.
Further, as to all future sinking fund obligations after 1996 and concluding in
the year 2009, the Company has, without doubt, eliminated the sinking fund
payment obligations entirely. The waiver requested in Proposal No. 4, therefore,
would only affect the potential claim that a Debentureholder could have
otherwise made with respect to the April 15, 1996 sinking fund payment.
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<PAGE> 34
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 approval or disapproval of Proposals No. 1, No. 2, No. 3
and No. 4, except as holders of Common Stock generally. The rescission of
acceleration is anticipated to affect positively the interests of the Company
generally and the interests of the holders of the Common Stock. See "Special
Risk Factors -- Priorities of Securities and Other Related Considerations
Relating to Any Future Bankruptcy of the Company," above.
PRINCIPAL DEBENTUREHOLDERS
The following table sets forth information concerning beneficial
ownership of Debentures. Such information is given as of May 31, 1996 (the
"reporting date"). At the reporting date, $9,538,000 in principal amount of
Debentures was outstanding. According to rules adopted by the Commission,
"beneficial ownership" of Debentures for this purpose is the power to vote them
or to direct their investment, and includes the right to acquire beneficial
ownership of Debentures within 60 days after the reporting date. Except as
otherwise noted, the indicated owners have sole voting and investment power with
respect to Debentures beneficially owned. An asterisk in the percent of class
column indicates beneficial ownership of less than 1% of the outstanding
Debentures.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name of Beneficial Owner Beneficial Ownership of Class
------------------------ -------------------- --------
<S> <C> <C>
William H. Boucher 0 *
J. Marvin Feigenbaum 0 *
Ronald G. Hersch, Ph.D. 0 *
Drew Q. Miller 0 *
W. James Nicol 0 *
Kerri Ruppert 0 *
Chriss W. Street 0 *
All executive officers and
directors as a group (7 persons) 0 *
</TABLE>
26
<PAGE> 35
PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning beneficial
ownership of Common Stock. Such information is given as of May 31, 1996 (the
"reporting date"). A total of 2,848,685 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 5,000 (1) *
J. Marvin Feigenbaum 5,000 (1) *
Lindner Funds(2) 586,700 (2) 20.6
Ronald G. Hersch, Ph.D. 40,501 (3) 1.4
Drew Q. Miller 27,667 (4) *
W. James Nicol 5,056 (5) *
Kerri Ruppert 28,000 (6) *
Chriss W. Street 166,560 (7) 5.8
All executive officers and
directors as a group (7 persons) 377,784 (8) 13.3
</TABLE>
________________
(1) Includes 5,000 shares subject to options that are presently exercisable
or exercisable within 60 days after the reporting date.
(2) 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. Lindner
Funds, as described in its Schedule 13G, holds the shares and
convertible debt in more than one fund.
(3) Includes 12,334 shares held directly and 28,167 shares subject to
options that are presently exercisable or exercisable within 60 days
after the reporting date.
(4) Includes 1,000 shares held directly and 26,667 shares subject to
options that are presently exercisable or exercisable within 60 days
after the reporting date.
(5) Includes 56 shares held by Mr. Nicol's spouse as custodian for his
three minor children, all of whom reside with Mr. Nicol, and 5,000
shares subject to options that are presently exercisable or exercisable
within 60 days after the reporting date.
(6) Consists of 28,000 shares subject to options that are presently
exercisable or exercisable within 60 days after the reporting date.
(7) Includes 6,560 shares held directly and 60,000 shares subject to
options that are presently exercisable or exercisable within 60 days
after the reporting date. Also includes 100,000 restricted shares under
a restricted stock agreement over which the holder has sole voting
power, the issuance of which is pending administerial matters.
(8) Includes a total of 249,834 shares subject to outstanding options that
are presently exercisable or exercisable within 60 days after the
reporting date and 100,000 restricted shares over which the holder has
sole voting power, the issuance of which is pending administerial
matters.
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<PAGE> 36
THE PROPOSED EXCHANGE
The references herein to the Exchange Offer, or the like, are not
intended to imply or indicate that any offer of exchange is made in this
Debenture Consent Solicitation Statement expressly or impliedly. The Exchange
Offer only will be made pursuant to the accompanying Offering Circular, Schedule
13E-4, Letter of Transmittal and the documents referred to therein
(collectively, "Exchange Offer Documents"). The Company desires the Exchange
Offer to be an offer to its Debentureholders to surrender for exchange each
$1,000 in outstanding principal amount of Debentures, and accrued and unpaid
interest to the exchange date, which at July 15, 1996 will aggregate $180 of
interest per $1,000 in outstanding principal amount, for an Exchange
Consideration aggregately of $580 in cash and 24 shares of Common Stock, which
will be comprised of $500 in cash and 16 shares Common Stock, as principal, plus
$80 in cash and 8 shares of Common Stock, as interest (the "Exchange Offer").
Unless the Consents requested herein are granted by the Debentureholders holding
the necessary aggregate principal amount of Debentures to effect rescission of
acceleration of the Debentures, the Company will not have any obligation to
effect the Exchange and pay Exchange Consideration. The Company does not
presently contemplate completion of the Exchange unless the Debenture
acceleration is rescinded and the Company's funding is adequate to pay Exchange
Consideration to all tendering Debentureholders and default interest, and
interest thereon, to all non- tendering Debentureholders, because the Company
does not expect to be able to make the payment of $9,538,000 principal plus
$1,716,840 interest, as of July 15, 1996, that would be required in order to
retire the Debentures. The Indenture also requires the Company to satisfy the
Company's financial commitments that are senior to the Debentures and have
become due. A rescission of acceleration of the Debentures would effect a
reinstatement of the Debentures to their original non-accelerated terms, and
that should result in an immediate improvement in the Company's working capital
deficit. There may be potentially some relative improvement in the Company's
debt-carrying ability.
The Debentureholders may wish to consider the opportunity that the
Company is providing to the Debentureholders to exchange their Debentures for
Exchange Consideration. However, should the Company's financial position after
rescission of acceleration and until the original maturity date of the
Debentures improve to such extent as Debentures can be paid in full on maturity,
the Debentureholders may wish to continue holding Debentures, as well as giving
Consent. Giving Consent will not effectively tender your Debentures. The manner
of tendering Debentures is described in the Exchange Offer Documents.
The Company cannot purchase any Debentures, otherwise than in an
exchange pursuant to the Exchange Offer, until the expiration of at least ten
business days after the termination of the Exchange Offer, and has no intention
presently to do so thereafter.
A registered Debentureholder's right to Consent will continue despite
tendering Debentures in the Exchange Offer, until such tendered Debentures are
accepted by the Company in the Exchange. A registered Debentureholder who
tenders Debentures in the Exchange Offer will also thereafter be able to revoke
a previous Consent. On the date or dates that Debentures are exchanged for
Exchange Consideration (the "Exchange Date"), the Debentures accepted for
payment will become the Company's, and such aggregate number of Debentures shall
be excluded thereafter from voting and from the calculation of the percentage
required for Consent.
28
<PAGE> 37
It is each beneficial and record Debentureholder's right to elect not
to tender such holder's Debentures. Nevertheless, there can be no assurance that
the aggregate market value of the Debentures (plus the default interest paid)
after a rescission of acceleration will be as great as the aggregate market
value of the Debentures while they continue to be immediately due and payable.
Debentureholders are urged, in addition to Consenting, to carefully consider the
Exchange Offer. After the Exchange Offer, the trading in the Debentures may
become more thin and sporadic, which could adversely affect the liquidity of an
investment in the Debentures.
A rescission of acceleration of the Debentures will not alter the
rights, pursuant to the Indenture, of Debentureholders to accelerate the
Debentures following any future Event of Default by the Company. In anticipation
that rescission of acceleration will be accomplished, the Company is
concurrently making the Exchange Offer. Concurrently with the Debenture Consent
Solicitation, therefore, each Debentureholder will find it necessary to decide
whether or not to tender Debentures based on either the current acceleration or
the possibility that a rescission of acceleration will be effected, which may
have the significant effect of reinstating the Debentures' original maturity
date of April 15, 2010. In doing so, each Debentureholder should consider the
information set forth in the Exchange Offer Documents pertaining to the Exchange
Offer and not only the information set forth herein.
The Exchange Offer is being made by the Company in reliance upon the
exemption from the registration requirements of the Securities Act afforded by
Section 3(a)(9) of the Securities Act. The Company, therefore, will not pay any
commission or other remuneration to any broker, dealer, salesman or other person
for soliciting Debentureholders to give Consents or to exchange Debentures.
Directors, officers and regular employees of the Company, who will not receive
additional compensation therefor, may solicit Debentureholders to give Consents
and/or to exchange Debentures.
PRO FORMA CAPITALIZATION AND INCOME STATEMENT INFORMATION
The following tables set forth (1) the condensed consolidated balance sheets
of the Company as of February 29, 1996 (unaudited) and pro forma as adjusted to
give effect to the Exchange for 100% of the outstanding Debentures and 30% of
the outstanding Debentures, respectively, without deducting the Company's
estimated expenses; (2) the condensed consolidated balance sheets of the Company
as of May 31, 1995 and pro forma as adjusted to give effect to the Exchange for
100% of the outstanding Debentures and 30% of the outstanding Debentures,
respectively, without deducting the Company's estimated expenses; (3) the
condensed consolidated income statements of the Company for the fiscal year
ended May 31, 1995 and pro forma as adjusted to give effect to the Exchange for
100% of the outstanding Debentures and 30% of the outstanding Debentures,
respectively, without deducting the Company's estimated expenses; and (4) the
condensed consolidated income statements of the Company for the 9 months ended
February 29, 1996 (unaudited) and pro forma as adjusted to give effect to the
Exchange for 100% of the outstanding Debentures and 30% of the outstanding
Debentures, respectively, without deducting the Company's estimated expenses.
For purposes of the presentation in the following pro forma financial statements
only, an assumed value of $7.50 per share ("Assumed Value Per Share") has been
assigned to the Company's Common Stock. 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.
The condensed 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. Notes to consolidated financial statements
29
<PAGE> 38
included in Form 10-K/A No. 4 for the year ended May 31, 1995, on file with
the Securities and Exchange Commission, provide additional disclosures and a
further description of accounting policies.
The Company's 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 continues 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.
30
<PAGE> 39
COMPREHENSIVE CARE CORPORATION
Condensed Consolidated Balance Sheets
Pro Forma
At February 29, 1996 (unaudited)
(Dollars in Thousands, except per share amounts)
<TABLE>
Pro Forma
------------------------------------
Actual 100% 30%
-------- ---------------- ---------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 3,214 $ (2,318) (1) $ 542 (6)
Accounts and notes receivable,
less allowance for doubtful
accounts of $1,056........................... 3,148 3,148 3,148
Property and equipment
held for sale................................ 3,821 3,821 3,821
Other current assets........................... 517 517 517
----------- ----------- -----------
Total current assets............................. 10,700 5,168 8,028
----------- ----------- -----------
Property and equipment, at cost.................. 18,742 18,742 18,742
Less accumulated depreciation
and amortization............................... (9,023) (9,023) (9,023)
----------- ----------- -----------
Net property and equipment....................... 9,719 9,719 9,719
----------- ----------- -----------
Property and equipment held
for sale....................................... 2,455 2,455 2,455
Other assets..................................... 3,724 3,724 3,724
----------- ----------- -----------
Total assets..................................... $ 26,598 $ 21,066 $ 23,926
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities................................... $ 10,078 $ 8,633 (2) $ 8,633 (7)
Long-term debt in default..................... 9,538 -- (3) -- (8)
Current maturities of long
term debt................................... 1,630 1,630 1,630
Income taxes payable.......................... 377 377 377
----------- ----------- -----------
Total current liabilities........................ 21,623 10,640 10,640
----------- ----------- -----------
Long-term debt, excluding current
maturities..................................... 2,048 2,048 8,724 (9)
Income taxes payable............................. 7,018 7,018 7,018
Other liabilities................................ 638 638 638
Minority interest................................ 1,000 1,000 1,000
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (See Note 5 to
the Company's Condensed Consolidated Financial
Statements included in its most recent Report
on Form 10-Q for the quarterly period ended
February 29, 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................ 27 29 (4) 28 (10)
Additional paid-in capital.................... 42,517 44,222 (4) 43,028 (10)
Accumulated deficit........................... (48,273) (44,529) (5) (47,150) (11)
----------- ----------- -----------
Total stockholders' equity (deficit)............. (5,729) (278) (4,094)
Total liabilities and
stockholders' equity............................. $ 26,598 $ 21,066 $ 23,926
=========== =========== ===========
</TABLE>
- -------------------------------------
(1) Represents payment of $4,769,000 in principal and $763,000 in interest.
(2) Represents $1,371,000 in accrued interest and $74,000 in default
interest.
(3) Represents Debenture payoff of $4,769,000 in cash, $1,707,000 in common
stock, and realization of $3,062,000 of forgiveness of debt (gain).
(4) Additional paid-in capital of $7.49 (at the $7.50 Assumed Value Per
Share less the $0.01 par value per share of common stock) multiplied by
228,912 shares of common stock = $1,714,551. Aggregate par value of
228,912 shares of common stock multiplied by $.01 per share = $2,289.
31
<PAGE> 40
(5) Represents gains of $3,062,000, $608,0000, and $74,000, respectively,
in the exchange of Exchange Consideration for principal, interest and
default interest.
(footnotes continued on following page)
32
<PAGE> 41
(6) Represents payment of $1,431,000 in principal, $1,189,000 in interest,
plus $52,000 in default interest.
(7) Represents $1,371,000 accrued interest and $74,000 in default interest.
(8) Represents Debenture payoff of $1,431,000 in cash, $512,000 in common
stock (at the $7.50 Assumed Value Per Share), and $919,000 forgiveness
of debt (gain), and reclassification of $6,676,000 from a long-term
debt in default to a long-term debt.
(9) Reclassification of $6,676,000 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 = $514,365. Aggregate par value of 68,674 shares of
common stock multiplied by $.01 per share = $687.
(11) Represents gains of $919,000, $182,000, and $22,000, respectively, in
the exchange of Exchange Consideration for principal, interest and
default interest.
33
<PAGE> 42
COMPREHENSIVE CARE CORPORATION
Condensed Consolidated Balance Sheets
Pro Forma
At May 31, 1995
(Dollars in Thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma (unaudited)
------------------------------------
ASSETS
Actual 100% 30%
----------- ---------------- ---------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents...................... $ 1,542 $ (3,990) (1) $ (718) (6)
Accounts and notes receivable,
less allowance for doubtful
accounts of $1,096........................... 3,329 3,329 3,329
Property and equipment
held for sale................................ -- -- --
Other current assets........................... 3,141 3,141 3,141
----------- ----------- -----------
Total current assets............................. 8,012 2,480 5,752
----------- ----------- -----------
Property and equipment, at cost.................. 25,181 25,181 25,181
Less accumulated depreciation
and amortization............................... (13,074) (13,074) (13,074)
----------- ----------- -----------
Net property and equipment....................... 12,107 12,107 12,107
----------- ----------- -----------
Property and equipment held
for sale....................................... 3,746 3,746 3,746
Other assets..................................... 2,136 2,136 2,136
----------- ----------- -----------
Total assets..................................... $ 26,001 $ 20,469 $ 23,741
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities................................. $ 10,235 $ 9,378 (2) $ 9,378 (7)
Long-term debt in default..................... 9,538 -- (3) -- (8)
Current maturities of long
term debt................................... 3,285 3,285 3,285
Income taxes payable.......................... 296 296 296
----------- ----------- -----------
Total current liabilities........................ 23,354 12,959 12,959
----------- ----------- -----------
Long-term debt, excluding current
maturities..................................... 5,077 5,077 11,753 (9)
Income taxes payable............................. -- -- --
Other liabilities................................ 1,503 1,503 1,503
Minority interest................................ 1,000 1,000 1,000
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (See Note 5 to
the Company's Consolidated Financial Statements
included in its most recent Report on Form 10-K
for the annual period ended May 31, 1995,
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................ 25 27 (4) 26 (10)
Additional paid-in capital.................... 41,558 43,263 (4) 42,069 (10)
Accumulated deficit........................... (46,516) (43,360) (5) (45,569) (11)
----------- ----------- -----------
Total stockholders' equity (deficit)............. (4,933) (70) (3,474)
Total liabilities and
stockholders' equity............................. $ 26,001 $ 20,469 $ 23,741
=========== =========== ===========
</TABLE>
- ------------------------------
(1) Represents payment of $4,769,000 in principal and $763,000 in interest.
(2) Represents $835,000 in accrued interest and $22,000 in default
interest.
(3) Represents Debenture payoff of $4,769,000 in cash, $1,707,000 in common
stock, and realization of $3,062,000 of forgiveness of debt (gain).
34
<PAGE> 43
(4) Additional paid-in capital of $7.49 (at the $7.50 Assumed Value Per
Share less the $0.01 par value per share of common stock) multiplied by
228,912 shares of common stock = $1,714,551. Aggregate par value of
228,912 shares of common stock multiplied by $.01 per share = $2,289.
(5) Represents gains of $3,062,000, $72,000, and $22,000, respectively, in
the exchange of Exchange Consideration for principal, interest and
default interest.
(footnotes continued on following page)
35
<PAGE> 44
(6) Represents payment of $1,431,000 in principal, $813,000 in interest,
plus $16,000 in default interest.
(7) Represents $835,000 accrued interest and $22,000 in default interest.
(8) Represents Debenture payoff of $1,431,000 in cash, $512,000 in common
stock (at the $7.50 Assumed Value Per Share), and $919,000 forgiveness
of debt (gain), and reclassification of $6,676,000 from a long-term
debt in default to a long-term debt.
(9) Reclassification of $6,676,000 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 = $514,365. Aggregate par value of 68,674 shares of
common stock multiplied by $.01 per share = $687.
(11) Represents gains of $919,000, $21,000, and $7,000, respectively, in the
exchange of Exchange Consideration for principal, interest and default
interest.
36
<PAGE> 45
COMPREHENSIVE CARE CORPORATION
Consolidated Income Statements
Pro Forma
Fiscal Year Ended May 31, 1995
(Dollars in Thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma (unaudited)
----------------------------
Actual 100% 30%
-------- -------- --------
Revenues:
<S> <C> <C> <C>
Operating revenues ................... $ 29,282 $ 29,282 $ 29,282
-------- -------- --------
Costs and expenses:
Direct healthcare operating expenses . 31,497 31,497 31,497
General and administrative expenses .. 4,331 4,331 4,331
Provision for doubtful accounts ...... 1,423 1,423 1,423
Depreciation and amortization ........ 1,797 1,797 1,797
Write-down of assets ................. 341 341 341
------- ------- -------
39,389 39,389 39,389
Loss from operations ................... (10,107) (10,107) (10,107)
Other income/(expenses):
Gain on sale of assets ............... 836 836 836
Loss on sale of assets ............... (754) (754) (754)
Interest income ...................... 38 38 38
Interest expense ..................... (1,366) (1,366) (1,366)
Loss before income taxes ............... (11,353) (11,353) (11,353)
Provision for income taxes ........... 180 180 180
-------- -------- --------
Loss before extraordinary item ......... $(11,533) $(11,533) $(11,533)
-------- -------- --------
Extraordinary item - gain on debenture
exchange ............................. -- 3,062 919
Extraordinary item - gain on debenture
interest ............................. -- 94 (1) 28 (2)
-------- -------- --------
Net (loss) ............................. $(11,533) $ (8,377) $(10,586)
======== ======== ========
Loss per common share:
Loss before extraordinary item ....... $ (5.11) $ (5.11) $ (5.11)
Extraordinary item - gain on debenture
exchange ............................. 0.00 1.40 0.42
-------- -------- --------
Net (loss) per share ................... $ (5.11) $ (3.71) $ (4.69)
======== ======== ========
</TABLE>
- ------------------------------------------
(1) Represents $72,000 gain on debenture interest and $22,000 gain on default
interest.
(2) Represents $21,000 gain on debenture interest and $7,000 gain on
default interest.
37
<PAGE> 46
COMPREHENSIVE CARE CORPORATION
Consolidated Income Statements
Pro Forma
Nine Months Ended February 29, 1996
(unaudited) (Dollars in Thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma (unaudited)
---------------------------
Actual 100% 30%
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Operating revenues ........................ $ 23,964 $ 23,964 $ 23,964
-------- -------- --------
Costs and expenses:
Direct healthcare operating expenses ...... 21,493 21,493 21,493
General and administrative expenses ....... 5,825 5,825 5,825
Provision for doubtful accounts ........... 920 920 920
Depreciation and amortization ............. 983 983 983
-------- -------- --------
29,221 29,221 29,221
-------- -------- --------
Loss from operations ........................ (5,257) (5,257) (5,257)
-------- -------- --------
Gain on sale of assets .................... 1,023 1,023 1,023
Non-operating gain ........................ 860 860 860
Interest income ........................... 164 164 164
Interest expense .......................... (1,053) (1,053) (1,053)
Loss before income taxes .................... (4,263) (4,263) (4,263)
Benefit for income taxes .................. (2,506) (2,506) (2,506)
-------- -------- --------
Loss before extraordinary item ............ (1,757) (1,757) (1,757)
-------- -------- --------
Extraordinary item - gain on debenture
exchange .................................. -- 3,062 919
Extraordinary item - gain on debenture
interest .................................. -- 682 (1) 204 (2)
-------- -------- --------
Net earnings/(loss) ....................... $ (1,757) $ 1,987 $ (634)
======== ======== ========
Loss per common share:
Loss before extraordinary item ............ $ (0.67) $ (0.67) $ (0.67)
Extraordinary item - gain on debenture
exchange .................................. 0.00 1.42 0.43
-------- -------- --------
Net earnings/(loss) per common share ........ $ (0.67) $ 0.75 $ (0.24)
======== ======== ========
</TABLE>
- ----------------------------
(1) Represents $608,000 gain on debenture interest and $74,000 gain on
default interest.
(2) Represents $182,000 gain on debenture interest and $22,000 gain on
default interest.
38
<PAGE> 47
BACKGROUND
The Debentures were issued by the Company on April 25, 1985. On October
17, 1994, the Company failed to make an interest payment as described in the
next paragraph. On or about February 10, 1995, an acceleration of all principal
and interest due under the Debentures was declared. Thereafter, on February 24,
1995, an involuntary bankruptcy petition was filed against the Company. The
petition was dismissed on March 6, 1995 with the consent of the petitioners.
The Company has missed four semi-annual interest payments, due October
15, 1994, April 15, 1995, October 15, 1995, and April 15, 1996, respectively. It
is estimated that the interest (and default interest thereon) accrued through
July 15, 1996 will aggregate $1,716,840.
Except for the effects of acceleration of the Debentures, the maturity
date of the Debentures would be April 15, 2010, and interest would be payable
semi-annually on each April 15 and October 15. See "Default on Debentures"
below. The Company has outstanding $9,538,000 in principal amount of Debentures.
The Debentures were issued for a price equal to 100% of the aggregate original
principal amount of $46.0 million. Since that time, $36,462,000 aggregate
principal amount of Debentures have been converted by their holders into Common
Stock. No sinking fund obligations under the Debentures apply to the Company on
account of the cancellation of such Debentures. See "The Proposals--Proposal No.
4" above. The interest cost to the Company under the Debentures is 7 1/2% of the
outstanding principal amount per year and, while a nonpayment continues,
includes interest at the annual rate of 7 1/2% on the overdue amounts. If the
Exchange is accomplished, the reduction of the Debenture's debt service
requirement would decrease the Company's future cash flow requirement. The
Debentures currently are redeemable, in whole or in part, by the Company at 100%
of face value.
DEFAULT ON DEBENTURES
The Company's losses in fiscal 1995 caused the Company to suspend
interest payments to the holders of the Company's Debentures. As a result, the
Company notified the Trustee that the Company was proposing a default interest
payment date. After the default interest payment date was announced, but prior
to payment, a group of Debentureholders and others purporting to hold an
aggregate of 25% of the principal amount of the Debentures then outstanding
declared on or about February 10, 1995 an acceleration of the principal in the
aggregate amount of $9,538,000 plus interest and default interest accrued from
April 15, 1994, which thereby became immediately due and payable. A subset of
such persons filed an involuntary petition on February 24, 1995 in United States
Bankruptcy Court for the Northern District of Texas against the Company under
Chapter 7 of the U.S. Bankruptcy Code, which was dismissed, with the consent of
the petitioners, on March 6, 1995 following the execution of the Letter
Agreement described below.
AGREEMENT OF PARTICIPATING SECURITYHOLDERS
On March 3, 1995 the Company entered into a letter agreement (sometimes
herein called the "Letter Agreement") with Mr. Jay H. Lustig, an individual who
was representing certain holders of Debentures ("Participating Securityholders")
owning or purporting to own approximately 25% in outstanding principal amount of
Debentures who had taken the action to accelerate Debentures and filed an
involuntary petition for bankruptcy of the Company on February 24, 1995. For the
reasons set forth below, the Company believes that it is not bound by the Letter
Agreement. The Exchange is being made by the Company voluntarily and includes
certain of the concepts of the Letter Agreement as a framework for the currently
39
<PAGE> 48
proposed Exchange. Some of the terms of the proposed Exchange Offer are
different from the Letter Agreement. See "Differences Between the Exchange Offer
and the Letter Agreement's Contemplated Exchange" below.
The Letter Agreement provided for a consensual out-of-court resolution
that the Company's Board of Directors approved as being in the best interests of
the Company and its stockholders and other stakeholders. Pursuant to the Letter
Agreement, the holders' representative agreed to provide notices of waiver of
the interest non-payment default, notices of rescission of the Debenture
acceleration and the effects thereof, and consent to the immediate dismissal of
the involuntary Chapter 7 petition filed on February 24, 1995 from holders of
$2.5 million in outstanding principal amount of Debentures by March 31, 1995 and
to use best efforts to provide waivers of the interest default and notice of
rescission of acceleration from the additional amount necessary to constitute a
majority of outstanding principal amount of Debentures. In return, the Company
agreed to provide an opportunity within 180 days to holders of Debentures to
tender their Debentures to the Company pursuant to an exchange offer to be made
by the Company to the holders of Debentures. The exchange offer consideration
was to consist of a payment of $500 in cash; $120 worth in shares of Common
Stock at a defined value equal to an average market price calculated based on
every round-lot trade over a specified trading period; and an $80 portion, in
cash, of the accrued and unpaid interest. The balance of accrued interest and
default interest in excess of such $80 was required to be waived by the record
holder at the record date for interest payment.
In addition, the Letter Agreement provided for a pledge by the Company
after 150 days of all of the shares of CareUnit, Inc., a wholly-owned operating
subsidiary of the Company, to secure the Company's obligation to complete the
exchange on the agreed upon terms or otherwise to purchase Debentures, provided
that the holder's representative and the Participating Securityholders had in
each material respect performed their obligations required to be performed.
Under the Letter Agreement, one of the material objectives was to
obtain from the holders of a majority interest in the Company's outstanding
Debentures a consent to, or waiver of, certain incidents of non-compliance with,
and to rescind acceleration of, the Debentures. The Company believes the
continuing acceleration results in material part from non-performance of
material obligations by the Participating Securityholders. Although the Letter
Agreement is not binding upon the Company, in its view, the currently proposed
Exchange Offer is being made by the Company voluntarily and includes certain of
the concepts of the Letter Agreement as a framework for the proposed Exchange.
The Company believes that the Exchange Offer as presently contemplated will
substantially comply with all material terms of the Letter Agreement in any
case.
The Debentureholders represented by Mr. Lustig consented to withdrawal
of the bankruptcy petition, and the Company was advised by Mr. Lustig that each
of them submitted notices of rescission of acceleration. Such Participating
Securityholders did not hold a majority in principal amount of the Debentures.
Management believes that the Participating Securityholders nevertheless did not
use best efforts to solicit or to cause the Trustee to solicit notices of
rescission of acceleration from other Debentureholders as necessary in order
that notices of rescission of acceleration would be given by a majority in
principal amount of the Debentures.
DIFFERENCES BETWEEN THE EXCHANGE OFFER AND THE LETTER AGREEMENT'S
CONTEMPLATED EXCHANGE
The Exchange Consideration includes a precise number of shares of
Common Stock that was calculated as closely as practicable based on a formula
from the Letter Agreement. The Letter Agreement provided for a number of shares
of
40
<PAGE> 49
Common Stock calculated based on the reported prices on the NYSE Composite Tape
during a defined trading period -- March 6, 1995 through May 19, 1995. The
Exchange Consideration is based on the same trading period. The Exchange
Consideration was calculated based on the weighted average closing price,
although the Letter Agreement specified that the price "averaging" calculation
was to have been based on the average price of each and every round-lot trade
(100 shares or more). The information necessary for the specified calculation,
as the Company experienced, is obtainable only within a short time following the
trading day involved. When the Company's request for the specified dates was
received by one of the few appropriate sources for such data, such data was no
longer available for the beginning half of the trading period. The $7.50 defined
worth per share is an approximation of $7.47, which was the "weighted average"
trading price during the specified period (price times volume reported on the
NYSE Composite Tape). The actually calculated value of $7.47 would have produced
fractional shares. The $7.47 amount was calculated based on the daily closing
prices over the same trading period, with the weighted daily closing prices for
daily composite volume to follow the framework of the Letter Agreement by making
trading volume a factor. This method is believed to approximate the Letter
Agreement method as well as reasonably possible throughout the specified trading
period. The Company was unable to utilize the individual round-lot trading
prices to know the results of such a calculation, but believes the results would
not be materially different from $7.50.
The Letter Agreement provided that the previously proposed exchange
would be consummated within 180 days; provided, however, that the Company
promised to use "best efforts" and its obligation to consummate the exchange was
expressly conditioned upon the satisfaction of Participating Securityholders'
obligations. Management of the Company believes that the continuance of the
nonpayment of the Debentures by approximately one year beyond such 180 days
contemplated in the Letter Agreement makes its offer of an additional eight (8)
shares of Common Stock per $1,000 principal amount exchanged, as interest,
comparable in attractiveness to the offer contemplated by the Letter Agreement
and reasonable in the circumstances, although no assurance is given as to the
actual amount of value that should be given to one share of Common Stock or the
proceeds thereof at any particular date, and no assurance is given that the
additional shares compensate financially for the time value of the money not
received previously.
The Letter Agreement provided for an agreement by the Company in favor
of all of the Debentureholders not to pledge the shares of CareUnit after the
date of the Letter Agreement in order for the Company to be prepared to satisfy
a future obligation, as of approximately July 29, 1995, to pledge those shares
under the Letter Agreement. The Company was willing and ready to do so, but only
if the Participating Securityholders had performed all of their material
obligations under the Letter Agreement (with opportunity for cure if cure was
possible). The Company has not pledged the shares to any person, and has no
intention of doing so. 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 of the Company believes that
the Company's obligations to perform the pledge of CareUnit shares did not arise
because Participating Securityholders did not use best efforts to provide
notices of rescission of acceleration signed by a majority of the outstanding
principal amount of Debentures. The Letter Agreement also provided that a
disposition of the shares for the benefit of satisfying the Debentures would
have been permitted at any time after approximately August 28, 1995, which was
180 days after March 3, 1995. No pledge of the CareUnit shares is contemplated
by the Company because in its 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. The Company's management determined that making such a pledge would
materially impair the Company's business and financial prospects.
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<PAGE> 50
Pursuant to the Letter Agreement, every holder of Debentures who
tendered them for exchange was to receive interest in an amount of $80 in cash
in lieu of receiving the full actual amount of the interest. The Exchange Offer
interest payment as contemplated today differs by including an additional eight
(8) shares of Common Stock. To the extent the accrual exceeded the designated
$80 in cash as interest, the tender of Debentures was to constitute a waiver of
excess accrued interest. At July 15, 1996, $180.00 of interest will have accrued
per $1,000 of principal amount. The Company believes that increasing the
interest payment with shares of Common Stock should provide Debentureholders an
Exchange Offer that offers comparable incentive taking into account the original
framework of the Letter Agreement and conserves the Company's cash funds for
future needs.
Because of the failure, in the Company's judgment, of the Participating
Securityholders to use best efforts to deliver the rescissions of the
acceleration and waiver of defaults by the registered owners of a majority in
principal amount of the Debentures, the Company is seeking the Consent of
Debentureholders through this solicitation. The Letter Agreement did not
contemplate a Company solicitation similar to this Statement, or the Company's
resulting costs, expenses and time consumed.
PRICE OF DEBENTURES AND COMMON STOCK 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 per each
$1,000 principal amount was $360 and the asked price was $390. Debenture prices
were reported to the Company informally, directly from brokers in the
over-the-counter market, and such reports are not intended to indicate that
active trading exists.
As of March 2, 1995, the NYSE Composite Tape reported that the
Company's Common Stock high sales price was $6, low sales price was $5 5/8, and
closing sales price was $5 3/4.
As of June 19, 1996, the bid and asked prices for the Debentures were
$680 and $750, respectively, as reported by a broker. The low and high sales
prices for the Company's Common Stock on June 26, 1996 were $7-1/4 and $7-3/8,
respectively, as reported on the NYSE Composite Tape, and the closing sales
price was $7-3/8.
EXCHANGE OFFER FUNDING REQUIREMENTS AND SOURCES
The proposed Exchange Offer will require, if accomplished at all, the
issuance of up to 228,912 shares of the Company's Common Stock to fund the stock
portion of the Exchange. Principal of $500 in cash and sixteen (16) shares of
Common Stock will be a designated principal portion of the Exchange
Consideration. Accrued interest to the extent of $80 in cash plus eight (8)
shares of Common Stock per $1,000 principal amount of Debentures will be a
designated interest portion of the Exchange Consideration.
Assuming that a majority in principal amount of Debentures consent to
give notice of rescission of acceleration, then the acceleration will be
rescinded if and only if the Company pays the interest due on the Debentures
that are not tendered. The interest accrued includes the four semi-annual
interest installments (interest from approximately April 15, 1994 to April 15,
1996) plus interest on defaulted interest payments accrued and unpaid to the
date that the interest is paid (the "Interest Payment Date"). At July 15, 1996,
the aggregate interest due will be approximately $1.72 million.
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<PAGE> 51
Debentures that are accepted in the Exchange will become the property
of the Company, along with all rights or claims thereunder, and a
Debentureholder who surrenders a Debenture will immediately become the holder of
a right to receive the Exchange Consideration. Assuming that 100% of the
principal amount of Debentures are exchanged, the Company will require a maximum
of $5,532,040 to pay the cash portion of the Exchange Consideration.
The Company has approximately $3,000,000 in short-term cash equivalent
investments, sufficient to exchange one-third of the outstanding principal
amount of the Debentures. The Company also anticipates utilizing one or more of
the following potential sources of cash to provide funds for its additional cash
needs if more than one-third of the Debentures are tendered.
- In March 1995, a jury awarded the Company approximately $2.7
million, plus interest, in damages in its lawsuit against
RehabCare Corporation. The defendant has posted a bond for the
amount of the award and has filed an appeal of the judgment.
The Company is unable to predict whether this judgment will be
sustained and, if sustained, when such proceeds might be
realized.
- The Company has received a firm commitment from a mutual fund
to purchase in a private placement shares of Preferred Stock
for a purchase price of up to $5.0 million.
- The Company is seeking to privately place from $2 million to
$4 million of equity through a broker-dealer that is not
affiliated with the Company or its directors or officers.
These potential needs for additional cash 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 rescission of
acceleration will not occur until after the Exchange has been funded fully.
SUMMARY COMPARISON OF TERMS OF DEBENTURES AND EXCHANGE CONSIDERATION
<TABLE>
<CAPTION>
THE DEBENTURES EXCHANGE CONSIDERATION
-------------- ----------------------
<S> <C> <C>
PRINCIPAL ... While the Debentures are accelerated, $1,000 of For each $1,000 in principal amount exchanged, the
principal and interest accrued on the principal to the Debentureholder will receive $500 in cash plus 16
date of payment is payable, along with interest on shares of Common Stock. As of July 1, 1996, the
unpaid interest to the extent lawful is due and payable reported closing price of the Common Stock on the NYSE
in cash. See "Interest" below. If the acceleration is was $7-1/2. The rights of holders of Common Stock are
rescinded, the principal amount will be due in full junior to the rights of Debentureholders and all other
April 15, 2010, subject to earlier redemption in the creditors. See "Ranking" below.
Company's discretion. No sinking fund payments will be
due. See "The Proposals--Proposal No. 4."
</TABLE>
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<PAGE> 52
<TABLE>
<CAPTION>
THE DEBENTURES EXCHANGE CONSIDERATION
-------------- ----------------------
<S> <C> <C>
INTEREST ..... Interest accrues at the rate of 7 1/2% per annum The Exchange Consideration includes, as interest, for
calculated on a 30-day month and 360 day year basis. each $1,000 in principal amount exchanged, $80 in cash
Interest has not been paid since the payment that was plus eight (8) shares of Common Stock. The accrued
made on April 15, 1994 on the Debentures. Four interest will have aggregated $180.00 to July 15, 1996.
semi-annual interest installments are in arrears No additional payment of Exchange Consideration will be
(October 1994, April 1995, October 1995 and April due on account of interest accruing or accrued or any
1996). Debentures earn interest on default interest at other claim under such Debentures. As of July 1, 1996,
7 1/2% per annum, to the extent permitted by law. the reported closing price of the Common Stock on the
Approximately $180.00 of interest in the aggregate will NYSE was $7-1/2.
have accrued on each $1,000 face value to July 15,
1996. If the acceleration is to be rescinded, the
interest required to be paid excludes the portion of
accrued interest due only on account of the
acceleration, comprised of interest on the principal
amount from and after April 15, 1996.
MATURITY .... While the Debentures are accelerated, all principal and Upon the Exchange being completed, the tendering
interest is due and payable immediately. If the Debentureholders will receive Exchange Consideration,
acceleration is rescinded, the principal amount will and the Debentures tendered and exchanged will be
mature on April 15, 2010, subject to optional cancelled. Completion of the Exchange Offer is subject
redemption at 100.00% of face amount, and also subject to a high degree of risk. See "Special Risk Factors."
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 an Event of
Default. The Company elected to subtract from the
Company's sinking fund obligations the $36,460,000
principal amount of Debentures converted by
Debentureholders in March 1991 and previously
cancelled, effectively removing the sinking fund
redemption obligation. See "the Proposals--Proposal No.
4."
CONVERSION OR Each $1,000 in principal amount is convertible into 4 See "Principal" above.
EXCHANGE .... whole Common shares (and a 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 "Additional 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>
<CAPTION>
THE DEBENTURES EXCHANGE CONSIDERATION
-------------- ----------------------
<S> <C> <C>
RANKING ..... Unsecured general obligations of the Company Payments received in the Exchange Offer by
subordinate to all existing and future Senior Debt of Debentureholders may be subject to claims of Senior
the Company (as defined). Secured Senior Debt totalled Debt holders or other creditors, and, if competing
approximately $2.0 million at July __, 1996. creditors prevail in asserting their claims, the
Exchange Consideration may be forfeitable. See
"Priorities of Securities and Other Considerations
Relating to Any Future Bankruptcy of the Company."
Shares of Common Stock received in the Exchange
constitute "equity" securities, which by their nature
are subordinate to all indebtedness of the Company.
REDEMPTION AT
OPTION OF THE
COMPANY ..... Redeemable at any time in whole or in part at the No redemption.
option of the Company at the principal amount, together
with accrued interest.
</TABLE>
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
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, 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
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 Stock plus the amount of cash received by the
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<PAGE> 54
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 tendering 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. 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
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 NOLs of
the Company (see "Special Risk Factors--Tax Matters" above) 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 NOLs will be in
excess of the DOD Income). 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
pre-ownership change consolidated NOL carryovers generally cannot exceed an
amount equal to the product of (i) the fair market value of the Company's stock
immediately before the ownership change (subject to various adjustments)
multiplied by (ii) the highest federal long-term tax-exempt rate in effect for
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<PAGE> 55
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 had 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%.
NO FAIRNESS OPINION
The Company has not advised Debentureholders to exchange or to refrain
from exchanging Debentures because, among other reasons, the Company has not
obtained a fairness opinion concerning the Exchange Offer from any investment
banking firm or an appraisal or any other investigation of the consequences of
an Exchange.
DESCRIPTION OF DEBENTURES
$46,000,000 principal amount, at a price of 100% of face amount plus
accrued interest, of the Company's 7 1/2% Convertible Subordinated Debentures
Due April 15, 2010 (the "Debentures") were issued under an Indenture dated as of
April 15, 1985 (the "Indenture") between the Company and Bank of America
National Trust and Savings Association, as trustee (the "Trustee"). In March
1991, over $36 million in principal amount of Debentures were converted by their
holders into shares of the Company's common stock, as then classified. As of the
date hereof, $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 those terms are referred to
the Indenture and the 1939 Act for a statement thereof. This summary makes use
of certain terms defined in the Indenture or the 1939 Act and does not purport
to be complete, and is qualified in its entirety by references to the Indenture
and the 1939 Act. All references to "Section," "Article" or "Paragraph" in this
section refer to the applicable Section or Article of the Indenture or the
applicable Paragraph in the form of Debenture included in the Indenture, as the
case may be.
GENERAL
The Debentures represent general unsecured obligations of the Company,
subordinate in right of payment to certain other obligations of the Company as
described under "Subordination of Debentures." The Debentures are convertible
into the Company's Common Stock as described under "Conversion of Debentures."
The Debentures are issued in fully registered form only in denominations of
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<PAGE> 56
$1,000 or any whole multiple thereof, and will mature on April 15, 2010. The
Debentures are traded in the over-the-counter market. Such trading is sporadic.
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 semiannually 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 of
transfer and exchange, without service charge, at the office of the Trustee. The
Trustee's office for this purpose is 180 E. Fifth Street, Suite 200, St. Paul,
Minnesota 55101.
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 the fifth business day prior to 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 (as defined) of the Common Stock. No adjustment in the
conversion price will be required unless such adjustment would require a change
of at least 1% in the price then in effect; but any adjustment that would
otherwise be required to be made shall be carried forward and taken into account
in any subsequent adjustment. No adjustment need be made for rights to purchase
Common Stock pursuant to a Company dividend or interest reinvestment plan. In
addition, no adjustment need be made if holders of Debentures are to participate
in such transactions on a basis and with notice that has been determined to be
fair and appropriate in light of the basis and notice on which holders of Common
Stock participate in the transaction. The Company may at any time reduce the
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<PAGE> 57
conversion price by any amount, provided that any such reduction must be
effective for a minimum period of 15 days. In March 1991, the Company
temporarily reduced the conversion price pursuant to such provision. 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 (as it exists on the date thereof).
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 is required to redeem,
through operation of a sinking fund, 5% of the aggregate principal amount of
Debentures on April 15, 1996, and on each April 15 thereafter through April 15,
2009, at a redemption price of 100% of principal amount thereof, plus accrued
interest to the redemption date. 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 Proposals--Proposal No. 4."
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. Provided also that Senior Debt shall not include any defined Debt
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of the Company to any of its subsidiaries (Section 11.02). The principal amount
of Senior Debt at May 31, 1996 was estimated at $2.5 million.
"Debt" means any indebtedness, contingent or otherwise, in respect of
borrowed money (whether or not the recourse of the lender is to the whole of the
assets of the Company or only to a portion thereof), or evidenced by bonds,
notes, debentures or similar instruments or letters of credit, or representing
obligations of the Company as lessee under leases of real or personal property,
or representing the deferred and unpaid balance of the purchase price of any
property or interest therein, except any such balance that constitutes a trade
payable, if and to the extent such indebtedness would appear as a liability upon
a balance sheet of the Company prepared on a consolidated basis 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, or the
holders of at least 25% in the principal amount of the Debentures then
outstanding can give notice to the Company and the Trustee in order to
accelerate and to declare all 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 remedy available at law or in equity 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
Trustee gives notice 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
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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
Event of Default which is known to the Trustee and continuing, to give the
holders of the Debentures notice of such Event of Default. The Trustee may
withhold from holders of the Debentures notice of any continuing Default or
Event of Default (except a Default or Event of Default in payment of principal
or interest) if it determines that withholding notice is in their interest
(Section 7.05). The Company is required to deliver to the Trustee annually a
statement regarding compliance with the Indenture, and upon becoming aware of
any Default or Event of Default, a statement specifying such Default or Event of
Default (Section 4.03).
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Company may not consolidate or merge into, or transfer all or
substantially all of its assets to, another corporation, person or entity unless
(i) the successor is a United States corporation, (ii) it assumes all of the
obligations of the Company under the Debentures and the Indenture, and (iii)
after such transaction no 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 such then outstanding Debentures, and any existing
default or non-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 Debentureholder affected,
the Company may not reduce the principal amount of Debentures, the holders of
which must consent to in order to amend the Indenture; 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 that stated in the Debenture, i.e., U.S. dollars; 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 adversely affects
Debentureholders under the Indenture's and the Debenture's subordination
provisions (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
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<PAGE> 60
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 the
Debenture for all purposes.
CONCERNING THE TRUSTEE
The Trustee acts as Debenture 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 will be permitted to engage in
other transactions; however, if it acquires any conflicting interest (as
defined) it must eliminate such conflict or resign (Article 7).
The holders of a majority in principal amount of the then outstanding
Debentures will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee.
The Indenture provides that in case an Event of Default shall occur (which shall
not be cured), the Trustee will be required, in the exercise of its power, to
use the degree of care of a prudent man in the conduct of his own affairs.
Subject to such provisions, the Trustee will be 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).
INCORPORATION BY REFERENCE
PROVIDED HEREWITH, FOR THE PURPOSE OF PROVIDING DEBENTUREHOLDERS WITH
SUBSTANTIALLY THE FINANCIAL INFORMATION THAT ITEM 13 OF SCHEDULE 14A UNDER THE
SECURITIES EXCHANGE ACT IDENTIFIES, AND THE RISK FACTORS SET FORTH THEREIN, ARE
THE COMPANY'S ANNUAL REPORT ON FORM 10-K, AS AMENDED, RELATED TO THE FISCAL YEAR
ENDED MAY 31, 1995, AND QUARTERLY REPORTS ON FORM 10-Q, AS AMENDED, FOR THE
PERIODS ENDED AUGUST 31, 1995, NOVEMBER 30, 1995 AND FEBRUARY 29, 1996. ONLY THE
RESPECTIVE AUDITORS' REPORTS, FINANCIAL STATEMENTS AND THE NOTES THERETO, OTHER
SELECTED FINANCIAL INFORMATION, THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND THE INFORMATION IN OR REFERRED
TO IN RISK FACTORS, ARE INCORPORATED HEREIN BY THIS REFERENCE.
MANAGEMENT REQUESTS A CONSENT FOR PROPOSALS NO. 1, 2, 3 AND 4.
BY ORDER OF THE BOARD OF DIRECTORS
Kerri Ruppert
Secretary
July __, 1996
Corona del Mar, California
52
<PAGE> 61
[FORM OF FRONT OF CARD]
COMPREHENSIVE CARE CORPORATION
CONSENT
THIS CONSENT IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF COMPREHENSIVE
CARE CORPORATION (the "Company"). The Board of Directors of Comprehensive Care
Corporation RECOMMENDS CONSENT on every proposal.
Debentureholders are urged to mark, sign, date and mail promptly this Consent
card in the envelope provided. Consents must be received at the address of the
Trustee by 5:00 p.m. St. Paul , Minnesota time, on or before _________, 1996,
unless the deadline is extended without further notice. If not otherwise
terminated, the Consent Solicitation Period terminates 60 days after the
earliest-dated Consent.
THIS CONSENT CARD IS INTENDED TO OBTAIN CONSENT; AND THIS CARD SHALL BE DEEMED
TO INDICATE A CONSENT TO EACH PROPOSAL IF NOT INDICATED TO THE CONTRARY AS TO
EACH PROPOSAL.
EACH CONSENT MUST BE SIGNED AND DATED.
Sign exactly as addressed to you. Joint owners should each sign. If signing as
executor, administrator, attorney, trustee, or guardian, give title as such. If
a corporation, sign in full corporate name by authorized officer. If a
partnership, sign in the name of authorized person. Please do not forget to sign
and date this Consent card.
Please return this consent card promptly, using the enclosed envelope. No
postage is required if mailed in the United States of America.
53
<PAGE> 62
[FORM OF BACK OF CARD]
PLEASE SIGN, DATE AND INDICATE APPROVAL BELOW.
PROPOSAL 1: / / APPROVE / / DISAPPROVE / / ABSTAIN
Proposal 1. To consent to rescind the acceleration, and hereby to notify
First Trust of California, National Association, successor to
Bank of America National Trust and Savings Association (the
"Trustee"), pursuant to Section 6.02 of the Indenture dated April
25, 1985 (the "Indenture") between the Company and the Trustee,
of a rescission of the acceleration of all principal and interest
due under the Company's 7 1/2% Convertible Subordinated
Debentures Due April 15, 2010 (the "Debentures").
PROPOSAL 2: / / APPROVE / / DISAPPROVE / / ABSTAIN
Proposal 2. To consent to waive, and hereby to notify the Trustee of a waiver
of, any other Events of Default under the Debentures (other than
any nonpayment of principal and interest).
PROPOSAL 3: / / APPROVE / / DISAPPROVE / / ABSTAIN
Proposal 3. To consent to instructions, and hereby to instruct the Trustee,
not to pursue any remedy under the Debentures or the Indenture
upon anything less than future directions given by a majority in
outstanding principal amount of Debentures during the Consent
Solicitation Period and a period of up to 30 calendar days
thereafter pending rescission of acceleration and competition of
the Exchange.
PROPOSAL 4: / / APPROVE / / DISAPPROVE / / ABSTAIN
Proposal 4. To consent to the waiver of notice provisions required under the
Indenture with respect to the Company's cancellation of sinking
fund payment obligations.
SIGNATURE(S)
_____________________________________
Signature
_____________________________________
Signature (if held jointly)
Title or authority (if applicable)
Date:____________________, 1996
THIS WRITTEN CONSENT IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE
COMPANY.
MANAGEMENT AND THE BOARD OF DIRECTORS RECOMMENDS A CONSENT TO "APPROVE" EACH OF
PROPOSALS NO. 1, NO. 2, NO. 3 AND NO. 4 IN ORDER TO FACILITATE RESCISSION OF
ACCELERATION OF THE DEBENTURES. THIS CONSENT CARD WILL BE COUNTED AS YOU
54
<PAGE> 63
DIRECT; IN THE ABSENCE OF SUCH DIRECTION, IT WILL BE DEEMED TO INDICATE CONSENT
TO "APPROVE" EACH OF THE FOREGOING PROPOSALS.
55
<PAGE> 1
EXHIBIT 99.11
FOURTH NOTICE
TO THE HOLDERS OF
COMPREHENSIVE CARE CORPORATION
7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES
DUE APRIL 15, 2010 (CUSIP NO. 204620AA6)
(THE "SECURITIES")
THIS FOURTH NOTICE IS HEREBY given to the Holders of the
above-referenced Securities, as provided for under the Indenture dated as of
April 25, 1985 (the "Indenture") between Comprehensive Care Corporation, a
Delaware corporation (the "Company"), and Bank of America National Trust and
Savings Association (the "Trustee"), that (1) the Company failed to make its
interest payment on the Securities which was due and payable on October 16,
1995, and, pursuant to Section 6.01 of the Indenture, such failure by the
Company is another Event of Default under the Indenture, effective as of
November 16, 1995; and (2) as more fully described below, certain additional
developments have occurred since the Trustee's last notice to the Holders dated
May 23, 1995. Capitalized terms not otherwise defined herein shall have the same
meanings as set forth in the Indenture.
As the Holders are aware, on November 22, 1994, the Trustee notified
the Holders by mail that an Event of Default had occurred under the Indenture in
that the Company had failed to make its interest payment on the Securities which
was due and payable on October 17, 1994, and had continued to fail to make such
missed interest payment for a period of 30 days. On February 13, 1995, the
Trustee notified the Holders by mail that (1) the Holders of at least 25% in
principal amount of the then outstanding Securities had, pursuant to Section
6.02 of the Indenture, by written notice to the Company and the Trustee declared
the principal of and accrued interest on all the Securities to be immediately
due and payable, and (2) the Company had delivered to the Trustee, and had
requested the Trustee to mail to the Holders, both a notice from the Company and
a Notice of Rescission of Acceleration. In order to rescind the acceleration of
the Securities pursuant to Section 6.02 of the Indenture, the Holders of at
least a majority in principal amount of the then outstanding Securities had to
execute and return to the Trustee such Notice of Rescission of Acceleration by
1:00 p.m., Los Angeles, California time on February 28, 1995. That did not
occur. On May 23, 1995, the Trustee notified the Holders by mail (the "Third
Notice") that (a) an additional Event of Default had occurred under the
Indenture in that the Company had failed to make its interest payment on the
Securities which was due and payable on April 17, 1995, and had continued to
fail to make such missed interest payment for a period of 30 days, and (b) the
Company had informed the Trustee that on March 3, 1995, the Company reached an
agreement in principle with an ad hoc committee of Holders providing, among
other things, for the Company to offer to purchase the outstanding Securities
with cash and common stock of the Company and that such agreement provided that
the Company would submit such offer to the Holders and would complete such offer
within 180 days from March 3, 1995. To date, such offer has not yet been
submitted to the Holders.
The Company has informed the Trustee (1) that the Company has submitted
to the United States Securities and Exchange Commission (the "Commission")
preliminary materials with respect to the offer to the Holders referenced in the
next to the last sentence of the preceding paragraph of this Fourth Notice, (2)
that the Company has received comments on these preliminary materials from the
Commission, and (3) that the Company is now responding to such comments. The
Company has informed the Trustee that the Company cannot at this time
1
<PAGE> 2
specify an exact date by which the foregoing described offer will be submitted
to the Holders.
The Company has also informed the Trustee, and has issued a press
release announcing, that on October 20, 1995, the Company received a tax refund
from the Internal Revenue Service in the amount of $9,393,382.00 together with
accrued interest thereon in the amount of $80,956.10, that the Internal Revenue
Service offset against such tax refund amount $2,547,618.14, including interest,
then owed by the Company to the Internal Revenue Service pursuant to a
settlement agreement, and that the Company thereby actually received a net tax
refund in the amount of $6,926,719.96 from the Internal Revenue Service.
The Trustee seeks direction from the Holders concerning how the Holders
wish the Trustee to proceed in connection with the delay which has occurred in
submitting the foregoing described offer to the Holders.
The Trustee will continue with its duties under the Indenture and will
monitor developments in this matter and intends to communicate with the Holders
of the Securities as it deems appropriate as it learns of developments
concerning this matter. Any directions or inquiries regarding this matter should
be directed to Ms. Sandy Chan, Trust Officer, First Trust of California,
National Association, as agent for Bank of America National Trust and Savings
Association, Corporate Trust Administration, Department #8510, 333 South Beaudry
Avenue, 25th Floor, Los Angeles, California 90017, telephone: (213) 345-4652.
NOTE: IF YOU ARE A NOMINEE OR A DEPOSITORY AND NOT A BENEFICIAL HOLDER,
PLEASE FORWARD COPIES OF THIS NOTICE IMMEDIATELY TO YOUR CLIENTS WHO
ARE BENEFICIAL HOLDERS OF THE SECURITIES.
Dated: November 24, 1995
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Trustee
2
<PAGE> 1
EXHIBIT 99.12
[COMPREHENSIVE CARE LETTERHEAD]
To: Holders of Comprehensive Care Corporation 7 1/2% Convertible
Subordinated Debentures Due April 15, 2010 (the "Securities")
NOTICE IS HEREBY given, pursuant to Section 2.12 of that certain Indenture dated
as of April 25, 1985 (the "Indenture"), between Comprehensive Care Corporation
(the "Company") and First Trust of California, National Association, as
successor to Bank of America National Trust and Savings Association (the
"Trustee"), that the Company intends to pay on ________, 1996 (the "Payment
Date"), the aggregate amount of three interest payments, and default interest on
each missed payment, plus the regular semi-annual interest payment, calculated
as follows:
(1) The interest payment on the Securities in the aggregate amount
of $357,675 ($37.50 per each $1,000 of principal amount of a
Security) which was due and payable by the Company on October
17, 1994, together with interest on such missed interest
payment (at the rate of 7 1/2% per annum from and including
October 15, 1994, and to but not including the Payment Date)
in the aggregate amount of $___________ ($_____ per each
$1,000 of principal amount of a Security);
(2) The interest payment on the Securities in the aggregate amount
of $357,675 ($37.50 per each $1,000 of principal amount of a
Security) which was due and payable by the Company on April
17, 1995, together with interest on such missed interest
payment (at the rate of 7 1/2% per annum from and including
April 15, 1995, and to but not including the Payment Date) in
the aggregate amount of $__________ ($______ per each $1,000
of principal amount of a Security);
(3) The interest payment on the Securities in the aggregate amount
of $357,675 ($37.50 per each $1,000 of principal amount of a
Security) which was due and payable by the Company on October
16, 1995, together with interest on such missed interest
payment (at the rate of 7 1/2% per annum from and including
October 15, 1995, and to but not including the Payment Date)
in the aggregate amount of $_________ ($_______ per each
$1,000 of principal amount of a Security); and
(4) The interest payment on the securities in the aggregate amount
of $357.675 ($37.50 per each $1,000 principal amount of a
Security) which was due and payable by the Company on April
15, 1996, together with interest on such missed interest
payment (at the rate of 7 1/2% per annum from and including
the Payment Date) in the aggregate amount of $_______ ($______
per each $1,000 of principal amount of a Security).
Such payments by the Company will be made to Holders in whose name a
Security is registered as of _________, 1996. Such payment by the Company is
conditioned upon the concurrent effectiveness of rescission of the acceleration
of the Securities by Holders of a majority in principal amount of the
outstanding Securities on the Payment Date.
1
<PAGE> 2
Dated: July __, 1996 COMPREHENSIVE CARE CORPORATION,
a Delaware corporation
By:_____________________________
Its:____________________________
2
<PAGE> 1
EXHIBIT 99.13
[COMP-CARE LOGO]
________ __, 1996
Dear Holder of Comprehensive Care Corporation 7 1/2% Convertible Subordinated
Debentures Due April 15, 2010 (the "Securities"):
The Board of Directors of Comprehensive Care Corporation solicits
holders of its 7 1/2% Convertible Subordinated Debentures Due April 15, 2010
(collectively called the "Securities") for the following purposes:
(1) For a majority in principal amount of the Securities to give notice
to First Trust of California, National Association, successor to Bank of America
National Trust and Savings Association (the "Trustee") to rescind the
acceleration of the Securities ("Proposal 1"); and
(2) For two-thirds in principal amount of the Securities to waive any
other Events of Default under the Debentures (other than any nonpayment of
principal and interest which is due otherwise than on account of
acceleration)("Proposal 2"); and
(3) For a majority in principal amount of the Securities to instruct
the Trustee to forebear from effecting any remedy for the Events of Default to
permit completion of an Exchange Offer during the Consent Solicitation Period
("Proposal 3"); and
(4) For two-thirds in principal amount of the Securities to agree to
amend the Indenture to facilitate or effect Proposals 1, 2 and 3 and the
Exchange ("Proposal 4").
Proposals 1, 2, 3 and 4, and the possible advantages and disadvantages
of each proposal, are described in the enclosed Debenture Consent Solicitation
Statement. Proposals 1, 2, 3 and 4 are recommended by your Board of Directors. A
consent card (the "Consent") is enclosed for the purpose of giving such a notice
to the Trustee.
The Board of Directors recommends the Proposals because it believes
that some of the Company's Securityholders would like to accept a proposed
exchange offer (the "Exchange Offer"). The other purposes include elimination of
the various undesirable effects of an acceleration, such as:
(a) An acceleration of indebtedness can impair the Company's business
and financial prospects.
(b) An acceleration of indebtedness could result in defaults under
other debts and obligations of the Company.
(c) An acceleration of indebtedness decreases the Company's
attractiveness to investors.
(d) An acceleration of indebtedness also creates an unfavorable
impression with the Company's vendors and clients.
<PAGE> 2
Although Securityholders will be offered an exchange of cash and Common
Stock for their Securities, a Securityholder is not required to exchange. The
Company will pay the entire amount of interest due on all non-tendered
Debentures, and the Securities will be reinstated. The Company will accept
properly tendered Securities in the Exchange Offer described in the Offering
Circular.
A rescission of acceleration of the Securities would effect a
reinstatement of the Securities on their original non-accelerated terms and that
should result in an immediate improvement in the Company's business and
financial condition, and thus an improvement in its debt-carrying ability.
Giving Consent will not effectively tender your Debentures. The manner
of tendering Debentures is described in the Letter of Transmittal and the
Offering Circular.
It is each beneficial and record Debentureholder's right to elect not
to tender such holder's Debentures. Nevertheless, there can be no assurance that
the aggregate market value of your Securities after a rescission will be as
great as the aggregate market value of your Securities before a rescission plus
the interest payment. Debentureholders are urged, in addition to Consenting, to
carefully consider the Exchange Offer. After the Exchange Offer, the trading in
the Securities may become more thin and sporadic, which could adversely affect
the liquidity of an investment in the Securities.
A rescission of acceleration of the Debentures will not alter rights of
Securityholders to accelerate the Securities upon any future Event of Default.
The Board of Directors is hopeful that a rescission of acceleration of
the Securities will help position the Company for a more successful long-term
future. Please SIGN, DATE and MAIL the enclosed Consent card as soon as
possible.
Sincerely,
Chriss W. Street
Chairman of the Board of
Directors, President & Chief
Executive Officer
2
<PAGE> 1
EXHIBIT 99.15
SCRIPT --
QUESTIONS AND ANSWERS
1. WHAT IS THE DEBENTURE CONSENT FOR?
All Debentureholders are separately asked to consent
to four proposals, including that the Debenture
acceleration be rescinded. Rescission of Acceleration
is a precondition of consummation of the Exchange,
and is the most important proposal for your consent.
Debentureholders holding aggregately at least a
majority of the outstanding principal amount of
Debentures can consent to rescind the acceleration.
The other proposals are intended to facilitate the
Exchange. Depending on the circumstances, the other
proposals may not be essential to a successful
exchange. We request Debentureholders to consider all
of the proposals and consent so that the Exchange can
be accomplished. Only Debentures that are tendered
and accompanied by a Consent will be accepted for
exchange.
2. WHAT DO I RECEIVE IN EXCHANGE FOR DEBENTURES THAT I
TENDER?
For every $1,000 of principal amount, and a waiver of
default interest and interest accrued on default
interest, you will receive $580 in cash and 24 shares
of Common Stock of Comprehensive Care Corporation.
Part of the amount will be considered interest. The
tax consequences for a typical holder are described
in the Offering Circular.
3. HOW MUCH INTEREST HAS ACCRUED PER $1,000?
If the Debenture acceleration is rescinded, the
amount of interest that would be due will include the
four missed semi-annual interest payments of $37.50
each. The four interest installments due aggregate
$150.00, and interest has accrued on that default
interest and added another $30.00 as of July 15,
1996, and the total increases by approximately
another $.02 or $.03 per day thereafter. This is the
amount of interest that a non-tendering
Debentureholder will receive before the acceleration
is rescinded. If the acceleration is not rescinded,
the entire principal amount continues to be due
immediately, and the accrued interest (and the
interest on the default interest) is due and payable
in full immediately. The amount of interest that is
due at such time only on account of acceleration will
be a proportional part of the $37.50 of interest that
normally comes due on October 15, 1996, which
increases by approximately $.21 per day. If the
acceleration is rescinded, whatever portion of that
$37.50 interest payment that has accrued from April
15, 1996 on the outstanding principal amount will be
included in the $37.50 semi-annual interest payment
due and payable October 15, 1996.
1
<PAGE> 2
4. ARE THE SHARES OF COMMON STOCK ISSUED IN THE EXCHANGE
FREELY-TRADEABLE?
That depends on the Debentures you hold now; if they
are freely tradeable, an exchange should give you
freely tradeable shares. Comprehensive Care is
relying on an exception to the requirement to
register the shares that requires that no commissions
be paid by Comprehensive Care to persons for
soliciting holders to exchange. No commissions will
be paid by Comprehensive Care. Employees, officers or
directors may solicit exchanges but will receive no
additional compensation for that service.
5. WHAT HAPPENS TO DEBENTURES THAT ARE NOT TENDERED?
If the Exchange does not take place because the
acceleration is not rescinded, you will remain the
holder of a Debenture that is due and payable in
full. However, if the Debenture acceleration is
rescinded, Debentures that are not tendered will have
been paid the overdue interest and interest on
overdue interest. A condition to the Exchange Offer
is that the principal and interest of Debentures will
no longer be accelerated. After rescission of the
acceleration, Debentures will continue to accrue
interest at the rate of 7 1/2% per year. Interest
payments will follow the original semi-annual April
15 - October 15 schedule until maturity in 2010, at
which time the principal amount will become due. To
that extent, the holder will become more reliant on
sale of Debentures to provide liquidity. However,
there will be fewer Debentures outstanding, and if
the Debentures are traded more thinly, there would be
a material risk of reduced liquidity of Debentures.
6. HOW CAN I TENDER DEBENTURES?
A. If you wish to tender Debentures that you
hold in your own name, you must complete a
Letter of Transmittal form and submit it to
the Exchange Agent yourself. To obtain the
form for yourself, give me your name and
address to confirm that you hold your
Debentures directly; or
B. If you wish to tender Debentures that you
hold through a broker, nominee or fiduciary,
you should request and instruct that such
person tender Debentures for you. Forms have
been sent to all known brokers, nominees or
fiduciaries,; however, to assure they obtain
the form for you, give me your broker's,
nominee's or fiduciary's name and address to
confirm that such person is on the mailing
list for these materials.
2
<PAGE> 3
7. WHAT IS THE EXCHANGE AGENT'S ADDRESS?
TRUSTEE AND EXCHANGE AGENT:
First Trust of California, National Association
180 East Fifth Street, Suite 200
St. Paul, Minnesota 55101
8. CAN I CHANGE MY MIND AND WITHDRAW DEBENTURES THAT I
TENDERED OR DIRECTED TO BE TENDERED?
Yes, but only if the notice of withdrawal is received
prior to the expiration date and only if you or your
broker gives written notice.
A. If you are the holder of record (i.e., you
are on the Trustee's official list of
registered holders holding Debentures), you
yourself should send a signed and dated
notice of withdrawal to First Trust of
California, National Association, 180 East
Fifth Street, Suite 200, St. Paul, Minnesota
55101. The notice must state the exact name
of, and be signed by, the registered owner,
the principal amount of Debentures to
withdraw from the Offer and that the
registered holder is withdrawing Debentures
tendered by the registered holder.
B. If you are holding Debentures through a
broker, then you are not considered to be a
registered holder yourself and, instead of
giving notice yourself, you should instruct
the broker who tendered the Debentures on
your behalf to withdraw them by giving
written notice. The notice must state the
exact name of, and be signed by, the
registered owner, the principal amount of
Debentures to withdraw from the Offer and
that the registered holder is withdrawing
Debentures tendered by the registered
holder.
9. HOW CAN I RE-TENDER ANY DEBENTURES I PREVIOUSLY
TENDERED AND THEN WITHDREW?
To re-tender a withdrawn or rejected Debenture, you
must submit another Letter of Transmittal form. You
could obtain another copy of the form or use any
reasonable facsimile of the Letter of Transmittal
form.
10. HOW WILL I KNOW THAT MY DEBENTURES HAVE BEEN
EXCHANGED?
3
<PAGE> 4
The Offer Period will expire not earlier than
_________, 1996. The Company may keep the Offer open
for a longer period of time without notice by making
a public announcement. The Exchange will be
consummated at approximately the same time as the
interest payment to cure the existing Events of
Default. The Exchange Agent will deliver certified
checks and stock certificates in the amount of the
Exchange Consideration as promptly as practicable
thereafter.
11. WHAT SHOULD I KNOW ABOUT TAXES?
The circumstances of a particular holder sometimes
affect the tax consequences. The tax effects for
typical persons are described in the Offering
Circular under "Potential Federal Income Tax
Consequences - Effects on the Debentureholders." To
the extent you want legal advice or that you may have
particular circumstances that may affect the tax
results, you must consult your own legal, tax or
accounting counsel.
4
<PAGE> 1
EXHIBIT 99.18
NOTICE OF CONVERSION PRICE ADJUSTMENT
<TABLE>
<CAPTION>
Shares Out-
Number of standing Prior Aggregate 30 Day Shares
Shares Current to Issuance Dollar Average Outstanding Adjusted
Issued or Conversion of Additional Consideration Market After Conversion
Issuable Shares Price Shares Received Price Issuance Price
- --------- ---------- ------------- ------------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
333,333(1) $ 259.69 2,214,541 $ 2,000,000 $ 6.517 2,547,874 $ 256.99
115,000(2) $ 256.99 2,547,874 $ 600,000 $ 6.029 2,662,874 $ 255.50
172,500(3) $ 255.50 2,662,874 $ 975,000 $ 6.783 2,835,374 $ 252.91
135,000(4) $ 252.91 2,835,374 $ 810,000 $ 7.579 2,970,374 $ 250.51
4,100(5) $ 250.51 2,970,374 $ 24,600 $ 7.104 2,974,474 $ 250.46
5,000(6) $ 250.46 2,974,474 $ 30,000 $ 7.342 2,979,474 $ 250.38
10,833(7) $ 250.38 2,979,474 $ 64,998 $ 7.342 2,990,307 $ 250.22
132,560(8) $ 250.22 2,990,307 $ 1,000,000 $ 8.925 3,122,867 $ 248.57
</TABLE>
- --------
(1) Shares of Common Stock issuable upon conversion of the Secured
Convertible Note dated January 9, 1996, at the original conversion price of
$6.00 per share, issued to Lindner Bulwark Fund
(2) Shares of Common Stock issued under the Common Stock Purchase
Agreement dated February 1, 1996 between the Company and Lindner Fund, Inc., at
the price of $6.00 per share
(3) Shares of Common Stock issued, at the price of $6.00 per share,
under the Common Stock Purchase Agreement dated April 15, 1995 between the
Company and Moriarty
(4) Shares of Common Stock issued, at the price of $6.00 per share,
under the Common Stock Purchase Agreement dated June 29, 1995 between the
Company and Lindner
(5) Shares of Common Stock issued, at the price of $6.00 per share,
under the Common Stock Purchase Agreement dated July 29, 1995 between the
Company and WVC LTD
(6) Shares of Common Stock issued, at the price of $6.00 per share,
under the Common Stock Purchase Agreement dated August 15, 1995 between the
Company and BLC
(7) Shares of Common Stock issued, at the price of $6.00 per share,
under the Common Stock Purchase Agreement dated August 15, 1995 between the
Company and Quinn
(8) Convertible Note dated November 30, 1995
1
<PAGE> 1
EXHIBIT 99.20
COMPREHENSIVE CARE CORPORATION
4350 Von Karman
Suite 280
Newport Beach, CA 92660
Tel: 714-798-0468
Fax: 714-752-0585
March 3, 1995
HAND DELIVERED
Mr. Jay H. Lustig
Individually and as representative of
the Participating Securityholders (defined below)
Re: Proposed Rescission of Acceleration of Securities
Dear Mr. Lustig:
Based on the various discussions that we have had among or between
Comprehensive Care Corporation (the "Company"), the Trustee of its 7-1/2%
Convertible Subordinated Debentures Due April 15, 2010 (the "Securities"), and
you as a representative of certain holders, and individually as a holder, of
certain Securities which we understand aggregate $4.653 million in original
principal amount (the "Participating Securityholders"), certain of whom were
Securityholders who gave notice of acceleration in February, 1995, and our
understanding of the type of transaction that is feasible for rescission of
acceleration and of interest to us, we outline the basis for this proposed
rescission relative to the proposed agreement to pay cash and issue shares to
Participating Securityholders, and permitted assigns (collectively, the
"Consideration"). In this regard, we propose the principal terms of an agreement
(the "Agreement") to be as set out in this letter as follows:
1. Voting of Securities; "Lock-Up." Upon the dismissal of the
involuntary Chapter 7 petition filed against the Company, the Participating
Securityholders will give notices of rescission of acceleration reasonably
acceptable and at times as determined by the Trustee and the Company, will vote
in favor of each related proposal to be made to all of the Securityholders of
the Company, including without limitation a proposed supplemental indenture if
necessary, and will tender their Securities for exchange for cash and shares as
described herein (the "Offer"). Furthermore the Participating Securityholders
will neither submit any notice or demand of acceleration, nor pursue any
remedies available under the Indenture nor join or participate in any Securities
Exchange Act of 1934 Rule 13(d) group or participate against the Board or
management in any proxy or other solicitation of any of the Securities or Common
Stock of the Company, and the Participating Securityholders agree that they will
give the Company any information they receive about anyone trying to form such a
group. Jay H. Lustig represents that he is authorized to execute and deliver
this Agreement on behalf of and to bind at least $2.5 million in original
principal amount of the Securities and further represents that he shall cause
the holders of at least $2.5 million of the outstanding principal amount of
Securities to rescind acceleration and waive the interest payment defaults,
substantially as provided in the attached Notice of Rescission of Acceleration
on or before March 31, 1995, and use his best efforts to cause holders of an
additional amount of Securities necessary to aggregately comprise more than 50%
of the outstanding principal amount of Securities to rescind such acceleration
and waive such interest payment defaults substantially as provided in such
notice.
2. Rights Non-Assignable. Until the earlier of the expiration of this
Agreement or the completion of the exchange of Securities contemplated
1
<PAGE> 2
herein, nothing contained in this Agreement will permit any Participating
Securityholder to at any time sell or dispose of in any manner the rights or
obligations of the said Participating Securityholder under this Agreement.
However, the Participating Securityholders may transfer their Securities
provided that the recipient, and each subsequent transferee, is irrevocably
bound hereby and so agrees in writing. Until the earlier of the expiration of
this Agreement or the completion of the exchange of Securities contemplated
herein, each Participating Securityholder shall notify the Company of any
private or public sale, and agrees to placement of an appropriate legend on the
Securities bound hereby.
3. Standstill. Until the earlier of the expiration of this Agreement or
the completion of the exchange of Securities contemplated herein, if any
Participating Securityholders, directly or indirectly, acquires beneficial or
record ownership of any Securities or other equity securities of the Company or
interest, such Securities will become and remain subject to this Agreement.
4. The Offer. The Offer shall incorporate the following features and
specifications upon first being given to Securityholders, subject to
requirements of law:
/ / The Offer shall be made pursuant to Section 3(a)(9) of the
Securities Act of 1933 for up to 100% of the Securities. Shares issuable
pursuant to the Offer are intended to be freely tradeable under the Securities
Act of 1933.
/ / The Board of the Company shall use best efforts to complete this
transaction within 120 days, but shall have a reasonable period of additional
time, ending not later than 180 days after the date hereof, in order to
consummate legal requisites to the Offer.
/ / The Company shall not, during the term of this Agreement, pledge or
otherwise dispose of, or issue or commit to issue any additional, capital stock,
or any interest therein, or securities convertible into shares of such stock, of
CareUnit, Inc., a Delaware corporation ("Care Unit"), 100% of whose outstanding
shares (the "Shares") are held beneficially and of record by the Company free of
any other liens or claims. At 150 days after the date of this Agreement,
provided that the Participating Securityholders have in each material respect
performed (with opportunity to cure if a cure is possible) their obligations
required to be performed hereunder on or prior to such date, and if the Offer
has not then been consummated, the Company shall pledge (with the Trustee, or an
alternate acceptable to the Company, to act as pledgeholder on terms of a
written agreement containing standard terms reasonably acceptable to the
Participating Securityholders) all of the Shares as collateral for its
obligation to purchase the Securities pursuant to the Offer or otherwise. Such
pledge may only be foreclosed upon following 180 days after the date hereof at
the request of any Securityholder or the Trustee if the Offer is not consummated
on or prior to such date, provided that the Participating Securityholders have
in each material respect performed (with opportunity to cure if a cure is
possible) their obligations required to be performed hereunder on or prior to
such date. From day 150 through day 180 after the date hereof, or the earlier
consummation of the Offer, the tendered (or all Participating Securityholders'
Securities if the Offer has not been commenced without fault of the
Participating Securityholders) Securities of the Participating Securityholders
shall accrue and be paid upon purchase thereof additional interest at the rate
of 7-1/2% per annum on the original principal amount). Upon consummation of the
Offer, the said pledges shall be released. The Company represents that Care Unit
is the subsidiary generating operating profits under the CareUnit name, and all
of its other subsidiaries with similar names are substantially inactive.
/ / The Participating Securityholders shall support the proposed Offer
and shall not speak or write publicly against the proposed Offer. In addition,
the Participating Securityholders will not solicit or support any solicitation
of proxies or consents inconsistent with the purposes or spirit of this
Agreement.
2
<PAGE> 3
/ / The Offer shall allow the Securityholders to participate pro-rata
to the amounts tendered, up to 100% of the amount of Securities outstanding,
provided that all tendering Securityholders also give notice of rescission of
acceleration and consent to any proposals reasonably made by the Company that
are incidental to the Offer.
/ / The tendering Securityholders shall receive, net to the
Securityholder, for each $1,000.00 of original principal amount tendered,
$500.00 in cash, plus $120.00 in shares of Common Stock of the Company (based on
a fair value of the Common Stock equalling the average round-lot traded price
reported on the NYSE Composite Tape for all trading days during the 75 calendar
days commencing with and as of March 6, 1995). Additionally, for each $1,000.00
of original principal amount, tendering Securityholders will receive $80 in cash
(approximately 1 year's interest) representing the amount agreed upon to
represent all interest owing and accrued to the payment date, in return for
which they will waive all other obligations including all default interest
accrued from April 15, 1994 which was due as of October 17, 1994, and all
interest (or interest on interest) accruing from and after October 15, 1994
through the date on which the Offer is consummated.
/ / The Offer and the Company's completion of an exchange as described
herein are subject to all relevant conditions provided in the Indenture relating
to the Securities dated as of April 25, 1985 between the Company and the
Trustee, as defined therein, and receipt of all reasonably necessary
governmental, and third-party, consents, filings, or approvals necessary to
consummate the Offer.
/ / The Company may condition the Offer upon a minimum of tendered
Securities of $2.5 million from the Participating Securityholders.
5. Costs. The Company shall pay legal fees of Weil, Gotshal & Manges
incurred by the accelerating Participating Securityholders from January 1, 1995
to date in the amount of between $35,000 and $40,000. Otherwise, the parties
each will bear their own respective costs.
6. Release. Upon dismissal of the involuntary Chapter 7 case, referred
to further below, the Company shall release each Participating Securityholder
and its officers, employees, agents, representatives, attorneys, and advisors
from any and all claims and causes of action arising or occurring prior to the
date hereof, including without limitation any and all claims or causes of action
arising out of or related to the delivery of the notice of acceleration of the
Securities or the filing of an involuntary Chapter 7 petition against the
Company, provided that the effectiveness of the release shall be conditioned
upon and subject only to the execution and delivery by each respectively
released Participating Securityholder of the notice of rescission of
acceleration described in paragraph 1 hereof and each Participating
Securityholder using its best efforts to achieve consummation of the
transactions contemplated herein.
7. News Release. Upon the execution by you and return to us of this
Agreement, the Company shall prepare the news release. Each news release
concerning this Agreement or the Offer shall be in form and substance and at
times reasonably determined by the Company after reasonable notice to you and
reasonable prior consultation with you, with your reasonable cooperation, as
representative of the Participating Securityholders.
8. Bankruptcy Petition. The Participating Securityholders that are
petitioning creditors in the involuntary Chapter 7 bankruptcy petition filed
against the Company shall support and cause their attorneys to execute and
indicate consent to the Order Dismissing Involuntary Petition (the "Order")
attached hereto. The Participating Securityholders that are petitioning
creditors shall support entry of the Order and dismissal of the involuntary
petition at the hearing scheduled for March 7, 1995. If such order is not
entered by the court prior to or on March 8, 1995, the Company thereafter shall
have the option to terminate this Agreement upon written notice and, prior to
such termination, to require additional reasonable cooperation of the
Participating Securityholders for the purpose contemplated in this paragraph.
3
<PAGE> 4
9. Survival. If the Offer is consummated, the terms and provisions of
this Agreement shall survive the consummation of the Offer.
If the foregoing meets with your approval, so signify by signing and
returning the enclosed duplicate copy of this letter, whereupon this letter
shall constitute the final agreement between the parties in accordance with the
terms and provisions set forth above. This offer will expire if not accepted on
March 3, 1995. We shall look forward to receiving your prompt acceptance.
Very truly yours,
COMPREHENSIVE CARE CORPORATION
By: /s/ Chriss W. Street
-----------------------------
Chriss W. Street, Chairman of the
Board, Chief Executive Officer and
President
AGREED AND CONFIRMED:
By: /s/ Jay H. Lustig Dated: March 3, 1995
- -----------------------------
Jay H. Lustig
APPROVED AS TO FORM:
WEIL, GOTSHAL & MANGES
By: /s/ Martin A. Sosland
- -----------------------------
Martin A. Sosland
4
<PAGE> 1
EXHIBIT 99.21
MAR-21-96 THU 11:59 JHL HOLDINGS INC FAX NO. 13104518518
March 21, 1996
Mr. Marvin Feigenbaum
c/o Goldstein, Axelrod & DiGioia
399 Lexington Avenue - 18th Floor
New York, NY 10017
Dear Marvin:
I have been unable to contact Sohail Masood. Nevertheless, my opinion is that
bondholders would be willing to tender their bonds upon receiving a revised
offer that compensates them for the delay in completing the transaction.
The old offer was for bondholders to receive $580 cash and 16 shares of fully
registered stock. It also provided for additional interest in the event the
transaction was not completed in 180 days (September 3, 1995).
In keeping consistent with this theme, a revised offer that incorporates this
would be $635 in cash and 16 shares of stock. In the event CompCare wanted to
pay the additional $55 in stock (which would have to be based on the same
formula price as the 16 shares). That would make the revised alternative offer
of $580 in cash and 23 1/3 shares per bond.
<TABLE>
<CAPTION>
Old Offer New Offer or Stock Option/Offer
--------- -------------------------------
<S> <C> <C> <C>
Cash $580 $635 $580
Shares 16 shares 16 shares 23 1/3 shares
</TABLE>
Sincerely,
/s/ JAY H. LUSTIG
Jay H. Lustig
P.S. This is assuming a transaction could be completed by May 1, 1996.
Anything later would need to reflect more interest.
1
<PAGE> 1
EXHIBIT 99.22
MAR 01 '96 10:25 FR LSD-1710 612 335 1710 TO
1585#6327#3#1714 P. 02
[LOGO] First Trust
First Trust Center
180 East Fifth Street
Suite 200
St. Paul, MN 55101
March 1, 1996
Mr. Drew Q. Miller
Comprehensive Care Corporation
4350 Von Karman Avenue, Suite 280
Newport Beach, CA 92660
Re: 7-1/2% Convertible Subordinated Debentures, Due April 15, 2010
Dear Mr. Miller:
You have indicated that Comprehensive Care Corporation (the "Company")
intends to pay all amounts due and overdue with respect to the above-referenced
securities (the "Securities") on April 15, 1996 and, thereafter, seek rescission
of the previously declared declaration of acceleration thereon.
Section 2.12 of the Indenture dated as of April 25, 1985 (the
"Indenture"), pursuant to which the Securities were issued, requires that the
Company shall fix the record and payment dates for payment of defaulted interest
(together with additional interest accrued on such amounts) and shall provide
notice thereof at least 15 days before the record date. Section 6 of the
Securities provides that 5% of the aggregate principal amount of the Securities
shall be redeemed on April 15, 1996. The amount of the April 15, 1996 sinking
fund redemption is subject to reduction as provided in such section following
notice to the Trustee at least 50 days
<PAGE> 2
prior to the redemption date, as provided in Section 3.01 of the Indenture. No
such notice was received.
Assuming the Company provides appropriate notification of the record
and payment dates to the holders of the Securities as required by the Indenture,
the amount to be paid on April 15, 1996 with respect to the Securities is as
follows:
<TABLE>
<S> <C>
Defaulted Interest (including
additional interest thereon) $1,155,532.66
Interest Due April 15, 1996 357,675.00
Sinking Fund Redemption 476,900.00
Total $1,990,107.66
</TABLE>
The declaration of acceleration with respect to the Securities may be
rescinded by the holders of a majority in principal amount of the then
outstanding Securities, as provided in
<PAGE> 3
MAR 01 '96 10:25 FR LSD-1710 612 335 1710 TO 1585#6327#3#1714 P. 03
Mr. Drew Q. Miller
March 1, 1996
Page 2
Section 6.02 of the Indenture, upon the payment of the foregoing amounts
(provided there are no other Events of Default which have not been cured or
waived).
Please confirm, in writing and not later than Friday, March 8, 1996,
that the Company will provide for the payment of the total amount indicated
above. Such amount, together with the fees and expenses of the Trustee and its
counsel, must be deposited with the Trustee on or before April 12, 1996 or, if
not federal funds or immediately available funds, on or before April 8, 1996.
Unpaid fees and expenses of the Trustee and its counsel, exclusive of any unpaid
fees and expenses of Bank of America Trust and Morrison & Foerster LLP, are
approximately $6,000 through February 29, 1996. Additional fees of the Trustee
and its counsel will be incurred in connection with the preparation and
distribution of the requisite notice to holders of the Securities, as well as
for the review of the rescission ballots. We will advise you, prior to April 8,
1996, of the total fees and expenses incurred, or to be incurred, through the
April 15, 1996 payment date.
Upon receipt of your written confirmation, we will have notices
prepared and forwarded to holders of the Securities to advise them of the April
15, 1996 payment date for defaulted interest and the sinking fund redemption, to
advise them of the record date with respect thereto, and to solicit their
consent to the rescission of acceleration.
Sincerely,
/s/ Joseph D. Roach
Joseph D. Roach
<PAGE> 1
EXHIBIT 99.23
COMPREHENSIVE CARE CORPORATION
350 W. Bay Street
Costa Mesa, California 92627
Tel: (714) 222-2273
Fax: (714) 574-3030
March 27, 1996
VIA U.S. FIRST CLASS MAIL &
CERTIFIED MAIL -- RETURN RECEIPT REQUESTED
First Trust of California
180 East Fifth Street, Suite 200
St. Paul, Minnesota 55101
Attention: Joe Roach: Bank of America Trust Administration No. 8510
Re: Notice of reduction of principal amount of Securities, as such
term is defined in the Indenture dated April 25, 1985 (the
"Indenture") between Comprehensive Care Corporation (the
"Company") and First Trust of California, National
Association, as successor to Bank of America National Trust
and Savings Association (the "Trustee"), To Be Redeemed
Pursuant to Paragraph 6 of the Securities
Ladies and Gentlemen:
The Company wants to reduce, in accordance with paragraph 6 of the
Securities, the principal amount of Securities otherwise required to be redeemed
pursuant to paragraph 6 of the Securities.
The Company hereby notifies the Trustee, and affirms previous notices,
that each respective principal amount referred to in paragraph 6 of the
Securities shall be individually reduced by subtracting an equal principal
amount (without premium) of Securities previously delivered by the Company to
the Trustee for cancellation. In accordance with
<PAGE> 2
paragraph 6 of the Securities, the Company may reduce the principal amount of
Securities to be redeemed by the principal amount of Securities (i) that have
been converted by Securityholders, (ii) that the Company has delivered to the
Trustee for cancellation or (iii) that the Company has redeemed other than
pursuant to paragraph 6.
The reductions shall be based on the $36,462,000 in principal amount of
Securities previously delivered by the Company to the Trustee for cancellation.
In March 1991 $36,460,000 of such Securities had been converted into Common
Stock by Securityholders. The Securities that were converted may, in accordance
with paragraph 6 of the Securities, reduce the principal amount to be redeemed
under paragraph 6 because such Securities had not been called for mandatory
redemption prior to conversion. The Company has never called any of the
Securities for redemption, mandatory or otherwise.
The reductions described above shall be effective independently, and
the amounts described above shall be subtracted independently and successively,
to reduce the principal amount of Securities otherwise required to be redeemed
under paragraph 6 of the Securities. The principal amount of each of the
cancelled Securities is to be subtracted only once.
<PAGE> 3
The $36,462,000 amount available to reduce the redemptions is
substantially greater than the amount of redemptions otherwise required.
Accordingly, the Company will not be required to redeem any Securities prior to
maturity.
The Company reserves the right to supplement or modify this notice. If
you have any question or comment about this notice, please call promptly.
Very truly yours,
COMPREHENSIVE CARE CORPORATION
By: KERRI RUPPERT
-------------------------
Kerri Ruppert, Senior Vice
President, Chief Accounting Officer, and Secretary/Treasurer
cc: Steven Rensig, Esq.
<PAGE> 4
COMPREHENSIVE CARE CORPORATION
350 W. Bay Street
Costa Mesa, California 92627
Tel: (714) 222-2273
Fax: (714) 574-3030
March 27, 1996
VIA U.S. FIRST CLASS MAIL &
CERTIFIED MAIL -- RETURN RECEIPT REQUESTED
First Trust of California
180 East Fifth Street, Suite 200
St. Paul, Minnesota 55101
Attention: Joe Roach: Bank of America Trust Administration No. 8510
RE: Indenture dated April 25, 1985 (the "Indenture") between
Comprehensive Care Corporation (the "Company") and First Trust
of California, National Association, as successor to Bank of
America National Trust and Savings Association (the "Trustee")
Ladies and Gentlemen:
Pursuant to Section 3.01 of the Indenture, the Company is to notify the
Trustee of the amount and basis for a reduction of the principal amount of
Securities to be redeemed pursuant to paragraph 6 of the Securities. The Company
is to give each notice provided for in Section 3.01 at least 50 days before the
redemption date.
The Company has given a notification today in a separate letter. The
Company understands that the Trustee has no objection to the timing of such
notification effecting independently a series of successive reductions of the
amount of redemptions pursuant to paragraph 6 of the Securities as to 5% of the
aggregate principal amount of Securities on April 15 in each of the successive
years from and including 1997 through and including 2009.
By letter dated March 1, 1996, the Trustee indicates that notice was
not given at least 50 days prior to the redemption date in 1996. The Company has
provided one or more such notifications in any case. The Company respectfully
draws the Trustee's attention to the fact that the Company has previously
notified the Trustee of the reduction by providing the Trustee with copies of
the Company's SEC filings made September 14, 1995, September 15, 1995, and
February 6, 1996, among others, that stated in clear and unequivocal terms the
Company's intention not to make any payments of principal on the Securities
prior to April 15, 2010 and, contingent upon rescission of acceleration, to
recommence to pay only interest until April 15, 2010.
Such statements reflect the Company's intentions not to pay sinking
fund redemption payments, and the only way to do that is by the Company electing
to reduce such obligations to zero through the mechanics of paragraph 6 of the
Securities, based upon previous cancellation by the Trustee of $36,462,000 of
Securities.
<PAGE> 5
The Trustee's predecessor seemed to accept the Company's basis for
making no sinking fund payments. The SEC documents, which relate to the exchange
offer with Securityholders, were reviewed and commented on by the predecessor
Trustee's counsel.
Moreover, and in addition to the above, the notice given concurrently
with this letter should not be considered untimely whatsoever. The Trustee has
done so only as a result of treating April 15, 1996 as the redemption date. The
Company respectfully disagrees--April 15 is not the redemption date. Treating
April 15 as the "redemption date" for purposes of prior notice under Section
3.01 of the Indenture is contrary to the meaning given to redemption date by the
Indenture and the Securities. It is not reasonable therefore to treat April 15
as the redemption date for the limited purpose of the notice requirement in
Section 3.01 of the Indenture. Please consider the following:
i. The Company, under paragraph 6, is to "redeem 5% of the
aggregate principal amount of Securities on April 15, 1996 ... at a redemption
price of 100% of principal amount, plus accrued interest to the redemption
date," which contemplates a lapse of time after April 15 to the redemption date.
ii. The meaning given to "redemption date" by the Indenture is
the actual payment date. This conclusion is clear, judging from the fact that
interest accrues to the redemption date under paragraph 6. In addition, the
provisions of Section 3.03(8) clearly describe the redemption date as the date
on which "interest on Securities called for redemption ceases to accrue." If
April 15 were the redemption date, interest could cease to accrue before
payments were made.
iii. The Company is required to pay all accrued interest on
April 15 each year, and no additional interest would accrue if April 15 were
also "the redemption date." It would be unnecessary to describe interest
accruing after April 15 unless the redemption date can be after April 15.
iv. Section 3.03 of the Indenture contemplates that prior to
every redemption the Company will mail a notice of redemption that states the
redemption date, a date chosen by the Company. In fact, the notice must state a
redemption date not less than 15 nor more than 60 days after the mailing of the
notice, which does not contemplate that the redemption date under paragraph 6
would always be April 15.
v. We do not understand how can 5% of the aggregate amount of
Securities on April 15 reasonably or practicably be called for redemption by the
Company 15 days or more before April 15. It would seem impracticable to give the
redemption notice until after April 15, and the redemption date needs to be from
15 to 60 days after mailing the redemption notice.
In accordance with the Company's intentions to solicit Securityholders
to rescind the present acceleration of the Securities, the Company proposes
therein not to pay any amount on the Securities prior to rescission of
acceleration, which is anticipated to be at least 50 days into the future.
Therefore, not only has adequate notice for purposes of Section 3.01 of
the Indenture been given at least 50 days prior to April 15, 1996, the notice
given today shall have been given at least 50 days prior to the earliest date
that potentially might be the redemption date.
<PAGE> 6
If you object to our conclusion that the Company is not required to
redeem 5% of the aggregate amount of Securities on April 15, 1996 because
adequate notice has been given under Section 3.01 of the Indenture, please call
promptly.
Very truly yours,
COMPREHENSIVE CARE CORPORATION
By: KERRI RUPPERT
------------------------------------
Kerri Ruppert, Senior Vice President,
Chief Accounting Officer, and
Secretary/Treasurer
cc: Steven Rensig, Esq.
