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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 ON
SCHEDULE 13E-4/A-2
ISSUER TENDER OFFER STATEMENT
(PURSUANT TO SECTION 13(e)(1) OF THE SECURITIES EXCHANGE
ACT OF 1934)
Comprehensive Care Corporation
--------------------------------
(Name of Issuer)
Comprehensive Care Corporation
--------------------------------
(Name of Person(s) Filing Statement)
7 1/2% Convertible Subordinated Debentures due April 15, 2010
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(Title of Class of Securities)
204620AA6
(CUSIP Number of Class of Securities)
Chriss W. Street, 1111 Bayside Drive, Suite 100, Corona del Mar, CA 92625
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(714) 222-2273
(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of the Person(s) Filing Statement)
Not Applicable
-----------------
(Date Tender Offer First Published, Sent or Given
to Security Holders)
Calculation of Filing Fee
---------------------------
<TABLE>
<CAPTION>
<S> <C>
Transaction
valuation* Amount of Filing Fee
$3,179,333 $6,358.67
</TABLE>
* Estimated solely for the purpose of calculating the filing fee, pursuant to
Rule 0-11(a)(4) and 0-11(b)(2), paid on September 14, 1995 upon originally
filing this Schedule 13E-4 (as hereafter from time to time may be amended herein
called the "Schedule") which was equal to one-fiftieth (1/50th) of one percent
of an amount equal to one-third of the value, determined as described below, of
the maximum amount of Debentures to be received by the Issuer (the "Transaction
Value"). The Issuer has an accumulated capital deficit, thereby qualifying to
base the Transaction Value on one-third of the $9,538,000 outstanding principal
amount pursuant to Rule 0-11(a)(4).
/X/Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and
identify the filing with which the offsetting fee was previously paid. Identify
the previous filing by registration statement number or the Form or Schedule and
the date of its filing
<TABLE>
<CAPTION>
<S> <C>
Amount Previously Paid: $6,358.67
Form or Registration Number: SC 13E-4 (Schedule 13E-4); File No. 005-19482
Filing Party: Comprehensive Care Corporation
Date Filed: September 14, 1995
</TABLE>
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ITEM 1. SECURITY AND ISSUER
(a) Comprehensive Care Corporation (the "Issuer") moved its
principal executive offices to 1111 Bayside Drive, Suite 100,
Corona del Mar, California 92625 on June 1, 1996.
(b) For each $1,000 outstanding principal amount (the "face
amount") of the Issuer's 7 1/2% Convertible Subordinated
Debentures originally due April 15, 2010 ("Debentures") and a
waiver of the interest accrued and unpaid since April 15, 1994
in excess of the portion comprising the interest payment that
is included in the Exchange Consideration, as defined below,
the Issuer proposes to exchange (the "Exchange
Offer")consideration comprised of the following: a payment of
principal of $500 in cash plus sixteen (16) shares of the
Issuer's authorized and previously unissued Common Stock, par
value $.01 per share ("Common Stock") and an interest payment
of $80 in cash plus eight (8) additional shares of Common
Stock. The combined aggregate of the Issuer's cash and Common
Stock exchangeable per $1,000 face amount of Debentures is
called the "Exchange Consideration." The total number of
shares of Common Stock included in the Exchange Consideration
are herein sometimes called the "Common Shares." Debentures
that are tendered (and not withdrawn) at least five business
days prior to the record date for the payment of overdue
installments of interest due will be accepted for payment (the
"Exchange"). The Debentures were issued pursuant to an
Indenture dated April 25, 1985 (the "Indenture") between the
Issuer and Bank of America National Trust and Savings
Association, as Trustee (including any successors, herein
called the "Trustee").
(c) The Debentures are traded over-the-counter, although trading
in these securities is limited and sporadic. The sections
headed "Price of Securities Prior to Announcement" on page 7
of the Offering Circular, "Price Range of Debentures" on page
10 thereof and "Other Factors to Consider - Price Range of the
Common Shares" on page 18 thereof are incorporated herein by
this reference.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
(a) The Issuer contemplates that the financing available to the
Issuer from its internal sources, including the sale of
additional equity securities, will be adequate to complete the
Exchange, including both (i) payment of the Exchange
Consideration in exchange for the Debentures that are
tendered, and (ii) payment of interest that is currently due
and unpaid, plus interest accrued on all overdue amounts, in
respect to all Debentures that are not tendered in order to
effect a rescission of acceleration of the Debentures. The
Issuer believes that its $3.0 million cash invested in 30-day
commercial paper or other short-term investments would be
adequate to pay the cash portion of the Exchange Consideration
for up to approximately 33% of the amount of Debentures
outstanding and to pay interest required to be paid on the
remaining approximate 67% in principal amount that would
remain outstanding after the Exchange. The Issuer currently
anticipates that approximately 30% of the principal amount of
Debentures outstanding will be tendered in the Exchange Offer.
If 30% of the Debentures were exchanged and 70% were not
exchanged, the Exchange Consideration would include
approximately $1,659,612 million payable in cash, and the
interest due on the unexchanged Debentures would be
approximately $1,201,788 million, if paid on July 15, 1996. If
other or additional cash funding becomes necessary, the Issuer
may rely on
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cash proceeds that may come from internal sources or one or a
combination of the following potential cash sources:
(i) In March 1995 a jury awarded the Issuer approximately
$2.7 million, plus certain legal costs and
post-judgment interest, in damages in a lawsuit
against RehabCare Corporation. The defendant has
posted a $3.0 million bond for the amount of the
award and has filed an appeal of the judgment. The
Issuer is unable to predict whether this judgment
will be sustained and, if sustained, when such
proceeds might be received.
(ii) The Issuer has received a firm commitment from a
mutual fund to purchase in a private placement up to
$5.0 million of Preferred Stock, but no assurance can
be made that the Issuer will be able to consummate
such private placement on such terms and conditions
acceptable to the Issuer.
(iii) The Issuer is seeking to privately place from $2
million to $4 million of equity through a
broker-dealer that is not affiliated with the Issuer
or its directors or officers.
In the event that, under circumstances then prevailing, financing is
unavailable or is available only on terms that are unacceptable in the
Issuer's reasonable judgment, or if other adverse conditions then
exist, the Issuer may elect not to proceed with or effect the Exchange,
if the Issuer reasonably determines that the Exchange is not in the
best interests of the Issuer, or may amend the Exchange Offer,
including to permit the Issuer to accept less than all of the
Debentures tendered and prorate acceptances of the offer among all
tendering holders.
In addition, the Issuer's Senior Debt, as defined in the Indenture, is
payable to the extent Senior Debt has matured. Senior Debt generally
includes all indebtedness (whether incurred directly or assumed or
guarantied) for borrowed money, any debt that is evidenced by a note or
similar instrument, or evidenced by a lease in which the Issuer is the
lessee. The Issuer estimates that the amount of principal and interest
that will mature prior to August 31, 1996 is $500,000.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE
The Debentures are currently due and payable pursuant to an
acceleration thereof that occurred when Debentureholders who owned an
aggregate of at least 25% of the outstanding principal amount gave
notice of acceleration on or about February 10, 1995. The rescission of
the acceleration will be solicited by the Issuer.
The purpose of the tender offer is to rescind the Debenture
acceleration by offering the Exchange Consideration, as defined in Item
1(b), in exchange for each $1,000, or integral multiple thereof, in
principal amount of up to 100% of the outstanding Debentures, provided
that each Debenture accepted in the Exchange be accompanied by the
Consent being solicited from Debentureholders. Exhibit 99.14, the
Issuer's Debenture Consent Solicitation Statement, is incorporated
herein by this reference.
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The Issuer is a party to a letter agreement dated March 3, 1995 (the
"Letter Agreement") with Mr. Jay H. Lustig, an individual who was
representing certain holders of outstanding Debentures (therein
represented to the Issuer as holding at least 26% of the principal
amount and called the "Participating Securityholders"). The Letter
Agreement is filed as Exhibit 99.20 hereto and is incorporated herein
by this reference. The Letter Agreement provided for the Issuer
offering an exchange for all of the Debentures that were outstanding
and properly tendered by the Debentureholders in the Issuer's second
quarter of fiscal 1996, but such proposed exchange offer was not
effected. Although the Issuer has increased the Exchange consideration
to compensate for delays, the Issuer believes that the Letter Agreement
is not binding upon the Issuer because of the failure on the part of
Participating Securityholders, believed to represent a 25% portion of
the outstanding principal, to use best efforts, if necessary, to
provide effective notice of rescission of acceleration, signed by
holders of a majority of the outstanding principal amount of
Debentures. The Exchange Offer is being made by the Issuer as a means
to obtain consent of Debentureholders to rescission of acceleration and
includes certain of the concepts of the Letter Agreement as a framework
for the proposed Exchange. See Item 5, "Contracts, Arrangements,
Understandings or Relationships with Respect to the Issuer's
Securities" below. Mr. Jay H. Lustig delivered, and the Issuer
received, a letter dated March 21, 1996 concerning the Letter
Agreement. Mr. Lustig indicated in such letter his opinion in support
of the Exchange Consideration's increase, per $1,000 in principal
amount of Debentures, by $55 in cash or 7 1/3 shares for delays from
September 3, 1995 to May 1, 1996. See Exhibit 99.21, "Letter dated
March 21, 1996 from Jay H. Lustig," incorporated herein by this
reference.
The Issuer conditions its obligation to accept the tendered Debentures
in the Exchange upon conditions including rescission of the Debenture
acceleration, which requires action by the holders of at least a
majority in principal amount of Debentures outstanding, and which also
requires that the Issuer have paid the interest due on non-tendered
Debentures in order to cure the Events of Default respecting the
aggregate principal amount of Debentures that are not exchanged. The
Issuer has available approximately $3.0 million in cash or cash
equivalents, representing an amount that would be necessary to make
full payment of Exchange Consideration for a maximum of approximately
33% of the outstanding Debentures, or any lesser amount that are
exchanged, plus interest and default interest due on the unexchanged
Debentures. The first paragraph of Item 2(a) above is incorporated
herein by this reference. Payment of the Exchange Consideration plus
interest in that event would require approximately $2,975,856 million
in cash. The Issuer intends to pay any additional principal and all
costs and expenses incurred to consummate the Exchange from additional
funds from one of the sources referred to above or general corporate
funds.
The tender of Debentures also includes the waiver of the accrued
interest respecting the tendered Debentures that will be in excess of
the interest payment that is included as a specified portion of the
Exchange Consideration. It is estimated that the interest (and default
interest thereon) accrued through July 15, 1996 would be approximately
$180 per $1,000 of principal amount of Debentures. To the extent this
accrual exceeds or differs from the $80 in cash plus the eight (8)
shares of Common Stock designated as interest, the tender of Debentures
is deemed to be a waiver of interest to the date of the Exchange.
The Debentures received by the Exchange Agent from the tendering
Debentureholders will be acquired by the Issuer upon consummation of
the Exchange, and once so acquired may neither be voted by the Issuer
nor
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counted in calculating the amount of consents required. Debentures
which are exchanged for Exchange Consideration will thereafter be
delivered on behalf of the Issuer to the Debenture Registrar for
cancellation as soon as practicable after the completion of the
Exchange. It is planned that the Trustee shall also act as the Exchange
Agent and the paying agent for the interest payable respecting
nontendered Debentures, in addition to its acting in the capacity of
Registrar.
In connection with the proposed Exchange, the Issuer has not taken any
action with the purpose of deregistering Debentures in accordance with
the Securities Exchange Act of 1934, as amended (the "Exchange Act");
provided, that, prior to the Exchange Offer the Debentures have been
held by fewer than 300 record holders. At any given time one or more
record holders may request certificates to be issued in the names of
one or more successor record holders. As of May 9, 1996 there were
approximately 42 record holders and the Issuer has no reason to believe
that Debentures were held of record in one "street" name by more than
one beneficial holder in order to avoid the provisions of the Exchange
Act by making the Debentures deregistrable. Record holders, including
clearing agencies and brokers, hold Debentures for one or more
beneficial holders in the ordinary course of their business. Based on
the Issuer's written communication to brokers believed to hold
Debentures for beneficial holders, brokers hold Debentures for an
aggregate of [170] beneficial holders. Therefore, the maximum total
number of potential record holders at this time is approximately [230].
The Debentures continue to have been deregistrable, effective ninety
(90) days after filing with the Commission a certification on Form 15
that there are fewer than 300 record holders. The Issuer may consider
deregistration of Debentures at some future time if circumstances
continue to exist under which the Debentures will be deregistrable
after the Exchange Offer. After the prescribed 90-day time period,
deregistration will affect to some extent the applicability of certain
federal securities laws to the Debentures.
The Issuer has no present intention to retire any Debentures prior to
their original maturity date except pursuant to the Exchange Offer. In
approximately the past five years, the Issuer has not purchased or
otherwise acquired any Debentures. In accordance with Rules and
Regulations promulgated under the Exchange Act, the Issuer cannot
acquire Debentures otherwise than pursuant to the Exchange Offer before
or during the period the Exchange Offer is open and until at least ten
business days after the termination of the Exchange Offer. Thereafter,
the Issuer may, from time to time, make purchases of Debentures in the
open market or in privately negotiated transactions, either at or with
reference to market prices, or at negotiated prices; in the event that
these purchases take place, either without all of the protections of
Section 13(e) of the Exchange Act after an Exchange Act deregistration
of Debentures, or if Rule 13(e) promulgated under the Exchange Act is
otherwise inapplicable pursuant to its existing or future exemptions
and exceptions. The Indenture provides for the Issuer's Board of
Directors to be able either to temporarily reduce the Debenture
conversion price (in order to provide a financial incentive for
Debentureholders to convert Debentures into Common Stock), or to redeem
Debentures for cash equal to their face amount.
The Issuer has elected to subtract from its sinking fund obligations
the approximately $36.5 million principal amount of Debentures
converted by Debentureholders in March 1991 and previously cancelled,
effectively removing the sinking fund redemption obligation.
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Except to the extent indicated in the preceding paragraphs, the Issuer
has no plans or proposals of the type enumerated in Item 3 of Schedule
13E-4.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER
Except as disclosed in Item 5, there have been no transactions in the
Debentures by the Issuer or any of its executive officers, directors,
affiliates, or any associate or subsidiary thereof, during the forty
(40) business days of the Issuer immediately preceding the filing
hereof.
For this purpose, "affiliate" or "associate" is assumed to include
subsidiaries and other entities that are controlled, directly or
indirectly, by the Issuer and the executive officers and directors of
each thereof.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
TO THE ISSUER'S SECURITIES.
The Letter Agreement dated March 3, 1995, which is filed as Exhibit
99.20 hereto, is incorporated herein by this reference. The third full
paragraph of Item 3 is incorporated herein by this reference. The
amount of the Exchange Consideration was first determined according to
the Letter Agreement, an agreement that arose from negotiations between
the Issuer and Mr. Jay H. Lustig, an individual purportedly
representing holders of a $2.5 million portion of the outstanding
$9,538,000 principal amount of Debentures, and purportedly including
Sohail Massoud, purportedly one of the Debentureholders who had filed
an involuntary petition to commence a bankruptcy liquidation of the
Issuer. The bankruptcy petition was filed on February 24, 1995. The
Participating Securityholders supported the dismissal of the
bankruptcy, as provided in the Letter Agreement, by executing a written
consent with advice from their legal counsel on the form and substance
of the consent. The petition was dismissed on March 6, 1995.
Subsequent to executing the Letter Agreement, the Issuer understands
that the Trustee received copies or originals of notices of rescission
of acceleration purportedly executed by Debentureholders of record
representing 44.1% of the Debentures in outstanding principal amount.
All of the notices were addressed to the Trustee and the Issuer and
purported to notify the Trustee to rescind acceleration of the
Debentures. Such notices were signed (although executed originals were
not always properly delivered) by holders of record of less than half
of the outstanding principal amount of Debentures, and therefore were
insufficient in quantity (a majority of the outstanding principal
amount being necessary to rescind acceleration); and unless it were
sufficient, the so-called Participating Securityholders would have, and
would have had, a "best efforts" obligation to provide such majority
consent evidenced by one or more written notices to the Trustee and the
Issuer.
The Participating Securityholders undertook sole responsibility for
obtaining notices of rescission of acceleration pursuant to the Letter
Agreement, in the Issuer's opinion. The Issuer knows of no other
current activity by any Participating Securityholder, including Mr.
Lustig, other than the prior discussions between the officers and
directors of the Issuer and Mr. Lustig regarding the matters set forth
in the March 21, 1996 letter from Mr. Lustig, in regard to Mr. Lustig's
opinion as to whether Debentureholders would be willing to participate
in the currently proposed Exchange.
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The Letter Agreement provided that the Issuer would offer the
Debentureholders an exchange. The exchange was to have been that, for
each $1,000 in outstanding principal amount of Debentures and a waiver
of whatever portion of the accrued interest on such Debentures exceeded
$80 in cash, the Issuer was to offer cash of $500 as principal and cash
of $80 as interest and a number of shares of Common Stock calculated
based on an average (including every round-lot trade) of the reported
prices on the New York Stock Exchange ("NYSE") Composite Tape during a
defined trading period (March 6, 1995 through May 19, 1995), such that
their total defined worth was $120. The Letter Agreement provided for a
manner of calculation to have been based on the average price of each
of the many round-lot trades (100 shares or more) during the entire
trading period. However, the calculation of the number of shares to be
paid as a portion of the amount of the initially proposed exchange
consideration was not based on that kind of average. Instead, a $7.50
defined worth per share was calculated over the trading period based on
the daily closing prices, weighted for daily composite volume, as
reported on the NYSE Composite Tape. The average of $7.47 was rounded
up to $7.50, which is the closest even divisor of $120. This method of
assigning worth is believed to approximate the Letter Agreement method
as well as reasonably possible. The Issuer was unable to utilize the
trading prices during the defined trading period because such data was
not available for the full trading period.
The Letter Agreement provided that the proposed exchange would be
consummated within 180 days; provided, however, the Issuer's promise to
use "best efforts" and its obligation to consummate the proposed
exchange were expressly conditioned upon the satisfaction of the
Participating Securityholders' obligations, including a best-efforts
obligation to cause notices of rescission of acceleration to be
delivered by a majority in principal amount of the Debentureholders.
The efforts, if any, made by or on behalf of the Participating
Securityholders, or otherwise, resulted in the delivery of notices of
rescission that were insufficient in amount. Management attributes the
Issuer's delay beyond the prescribed 180 days to the failure to cause a
rescission of acceleration. Management believes that the continuance of
the acceleration of the Debentures has adversely affected the Issuer's
ability to perform its obligation, if any, to make an exchange offer
and that the time expended by the Issuer has been reasonable in the
circumstances.
The Issuer has proposed to make a general mailing to Debentureholders
of written requests that Debentureholders give notice to the Trustee of
rescission of acceleration and any other matters necessary so that the
rescission of acceleration and the Exchange Offer may proceed. The
Trustee will assist administratively in such mailing and will receive
and authenticate all tendered Debentures and all Consents for a fee.
The Trustee shall not make recommendations with respect thereto.
Solicitations of a notice of rescission of acceleration of the
Debentures may result in effectively reinstating the maturity for the
outstanding Debentures to April 15, 2010.
The Issuer's current year auditors have indicated that the
acceleration, among other factors, creates uncertainty as to the
Issuer's ability to continue as a going concern. If effected, the
rescission could improve the Issuer's financial prospects. In addition
to the acceleration, however, other factors creating uncertainty as to
the Issuer's ability to continue as a going concern include significant
recurring losses and negative cash flows from operations. A rescission
of acceleration also could affect the "creditors' rights" of
Debentureholders. The rescission of acceleration could have the effect
of impairing the rights
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of Debentureholders relative to any other creditors of the Issuer, now
or in the future.
While the acceleration and any Event of Default continue, the Trustee
also can pursue any remedy at law or in equity to recover the full
outstanding principal amount of the Debentures plus unpaid interest and
costs, either in the judgment of the Trustee or at the instruction of
Debentureholders holding 25 percent or more of the outstanding
principal amount.
The March 3, 1995 Letter Agreement provided for an agreement in favor
of Mr. Lustig and all of the Debentureholders that the Issuer was not
to pledge the shares of CareUnit, Inc., a Delaware corporation and a
wholly-owned subsidiary of the Issuer, after the date of the Letter
Agreement in order for the Issuer to be prepared to satisfy a future
obligation to pledge those shares for the benefit of Participating
Securityholders, but only if the Participating Securityholders
performed all of their material obligations (with opportunity for cure
if cure were possible) under the Letter Agreement. Such pledge would
have been to secure the Issuer's obligation to purchase the Debentures
on and subject to the terms and conditions of the Letter Agreement or
otherwise. Management believes that the Issuer's obligations to perform
the pledge of CareUnit, Inc. shares did not arise because Mr. Lustig
and the Participating Securityholders did not use best efforts to
provide proper notices of rescission of acceleration signed by
Participating Securityholders and at least a majority in principal
amount of the outstanding Debentures. The Letter Agreement also
provided that a disposition of pledged CareUnit shares would have been
permitted at any time after approximately September 3, 1995, or 180
days from March 3, 1995, if the Participating Securityholders had
performed all of their material obligations (with opportunity to cure
if cure were possible). The Issuer has honored its covenant not to
encumber the CareUnit shares otherwise than as contemplated by the
Letter Agreement, and no pledge of the CareUnit shares is contemplated
by the Issuer.
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.
For the reasons set forth above, the Issuer believes that it is not
responsible for the delay in completing an exchange as contemplated by
the Letter Agreement. However, the Exchange includes certain of the
concepts of the Letter Agreement as a framework for the proposed
Exchange. In addition, Mr. Lustig had indicated that, as of May 1,
1996, an additional interest payment of $55 in cash or 7 1/3 shares
would, in his opinion, be acceptable to Debentureholders.
The Issuer intends to offer eight (8) shares of Common Stock as
interest in addition to previously proposed Exchange Consideration per
$1,000 of the Debentures.
According to the Indenture between the Issuer and the Trustee, no
payment may be made to the holders of Debentures if any Senior Debt, as
defined in the Indenture, has matured and is unpaid or if any Senior
Debt, as so defined, is in default and if such default would permit
acceleration of the Senior Debt and if any legal action concerning any
such default is commenced or if the Senior Debt holder gives notice to
the Issuer of such a default. To the Issuer's best knowledge, there is
no such default under any Senior Debt. However, no assurance can be
made that no such default exists or may occur in the future.
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The Issuer has and in the future may engage investment bankers or
consultants to advise the Issuer and/or to offer, sell, or solicit
offers or other indications of interest in the Issuer's securities,
when and where permitted by law. For purposes of the preceding
sentence, the term securities includes debt securities, exchangeable or
convertible securities, secured or unsecured by collateral, and
subordinated or unsubordinated with respect to the Issuer's general
creditors or the Debentures.
The Issuer has, as approved by the Board of Directors, from time to
time engaged and compensated firms for the purpose of facilitating a
placement of securities including, but not limited to, Chriss Street &
Co., an investment banking firm affiliated with Chriss W. Street, the
Chairman, Chief Executive Officer and President of the Issuer. In
addition, from time to time some of the investors introduced to the
Issuer by Mr. Street have discussed follow-on investments with the
Issuer's management. Chriss Street & Co. may receive advisory fees in
connection with such investments if approved by the Board of Directors
in the particular instance.
No fees shall be paid by the Issuer, directly or indirectly, to any
person for soliciting the Exchange of Debentures by Debentureholders.
Item 6 of this Schedule 13E-4 is incorporated herein by this reference.
The information presented in the Offering Circular under the headings
"Risk Factors," "Other Factors to Consider," "The Exchange Offer,"
"Interests of Certain Persons," "Principal Stockholders," "Use of
Proceeds," "Dividend Policy," "Pro Forma Capitalization and Income
Statement Information," "Changes in Accountants," "Description of
Debentures," "Description of Capital Stock" and "Exchange Offer Funding
Requirements and Sources" is incorporated herein by this reference.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED
The Exchange Offer is being made by the Issuer in reliance upon the
exemption from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"), afforded by Section 3(a)(9)
thereof. The Issuer, therefore, will not pay any commission or other
remuneration to any broker, dealer, salesman, or other person for
soliciting tenders of the Debentures in the Exchange Offer. Regular
employees, officers and directors of the Issuer and its subsidiaries,
who will not receive additional compensation therefor, may solicit
Exchanges from holders of the Debentures.
The Trustee, which has been appointed as Exchange Agent for the
Exchange Offer (the "Exchange Agent") and which also serves as the
Debenture Registrar, and Continental Stock Transfer & Trust Company,
serving as the Common Stock Registrar and Transfer Agent, will be
engaged to perform administrative services. The Issuer will provide, or
will cause to be provided, copies of the Offering Circular and other
documents upon request.
ITEM 7. FINANCIAL INFORMATION
"Selected Financial Data," "Management's Discussion and Analysis," the
financial statements, and the notes thereto, and the auditors' reports
thereon, included in the Issuer's Form 10-K/A Amendment No. 3 for the
fiscal year ended May 31, 1995, as filed on April 24, 1996 with the
Securities and Exchange Commission (the "Commission"), found on pages
18 through 61 thereof, are incorporated herein by this reference.
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The "Condensed Consolidated Financial Statements," and the notes
thereto, included in the Issuer's Form 10-Q/A, Amendment No. 2, for the
fiscal quarter ended August 31, 1995, as filed on or about June 21,
1996 with the Commission, found on pages 2 through 16 thereof, are
incorporated herein by this reference.
The "Condensed Consolidated Financial Statements," and the notes
thereto, included in the Issuer's Form 10-Q/A, Amendment No. 1, for the
fiscal quarter ended November 30, 1995, as filed on or about
June 21, 1996 with the Commission, found on pages 3 through 11
thereof, are incorporated herein by this reference.
The "Condensed Consolidated Financial Statements," and the notes
thereto, included in the Issuer's Form 10-Q for the fiscal quarter
ended February 29, 1996, as filed on or about April 15, 1996 with the
Commission, found on pages 3 through 13 thereof, are incorporated
herein by this reference.
The information in the section of the Offering Circular entitled "Ratio
of Earnings to Fixed Charges," which is located at page 10 thereof, is
incorporated herein by this reference.
The information in the section of the Offering Circular entitled "Pro
Forma Capitalization and Income Statement Information," which is
located at page 43 thereof, is incorporated herein by this reference.
ITEM 8. ADDITIONAL INFORMATION
The Issuer intends to conduct the Exchange Offer in accordance with
Section 3(a)(9) of the Securities Act, in order that the issuance of
Common Shares in connection with the Exchange will not require
Securities Act registration. The Debentures were originally issued in a
public offering that was registered under the Securities Act; and,
therefore, the Debentures would be treated as unrestricted securities
for purposes of the Securities Act so long as they are held by, or are
traded by and among, Debentureholders who are other than the Issuer or
its affiliates or any persons deemed to be underwriters. Debentures
that, after the public offering, are acquired by the Issuer, or any
persons deemed affiliates of the Issuer, or any persons deemed
underwriters of the Issuer, would nevertheless be considered to be
restricted for purposes of the Securities Act, and any Debentures
acquired from any such persons in a transaction not involving a public
offering also would be considered restricted until held by a
nonaffiliate for three years. The Common Shares exchanged for
unrestricted Debentures would also be unrestricted for Securities Act
purposes provided that the Section 3(a)(9) exemption from Securities
Act registration applies.
The Issuer has applied for listing on the NYSE of the Common Shares
forming part of the Exchange Consideration. The NYSE has indicated
approval of listing 154,584 shares thereof upon official notice of
issuance, which was the maximum number of shares initially proposed to
be issuable to tendering Debentureholders. If required, the Issuer
intends to obtain approval from the NYSE for listing upon notice of
issuance prior to consummation of the Exchange of the balance of the
maximum number of shares issuable.
11
<PAGE> 11
The Issuer has filed a Proxy Statement/Debenture Consent Solicitation
Statement (the "Consent Solicitation"), as amended, with the Commission
pursuant to the Exchange Act, a copy of which is attached hereto as
Exhibit 99.14, (a)(vii), and incorporated herein by this reference. The
purpose of the Consent Solicitation is to obtain the consent (the
"Consent") of the Debentureholders to the following four proposals:
A. To consent to rescind, and to notify the Trustee of a
rescission of, an acceleration of $9,538,000 of
principal due under the Debentures and all of the
effects thereof (Proposal 1);
B. To consent to waive, and to notify the Trustee of a
waiver of, any defaults or Events of Default (other
than nonpayment of any principal or interest due) that
exists at the time of the Issuer'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 (Proposal 2);
C. To consent to instruct the Trustee not to pursue any
remedy available at law or in equity upon anything less
than future directions given by a majority in
outstanding principal amount of Debentures during the
consent solicitation period and a period ending at the
close of business on the Default Interest Payment Date
if the same occurs within 30 calendar days after the
termination of the consent solicitation period
(Proposal 3); and
D. To consent to the waiver under the Indenture of formal
notice from the Issuer to the Trustee with respect to
the cancellation of the Issuer's sinking fund payment
obligations (Proposal 4).
The Issuer does not presently contemplate completion of the Exchange
unless the Consent requested in Proposal 1 in the Consent Solicitation
is granted by the Debentureholders. The Issuer at this time intends to
proceed with the Exchange notwithstanding that approval is not received
on Proposals 2, 3 or 4, provided that the rescission of acceleration
can be effected under the circumstances then existing. Under the
Indenture, approval of Proposals 1 and 3 requires consent of at least a
majority of the outstanding principal amount of Debentures, and
approval of Proposals 2 and 4 requires consent of the holders of at
least 66 2/3% of the outstanding principal amount of Debentures.
All other notices given or authorized under the Indenture that the
Trustee and the management and Board of Directors of the Issuer solicit
will be solicited pursuant to a Debentureholder Proxy Statement filed
as a proxy statement and additional proxy materials on Schedule 14A
under the Exchange Act.
Various documents and actions required to be delivered or taken
pursuant to the Indenture are subject to approval by the Trustee under
the Indenture as to proper form and substance and as to compliance with
the Indenture. The Indenture contains terms and provisions regarding,
among other things, defaults and cures which may affect, directly and
indirectly, the Exchange Offer.
The information presented in the Offering Circular under the headings
"Description of Debentures," "Risk Factors," and "The Exchange Offer --
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<PAGE> 12
Conditions of the Exchange Offer," is hereby incorporated herein by
this reference.
The consummation of the Exchange Offer is intended to be concurrent
with the rescission of the Debenture acceleration. If the Debenture
acceleration is continuing, there may be a material adverse effect on
the Issuer's ability to consummate the Exchange Offer. If the
acceleration is not rescinded prior to or concurrent with the payment
of Exchange Consideration to tendering Debentureholders and accrued
interest to non-tendering Debentureholders, the Issuer does not intend
to consummate the Exchange and does not intend to pay interest on
nontendered Debentures.
Debentures are tendered by properly executing and delivering a Letter
of Transmittal, with the tendered Debentures, to the Exchange Agent.
The Debentureholders, in order to cause the Issuer to accept the
Debentures for Exchange, are requested to return to the Trustee a
Consent for the purposes of submitting notice of rescission of the
acceleration of the Debentures; waiver of defaults (other than
nonpayment); instructing the Trustee not to pursue collection remedies
against the Issuer during the Exchange Offer in order to permit
completion of the Exchange Offer; and the reinstatement of April 15,
1996 as the maturity date as to the entire principal amount of
Debentures outstanding. Independently, the tender of Debentures
pursuant to the Letter of Transmittal serves as a waiver of the accrued
interest in excess of the interest portion of the Exchange
Consideration, and waiver of all other claims under or pursuant to the
Debentures, other than for the payment of the Exchange Consideration.
Unless the condition is waived or modified by the Issuer, none of the
Debentures will be accepted for exchange unless the Debentureholders
appropriately consent to the Proposals set forth in the Consent
Solicitation.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
The Exhibit Index attached to this Schedule is incorporated herein by
this reference.
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<PAGE> 13
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, correct and complete.
COMPREHENSIVE CARE CORPORATION
/s/ KERRI RUPPERT
--------------------------------------
Kerri Ruppert
Senior Vice President,
Secretary and Chief Accounting
Officer
Date: July 3, 1996
14
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No.
<S> <C> <C> <C>
99.8 (a) (i) Offering Circular and Cover Letter*
99.9 (ii) Letter of Transmittal*
99.10 (iii) Guidelines for Certification of Taxpayer Identification
Number on Form W-9*
99.11 (iv) First, Second, Third, Fourth and Fifth Notices of
Default from Trustee to Debentureholders*
99.12 (v) Notice to Debentureholders of Interest Payment Date
99.13 (vi) Cover Letter for Debenture Consent Solicitation
Statement*
99.14 (vii) Consent Solicitation Statement on Schedule 14A for
solicitation of Debentureholders as filed by the Issuer
on September 15, 1995, and as amended through
July 3, 1996, pursuant to the Exchange Act*
(incorporated by reference)
99.15 (viii) Script for use by persons answering questions
99.16 (ix) Letter to Brokers
99.17 (x) Letter to Clients of Brokers and Others*
99.18 (xi) Notice of Conversion Price Adjustment*
99.19 (c) (i) Indenture dated April 25, 1985 between the Issuer and
Bank of America National Trust and Savings Association,
is incorporated by reference to Exhibit 4 to the
Issuer's Form S-3 Registration No. 2-97160 filed April
25, 1985 regarding an aggregate $46,000,000 original
principal amount of the Debentures
99.20 (ii) Letter Agreement dated March 3, 1995 between the Issuer
and Mr. Jay H. Lustig, as a representative of certain
holders of Debentures
99.21 (iii) Letter dated March 21, 1996 from Mr. Jay H. Lustig to
the Issuer concerning the present terms of the Exchange
99.22 (iv) Letter dated March 1, 1996 from the Trustee to the
Issuer concerning sinking fund provisions of the
Indenture
99.23 (v) Letters dated March 27, 1996 from the Issuer to the
Trustee concerning the Trustee's letter dated
March 1, 1996
</TABLE>
- --------------
* To be distributed to Debentureholders.
15
<PAGE> 1
EXHIBIT 99.8
[COMPREHENSIVE CARE CORPORATION LETTERHEAD]
July __, 1996
To: Holders of our 7 1/2% Convertible Subordinated
Debentures Due April 15, 2010 ("Debentures")
Comprehensive Care Corporation (the "Company") is offering you, in
exchange for each $1,000 in principal amount of your outstanding Debentures
together with a waiver from you of interest and default interest accrued thereon
from April 15, 1994 that exceeds or differs from the designated interest payment
as described below, an EXCHANGE CONSIDERATION comprised of (a) a cash principal
payment of $500, plus (b) a non-cash principal payment of sixteen (16) shares of
Common Stock, par value $.01 per share, of the Company ("Common Stock"), and (c)
a cash interest payment of $80, plus (d) a non-cash interest payment of eight
(8) shares of Common Stock.
If you elect to keep your Debentures, you will not lose the accrual of
any interest payment; provided, however, that continued payment of interest and
ultimately the principal thereof by the Company is subject to prior satisfaction
of conditions to such payment provided in the Indenture and the Company's
ability to pay such interest. Principal and interest due under the Debentures
are unsecured and are subject to the terms, restrictions and subordinations as
provided in the Indenture pursuant to which the Debentures were issued.
The Debentures are currently due and payable in full as a result of
acceleration resulting from an election to accelerate on account of specified
continuing payment defaults (the "Events of Default"). For the Exchange Offer to
be completed, holders of a majority in principal amount of Debentures must
consent for the purpose of giving notice to the Trustee that the acceleration is
rescinded and also the Company must cure the Events of Default. Interest
payments due on non-tendered Debentures are not waived, and all default interest
will be paid to non-tendering Debentureholders. Subject to certain conditions,
the Company expects to deliver Exchange Consideration for all Debentures
properly tendered for Exchange. The Company also intends to resume semi-annual
interest payments on non-tendered Debentures and does not have any present
intention to redeem or otherwise retire any such non-tendered Debentures except
in the Exchange.
The Exchange Offer expires on __________, 1996, and the Company
anticipates payment of the Exchange Consideration on or before __________, 1996.
Under certain circumstances, the Company may extend such dates and amend or
withdraw the offer. The enclosed Offering Circular further describes the
Exchange Offer. Existing Debentureholders and their representatives, successors
or assigns may obtain additional copies of the Offering Circular upon request to
Kerri Ruppert, Senior Vice President, Chief Accounting Officer and
Secretary/Treasurer, telephone (800) 678-2273.
You are urged to read the enclosed Offering Circular carefully. The
Offering Circular is accompanied by a Letter of Transmittal, Notice of
Guaranteed Delivery, Letter to Brokers and Letter to Clients of Brokers for your
use in tendering your Debenture certificates to the Exchange Agent, First Trust
of California, National Association. Also, the Offering Circular is accompanied
by a Debenture Consent Solicitation Statement. Each of these documents is
accompanied by additional documents describing the proposed
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<PAGE> 2
transaction. One desired effect of the Exchange Offer is to obtain a rescission
of acceleration of the Debentures so that the Company can resume its former
non-default status under the Debentures and reinstate the maturity date of April
15, 2010. If the acceleration is not rescinded, the Company anticipates that it
would not be permitted by the Trustee or holders of its Senior Debt to deliver
Exchange Consideration to the tendering Debentureholders.
THE BOARD OF DIRECTORS SOLICITS YOU TO TENDER YOUR DEBENTURES TO
RECEIVE THE EXCHANGE CONSIDERATION DESCRIBED ABOVE.
Cordially,
________________________________________
Kerri Ruppert
Senior Vice President, Secretary and Chief
Accounting Officer
2
<PAGE> 3
OFFERING CIRCULAR
OFFER BY THE ISSUER TO EXCHANGE CASH AND COMMON STOCK FOR THE SURRENDER OF ALL
PRINCIPAL AND INTEREST DUE ON ANY OR ALL OUTSTANDING 7 1/2% CONVERTIBLE
SUBORDINATED DEBENTURES DUE APRIL 15, 2010 ("DEBENTURES")
COMPREHENSIVE CARE CORPORATION
1111 BAYSIDE DRIVE, SUITE 100
CORONA DEL MAR, CA 92625
THE COMPANY OFFERS AN AGGREGATE EXCHANGE CONSIDERATION OF
$500 IN CASH AND 16 SHARES OF ITS COMMON STOCK AS PRINCIPAL, AND
$80 IN CASH AND 8 SHARES OF ITS COMMON STOCK AS INTEREST,
FOR THE SURRENDER OF EACH $1,000 OF OUTSTANDING PRINCIPAL
AMOUNT OF DEBENTURES
AND WAIVER AND FORGIVENESS
OF ALL CLAIMS THEREUNDER, INCLUDING INTEREST THEREON
ACCRUED OR ACCRUING
FROM APRIL 15, 1994 TO THE DATE OF THE EXCHANGE WHICH WOULD BE $180.00 OF
INTEREST ACCRUED AS OF JULY 15, 1996
THE EXCHANGE OFFER WILL EXPIRE AT 2:00 P.M. ST. PAUL, MINNESOTA TIME, ON
________, 1996 UNLESS THE EXCHANGE OFFER IS EXTENDED.
THE DATE OF THIS OFFERING CIRCULAR IS July ___, 1996.
Comprehensive Care Corporation (the "Company") hereby offers, upon the
terms and subject to the conditions set forth in this Offering Circular and in
the accompanying Letter of Transmittal (which together constitute the "Exchange
Offer"), to exchange $500 in cash plus sixteen (16) shares of Common Stock, par
value $.01 per share ("Common Shares"), designated aggregately as a payment of
principal, plus $80 in cash plus eight (8) Common Shares, designated aggregately
as a payment of interest (the combined total of principal and interest herein
called "Exchange Consideration") for each $1,000 of the outstanding principal
amount of its 7 1/2% Convertible Subordinated Debentures due April 15, 2010 (the
"Debentures"), and the waiver by the Debentureholder of all interest accrued and
unpaid on such principal amount as of the date of the Exchange except for such
designated interest payment included in the Exchange Consideration. See "The
Exchange Offer -- Procedures for Tendering."
THE COMPANY IS CONCURRENTLY SOLICITING FOUR CONSENTS FROM
DEBENTUREHOLDERS PURSUANT TO A DEBENTURE CONSENT SOLICITATION STATEMENT WHICH IS
A DOCUMENT SEPARATE FROM THIS OFFERING CIRCULAR RELATING TO THE FOLLOWING:
Consent (1) to rescind, and to notify the Trustee of a rescission of, an
acceleration of $9,538,000 of principal due under the Debentures, (2) to waive,
and to notify the Trustee of a waiver of, any defaults or Events of Default
(other than nonpayment of any 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) 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
1
<PAGE> 4
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 termination of the
consent solicitation period, and (4) to the waiver under the Indenture of formal
notice from the Company to the Trustee with respect to the cancellation of the
Company's sinking fund payment obligations.
IF THE CONSENTS ARE OBTAINED, ALL DEBENTURES WHICH REMAIN UNTENDERED
AND OUTSTANDING AT THE EXPIRATION OF THE OFFER WILL BE ENTITLED TO RECEIVE A
PAYMENT OF $180 PER $1,000 OF PRINCIPAL, PLUS ADDITIONAL INTEREST ACCRUING FROM
AND AFTER JULY 15, 1996 TO THE INTEREST PAYMENT DATE, BUT THE ACCELERATION WILL
HAVE BEEN RESCINDED BY VIRTUE OF SUCH CONSENT AND INTEREST PAYMENT.
The Company shall not accept any Debentures submitted for tender at any
time after 2:00 p.m., St. Paul, Minnesota time on __________, 1996 (the
"Expiration Date") or the business day five business days prior to the Interest
Record Date, as defined below. The Company will pay (concurrently with the
interest payment on all of the Debentures not exchanged in the Exchange Offer)
the Exchange Consideration to the Trustee for the benefit of tendering
Debentureholders, and holders of Senior Debt, and upon the receipt of the
Exchange Consideration by the Trustee, and if at such time such payments to
Debentureholders are permitted by law and only if the Trustee also shall not
have theretofore received a notice of any claim that there has occurred a
prohibited default under, or non-payment of, any Senior Debt, then and in such
case, the payments shall be deemed effectively made as soon as the funds are
held by the Trustee. Thereupon, simultaneously, all Events of Default will be
cured by full payment of interest to every Debentureholder rejecting the
Exchange Offer and waived by every Debentureholder who accepts the Exchange
Offer by tendering and surrendering Debentures in exchange for Exchange
Consideration. The interest due (other than the interest arising only on account
of acceleration) will be paid to all Debentureholders (except as to only the
aforesaid tendered and exchanged Debentures). The scheduled termination date of
the Exchange Offer, subject to extension by the Company, is on or before
__________, 1996 (the "Exchange Date"). The Company also will, at least fifteen
(15) days in advance, notify all Debentureholders of the Exchange Date and
notify the non-tendering Debentureholders of the record date (the "Interest
Record Date") and the date for payment of such interest ("Interest Payment
Date"). Such outstanding (non-exchanged) Debentures will be convertible into
Common Shares at the adjusted Conversion Price then currently in effect (See
"Notice of Conversion Price Adjustments" annexed hereto). The Expiration Date,
Interest Record Date and the Interest Payment Date are subject to extension in
the reasonable discretion of the Company.
The Common Shares have been accepted for listing upon notice of
issuance on the New York Stock Exchange ("NYSE"). On July 1, 1996, the reported
closing price of the Common Shares on the NYSE was $7.50 per share. The Exchange
Consideration includes twenty-four (24) Common Shares. The Company's Common
Shares are described in "Risk Factors," "Other Factors to Consider" and
"Description of the Capital Stock." See "Summary Comparison of Terms of
Debentures and Exchange Consideration."
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will accept for exchange any and all Debentures properly tendered prior
to the Expiration Date, unless the Exchange Offer is extended from time to time
at the option of the Company. Tenders of Debentures may be withdrawn at any time
prior to 2:00 p.m., St. Paul, Minnesota time on the Expiration Date. See "The
Exchange Offer -- Withdrawal Rights." The Company will deliver Exchange
Consideration including certificates representing Common Shares as soon as
practicable following the Expiration Date. PROVIDED, if, under circumstances
then prevailing, financing is unavailable or is available only on terms that are
unacceptable in the Company's reasonable judgment, or if
2
<PAGE> 5
other adverse conditions then exist, the Company may elect not to proceed with
or to effect the Exchange, if the Company reasonably determines that the
Exchange is not in the best interests of the Company, or may amend the Exchange
Offer, including to permit the Company to accept less than all of the Debentures
tendered and to prorate acceptances of the offer among all tendering holders.
An aggregate of $9,538,000 in principal amount ("face value") of
Debentures was outstanding as of June 15, 1996. The Debentures are traded in the
over-the-counter market, although trading in these securities is limited and
sporadic. On July 1, 1996, the reported bid and asked prices of the Debentures
on the over-the-counter market based on information from one or more brokers
were $620 and $640, respectively, per $1,000 original principal amount. The
existence of a bid price does not indicate an actual trading market exists or
will exist.
The entire outstanding principal amount of Debentures, plus interest
and default interest accrued thereon, is currently due and payable pursuant to
acceleration thereof by holders of 25% or more of the outstanding principal
amount. Interest is unpaid on the Debentures from April 15, 1994. As of July 15,
1996, the amount of interest and default interest would be $180.
The Exchange Offer is not conditioned upon any minimum principal amount
of Debentures being tendered for exchange, although the obligation of the
Company to complete the Exchange is subject to the Company's ability to raise
sufficient funds, the rescission of acceleration of the Debentures, the absence
of certain actions or notices by Senior Debt holders, and certain customary
conditions, all as described under "The Exchange Offer -- Conditions of the
Exchange Offer," certain of which may be waived by the Company.
The Exchange Offer is being made by the Company in reliance upon the
exemption from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), afforded by Section 3(a)(9) thereof. The
Company, therefore, will not pay any commission or other remuneration to any
broker, dealer, salesman, or other person for soliciting tenders of the
Debentures. Regular employees of the Company and its subsidiaries, who will not
receive additional compensation therefor, may solicit exchanges from holders of
the Debentures. This Exchange Offer is directed solely to existing
Debentureholders.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Offering Circular. If given or made, the information or representations
should not be relied upon as having been authorized by the Company. The delivery
of this Offering Circular shall not, under any circumstances, imply that the
information herein is correct as of any time subsequent to its date.
This Offering Circular does not constitute an offer to any person in
any jurisdiction in which any such offer would be unlawful, and the Company will
not accept tenders from holders of Debentures in any jurisdiction in which such
acceptance would not be in compliance with applicable securities or blue sky
laws of such jurisdiction.
This Offering Circular describes private unregistered sales of the
Company's Common Stock and convertible debt. Such shares upon issuance are
restricted pursuant to the Securities Act and may not be resold without
registration under the Securities Act or an appropriate exemption. No offer
thereof, express or implied, is made herein.
3
<PAGE> 6
ADDITIONAL INFORMATION
The Trustee of the Debentures is First Trust of California, National
Association, successor to Bank of America National Trust and Savings
Association. The Trustee has also agreed to provide certain services as Exchange
Agent in connection with the Exchange Offer. Holders of Debentures who require
assistance may contact the Company, attention Kerri Ruppert, Senior Vice
President, Secretary and Chief Accounting Officer, at 1111 Bayside Drive, Suite
100, Corona del Mar, California 92625, (800) 678-2273; or by mail to the
Exchange Agent and Trustee, First Trust of California, National Association,
successor to Bank of America National Trust and Savings Association, 180 East
Fifth Street, Suite 200, St. Paul, Minnesota 55101.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at 500 West Madison Street, Chicago, Illinois
60606 and 7 World Trade Center, New York, New York 10048. Copies of such
material can also be obtained from the Public Reference Section of the
Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.
This Offering Circular does not contain all of the information set
forth in the Schedule 13E-4, as the same from time to time may hereafter be
amended, of which this Offering Circular is a part and which the Company has
filed with the Commission. For further information with respect to the Company
and the securities offered hereby, reference is made to the Schedule 13E-4,
including the exhibits filed as a part thereof, copies of which can be inspected
at, or obtained at prescribed rates from, the Public Reference Section of the
Commission at the address set forth above. Additional updating information with
respect to the Company may be provided in the future by means of documents
incorporated by reference herein or other appendices or supplements to this
Offering Circular.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company with the
Commission under the Exchange Act and are incorporated herein by reference:
a. The Company's Annual Report on Form 10-K/A Amendment No. 3 for
the fiscal year ended May 31, 1995 including portions of the
Company's definitive Proxy Statement incorporated therein by
reference;
b. The Company's Quarterly Report on Form 10-Q/A, Amendment No. 2,
for the fiscal quarter ended August 31, 1995;
c. The Company's Quarterly Report on Form 10-Q/A, Amendment No. 1,
for the fiscal quarter ended November 30, 1995;
d. The Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended February 29, 1996; and
4
<PAGE> 7
e. The Company's Current Report on Form 8-K and on Form 8-K/A filed
on or about May 22, 1995 and May 25, 1995 reporting under Item 4
certain descriptions and required information regarding the
disassociation of the Company and Arthur Andersen LLP and the
Company's Form 8-K filed on or about July 5, 1995 reporting under
Item 4 thereof the engagement of Ernst & Young LLP.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date of this Offering Circular,
and prior to the filing of a post-effective amendment which indicates that all
securities offered have been sold or which deregisters all securities then
remaining unsold, shall be deemed to be incorporated by reference in this
Offering Circular and to be part hereof from the date of filing such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Offering Circular to the extent that a statement contained
herein, or in any other subsequently filed document that also is or is deemed to
be incorporated herein by reference, modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Offering Circular.
The Company will provide, without charge, to each person, including any
beneficial owner, to whom this Offering Circular is delivered, upon written or
oral request of such person, a copy of any and all of the information that has
been incorporated by reference herein (other than exhibits to the information
that is incorporated by reference unless such exhibits are specifically
incorporated by reference into the information this Offering Circular
incorporates). Such requests should be directed to Kerri Ruppert, Senior Vice
President, Secretary and Chief Accounting Officer of the Company, at (800)
678-2273.
5
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PURPOSE OF THE EXCHANGE OFFER...................................................... 1
OFFERING SUMMARY................................................................... 1
SUMMARY COMPARISON OF TERMS OF DEBENTURES AND EXCHANGE CONSIDERATION............... 5
PRICE OF SECURITIES PRIOR TO ANNOUNCEMENT.......................................... 7
THE COMPANY........................................................................ 8
FINANCIAL INFORMATION.............................................................. 8
EXCHANGE OFFER FUNDING REQUIREMENTS AND SOURCES.................................... 9
RATIO OF EARNINGS TO FIXED CHARGES................................................. 10
RECENT TRANSACTIONS IN SECURITIES OF THE COMPANY................................... 10
PRICE RANGE OF DEBENTURES.......................................................... 10
THE EXCHANGE OFFER................................................................. 10
TERMS OF THE EXCHANGE OFFER............................................... 10
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS...................... 11
THE DEBENTURE ACCELERATION................................................ 12
PROCEDURES FOR TENDERING.................................................. 13
GUARANTEED DELIVERY PROCEDURE............................................. 14
CONDITIONS OF THE EXCHANGE OFFER.......................................... 15
ACCEPTANCE OF DEBENTURES FOR EXCHANGE; DELIVERY OF EXCHANGE
CONSIDERATION.................................................... 16
WITHDRAWAL RIGHTS......................................................... 16
EXCHANGE AGENT............................................................ 17
PAYMENT OF EXPENSES....................................................... 17
EXCHANGE OF DEBENTURE CERTIFICATES........................................ 18
BOARD OF DIRECTORS' DISCRETION AND RESERVATION OF RIGHTS.................. 18
NO DISSENTER'S RIGHTS..................................................... 18
OTHER FACTORS TO CONSIDER.......................................................... 18
PRICE RANGE OF THE COMMON SHARES.......................................... 18
SHARES ELIGIBLE FOR FUTURE SALE........................................... 20
POTENTIAL FEDERAL INCOME TAX CONSEQUENCES.......................................... 21
EFFECTS ON THE DEBENTUREHOLDERS........................................... 22
EFFECTS ON THE COMPANY.................................................... 22
DESCRIPTION OF CAPITAL STOCK....................................................... 23
COMMON STOCK.............................................................. 23
COMMON STOCK PURCHASE RIGHTS.............................................. 24
REGISTRATION RIGHTS....................................................... 24
COMMON STOCK TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND
REGISTRAR........................................................ 24
PREFERRED STOCK........................................................... 24
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS............................... 25
DESCRIPTION OF DEBENTURES.......................................................... 25
GENERAL................................................................... 25
CONVERSION OF DEBENTURES.................................................. 26
OPTIONAL REDEMPTION....................................................... 27
SINKING FUND.............................................................. 27
SUBORDINATION OF DEBENTURES............................................... 27
EVENTS OF DEFAULT AND REMEDIES............................................ 28
MERGER, CONSOLIDATION, OR SALE OF ASSETS.................................. 29
AMENDMENT, SUPPLEMENT AND WAIVER.......................................... 29
</TABLE>
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<PAGE> 9
<TABLE>
<CAPTION>
<S> <C>
TRANSFER AND EXCHANGE..................................................... 29
CONCERNING THE TRUSTEE.................................................... 29
RISK FACTORS....................................................................... 30
FAILURE TO CONSUMMATE EXCHANGE OFFER...................................... 30
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND
ASSOCIATED RISKS................................................. 31
ABILITY OF THE COMPANY TO CONTINUE AS A GOING CONCERN; EXPLANATORY
PARAGRAPH IN AUDITORS' REPORT.................................... 31
TAXES..................................................................... 31
PRIORITIES OF SECURITIES AND OTHER CONSIDERATIONS RELATING TO ANY
FUTURE BANKRUPTCY OF THE COMPANY................................. 33
RELATIVE PRIORITIES OF DEBT CLAIMS AND EQUITY INTERESTS.......... 33
AVOIDABLE PREFERENCES............................................ 34
POTENTIAL TO BE SUBJECTED TO AUTOMATIC BANKRUPTCY STAY........... 34
PROHIBITIONS ON PAYMENT TO DEBENTUREHOLDERS...................... 37
FRAUDULENT CONVEYANCES........................................... 37
NO FAIRNESS OPINION....................................................... 38
HISTORY OF LOSSES AND ANTICIPATED FUTURE LOSSES; UNCERTAINTY OF
FUTURE PROFITABILITY............................................. 38
CONTINUED LISTING ON NYSE................................................. 38
ADDITIONAL RISK FACTORS WITH RESPECT TO HOLDERS OF DEBENTURES NOT
TENDERED IN THE EXCHANGE OFFER................................... 38
SUBORDINATION.................................................... 38
REDEMPTION; MATURITY............................................. 39
CONVERSION PRICE FAR ABOVE SHARE PRICES.......................... 39
INVOLUNTARY BANKRUPTCY PETITION; ACCELERATION OF
INDEBTEDNESS............................................ 39
SPORADIC TRADING................................................. 39
UNCERTAINTY OF FUTURE FUNDING............................................. 39
DISPOSITION OF ASSETS..................................................... 40
CIRCUMSTANCES RELATED TO CERTAIN FUTURE FILINGS WITH THE SEC.............. 40
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS......................... 41
UNCERTAINTY OF PRICING; HEALTHCARE REFORM AND RELATED MATTERS............. 41
MANAGEMENT OF EXPANSION................................................... 41
MANAGEMENT OF TRANSITION.................................................. 41
PRICE VOLATILITY IN PUBLIC MARKET......................................... 41
INTERESTS OF CERTAIN PERSONS....................................................... 41
PRINCIPAL STOCKHOLDERS............................................................. 42
USE OF PROCEEDS.................................................................... 43
DIVIDEND POLICY.................................................................... 43
PRO FORMA CAPITALIZATION AND INCOME STATEMENT INFORMATION.......................... 43
CHANGES IN ACCOUNTANTS............................................................. 50
</TABLE>
ii
<PAGE> 10
PURPOSE OF THE EXCHANGE OFFER
The Exchange Offer is an integral step in the Company's
recapitalization and offer of compromise to the Debentureholders in order to
eliminate its default status under the Debentures and to enable the Company to
conduct its affairs and business without the overhanging threats of foreclosure
and bankruptcy, and to attempt to increase the value of the Company's Common
Stock for the benefit of all of the stockholders, including those who receive
their shares in the Exchange. Payment of all amounts due under the Debentures
has been accelerated by a group of Debentureholders, and thus approximately $11
million is currently due and payable under the Debentures, subject, however, to,
rescission of the acceleration by holders of a majority in principal amount of
the outstanding Debentures. All other continuing Events of Default must be
appropriately cured or waived prior to the rescission becoming effective.
Concurrently with the Exchange, the Company is soliciting the rescission of
acceleration. Holders of Senior Debt (as defined by the subordination provisions
of the Debentures) or Debentureholders or other creditors may be able to make
claims senior to those of Debentureholders or on a parity therewith. Payments by
the Company in exchange for the Debentures are expected to improve the Company's
financial position. The issuance of Common Shares and payment by the Company in
cash at a discount to the face amount are expected to improve the Company's
balance sheet and financial outlook. If holders of a majority in principal
amount of the outstanding Debentures notify the Trustee of rescission of
acceleration of the Debentures, the Debentures will be reinstated and once again
will mature on April 15, 2010. If the holders of a majority in principal amount
of Debentures outstanding do not give notice of rescission of acceleration of
the Debentures, the Company will then consider its potential options, but has no
present intention to consummate the Exchange or to pay any interest accrued on
the Debentures unless the acceleration is rescinded.
OFFERING SUMMARY
The following is a summary of certain features of the Exchange Offer
and other matters, and all statements contained herein are qualified in their
entirety by reference to the more detailed information included elsewhere in
this Offering Circular.
<TABLE>
<CAPTION>
<S> <C>
THE OFFERING.................................... The Company is offering to exchange the
Exchange Consideration, as defined below,
for each $1,000 principal amount of
outstanding Debentures properly tendered
for exchange and accepted by the Company in
the Exchange Offer. See "The Exchange
Offer--Terms of the Exchange Offer."
EXCHANGE CONSIDERATION.......................... The Company is offering to exchange, for
each $1,000 principal amount of outstanding
Debentures, a principal payment of $500 in
cash plus sixteen (16) shares of Common
Stock and additionally an interest payment
of $80 in cash plus eight (8) shares of
Common Stock. All Debentureholders that
tender Debentures will be deemed to have
waived accrued interest since April 15,
1994 (and interest on default interest
since October 15, 1994) to the extent the
aggregate accrued amount exceeds the
aggregate designated interest payment.
</TABLE>
1
<PAGE> 11
<TABLE>
<CAPTION>
<S> <C>
EFFECTS OF TENDERING
DEBENTURES..................................... Tendering Debentureholders will receive
Exchange Consideration for Debentures and
will waive a portion of the accrued
interest. Debentureholders should receive a
separate proxy statement relating to Notice
of Rescission of Acceleration and an
accompanying consent form to be submitted
by them to the Trustee.
NOTICE OF RESCISSION
OF ACCELERATION................................. As a condition to the Company's obligation
to consummate the Exchange, the
acceleration of the Debentures must be
rescinded. Rescission of acceleration will
have significant effects on tendering
Debentureholders if the tendered Debentures
are not accepted for exchange and on all
non-tendering Debentureholders. See "Risk
Factors."
EXPIRATION DATE................................. 2:00 p.m., St. Paul, Minnesota time, on
__________, 1996, unless extended by the
Company. See "The Exchange Offer--
Expiration Date; Extensions; Termination;
Amendments."
WITHDRAWAL OF TENDERS........................... Tenders of Debentures may be withdrawn at
any time prior to the Expiration Date or at
any time after the Expiration Date, or
__________, 1996, whichever is earlier, if
not theretofore accepted for exchange. See
"The Exchange Offer -- Withdrawal Rights."
ACCEPTANCE OF DEBENTURES........................ The Company will accept for exchange any
and all Debentures which are properly
tendered in the Exchange Offer prior to
2:00 p.m., St. Paul, Minnesota time, on the
Expiration Date, subject to the Company's
ability to extend, amend or terminate the
Exchange. See "The Exchange Offer--
Acceptance of Debentures for Exchange."
CONDITIONS OF THE EXCHANGE
OFFER......................................... The Company's obligation to consummate the
Exchange Offer is not conditioned upon any
minimum principal amount of Debentures
being tendered for exchange. The Exchange
Offer is, however, subject to the Company's
ability to raise sufficient funds to
purchase all of the Debentures that are
properly tendered, the rescission of
acceleration of the Debentures, the prior
payment of any matured Senior Debt and the
absence of legal actions or default notices
by certain Senior Debt holders, as well as
certain customary conditions. Certain of
the conditions may be waived by the
</TABLE>
2
<PAGE> 12
<TABLE>
<CAPTION>
<S> <C>
Company. See "The Exchange Offer--
Conditions of the Exchange Offer."
PROCEDURES FOR TENDERING
DEBENTURES.................................... Each holder of Debentures wishing to accept
the Exchange Offer must complete and sign
the Letter of Transmittal, in accordance
with the instructions contained herein and
therein, and forward or hand deliver such
Letter of Transmittal to the Exchange Agent
at one of the addresses set forth herein
and therein. Any holder of Debentures whose
Debentures are registered in the name of a
broker, dealer, commercial bank, trust
company or nominee is urged to contact such
registered holder promptly if such holder
wishes to accept the Exchange Offer.
Holders whose certificates representing
their Debentures are not immediately
available or who cannot deliver their
certificates or any other required
documents to the Exchange Agent prior to
2:00 p.m., St. Paul, Minnesota time, on the
Expiration Date may tender their Debentures
pursuant to the guaranteed delivery
procedure set forth herein. See "The
Exchange Offer--Procedures for Tendering"
and "--Guaranteed Delivery Procedure."
NOTICES OF RESCISSION
OF ACCELERATION............................... The Company's Debentures have been and are
immediately due and payable. The Company
requests that all Debentureholders submit a
Notice of Rescission of Acceleration to the
Trustee. While the acceleration of
Debentures is continuing, the Trustee can
obtain a judgment against the Company in
the amount of the full face value of the
Debentures, plus interest and default
interest and costs.
SENIOR DEBT..................................... All principal or interest of Senior Debt,
as defined in the Indenture, that has
theretofore matured, by acceleration or
otherwise, must be paid prior to the
Company's making any payment to
Debentureholders. Any Senior Debt holder
who commences any legal proceeding (whether
or not the holder prevails), or gives
notice (whether or not meritorious)
concerning any purported Senior Debt
default that purportedly would permit the
Senior Debt to be accelerated can
effectively prevent or delay payment to
Debentureholders. As of May 31, 1996, the
Company believes that it has approximately
$2.5 million of Senior Debt outstanding and
an additional $8.5 million in the aggregate of
other liabilities with priority over the
Debentures.
</TABLE>
3
<PAGE> 13
<TABLE>
<CAPTION>
<S> <C>
EFFECTS OF THE RESCISSION
OF ACCELERATION............................... Rescission of acceleration may affect the
rights of Debentureholders relative to
other creditors. The Company intends to
consummate the Exchange Offer as promptly
as legally practicable following or
concurrently with the effective rescission
of acceleration.
INTEREST PAID OR PAYABLE TO
OTHER THAN THE TENDERING
RECORD HOLDER................................. Debentureholders intending to tender in the
Exchange Offer must properly tender before
the Expiration Date, as the same may be
extended from time to time at the Company's
sole discretion. If Debentures are tendered
after the Expiration Date by a successor or
transferee of the record holder on the
interest payment date, the tendering
Debentureholder will be offered the
Exchange Consideration minus the interest
paid or payable to the predecessor, unless
the predecessor assigns the interest
payable to the tendering record holder, who
re-assigns the same to the Company on a
form acceptable to the Company and its
legal counsel.
TRADING......................................... The Company's Debentures are traded in the
over-the-counter market; however, trading
is sporadic. The Company's shares of Common
Stock are traded on the New York Stock
Exchange ("NYSE") and the Common Shares
included in the Exchange Consideration have
been approved for listing on the NYSE
subject to notice of issuance.
EXCHANGE AGENT.................................. First Trust of California, N.A., 180 East
Fifth Street, Suite 200, St. Paul,
Minnesota 55101. See "The Exchange Offer --
Exchange Agent."
FURTHER INFORMATION............................. For further information, please contact the
Company, attention Kerri Ruppert, Senior
Vice President, Secretary and Chief
Accounting Officer, at (800) 678-2273 or
First Trust of California, N.A., the
Exchange Agent, at the above address.
</TABLE>
4
<PAGE> 14
SUMMARY COMPARISON OF TERMS OF DEBENTURES AND EXCHANGE CONSIDERATION
<TABLE>
<CAPTION>
THE DEBENTURES EXCHANGE
CONSIDERATION
<S> <C> <C>
PRINCIPAL... While the Debentures are For each $1,000 in principal amount
accelerated, $1,000 of principal exchanged, the Debentureholder will
and interest accrued on the receive $500 in cash plus 16 shares
principal to the date of payment is of Common Stock. As of July 1,
payable, along with interest on 1996, the closing price of the
unpaid interest to the extent Common Stock on the NYSE was $7.50.
lawful is due and payable in cash. The rights of holders of Common
See "Interest" below. If the Stock are junior to the rights of
acceleration is rescinded, the Debentureholders and all other
principal amount will be due in creditors. See "Ranking" below.
full April 15, 2010, subject to
earlier redemption in the Company's
discretion. No sinking fund
payments will be due.
INTEREST.... Interest accrues at the rate of 7 The Exchange Consideration
1/2% per annum calculated on a includes, as interest, for each
30-day month and 360-day year $1,000 in principal amount
basis. Interest has not been paid exchanged, $80 in cash plus 8
since April 15, 1994 on the shares of Common Stock. The accrued
Debentures. Four semi-annual interest will have aggregated $180
interest installments are in to July 15, 1996. No additional
arrears (October 1994, April 1995, payment of Exchange Consideration
October 1995 and April 1996). will be due on account of interest
Debentures earn interest on default accruing or accrued or any other
interest at 7 1/2% per annum, to claim under such Debentures. As of
the extent permitted by law. While July 1, 1996, the reported closing
the Debentures are accelerated, price of the Common Stock on the
interest accrues on the entire NYSE was $7.50.
principal amount. Approximately
$180 of interest in the aggregate
will 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.
</TABLE>
5
<PAGE> 15
<TABLE>
<CAPTION>
<S> <C> <C>
MATURITY.... While the Debentures are Upon the Exchange being completed,
accelerated, all principal and the tendering Debentureholders will
interest is due and payable receive Exchange Consideration, and
immediately. If the acceleration is the Debentures tendered and
rescinded, the principal amount exchanged will be cancelled.
will mature on April 15, 2010, Completion of the Exchange Offer is
optional redemption at 100% of face subject to a high degree of risk.
amount, and also subject to See "Risk Factors."
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.
CONVERSION OR Each $1,000 in principal amount is See "Principal" above.
EXCHANGE.... convertible into 4 whole Common
shares (and the Debentureholder
will not be entitled to convert a
Debenture in a principal amount
less than $1,000) at the current
conversion price of $248.57 per
share. The conversion price is
subject to adjustment to prevent
dilution in certain events. The
conversion price adjustments are
made generally whenever shares are
sold by the Company at a price
below the average closing price on
the NYSE during a specified period.
See "Risk Factors--Conversion Price
Far Above Share Prices." See the
"Notice of Conversion Price
Adjustment" attached as Exhibit
99.18 hereto.
RANKING..... Unsecured general obligations of Payments received in the Exchange
the Company subordinate to all Offer by Debentureholders may be
existing and future Senior Debt of subject to claims of Senior Debt
the Company (as defined). Secured holders or other creditors, and, if
Senior Debt totalled approximately competing creditors prevail in
$2.5 million at May 31, 1996. 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
</TABLE>
6
<PAGE> 16
<TABLE>
<CAPTION>
<S> <C> <C>
of Common Stock received in the
Exchange constitute "equity"
securities, which by their nature
are subordinate to all indebtedness
of the Company.
FORFEITURE.. Payments received generally by Payments received in the Exchange
Debentureholders may be subject to Offer by Debentureholders may be
claims of Senior Debt holders or subject to claims of Senior Debt
other creditors, and, if competing holders, and, if competing
creditors prevail in asserting creditors prevail in asserting
their claims, the payments may be their claims, the Exchange
forfeitable. See "Priorities of Consideration may be forfeitable.
Securities and Other Considerations See "Priorities of Securities and
Relating to Any Future Bankruptcy Other Considerations Relating to
of the Company." Any Future Bankruptcy of the
Company."
REDEMPTION AT Redeemable at any time in whole or No redemption.
OPTION OF THE in part at the option of the
COMPANY..... Company at the principal amount,
together with accrued interest.
</TABLE>
PRICE OF SECURITIES PRIOR TO ANNOUNCEMENT
As of March 2, 1995, the date preceding the public announcement of the
intention to make the Exchange Offer, the bid price for Debentures of $1,000
principal amount was $360. On such date, the closing sales price for the
Company's Common Stock reported on the NYSE Composite tape was $5 3/4. As of
July 1, 1996, the bid and asked prices for the Debentures were $620 and
$640, respectively, as reported by a broker, and the low and high sales prices
for the Company's Common Stock were $7.50 and $7.50, respectively, and the
closing price was $7.50, as reported on the NYSE Composite tape.
7
<PAGE> 17
THE COMPANY
Comprehensive Care Corporation (the "Company") was incorporated in
Delaware in 1969. The Company, directly or through subsidiaries, engages in
providing behavioral health care and substance abuse treatment on a managedcare
or contract basis. The Company owns six freestanding hospital facilities, four
of which are closed and held for sale.
The Company generated losses from its own operations in fiscal 1995 and
relied for its cash requirements on funds generated by its subsidiaries,
principally CareUnit, Inc., a Delaware corporation; the disposition of
freestanding hospital facilities; $2.67 million of equity private placements, a
convertible debt private placement of $2.0 million, a subsidiary's preferred
equity private placement of $1.0 million; and sale of $3.0 million of assets
held for sale. In addition, in fiscal 1996 the Company received cash generated
by a tax refund in the amount of $9.4 million (less certain amounts described
under "Risk Factors--Taxes" below) for the fiscal 1995 tax year, and a sale of a
$1 million Conditionally Exchangeable Secured Note, which was converted into
132,560 shares of the Company's Common Stock on May 31, 1996. The Company's
primary use of available cash resources is to expand its behavioral medicine
managed care and contract management businesses and fund operations while it
seeks to restore profitability to certain of its freestanding facilities.
The Company could be required to rely for cash financing of the
Exchange Offer solely on its cash reserves, potential cash flow generated by
operations, proceeds from any assets disposed of as currently anticipated, and
its available cash.
At June 15, 1996, the Company's outstanding Debentures (originally
issued pursuant to a public offering), aggregated $9,538,000 in outstanding
principal amount. In the first quarter of fiscal 1997, the Company is expecting
to complete the Exchange Offer with respect to the Debentures.
To the extent Debentures are converted into Common Stock of the
Company, the subordinated debt related thereto is retired and some portion of
that amount becomes part of stockholders' equity.
FINANCIAL INFORMATION
The information under the captions "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Consolidated Financial Statements," and "Notes to Consolidated
Financial Statements" included in the Company's Form 10-K/A Amendment No. 3, for
the fiscal year ended May 31, 1995, on pages [18] through [61] thereof, is
incorporated herein by this reference.
The information under the captions "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Risk Factors,"
"Consolidated Unaudited Financial Statements," and "Notes to Consolidated
Unaudited Financial Statements" included on pages 3 through 16 of the
Company's Form 10-Q/A, Amendment No. 2, for the fiscal quarter ended
August 31, 1995; and on pages 3 through 20 of the Company's Form 10-Q/A,
Amendment No. 1, for the fiscal quarter ended November 30, 1995; and on pages
3 through 13 of the Company's Form 10-Q for the fiscal quarter ended
February 29, 1996, are incorporated herein by this reference.
8
<PAGE> 18
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 Consideration. In addition, the Company will require a
maximum of $5,532,040 to pay the cash portion of the Exchange Consideration.
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
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 regular semi-annual interest
installments--(1)interest for the 6 months commencing April 15, 1994 due October
15, 1994, (2) interest for the 6 months commencing October 15, 1994 due April
15, 1995, (3) interest for the 6 months commencing April 15, 1995 due October
15, 1995, and (4) interest for the 6 months commencing October 15, 1995 due
April 15, 1996--plus interest on defaulted interest payments 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.
Debentures that are accepted in the Exchange will become the property
of the Company, along with all rights or claims thereunder, and each
Debentureholder who surrendered the Debenture will immediately become the holder
of a right to receive the Exchange Consideration.
The Company has approximately $3,000,000 in short-term cash equivalent
investments, sufficient to Exchange one-third of the outstanding principal
amount of Debentures and to fully fund the payment of overdue interest to the
other two-thirds of the outstanding principal amount. The Company also
anticipates utilizing one or more of the following potential sources of cash to
provide funds for its additional cash needs that could arise for various reasons
that may include 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 sources of 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
9
<PAGE> 19
Exchange will not occur until after the rescission of acceleration has been
funded fully. See "Risk Factors."
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges
for the Company for the periods indicated. Adjusted Net Earnings represent
consolidated earnings (loss), before provision (benefit) for income taxes, and
the cumulative effect of accounting changes and before fixed charges (excluding
capitalized interest). Fixed charges consist of interest expense, amortized
issuance cost of debt, and a one-third portion of rental expense which is deemed
representative of the interest factor. The Company has no Preferred Stock
outstanding.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MAY 31, FEBRUARY 29, 1996
------------------ -----------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Adjusted
Net Earnings $ (7,274) $ 298 $ (9,029) $ (5,876) $ (9,619) $ (3,176)
Total Fixed Charges $ 7,959 $ 4,392 $ 2,183 $ 1,675 $ 1,734 $ 1,280
Ratio of earnings to
fixed charges (.9):1 .1:1 (4.1):1 (3.5):1 (5.6):1 (2:5):1
</TABLE>
RECENT TRANSACTIONS IN SECURITIES OF THE COMPANY
There have been no transactions in the Debentures by the Company or any
of its executive officers, directors, affiliates or any associate or subsidiary
thereof during the forty (40) business days of the Company immediately preceding
the date of this Offering Circular.
PRICE RANGE OF DEBENTURES
The Debentures are traded in the over-the-counter market; however there
is only sporadic trading. As of July 1, 1996, the reported bid price per $1,000
face amount was $620 and the reported asked price was $640 according to one
broker as based only on information known to the broker. The existence of a
reported price does not imply that an active trading market exists or in the
future will exist. In the event that a substantial portion of the Debentures are
exchanged by the holders thereof, the trading, if any, may become more sporadic.
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions
set forth herein and in the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange the Exchange Consideration for each $1,000 principal
amount of its outstanding Debentures and a waiver of all claims thereunder,
including a waiver of the interest accrued thereon as of the time of a
consummation of the Exchange to the extent such interest will exceed the
designated interest payment included in the Exchange Consideration.
Approximately $1,716,840 of interest and interest on defaulted interest has
accrued to and including July 15, 1996.
The Exchange Consideration is comprised of a principal payment of $500
in cash plus 16 shares of Common Stock and an interest payment of $80 in cash
plus 8 shares of Common Stock. Accrued interest from April 15, 1994, the day
10
<PAGE> 20
to which interest was paid on all Debentures, to the Payment Date will not be
paid on Debentures exchanged, except for the designated interest payment
included in the Exchange Consideration.
Although the Company has no present intention to do so, if it should
modify the consideration offered for the Debentures in the Exchange Offer, such
modified consideration would be paid with regard to all Debentures accepted in
the Exchange Offer. If the consideration is modified, the Exchange Offer will
remain open at least 10 business days from the date the Company first gives
notice, by public announcement or otherwise, of such modification, when required
by law. The modified consideration also may provide for different alternatives
for Debentureholders, provided that the modified consideration would be paid in
regard to all Debentures electing the alternative that was provided for or
modified.
As of June 15, 1996, $9,538,000 in aggregate principal amount of the
Debentures was outstanding. This Offering Circular, together with the Letter of
Transmittal, is being sent to all record holders of the Debentures and is being
forwarded by certain record holders to beneficial holders. The Company is paying
the costs of distribution and printing of this information. The Company will
reimburse costs of transmitting documents.
The Company reserves the right in its sole discretion to purchase or
make offers for any Debentures that remain outstanding subsequent to the
Expiration Date. The terms of any such purchases or offers could differ from the
terms of the Exchange Offer.
Tendering holders of Debentures will not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of Debentures pursuant
to the Exchange Offer. The Company will pay all charges and expenses, other than
certain applicable taxes, in connection with the Exchange Offer.
See "Payment of Expenses" below.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer will expire at 2:00 p.m., St. Paul, Minnesota time,
on __________, 1996, subject to extension by the Company by notice to the
Exchange Agent as herein provided. The Company reserves the right to so extend
the Exchange Offer at its discretion, in which event the term "Expiration Date"
shall mean the time and date on which the Exchange Offer as so extended shall
expire. The Company will notify the Exchange Agent and the Trustee of any
extension by oral or written notice and will make a public announcement thereof,
each prior to 9:00 a.m., St. Paul, Minnesota time, on the next business day
after the previously scheduled Expiration Date.
While it does not foresee doing so, the Company reserves the right (i)
to delay accepting any Debentures for exchange and to extend or to terminate the
Exchange Offer and not accept for exchange any Debentures if any of the events
set forth below under the caption "Conditions of the Exchange Offer" shall have
occurred and shall not have been waived by the Company, by giving oral or
written notice of such delay or termination to the Exchange Agent and the
Trustee or (ii) to amend the terms of the Exchange Offer. Any such delay in
acceptance for exchange, extension, termination or amendment will be followed as
promptly as practicable by public announcement thereof. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendment in a manner reasonably
calculated to inform the holders of such amendment, and the Company will extend
the applicable Exchange Offer for a period of five to 10 business days,
depending upon the significance of the amendment and the manner of disclosure to
holders of the Debentures, if the Exchange Offer would otherwise expire during
such five to 10 business-day period. The rights reserved by the Company in this
paragraph are in addition to the Company's rights set forth below under the
caption "Conditions of the Exchange Offer."
11
<PAGE> 21
THE DEBENTURE ACCELERATION
A group of holders and purported holders of Debentures declared an
acceleration of the principal amount outstanding under the Debentures in the
aggregate amount of $9,538,000 plus interest and default interest, and such
amount became immediately due and payable as of approximately February 10, 1995.
On February 24, 1995, three of such persons filed an involuntary petition in
United States Bankruptcy Court for the Northern District of Texas under Chapter
7 of the U.S. Bankruptcy Code. The petition was dismissed without protest from
the bankruptcy petitioners on March 6, 1995. The representative of this subset
of the Debentureholders agreed and consented to the dismissal of the petition
before any bankruptcy case had commenced against the Company.
Subject to certain limitations, holders of a majority in principal
amount of the outstanding Debentures may direct the Trustee regarding the time,
method and place of exercising any trust or power conferred on it. Therefore, a
majority in interest of the Debentures are entitled to direct the Trustee not to
pursue any remedy that may be requested by less than a majority of
Debentureholders. Their approval of rescission of the acceleration of the
Debentures will be a condition to the Company's offer to exchange any cash or
property (other than capital stock) to Debentureholders.
In order to restore the Debentures to the status before having suffered
Events of Default and acceleration, a majority in principal amount of the
Debentureholders must give notice to rescind the acceleration, and the Company
must cure payment defaults as to any Debentures not tendered in the Exchange
Offer, and the past due interest, along with interest on all overdue
installments of principal and interest, must be paid on non-tendered Debentures.
Debentures tendered in the Exchange Offer will receive Exchange Consideration,
and all payments otherwise due will be waived as to all tendered Debentures
(except as to the designated principal and interest payments included in the
Exchange Consideration) effective upon completion of the Exchange. Upon the cure
or waiver of all Events of Default under the Debentures, assuming a majority in
principal amount has given (and not revoked) notice of rescission of
acceleration, the original terms of the Debentures will be reinstated with all
of the then outstanding principal due April 15, 2010 and interest thereafter
payable semi-annually at the rate of 7 1/2% per annum. The next regular interest
payment, due October 15, 1996, would include interest on the outstanding
principal accruing from April 15, 1996. The Company's future-year sinking fund
obligations will have been effectively extinguished by subtracting a portion of
the principal amount of Debentures converted into Common Stock in 1991.
The Company is a party to a letter agreement dated March 3, 1995 (the
"Letter Agreement") with Mr. Jay H. Lustig, an individual who represented that
he was a representative of certain holders of at least 25% of the outstanding
principal amount of Debentures (therein called the "Participating
Securityholders"). The Letter Agreement provided for the Company offering an
exchange for all of the Debentures that were outstanding and properly tendered
by the Debentureholders, but such proposed exchange offer was not effected. The
Letter Agreement provided that the Company could condition the proposed exchange
offer on at least $2.5 million in principal amount of Debentures being tendered
by Debentureholders represented by Mr. Lustig. Although the Letter Agreement is
not binding upon the Company because of the failure on the part of Mr. Lustig to
perform under the terms thereof, the Exchange is being made by the Company
voluntarily and includes certain of the concepts of the Letter Agreement as a
framework for the proposed Exchange. In a letter dated March 21, 1996 to Mr.
Marvin Feigenbaum, a director of the Company, Mr. Lustig expressed his opinion
that aggregate Exchange Consideration of $580 in cash and 24 shares of Common
Stock would be acceptable to Debentureholders, assuming the Exchange could be
completed by May 1, 1996. To the Company's knowledge, no subsequent
correspondence or other communication has been received from Mr. Lustig. The
Company may modify or terminate the Exchange
12
<PAGE> 22
Offer and pursue alternative transactions, subject to rights of Debentureholders
pursuant to the Indenture.
CONSENT TO MATTERS DESCRIBED IN CONSENT SOLICITATION STATEMENT
Each Debentureholder will be requested, pursuant to a Debenture Consent
Solicitation Statement, to consent to certain specified proposals related to
rescinding the Debenture acceleration in writing (by signing and dating a
consent card and forwarding it to the Trustee). The Company's management and
Board of Directors requests that each Debentureholder execute and return a
consent card. Pursuant to the Indenture, the consent card may itself be revoked
until all of the conditions to rescission of acceleration are met. The Company's
purpose in requesting Debentureholder consent is to complete the Exchange with
every tendering Debentureholder and cure the Event of Default by paying the
default interest to the non-tendering Debentureholders. In order to tender
Debentures, a Debentureholder must also consent as requested by the Board of
Directors and management pursuant to the Debenture Consent Solicitation
Statement.
PROCEDURES FOR TENDERING
The acceptance of the Exchange Offer by a holder of the Debentures
pursuant to one of the procedures set forth below will constitute an agreement
between such holder and the Company in accordance with the terms and subject to
the conditions set forth herein or in the Letter of Transmittal.
To be tendered effectively, the Debentures, in integral multiples of
$1,000, together with the properly completed Letter of Transmittal (or facsimile
thereof), executed by the registered holder thereof, as well as the consent card
and any other documents required by the Letter of Transmittal, must be received
by the Exchange Agent at the address set forth below prior to 2:00 p.m., St.
Paul, Minnesota time, on the Expiration Date, except as otherwise provided below
under the caption "Guaranteed Delivery Procedure." LETTERS OF TRANSMITTAL AND
DEBENTURES SHOULD NOT BE SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Debentures tendered pursuant thereto
are tendered (i) by a registered holder of the Debentures who has not completed
the box entitled "Special Issuance and Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be by a firm
that is a member of a registered national securities exchange or a member of the
NASD or by a commercial bank or trust company having an office in the United
States (an "Eligible Institution").
The method of delivery of Debentures and other documents to the
Exchange Agent is at the election and risk of the holder. If such delivery is by
mail it is suggested that the mailing be made sufficiently in advance of the
Expiration Date to permit delivery to the Exchange Agent before the Expiration
Date.
The Exchange Agent will make a request to establish accounts with
respect to the Debentures at the Depository Trust Company ("DTC"), the Midwest
Securities Transfer Company ("MSTC") and the Philadelphia Depository Trust
Company ("PHILADEP" and, together with DTC and MSTC, collectively referred to
herein as the "Book-Entry Transfer Facilities") for the purpose of the Exchange
Offer promptly after the date of this Offering Circular.
Any financial institution that is a participant in any of the
Book-Entry Transfer Facilities' systems may make book-entry transfer of the
Debentures by causing DTC, MSTC or PHILADEP to transfer such Debentures into the
Exchange Agent's account in accordance with such Book-Entry Transfer Facility's
procedure for such transfer. Although delivery of Debentures may be effected
13
<PAGE> 23
through book-entry transfer in the Exchange Agent's account at DTC, MSTC or
PHILADEP, the Letter of Transmittal (or facsimile thereof), with all required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received or confirmed by the Exchange Agent its addresses set
forth below prior to 2:00 p.m., St. Paul, Minnesota time, on the Expiration
Date, except as provided below under the caption "Guaranteed Delivery
Procedure." DELIVERY OF DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY IN
ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.
If the Letter of Transmittal is signed by a person other than a
registered holder of any certificate(s) listed, such certificate(s) must be
endorsed or accompanied by appropriate bond powers, in either case signed
exactly as the name or names of the registered holder or holders appear on the
certificate(s).
If the Letter of Transmittal or Guaranteed Delivery Form or any
certificates or bond powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing, and, unless waived by the Company, proper evidence satisfactory to the
Company of their authority to so act must be submitted.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Debentures will be resolved by
the Company, whose determination will be final and binding. The Company reserves
the absolute right to reject any or all tenders that are not in proper form or
the acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any irregularities or
conditions of tender as to particular Debentures. The Company's interpretation
of the terms and conditions of the Exchange Offer (including the instructions in
the Letter of Transmittal) will be final and binding. Unless waived, any
irregularities in connection with tenders must be cured within such time as the
Company shall determine. Neither the Company nor the Exchange Agent shall be
under any duty to give notification of defects in such tenders or shall incur
liabilities for failure to give such notification. Tenders of Debentures will
not be deemed to have been made until such irregularities have been cured or
waived.
Any Debentures received by the Exchange Agent that are not properly
tendered and as to which the irregularities have not been cured or waived will
be returned by the Exchange Agent to the tendering holder, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
GUARANTEED DELIVERY PROCEDURE
If a holder of the Debentures desires to tender his Debentures and the
certificate(s) representing such Debentures are not immediately available, or
time will not permit such holder's certificate(s) or any other required
documents to reach the Exchange Agent before 2:00 p.m., St. Paul, Minnesota
time, on the Expiration Date, a tender may be effected if:
(a) The tender is made by or through an Eligible Institution;
(b) Prior to 2:00 p.m., St. Paul, Minnesota time, on the Expiration
Date, the Exchange Agent receives from such Eligible Institution
a properly completed and duly executed Guaranteed Delivery Form
(by facsimile transmission, mail or hand delivery), setting forth
the name and address of the holder of the Debentures and the
principal amount of the Debentures tendered, stating that the
tender is being made thereby and guaranteeing that, within three
trading days after the Expiration Date, the certificate(s)
representing the Debentures, accompanied by a properly completed
and duly executed Letter of Transmittal and any other documents
required by
14
<PAGE> 24
the Letter of Transmittal, will be deposited by the Eligible
Institution with the Exchange Agent; and
(c) The certificate(s) for all tendered Debentures, or a confirmation
of a book-entry transfer of such Debentures into the Exchange
Agent's applicable account at a Book-Entry Transfer Facility as
described above, as well as a properly completed and duly
executed Letter of Transmittal and all other documents required
by the Letter of Transmittal, are received by the Exchange Agent
within three trading days after the Expiration Date.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will
not be required to accept for exchange, or to exchange the Exchange
Consideration for, any Debentures not theretofore accepted for exchange or
exchanged, and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Debentures, if any of the following conditions
exist:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the
Exchange Offer which, in the reasonable judgment of the Company,
if successful could be reasonably considered likely to materially
impair the ability of the Company to proceed with the Exchange
Offer or have a material adverse effect on the contemplated
benefits of the Exchange Offer to the Company; or
(b) there shall have been approved, adopted or enacted any law,
statute, rule or regulation which, in the reasonable judgment of
the Company, if invoked could reasonably be considered likely to
materially impair the ability of the Company to proceed with the
Exchange Offer or have a material adverse effect on the
contemplated benefits of the Exchange Offer to the Company; or
(c) there shall not have occurred a rescission of the acceleration of
the Debentures; or
(d) there shall not have occurred a waiver of other Events of Default
under the Debentures; or
(e) under then prevailing circumstances, financing is unavailable or
is available only on terms that are unacceptable in the Company's
reasonable judgment, or other adverse conditions then exist, and
the Company elects not to proceed with or effect the Exchange,
and the Company reasonably determines that under such
circumstances the Exchange is not in the best interests of the
Company; or
(f) the Company has determined in its reasonable judgment that, in
the best interests of the Company, the Exchange Offer should be
amended to permit it to limit its obligations and accept less
than all of the Debentures tendered and accordingly to prorate
acceptances of the offer among all tendering holders; or
(g) any Senior Debt, as defined in the Indenture, (i) shall have
matured as to principal or interest and remain unpaid, or (ii)
shall entitle the holder to accelerate its maturity if the holder
gives notice of default or commences a proceeding related
thereto, or (iii) shall threaten to interfere with or regarding
payment of the Exchange Consideration to holders of the
Debentures.
The foregoing conditions are for the sole benefit of the Company and
may be asserted by the Company regardless of the circumstances giving rise to
such
15
<PAGE> 25
conditions or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. If the Company waives or amends the
foregoing conditions, the Company will, if required by applicable law, extend
the Exchange Offer for a minimum of five business days from the date that the
Company first gives notice, by public announcement or otherwise, of such waiver
or amendment, if the Exchange Offer would otherwise expire within such five
business-day period. Any determination by the Company concerning the events
described above will be final and binding upon all parties.
ACCEPTANCE OF DEBENTURES FOR EXCHANGE; DELIVERY OF EXCHANGE CONSIDERATION
Tenders will be accepted only in principal amounts of $1,000 and
integral multiples thereof.
Upon the terms and subject to the conditions of the Exchange Offer,
promptly after the Expiration Date the Company will accept all Debentures
validly tendered and not withdrawn. The Company will deliver the Exchange
Consideration in exchange for Debentures on or prior to the Payment Date.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted validly tendered Debentures when, as and if the Company has given oral
or written notice thereof to the Exchange Agent. The Exchange Agent will act as
agent for the tendering holder of Debentures for the purposes of receiving
Exchange Consideration from the Company. Under no circumstances will interest be
paid by the Company by reason of any delay in making such payment or delivery.
If any tendered Debentures are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Debentures will be returned,
without expense, to the tendering holder thereof (or, in the case of Debentures
tendered by book-entry transfer, to an account maintained at such Book-Entry
Transfer Facility), as promptly as practicable after the expiration or
termination of the Exchange Offer.
WITHDRAWAL RIGHTS
Any registered holder of Debentures who has tendered Debentures may
withdraw the tender at any time prior to 2:00 p.m., St. Paul, Minnesota time, on
the Expiration Date, and, unless previously accepted for exchange by the
Company, after 2:00 p.m., St. Paul, Minnesota time, on the day following the
Payment Date, by delivery of written notice of withdrawal to the Exchange Agent.
To be effective, a written, telegraphic, telex or facsimile
transmission notice of withdrawal must (a) be timely received by the Exchange
Agent at the address set forth herein, (b) specify the name of the person having
tendered the Debentures to be withdrawn, (c) indicate the Debentures to which it
relates (or if the tender was by book-entry transfer, information sufficient to
enable the Exchange Agent to identify the Debentures so tendered) and the
aggregate principal amount of Debentures to be withdrawn and (d) be (i) signed
by the holder in the same manner as the original signature on the Letter of
Transmittal (including a guarantee of signature, if required) or (ii)
accompanied by evidence satisfactory to the Company that the holder withdrawing
such tender has succeeded to beneficial ownership of such Debentures. If
certificates have been delivered or otherwise identified to the Exchange Agent,
the name of the registered holder and the serial numbers of the particular
certificate(s) evidencing the Debentures withdrawn must also be so furnished to
the Exchange Agent as aforesaid prior to the physical release of the
certificates for the withdrawn Debentures. If Debentures have been tendered
pursuant to the procedures for book-entry transfer as set forth herein, any
notice of withdrawal must also specify the name and number of the account at
DTC, MSTC or PHILADEP to be credited with the withdrawn Debentures. Withdrawals
of tenders of Debentures may not be rescinded, and any Debentures
16
<PAGE> 26
withdrawn will thereafter be deemed not validly tendered for purposes of the
Exchange Offer; provided, however, that withdrawn Debentures may be re-tendered
by again following one of the procedures described herein at any time prior to
2:00 p.m., St. Paul, Minnesota time, on the Expiration Date.
All questions as to the validity (including time of receipt) of notices
of withdrawal will be determined by the Company, whose determination will be
final and binding. None of the Company, the Exchange Agent nor any other person
will be under any duty to give notification of any defects or irregularities in
any notice of withdrawal or incur any liability for failure to give any such
notification.
EXCHANGE AGENT
First Trust of California, the Trustee, has been appointed as Exchange
Agent for the Exchange Offer. Debentures, Letters of Transmittal, and any other
required documents thereunder, should be sent to the Exchange Agent, at the
addresses set forth on the back cover hereof.
The Exchange Agent will in turn requisition Common Share certificates
from Continental Stock Transfer & Trust Company (the "Common Stock
Registrar").
Requests for additional copies of this Offering Circular or the Letter
of Transmittal or for additional information should be directed to Kerri
Ruppert, Senior Vice President, Chief Accounting Officer and
Secretary/Treasurer of the Company, at (800) 678-2273.
LETTERS OF TRANSMITTAL AND DEBENTURES SHOULD NOT BE SENT TO THE
COMPANY.
PAYMENT OF EXPENSES
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the Exchange Offer. The Company,
however, will pay the Trustee, in its capacity as such and for services as the
Exchange Agent, and the Common Stock Registrar reasonable and customary fees for
its respective services and will reimburse it for reasonable out-of-pocket
expenses in connection therewith. The Company will also pay brokerage houses and
other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Offering Circular and related
documents to the beneficial owners of the Debentures, and in handling or
forwarding tenders for their customers to the Exchange Agent.
The cash expenses to be incurred in connection with the Exchange Offer,
including the fees and expenses of the Exchange Agent and the Common Stock
Registrar and printing, accounting and legal fees, will be paid by the Company
and are estimated at $0.2 million.
The Company will pay all transfer taxes, if any, applicable to the
transfer and sale of Debentures to it or its order pursuant to the Exchange
Offer. If, however, the Exchange Consideration and/or substitute Debentures for
principal amounts not exchanged are to be delivered or paid to, or are to be
registered or issued in the name of, any person other than the registered holder
of the Debentures tendered hereby, or if tendered certificates are registered in
the name of any person other than the person signing the Letter of Transmittal,
or if a transfer tax is imposed for any reason other than the transfer and sale
of Debentures to the Company or its order pursuant to the Exchange Offer, the
amount of any such transfer taxes (whether imposed on the registered holder or
any other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption
17
<PAGE> 27
therefrom is not submitted herewith, the amount of such transfer taxes will be
billed directly to such tendering holder.
EXCHANGE OF DEBENTURE CERTIFICATES
The Exchange Agent will act for holders of Debentures in implementing
the Exchange of their Debenture certificates. Do not send Debenture certificates
until requested pursuant to the Company's Offering Circular and Letter of
Transmittal, which will be mailed to each Debentureholder registered in the
Trustee's register of holders, including sufficient copies for the
redistribution to each beneficial owner thereof. The Company reimburses brokers
and nominees for the costs of mailing or other customary commercial delivery
charges or fees.
BOARD OF DIRECTORS' DISCRETION AND RESERVATION OF RIGHTS
The Board of Directors reserves the rights, notwithstanding
Debentureholders' approval and without further action by the Debentureholders,
to elect not to proceed with any of the proposed actions in connection with the
Exchange Offer, if at any time prior to the Company's completion thereof the
Board of Directors, in its sole and reasonable discretion, determines that the
proposed action is no longer in the best interests of the Company after
considering advice of an investment banker and such other information or advice
as the Board deems relevant.
Under each of the four Proposals described in the Debenture Consent
Solicitation Statement, the Board reserves the right to delay or defer any
occurrence, action, event or record date, upon notice, for purposes of allowing
the consent solicitation period to remain open for any legally required period
or periods of time, subject to the restrictions on such rights that exist under
laws, rules or decisions.
The Board of Directors also retains the authority to take or to
authorize discretionary incidental actions as may be necessary and appropriate
to carry out the purposes and intentions of the four Proposals.
NO DISSENTER'S RIGHTS
Under Delaware law, Debentureholders are not entitled to dissenter's
rights of appraisal with respect to the Exchange Offer. The rights of
Debentureholders include the right to sue on the obligation. The
Debentureholders are referred to the Indenture for a complete statement of such
rights.
OTHER FACTORS TO CONSIDER
PRICE RANGE OF THE COMMON SHARES
The Common Shares are traded on the NYSE. See paragraph (d), below.
Listing on the NYSE, upon official notice of issuance, of the Common Shares
issuable in the Exchange has been approved as to 152,860 of the total 228,812
Common Shares that are the maximum issuable in the Exchange. Listing on the
NYSE, upon official notice of issuance, has been approved as to the
approximately 38,152 shares of Common Stock that are the maximum issuable upon
conversion of all outstanding Debentures. The following table sets forth the
range of reported high and low prices on the NYSE Composite Tape for the Common
Shares for the fiscal quarters indicated.
<TABLE>
<CAPTION>
1994 HIGH LOW
---- ---- ---
<S> <C> <C>
First Quarter............................... $11 1/4 $ 6 1/4
Second Quarter.............................. 8 3/4 6 1/4
Third Quarter............................... 12 1/2 5
Fourth Quarter.............................. 8 3/4 5
</TABLE>
18
<PAGE> 28
<TABLE>
<CAPTION>
<S> <C> <C>
1995
----
First Quarter............................... $ 8 3/4 $2 1/2
Second Quarter.............................. 7 3/4 5
Third Quarter............................... 9 3/8 5 1/4
Fourth Quarter.............................. 8 3/4 5
1996
----
First Quarter............................... $ 9 1/2 $ 5 3/4
Second Quarter.............................. 10 7 3/4
Third Quarter............................... 10 3/4 8
Fourth Quarter.............................. 10 7 1/4
</TABLE>
On July 1, 1996, the closing sales price per share of the Common Shares as
reported on the NYSE Composite Tape was $7.50.
(a) At May 31, 1996, there were 2,848,685 issued and outstanding
shares of Common Stock (calculated as described in paragraph (c)
below), and the Company had 1,794 stockholders of record of
Common Stock. These included 559 record holders who have
exchanged their old stock certificates pursuant to the reverse
stock split and 1,235 holders who have not yet surrendered old
certificates representing approximately 45,050 shares of Common
Stock (and nominally representing 450,505 shares of old Common
Stock, par value $.10 per share, which entitle the holder to a
certificate representing one share of Common Stock for every 10
old shares surrendered, plus a payment of cash in lieu of any
resultant fraction of a share of Common Stock).
(b) No cash dividend was declared during any quarter of fiscal 1996,
1995, 1994 or 1993, as a result of the Company's operating losses
and restrictions contained in the Company's loan agreements. The
Company does not expect to resume payment of cash dividends in
the foreseeable future. Dividend payments are restricted also,
while the acceleration of the Debentures continues, by the
Indenture.
(c) On May 16, 1994, the stockholders of the Company authorized and
approved an amendment to the Company's Certificate of
Incorporation to effect a reverse stock split. The stockholders
also approved amendments to the Certificate of Incorporation
reducing the par value of the Company's Common Stock to $.01 per
share and reducing the number of authorized shares of Common
Stock to five times the number of shares outstanding, reserved or
otherwise committed for future issuance but not less than 12.5
million. The reverse stock split was authorized to be in any
ratio selected by the Board of Directors; and all of the actions
were to become effective on any date selected by the Board of
Directors, provided that the actions were completed prior to
February 16, 1995.
Pursuant to the May 16, 1994 approval, the Board of Directors
effected a one-for-ten reverse stock split effective October 21,
1994. On the effective date of the reverse stock split, the
Certificate of Incorporation was amended to effect the reverse
split, to change the par value of the Common Stock to $.01 per
share and to reduce the number of authorized shares of Common
Stock to 12.5 million. Pursuant to the amendment, the old Common
Stock was converted into a right to receive, upon surrender of
ten old shares, one new share of Common Stock, and to receive
payment in lieu of fractions of a share of new Common Stock. The
share figures contained in this statement reflect the effect of
the reverse stock split, which would be to reduce the number of
shares set forth by a factor of ten, with each stockholder's
19
<PAGE> 29
proportionate ownership interest remaining constant, subject to
payment in cash in lieu of fractional shares (at the rate of $.75
per one-tenth of one share) and escheat laws applicable to
unclaimed new stock certificates. The number of shares
outstanding as reported herein includes an estimate of the whole
shares of the Company's Common Stock, par value $.01 per share,
represented by old stock certificates nominally representing
shares of the Company's Common Stock, par value $.10 per share,
issued before the effective time of the October 21, 1994
one-for-ten reverse stock split.
(d) In October 1994, the NYSE notified the Company that it was below
certain quantitative and qualitative listing criteria in regard
to continued listing of the Common Stock for trading on the NYSE.
Continued listing of the Common Stock for trading on the NYSE is
dependent upon factors including the improvement of the Company's
financial condition and results of operations as well as the
level of activity and breadth of the trading in the shares. No
assurance is possible of continued NYSE listing. No assurances
can be given by the Company, whether or not the Exchange is
effected, of the Company's ability to improve its financial
position sufficiently, or that if improved, such financial
position can be maintained, so as to satisfy the listing criteria
once again and in the future. The NYSE may, in its discretion,
delist the Common Stock. See "Risk Factors - Continued Listing on
NYSE."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public
market could adversely affect prevailing market prices and the liquidity of an
investment in the Common Stock. Lower public market prices may also adversely
affect the Company's ability to raise additional capital in the capital markets
at prices favorable to the Company. The Company has issued or committed
approximately 700,000 shares, notes convertible or exchangeable into
approximately 400,000 shares, and options or other rights to purchase
approximately 600,000 and contemplates issuing substantial additional amounts of
equity in private transactions, including approximately 1,100,000 shares in
currently contemplated acquisitions or placements. Issuance of this equity, and
such shares becoming free of restrictions on resale pursuant to Rule 144 or upon
registration thereof pursuant to registration rights granted on almost all of
these shares, and additional sales of equity, could adversely affect the trading
price of the Common Stock. These shares will be restricted under the Securities
Act of 1933, as amended (the "Securities Act"), because the shares were acquired
from the Company, an underwriter or an "affiliate" of the Company in a
transaction not involving a public offering.
The foregoing outstanding shares would be "restricted securities" as
defined in Rule 144 under the Securities Act ("Restricted Shares"). Restricted
Shares will become eligible for sale (subject to the volume limitation and other
provisions of Rule 144 as then in effect) in the public market after certain
holding periods are met. Moreover, certain shares could immediately cease to be
Restricted Shares if registered by the Company, at its expense, under the
Securities Act upon demand by any or all of the holders pursuant to the
Company's previously granted registration rights.
The Company has filed Forms S-8 under the Securities Act to register up
to 870,000 shares of Common Stock, and intends to file registration statements
on Form S-8 to register 520,000 additional shares of Common Stock authorized by
the stockholders on November 14, 1994 to be reserved for issuance under its 1988
Incentive Stock Option Plan ("ISO Plan") and 1988 Nonqualified Stock Option Plan
("NSO Plan"), Non-Employee Directors' Stock Option Plan (as amended and
restated, "Directors' Plan"), and 1995 Incentive Plan ("Incentive
20
<PAGE> 30
Plan") which would permit the immediate resale of any shares issued under these
plans in the public market without restriction under the Securities Act.
Although there can be no assurances that the Company will be able to
register shares for purposes of a public offering under the Securities Act, in
the event that there is an opportunity to do so, the Company may sell
substantial amounts of shares for its own account and may register shares held
or purchasable by others, which may further adversely affect the market price of
the Common Stock. Issuance of shares sold in a public offering for cash does not
require stockholder approval pursuant to the NYSE Shareholder Approval Policy.
<TABLE>
<CAPTION>
When Restrictions Shares Eligible
Lapse for Future Sale Comment
----- --------------- -------
<S> <C> <C>
Upon the Exchange Up to approximately 228,912 shares Freely tradeable in compliance
of Common Stock that may be with Section 3(a)(9) under the
exchanged as a portion of the Securities Act and assuming
Exchange Consideration for the Debentures were freely
Debentures tradeable by their respective
holders
Upon filing registration Up to approximately 1,250,000 Freely tradeable
statements on Form S-8 shares of Common Stock issuable
under the 1988 ISO Plan, the 1988
NSO Plan, the Directors' Plan,
or the 1995 Incentive Plan
Upon effectiveness of a Up to approximately [1,011,295] Freely tradeable
public offering shares held by or issuable to
holders with registration rights
When Restricted Shares All Restricted Shares Saleable under Rule 144,
have been held for two subject to certain numeric
years or more restrictions
When Restricted Shares All Restricted Shares held by Saleable under Rule 144(k) by
have been held three non-affiliates non-affiliates without numeric
years or more restriction
</TABLE>
POTENTIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion, 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 of 1986, as amended
(the "Code"), existing and proposed regulations thereunder, and current
administrative rulings and court decisions. All of the foregoing are subject to
change, which change may be retroactive, and any such change could affect the
continuing validity of this discussion.
The Company is not requesting a tax opinion or a tax ruling from the
Internal Revenue Service ("IRS") on any issue connected with the Exchange. No
assurance can be given that the IRS would agree with any of the tax
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<PAGE> 31
consequences described herein. EACH DEBENTUREHOLDER IS URGED TO SEEK HIS, HER OR
ITS OWN TAX ADVICE. All Debentureholders are urged to consult their own tax
advisors concerning the federal, state, local and foreign tax consequences of
the Exchange to them in their particular circumstances.
EFFECTS ON THE DEBENTUREHOLDERS
The transaction is taxable for federal income tax purposes, and tax
would be due in the year of the Exchange. The Exchange Consideration specifies
an amount as interest which is less than the actual interest accrued through the
date of the Exchange. The specified interest should be respected as interest for
federal income tax purposes. The accrual or receipt of interest results in
ordinary income. Accrual basis taxpayers should consult their tax advisors
regarding accrued but unpaid interest. Assuming that the Debentures are held as
a capital asset, the Exchange will result in capital gain or loss to the extent
of the difference between (a) the fair market value as of the date of the
Exchange of the Common Shares plus the amount of cash received by the
Debentureholder as Exchange Consideration (excluding any portion treated as
interest for federal income tax purposes) and (b) the Debentureholder's tax
basis in such Debentures. In the event a Debentureholder acquired Debentures
with "Market Discount," the gain recognized on the transaction will be treated
as ordinary income to the extent that the gain does not exceed the accrued
Market Discount on the Debentures. Market Discount is defined as the excess of a
debt instrument's stated redemption price at maturity over its basis immediately
after its acquisition. Such ordinary income (if any) should be treated as
interest by the Debentureholders.
Unless a Debentureholder provides its correct taxpayer identification
number to the Company and certifies that such number is correct, generally under
the federal income tax backup withholding rules an amount equal to 31% of the
fair market value of the Exchange Consideration must be withheld and remitted to
the IRS. Therefore each Debentureholder should complete and sign the Substitute
Form W-9 included in the Letter of Transmittal, so as to provide the information
and certification necessary to avoid backup withholding. However, corporations
and certain other Debentureholders are not subject to these backup withholding
and reporting requirements. Withholding is not an additional federal income tax.
Rather, the federal income tax liability of a person subject to withholding will
be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained from the IRS. EFFECTS ON THE
COMPANY
In connection with the Exchange Offer, the Company will realize gross
income from the discharge of indebtedness ("DOD Income") to the extent that the
adjusted issue price of the Debentures exceeds the cash (excluding any portion
of the cash treated as interest for federal income tax purposes) and the fair
market value of the Common Shares exchanged for the Debentures in the Exchange
Offer. Such DOD Income will be excluded from taxable income to the extent that
the Company is considered to be insolvent immediately before the Exchange Offer
occurs (the "Insolvency Exclusion"). The Company would be considered insolvent
for purposes of the Insolvency Exclusion to the extent that its liabilities
exceed the fair market value of its assets immediately before the Exchange. The
exclusion of DOD Income based on the Insolvency Exclusion is limited to the
amount of such excess. Section 108(b) of the Code requires the Company to reduce
certain tax attributes (including net operating loss carryovers unless an
election is made to reduce only the adjusted tax basis of depreciable assets) to
the extent of income excluded under the Insolvency Exclusion.
If the Insolvency Exclusion does not apply to the Company, any net
operating losses ("NOLs") of the Company (see discussion below) are available to
offset DOD Income based on certain assumptions made by the Company that it
considers to be reasonable (including, but not limited to, the assumption that
22
<PAGE> 32
the Company did not have a net unrealized built-in loss at the time the Exchange
Offer is completed and the assumption that the Company's actual net operating
losses will be in excess of the DOD Income, as discussed below). The Company
believes that it will not recognize any DOD Income in excess of available NOLs
as a consequence of the Exchange Offer. The amount of DOD Income would depend in
part upon the deemed issue price of the Common Shares, which would equal the
fair market value thereof on the date the Exchange Offer is completed.
Section 382 of the Code provides rules limiting the utilization of a
corporation's NOL carryovers following a more than 50% change in ownership of a
corporation's equity by 5% shareholders and certain segregated public groups (an
"ownership change"). Upon the occurrence of an ownership change, the amount of
post-ownership change annual taxable income of the Company and its affiliated
subsidiaries (the "Company Group") that can be offset by the Company Group's
pre-ownership change consolidated NOL carryovers generally cannot exceed an
amount equal to the product of (i) the fair market value of the Company's stock
immediately before the ownership change (subject to various adjustments)
multiplied by (ii) the highest federal long-term tax-exempt rate in effect for
any month in the three-calendar-month period ending with the calendar month of
the ownership change (the "Annual Limitation"). In addition, in the event that
the Company Group has a net unrealized built-in loss at the time of the
ownership change, the deduction of certain built-in losses recognized during the
five-year recognition period following the date of the ownership change will be
subject to the Annual Limitation. In the event of multiple ownership changes,
the applicable Annual Limitation for preownership change NOLs may result in a
lower Annual Limitation.
The Company has a NOL carryover into fiscal and tax year 1996 of
approximately $11.5 million. All of such NOLs may be limited by Section 382 of
the Code (as described above) as a consequence of the occurrence of one or more
ownership changes. The Company believes that, as of the start of fiscal 1996 and
before this Exchange Offer, such NOLs were not subject to an Annual Limitation
on their utilization.
As a consequence of the Exchange and other financial restructuring,
there is a substantial risk that the Company will incur an ownership change (as
defined above). In the event that an ownership change occurs, it is likely that
the Annual Limitation will materially reduce the amount of annual taxable income
that can be offset with NOLs. At June 28, 1996, the federal long-term tax-exempt
rate was 5.75%.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 12,500,000
shares of Common Stock, $.01 par value per share (the "Common Stock"), and
60,000 shares of Preferred Stock, $50.00 par value per share.
COMMON STOCK
At May 31, 1996, there were 2,848,685 issued and outstanding shares of
Common Stock, and the Company had 1,794 holders of record of Common Stock. These
included 1,235 record holders of certificates nominally representing 450,505
shares of old Common Stock, par value $.10 per share, which represent one share
of Common Stock for every 10 old shares, plus a payment of cash in lieu of any
resultant fraction of a share of Common Stock at the rate of $.75 per old share.
Holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. The Company's Restated Certificate
of Incorporation grants the Board of Directors express authority to fix the
designations, powers, preferences, rights, qualifications, limitations,
restrictions, dividend rates, and, if any, the redemption rights, liquidation
rights, sinking fund provisions, conversion rights and voting
23
<PAGE> 33
rights of any future series of Preferred Stock which may be issued. Thus, the
Board of Directors may create one or more series of Preferred Stock which may
adversely affect the holders of shares of Common Stock. Subject to preferences
that may be applicable to the holders of outstanding shares of Preferred Stock,
if any, the holders of Common Stock are entitled to receive such lawful
dividends as may be declared by the Board of Directors. In the event of
liquidation, dissolution or winding up of the Company, and subject to the rights
of the holders of outstanding shares of Preferred Stock, if any, the holders of
shares of Common Stock shall be entitled to receive pro rata all of the
remaining assets of the Company available for distribution to its stockholders.
The holders of Common Stock are entitled to cumulative voting rights in the
election of directors, and one vote per share in all other matters. There are no
redemption or sinking fund provisions applicable to the Common Stock. There are
no preemptive or conversion rights applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
Common Shares to be issued pursuant to this offering shall be fully paid and
nonassessable.
See "Other Factors to Consider -- Price Range of the Common Shares."
COMMON STOCK PURCHASE RIGHTS
On the terms, and subject to the conditions, of the Restated and
Amended Rights Agreement dated April 19, 1988, as restated and amended on
October 21, 1994, between the Company and Continental Stock Transfer & Trust
Company, each share of Common Stock includes a right to purchase an additional
share of Common Stock or shares of any acquiring company at a formula price
generally less than the prevailing price thereof in certain defined events, such
as an acquisition by a third party of a substantial portion of the shares of
Common Stock, unless in each such case the transaction is approved by the Board
of Directors excluding any directors that are affiliated with the acquiring
person.
<ST,,,0><SS,6><QL>
REGISTRATION RIGHTS
The Company has granted registration rights to certain private
investors. The private placement agreements all provide for demand registration
by the investors and other incidental registration rights. If registration
rights are exercised, any substantial number of shares that are registered at
one time would be likely to have an adverse effect on the market price of the
Common Stock. See "Other Factors to Consider--Shares Eligible for Future Sale."
The Company has not been able to comply with registration provisions, which
could result in claims against the Company for any monetary damages suffered by
the investors.
COMMON STOCK TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The stock transfer agent, dividend disbursing agent and registrar for
the Company's Common Stock is Continental Stock Transfer & Trust Company.
PREFERRED STOCK
No shares of Preferred Stock are outstanding. The Board of Directors
has the authority, without further action by the stockholders, to issue the
shares of Preferred Stock in one or more series and to fix the rights,
preferences and privileges thereof, including voting rights, terms of
redemption, redemption prices, liquidation preferences, number of shares
constituting any series or the designation of such series, without further vote
or action by the stockholders. The Board of Directors, without stockholder
approval, could issue Preferred Stock with voting and conversion rights which
could adversely affect the voting power of the holders of Common Stock.
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<PAGE> 34
These provisions may be deemed to have a potential anti-takeover effect
and the issuance of Preferred Stock in accordance with such provisions may delay
or prevent a change of control of the Company.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law and anti-takeover law. In general, the statute prohibits
a publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless
either (i) prior to the date at which the person becomes an interested
stockholder, the Board of directors approves such transaction or business
combination, (ii) the stockholder acquires more than 85% of the outstanding
voting stock of the corporation (excluding shares held by directors who are
officers or held in certain employee stock plans) upon consummation of such
transaction, or (iii) the business combination is approved by the Board of
Directors and by two-thirds of the outstanding voting stock of the corporation
(excluding shares held by the interested stockholder) at a meeting of
stockholders (and not by written consent). A "business combination" includes a
merger, asset sale or other transaction resulting in a financial benefit to such
interested stockholder. For purposes of Section 203, "interested stockholder" is
a person who, together with affiliates and associates, owns (or within three
years prior, did own) 15% or more of the corporation's voting stock.
The Company's Restated Certificate of Incorporation includes a
provision that allows the Board of Directors to issue Preferred Stock in one or
more series with such voting rights and other provisions as the Board of
Directors may determine. This provision may be deemed to have a potential
anti-takeover effect and the issuance of Preferred Stock in accordance with such
provisions may delay or prevent a change of control of the Company. See
"Preferred Stock."
DESCRIPTION OF DEBENTURES
An aggregate of $46,000,000 principal amount, at a price of 100% of
face amount plus accrued interest, of the Company's Debentures were issued under
the Indenture between the Company and the Trustee. At June 15, 1996, $9,538,000
in principal amount remained outstanding.
The terms of the Debentures include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of 1939
(the "1939 Act") as in effect on the date of the Indenture. The Debentures are
subject to all such terms, and persons interested in such terms are referred to
the Indenture and the 1939 Act for a statement thereof. This summary makes use
of terms defined in the Indenture and does not purport to be complete, and is
qualified in its entirety by references to the Indenture and the 1939 Act. All
references to "Section," "Article" or "Paragraph" in this section refer to the
applicable Section or Article of the Indenture or the applicable Paragraph in
the form of Debenture included in the Indenture, as the case may be.
GENERAL
The Debentures represent general unsecured obligations of the Company,
subordinate in right of payment to certain other obligations of the Company as
described below under "Subordination of Debentures." The Debentures are
convertible into the Company's Common Stock as described below under "Conversion
of Debentures." The Debentures are issued in fully registered form
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<PAGE> 35
only in denominations of $1,000 or any whole multiple thereof, and will mature
on April 15, 2010. The Debentures are traded in the over-the-counter market.
The Company pays interest on the Debentures at the rate of 7 1/2% per
annum to the persons who are registered holders of Debentures at the close of
business on the April 1 or October 1 next preceding the interest payment date.
Interest is payable semi-annually on April 15 and October 15 of each year.
Interest is computed on the basis of a 360-day year of twelve 30-day months. The
Company may pay principal and interest by its check and may mail interest checks
to a holder's registered address. Principal and premium, if any, will be
payable, and the Debentures may be presented for conversion, registration or
transfer and exchange, without service charge, at the office of the Trustee in
Los Angeles, California.
CONVERSION OF DEBENTURES
The holder of any Debenture will be entitled at any time prior to the
close of business on April 15, 2010, subject to prior redemption, to convert the
Debentures or portions thereof which are $1,000 or whole multiples thereof, at
the principal amount thereof, into shares of Common Stock of the Company, at the
adjusted conversion price of $248.57 per share, subject to further adjustment as
described below. On each semi-annual interest payment date, interest will be
paid to the registered holder as of the record date for payment. Debentures that
are surrendered for conversion after the record date for the payment of interest
would receive the interest payable. (Paragraph 2) No other payment or adjustment
will be made on conversion of any Debenture for interest accrued thereon or
dividends on any Common Stock issued. (Section 10.02) The Company will not issue
fractional shares of Common Stock upon conversion of Debentures and, in lieu
thereof, will pay a cash adjustment based upon the market price of the Common
Stock on the last business day prior to the date of conversion. (Section 10.03
and Paragraph 8) In the case of Debentures called for redemption, conversion
rights will expire at the close of business on the redemption date. (Section
3.03 and Paragraph 8)
The conversion price, which, as adjusted, was $248.57 per share as of
May 31, 1996, is subject to adjustment as set forth in the Indenture in certain
events, including: the issuance of stock of the Company as a dividend or
distribution on the Common Stock; subdivisions and combinations of the Common
Stock; the issuance of stock of the Company upon certain reclassifications of
its Common Stock; the issuance to all holders of Common Stock of certain rights
or warrants entitling them to subscribe for Common Stock at less than the
current market price (as defined); the distribution to all holders of Common
Stock of debt securities or assets of the Company or rights or warrants to
purchase assets or securities of the Company (excluding cash dividends or
distributions paid out of current or retained earnings); the issuance of shares
of Common Stock (with certain exceptions) for less consideration than the
current market price; and the issuance of securities convertible into or
exchangeable for shares of Common Stock (other than pursuant to transactions
described above and with certain exceptions) for a consideration per share of
Common Stock deliverable on such conversion or exchange that is less than the
current market price of the Common Stock. No adjustment in the conversion price
will be required unless such adjustment would require a change of at least 1% in
the price then in effect; but any adjustment that would otherwise be required to
be made shall be carried forward and taken into account in any subsequent
adjustment. No adjustment need be made for rights to purchase Common Stock
pursuant to a Company dividend or interest reinvestment plan. In addition, no
adjustment need be made if holders of Debentures are to participate in such
transactions on a basis and with notice that has been determined to be fair and
appropriate in light of the basis and notice on which holders of Common Stock
participate in the transaction. The Company may at any time reduce the
conversion price by any amount, provided that any such reduction must be
effective for a minimum period of 15 days. If the Company consolidates or merges
into or transfers or leases all or substantially all of its assets to any
person, the Debentures will become convertible into the kind and amount of
securities, cash or other
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<PAGE> 36
assets which the holders of the Debentures would have owned immediately after
the transaction if the holders had converted the Debentures immediately before
the effective date of the transaction. (Sections 10.06-10.18)
If the Company makes a distribution resulting in an adjustment to the
conversion price and such adjustment is considered to result in an increase in
the proportionate interests of the holders of the Debentures in the assets or
earnings and profits of the Company, holders of the Debentures may be viewed as
receiving a "deemed distribution" that is taxable as a dividend under Sections
301 and 305 of the Code.
OPTIONAL REDEMPTION
The Company may, at its option, redeem all or part of the Debentures,
on at least 15 days' but not more than 60 days' notice to each holder of
Debentures to be redeemed at the holder's registered address, at the redemption
price (expressed as a percentage of principal amount) of 100%, plus accrued
interest to the redemption date.
SINKING FUND
The Company is required to redeem, through operation of a sinking fund,
5% of the aggregate principal amount of Debentures on April 15, 1996, and on
each April 15 thereafter through April 15, 2009, at a redemption price of 100%
of principal amount thereof, plus accrued interest to the redemption date. 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)
SUBORDINATION OF DEBENTURES
The payment of the principal of, premium, if any, and interest on the
Debentures is subordinated in right of payment, as set forth in the Indenture,
to the prior payment in full of all Senior Debt, as defined in the Indenture,
whether outstanding on the date of the Indenture or thereafter created,
incurred, assumed or guaranteed. Upon (i) the maturity of Senior Debt, including
by acceleration or otherwise, or (ii) any distribution of the assets of the
Company upon any dissolution, winding up, liquidation or reorganization of the
Company, the holders of Senior Debt will be entitled to receive payment in full
before the holders of Debentures are entitled to receive any payment.
(Sections 11.03-11.04)
"Senior Debt" means all defined Debt (present or future) created,
incurred, assumed or guaranteed by the Company (and all renewals, extensions or
refundings thereof), unless the instrument governing such Debt expressly
provides that such Debt is not senior or superior in right of payment to the
Debentures. The principal amount of Senior Debt at May 31, 1996 was estimated at
$2.5 million.
"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
27
<PAGE> 37
appear as a liability upon a balance sheet of the Company in accordance with
generally accepted accounting principles. (Section 11.02)
In addition, the claims of third parties to the assets of the Company's
subsidiaries incurring such obligations will be superior to those of the Company
as a stockholder, and, therefore, the Debentures may be deemed to be effectively
subordinated to the claims of such third parties. Certain substantial operations
of the Company are conducted through such subsidiaries, and the Debentures are
effectively subordinated to repayment of the Company's liabilities arising from
those operations. The Indenture does not limit the amount of additional
indebtedness, including Senior Debt, which the Company or any subsidiary can
create, incur, assume or guarantee. As a result of these subordination
provisions, in the event of insolvency, holders of the Debentures may recover
less ratably than other creditors of the Company or its subsidiaries.
EVENTS OF DEFAULT AND REMEDIES
An Event of Default is: default for 30 days in payment of interest on
the Debentures; default in payment when due of principal and premium, if any, on
the Debentures; failure by the Company for 30 days after notice to comply with
any of its other agreements in the Indenture or the Debentures; and certain
events of bankruptcy or insolvency. (Section 6.01)
If any Event of Default occurs and is continuing, the Trustee by notice
to the Company, or the holders of at least 25% in the principal amount of the
Debentures then outstanding by notice to the Company and the Trustee, can
accelerate the Debentures and declare all principal and interest under the
Debentures to be due and payable immediately, except that in the case of an
Event of Default arising from certain events of bankruptcy or insolvency, and
subject to applicable law, all outstanding Debentures become due and payable
without further action or notice. (Section 6.02)
If an Event of Default occurs and is continuing, the Trustee may pursue
any available remedy to collect the payment of principal or interest on the
Debentures or to enforce the performance of any provision of the Indenture or
the Debentures. A delay or omission by the Trustee or any Debentureholder in
exercising any right or remedy shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. (Section 6.03)
Holders of the Debentures may not enforce the Indenture or the
Debentures except as provided in the Indenture. A holder of Debentures may
enforce a remedy with respect to the Indenture or the Debentures only if the
holder gives notice to the Trustee of a continuing Event of Default, the holders
of at least 25% in principal amount of then outstanding Debentures make a
request to the Trustee to pursue the remedy, such holders offer to the Trustee
an indemnity satisfactory to the Trustee against loss, liability or expense, the
Trustee does not comply with the request within 60 days after receipt of the
request and the offer of indemnity, and during such 60-day period the holders of
a majority in principal amount of then outstanding Debentures do not give the
Trustee a direction inconsistent with the request. (Section 6.06) Subject to
certain limitations, holders of a majority in principal amount of the then
outstanding Debentures may direct the Trustee regarding the time, method and
place of exercising any trust or power conferred on it. (Section 6.05)
The Trustee is required, within 90 days after the occurrence of any
default which is known to the Trustee and continuing, to give the holders of the
Debentures notice of such default. The Trustee may withhold from holders of the
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
28
<PAGE> 38
of Default, a statement specifying such Default or Event of Default.
(Section 4.03)
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Company may not consolidate or merge into, or transfer all or
substantially all of its assets to, another corporation, person or entity unless
(i) the successor is a United States corporation, (ii) it assumes all the
obligations of the Company under the Debentures and the Indenture, and (iii)
after such transaction no Default or Event of Default exists.
(Article 5)
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the Indenture or the Debentures may be
amended or supplemented with the consent of the holders of at least two-thirds
in principal amount of the then outstanding Debentures, and any existing default
or compliance with any provision may be waived with the consent of the holders
of at least two-thirds in principal amount of the then outstanding Debentures.
(Sections 9.02 and 6.04) Without the consent of any holder of the Debentures,
the Company and the Trustee may amend or supplement the Indenture or the
Debentures to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Debentures in addition to or in place of certificated Debentures,
to provide for the assumption of the Company's obligations to holders of the
Debentures in the case of a merger or acquisition, or to make any change that
does not adversely affect the rights of any holder of the Debentures. (Section
9.01 and Paragraph 12) Without the consent of each Debenture holder affected,
the Company may not reduce the principal amount of Debentures, reduce the rate
or change the interest payment time of any Debenture; reduce the principal of or
change the fixed maturity of any Debenture; make any Debenture payable in money
other than stated in the Debenture; make any change in the provisions concerning
waiver of Defaults or Events of Default by holders of the Debentures or rights
of holders to receive payment of principal or interest; or make any change that
adversely affects conversion rights or certain subordination rights. (Section
9.02)
TRANSFER AND EXCHANGE
A holder may transfer or exchange Debentures in accordance with the
Indenture. The Registrar may require a holder, among other things, to furnish
appropriate endorsements and transfer documents, and to pay any taxes and fees
required by law or permitted by the Indenture. The Registrar is not required to
transfer or exchange any Debenture selected for redemption. Also, the Registrar
is not required to transfer or exchange any Debenture for a period of 15 days
before a selection of Debentures to be redeemed. (Section 2.06 and Paragraph 10)
The registered holder of a Debenture may be treated as the owner of it
for all purposes.
CONCERNING THE TRUSTEE
The Trustee acts as Conversion Agent, Paying Agent and Registrar.
(Section 12.10)
The Indenture contains certain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee is permitted to engage in other
transactions; however, if it acquires any conflicting interest (as defined) it
must eliminate such conflict or resign. (Article 7)
The holders of a majority in principal amount of the then outstanding
Debentures will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee.
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The Indenture provides that in case an Event of Default shall occur (which shall
not be cured), the Trustee is required, in the exercise of its power, to use the
degree of care of a prudent man in the conduct of his own affairs. The Trustee
is under no obligation to exercise any of its rights or powers under the
Indenture at the request of any of the holders of the Debentures, unless they
shall have offered to the Trustee security and indemnity satisfactory to it.
(Section 7.01)
RISK FACTORS
In addition to the other information set forth in this Offering
Circular, the following factors should be considered carefully:
FAILURE TO CONSUMMATE EXCHANGE OFFER
If the Exchange Offer is not consummated, the Company does not
anticipate that it will likely be able to address the acceleration of
Debentures. The Debentureholders may file an involuntary petition to commence a
Chapter 7 liquidation.
The Company believes that any protracted bankruptcy case would have
material adverse effects on the Company possibly including:
(a) disruption of business activities by diverting the attention of
the Company's senior management to the bankruptcy case or
resultant disputes, and eventually terminations, of its contracts
with third parties;
(b) potential for substantial diminution in the value of the
Company's assets and its revenues, earnings and cash flow;
(c) potential adverse impact upon the ability of the Company to
obtain the financing necessary for its future operations;
(d) substantial increase in the cost of restructuring the Company,
including the increase in the expenses of professionals normally
associated with a bankruptcy case commenced without prior
agreement with the Company's major creditors;
(e) uncertainty as to the ability of the Company to effectuate any
such restructuring and, if it is effectuated, the timing thereof;
(f) interference and delay regarding payments to holders of
Debentures and risks associated with subordinated unsecured debt;
(g) potential for forced liquidation of some of the Company's assets
at substantially reduced values and the resulting loss to
creditors and others; and
(h) increased uncertainty and suspicions among the Company's
employees and vendors.
In addition, the Company believes that, because of the importance of
continuing stable relations with medical and health professionals and other
service and goods providers in the behavioral treatment industry, the Company is
particularly susceptible to any adverse reactions these highly sought after
constituencies may have to the filing of a bankruptcy petition affecting the
Company.
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IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Offering Circular contains certain forward-looking statements that
are based on current expectations and involve a number of risks and
uncertainties. Factors that may materially affect revenues, expenses and
operating results include, without limitation, the Company's success in (i)
implementing its "global restructuring" plans, (ii) resolving issues with its
former auditors and timely filing documents with the Securities and Exchange
Commission that may be requisite to the consummation of the private placement
and debenture exchange transactions described above, (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 IRS and certain judgments from
adverse parties in the legal proceedings described above, (vi) maintaining the
listing of the Company's Common Stock on the NYSE, (vii) securing any requisite
stockholder and debentureholder approval and consent, as the case may be, to the
transactions described above, 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 Exchange
Offer or otherwise reach a settlement with the debentureholders, that
competitive conditions within the healthcare industry will not change materially
or adversely, that the Company will retain existing key management personnel,
that the Company's forecasts will accurately anticipate market demand for its
services, and that there will be no material adverse change in the Company's
operations or business. Assumptions relating to the foregoing involve judgments
that are difficult to predict accurately and are subject to many factors that
can materially affect results. Budgeting and other management decisions are
subjective in many respects and thus susceptible to interpretations and periodic
revisions based on actual experience and business developments, the impact of
which may cause the Company to alter its budgets, which may in turn affect the
Company's results. In light of the factors that can materially affect the
forward-looking information included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.
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.
TAXES
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
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for fiscal year 1995. Therefore, assurances cannot be made 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 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 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 NOLs may be subject to limitation in
the event that the Company issues or agrees to issue substantial amounts of
additional equity (see "Potential Federal Income Tax Consequences - Effects on
the Company"). The Company monitors the potential for "change of ownership" and
believes that the presently contemplated private placements of stock and the
recent exchange of an outstanding promissory note for shares of stock will not
cause a "change of ownership;" however, no assurances can be made that future
events will not act to limit the Company's tax benefits.
The Company had a carryover of $11.5 million of NOLs into fiscal 1996.
In the event that the Company's tax refunds (as described above) are disallowed,
the disallowed amount of carrybacks of specified liability losses would be
recharacterized as NOLs. The resultant NOLs could increase the NOLs aggregately
to approximately $61.5 million. In the event that a substantial portion of the
$50 million aggregate tax deductions forming the basis for the Company's tax
refund claims shall have been reclassified as NOLs, a change of ownership (as
defined above) would likely have the effect of disallowing the use of a
substantial portion of the Company's NOLs by the Company under any circumstances
during the limited carryover periods applicable thereto.
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In addition, the Company may be unable to utilize some or all of its
allowable tax deductions or losses, which depends upon factors including the
availability of sufficient net income from which to deduct such losses during
limited carryback and carryover periods.
PRIORITIES OF SECURITIES AND OTHER CONSIDERATIONS RELATING TO ANY FUTURE
BANKRUPTCY OF THE COMPANY
Implementation of the Exchange Offer will have significant consequences
for the holders of the Company's debt and equity securities in the event of any
future bankruptcy of the Company. Certain of these consequences are summarized
below. Holders of debt and equity securities are encouraged to seek the advice
of their own counsel or advisors with respect to such matters.
RELATIVE PRIORITIES OF DEBT CLAIMS AND EQUITY INTERESTS
The relative rankings of the Company's debt claims and equity
interests as of July ___, 1996, both before and after giving effect to the
Exchange for all of the outstanding Debentures (without reflecting any other
transactions), are summarized in the following table. The relative priority of
claims of holders of Debentures who do not tender such Debentures pursuant to
the Exchange Offer may worsen because new debt or convertible securities,
whether secured or unsecured, may, in each case, rank senior to the Debentures.
In the event that the Company incurs additional indebtedness that is senior to
the Debentures, the position of the Debentures relative to the new senior
indebtedness will worsen. The relative priority of claims of holders of
Debentures who tender them for acceptance by the Company, to the extent that
such holders receive and retain cash, would improve in position relative to
other creditors; to the extent that they exchange their Debentures for Common
Stock, their relative position may worsen because all secured and unsecured debt
ranks ahead of equity.
<TABLE>
<CAPTION>
Priority Pre-Restructuring Post-Restructuring
- ---------------------------------------------------------------------------------------------------------------
Type and Amount Type and Amount
Outstanding Outstanding
<S> <C> <C>
Secured Debt (a)
Parent 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............................ Various Creditors Various 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."
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<PAGE> 43
(b) All "unsecured debt" ranks ahead of all "equity." Debentures rank pari
passu in right of payment with all "unsecured debt," which would
include trade payables and other general creditors of the Company
(except for debts which are, by their terms, subordinated to
indebtedness owed under the Debentures). The term pari passu means that
such securities rank at the same level of priority for distributions in
liquidation and/or bankruptcy, absent other bankruptcy considerations.
(c) Preferred Stock has priority over Common Stock in right of payment of
dividends and in any distribution upon the liquidation, dissolution or
winding up of the Company. Preferred Stock may be issued with rights
determined by the Board of Directors from time to time.
AVOIDABLE PREFERENCES
If a case were to be commenced by or against the Company under the
Bankruptcy Code following the consummation of the Exchange Offer, a bankruptcy
trustee or the Company, as debtor in possession, could avoid as a preference any
transfer of property made by the Company to or for the benefit of a creditor
which was made on account of an antecedent debt if such transfer (i) was made
within 90 days prior to the date of the commencement of the bankruptcy case or,
if the creditor is found to have been an "insider" (as defined in the Bankruptcy
Code), within one year prior to the date of commencement of the bankruptcy case;
(ii) was made when the Company was insolvent; and (iii) permitted the creditor
to receive more than it would have received in a liquidation under Chapter 7 of
the Bankruptcy Code had the transfer not been made. Under the Bankruptcy Code, a
debtor is presumed to be insolvent during the 90 days preceding the date of
commencement of a bankruptcy case. To overcome this presumption, it would need
to be shown that at the time the transfers were made, the sum of the Company's
debts was less than the fair market value of all of its assets.
Under the Bankruptcy Code, all or a portion of the property
transferred, including any cash payments, to tendering holders of Debentures, as
well as any subsequent payment to non-tendering holders of Debentures, could be
found to constitute preferences if a bankruptcy case were commenced within the
applicable time period following such payments and if the other elements
discussed above are present. If, following the commencement of a bankruptcy case
within the applicable time period, such transfers were found to be preferential
transfers, transferees could be ordered to return the full value of such
transfers. In such event, transferees would have a general unsecured claim in
the Company's bankruptcy case equal to the value of the property returned.
POTENTIAL TO BE SUBJECTED TO AUTOMATIC BANKRUPTCY STAY
In the event that the Company does not retire the Debentures or rescind
the acceleration, a majority of Debentureholders by principal amount can request
the Trustee to seek any remedies for non-payment, including potentially the
filing of a bankruptcy petition. The filing of a petition would not affect the
relative priority of creditors. Senior creditors may also file such a petition,
or institute other actions against the Company, in order to enforce the
subordination provisions of the Indenture that prevent the Debentureholders from
collecting on their debts in advance of payment to any senior creditors.
A bankruptcy debtor could, after an involuntary petition is filed, seek
voluntary protection under Chapter 11. Chapter 11 is the principal
reorganization chapter of the Bankruptcy Code. Pursuant to Chapter 11, a
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<PAGE> 44
debtor in possession attempts to reorganize its business for the benefit of the
debtor, its creditors, and other parties-in-interest.
If the acceleration of principal and interest under the Debentures is
not rescinded and the Debentureholders or the Trustee pursue remedies for
collection of the aggregate of principal and interest due on all outstanding
Debentures, it may result in the Company, as its only viable alternative,
commencing a bankruptcy case.
Involuntary bankruptcy petitions do not result in an immediate Event of
Default and acceleration under the Debentures. During the period beforehand, the
Company would, absent a contrary bankruptcy court order, continue to manage its
own assets, and may incur additional debtor obligations. A voluntary petition,
or the order for relief under an involuntary petition as described above, does
result in an Event of Default and an acceleration under the terms of the
Indenture. A Chapter 11 petition is treated like a voluntary petition under the
Indenture.
The filing of a Chapter 11 petition also triggers the automatic stay
provisions of the Bankruptcy Code. Section 362 of the Bankruptcy Code provides,
among other things, for an automatic stay of all attempts to collect
pre-petition claims from the debtor or otherwise interfere with its property or
business. Except as otherwise ordered by the bankruptcy court, the automatic
stay remains in full force and effect until confirmation of a plan of
reorganization.
There is a substantial risk that the bankruptcy case will be protracted
and costly and disruptive to the Company's business and there can be no
assurance that a plan favorable to Debentureholders will be proposed and
confirmed. The Company believes that any protracted bankruptcy case would have a
material adverse effect on the Company including:
(a) disruption of business activities by diverting the attention of
the Company's senior management;
(b) potential for substantial diminution in the value of the
Company's assets;
(c) potential adverse impact upon the ability of the Company to
obtain the financing necessary for its future operations;
(d) substantial increase in the cost of restructuring the Company,
including the increase in the expenses of professionals normally
associated with a bankruptcy case commenced without prior
agreement with the Company's major creditors;
(e) uncertainty as to the ability of the Company to effectuate any
such restructuring and, if it is effectuated, the timing thereof;
(f) interference and delay regarding payments to holders of
Debentures and other creditors;
(g) potential for forced liquidation of some of the Company's assets
at substantially reduced values and the resulting loss to
creditors and others; and
(h) increased uncertainty among the Company's employees, business
partners and associates.
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In addition, the Company believes that, because of the importance of
continuing stable relations with the health care industry, the Company is
particularly susceptible to any adverse reactions such constituencies may have
to the filing of a bankruptcy petition, particularly if the bankruptcy case is
long in duration. As a result, and for other reasons, any commencement of a
bankruptcy case could adversely affect the Company's business operations.
To determine what holders in each impaired class of creditors would
receive if the Company were liquidated or the least they can receive in a
Chapter 11 reorganization, one must determine the dollar amount that would
be generated from the liquidation of the Company's assets and properties
in the context of a Chapter 7 liquidation case. Secured claims and the
costs and expenses of the liquidation case would be paid in full from the
liquidation proceeds before the balance of those proceeds would be made
available to pay pre-petition unsecured claims and interests.
Under Chapter 7, absent subordination in accordance with Section 510 of
the Bankruptcy Code, the rule of absolute priority of distribution would apply.
Under that rule, no junior creditor would receive any distribution until the
allowed claims of all senior creditors are paid in full, and no holder of an
Interest would receive any distribution until the allowed claims of all
creditors are paid in full.
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<PAGE> 46
The Company has not performed any analysis of its reorganization or
liquidation values and has not obtained an independent valuation of the
Company's assets or liabilities and there can be no assurance that the Company
would receive in liquidation the value for its assets set forth in the Company's
financial statements. The Company's financial statements do not include any
adjustments to reflect possible future effects on the recoverability and
classification of assets and liabilities that may result from the outcome of
this uncertainty as to its ability to continue as a going concern.
PROHIBITIONS ON PAYMENT TO DEBENTUREHOLDERS
The payment of cash or property (other than capital stock of the
Company) would be prohibited, and the Company does not intend to make such
payment, if there exists at such time any law, rule or order which would be
violated by such payment or a law that would under the circumstances existing at
the time be violated by such payment. The Company cannot determine at this time
whether the payment to Debentureholders will be permitted by law. Certain of the
laws affecting the Company's ability to make such payments are described
elsewhere herein.
FRAUDULENT CONVEYANCES
If a court in a lawsuit by or on behalf of an unpaid creditor or a
representative of creditors, such as a bankruptcy trustee, or the Company, as
debtor in possession, were to find that, at the time of consummation of the
Exchange Offer (a) the Company received less than reasonably equivalent value in
exchange for the consideration given by the Company for property surrendered by
the tendering holders of Debentures, and (b) the Company (i) was insolvent or
was rendered insolvent as a result of such transfers, (ii) had unreasonably
small remaining assets or capital for its business, or (iii) intended to incur,
or believed or reasonably should have believed it would incur, debts beyond its
ability to pay such debts as they become due, then such court could determine
that all or a portion of such transfers were avoidable as a "constructive"
fraudulent transfer and require the transferees to return to the Company or its
bankruptcy trustee the consideration given. The Company believes that, because
of the reduction in the Company's outstanding indebtedness that will result from
each of the other exchanges or transfers described above, a bankruptcy court
should find that the Company received reasonably equivalent value for the
consideration given by the Company. There can be no assurance, however, that a
bankruptcy court would make such a determination.
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NO FAIRNESS OPINION
The Company has not advised Debentureholders on the value of the
Debentures that would be surrendered in the Exchange because, among other
reasons, the Company has not obtained a fairness opinion from any investment
banking firm or an appraisal or any other investigation of the fairness to
Debentureholders from a financial point of view, of the Exchange Consideration.
HISTORY OF LOSSES AND ANTICIPATED FUTURE LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY
As of 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 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 "Taxes" above) and
the loss from operations for the three months ended February 29, 1996 was $1.8
million. The Company believes that the increasing role of HMO's, reduced
benefits from employers and indemnity companies, and a shifting to outpatient
programs continue to impact utilization of its facilities and services.
There can be no assurance that the Company will be able to achieve
profitability and positive cash flows from operations or that profitability and
positive cash flow from operations, if achieved, can be sustained on an ongoing
basis. Moreover, if achieved, the level of that profitability or that positive
cash flow cannot accurately be predicted.
CONTINUED LISTING ON NYSE
In October 1994, the New York Stock Exchange ("NYSE") notified the
Company that it was below certain quantitative and qualitative listing criteria
in regard to net tangible assets available to common stock and three year
average net income among other items. The Listing and Compliance Committee of
the NYSE has determined to monitor the Company's progress toward returning to
continuing listing standards. Management anticipates success in "global
restructuring" (see Note 2 to the Company's Condensed Consolidated Financial
Statements filed with its Quarterly Report on Form 10-Q for the quarter ended
February 29, 1996, incorporated herein by reference) will be necessary in order
to satisfy the Committee of the Company's progress. The Company met with
representatives of the NYSE during the third quarter of fiscal 1995 and during
the first and fourth quarters of fiscal 1996, to discuss the Company's financial
condition and intention to issue shares without seeking approval of shareholders
pursuant to the exception to the NYSE policy for financially distressed
companies.
ADDITIONAL RISK FACTORS WITH RESPECT TO HOLDERS OF DEBENTURES NOT TENDERED IN
THE EXCHANGE OFFER
SUBORDINATION
The Debentures represent the subordinated indebtedness of the Company.
The Company may incur indebtedness that is senior to the Debentures in unlimited
amounts. The Debentures are general unsecured obligations exclusively of the
Company. Since a substantial portion of the Company's and its consolidated
subsidiaries' business is conducted through certain of such subsidiaries, the
cash flow and consequent ability of the Company to satisfy its indebtedness to
Debentureholders are dependent, in part, upon the earnings of such subsidiaries
and a distribution of those earnings to the Company. The Company's subsidiaries
are distinct legal entities and have no obligation, contingent or otherwise, to
make any payment on the Debentures or to make funds therefor available. Any
rights of the Company to receive assets of any subsidiary (and the consequent
right of Debentureholders to possibly benefit from participating therein) in any
liquidation or reorganization of the subsidiary will be effectively subordinated
to the creditors of the subsidiary
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<PAGE> 48
(including trade creditors) in any liquidation or reorganization of the
subsidiary.
REDEMPTION; MATURITY
The Indenture permits the Company, at its election, to redeem the
Debentures at 100% of the original principal amount (the "face value") at any
time before maturity. The original maturity date of the Debentures was April 15,
2010. Provided that the acceleration of Debentures is effectively rescinded, the
maturity date will once again become April 15, 2010, subject to any future
conditions affecting maturity. The Company may determine whether or not to
redeem Debentures based on interest rates that prevail at future times or other
economic factors as they affect the Company's interests. See "Description of
Debentures."
CONVERSION PRICE FAR ABOVE SHARE PRICES
The Debentures are convertible into Common Stock at a price so far in
excess of the current market price of Common Stock as to be unattractive to
Debentureholders in today's market.
INVOLUNTARY BANKRUPTCY PETITION; ACCELERATION OF INDEBTEDNESS
Despite the dismissal on March 6, 1995 of the involuntary bankruptcy
petition filed against the Company on February 24, 1995 by or on behalf of three
Debentureholders, no assurance may be made that such or other persons whom the
Company owes any debt could not file another involuntary petition in bankruptcy
court. The Company's 7 1/2% Convertible Subordinated Debentures continue to be
in default, including the payment default involving interest accruing from April
1994 on approximately $9.5 million of outstanding face amount, and interest on
all overdue installments, and the Debentures continue to be accelerated, and
immediately payable in full. To rescind the acceleration of the Debentures would
require written consent of a majority of the Debentures and the cure of all
existing defaults. No assurances can be made that the holders of Debentures will
consent to rescission of the acceleration or that the defaults can be cured. The
Company's ability to solicit consent of Debentureholders may be subject to Rule
14a under the Exchange Act, which may require that the Company provide audited
and unaudited financial information to holders. Debentureholders who filed the
earlier involuntary petition on February 24, 1995 may file another such
petition. Other creditors may also file such a petition, or institute other
actions against the Company, in order to prevent the Debentureholders from
collecting on their debts in advance of payment to themselves.
SPORADIC TRADING
The Debentures are not listed on any securities exchange or quoted on
NASDAQ. The trading, if any, in the Debentures is limited and sporadic.
Presently there are fewer than 50 registered holders of Debentures. Because the
Debentures may be, after consummation of the Exchange Offer, held by a more
limited number of registered holders, the trading market will become even more
limited. These events are likely to have an adverse effect on the overall
liquidity and market value of the Debentures.
UNCERTAINTY OF FUTURE FUNDING
The Company's negative cash flow from operations has consumed
substantial amounts of cash. Also, the retiring of Debentures, which the Company
has agreed to use its best efforts to do, will require substantial amounts of
cash. Issuance of additional equity securities by the Company could result in
substantial dilution to then-existing stockholders. In the event of a failure to
meet these obligations on a timely basis, the Company may become liable for the
entire $9,538,000 principal amount plus accrued interest, and
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interest on default interest, from April 15, 1994, estimated at approximately
$1,716,840 at July 15, 1996.
During fiscal 1995 and 1996, a principal source of liquidity has been
the private sale of debt securities convertible into equity. Under the
shareholder policies of the NYSE, the Company may not be able to effect further
sales of equity without shareholder approval, which, if not obtained, may
adversely affect the Company with respect to future capital formation.
DISPOSITION OF ASSETS
The Company has been required to dispose of various properties in order
to raise working capital, and no assurance can be made that such dispositions
will not have adverse effects on the Company's financial condition and results
of operations or that the Company has sufficient additional assets that could be
disposed of in order to fund its current or future capital requirements.
A $2.0 million secured promissory note has been issued by the Company,
the collateral for which constitutes two of the four remaining free standing
facilities of the Company.
In connection with the March 3, 1995 Letter Agreement with Mr. Lustig,
the Company conditionally agreed to pledge all of the shares of its CareUnit,
Inc. subsidiary. The Letter Agreement provided that "At 150 days after the date
of this Agreement, provided that the Participating Securityholders have in each
material respect performed (with opportunity to cure if a cure is possible)
their obligations required to be performed hereunder on or prior to such date,
and if the Offer has not then been consummated, the Company shall pledge (with
the Trustee, or an alternate acceptable to the Company, to act as pledgeholder
on terms of a written agreement containing standard terms reasonably acceptable
to the Participating Securityholders) all of the Shares as collateral for its
obligation to purchase the Securities pursuant to the Offer or otherwise." No
pledge of the CareUnit shares is contemplated by the Company in the currently
proposed Exchange Offer, because, in the Company's view, the particular
provision of the Letter Agreement related thereto is not binding upon the
Company because of the failure on the part of the other parties thereto to
perform under the conditions thereof. However, the Company is using certain
concepts from the Letter Agreement as a framework for the proposed Exchange
described in this Offering Circular.
CIRCUMSTANCES RELATED TO CERTAIN FUTURE FILINGS WITH THE SEC
The consents of Arthur Andersen LLP ("Andersen"), the Company's former
auditors, will be a prerequisite for the inclusion of its audit reports for the
1993 or 1994 fiscal years in various SEC reports or registration statements. As
indicated by Andersen in its letter addressed to the SEC, Andersen intends to
conduct a due diligence review in order to ascertain whether it believes that
its report could be reissued without modifications, or what modifications of its
report and qualifications or uncertainties therein would be necessary. The
Company can give no assurance that Andersen will issue its consent in any
particular case. The consent of Andersen to use such reports, or in lieu thereof
reports of another auditor (requiring another complete audit of such periods),
will be necessary in order to, among other things, complete the filings related
to the Exchange Offer or to file registration statements to register shares of
Common Stock under the Securities Act. In addition, pursuant to the NYSE
Shareholder Approval Policy, the Company may be required to solicit shareholder
approval for the issuance of additional shares of Common Stock, and such
solicitation may require a proxy statement that includes financial statements
and auditors' consents. See "Changes in Accountants."
40
<PAGE> 50
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS
The Company's ability to succeed in increasing revenues may depend in
part on the extent to which reimbursement of the cost of the treatment provided
by the Company will be available from government health administration
authorities, private health insurers and other organizations. Third-party payors
are increasingly challenging the price of medical products and services. As a
result of reimbursement changes and competitive pressures, the contractual
obligations of the Company have been subject to intense evaluation.
UNCERTAINTY OF PRICING; HEALTHCARE REFORM AND RELATED MATTERS
The levels of revenues and profitability of healthcare companies may be
affected by the continuing efforts of governmental and third party payors to
contain or reduce the costs of healthcare through various means. In the United
States, there have been, and the Company expects that there will continue to be,
a number of federal and state proposals to implement governmental controls on
the price of healthcare. It is uncertain what legislative proposals will be
adopted or what actions federal, state or private payors for healthcare goods
and services may take in response to any healthcare reform proposals or
legislation. The Company cannot predict the effect healthcare reforms may have
on its business, and assurances cannot be made that any such reforms will not
have material adverse effects on the Company.
MANAGEMENT OF EXPANSION
The Company's anticipated growth and expansion into areas and
activities requiring additional medical and administrative expertise, such as
behavioral medicine managed care, are expected to place increased demands on the
Company's resources. These demands are expected to require the retention of some
or all of current management and the addition of new management personnel and
the development of additional expertise by some or all existing and new
management personnel. The failure to retain or acquire such services or to
develop such expertise could have a material adverse effect on the prospects for
the Company's success.
MANAGEMENT OF TRANSITION
The Company's prospects for success depend, to a degree, on its ability
to successfully implement its current restructuring plans. The failure of the
Company to successfully transition, or any unanticipated or significant delays
in such transition, could have a material adverse effect on the Company's
business. There can be no assurance that the Company will be able to achieve its
planned transition without disruption to its business or that the transitioned
Company resulting from the planned business transition will be adequate to
sustain future growth by the Company.
PRICE VOLATILITY IN PUBLIC MARKET
The securities markets have from time to time experienced significant
price and volume fluctuations that may be unrelated to the operating performance
of particular companies. Trading prices of securities of companies in the
managed care sector have experienced significant volatility.
INTERESTS OF CERTAIN PERSONS
The directors and executive officers who served the Company since June
1, 1994 have no substantial interest, direct or indirect, by security holdings
or otherwise, in the Exchange Offer and the approval or disapproval of
Rescission of Acceleration, except as holders of Common Stock generally.
41
<PAGE> 51
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> <C>
William H. Boucher 5,000 (1) *
J. Marvin Feigenbaum 5,000 (1) *
Lindner Funds(2) 586,700 (2) 20.6
Ronald G. Hersch 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.
42
<PAGE> 52
USE OF PROCEEDS
The Company's negative cash flow from operations has consumed
substantial amounts of cash. The Company's capital requirements will depend on
numerous factors, including the Company's obligations to raise substantial
additional funds to complete the Exchange Offer.
Up to approximately $5,750,000 ($5,550,000 in cash and estimated costs
of $200,000) could be used to retire 100% of the outstanding balance of
indebtedness under the Debentures. The Company presently has on hand
approximately $3.0 million in cash invested in short-term investments. See
"Exchange Offering Funding Requirements and Sources." There can be no assurance
of successful completion of the Exchange Offer.
DIVIDEND POLICY
The Company anticipates that all future earnings will be retained to
finance future growth. The Company does not anticipate paying any cash dividends
on the Common Stock in the foreseeable future. While the Debentures are due and
unpaid, payments of dividends is prohibited.
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 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 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 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 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
included in Form 10-K/A No. 3 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.
43
<PAGE> 53
COMPREHENSIVE CARE CORPORATION
Condensed Consolidated Balance Sheets
At February 29, 1996 (unaudited)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
------------------------------------
Actual 100% 30%
-------- ---------------- ---------------
ASSETS
<S> <C> <C> <C>
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.
(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)
44
<PAGE> 54
(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.
45
<PAGE> 55
COMPREHENSIVE CARE CORPORATION
Condensed Consolidated Balance Sheets
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).
(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)
46
<PAGE> 56
(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.
47
<PAGE> 57
COMPREHENSIVE CARE CORPORATION
Consolidated Income Statements
Fiscal Year Ended May 31, 1995
(Amounts in Thousands)
<TABLE>
<CAPTION>
Pro Forma (unaudited)
------------------------------------
Actual 100% 30%
----------- ---------------- -----------
<S> <C> <C> <C>
Revenues:
Operating revenues............................. $ 29,282 $ 29,282 $ 29,282
Costs and expenses:
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
--------- ------------ -----------
39,048 39,048 39,048
--------- ------------ -----------
Loss from Operations............................. (9,766) (9,766) (9,766)
--------- ------------ -----------
Gain on sale of assets......................... 259 259 259
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
principal exchange............................. -- 3,062 919
Extraordinary item - gain on debenture
interest....................................... -- 94 (1) 28 (2)
--------- ------------ -----------
Net loss......................................... $ (11,533) $ (8,377) $ (10,586)
========= ============ ===========
Loss per share:
Loss before extraordinary
item......................................... $ (5.11) $ (5.11) $ (5.11)
Extraordinary item - gain on debenture
exchange....................................... .00 1.40 .42
--------- ------------ -----------
Net loss per share............................... $ (5.11) $ (3.71) $ (4.69)
========= ============ ===========
</TABLE>
------------------------------------------
(1) Represents $72,000 gain on interest and $22,000 gain on forgiveness of
default interest.
(2) Represents $21,000 gain on interest and $7,000 gain on forgiveness of
default interest.
48
<PAGE> 58
COMPREHENSIVE CARE CORPORATION
Consolidated Income Statements
Nine Months Ended February 29, 1996 (unaudited)
(Amounts in Thousands)
<TABLE>
<CAPTION>
Pro Forma (unaudited)
------------------------------------
Actual 100% 30%
----------- ---------------- -----------
<S> <C> <C> <C>
Revenues:
Operating revenues............................. $ 23,964 $ 23,964 $ 23,964
Costs and expenses:
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
principal exchange............................. -- 3,062 919
Extraordinary item - gain on debenture
interest exchange.............................. -- 682 (1) 204 (2)
--------- ------------ -----------
Net earnings/(loss)............................ $ (1,757) $ 1,987 $ (634)
========= ============ ===========
Loss per share:
Loss before extraordinary item................. $ (0.67) $ (0.67) $ (0.67)
Extraordinary item - gain on debenture
exchange....................................... .00 1.42 .43
--------- ------------ -----------
Net earnings/(loss) per share.................... $ (0.67) $ 0.75 $ (0.24)
========= ============ ===========
</TABLE>
- ----------------------------
(1) Represents $608,000 gain on interest and $74,000 gain on forgiveness of
default interest.
(2) Represents $182,000 gain on interest and $22,000 gain on forgiveness of
default interest.
49
<PAGE> 59
CHANGES IN ACCOUNTANTS
Arthur Andersen LLP ("Arthur Andersen") had been the principal
independent auditors of the financial statements for the Company. On May 22,
1995, that firm advised the Company that the Company did not meet Arthur
Andersen's client profile. In connection with the audits of the fiscal years
ended May 31, 1993 and May 31, 1994, and the subsequent interim period through
the date of resignation (the "Period"), there were no disagreements with Arthur
Andersen on any matter of accounting principles or practices, financial
statement disclosure or audit scope or procedures, which disagreements if not
resolved to their satisfaction would have caused them to make reference in
connection with their audit reports to the subject matter of the disagreement.
The audit reports of Arthur Andersen on the consolidated financial
statements of the Company and subsidiaries as of and for the fiscal years ended
May 31, 1993 and 1994 did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope or
accounting principles, other than that such auditor's reports contained two
separate paragraphs that stated that:
As further discussed in Note 15, the Company is negotiating a
settlement with the Internal Revenue Service (IRS) regarding
assessments of payroll taxes. Management believes that adequate
reserves have been provided for the additional taxes to be assessed by
the IRS. There can be no assurance, however, that such reserves will be
sufficient until a formal settlement is reached.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the
Company has incurred significant recurring losses and negative cash
flows from operations which raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result
should the Company be unable to continue as a going concern.
The uncertainty with respect to the IRS assessment had been resolved by
the Company pursuant to a settlement agreement with the IRS entered into during
the quarterly period ended November 30, 1994.
Arthur Andersen advised the Company that Arthur Andersen might permit
(without commitment) its 1993 and 1994 audit reports to be used in the Company's
filings with the Commission, but the appropriate form that such audit reports
may take, if reissued at a future time, would depend upon the results of
postaudit review procedures that Arthur Andersen would perform as it considers
necessary in the circumstances. Auditors' reports must be included in all
Securities and Exchange Act filings with the Commission, and a consent to use
such report must be included in all Securities Act filings.
50
<PAGE> 60
COMPREHENSIVE CARE CORPORATION
THE EXCHANGE AGENT: FIRST TRUST OF CALIFORNIA, NATIONAL ASSOCIATION
By Mail: By Hand:
FIRST TRUST OF CALIFORNIA, N.A. FIRST TRUST OF CALIFORNIA, N.A.
180 EAST FIFTH STREET, SUITE 200 180 EAST FIFTH STREET, SUITE 200
ST. PAUL, MINNESOTA 55101 ST. PAUL, MINNESOTA 55101
REQUESTS FOR ADDITIONAL INFORMATION SHOULD BE DIRECTED TO KERRI RUPPERT,
SECRETARY, COMPREHENSIVE CARE CORPORATION 1111 BAYSIDE DR., SUITE 100,
CORONA DEL MAR, CALIFORNIA 92625, AT (800) 678-2273
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
<S> <C>
TABLE OF CONTENTS
Additional Information.........................................................
Offering Summary...............................................................
Selected Financial Data........................................................
The Company....................................................................
Ratio of Earnings to Fixed Charges.............................................
Recent Transactions in the Company's Securities................................
Price Range of Common Shares and Debentures....................................
The Exchange Offer ............................................................
Description of Debentures .....................................................
Description of Capital Stock ..................................................
- -------------------------------------------------------------------------------
</TABLE>
51
<PAGE> 1
EXHIBIT 99.9
LETTER OF TRANSMITTAL
FOR
COMPREHENSIVE CARE CORPORATION
OFFER TO EXCHANGE THE EXCHANGE CONSIDERATION
FOR ANY AND ALL OF ITS
7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES
DUE APRIL 15, 2010
THE EXCHANGE OFFER WILL EXPIRE AT 2:00 P.M., ST. PAUL, MINNESOTA TIME, ON
__________, 1996 UNLESS THE EXCHANGE OFFER IS EXTENDED (THE "EXPIRATION DATE").
TENDERS OF DEBENTURES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 2:00 P.M. ON THE
EXPIRATION DATE.
TO: FIRST TRUST OF CALIFORNIA, NATIONAL ASSOCIATION, EXCHANGE AGENT
By Mail: By Hand:
FIRST TRUST OF CALIFORNIA, N.A. FIRST TRUST OF CALIFORNIA, N.A.
180 EAST FIFTH STREET, SUITE 200 180 EAST FIFTH STREET, SUITE 200
ST. PAUL, MINNESOTA 55101 ST. PAUL, MINNESOTA 55101
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION
VIA TELEGRAM, TELEX OR FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE EXCHANGE CONSIDERATION FOR
THEIR DEBENTURES PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT
WITHDRAW)THEIR DEBENTURES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
By execution hereof, the undersigned acknowledges receipt of the
Offering Circular dated ________, 1996 (the "Offering Circular"), of
Comprehensive Care Corporation, a Delaware corporation (the "Company"), which,
together with this Letter of Transmittal and the instructions hereto (the
"Letter of Transmittal"), constitute the Company's offer (the "Exchange Offer")
to exchange, as principal, $500 in cash plus 16 shares of Common Stock, subject
to payment of cash in lieu of any fractional shares, and, as interest, $80 in
cash plus 8 shares of Common Stock (the "Exchange Consideration"), for each
$1,000 of original principal amount of its outstanding 7 1/2% Convertible
Subordinated Debentures, due April 15, 2010 (the "Debentures"), and the waiver
by the Debentureholder of all interest accrued and unpaid as of the date of the
Exchange in excess of such designated interest payment included in the Exchange
Consideration, upon the terms and subject to the conditions set forth in the
Exchange Offer.
This Letter of Transmittal is to be used by Holders (as defined below)
if: (i) certificates representing Debentures are to be physically delivered to
the Exchange Agent herewith by Holders; (ii) tender of Debentures is to be made
by book-entry transfer to the Exchange Agent's account at The Depository Trust
Company ("DTC") pursuant to the procedures set forth in the Offering Circular
under "The Exchange Offer -- Procedures for Tendering" by any financial
institution that is a participant in DTC and whose name appears on a security
position listing as the owner of Debentures (such participants, acting on behalf
of Holders are referred to herein, together with such Holders, as "Acting
Holders"); or (iii) tender of Debentures is to be made according to the
guaranteed delivery procedures set forth in the Offering Circular under "The
Exchange Offer -- Guaranteed Delivery Procedure." Delivery of documents to DTC
does not constitute delivery to the Exchange Agent.
1
<PAGE> 2
The term "Holder" with respect to the Exchange Offer means any person:
(i) in whose name Debentures are registered on the books of the Company or any
other person who has obtained a properly completed bond power from the
registered Holder; or (ii) whose Debentures are held of record by DTC who
desires to deliver such Debentures by book-entry transfer at DTC.
The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer. Holders who wish to tender their Debentures must complete
this Letter of Transmittal in its entirety.
All capitalized terms used herein and not defined shall have the
meanings ascribed to them in the Offering Circular.
The instructions included with this Letter of Transmittal must be
followed. Questions and requests for assistance or for additional copies of the
Offering Circular, this Letter of Transmittal and the Notice of Guaranteed
Delivery may be directed to the Exchange Agent. See Instruction 8 herein.
HOLDERS WHO WISH TO ACCEPT THE EXCHANGE OFFER AND TENDER THEIR
DEBENTURES MUST COMPLETE THIS LETTER OF TRANSMITTAL IN ITS ENTIRETY.
2
<PAGE> 3
List below the Debentures to which this Letter of Transmittal relates.
If the space provided below is inadequate, list the certificate numbers and
principal amounts on a separately executed schedule and affix the schedule to
this Letter of Transmittal. Tenders of Debentures will be accepted only in
principal amounts equal to $1,000 or integral multiples thereof.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF DEBENTURES
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CERTIFICATE AGGREGATE
NUMBER(S)* PRINCIPAL
(ATTACH SIGNED AMOUNT
NAME(S) AND ADDRESS(ES) OF LIST IF TENDERED (IF
HOLDER(S) NECESSARY) LESS
(PLEASE FILL IN, IF BLANK) THAN ALL)**
- ---------------------------------------------------- ---------------------------- ---------------------------
- ---------------------------------------------------- ---------------------------- ---------------------------
- ---------------------------------------------------- ---------------------------- ---------------------------
- ---------------------------------------------------- ---------------------------- ---------------------------
- ---------------------------------------------------- ---------------------------- ---------------------------
- ---------------------------------------------------- ---------------------------- ---------------------------
- ---------------------------------------------------- ---------------------------- ---------------------------
- ---------------------------------------------------- ---------------------------- ---------------------------
- -----------------------------------------------------------------------------------------------------------------------
TOTAL PRINCIPAL AMOUNT OF DEBENTURES TENDERED
- -----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
* Need not be completed by Holders tendering by book-entry transfer.
** Need not be completed by Holders who wish to tender with respect to all
Debentures listed. See Instruction 2.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
/ / CHECK HERE IF TENDERED DEBENTURES ARE BEING DELIVERED BY DTC TO THE
EXCHANGE AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution: ____________________________________________
DTC Book-Entry Account No.: _______________________________________________
If Holders desire to tender Debentures pursuant to the Exchange Offer and (i)
certificates representing such Debentures are not lost but are not immediately
available, (ii) time will not permit this Letter of Transmittal, certificates
representing such Debentures or other required documents to reach the Exchange
Agent prior to the Expiration Date or (iii) the procedures for book-entry
transfer cannot be completed prior to the Expiration Date, then such Holders may
effect a tender of such Debentures in accordance with the guaranteed delivery
procedure set forth in the Offering Circular under "The Exchange Offer--
Guaranteed Delivery Procedure."
/ / CHECK HERE IF TENDERED DEBENTURES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
3
<PAGE> 4
Name(s) of Holder(s) of Debentures:__________________________________________
Window Ticket No. (if any):__________________________________________________
Date of Execution of
Notice of Guaranteed Delivery:_______________________________________________
Name of Eligible Institution that Guaranteed Delivery:_______________________
If Delivered by Book-Entry Transfer:
Name of Tendering Institution:_______________________________________________
DTC Book-Entry Account No.:__________________________________________________
4
<PAGE> 5
Subject to the terms of the Exchange Offer, the undersigned hereby
tenders to the Company the principal amount of Debentures indicated above.
Subject to and effective upon the acceptance for exchange of the principal
amount of Debentures tendered in accordance with this Letter of Transmittal, the
undersigned sells, assigns and transfers to the Company all right, title and
interest in and to the Debentures tendered hereby. The undersigned hereby
irrevocably constitutes and appoints the Exchange Agent its agent and
attorney-in-fact (with full knowledge that the Exchange Agent also acts as the
agent of the Company) with respect to the tendered Debentures with full power of
substitution to deliver certificates for such Debentures for cancellation in
accordance with the Indenture for the Debentures, all in accordance with the
terms of the Exchange Offer. The power of attorney granted in this paragraph
shall be deemed irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that he or she has full
power and authority to tender, sell, assign and transfer the Debentures tendered
hereby and that the Company will acquire good and unencumbered title thereto,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim, when the same are acquired by the Company.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the assignment and transfer of the Debentures tendered
hereby.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted validly tendered Debentures when the Company has given oral or written
notice thereof to the Exchange Agent. If any tendered Debentures are not
accepted for exchange pursuant to the Exchange Offer for any reason,
certificates for any such unaccepted Debentures will be returned (except as
noted below with respect to tenders through DTC), without expense, to the
undersigned at the address shown below or at a different address shown below or
at a different address as may be indicated under "Special Issuance Instructions"
as promptly as practicable after the Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned and every obligation under this Letter of Transmittal shall be
binding upon the undersigned's heirs, personal representatives, successors and
assigns.
The undersigned understands that tenders of Debentures pursuant to the
procedures described under the caption "The Exchange Offer -- Procedures for
Tendering" in the Offering Circular and in the instructions hereto will
constitute a binding agreement between the undersigned and the Company upon the
terms and subject to the conditions of the Exchange Offer.
Unless otherwise indicated under "Special Issuance Instructions," in
exchange for the Debentures accepted for exchange, please pay the cash portion
of the Exchange Consideration by check made payable in the name(s) of the
undersigned (or in the case of Debentures tendered by DTC, to DTC), and issue
the certificates representing the Common Shares, in the name(s) of the
undersigned (or in the case of Debentures tendered by DTC, by credit to the
account at DTC). Similarly, unless otherwise indicated under "Special Delivery
Instructions," please send the Exchange Consideration in exchange for the
Debentures accepted for exchange and any certificates for Debentures not
tendered or not exchanged (and accompanying documents, as appropriate) to the
undersigned at the address shown below the undersigned's signature(s), unless,
in either event, tender is being made through DTC. In the event that both
"Special Issuance Instructions" and "Special Delivery Instructions" are
completed, please pay and issue the Exchange Consideration due in exchange for
5
<PAGE> 6
the Debentures accepted for exchange and return any Debentures not tendered or
not exchanged in the name(s) of, and send said certificates to, the person(s) so
indicated. The undersigned recognizes that the Company has no obligation
pursuant to the "Special Issuance Instructions" and "Special Delivery
Instructions" to transfer any Debentures from the name of the registered
holder(s) thereof if the Company does not accept for exchange any of the
Debentures so tendered.
6
<PAGE> 7
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS OF
DEBENTURES REGARDLESS OF WHETHER DEBENTURES ARE BEING PHYSICALLY
DELIVERED HEREWITH)
This Letter of Transmittal must be signed by the Holder(s) of
Debentures exactly as their name(s) appear(s) on certificate(s) for Debentures
or, if tendered by a participant in DTC, exactly as such participant's name
appears on a security position listing as the owner of Debentures, or by
person(s) authorized to become registered Holder(s) by endorsements and
documents transmitted with this Letter of Transmittal. If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer or other
person acting in a fiduciary or representative capacity, such person must set
forth his or her full title below under "Capacity" and submit evidence
satisfactory to the Company of such person's authority to so act. See
Instruction 3 herein.
If the signature appearing below is not of the registered Holder(s) of
the Debentures, then the registered Holder(s) must sign a valid proxy.
X_________________________________ Date:___________________________________
X_________________________________ Date:___________________________________
Signature(s) of Holder(s) or
Authorized Signatory
Name(s):__________________________ Address:________________________________
__________________________ ________________________________
(Please Print) (Including Zip Code)
Capacity:_________________________ Area Code and Telephone No.:____________
Social Security No.:______________
PLEASE COMPLETE SUBSTITUTE FORM W-9 HEREIN
SIGNATURE GUARANTEE (SEE INSTRUCTION 3 HEREIN)
CERTAIN SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION
_______________________________________________________________________________
(Name of Eligible Institution Guaranteeing Signatures)
_______________________________________________________________________________
(Address (including zip code) and Telephone Number
(including area code) of Firm)
_______________________________________________________________________________
(Authorized Signature)
_______________________________________________________________________________
(Printed Name)
_______________________________________________________________________________
(Title)
Date:_____________________________
7
<PAGE> 8
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTION 4 HEREIN)
To be completed ONLY if certificates for the Common Shares issued pursuant to
the Exchange Offer or for any principal amount of Debentures not tendered for
exchange are to be issued in the name of someone other than the person or
persons whose signature(s) appear(s) within this Letter of Transmittal or issued
to an address different from that shown in the box entitled "Description of
Debentures" within this Letter of Transmittal, or if Debentures tendered by
book-entry transfer that are not accepted for purchase are to be credited to an
account maintained at DTC.
Name:__________________________________________________________________________
(Please Print)
Address:_______________________________________________________________________
(Please Print)
_______________________________________________________________________________
Zip Code
_______________________________________________________________________________
Taxpayer Identification or
Social Security Number
(See Substitute Form W-9 herein)
_______________________________________________________________________________
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTION 4 HEREIN)
To be completed ONLY if certificates for the Common Shares issued pursuant to
the Exchange Offer or for any principal amount of Debentures not tendered for
exchange are to be sent to someone other than the person or persons whose
signature(s) appear(s) within this Letter of Transmittal or issued to an address
different from that shown in the box entitled "Description of Debentures" within
this Letter of Transmittal.
Name:__________________________________________________________________________
(Please Print)
Address:_______________________________________________________________________
(Please Print)
_______________________________________________________________________________
Zip Code
_______________________________________________________________________________
Taxpayer Identification or
Social Security Number
(See Substitute Form W-9 herein)
_______________________________________________________________________________
8
<PAGE> 9
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER AND THE SOLICITATION
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND DEBENTURES. The
certificates for the tendered Debentures (or a confirmation of a book-entry
transfer into the Exchange Agent's account at DTC of all Debentures delivered
electronically), as well as a properly completed and duly executed copy of this
Letter of Transmittal or facsimile hereof and any other documents required by
this Letter of Transmittal must be received by the Exchange Agent at its address
set forth herein prior to 2:00 p.m., St. Paul, Minnesota time, on the Expiration
Date. The method of delivery of the tendered Debentures, this Letter of
Transmittal and all other required documents to the Exchange Agent is at the
election and risk of the Holder and, except as otherwise provided below, the
delivery will be deemed made only when actually received by the Exchange Agent.
Instead of delivery by mail, it is recommended that the Holder use an overnight
or hand delivery service. In all cases, sufficient time should be allowed to
assure timely delivery. No Letter of Transmittal or Debentures should be sent to
the Company.
Holders who wish to tender their Debentures and (i) whose Debentures
are not immediately available or (ii) who cannot deliver their Debentures, this
Letter of Transmittal or any other documents required hereby to the Exchange
Agent prior to the Expiration Date must tender their Debentures and follow the
guaranteed delivery procedure set forth in the Offering Circular. Pursuant to
such procedure: (i) such tender must be made by or through an Eligible
Institution; (ii) prior to the Expiration Date, the Exchange Agent must have
received from the Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder of the Debentures, the
certificate number or numbers of such Debentures and the principal amount of
Debentures tendered, stating that the tender is being made thereby and
guaranteeing that, within five business days after the Expiration Date, this
Letter of Transmittal (or facsimile hereof) together with the certificate(s)
representing the Debentures (or a confirmation of electronic delivery of
book-entry delivery into the Exchange Agent's account at DTC) and any required
documents will be deposited by the Eligible Institution with the Exchange Agent;
and (iii) such properly completed and executed Letter of Transmittal (or
facsimile hereof), as well as all other documents required by this Letter of
Transmittal and the certificate(s) representing all tendered Debentures in
proper form for transfer (or a confirmation of electronic mail delivery of
book-entry delivery into the Exchange Agent's account at DTC), must be received
by the Exchange Agent within five business days after the Expiration Date, all
as provided in the Offering Circular under the caption "Guaranteed Delivery
Procedure." Any Holder of Debentures who wishes to tender his Debentures
pursuant to the guaranteed delivery procedure described above must ensure that
the Exchange Agent receives the Notice of Guaranteed Delivery prior to 2:00
p.m., St. Paul, Minnesota time, on the Expiration Date.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Debentures will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all
Debentures not properly tendered or any Debentures the Company's acceptance of
which would, in the opinion of counsel for the Company, be unlawful. The Company
also reserves the right to waive any irregularities or conditions of tender as
to particular Debentures. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in this Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
9
<PAGE> 10
defects or irregularities in connection with tenders of Debentures must be cured
within such time as the Company shall determine. Neither the Company, the
Exchange Agent nor any other person shall be under any duty to give notification
of defects or irregularities with respect to tenders of Debentures, nor shall
any of them incur any liability for failure to give such notification. Tenders
of Debentures will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Debentures received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost by
the Exchange Agent to the tendering Holders of Debentures, unless otherwise
provided in this Letter of Transmittal, as soon as practicable following the
Expiration Date.
2. PARTIAL TENDERS. Tenders of Debentures will be accepted in all
denominations of $1,000 and integral multiples in excess thereof. If less than
the entire principal amount of any Debentures is tendered, the tendering Holder
should fill in the principal amount tendered in the third column of the chart
entitled "Description of Debentures." The entire principal amount of Debentures
delivered to the Exchange Agent will be deemed to have been tendered unless
otherwise indicated. If the entire principal amount of all Debentures is not
tendered or accepted, a certificate or certificates representing Debentures not
tendered or accepted will be issued and sent to the Holder at his or her
registered address, unless a different address is provided in the appropriate
box on this Letter of Transmittal or unless tender is made through DTC, promptly
after the Debentures are accepted for exchange.
3. SIGNATURES ON THE LETTER OF TRANSMITTAL; BOND POWERS AND
ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal (or
facsimile hereof) is signed by the registered Holder(s) of the Debentures
tendered hereby, the signature must correspond with the name(s) as written on
the face of the Debentures without alteration, enlargement or any change
whatsoever.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered Holder(s) of Debentures tendered and the certificate(s) for Common
Shares issued in exchange therefor is to be issued (or any untendered principal
amount of Debentures is to be reissued) to the registered Holder, such Holder
need not and should not endorse any tendered Debentures, nor provide a separate
bond power. In any other case, such Holder must either properly endorse the
Debentures tendered or transmit a properly completed separate bond power with
this Letter of Transmittal, with the signatures on the endorsement or bond power
guaranteed by an Eligible Institution.
If this Letter of Transmittal (or facsimile hereof) is signed by a
person other than the registered Holder(s) of any Debentures listed, such
Debentures must be endorsed or accompanied by appropriate bond powers signed as
the name of the registered Holder(s) appears on the Debentures.
If this Letter of Transmittal (or facsimile hereof) or any Debentures
or bond powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, or officers of corporations or others acting in a fiduciary
or representative capacity, such persons should so indicate when signing, and
unless waived by the Company, evidence satisfactory to the Company of their
authority to so act must be submitted with this Letter of Transmittal.
Endorsements on Debentures or signatures on bond powers required by
this Instruction 3 must be guaranteed by an Eligible Institution.
Signatures on this Letter of Transmittal (or facsimile hereof) must be
guaranteed by an Eligible Institution unless the Debentures tendered pursuant
thereto are tendered (i) by a registered Holder (including any participant in
10
<PAGE> 11
DTC whose name appears on a security position listing as the owner of
Debentures) who has not completed the box set forth herein entitled "Special
Issuance Instructions" or the box entitled "Special Delivery Instructions" or
(ii) for the account of an Eligible Institution.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering Holders should
indicate, in the applicable spaces, the name and address to which Debentures or
substitute Debentures reissued for principal amounts not tendered or not
accepted for exchange are to be issued or sent, if different from the name and
address of the person signing this Letter of Transmittal (or in the case of
tender of the Debentures through DTC, if different from DTC). In the case of
issuance in a different name, the taxpayer identification or social security
number of the person named must also be indicated.
5. TRANSFER TAXES. The Company will pay all transfer taxes, if any,
applicable to the exchange of Debentures pursuant to the Exchange Offer. If,
however, certificates representing New Debentures or Debentures for principal
amounts not tendered or accepted for exchange are to be delivered to, or are to
be registered or issued in the name of, any person other than the registered
Holder of the Debentures tendered hereby, or if tendered Debentures are
registered in the name of any person other than the person signing this Letter
of Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Debentures pursuant to the Exchange Offer, then the amount of any
such transfer taxes (whether imposed on the registered Holder or any other
person) will be payable by the tendering Holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with this Letter
of Transmittal, the amount of such transfer taxes will be billed directly to
such tendering Holder.
Except as provided in this Instruction 5, it will not be necessary for
transfer tax stamps to be affixed to the Debentures listed in this Letter of
Transmittal.
6. WAIVER OF CONDITIONS. The Company reserves the absolute right to
amend, waive or modify specified conditions in the Exchange Offer in the case of
any Debentures tendered.
7. MUTILATED, LOST, STOLEN OR DESTROYED DEBENTURES. Any tendering
Holder whose Debentures have been mutilated, lost, stolen or destroyed should
contact the Exchange Agent at the address indicated herein for further
instruction.
8. REQUEST FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests
for assistance and requests for additional copies of the Offering Circular or
this Letter of Transmittal may be directed to the Exchange Agent at the address
specified in the Offering Circular or to Kerri Ruppert, Senior Vice President,
Secretary and Chief Accounting Officer of the Company, 1111 Bayside Drive, Suite
100, Corona del Mar, California 92625, (800) 678-2273.
11
<PAGE> 12
(DO NOT WRITE IN SPACE BELOW)
_______________________________________________________________________________
_______________________________________________________________________________
CERTIFICATE SURRENDERED Debentures TENDERED Debentures ACCEPTED
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
Delivery Prepared by Checked by Date
_______________________________________________________________________________
_______________________________________________________________________________
IMPORTANT TAX INFORMATION
Under federal income tax laws, a Holder whose tendered Debentures are
accepted pursuant to the Exchange Offer is required to provide the Exchange
Agent (as payer) with such Holder's correct Taxpayer Identification Number
("TIN") or Substitute Form W-9 below or otherwise establish a basis for
exemption from backup withholding. If such Holder is an individual, the TIN is
his social security number. If the Exchange Agent is not provided with the
correct TIN, a $50 penalty may be imposed by the Internal Revenue Service, and
payments made with respect to Debentures purchased pursuant to the Exchange
Offer may be subject to backup withholding.
Certain Holders (including, among others, all corporations and certain
foreign persons) are not subject to these backup withholding and reporting
requirements. Exempt Holders should indicate their exempt status on Substitute
Form W-9. A foreign person may qualify as an exempt recipient by submitting to
the Exchange Agent a properly completed U.S. Treasury Form W-8, signed under
penalties of perjury, attesting to that Holder's exempt status. A Form W-8 can
be obtained from the Exchange Agent. See the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional instructions.
If backup withholding applies, the Exchange Agent is required to
withhold 31% of any payments made to the Holder or other payee. Backup
withholding is not an additional federal income tax. Rather, the federal income
tax liability of persons subject to backup withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained from the Internal Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments made with respect to the
Exchange Offer, the Holder is required to provide the Exchange Agent with
either: (i) the Holder's correct TIN by completing the form below, certifying
that the TIN provided on Substitute Form W-9 is correct (or that such Holder is
awaiting a TIN) and that (A) the Holder has not been notified by the Internal
Revenue Service that the Holder is subject to backup withholding as a result of
12
<PAGE> 13
failure to report all interest or dividends or (B) the Internal Revenue Service
has notified the Holder that the Holder is no longer subject to backup
withholding; or (ii) an adequate basis for exemption.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The Holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the registered Holder of
the Debentures. If the Debentures are held in more than one name or are held not
in the name of the actual owner, consult the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional guidance on which number to report.
13
<PAGE> 14
_______________________________________________________________________________
SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX AT
FORM W-9 RIGHT AND CERTIFY BY SIGNING AND DATING BELOW
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE ______________________________________________
Social Security Number
OR____________________________________________
Employer Identification Number
______________________________________________
PAYER'S REQUEST FOR TAXPAYER PART 2 -- CERTIFICATION -- Under penalties of
IDENTIFICATION NUMBER (TIN) perjury, I certify that:
(1) The number shown on this form is my
correct Taxpayer Identification Number
(or I am waiting for a number to be
issued to me), and
(2) I am not subject to backup withholding
because (a) I am exempt from backup
withholding or (b) I have not been
notified by the Internal Revenue Service
("IRS") that I am currently subject to
backup withholding as a result of failure
to report all interest or dividends, or
(c) the IRS has notified me that I am no
longer subject to backup withholding.
PART 3
Awaiting TIN / /
_____________________________________________
CERTIFICATE INSTRUCTIONS -- You must cross out
item (2) in Part 2 above if you have been
notified by the IRS that you are subject to
backup withholding because of underreporting
interest or dividends on your tax return.
However, if after being notified by the IRS
that you were subject to backup withholding
you received another notification from the IRS
stating that you are no longer subject to
backup withholding, do not cross out item (2).
_____________________________________________
SIGNATURE
_____________________________________________
NAME (PLEASE PRINT)
_____________________________________________
DATE
_______________________________________________________________________________
14
<PAGE> 15
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO HOLDERS OF DEBENTURES
PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES
FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM
W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN
PART 3 OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (b)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number within 60 days, 31% of all
reportable payments made to me thereafter will be withheld until I provide a
number.
_______________________________________ _______________________________
Signature Date
15
<PAGE> 16
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
FIRST TRUST OF CALIFORNIA, NATIONAL ASSOCIATION
By Mail: By Hand:
FIRST TRUST OF CALIFORNIA, N.A. FIRST TRUST OF CALIFORNIA, N.A.
180 EAST FIFTH STREET, SUITE 200 180 EAST FIFTH STREET, SUITE 200
ST. PAUL, MINNESOTA 55101 ST. PAUL, MINNESOTA 55101
16
<PAGE> 1
EXHIBIT 99.10
GUIDELINES FOR CERTIFICATION
OF TAXPAYER IDENTIFICATION
NUMBER ON FORM W-9
1
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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 specify an
exact date by which the foregoing described offer will be submitted to the
Holders.
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The Company has also informed the Trustee, and has issued a press
release announcing, that on October 20, 1995, the Company received a tax refund
from the Internal Revenue Service in the amount of $9,393,382.00 together with
accrued interest thereon in the amount of $80,956.10, that the Internal Revenue
Service offset against such tax refund amount $2,547,618.14, including interest,
then owed by the Company to the Internal Revenue Service pursuant to a
settlement agreement, and that the Company thereby actually received a net tax
refund in the amount of $6,926,719.96 from the Internal Revenue Service.
The Trustee seeks direction from the Holders concerning how the Holders
wish the Trustee to proceed in connection with the delay which has occurred in
submitting the foregoing described offer to the Holders.
The Trustee will continue with its duties under the Indenture and will
monitor developments in this matter and intends to communicate with the Holders
of the Securities as it deems appropriate as it learns of developments
concerning this matter. Any directions or inquiries regarding this matter should
be directed to Ms. Sandy Chan, Trust Officer, First Trust of California,
National Association, as agent for Bank of America National Trust and Savings
Association, Corporate Trust Administration, Department #8510, 333 South Beaudry
Avenue, 25th Floor, Los Angeles, California 90017, telephone: (213) 345-4652.
NOTE: IF YOU ARE A NOMINEE OR A DEPOSITORY AND NOT A BENEFICIAL HOLDER, PLEASE
FORWARD COPIES OF THIS NOTICE IMMEDIATELY TO YOUR CLIENTS WHO ARE
BENEFICIAL HOLDERS OF THE SECURITIES.
Dated: November 24, 1995
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Trustee
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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 four overdue interest payments, and default
interest on each overdue 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 (the "record date"). Such payment
by the Company is conditioned upon the concurrent effectiveness of rescission of
the acceleration of the Securities with consent of the Holders of a majority in
principal amount of the outstanding Securities on the Payment Date.
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Dated: July __, 1996 COMPREHENSIVE CARE CORPORATION,
a Delaware corporation
By:_____________________________________
Its:____________________________________
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EXHIBIT 99.13
[COMP-CARE LOGO]
July __, 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 the
holders of its 7 1/2% Convertible Subordinated Debentures Due April 15, 2010
(collectively called the "Securities") for the following purposes:
(1) To consent to rescind, and to notify the Trustee of a rescission
of, an acceleration of $9,538,000 of principal due under the
Debentures and all of the effects thereof (Proposal 1);
(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 exists at the time of the
Company's payment of default interest, and the interest on default
interest (the "Default Interest Payment Date") if the same occurs
within 30 calendar days after the termination of the consent
solicitation period (Proposal 2);
(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 (Proposal 3); and
(4) To consent to waiver under of the Indenture, or to amend the
Indenture so as not to require, formal notice from the Company to
the Trustee to the extent necessary to effect the reinstatement of
April 15, 2010 as of the maturity date as to the entire principal
amount of Debentures outstanding (Proposal 4).
Proposals 1, 2, 3 and 4, and the possible advantages and disadvantages,
are described in the enclosed Debenture Consent Solicitation Statement.
Proposals 1, 2, 3 and 4 are recommended by your Board of Directors. A card (the
"Consent") is enclosed for the purpose of giving such a notice to the Trustee.
The Board of Directors approves the Proposals and the proposed exchange
offer (the "Exchange Offer") in order to eliminate various undesirable effects
of acceleration; the existing acceleration of the Securities.
(a) Impairs the Company's business and financial prospects.
(b) Could cause other creditors under the other debts and obligations
of the Company to feel insecure and refuse to extend credit.
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(c) Decreases the Company's attractiveness to investors.
(d) Creates an unfavorable impression with the Company's vendors and
clients.
Although Securityholders will be offered an exchange of cash and Common
Stock for their Securities, a Securityholder is not required to exchange. The
Company will pay the entire amount of interest due on all non-tendered
Debentures, and the Securities will be reinstated if at least a majority in
principal amount of Debentures Consents on all of the Proposals. In the Exchange
Offer, the Company will accept all properly tendered Securities accompanied by a
Consent on all of the Proposals. The Exchange is described in the Offering
Circular. Giving Consent will not effectively tender your Debentures. The manner
of tendering Debentures is described in the Letter of Transmittal and the
Offering Circular. However, Consent must accompany all tendered Debentures in
the Exchange Offer.
A rescission of acceleration would result in a reinstatement of the
Securities, 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.
It is each beneficial and record Debentureholder's right to elect to
not tender such holder's Debentures. Nevertheless, there can be no assurance
that the aggregate market value of your Securities after a rescission, plus the
interest payment, will be as great as the aggregate market value of your
Securities before a rescission. Debentureholders are urged, in addition to
consenting, to carefully consider the Exchange Offer. After the Exchange Offer,
the trading in the Securities may become more thin and sporadic, which could
adversely affect the liquidity of an investment in the Securities.
A rescission of acceleration will not alter rights of Securityholders
to accelerate the Securities upon any future Event of Default.
The Board of Directors is hopeful that a rescission of acceleration of
the Securities will help position the Company for a more successful long-term
future. Please SIGN, DATE and MAIL the enclosed Consent card as soon as
possible.
Sincerely,
Chriss W. Street
Chairman of the Board of
Directors, President & Chief
Executive Officer
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EXHIBIT 99.14
DEBENTURE CONSENT SOLICITATION STATEMENT
Incorporated by Reference
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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.
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4. ARE THE SHARES OF COMMON STOCK ISSUED IN THE EXCHANGE
FREELY-TRADEABLE?
That depends on the Debentures you hold now; if they
are freely tradeable, an exchange should give you
freely tradeable shares. Comprehensive Care is
relying on an exception to the requirement to
register the shares that requires that no commissions
be paid by Comprehensive Care to persons for
soliciting holders to exchange. No commissions will
be paid by Comprehensive Care. Employees, 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.
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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?
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.
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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.
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EXHIBIT 99.16
NOTICE OF EXCHANGE OFFER FOR
ANY AND ALL OF THE OUTSTANDING
7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES
OF
COMPREHENSIVE CARE CORPORATION
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 2:00 P.M.,
ST. PAUL, MINNESOTA TIME, ON _______, __________, 1996,
UNLESS EXTENDED BY THE COMPANY.
July ___, 1996
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
We are enclosing the material listed below relating to the offer by
Comprehensive Care Corporation (the "Company"), upon the terms and subject to
the conditions set forth in the enclosed Offering Circular dated May ___, 1996
and Letter of Transmittal and related documents (the "Exchange Offer"), to
exchange for aggregate Exchange Consideration (defined below) all Debentures
(defined below) that are properly tendered and exchanged from the date of the
Offer through 2:00 p.m., St. Paul, Minnesota time, on _______, __________, 1996,
unless extended (the "Offer Period"). A holder of Debentures who elects to
exchange during the Offer Period will receive the aggregate exchange
consideration comprised of $500 in cash and 16 shares of the Company's Common
Stock, $.01 par value per share (the "Common Stock") as principal plus $80 in
cash and 8 shares of Common Stock as interest (the "Exchange Consideration") for
the surrender of each $1,000 of outstanding principal amount of the Company's 7
1/2% Convertible Subordinated Debentures Due April 15, 2010 (the "Debentures")
and waiver and forgiveness of excess interest (over $80 in cash and the fair
value of 8 shares of Common Stock) accrued since April 15, 1994 and all other
claims. The payment of the exchange consideration in the Exchange Offer will be
treated by the Company for accounting and tax purposes as principal to the
extent of $500 plus the fair value of 16 shares of Common Stock and as interest
to the extent of $80 plus the fair value of 8 shares of Common Stock.
Accordingly for most taxpayers, the aggregate amount of principal payments, less
tax basis, will be gain or loss to the holder, and the aggregate amount of
interest payments will be ordinary income. At July 15, 1996, the aggregate
amount of interest accrued, including interest on overdue installments, will be
$180 per $1,000 of outstanding principal amount of Debentures. The Debentures
are currently due and payable in full on account of acceleration resulting from
payment defaults. The purpose of the Exchange Offer is to provide incentive to
rescind the Debenture acceleration. CompCare is concurrently soliciting
Debentureholders for the purpose of rescinding the acceleration. Through July
15, 1996, $168.75 of interest plus $11.25 of interest on overdue installments
has accrued, and is payable prior to rescission of acceleration.
Debentureholders can either receive accrued amounts and retain the balance due
under Debentures or can exchange them for $580 in cash plus 24 shares of Common
Stock. The Company does not intend to complete the Exchange unless the
acceleration is rescinded. Immediately before the Debenture acceleration is
rescinded, the Company will accept all of the Debentures tendered in the
Exchange and as to all non-tendered Debentures will retire five percent (5%) of
the outstanding principal amount of thereof, pro rata, and will pay accrued
interest, including interest on all overdue installments thereon, as required
under the Debentures. The Company will thereafter make semi-annual interest
payments until maturity of the outstanding Debentures on April 15, 2010. At the
conclusion of the Offer Period, a holder of Debentures who did not exchange
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those Debentures in the Exchange Offer will no longer be entitled to the
Exchange Consideration.
The Company will pay no commission or other consideration to solicit
exchanges of Debentures so that the Common Stock issuable in the Exchange will
be exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act") under Section 3(a)(9) of the Securities Act, and be exempt
from qualification or registration under applicable U.S. state securities laws.
The Common Shares to be issued upon exchange of the Debentures pursuant to this
offer by the holders thereof should be freely tradeable to the same extent that
tendered and exchanged Debentures were freely tradeable. Comprehensive Care
Corporation Common Stock to be issued in the Exchange Offer has been approved
for listing upon notice of issuance on the New York Stock Exchange.
Holders of Debentures who elect to tender and exchange their Debentures
pursuant to the Exchange Offer will not receive future, regular principal or
interest payments with respect to the Debentures, including any amount in
respect of periods since April 15, 1996, the last record date prior to the date
hereof for payment of regularly scheduled interest payments.
The offer is made on the terms and subject to the conditions set forth
in the enclosed Offering Circular and any supplements or amendments thereto (the
"Offering Circular"), in the related Letter of Transmittal and in the related
documents (which together constitute the "Exchange Offer").
For your information and for forwarding to your clients who hold
Debentures, whether registered in your name, in the name of your nominee, or in
their own names, we are enclosing the following documents:
1. The Offering Circular;
2. The Letter of Transmittal to be used by holders of Debentures
in accepting the Exchange Offer (facsimile copies of the
Letter of Transmittal may be used to tender Debentures for
exchange);
3. Notice of Guaranteed Delivery to be used to accept the
Exchange Offer if any Debentures to be tendered are
represented by certificates and those certificates are not
immediately available;
4. A suggested form of letter that may be sent to your clients
for whose accounts you hold Debentures in your name or in the
name of a nominee, with space provided for obtaining the
clients' instructions about the Exchange Offer;
5. Guidelines of the Internal Revenue Service for Certification
of Taxpayer Identification Number on Substitute Form W-9;
6. A return envelope addressed to First Trust of California, the
Exchange Agent;
7. The Company's Annual Report on Form 10-K for the Fiscal Year
Ended May 31, 1995;
8. The Company's Quarterly Report on Form 10-Q for the Quarterly
Period Ended August 31, 1995;
9. The Company's Quarterly Report on Form 10-Q for the Quarterly
Period Ended November 30, 1995; and
10. The Company's Quarterly Report on Form 10-Q for the Quarterly
Period Ended February 29, 1996.
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WE URGE YOU TO CONTACT YOUR CLIENTS PROMPTLY. PLEASE NOTE THAT THE OFFER
PERIOD EXPIRES AT 2:00 P.M., ST. PAUL, MINNESOTA TIME, ON _________, __________,
1996, UNLESS EXTENDED BY THE COMPANY.
No fees or commissions will be payable to brokers, dealers or other
persons for soliciting tenders of Debentures pursuant to the Exchange Offer.
However, the Company will, upon request, reimburse brokers, dealers, commercial
banks and trust companies for reasonable and necessary costs incurred by them in
forwarding the Offering Circular and the related documents to the beneficial
owners of Debentures held by them as nominee or in a fiduciary capacity. The
Company will pay all transfer taxes, if any, on the exchange of the Debentures,
other than those resulting from a request to issue Common Stock to a person
other than the registered holder of the Debentures.
Any questions or requests for assistance or additional copies of the
enclosed materials may be obtained from the Company, the Trustee or the Exchange
Agent at the addresses set forth in the Offering Circular.
Very truly yours,
COMPREHENSIVE CARE CORPORATION
Kerri Ruppert,
Secretary
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE
YOU OR ANY PERSON AS AN AGENT OF THE COMPANY, ANY AFFILIATE OF THE COMPANY, OR
THE EXCHANGE AGENT OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENTS
ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE EXCHANGE OFFER EXCEPT FOR
STATEMENTS EXPRESSLY MADE IN THE OFFERING CIRCULAR AND THE RELATED DOCUMENTS.
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EXHIBIT 99.17
NOTICE OF EXCHANGE OFFER FOR
ANY AND ALL OF THE OUTSTANDING
7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES
OF
COMPREHENSIVE CARE CORPORATION
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 2:00 P.M.,
ST. PAUL, MINNESOTA TIME, ON _______, __________, 1996,
UNLESS EXTENDED BY THE COMPANY.
July __, 1996
To Our Clients:
Enclosed for your consideration is a copy of the Offering Circular of
Comprehensive Care Corporation (the "Company") dated July __, 1996, with respect
to the offer by the Company upon the terms and subject to the conditions set
forth in the Offering Circular to pay aggregate exchange consideration for each
$1,000 principal amount of the Company's 7 1/2% Convertible Subordinated
Debentures Due April 15, 2010 (the "Debentures") that is properly tendered for
exchange from the date of the Offering Circular through 2:00 p.m., St. Paul,
Minnesota time, on __________, __________, 1996, unless extended (the "Offer
Period"). A holder of Debentures who elects to exchange during the Offer Period
will receive aggregate exchange consideration comprised of $500 in cash and 16
shares of the Company's Common Stock, $.01 par value per share (the "Common
Stock") as principal plus $80 in cash and 8 shares of Common Stock as interest
(the "Exchange Consideration") for the surrender of each $1,000 of outstanding
principal amount of Debentures and waiver and forgiveness of excess interest
(over $80 in cash plus the fair value of 8 shares of Common Stock) accrued since
April 15, 1994 and all other claims. At July 15, 1996, the amount of interest,
and interest on overdue installments, that will have accrued is $180 per $1,000
of outstanding principal amount of Debentures. At the conclusion of the Offer
Period, a holder of Debentures who did not tender Debentures for exchange during
the Offer Period will no longer be entitled to the Exchange Consideration.
The Company will pay no commission or other consideration to solicit
exchanges of Debentures so that the Common Stock issuable in the Exchange will
be exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act") under Section 3(a)(9) of the Securities Act, and be exempt
from qualification or registration under applicable U.S. state securities laws.
The Common Shares to be issued upon exchange of the Debentures pursuant to this
offer by the holders thereof should be freely tradeable to the same extent that
tendered and exchanged Debentures were freely tradeable. Comprehensive Care
Corporation Common Stock to be issued in the Exchange Offer has been approved
for listing upon notice of issuance on the New York Stock Exchange.
Holders of Debentures who elect to tender Debentures for exchange
pursuant to the Exchange Offer will not receive future, regular interest
payments with respect to the Debentures, including any amount in respect of
periods since April 15, 1996, the last record date prior to the date hereof for
payment of regularly scheduled interest payments.
Assuming all of the outstanding Debentures are exchanged during the
Offer Period, the holders of Debentures will receive an aggregate of
approximately 228,912 shares of Common Stock and $5,532,040 in cash.
1
<PAGE> 2
THE ENCLOSED OFFERING CIRCULAR AND LETTER OF TRANSMITTAL AND RELATED
DOCUMENTS, TOGETHER WITH THE INFORMATION INCORPORATED BY REFERENCE THEREIN,
CONSTITUTE THE COMPANY'S OFFER AND DISCLOSURE MATERIALS AND SHOULD BE REVIEWED
BY YOU IN THEIR ENTIRETY.
We are the record owner of Debentures held by us for your account, and
the Offering Circular and related materials are being forwarded to you as the
beneficial owner of those Debentures. The exchange of those Debentures can be
made only by us as the holder of record and pursuant to your instructions. The
enclosed Letter of Transmittal is furnished to you for your information only and
cannot be used by you to exchange Debentures held by us for your account.
We request your instructions as to whether you wish us to exchange on
your behalf any or all the principal amount of Debentures held by us for your
account, pursuant to the terms and subject to the conditions of the Offering
Circular.
Your attention is called to the following:
1. Pursuant to the Exchange Offer, the Exchange Consideration
will be paid by the Company for each $1,000 principal amount
of Debentures exchanged during the Offer Period.
2. The Exchange Offer is being made for all of the outstanding
Debentures. The Exchange Offer is not conditioned upon any
minimum amount of Debentures being tendered.
3. The Offer Period commenced as of ____________ July ___, 1996,
and will remain in effect until and will expire at 2:00 p.m.,
St. Paul, Minnesota time, on _____________, __________, 1996,
unless extended by the Company.
4. Holders electing to exchange Debentures pursuant to the
Exchange Offer will not be obligated to pay brokerage fees or
commissions.
5. Holders of Debentures may convert less than the entire stated
principal amount represented by surrendered Debenture
certificates provided they appropriately indicate this fact on
the Instructions with Respect to the Exchange Offer by
Comprehensive Care Corporation attached hereto.
If you wish us to exchange any or all of your Debentures, please so
instruct us by completing, executing, and returning to us the form attached
hereto entitled Instructions with respect to the Exchange Offer by Comprehensive
Care Corporation. If you authorize an exchange of your Debentures, the total
principal amount of your Debentures will be tendered for exchange unless
otherwise indicated. If you do not instruct us to exchange your Debentures, they
will not be tendered for exchange. The Exchange Offer is not being made, nor
will deliveries of Debentures for exchange pursuant to the Exchange Offer be
accepted from or on behalf of, holders of Debentures residing in any
jurisdiction in which the making of the Exchange Offer or the acceptance thereof
would not be in compliance with the laws of such jurisdiction. YOUR INSTRUCTIONS
SHOULD BE FORWARDED TO US IN AMPLE TIME TO PERMIT US TO SUBMIT A LETTER OF
TRANSMITTAL ON YOUR BEHALF TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION OF THE
OFFER PERIOD.
2
<PAGE> 3
INSTRUCTIONS
WITH RESPECT TO THE
EXCHANGE OFFER
BY
COMPREHENSIVE CARE CORPORATION
The undersigned acknowledge(s) receipt of your letter, dated July ___,
1996, and the Offering Circular, in connection with the Exchange Offer by
Comprehensive Care Corporation, a Delaware corporation (the "Company") to pay
the Exchange Consideration for each $1,000 principal amount of the Company's 7
1/2% Convertible Subordinated Debentures (the "Debentures") that are tendered
for exchange from the date of the Offering Circular through 2:00 p.m., St. Paul,
Minnesota time, on __________, __________, 1996, unless extended (the "Offer
Period").
You are hereby instructed to deliver to the Exchange Agent for exchange
pursuant to the Exchange Offer the principal amount of Debentures indicated
below (or, if no number is indicated below, all Debentures) which are held by
you for the account of the undersigned, upon the terms and subject to the
conditions set forth in the Offering Circular.
Dated ____________________, 1996
_________________________________________
_________________________________________
_________________________________________
_________________________________________
Please print name(s) here
Principal Amount of 7 1/2% Convertible Subordinated Debentures
to be exchanged pursuant to the Exchange Offer*
________________________________________________________________________________
_______________________________________________
Address(es)
(_________)____________________________________
______________________________________________
Area Code and Day Telephone Number
______________________________________________
Tax Identification or Social Security No(s).
- -----------------
* If the principal amount of Debentures is not indicated, the total
number of Debentures held by us for your account will be delivered for
conversion pursuant to the Exchange Offer.
1
<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
- --------------- ---------- -------------- ------------- ------- ----------- ----------
<C> <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 99.21
MAR-21-96 THU 11:59 JHL HOLDINGS INC FAX NO. 13104518518
March 21, 1996
Mr. Marvin Fiegenbaum
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 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> 2
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 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.
<PAGE> 2
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.
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> 3
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.
<PAGE> 4
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.
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
<PAGE> 5
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.
