-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JuUySVlx+iD86KBHQ5PDUETCIUS+7ZMQp8AeK46tAcF9nAiDzf1bPB5+uQz8MSGZ zWuqeOoCAwGW+H8pIhcPTQ== 0000892569-96-002004.txt : 19961008 0000892569-96-002004.hdr.sgml : 19961008 ACCESSION NUMBER: 0000892569-96-002004 CONFORMED SUBMISSION TYPE: PRER14A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19961007 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPREHENSIVE CARE CORP CENTRAL INDEX KEY: 0000022872 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 952594724 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: PRER14A SEC ACT: 1934 Act SEC FILE NUMBER: 001-09927 FILM NUMBER: 96639724 BUSINESS ADDRESS: STREET 1: 1111 BAYSIDE DRIVE, 100 CITY: CORONA DEL MAR STATE: CA ZIP: 92625 BUSINESS PHONE: 7147199797 MAIL ADDRESS: STREET 1: 1111 BAYSIDE DRIVE 100 CITY: CORONA DEL MAR STATE: CA ZIP: 92625 FORMER COMPANY: FORMER CONFORMED NAME: NEURO PSYCHIATRIC & HEALTH SERVICES DATE OF NAME CHANGE: 19730501 FORMER COMPANY: FORMER CONFORMED NAME: JADE OIL CO DATE OF NAME CHANGE: 19700402 FORMER COMPANY: FORMER CONFORMED NAME: NEURO PSYCHIATRIC & HEALTH SERVICES INC DATE OF NAME CHANGE: 19700402 PRER14A 1 REVISED PRELIMINARY PROXY MATERIALS 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- SCHEDULE 14A INFORMATION ---------------------- Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 ---------------------- AMENDMENT NO. 4 TO PRELIMINARY SCHEDULE 14A ON SCHEDULE PRER14A/A-4 ---------------------- Filed by the Registrant /X/ Filed by a Party other than the Registrant / / Check the appropriate box: /X/Preliminary Proxy Statement / /Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) / /Definitive Proxy Statement / /Definitive Additional Materials / /Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 COMPREHENSIVE CARE CORPORATION (Name of Registrant as Specified in its Charter) COMPREHENSIVE CARE CORPORATION (Name of Person(s) Filing Proxy Statement) Payment of Filing Fee (Check the appropriate box): / /$125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item 22(a)(2) of Schedule 14A. / /$500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). /X/Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. 1. Title of each class of securities to which transaction applies: 7 1/2% Convertible Subordinated Debentures Due April 15, 2010 2. Aggregate number of securities to which transaction applies: $9,538,000 in principal amount of Debentures 3. Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): Estimated solely for the purpose of calculating the filing fee, pursuant to Rules 0-11(a)(4) and 0-11(b)(2), equal to one-fiftieth (1/50th) of one percent of the market value of the maximum amount of Debentures to be acquired by the Issuer (the "Transaction Value"). The average of the bid and asked prices of the Debentures as of a trading date within the five trading days prior to the date of this filing by the Issuer, was not known or reasonably available. The Issuer has an accumulated capital deficit, thereby calculating this filing fee based on one-third of the $9,538,000 outstanding principal amount of Debentures as provided in Rule 0-11(a)(4). 4. Proposed maximum aggregate value of transaction: $3,179,333 in principal amount of Debentures /X/Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1.Amount Previously Paid: $6,358.67 2.Form, Schedule or Registration Statement No.: SC13E4: FILE NO. 005-19482 3.Filing Party: COMPREHENSIVE CARE CORPORATION 4.Date Filed: SEPTEMBER 14, 1995 1 2 [COMPCARE LOGO] October 8, 1996 Dear Holders of Comprehensive Care Corporation's 7 1/2% Convertible Subordinated Debentures Due April 15, 2010: On behalf of the Board of Directors and Management of your Company, I respectfully request that each of you, as holders of the Company's 7 1/2% Convertible Subordinated Debentures due April 15, 2010 (the "Securities" or "Debentures"), currently due and payable in full on account of acceleration, consent in writing ("Consent") to the actions described in the accompanying Debenture Consent Solicitation Statement. The principal purpose of the Consents is to facilitate the exchange or reinstatement of the Company's outstanding Debentures, which have been in default since the Company failed to make interest payments commencing October 17, 1994, under the proposals RECOMMENDED BY MANAGEMENT to (1) rescind the existing acceleration of payments due under the Debentures; (2) waive any Events of Default and other defaults under the Indenture or the Debentures (other than nonpayment of any principal or interest due) that exist at the time of the Company's payment of default interest, and the interest payable on it (the "Default Interest Payment Date") if the same occurs within 30 calendar days after the termination of the Consent Solicitation Period; (3) instruct the Trustee not to pursue remedies otherwise available on account of defaults or existing Events of Default during the Consent Solicitation Period and 30 calendar days thereafter; and (4) consent to the waiver of a notice provision in the Indenture under which the Debentures were issued relating to the cancellation of sinking fund payment obligations. The enclosed Debenture Consent Solicitation Statement explains in more detail the reasons for, and the effects of, your Consent to the proposals recommended by the Board of Directors and Management. Please read the Statement carefully. Your Consent to the proposals is critical to your Company. A Consent Card is enclosed for the purpose of giving Consent. THE BOARD OF DIRECTORS OF THE COMPANY HAS APPROVED THE PROPOSED ACTIONS AND REQUESTS THAT THE DEBENTUREHOLDERS CONSENT TO EACH OF PROPOSALS (1), (2), (3) AND (4). YOUR CONSENT IS IMPORTANT. Consents of the holders of at least a majority in principal amount of the outstanding Debentures are necessary to approve and adopt each of Proposals (1) and (3). Consent of at least 66 2/3% in principal amount of the outstanding Debentures is necessary to approve and adopt each of Proposals (2) and (4). The Board of Directors is hopeful that a rescission of acceleration of the Securities will help position the Company for a more successful long-term future. Please SIGN, DATE and MAIL the enclosed Consent Card as soon as possible in the enclosed prepaid envelope. Your consent may be withdrawn as to each of the Proposals at any time prior to the close of business on October 30, 1996 or thereafter until the Company's receipt of Consents sufficient to approve the Proposal or any earlier termination of the Consent Solicitation Period. Your prompt cooperation will be greatly appreciated. Sincerely, Chriss W. Street Chairman of the Board, President and Chief Executive Officer 3 COMPREHENSIVE CARE CORPORATION NOTICE OF DEBENTURE CONSENT SOLICITATION TO THE DEBENTUREHOLDERS: The Board of Directors of Comprehensive Care Corporation (the "Company") hereby requests your consent in writing for the following purposes as described in the accompanying Debenture Consent Solicitation Statement: 1. Proposal No. 1, to consent to rescind the acceleration, and to notify First Trust of California, National Association, as successor to Bank of America National Trust and Savings Association (the "Trustee"), of a rescission of the acceleration, of all principal and interest due under the Company's 7 1/2% Convertible Subordinated Debentures Due April 15, 2010 (the "Debentures"), and all of the effects thereof. 2. Proposal No. 2, to consent to waive, and to notify the Trustee of a waiver of, any Events of Default and other defaults under the Indenture or the Debentures (other than nonpayment of any principal or interest due) that exist at the time, if any, when the Company's consummation of the Exchange and the rescission of the Acceleration results in termination of the Consent Solicitation Period. 3. Proposal No. 3, to consent to instruct the Trustee not to pursue any remedy available at law or in equity upon anything less than future directions given by a majority in outstanding principal amount of Debentures during the period ending at the close of business on November 29, 1996. 4. Proposal No. 4, to consent to the waiver of an Event of Default that arises under a notice provision in the Indenture dated April 25, 1985 (the "Indenture") between the Company and the Trustee relating to the Company's cancellation of a sinking fund payment obligation and to waive any claim to receive the sinking fund installment payment that purportedly was due April 15, 1996. MANAGEMENT AND THE BOARD OF DIRECTORS RECOMMEND YOUR CONSENT AND APPROVAL IN ORDER TO FACILITATE THE DEFAULT INTEREST PAYMENT DESCRIBED IN THE ATTACHED DEBENTURE CONSENT SOLICITATION STATEMENT. 4 Each registered Debentureholder is urged to SIGN, DATE and MAIL the enclosed Consent Card as promptly as possible. Only Debentureholders, as registered on the Registrar's List of Debentureholders, are entitled to Consent. The broker or other nominee holding Debentures in "street name" for a beneficial holder will seek instruction from the beneficial holder and will Consent on behalf of a beneficial holder, if appropriately instructed. By Order of the Board of Directors, Kerri Ruppert Senior Vice President, Secretary/ Treasurer and Chief Financial Officer October 8, 1996 Corona del Mar, California YOUR CONSENT IS IMPORTANT TO ENSURE EVERY CONSENT BEING COUNTED, ANY REGISTERED HOLDERS ARE REQUESTED TO COMPLETE, SIGN AND DATE THE ENCLOSED CONSENT CARD AS PROMPTLY AS POSSIBLE AND TO MAIL IT IN THE ENCLOSED SELF-ADDRESSED ENVELOPE TO FIRST TRUST OF CALIFORNIA, NATIONAL ASSOCIATION, 180 E. FIFTH STREET, SUITE 200, ST. PAUL, MINNESOTA 55101. ANY BENEFICIAL HOLDERS (OF DEBENTURES REGISTERED IN A BROKER'S OR OTHER NOMINEE'S NAME) SHOULD PROVIDE A COMPLETE, SIGNED AND DATED CONSENT CARD DIRECTLY TO THE BROKER OR OTHER NOMINEE WHO ACTS AS THE REGISTERED HOLDER, AND THE REGISTERED NOMINEE HOLDER SHOULD IN TURN COMPLETE, SIGN AND DATE A CONSENT CARD AND SEND IT TO THE TRUSTEE AT THE ADDRESS ABOVE. 2 5 TABLE OF CONTENTS
PAGE DEBENTURE CONSENT SOLICITATION STATEMENT................................................... 1 GENERAL ......................................................................... 1 REQUIRED VOTE OR CONSENT.......................................................... 1 RECORD DATE....................................................................... 2 CONSENTS AND TRANSFERS............................................................ 2 CONSENTS AND TENDERS.............................................................. 2 CONSENT SOLICITATION PERIOD....................................................... 2 REVOCABILITY OF CONSENTS.......................................................... 3 VOTING OR CONSENTING.............................................................. 3 INFORMATION AND SOLICITATION...................................................... 3 INTENTIONS OF THE COMPANY IF PROPOSALS NO. 2, NO. 3 AND NO. 4 NOT APPROVED................................................................. 4 BOARD OF DIRECTORS' DISCRETION AND RESERVATION OF RIGHTS.......................... 4 NO DISSENTERS' RIGHTS............................................................. 5 CONSENTS EXPECTED................................................................. 5 SPECIAL RISK FACTORS....................................................................... 5 IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS......................................................... 5 EFFECTS OF REINSTATING NON-DEFAULT STATUS......................................... 6 SUMMARY COMPARISON OF TERMS OF DEBENTURES WITH AND WITHOUT ACCELERATION............................................................. 8 POTENTIAL EFFECTS OF SENIOR DEBT.................................................. 9 POTENTIAL EFFECTS OF FAILURE TO RESCIND ACCELERATION.............................. 9 ABILITY OF THE COMPANY TO CONTINUE AS A GOING CONCERN; EXPLANATORY PARAGRAPH IN AUDITORS' REPORT............................................ 10 PRIORITIES OF SECURITIES AND OTHER RELATED CONSIDERATIONS RELATING TO ANY FUTURE BANKRUPTCY OF THE COMPANY.................................. 10 DEBT CLAIMS VS. EQUITY INTERESTS......................................... 10 AVOIDABLE PREFERENCES.................................................... 12 POTENTIAL TO BE SUBJECTED TO AUTOMATIC BANKRUPTCY STAY............................ 12 PROHIBITIONS ON PAYMENT TO DEBENTUREHOLDERS.............................. 14 FRAUDULENT CONVEYANCES................................................... 14 DETERMINATION OF TERMS OF EXCHANGE OFFER.......................................... 15 HISTORY OF LOSSES AND ANTICIPATED FUTURE LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY..................................................... 15 ADDITIONAL RISK FACTORS WITH RESPECT TO HOLDERS OF DEBENTURES NOT TENDERED IN THE EXCHANGE OFFER........................................... 16 SUBORDINATION............................................................ 16 REDEMPTION; MATURITY..................................................... 16 SPORADIC TRADING......................................................... 16 CONVERSION PRICE FAR ABOVE SHARE PRICES.................................. 16 NEED FOR ADDITIONAL FUNDS; UNCERTAINTY OF FUTURE FUNDING.......................... 16 DISPOSITION OF ASSETS............................................................. 17 INVOLUNTARY BANKRUPTCY PETITION; ACCELERATION OF INDEBTEDNESS..................... 18 TAX MATTERS....................................................................... 18 THE PROPOSALS.............................................................................. 20 PROPOSAL NO. 1.................................................................... 20 PROPOSAL NO. 2.................................................................... 22 PROPOSAL NO. 3.................................................................... 23 PROPOSAL NO. 4.................................................................... 24 INTERESTS OF CERTAIN PERSONS............................................................... 26 PRINCIPAL DEBENTUREHOLDERS................................................................. 27
i 6
PAGE PRINCIPAL STOCKHOLDERS......................................................................28 PRO FORMA CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS..........................30 POTENTIAL FEDERAL INCOME TAX CONSEQUENCES...................................................35 EFFECTS ON THE DEBENTUREHOLDERS....................................................35 EFFECTS ON THE COMPANY.............................................................35 LIMITATIONS AND QUALIFICATIONS OF THE DISCUSSION...................................35 THE PROPOSED EXCHANGE.......................................................................35 BACKGROUND.........................................................................37 DEFAULT ON DEBENTURES.....................................................37 AGREEMENT OF PARTICIPATING SECURITYHOLDERS................................38 DIFFERENCES BETWEEN THE EXCHANGE OFFER AND THE LETTER AGREEMENT'S CONTEMPLATED EXCHANGE................................39 PRICE OF DEBENTURES AND COMMON STOCK PRIOR TO ANNOUNCEMENT................40 EXCHANGE OFFER FUNDING REQUIREMENTS AND SOURCES....................................41 SUMMARY COMPARISON OF TERMS OF DEBENTURES AND EXCHANGE CONSIDERATION.............................................................42 NO FAIRNESS OPINION................................................................44 DESCRIPTION OF DEBENTURES...................................................................45 GENERAL ..........................................................................45 CONVERSION OF DEBENTURES...........................................................45 OPTIONAL REDEMPTION................................................................46 SINKING FUND.......................................................................47 SUBORDINATION OF DEBENTURES........................................................47 EVENTS OF DEFAULT AND REMEDIES.....................................................48 MERGER, CONSOLIDATION, OR SALE OF ASSETS...........................................49 AMENDMENT, SUPPLEMENT AND WAIVER...................................................49 TRANSFER AND EXCHANGE..............................................................49 CONCERNING THE TRUSTEE.............................................................49 INCORPORATION BY REFERENCE..................................................................50
ii 7 COMPREHENSIVE CARE CORPORATION DEBENTURE CONSENT SOLICITATION STATEMENT GENERAL The Board of Directors hereby requests the holders of the $9,538,000 in principal amount outstanding of the 7 1/2% Convertible Subordinated Debentures due April 15, 2010 (herein called either the "Securities" or the "Debentures"), currently due and payable in full on account of acceleration, issued by Comprehensive Care Corporation, a Delaware corporation (the "Company"), (1) to notify First Trust of California, National Association, successor to Bank of America National Trust and Savings Association (the "Trustee"), of rescission of the acceleration of the Securities; (2) to waive any Events of Default and other defaults under the Indenture or the Debentures (other than nonpayment of any principal or interest due) that exist at the time when the Company's payment of default interest, and the interest payable on it (the "Default Interest Payment Date"), if the same occurs within 30 calendar days after the termination of the Consent Solicitation Period; (3) to instruct the Trustee not to pursue remedies for any defaults or continuing Events of Default during the Consent Solicitation Period and for a period of 30 calendar days thereafter pending the acceleration being rescinded upon anything less than future directions given by a majority in outstanding principal amount of Debentures; and (4) to consent to the waiver of a notice provision in the Indenture dated April 25, 1985 between the Company and the Trustee pursuant to which the Debentures were issued (the "Indenture") relating to the cancellation of sinking fund payment obligations. REGISTERED HOLDERS ARE REQUESTED to please Consent on every Proposal by signing, dating and mailing the Consent Card, or a facsimile thereof, to the Trustee using the pre-addressed envelope provided for your convenience. The Trustee's address is First Trust of California, National Association, 180 E. Fifth Street, Suite 200, St. Paul, Minnesota 55101. BENEFICIAL HOLDERS WHOSE DEBENTURES ARE REGISTERED IN "STREET NAME" ARE REQUESTED to please sign, date and mail the Consent Card to the broker or other nominee holder of the Debentures, who should in turn sign, date and mail a Consent Card to the Trustee at the above address. These materials were first given or mailed to Securityholders on or about October 8, 1996. Requests for information or documents may be directed to the attention of Kerri Ruppert, Senior Vice President, Secretary/Treasurer and Chief Financial Officer of the Company, at the principal executive office of the Company located at 1111 Bayside Drive, Suite 100, Corona del Mar, California 92625. SEE "SPECIAL RISK FACTORS" COMMENCING ON PAGE 5. REQUIRED VOTE OR CONSENT Under the Indenture, approval of Proposals No. 1 and 3 each requires Consent of at least a majority of the outstanding principal amount of Debentures, and approval of Proposals No. 2 and 4 each requires Consent of the holders of at least 66 2/3% of the outstanding principal amount of the Debentures. Approval of each of Proposals No. 2, No. 3 and No. 4 is contingent upon approval of Proposal No. 1. As set forth below under "Consents Expected," the Company presently contemplates that the Consent requested herein will be granted by the 1 8 Debentureholders as to Proposals No. 1, No. 2, No. 3 and No. 4. As set forth below under "The Proposed Exchange," the Company also requires that any Debentureholder tendering Debentures in the Exchange also Consent on each Proposal. The Company does not presently contemplate making the default interest payment that is due unless the Consent requested herein is granted by the Debentureholders as to Proposals No. 1, No. 2, No. 3 and No. 4, but the Company may elect under some circumstances to complete the Exchange without Consent on Proposals No. 2, No. 3 and No. 4. See "Intentions of the Company If Proposals No. 2, No. 3 and No. 4 Not Approved" below. RECORD DATE Debentureholders of record (excluding the Company or an Affiliate, as defined in the Indenture) at the close of business on the date a Consent is executed are entitled to give Consents to the actions proposed, and to bind all successors and assigns of all or a portion of such Debentures unless and until Consent is properly revoked. See "Revocability of Consents" below. The Trustee, which is also the Debenture Registrar, would be available to respond to written inquiries as to whether Consent has been given that could bind the purchaser of a Debenture. For the Trustee's address, see "Information and Solicitation." Also see "Consents and Transfers" below. At October 1, 1996, an aggregate of $9,538,000 principal amount of the Debentures were outstanding, and none of such Debentures were held by the Company. CONSENTS AND TRANSFERS Any Consent signed and dated by the registered Debentureholder will bind all beneficial owners and all transferees of either registered or beneficial owners. A transferee, being bound until a Consent is properly revoked by the registered Debentureholder, should consult the transferor concerning whether there were pre-transfer Consents. If Debentures are traded through a brokerage, the broker or its nominee can make such inquiries. In addition, the Trustee would be available to respond to written inquiries. For the Trustee's address, see "Information and Solicitation." CONSENTS AND TENDERS All Debentureholders tendering in the Exchange must Consent on Proposals No. 1, No. 2, No. 3 and No. 4 and revoking the Consent after having tendered Debentures will be considered a concurrent withdrawal (for the purposes of the Exchange Offer) of the tendered Debentures. Debentures tendered by a Debentureholder failing to Consent or revoking such Consent will not be accepted for the Exchange. Although each Debentureholder that Consents will be offered an exchange of cash and Common Stock for its Debentures, a Debentureholder is not required to tender Debentures in order to Consent, and a Consent does not indicate an intention to tender. See "The Proposed Exchange." CONSENT SOLICITATION PERIOD Consents will be effective as to each respective proposal if Consents from registered holders of a sufficient principal amount of the Debentures on such proposal have been received, and not revoked, at any time after the close of business on October 30, 1996, or any date thereafter which is within the 60-day period immediately following the first-dated Consent received. The Consent Solicitation Period, if not earlier terminated, shall end on or prior to such 60th day, if it is a business day, or on the last business day prior 2 9 to such day. For example, if the earliest-dated Consent is dated October 8, 1996, the Consent Solicitation Period would end on or before December 6, 1996. REVOCABILITY OF CONSENTS The Company will not use Consents received from the Debentureholders unless the Consent Solicitation Period has remained open for a minimum period of 20 business days ending November 7, 1996(approximately 30 calendar days) (the "Consent Solicitation Period") after the date of commencing this solicitation. Thereafter, the Consent Solicitation Period as to all Proposals shall end at 2:00 o'clock p.m., St. Paul, Minnesota time, on the earlier of (a) the 60th calendar day after the first-dated Consent or (b) the first date on which the Consents are sufficient independently to effect the respective Proposal. The Company in its discretion may not require Consent on Proposal No. 3. See "Intentions of the Company if Proposal No. 3 Not Approved" below. A Consent becomes effective as to each Proposal independently in accordance with its terms, and the Consent on such Proposal thereafter binds all Debentureholders of the Company. Any Consent given is revocable, at any time before it becomes effective as to a Proposal, by the registered Debentureholder giving it (or by any registered successor Debentureholder) as to all or any portion of the same Debenture. If prior to the date the Consent becomes effective as to a Proposal, the Trustee receives a written notice of revocation of a Consent, or a duly executed Consent bearing a later date, from a registered Debentureholder, any earlier-dated Consent will be revoked as to such Proposal. VOTING OR CONSENTING "Approving" on a Proposal is counted as a Consent on the Proposal. "Disapproving" or "abstaining" on a Proposal, and brokers indicating a "non- vote" in the customary manner, all have the same effect, and none is counted as a Consent on such Proposal. If a preference is not indicated as to Proposal No. 1, No. 2, No. 3 or No. 4 on a signed and dated Consent delivered by a Debentureholder, the Consent will be counted as an APPROVE on each such Proposal. Only registered holders may give a Consent. The Consent Card provided may be executed by the registered holder or pursuant to authority given by the record holder. Beneficial holders must instruct the broker or other nominee holder to Consent. INFORMATION AND SOLICITATION The Company is required to undertake to reimburse, and does reimburse, brokerage firms and other persons representing beneficial owners of securities for their expenses in forwarding solicitation materials to such beneficial owners. The Trustee will mail, or cause to be mailed, at the Company's cost and expense, copies of this Debenture Consent Solicitation Statement (and any other documents contemplated hereby). The Trustee, acting as Registrar, will also collect and tabulate the Consents. The Trustee also will provide required and optional notices to registered Debentureholders in addition to its continuing to provide customary services as Trustee. The Trustee will not advise Debentureholders concerning the request for Consent. Appropriate written questions or comments may be addressed to First Trust of California National Association, 180 E. Fifth Street, Suite 200, St. Paul, Minnesota 55101. 3 10 The above-described fees, costs and expenses, in addition to costs of administrative matters related to distribution of this statement and related documents, will be borne by the Company. Consents may be solicited personally or by telephone, telegram or fax by certain of the Company's directors, officers and regular employees, without additional compensation. INTENTIONS OF THE COMPANY IF PROPOSALS NO. 2, NO. 3 AND NO. 4 NOT APPROVED The Company is not aware of any requirement under the Debentures or the Indenture, or under any applicable law, or any existing circumstances that would require that Debentureholders approve Proposals No. 2 and No. 3 in order for rescission of the acceleration of the Debentures to take effect, unless Proposal No. 2 is not approved and an Event of Default is declared prior to the consummation of the Exchange and the rescission of the Acceleration or unless Proposal No. 3 is not approved and the Trustee has pursued a remedy at law or in equity that interferes with the Company's ability to proceed to cure, or to obtain the waiver of, all continuing Events of Default as required for rescission of the Acceleration. The Company could pursue certain alternatives to Consent on Proposal No. 4 if not approved, including but not limited to seeking an injunction or other order that nullifies the purported Event of Default that arose from the purportedly ineffective notice given by the Company to the Trustee (given by the Company to the Trustee) in order to eliminate or reduce the sinking fund obligations of the Company). The Company does not concede that such Event of Default exists. If the Company is able to proceed without approval of Proposal No. 2 and No. 3 in the circumstances that then exist, the Company intends (at the earliest practicable date) to consummate the payments and other things necessary in order to consummate the Exchange and to rescind Acceleration provided that Proposals No. 1 and No. 4 shall have been approved. BOARD OF DIRECTORS' DISCRETION AND RESERVATION OF RIGHTS The Board of Directors reserves the right, notwithstanding Debentureholders' approval and without further action by the Debentureholders, to elect not to proceed with any of the proposed actions in connection with one or more of the Proposals, if at any time prior to the Company's completion thereof the Board of Directors, in its sole discretion, determines that the proposed action is no longer in the best interests of the Company. Under each of the Proposals, the Board reserves the right to delay or defer any occurrence, action, event or record date, upon notice, for purposes of allowing the Consent Solicitation Period to remain open for up to 60 days from the earliest-dated Consent. The Exchange Offer cannot be completed without rescission of acceleration pursuant to the Consent. The Exchange Offer will remain open at least five (5) business days after sufficient Consents have been given. However, the Consent Solicitation Period is not terminated when sufficient Consents have been given or at lease five (5) business days later, when the Exchange Offer expires. The Consent Solicitation Period will be open for up to 60 calendar days from and after the date of the earliest-dated Consent. The Consent Solicitation Period will not terminate before the close of business on such 60th calendar day unless and until the Exchange and the rescission of the Debenture Acceleration shall have each been consummated. These, in turn, cannot occur before all conditions to the Exchange and the rescission of the Acceleration, including funding, are satisfied. If the Consent Solicitation Period remains open, Consents may be given or revoked by the Debentureholders. 4 11 All correspondence intended to Consent or revoke Consent should be addressed to the Trustee in writing, signed by the record holder or a duly authorized representative and dated. For the address of the Trustee, see "Information and Solicitation." In order to revoke Consent, see "Revocability of Consents" above. NO DISSENTERS' RIGHTS Under Delaware law, Debentureholders are not entitled to dissenters' rights of appraisal with respect to the Proposals or the Exchange Offer. CONSENTS EXPECTED The rescission of the acceleration of the Debentures, and its effects, requires Consent by a majority in principal amount of the Debentures. The Company anticipates Consent will be given by the Participating Securityholders, which are estimated to comprise approximately 25% of the outstanding principal amount of Debentures. The Company has also received informal, unsolicited indications that enough additional holders of Debentures intend to Consent in order to effect the rescission of acceleration upon the Company's payment of the interest due. SPECIAL RISK FACTORS In addition to the other information set forth herein, the following factors should be considered carefully by the Debentureholders in deciding whether or not to grant the Consents requested by the Company: IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS This Debenture Consent Solicitation Statement contains certain forward- looking statements that are based on current expectations and involve a number of risks and uncertainties. Factors that may materially affect revenues, expenses or operating results include, without limitation, the Company's success in (i) implementing its Debenture restructuring plans, (ii) resolving issues and timely filing documents with the Securities and Exchange Commission ("Commission") that may be requisite to the consummation of the Debenture exchange offer and solicitation of consent to rescind acceleration described herein, (iii) disposing of certain remaining facilities on acceptable terms, (iv) expanding the behavioral medicine managed care and contract management portions of the Company's business, (v) securing and retaining certain refunds from the Internal Revenue Service ("IRS") and certain judgments from adverse parties in legal proceedings, (vi) maintaining the listing of the Company's Common Stock on the New York Stock Exchange ("NYSE"), and (vii) securing Debentureholder approval and consent to the Debenture transactions described herein. The forward-looking statements included herein are based on current assumptions that the Company will be able to proceed with the proposed Debenture exchange offer or otherwise reach a settlement with the Debenture holders, that competitive conditions within the healthcare industry will not change materially or adversely, that the Company will retain existing key management personnel, that the Company's forecasts will accurately anticipate market demand for its services, and that there will be no material adverse change in the Company's operations or business. Assumptions relating to the foregoing involve judgments that are difficult to predict accurately and are subject to many factors that can materially affect results. Budgeting and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause the Company to alter its budgets, which may in turn affect the Company's results. 5 12 In light of the factors that can materially affect the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. EFFECTS OF REINSTATING NON-DEFAULT STATUS The amount of interest due under the Debentures currently is, on account of the Acceleration, equal to the full amount of the accrued interest, which would be $208.98 approximately per $1,000 of principal amount as of November 15, 1996. The amount of default interest due and payable, along with the interest accrued on such default interest, in order to rescind the acceleration (which is the amount of interest to be paid on Debentures that are not Exchanged) will be only approximately $202.73 on each $1,000 of face value as of November 15, 1996. The difference between the $208.98 and the $202.73 is approximately $6.25 that will be due on April 15, 1997 (along with the balance of the semi-annual interest payment of $37.50 per $1,000 of the outstanding principal amount for the period from October 15, 1996 to April 15, 1997. At present, unless there is a rescission of acceleration of the Debentures (the "Acceleration"), the Company is unable to cure the continuing Events of Default under the Debentures without paying all principal and interest which is due otherwise than on account of acceleration, which the Company estimates will aggregate approximately $11.5 million as of November 15, 1996 ($9.5 million principal and $2.0 million default interest and interest thereon), plus the Trustee's fees and costs, estimated at less than $0.1 million and other costs necessary to complete the Exchange estimated at $75,000. The Company expects to be able to cure the Events of Default, which must be cured in order to rescind the Acceleration. After rescission of the Acceleration, and at least while no subsequent Events of Default occur, the Trustee will have only those certain rights specified in the Indenture, and shall not have the right to seek immediate payments of Debenture principal. The Indenture does not limit the Company in the amount of Senior Debt which may be issued or in regard to dividends on stock or securities. The Trustee's and the Debentureholders' influence over the Company, however, at present, which is a time of continuing Events of Default, is at its greatest. The Trustee is empowered, for instance, to sue for a judgment for the total amount owing under the Debentures and the Indenture; and the right to seek any available remedy against the Company gives rise to various considerations that tend to influence the Company and its other financial and business dealings. The Company has many practical limitations on its ability to incur additional Senior Debt, and to make distributions, including its limited assets and excessive liabilities. The Indenture does not impose any limit expressly on Senior Debt or distributions. The practical implications of continuing Events of Default include that other creditors are deterred from extending credit. Further, with a continuing Event of Default, the Indenture prohibits the Company from distributing anything of value to holders of Common Stock, other than shares of capital stock. The Indenture does not restrict the Company after rescission of the Acceleration. The renewed non-default status would eliminate the present ability of Debentureholders to instruct the Trustee to claim the full amount due and to seek any remedy to recover payment. Management believes that the Company's financial strategy depends in material part upon rescission of the Acceleration. The effect of rescinding Acceleration is that the amount immediately due and payable of approximately $11.5 million will no longer be immediately due, the $9.5 million of principal 6 13 amount will be due April 15, 2010 and payment of semi-annual interest installments will resume April 15, 1997, provided that the Debentureholders Consent and the Company shall have paid all of the interest that would have come due in any case even if the Acceleration had not occurred (i.e., $37.50 per $1,000 of principal on October 15, 1994, April 15, 1995, October 15, 1995, April 15, 1996, and October 15, 1996, plus interest on the overdue installments of default interest, aggregating $202.73 of interest payable per $1,000 of principal amount and $1,933,639 of interest payable on account of the entire $9,538,000 of outstanding principal amount as of November 15, 1996). After the rescission of Acceleration the Debentureholders will be entitled to payment on April 15, 2010 of 100% of the $1,000 of principal amount and to payment in full of semi-annual interest installments each April 15 and October 15, commencing April 15, 1997. Holders of debt and equity securities are encouraged to read the following Sections of this Debenture Consent Solicitation Statement and to seek the advice of their own counsel or advisors with respect to such matters. 7 14 SUMMARY COMPARISON OF TERMS OF DEBENTURES WITH AND WITHOUT ACCELERATION
ACCELERATED ACCELERATION RESCINDED PRINCIPAL .... While the Debentures are If the acceleration is rescinded, the accelerated, $1,000 of principal and principal amount will be due in full April interest accrued on the principal to the 15, 2010, subject to earlier redemption in date of payment is payable, along with the Company's discretion. interest on unpaid interest to the extent lawful is due and payable in cash. See "Interest" below. INTEREST...... Interest accrues at the rate of 7 1/2% If the acceleration is to be rescinded, the per annum calculated on a 30-day month and interest required to be paid excludes 360 day year basis. Interest has not the portion of accrued interest due only been paid since the payment that was on account of the acceleration, made on April 15, 1994 on the comprised of interest on the principal Debentures. Four semi-annual interest amount from and after October 15, 1996. installments are in arrears (October That amount of approximately $6.25 per 1994, April 1995, October 1995 and April $1,000 of principal amount, estimated as 1996), and a fifth interest installment of November 15, 1996, will be included will have been missed as of October 15, in the April 15, 1997 semi-annual 1996. Debentures earn interest on interest installment of $37.50 per default interest at 7 1/2% per annum, to $1,000 of principal amount, calculated the extent permitted by law. at the rate of 7 1/2% per year for the Approximately $208.98 of interest in the full six-month period. aggregate will have accrued on each $1,000 face value to November 15, 1996. MATURITY..... While the Debentures are accelerated, If the acceleration is rescinded, the all principal and interest is due and principal amount will mature on April payable immediately. The Company elected 15, 2010, subject to optional redemption to subtract from the Company's sinking at 100.00% of face amount, and also fund obligations the $36,460,000 subject to acceleration in the event of principal amount of Debentures converted notice by the Trustee or at least 25% in by Debentureholders in March 1991 and principal amount of Debentures following previously cancelled, effectively the existence and continuation of an removing the sinking fund redemption Event of Default. obligation. See "The Proposals-- Proposal No. 4." CONVERSION... Each $1,000 in principal amount is Same. convertible into 4 whole Common shares (and the Debentureholder will not be entitled to convert a Debenture in a principal amount less than $1,000) at the current conversion price of $248.57 per share. The conversion price is subject to adjustment to prevent dilution in certain events. The conversion price adjustments are made generally whenever shares are sold by the Company at a price below the average closing price on the NYSE during a specified period. See "Additional Risk Factors--Conversion Price Far Above Share Prices" below. See "Notice of Conversion Price Adjustment" attached as Exhibit 99.18.
8 15 RANKING...... Unsecured general obligations of the Company subordinate to all existing and future Senior Debt of the Company (as defined). Secured Senior Debt totalled approximately $2.1 million at August 31, 1996. Payments received by Debentureholders may be subject to claims of Senior Debt holders or other creditors, and, if competing creditors prevail in asserting their claims, the payment may be forfeitable. See "Priorities of Securities and Other Considerations Relating to Any Future Bankruptcy of the Company."If the acceleration is rescinded, the ranking of the Debentures will not be directly affected; however, the non-default status of the Debentures may increase the Company's debt-carrying ability and, hence, the Company may incur greater amounts of Senior Debt or other obligations. REDEMPTION... Not applicable. Redeemable at any time in whole or in part at the option of the Company at the principal amount, together with accrued interest. No sinking fund redemption payments will be due. See "The Proposals--Proposal No. 4."
POTENTIAL EFFECTS OF SENIOR DEBT Payment of Exchange Consideration in the proposed Exchange Offer may be subject to restrictions contained in the Indenture. The Company is restricted from paying, directly or through paying agents, any amount in cash or property (other than capital stock of the Company) if any Senior Debt that has matured on or before the date on which the Company intends to make payment is not previously paid to the extent of the full amount of principal or interest due. As of August 31, 1996, the Company believes that it has approximately $2.1 million of Senior Debt outstanding and an additional estimated $8.5 million in the aggregate of other liabilities (including debt and senior equity of the subsidiaries of the Company) with priority over the Debentures and approximately $13.1 million of obligations represented by the Debentures themselves or that are on a parity with the Debentures. The amount, including principal and interest, of the Company's Senior Debt that will become due on or prior to November 30, 1996 is estimated to be approximately $500,000. If any Senior Debt is in default and if the holder gives the Company proper notice or institutes any proceeding related to such default, and such Senior Debt provides for a right of acceleration on default, the holder of Senior Debt in default must consent in advance to the payment to Debentureholders of any cash or other property (other than capital stock of the Company) before such payment may be made to Debentureholders. As of the date of the Offering Circular describing the proposed Exchange Offer, no holder of Senior Debt had given such notice or instituted such proceedings to the Company's knowledge. No assurance can be made that a default under the Company's Senior Debt has not or will not occur. The Company anticipates being able to make full and timely payment to each holder of Senior Debt as such Senior Debt matures as to principal or interest in the immediate future. POTENTIAL EFFECTS OF FAILURE TO RESCIND ACCELERATION In the event of a failure to accomplish the proposed rescission of acceleration of the Debentures, the Company would continue to be immediately 9 16 liable for the entire $9,538,000 principal amount plus accrued interest and default interest from April 15, 1994, estimated at approximately $2.0 million to November 15, 1996, plus certain other costs. In such event, the Company believes that it probably would not be able to pay the $9,538,000 of principal amount, plus accrued interest and costs, that would remain immediately due under the outstanding Debentures. Generally, unpaid creditors could file to commence a Chapter 7 liquidation. The Company believes that any protracted bankruptcy case would have material adverse effects on the Company. See "Brief Explanation of Chapter 11" below. ABILITY OF THE COMPANY TO CONTINUE AS A GOING CONCERN; EXPLANATORY PARAGRAPH IN AUDITORS' REPORT The Company's independent auditors have included an explanatory paragraph in their report stating that the Company's history of losses, consolidated financial position and uncertainties resulting from the Company's existing default in the terms of its Debentures raise substantial doubt about its ability to continue as a going concern. PRIORITIES OF SECURITIES AND OTHER RELATED CONSIDERATIONS RELATING TO ANY FUTURE BANKRUPTCY OF THE COMPANY Implementation of the rescission of acceleration will have significant consequences for the holders of the Company's debt and equity securities in the event of any future bankruptcy of the Company. Certain of these risks are summarized below. DEBT CLAIMS VS. EQUITY INTERESTS The relative rankings of the Company's debt claims and equity interests as of May 31, 1996, both before and after giving effect to the rescission of acceleration for all of the outstanding Debentures (without reflecting any other transactions) are summarized in the following table. The relative priority of claims of holders of Debentures may worsen as a result of the issuance of new debt or convertible securities, whether secured or unsecured, which may, in each case, rank senior to the Debentures or on a parity with them. In the event the Company incurs additional indebtedness that is senior to the Debentures or issues any preferred equity evidenced by a note, bond or similar instrument, or in the event that the Company permits or authorizes its subsidiaries to incur any indebtedness, liability, cause of action or claim, of any kind, to issue senior securities, or to become or agree to be liable for other obligation whatsoever, the position of the Debentures relative to the new indebtedness or equity will worsen. In the event the Company, independently of its subsidiaries, incurs obligations on a parity with the Debentures, Debentures will share on a prorated basis, in available proceeds, thus reducing the Debentureholders' share. Rescission of acceleration may again make it possible for the Company to pay dividends on shares of capital stock so long as no Event of Default exists and is continuing. 10 17
Priority Pre-Restructuring Post-Restructuring -------- ----------------- ------------------ Type and Amount Type and Amount Outstanding Outstanding Secured Debt (a) Parent's Secured Creditors................... $ 2,042,000 $2,042,000 Subsidiaries' Secured Creditors ............. $ 368,000 $ 368,000 Subsidiaries' Unsecured Liabilities (b) ....... $ 7,006,000 $7,006,000 Subsidiaries' Senior Equity (c)................ $ 1,040,000 $1,040,000 Parent's Unsecured Debt (b) General Creditors............................ $ 1,497,000 $1,497,000 Subordinated Debentures...................... $11,186,000 $9,627,000 Equity in Parent (c) Shares of Common Stock Outstanding .......... 2,864,620 Shares 2,864,620 Shares
(a) All "secured debt" ranks ahead of all "equity" and, to the extent of the value of the security interest securing any such "secured debt," all "unsecured debt," except to the extent subordination agreements among creditors specify otherwise. To the extent any amount of the "secured debt" is undersecured or becomes unsecured, any such amount will have the relative priority of other "unsecured debt." See "The Proposed Exchange--Exchange Offering Funding and Sources." (b) All "unsecured debt" ranks ahead of all "equity." Debentures rank pari passu in right of payment with all "unsecured debt," which would include trade payables and other general creditors of the Company (except for debts which are, by their terms, subordinated to indebtedness owed under the Debentures). The term pari passu means that such securities rank at the same level of priority for distributions in liquidation and/or bankruptcy, absent other bankruptcy considerations. (c) Preferred Stock has priority over Common Stock in right of payment of dividends and in any distribution upon the liquidation, dissolution or winding up of the Company. Preferred Stock may be issued with rights determined by the Board of Directors from time to time. See "The Proposed Exchange--Exchange Offer Funding and Sources." 11 18 AVOIDABLE PREFERENCES If a case were to be commenced by or against the Company under the Bankruptcy Code following the consummation of the Exchange Offer, a bankruptcy trustee or the Company, as debtor in possession, could avoid as a preference any transfer of property made by the Company to or for the benefit of a creditor which was made on account of an antecedent debt if such transfer (i) was made within 90 days prior to the date of the commencement of the bankruptcy case or, if the creditor is found to have been an "insider" (as defined in the Bankruptcy Code), within one year prior to the date of commencement of the bankruptcy case; (ii) was made when the Company was insolvent; and (iii) permitted the creditor to receive more than it would have received in a liquidation under Chapter 7 of the Bankruptcy Code had the transfer not been made. Under the Bankruptcy Code, a debtor is presumed to be insolvent during the 90 days preceding the date of commencement of a bankruptcy case. To overcome this presumption, it would need to be shown that at the time the transfers were made, the sum of the Company's debts was less than the fair market value of all of its assets. Under the Bankruptcy Code, all or a portion of the property transferred, including any cash payments, to tendering holders of Debentures, as well as any subsequent payment to non-tendering holders of Debentures, could be found to constitute preferences if a bankruptcy case were commenced within the applicable time period following such payments and if the other elements discussed above are present. If, following the commencement of a bankruptcy case within the applicable time period, such transfers were found to be preferential transfers, transferees could be ordered to return the full value of such transfers. In such event, transferees would have a general unsecured claim in the Company's bankruptcy case equal to the value of the property returned. POTENTIAL TO BE SUBJECTED TO AUTOMATIC BANKRUPTCY STAY In the event that the Company does not retire the Debentures or rescind the acceleration, a majority of Debentureholders by principal amount can request the Trustee to seek any remedies for non-payment, including potentially the filing of a bankruptcy petition. The filing of a petition would not affect the relative priority of creditors. Senior creditors may also file such a petition, or institute other actions against the Company, in order to enforce the subordination provisions of the Indenture that prevent the Debentureholders from collecting on their debts in advance of payment to any senior creditor. Involuntary bankruptcy petitions do not result in an immediate Event of Default and acceleration under the Debentures. During the period beforehand, the Company would, absent a contrary bankruptcy court order, continue to manage its own assets, and may incur additional debtor obligations. A voluntary petition, or the order for relief under an involuntary petition as described above, does result in an Event of Default and an acceleration under the terms of the Indenture. A Chapter 11 petition is treated like a voluntary petition under the Indenture. The filing of a bankruptcy petition also triggers the automatic stay provisions of the Bankruptcy Code. Section 362 of the Bankruptcy Code provides, among other things, for an automatic stay of all attempts to collect pre-petition claims from the debtor or otherwise interfere with its property or business. Except as otherwise ordered by the bankruptcy court, the automatic stay remains in full force and effect until confirmation of a plan of reorganization. 12 19 There is a substantial risk that a bankruptcy case will be protracted and costly and disruptive to the Company's business. There can be no assurance that a pre-packaged agreement favorable to Debentureholders will be proposed or reached or that a plan favorable to Debentureholders will be proposed and confirmed in the bankruptcy court. The Company believes that any protracted bankruptcy case would have a material adverse effect on the Company including: (a) disruption of business activities by diverting the attention of the Company's senior management; (b) potential for substantial diminution in the value of the Company's assets; (c) potential adverse impact upon the ability of the Company to obtain the financing necessary for its future operations; (d) substantial increase in the cost of liquidating or restructuring the Company, including the increase in the expenses of professionals normally associated with a bankruptcy case commenced without prior agreement with the Company's major creditors; (e) uncertainty as to the ability of the Company to effectuate any such liquidation or restructuring and, if it is effectuated, the timing thereof; (f) interference and delay regarding payments to creditors; (g) potential for forced liquidation of some or all of the Company's assets, erosion in value of assets in the context of a liquidation and the "forced sale" atmosphere that would prevail, the adverse effects on the salability of a business that could result from the probable departure of key employees, and the costs attributable to the time value of money resulting from what is likely to be a protracted proceeding, the resulting loss to creditors and others; and (h) increased uncertainty among the Company's employees, business partners and associates. In addition, the Company believes that, because of the importance of continuing stable relations with the health care industry, the Company is particularly susceptible to any adverse reactions such constituencies may have to the filing of a bankruptcy petition, particularly if the bankruptcy case is long in duration. As a result, and for other reasons, any commencement of a bankruptcy case could adversely affect the Company's business operations. To determine what holders in each impaired class of creditors would receive if the Company were liquidated or the least they can receive in a Chapter 11 reorganization, one must determine the dollar amount that would be generated from the liquidation of the Company's assets and properties in the context of a Chapter 7 liquidation case. Secured claims and the costs and expenses of the liquidation case would be paid in full from the liquidation proceeds before the balance of those proceeds would be made available to pay pre-petition unsecured claims and interests. The rule of absolute priority of distribution would apply. Under that rule, no junior creditor would receive any distribution until the allowed claims of all senior creditors are paid in full, and no holder of an Interest would receive any distribution until the allowed claims of all creditors are paid in full. 13 20 The Company has not performed any analysis of its reorganization or liquidation values and has not obtained an independent valuation of the Company's assets or liabilities and there can be no assurance that the Company would receive in liquidation the value for its assets set forth in the Company's financial statements. The Company's financial statements do not include any adjustments to reflect possible future effects on the recoverability and classification of assets and liabilities that may result from the outcome of this uncertainty as to its ability to continue as a going concern. PROHIBITIONS ON PAYMENT TO DEBENTUREHOLDERS The payment of cash or property (other than capital stock of the Company) would be prohibited pursuant to the Indenture, and the Company does not intend to make such payment, if there exists at such time any law, rule or order which would be violated by such payment or a law that would under the circumstances existing at the time be violated by such payment. The Company cannot determine at this time whether the payment to Debentureholders pursuant to the proposed Exchange Offer described below will be permitted by law. Certain of the laws affecting the Company's ability to make such payments are described elsewhere herein. Moreover, under the Bankruptcy Code, all or a portion of the property transferred, including any cash payments, to tendering holders of Debentures, as well as any subsequent payment to non-tendering holders of Debentures, could be found to constitute preferences if a bankruptcy case were commenced within the applicable time period following such payments and if the other elements discussed above are present. If, following the commencement of a bankruptcy case within the applicable time period, such transfers were found to be preferential transfers, transferees could be ordered to return the full value of such transfers. In such event, transferees would have a general unsecured claim in the Company's bankruptcy case equal to the value of the property returned. FRAUDULENT CONVEYANCES If a court in a lawsuit by or on behalf of an unpaid creditor or a representative of creditors, such as a bankruptcy trustee, or the Company, as debtor in possession, were to find that, at the time of consummation of the Exchange Offer (a) the Company received less than reasonably equivalent value in exchange for the consideration given by the Company for property surrendered by the tendering holders of Debentures, and (b) the Company (i) was insolvent or was rendered insolvent as a result of such transfers, (ii) had unreasonably small remaining assets or capital for its business, or (iii) intended to incur, or believed or reasonably should have believed it would incur, debts beyond its ability to pay such debts as they become due, such court could determine that all or a portion of such transfers were avoidable as a "constructive" fraudulent transfer and require the transferees to return to the Company or its bankruptcy trustee the consideration given. The Company believes that because of the reduction in the Company's outstanding indebtedness which will result from each of the other exchanges or transfers 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. 14 21 DETERMINATION OF TERMS OF EXCHANGE OFFER The Company is seeking the Consent as part of a voluntary arrangement with Debentureholders. While the Trustee is empowered to pursue any remedy at law or in equity to obtain payment of the Debentures, the Trustee has forborne from seeking remedies. The Company believes that a voluntary resolution will best assure that Debentureholders receive value. The Trustee's acquiescence does not necessarily indicate any position by the Trustee with regard to the subject of whether to sign, date, and return a Consent Card. Nothing herein should be interpreted as a basis to infer that the Trustee or any Debentureholder is in any way whatsoever responsible for directing or examining the terms of the Consent and the Exchange Offer or in any way related to the past, present or future conduct of the Company's financial or business affairs. The Company has not performed any analysis of its liquidation or reorganization value and has not obtained an independent valuation of the Company's assets or liabilities and there can be no assurance whether the Debentureholders would receive more or less in a liquidation, a reorganization, or a voluntary arrangement. Holders of Debentures are cautioned to consult with their own advisors. In particular, there can be no assurance regarding the assumptions underlying the Company's determination that failure to obtain Consent or to accomplish the Debenture Exchange, or, in the alternative, a failure of the Company and the Debentureholders to otherwise reach a settlement, may cause the Debentureholders to pursue an involuntary bankruptcy of the Company and/or the Company to take alternative actions that may include filing for voluntary protection from creditors. The Company's consolidated financial statements do not include any adjustments to reflect possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the outcome of the uncertainty of the Company's ability to continue as a going concern. The Company believes that the Debentureholders will receive less if they seek a liquidation of the Company than if they pursue the voluntary arrangements described in this Debenture Consent Solicitation Statement. HISTORY OF LOSSES AND ANTICIPATED FUTURE LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY As of May 31, 1996, the Company had a stockholders' deficiency of $6.8 million, a working capital deficiency of approximately $20.2 million, and a negative current ratio (a measure of liquidity comparing current assets to current liabilities). The net loss for the 12 months ended May 31, 1996 was $4.2 million, and the loss for the same 12-month period in 1995 was $10.5 million. In the fourth quarter of fiscal 1996, the Company's losses from operations were $2.5 million; and the Company's results in the first quarter of fiscal 1997 are expected by Management to be similar. The Company's cash position declined over the fourth quarter of fiscal 1996 from $4.4 million to $2.8 million. The Company believes that the increasing role of HMO's, reduced benefits from employers and indemnity companies, and a shifting to outpatient programs continue to impact utilization of its facilities and services. There can be no assurance that the Company will be able to achieve profitability and positive cash flows from operations or that profitability and positive cash flow from operations, if achieved, can be sustained on an ongoing basis. Moreover, if achieved, the level of that profitability or that positive cash flow cannot accurately be predicted. The Company's lack of profitability results also in its failing to satisfy listing standards of the NYSE. No assurance can be made that the Common Stock will continue to trade on the NYSE or that the Company can satisfy the comparable requirements of any other stock exchange or the Nasdaq Stock Market. 15 22 ADDITIONAL RISK FACTORS WITH RESPECT TO HOLDERS OF DEBENTURES NOT TENDERED IN THE EXCHANGE OFFER SUBORDINATION The Debentures represent the subordinated indebtedness of the Company. The Company may incur indebtedness which is senior to the Debentures in unlimited amounts. The Debentures are general unsecured obligations exclusively of the Company. Since a substantial portion of the Company's business is conducted by the Company's subsidiaries, the cash flow and consequent ability of the Company to satisfy the Company's indebtedness to Debentureholders are dependent, in part, upon the earnings of such subsidiaries and a distribution of those earnings to the Company. The Company's subsidiaries are distinct legal entities and have no obligation, contingent or otherwise, to make any payment on the Debentures or to make funds therefor available. Any rights of the Company to receive assets of any subsidiary (and the consequent right of Debentureholders to possibly benefit from participating therein) in any liquidation or reorganization of the subsidiary will be effectively subordinated to the creditors of the subsidiary (including trade creditors) in any liquidation or reorganization of the subsidiary. REDEMPTION; MATURITY The Indenture permits the Company, at its election, to redeem the Debentures at 100% of the original principal amount (the "face value") at any time before maturity. The original maturity date of the Debentures was April 15, 2010. Provided that the acceleration of Debentures is effectively rescinded, the maturity date will once again become April 15, 2010, subject to any future conditions affecting maturity. The Company may determine whether or not to redeem Debentures based on interest rates that prevail at future times or other economic factors as they affect the Company's interests. See "Description of Debentures." SPORADIC TRADING The Debentures are not listed on any securities exchange or quoted on the Nasdaq Stock Market or any other automatic quotation system. The over-the-counter trading, if any, in the Debentures is limited and sporadic. Presently there are fewer than 50 registered holders of Debentures. Because the Debentures may be, after consummation of the Exchange Offer described below, held by a more extremely limited number of holders, the trading market will become even more limited. These events are likely to have an adverse effect on the overall liquidity and market value of the Debentures. CONVERSION PRICE FAR ABOVE SHARE PRICES The Debentures are convertible into Common Stock at a price so far in excess of the current market price of Common Stock as to be unattractive to Debentureholders in today's market. NEED FOR ADDITIONAL FUNDS; UNCERTAINTY OF FUTURE FUNDING The Company's negative cash flow from operations has consumed substantial amounts of cash. Retirement of the Debentures would require approximately $11.5 million as of November 15, 1996 including all accrued interest, if paid in full at such date, or approximately $5.5 million in cash, if 100% of the outstanding principal amount were tendered pursuant to the Exchange Offer (in addition to 228,912 shares of Common Stock), and/or payment of up to approximately $2.0 million of default interest. 16 23 Additional investment in the Company could result in impairment of the Debentureholders' eventual receipt of payment or recovery. Issuance of additional debt by the Company could result in substantial obligations senior to Debentures. During fiscal 1995 and 1996, a principal source of liquidity has been the private sale of equity securities and debt securities convertible into equity. Under the Shareholder Approval Policy of the NYSE, the Company may not be able to effect large placements of equity without shareholder approval, which, if not obtained, may adversely affect the Company with respect to future capital formation. The Company has received a tax refund for fiscal 1995 in the amount of $9.4 million based on loss carrybacks under Section 172(f) of the Internal Revenue Code (the "Code"). However, the IRS payment of such refund did not follow confirmation of the validity thereof by the IRS, and Section 172(f) is an area of tax law without any guiding legal precedents. The Company's 1993, 1994 and 1995 federal income tax returns are currently under audit by the IRS. Any IRS claim for return of all or any portion thereof could have a material adverse effect on the Company's cash flows. See "Tax Matters" below. DISPOSITION OF ASSETS The Company has been required to dispose of various properties in order to raise working capital, and no assurance can be made that such dispositions will not have adverse effects on the Company's financial condition and results of operations or that the Company has sufficient additional assets that could be disposed of in order to fund its current or future capital requirements. A $2.0 million secured promissory note has been issued by the Company, the collateral for which is comprised of two of the remaining freestanding facilities of the Company. In connection with the March 3, 1995 Letter Agreement with Mr. Jay H. Lustig (described under "The Proposed Exchange--Background--Agreement of Participating Securityholders" below), the Company conditionally agreed to pledge all of the shares of its CCI subsidiary (formerly known as CareUnit, Inc.). The Company has not nor does it recognize any obligation to have pledged such shares. The Letter Agreement provides 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 assurances can be made that the Participating Securityholders will not demand a pledge of such shares or that the Company will not be required to perform such agreement, or otherwise satisfy its obligations to Debentureholders. However, the Company believes that the Letter Agreement does not require the Company to pledge such shares on account of the failure by the Participating Securityholders to perform their obligations in material respects, and no pledge of the shares is contemplated by the Company in the currently proposed Exchange. 17 24 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 or waiver 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, or waivers thereof obtained, or that other defaults will not occur. In addition, no assurance can be made that the Company will successfully resolve all matters regarding necessary funding or legal compliance. Debentureholders who filed the earlier involuntary petition on February 24, 1995 may file another such petition. Other creditors may also file such a petition, or institute other actions against the Company, in order to prevent the Debentureholders from collecting on their debts in advance of payment to themselves. TAX MATTERS On July 20, 1995, the Company filed its Federal income tax return for fiscal 1995. On August 4, 1995, the Company filed Form 1139 "Corporate Application for Tentative Refund" to carry back losses under Section 172(f) requesting a refund to the Company in the amount of $9.4 million. On August 30, 1995, the Company also filed amended Federal tax returns for several prior years to carry back losses under Section 172(f). The refunds claimed on the amended returns are approximately $6.2 million for 1986; $0.4 million for 1985; $0.7 million for 1983 and $0.4 million for 1982. On September 20, 1996, the Company filed its Federal income tax return for fiscal 1996, and subsequently filed Form 1139 "Corporate Application for Tentative Refund" to carry back losses described in Section 172(f) requesting a refund to the Company in the amount of $5.5 million. The total refunds applied for are $22.6 million, comprised of $7.7 million for amended prior years' returns, $9.4 million for fiscal year 1995, and $5.5 million for fiscal year 1996. Section 172(f) is an area of the tax law without guiding legal precedent. There may be opposition by the Internal Revenue Service ("IRS") as to the Company's ability to obtain benefits from refunds claimed under this section. Therefore, no assurances can be made as to the Company's entitlement to the claimed refunds. In October 1995, the Company received a $9.4 million refund for fiscal 1995. Of this refund, $2.4 million was recognized as a tax benefit during the second quarter of fiscal 1996. Receipt of the 1995 Federal tax refund does not imply IRS approval. Due to the lack of legal precedent regarding Section 172(f), the remaining amount, $7.0 million, is reflected on the Company's consolidated balance sheets in unbenefited tax refunds received. In addition, during the second quarter of fiscal 1996, the Company recorded a tax benefit of $0.2 million, which is related to prior years returns. The Company paid a contingency fee of $1.9 million related to the 1995 refund. In the event the IRS Appeals Office determines that the Company is not entitled to all or a portion of the deductions under Section 172(f), this fee is reimbursable to the Company proportionately. Of the $1.9 million, the Company expensed $0.5 million during the second quarter of fiscal 1996, which is the amount of fees related to the tax benefit recognized by the Company. The remaining $1.4 million is reflected in the Company's financial statements as other receivables. 18 25 The Company is currently under audit by the IRS related to its 1995 Federal income tax return and the amended returns for prior years. Neither the Company nor the IRS will be foreclosed from raising other tax issues in regard to any audits of any such returns, which could also ultimately affect the Company's tax liability. The Company's ability to use any NOLs may be subject to limitation in the event that the Company issues or agrees to issue substantial amounts of additional equity (see "Potential Federal Income Tax Consequences - Effects on the Company"). The Company monitors the potential for "change of ownership" and believes that the presently contemplated private placements of stock and the recent exchange of an outstanding promissory note for shares of stock will not cause a "change of ownership;" however, no assurances can be made that future events will not act to limit the Company's tax benefits. The Company had a carryover of $11.5 million of NOLs into fiscal 1996. In the event that the Company's tax refunds (as described above) are disallowed, the disallowed amount of carrybacks of specified liability losses would be recharacterized as NOLs. The resultant NOLs could increase the NOLs aggregately to approximately $61.5 million. In the event that a substantial portion of the $50 million aggregate tax deductions forming the basis for the Company's tax refund claims shall have been reclassified as NOLs, a change of ownership (as defined above) would likely have the effect of disallowing the use of a substantial portion of the Company's NOLs by the Company under any circumstances during the limited carryover periods applicable thereto. In addition, the Company may be unable to utilize some or all of its allowable tax deductions or losses, which depends upon factors including the availability of sufficient net income from which to deduct such losses during limited carryback and carryover periods. 19 26 THE PROPOSALS PROPOSAL NO. 1 Debentureholders are asked to Consent on Proposal No. 1 in order to rescind the acceleration of payment of principal and interest under the Debentures, and its effects. The Company missed the October 15, 1994 semi-annual interest payment on the Debentures. An Event of Default was declared 30 days after the missed payment due October 15, 1994. Estimated as of November 15, 1996, the interest that will have accrued, will be $1,993,294 and the aggregate of all principal and interest under the Debentures will be $11,531,294. Acceleration was declared by the Trustee on or about February 13, 1995 after the Trustee received acceleration notices purportedly from a group of Debentureholders that were record holders of 25% of the $9,538,000 in principal amount of Debentures outstanding. The Event of Default resulted in acceleration of the Debentures because of the inability (prior to such notice of Acceleration being given) of the Company to remedy the missed interest installment payments which would have required at least 15-days' prior written notice of the default interest payment record date. Subsequently, on account of the Acceleration of the $9,538,000 of principal, the Company has failed to pay all semi-annual interest installments, in addition to that first missed payment giving rise to the Acceleration. These events are further described under "The Proposed Exchange-- Background" below. Section 6.02 of the Indenture (entitled, "Acceleration") provides in part as follows: ". . . The Holders of a majority in principal amount of the then outstanding Securities by notice to the Trustee may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if any existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration." If the Consent of the holders of more than 50% in principal amount of the Debentures is obtained for Proposal No. 1, the Company will cause the Acceleration to be rescinded, provided that the Company pays to Debentureholders (except those Exchanged in the proposed Exchange) all default interest due. Without acceleration, the interest due would be the sum of (a) interest at the rate of 7 1/2% per year from April 14, 1994 through October 15, 1996, the immediately prior semi-annual interest payment date, on the principal amount, plus (b) interest on all overdue installments accrued or accruing thereafter to the date that the default interest shall be paid. The Company's obligation to the Debentureholders will return to a non-accelerated, non-default status. The Company will set a record date for this interest payment. The Company will send a notice stating the amount of interest to be paid at least 15 days before the record date. The Company will consummate the rescission by the payment of interest to the Trustee, which will act as the paying agent. Following acceleration, and its effects, having been rescinded, the Debentures (except those tendered and exchanged) will remain outstanding and will become a long-term debt of the Company. The Company will be obligated to make all future payments of interest when due. The scheduled maturity of all outstanding principal as of the date of the rescission will be on April 15, 2010 (subject to the future occurrence of an Event of Default, if any, and an acceleration of principal otherwise due at maturity of the Debentures in the event of any future declaration thereof under the Debentures); and a Debentureholder will until maturity be unable to demand immediately the full 20 27 payment of all principal and accrued interest on account of the Acceleration that now exists. The Company will have no obligation to redeem Debentures prior to maturity. Debentures that are not tendered in the "Exchange" described below will be fully subject to the risks of the Company's future as a going concern. See "Special Risk Factors" above. Debentureholders may be able to achieve liquidity only through the sale or other disposition of the Debentures in the over-the-counter market, if and to the extent the Debentures are so traded, or in a private financing or other transaction or exchange that any Debentureholder could negotiate individually. If the Consent to Proposal No. 1 is not granted by a sufficient principal amount, the Debentureholders will continue to be entitled to receive immediate payment of all principal and accrued interest due under the Debentures. Estimated as of November 15, 1996, the aggregate of all principal and interest due on account of the Acceleration under the $9,538,000 in principal amount of Debentures that are presently outstanding will be an estimated $11,531,294, or $1,208.98 per $1,000 of face value. The purposes of the Consent on Proposal No. 1 include elimination of the various undesirable effects on the Company of an acceleration, such as: (a) An acceleration of indebtedness could impair the Company's business and financial prospects. (b) An acceleration of indebtedness could result in defaults under other debts and obligations of the Company. (c) An acceleration of indebtedness decreases the Company's attractiveness to investors. (d) An acceleration of indebtedness also creates an unfavorable impression with the Company's vendors and clients. If the Company fails, or is unable, to make the payments resulting from the Debenture acceleration, all creditors of the Company, including the Trustee or the Debentureholders, may seek any remedies available at law or in equity, including but not limited to remedies under bankruptcy or other similar laws governing or affecting creditors' rights. Debentures are general unsecured obligations of the Company, independently from its subsidiaries. The Company will pay the entire amount of interest due on all non-tendered Debentures other than those exchanged, so that the non-accelerated status of the Debentures will be reinstated. Payment of principal and interest under the Debentures is expressly subordinated to the prior payment of Senior Debt of the Company that has matured or, in certain circumstances, has the right to accelerate its maturity. Senior Debt is defined in Section 11.02 of the Indenture to encompass generally all debt other than trade payables to the extent that such debt does not by its terms negate its status as Senior Debt. See "Special Risk Factors -- Priorities of Securities and Other Considerations Relating to Any Future Bankruptcy of the Company" above and "Description of Debentures -- Subordination of Debentures" below. In any bankruptcy or similar proceeding, the indebtedness evidenced by the Debenture may be paid or accounted for only according to its ranking as subordinated debt. Section 11.04 of the Indenture, "Default on Senior Debt" provides in part as follows: "Upon the maturity of any Senior Debt by lapse of time, acceleration or otherwise, all such Senior Debt shall first be paid in full, or such payment duly provided for in cash or in a 21 28 manner satisfactory to the holders of such Senior Debt, before any payment is made by the Company or any person acting on behalf of the Company on account of the principal or interest on the Securities. "The Company may not pay principal of or interest on the Securities and may not acquire any Securities for cash or property other than capital stock of the Company if: "(1) a default on Senior Debt occurs and is continuing that permits holders of such Senior Debt to accelerate its maturity, . . . ." The Company does not know of any Senior Debt currently in default whose holder on account thereof has a right to accelerate it and has instituted any proceeding or given notice in writing addressed to the Company; provided, however, no assurance can be made that such default under any Senior Debt, or other senior claims on the Company's assets, incurred any time, before or after this Consent Solicitation Statement, has not and will not occur. PROPOSAL NO. 2 Debentureholders are asked to Consent to waive any unknown or future Events of Default under the Debentures (other than nonpayment of any principal or interest due) that exist at the time, if any, when the Company's consummation of the Exchange and the rescission of the Acceleration results in termination of the Consent Solicitation Period. Accomplishing a rescission of the Acceleration is dependent on the prior cure or waiver of all Events of Default. Section 6.02 of the Indenture quoted under Proposal No. 1 above indicates that to effect a rescission of acceleration, all Events of Default must have been "cured or waived." Consent on Proposal No. 2 includes the waiver of Events of Default. Proposal No. 2 also includes the waiver of any known or unknown defaults under the Indenture or the Debentures. The Company is not aware of any such defaults presently existing under the Indenture or the Debentures. Consent on Proposal No. 2 includes the waiver of any other defaults, including any other defaults of which the Trustee (or, under specified conditions, the Debentureholders) may otherwise have given notice to the Company (whether now existing or hereafter arising) that would declare a default to become an Event of Default. Proposal No. 2 relates not only to any known defaults, but also any unknown defaults as well. The Company asks that the Debentureholders approve the waiver of any other defaults in order to eliminate the possibility of a technical breach or default becoming an Event of Default. A technical default potentially could make the Company subject to demands or claims that the proposed rescission of acceleration is not effective. If the Consent of the holders of more than 66 2/3% in principal amount of the Debentures is obtained for Proposal No. 2, the Company will not be deemed to be in default with respect to any Event of Default or other default which exists (whether known or unknown) or which could occur. Proposal No. 2 is not a waiver of existing or subsequent defaults in payment of interest due on October 15, 1994; April 15, 1995; October 15, 1995; April 15, 1996; or October 15, 1996 or thereafter; and it is not a waiver of the interest on overdue interest. All interest will in either event be due and payable in accordance with the terms of the Debentures, unless the Debentures are Exchanged by the Debentureholder affected. (The Exchange 22 29 automatically involves such a waiver by Debentureholders tendering Debentures in the Exchange Offer.) All non-tendered Debentures will entitle the Debentureholder to the interest payment. Such interest must be paid to a paying agent for the benefit of the Debentureholders in order to satisfy a necessary condition to the rescission of the Debentures' Acceleration. If Proposal No. 2 is approved by the Debentureholders, the restored non- accelerated status of the Debentures will be maintained notwithstanding any Events of Default or other defaults that are so waived. So long as each of the future semi-annual interest installments until maturity of principal on April 15, 2010, the Company cannot be required to pay or redeem the outstanding principal under the Debentures prior to April 15, 2010. Another acceleration could occur only if the Company commits a future default that is subsequently declared to be, and thereby becomes, an Event of Default and only if proper notices of acceleration are delivered (while such Event of Default is continuing) by record holders of at least 25% of the outstanding principal amount of Debentures. PROPOSAL NO. 3 Debentureholders are asked to Consent to the giving of directions to the Trustee under the Indenture to the effect that the Trustee shall not, during the period ending November 1996, pursue any available remedy under or in accordance with the Debentures or Indenture for ongoing Events of Default unless directions to do so are given by the holders of not less than 50% of the outstanding principal amount of Debentures. Approval of a majority in principal amount of outstanding Debentures is necessary to effect Proposal No. 3. If Proposal No. 3 is adopted, the Trustee continues to have the ability to pursue any remedy for the existing (or any future) Events of Default or to choose not to do so after November 29, 1996. Instructions to the Trustee to pursue remedies against the Company on account of the Events of Default will not be effective to instigate the Trustee to do so prior to November 30, 1996 if the instruction is made by only 25% of the outstanding Debentures. A 25% level of support for such action makes any such instruction non-binding on the Trustee, and can be disregarded in the Trustee's discretion. The Trustee's discretion can ordinarily be exercised to pursue or not to pursue the remedy if 25% to 50% in principal amount so request. Each Debentureholder is entitled to give notice to the Trustee addressing the question whether the Trustee should declare an Event of Default on account of the claimed existence and continuation of a default under the Indenture or the Debentures. The Trustee is permitted to take the action of declaring an Event of Default, in its discretion, or upon an instruction of 25% or more of the outstanding principal amount of Debentures and must in every case take the action where a majority in principal amount of the Debentures so request. Such rights as may be exercisable by the 25% or more of the Debentures and less than a majority of the Debentures outstanding, although they continue to be exercisable notwithstanding sufficient Consents on Proposal No. 3, are nonetheless ineffective, the effectiveness thereof being deferred until Monday, December 2, 1996) because these rights are subject to the rights which can only be exercised by a majority in principal amount to give instructions to the Trustee on behalf of the Debentureholders and the right to waive defaults and give consents which can only be exercised by two-thirds of the Debentures in principal amount. Debentureholders comprising a majority of the outstanding principal amount can give instructions to take action or not to take action as they may see fit. The Indenture provides that a "majority of the principal amount of Debentures outstanding [that] is required in order to require the Trustee to act." 23 30 Proposal No. 3 will rely upon the right of the majority in principal amount to compel the Trustee to take action by instructing the Trustee to refrain from taking any action. The instruction makes an express exception for taking any action that shall have been subsequently authorized by Debentureholders holding of record a majority of the outstanding principal amount of Debentures. If rather than a majority, merely 25% in principal amount of Debentures give written instruction to the Trustee, the Trustee shall not take such action as instructed, in favor of the majority's Consent on Proposal No. 3. The majority rule is as provided in the Indenture. See "Description of Debentures--Events of Default and Remedies." If Proposal No. 3 is adopted, it will become more difficult for the Debentureholders to instruct the Trustee to institute collection or other proceedings against the Company pending completion of the Consent Solicitation Period. Adoption of Proposal No. 3 will instruct the Trustee not to pursue any remedy for ongoing Events of Default under the Debentures during the Consent Solicitation Period unless a majority in principal amount of Debentures instructs the Trustee to pursue any such remedy at such time. PROPOSAL NO. 4 Debentureholders are asked to Consent to the waiver of the notice required to be given by the Company to the Trustee under a provision of the Indenture and to waive any claim to receive the sinking fund installment payment that purportedly was due April 15, 1996. Under the terms of the Debentures and the Indenture, scheduled sinking fund payments are reduced by the original principal amount of Debentures that are converted by Debentureholders, that are delivered to the Trustee for cancellation or that otherwise are redeemed by the Company, at the Company's election. Debentureholders converted an aggregate of $36,460,000 of Debentures in March 1991, which exceeded the Company's sinking fund obligations. The Company has given notice to the Trustee to subtract such amounts from the sinking fund obligations effective as to all sinking fund redemption obligations. However, as described further below, the Company's belief that it timely provided adequate notice to the Trustee is not free from doubt, and the Company, therefore, is also seeking consent to the waiver of such notice provisions. That notice provision applies only if and when the Company intends to exercise its rights to reduce its sinking fund payment obligations under the Indenture. The Company exercised its right to reduce and eliminate sinking fund obligations, although the timing and sufficiency of the notice was questioned by the Trustee as to the sinking fund installment of five percent (5%) on April 15, 1996. As a result of the surrender and cancellation in 1991 of approximately $36 million in principal amount of Debentures, the Company was entitled to reduce the amount, to zero, that otherwise would be payable on specified sinking fund payment dates that would commence April 15, 1996 and continue annually through April 15, 2009. Management believes that the Company had given notice of its intention not to make any of the sinking fund installment payments as early as March 1995, when the Company discussed with the Trustee its long-range planning to reinstate the Debentures. The Company stated that all of those Debentures not Exchanged would be paid on April 15, 2010 at the price of 100% of the principal amount. In 1995 the Company also put that understanding into writing and delivered those necessary writings to the Trustee when the Company shared copies of its SEC filings with the Trustee related to the Exchange. The Debentureholders, if sufficient Consent is given on Proposal No. 4, can only claim (subject to future acceleration of the Debentures based on future Events of Default) the entitlement to receive payment of 100% of the principal amount of the Debentures on the maturity date of April 15, 2010 and in the meantime to receive all of the semi-annual interest installments each 24 31 April 15 and October 15 on outstanding principal at the rate of 7 1/2% per year. The Consent of two-thirds in principal amount of currently outstanding Debentures is necessary to approve this Proposal No. 4. The Indenture requires notice by the Company to the Trustee that the Company intends to reduce its obligation to make a sinking fund payment, or payments. The Company has previously accepted approximately $36 million dollars in principal amount of Debentures, all of which were surrendered in March 1991 by the holders thereof, who at that time converted their Debentures into Common Stock at a special conversion price. The Company, which thereafter delivered such Debentures to the Trustee for cancellation, is entitled to reduce its sinking fund obligations under the Indenture by the aggregate amount of Debentures theretofore cancelled. The purpose of Proposal No. 4 is to provide a waiver of the notice provision in the Indenture relating to the provisions for sinking fund payments. The consent of two-thirds of outstanding principal amount of Debentures is necessary to waive an Event of Default under the Indenture. The Company does not concede that it should be required to obtain a waiver of the failure to give notice. The Company received notice from the Trustee to the effect that the sinking fund installment was due and payable on April 15, 1996. The Company believes the notice previously given to the Trustee was adequate; the Company promptly cured the failure to give notice and that such cure was timely made. The failure to give notice may be considered an Event of Default under the Indenture nevertheless. Although the Company had provided the Debentures to the Trustee for cancellation and there were sufficient Debentures cancelled in order for the Company to eliminate all of the sinking fund obligations under the Indenture and the Debentures, the notice provision has arguably not been satisfied by the Company. The Company believes that it satisfied the notice provision; however, out of an abundance of caution, the Company desires to further obtain the waiver of notice in order to assure that claims will not be made against the Company with respect to the sinking fund provisions based on a failure to properly give notice in a timely fashion as required. By giving Consent on Proposal No. 4, a Debentureholder will, in effect, be confirming the Company's interpretation. The Trustee, whose interpretation of the notice provision is not necessarily a definitive interpretation, informed the Company that the Company had not provided timely notice of its intentions regarding the sinking fund payment due April 15, 1996; however, the Trustee does not dispute the effectiveness of notice given by the Company to eliminate the sinking fund obligations April 15, 1997 through April 15, 2009. The Company responded to the Trustee concerning the 1996 installment by letters dated March 27, 1996, that it believed that it had provided adequate notice to the Trustee and that the notice provision was not yet applicable. The notice from the Trustee and the response letters from the Company are provided as Exhibits 99.22 and 99.23, respectively, hereto, and are incorporated herein by reference. The Indenture provides that a provision may be waived by two-thirds in outstanding principal amount of Debentures. Without conceding that the notice provision was applicable or that the time for providing such notice had passed prior to the giving of such notice, the Company is seeking consent on Proposal No. 4 so that, if necessary, the requirement of notice will have been waived by the Debentureholders. The effect of such waiver of notice would be to eliminate claims that a sinking fund payment was due at April 15, 1996. All 25 32 other conditions to the elimination of such payment obligation were met, other than the giving of notice, which the Company believes it also has met. The sinking fund payment due April 15, 1996 would be an obligation to redeem a portion of the aggregate principal amount of Debentures equal to five percent (5%) thereof. The amount of Debentures outstanding at such date was $9,538,000; five percent of $9,538,000 is $476,900 ($50 per $1,000 of principal amount). However, the aggregate principal amount, as such term is used in the sinking fund provisions of the Indenture, is not specifically defined and, therefore, cannot be entirely free of ambiguity. Such term might refer, it may be arguable, to the originally outstanding $46 million in principal amount of Debentures; in that case, five percent would represent $2,300,000 in principal amount of Debentures. Such interpretation has not been heretofore adopted by the Trustee. The Company's Management believes that this interpretation would distort the sinking fund provisions. However, Consent on Proposal 4 also will be a relinquishment of any arguable claim that approximately 23% of the principal amount ($241.14 per $1,000 of principal amount) matured at April 15, 1996 because $2,300,000 of payment obligation would be allocated among the $9,538,000 in principal amount of Debentures. Sinking fund payments would be applied to the redemption, pro rata, of a portion of all of the outstanding Debentures. Debentures that are redeemed are, to the extent redeemed, cancelled and retired. Although Debentures that are redeemed are paid the full at the rate of 100% of the portion of the principal amount redeemed, once paid, such Debentures no longer bear interest. Payment of principal also has tax consequences to be considered, although this Proposal only affects the timing of the receipt of payment. Those Debentureholders who Consent on this Proposal also are in effect waiving their rights as Debentureholders to contest the efficacy of this Proposal. It could be argued by any non-Consenting Debentureholder that Proposal No. 4 requires Consent by each particular Debentureholder affected, by claiming that Proposal No. 4 in effect is a waiver of a payment of a portion of the principal amount. The Indenture requires each particular Debentureholder affected to waive a payment due. Debentureholders who give Consent and continue to hold Debentures (i.e., that do not tender their Debentures for the Exchange) will be waiving any right to the sinking fund installment of April 15, 1996. Debentureholders who neither give Consent nor tender their Debentures for the Exchange may have claims against the Company for the sinking fund installment notwithstanding the adoption of Proposal No. 4, although the Company intends to vigorously contest any such claims. Although, arguably, by waiving the notice provision, Debentureholders may be waiving their rights to claim the April 15, 1996 sinking fund payment, the Company has no intention whatsoever of making such sinking fund payment in any event, as it believes that the notice provision was completely satisfied. Further, as to all future sinking fund obligations after 1996 and concluding in the year 2009, the Company has, without doubt, eliminated the sinking fund payment obligations entirely. The waiver requested in Proposal No. 4, therefore, would only affect the April 15, 1996 sinking fund payment. The Trustee ultimately will determine its course of action from its own interpretation and decision concerning (a) first, whether any default or claimed default has occurred under the Indenture and the Debentures, (b) second, whether the default can be waived by two-thirds (and not require each Debentureholder affected to waive or consent), and (c) third, whether Proposal No. 2 is effective as such a waiver. 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 26 33 holdings or otherwise, in the approval or disapproval of Proposals No. 1, No. 2, No. 3 and No. 4, except as holders of Common Stock generally. The rescission of acceleration is anticipated to affect positively the interests of the Company generally and the interests of the holders of the Common Stock. See "Special Risk Factors -- Priorities of Securities and Other Related Considerations Relating to Any Future Bankruptcy of the Company," above. PRINCIPAL DEBENTUREHOLDERS The following table sets forth information concerning beneficial ownership of Debentures. Such information is given as of August 31, 1996 (the "reporting date"). At the reporting date, $9,538,000 in principal amount of Debentures was outstanding. According to rules adopted by the Commission, "beneficial ownership" of Debentures for this purpose is the power to vote them or to direct their investment, and includes the right to acquire beneficial ownership of Debentures within 60 days after the reporting date. Except as otherwise noted, the indicated owners have sole voting and investment power with respect to Debentures beneficially owned. An asterisk in the percent of class column indicates beneficial ownership of less than 1% of the outstanding Debentures.
Amount and Nature of Percent Name of Beneficial Owner Beneficial Ownership of Class ------------------------ -------------------- ------- William H. Boucher 0 * J. Marvin Feigenbaum 0 * Stuart J. Ghertner, Ph.D. 0 * Ronald G. Hersch, Ph.D. 0 * Drew Q. Miller 0 * W. James Nicol 0 * Kerri Ruppert 0 * Chriss W. Street 0 * All executive officers and directors as a group (8 persons) 0 *
27 34 PRINCIPAL STOCKHOLDERS The following table sets forth information concerning beneficial ownership of Common Stock. Such information is given as of September 25, 1996 (the "reporting date"). A total of 2,928,682 shares of Common Stock were outstanding, entitled to one vote per one whole share. According to rules adopted by the Commission, "beneficial ownership" of securities for this purpose is the power to vote them or to direct their investment, and includes the right to acquire beneficial ownership within 60 days. Except as otherwise noted, the indicated owners have sole voting and investment power with respect to shares beneficially owned. An asterisk in the percent of class column indicates beneficial ownership of less than 1% of the outstanding Common Stock. Amount and Nature of Percent Name of Beneficial Owner Beneficial Ownership of Class - -------------------------------------------------------------------------------- William H. Boucher 12,500 (1) * J. Marvin Feigenbaum 24,166 (2) * Stuart J. Ghertner, Ph.D. 5,000 (3) * Lindner Funds (4) 586,700 (4) 18.1 Ronald G. Hersch, Ph.D. 48,667 (5) 1.6 Drew Q. Miller 0 (6) * W. James Nicol 12,612 (7) * Kerri Ruppert 42,250 (8) 1.4 Chriss W. Street 179,060 (9) 5.8 All executive officers and directors as a group (8 persons) 324,255 (10) 10.0 - ---------------- (1) Includes 12,500 shares subject to options that are presently exercisable or exercisable within 60 days after the reporting date. (2) Includes 24,166 shares subject to options that are presently exercisable or exercisable within 60 days after the reporting date. (3) Includes 5,000 shares subject to options that are presently exercisable or exercisable within 60 days after the reporting date. Dr. Ghertner was appointed Interim Chief Operating Officer of the Company on August 15, 1996; and on September 3, 1996, was named Interim President of the Company's majority-owned subsidiary, Comprehensive Behavioral, Inc. (4) The mailing address of Lindner Funds is c/o Ryback Management Corporation, 7711 Carondelet Avenue, Suite 700, St. Louis, Missouri 63105. Includes 336,700 shares currently reserved for issuance upon conversion of a Secured Convertible Note dated January 9, 1995 and 250,000 shares sold under an Amended Common Stock Purchase Agreement dated June 29, 1995 that are issuable on approval of listing on the NYSE and completion of administerial matters. Lindner Funds, as described in its Schedule 13G, holds the shares and convertible debt in more than one fund. (5) Includes 8,334 shares held directly and 40,333 shares subject to options that are presently exercisable or exercisable within 60 days after the reporting date. On September 3, 1996, Dr. Hersch was named Vice President - Strategic Planning and Development for the Company. (6) Mr. Drew Miller was an executive officer of the Company as of the end of the 1996 fiscal year and until August 14, 1996, at which time he resigned as Senior Vice President and Chief Operating Officer. Mr. Miller's mailing address is 775 Oakwood Street, Orange, California 92669. (7) Includes 56 shares held by Mr. Nicol's spouse as custodian for his three minor children, all of whom reside with Mr. Nicol, and 12,556 shares 28 35 subject to options that are presently exercisable or exercisable within 60 days after the reporting date. (8) Consists of 42,250 shares subject to options that are presently exercisable or exercisable within 60 days after the reporting date. (9) Includes 6,560 shares held directly and 72,500 shares subject to options that are presently exercisable or exercisable within 60 days after the reporting date. Also includes 5,000 vested shares and 95,000 restricted shares under a restricted stock agreement over which the holder has sole voting power, the issuance of which is pending administerial matters. (10) Includes a total of 209,305 shares subject to outstanding options that are presently exercisable or exercisable within 60 days after the reporting date and 5,000 vested and 95,000 restricted shares over which the holder has sole voting power, the issuance of which is pending. 29 36 PRO FORMA CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS The following tables set forth (1) the pro forma consolidated balance sheets of the Company as of May 31, 1996, which give effect to the Exchange for 100% of the outstanding Debentures and 30% of the outstanding Debentures, respectively, after adding the non-recurring gains attributable to the Exchange and deducting the Company's estimated expenses; and (2) the pro forma consolidated statements of operations of the Company for the fiscal year ended May 31, 1996, which give effect, as of the beginning of the fiscal year, to the Exchange for 100% of the outstanding Debentures and 30% of the outstanding Debentures, respectively, and reports only in the notes thereunder, and does not include in the Pro Forma Statements of Operations, the pro forma results of the Exchange in terms of earnings after the effect of the non-recurring gains to be recognized upon such Exchange. For purposes of the presentation in the following pro forma financial statements, an assumed value of $7.50 per share ("Assumed Value Per Share") has been assigned to the Company's Common Stock to be issued and delivered to Debentureholders in the Exchange. The Assumed Value Per Share is not intended to reflect any opinion or prediction as to the actual fair market value of the Common Stock at any particular date. These pro forma consolidated financial statements do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The consolidated financial statements and notes to consolidated financial statements included in the Form 10-K for the fiscal year ended May 31, 1996 as filed with the Securities and Exchange Commission on August 29, 1996, provide additional disclosures and a further description of accounting policies. The Company's pro forma financial statements are presented on the basis that it is a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company incurred significant losses from operations in fiscal 1995 and continued to report operating losses for fiscal 1996. The continuation of the Company's business is dependent upon the resolution of operating and short-term liquidity problems and the realization of the Company's plan of operations, and the consolidated financial statements do not include any adjustments that might result from an unfavorable outcome of this uncertainty. 30 37 COMPREHENSIVE CARE CORPORATION Pro Forma Consolidated Balance Sheets As of May 31, 1996 (Dollars in Thousands, except per share amounts)
Pro Forma (Unaudited) May 31, 1996 (Audited) Adjustments 100% Adjustments 30% --------- ----------- -------- ----------- ------ ASSETS Current assets: Cash and cash equivalents.................... $ 4,433 $ (5,532)(1) $(1,099) $ (2,813)(6) $ 1,620 Accounts receivable, less allowance for doubtful accounts of $877.............. 2,476 -- 2,476 -- 2,476 Other receivables............................ 1,478 -- 1,478 -- 1,478 Property and equipment held for sale......... 1,233 -- 1,233 -- 1,233 Other current assets......................... 352 -- 352 -- 352 -------- -------- -------- -------- ------- Total current assets........................... 9,972 (5,532) 4,440 (2,813) 7,159 -------- -------- -------- -------- ------- Property and equipment ........................ 9,863 -- 9,863 -- 9,863 Less accumulated depreciation and amortization. (3,590) -- (3,590) -- (3,590) -------- -------- -------- -------- ------- Net property and equipment..................... 6,273 -- 6,273 -- 6,273 -------- -------- -------- -------- ------- Property and equipment held for sale........... 6,915 -- 6,915 -- 6,915 Other assets................................... 1,958 -- 1,958 -- 1,958 -------- -------- -------- -------- ------- Total assets................................... $ 25,118 (5,532) $ 19,586 (2,813) $22,305 ======== ======== ======== ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities.... $ 10,714 $ (1,573)(2) $ 9,141 $ (1,573)(7) $ 9,141 Long-term debt in default................... 9,538 (9,538)(3) -- (9,538)(8) -- Current maturities of long-term debt........ 2,464 -- 2,464 -- 2,464 Unbenefited tax refund received............. 7,018 -- 7,018 -- 7,018 Income taxes payable........................ 410 -- 410 -- 410 -------- -------- -------- -------- ------- Total current liabilities...................... 30,144 (11,111) 19,033 (11,111) 19,033 -------- -------- -------- -------- ------- Long-term debt, excluding current maturities... 24 -- 24 6,677 (9) 6,701 Other liabilities.............................. 749 -- 749 -- 749 Minority interest.............................. 1,000 -- 1,000 -- 1,000 COMMITMENTS AND CONTINGENCIES (See Note 15 to the Company's Consolidated Financial Statements included in its Annual Report on Form 10-K for the fiscal year ended May 31, 1996, incorporated herein by this reference) Stockholders' equity: Preferred stock, $50.00 par value; authorized 60,000 shares.................. -- -- -- -- -- Common stock, $.01 par value; authorized 12,500,000 shares; issued and outstanding 2,848,685.......... 28 2 (4) 30 1 (10) 29 Additional paid-in capital.................. 43,931 1,715 (4) 45,646 514 (10) 44,445 Accumulated deficit......................... (50,758) 3,862 (5) (46,896) 1,106 (11) (49,652) -------- -------- -------- -------- ------- Total stockholders' equity (deficit)........... (6,799) 5,579 (1,220) 1,621 (5,178) -------- -------- -------- -------- ------- Total liabilities and stockholders' equity..... $ 25,118 $ (5,532) $ 19,586 $ (2,813) $22,305 ======== ======== ======== ======== =======
(footnotes begin on following page) 31 38 - ------------------------------------- (1) Represents payment of $4,769,000 in principal ($500 payable in cash per $1,000 of principal amount) and $763,000 in interest ($80 payable in cash per $1,000 of principal amount). (2) Represents cancellation of $1,550,000 in accrued interest and $98,000 in default interest, each at the rate of 7 1/2% per year, partially offset by the accrual of $75,000 in related filing expenses. (3) Represents Debenture payoff of $4,768,000 in cash, the issuance of $1,716,000 in common stock, and the realization of $3,054,000 of cancellation of debt (non-recurring gain). (4) Using the $7.50 Assumed Value Per Share, less the $.01 par value per share of common stock: (a) the aggregate par value is computed by multiplying 228,912 shares of common stock by the $.01 par value per share; and (b) the additional paid in capital is derived by multiplying the remaining $7.49 per share ($7.50 less $.01) by 228,912 shares. (5) Represents non-recurring gains of $3,052,000, $787,0000, and $98,000 in the exchange of Exchange Consideration for principal, interest and default interest, respectively, partially offset by the accrual of $75,000 in related filing expenses. (6) Represents payment of $1,431,000 in principal ($500 payable in cash per $1,000 of principal amount), $1,313,000 in interest, plus $69,000 in default interest (the sum of $80 payable in cash per $1,000 of principal amount plus the interest on 70% of the principal amount at the rate of 7 1/2% per year from April 15, 1994 to June 1, 1995 plus interest on default interest at the same rate of 7 1/2%). (7) Represents cancellation of $1,550,000 accrued interest and $98,000 in default interest, each at the rate of 7 1/2% per year, partially offset by the accrual of $75,000 in related filing expenses. (8) Represents Debenture payoff of $1,431,000 in cash, $514,000 in common stock (at the $7.50 Assumed Value Per Share), and $916,000 forgiveness of debt (non-recurring gain), and reclassification of $6,677,000 from a long-term debt in default to a long-term debt. (9) Reclassification of $6,677,000 unexchanged Debentures from a long-term debt in default to a long-term debt. (10) Additional paid-in capital of $7.49 (at the $7.50 Assumed Value Per Share less the $0.01 par value per share) multiplied by 68,674 shares of common stock = $514,368. Aggregate par value of 68,674 shares of common stock multiplied by $.01 per share = $687. (11) Represents non-recurring gains of $916,000, $236,000, and $29,000 in the exchange of Exchange Consideration for principal, interest and default interest, respectively, partially offset by the accrual of $75,000 in related filing expenses. 32 39 COMPREHENSIVE CARE CORPORATION Pro Forma Consolidated Statements of Operations Fiscal Year Ended May 31, 1996 (Dollars in Thousands, except per share amounts)
Pro Forma (Unaudited) ------------------------------------------- May 31, 1996 (Audited) Adjustments 100% Adjustments 30% --------- ----------- -------- ----------- ---------- Revenues: Operating revenues............................. $ 32,488 $ -- $ 32,488 $ -- $ 32,488 Costs and expenses: Direct healthcare operating expenses........... 29,208 -- 29,208 -- 29,208 General and administrative expenses............ 7,632 75(1) 7,707 75(1) 7,707 Provision for doubtful accounts................ 934 -- 934 -- 934 Depreciation and amortization.................. 2,099 -- 2,099 -- 2,099 Write-down of assets........................... -- -- -- -- -- Restructuring expenses......................... 94 -- 94 -- 94 Equity in loss of unconsolidated affiliates.... 191 -- 191 -- 191 --------- ---------- -------- -------- --------- Total Costs and Expenses ........................ 40,158 75 40,233 75 40,233 --------- ---------- -------- -------- --------- Loss from operations ............................ (7,670) (75) (7,745) (75) (7,745) --------- ---------- -------- -------- --------- Gain on sale of assets......................... 1,336 -- 1,336 -- 1,336 Loss on sale of assets......................... (82) -- (82) -- (82) Non-operating gain............................. 860 -- 860 -- 860 Interest expense............................... (1,374) 791(2) (583) 237(3) (1,137) Interest income................................ 210 -- 210 -- 210 --------- ---------- -------- -------- --------- Loss before income taxes......................... (6,720) 716 (6,004) 162 (6,558) Benefit for income taxes....................... 2,478 -- 2,478 -- 2,478 --------- ---------- -------- -------- --------- Loss before extraordinary item................. $ (4,242) $ 716 $ (3,526) $ 162 $ (4,080) ========= ========== ======== ======== ========= Loss per common share: Loss before extraordinary item................. $ (1.60) $ 0.27 $ (1.33) $ 0.06 $ (1.54) ========= ========== ======== ======== =========
- ---------------------------- (1) Represents legal, accounting, printing, distribution and filing fees related to the Exchange. (2) Represents $715,000 of Debenture interest accruing at 7 1/2% on $9,538,000 of principal amount and $76,000 of default interest which is calculated at an interest rate of 7 1/2% of unpaid interest and would not have accrued assuming the Exchange occurred effective June 1, 1995. (3) Represents $214,000 of Debenture interest accruing at 7 1/2% on $9,538,000 of principal amount and $23,000 of default interest which is calculated at an interest rate of 7 1/2% of unpaid interest and would not have accrued assuming the Exchange occurred effective June 1, 1995. The Pro Forma Consolidated Statements of Operations do not reflect the non-recurring gain resulting from the Debenture Exchange, which is estimated to be approximately $3,862,000 and $1,106,000, respectively, before taxes, on a 100% or 30% Exchange of the outstanding $9,538,000 in principal amount of Debentures. Assuming 100% of the Debentures are converted, the portion of the gain attributable to unpaid principal and interest is $3,052,000 and $885,000, respectively. The principal gain is computed by subtracting from the $9,538,000 of outstanding principal, $4,769,000 of cash ($500 per $1,000 of outstanding principal) and the issuance of $1,717,000 of common stock (24 shares per $1,000 of outstanding principal multiplied by the $7.50 Assumed Value Per Share). The interest gain is computed by multiplying 7 1/2% by the principal amount outstanding for the period from April 1, 1994 to May 31, 1996 plus interest at 7 1/2% on the unpaid default interest amount for the period 33 40 from October 1, 1994 to May 31, 1996 based on an increasing default balance as additional payments became due less $80 per $1,000 of $9,538,000 (100% of outstanding principal amount). Assuming 30% of the Debentures are converted, the portion of gain attributable to unpaid principal and interest is $915,000 and $266,000, respectively. The principal gain is computed by subtracting from the 30% of the $9,538,000 of outstanding principal equaling $2,861,00, $1,431,000 of cash ($500 per $1,000 of 30% outstanding principal) and the issuance of $515,000 of common stock (24 shares per $1,000 of 30% outstanding principal multiplied by the $7.50 Assumed Value Per Share). The interest gain is computed by multiplying 7 1/2% by the 30% principal amount outstanding for the period of April 1, 1994 to May 31, 1996 plus interest of 7 1/2% on the unpaid default interest amount for the period from October 1, 1994 to May 31, 1996 based on an increasing default balance as additional payments became due less $80 per $1,000 of $2,861,000 (30% of outstanding principal). 34 41 POTENTIAL FEDERAL INCOME TAX CONSEQUENCES The discussion under the heading "Potential Federal Income Tax Consequences" in the Offering Circular expresses the Company's understanding as to all material federal income tax consequences of the Exchange to the Debentureholder that participates by tendering Debentures for Exchange to the Company. Debentureholders should consult the Offering Circular for that information in connection with deciding whether to tender in the Exchange Offer or to the extent that an understanding of the Company's potential federal income tax consequences arising from the Exchange may be relevant. Consent on the Proposals will be necessary in order to allow the Company to consummate the Exchange. The potential federal income tax consequences of the Exchange are as set forth in the Offering Circular under the heading "Potential Federal Income Tax Consequences." EFFECTS ON THE DEBENTUREHOLDERS For federal income tax purposes, none of the Proposals would make any material difference to the Debentureholder regarding the tax consequences of holding Debentures. EFFECTS ON THE COMPANY For federal income tax purposes, none of the Proposals would make any material difference to the Company regarding the tax consequences of being the issuer of Debentures. LIMITATIONS AND QUALIFICATIONS OF THE DISCUSSION The foregoing discussion contains information regarding federal income tax consequences of the Proposals to a typical taxpayer who does not participate in the Exchange. The discussion does not describe any tax consequences arising out of the tax laws of any state, local or foreign jurisdiction. The summary is based upon the Internal Revenue Code, existing and proposed regulations thereunder, and current administrative rulings and court decisions. All of the foregoing are subject to change, which change may be retroactive, and any such change could affect the continuing validity of this discussion. 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 Proposals to them in their particular circumstances. THE PROPOSED EXCHANGE The references herein to the Exchange Offer, or the like, are not intended to imply or indicate that any offer of exchange is made in this Debenture Consent Solicitation Statement expressly or impliedly. The Exchange Offer only will be made pursuant to the accompanying Offering Circular, Schedule 13E-4, Letter of Transmittal and the documents referred to therein (collectively, "Exchange Offer Documents"). The Company desires the Exchange Offer to be an offer to its Debentureholders to surrender for exchange each $1,000 in outstanding principal amount of Debentures, and accrued and unpaid interest to the exchange date, which at November 15, 1996 will aggregate $208.98 of interest per $1,000 in outstanding principal amount, for an Exchange Consideration aggregately of $580 in cash and 24 shares of Common Stock, which will be comprised of $500 in cash and 16 shares Common Stock, as 35 42 principal, plus $80 in cash and 8 shares of Common Stock, as interest (the "Exchange Offer"). Unless the Consents requested herein are granted by the Debentureholders holding the necessary aggregate principal amount of Debentures to effect rescission of acceleration of the Debentures, the Company will not have any obligation to effect the Exchange and pay Exchange Consideration. The Company does not presently contemplate completion of the Exchange unless the Debenture acceleration is rescinded and the Company's funding is adequate to pay Exchange Consideration to all tendering Debentureholders and default interest, and interest thereon, to all non- tendering Debentureholders, because the Company does not expect to be able to make the payment of $9,538,000 principal plus $1,993,294 interest, as of November 15, 1996, that would be required in order to retire the Debentures. The Indenture also requires the Company to satisfy the Company's financial commitments that are senior to the Debentures and have become due. A rescission of acceleration of the Debentures would effect a reinstatement of the Debentures to their original non-accelerated terms, and that should result in an immediate improvement in the Company's working capital deficit. There may be potentially some relative improvement in the Company's debt-carrying ability. The Debentureholders may wish to consider the opportunity that the Company is providing to the Debentureholders to exchange their Debentures for Exchange Consideration. However, should the Company's financial position after rescission of acceleration and until the original maturity date of the Debentures improve to such extent as Debentures can be paid in full on maturity, the Debentureholders may wish to continue holding Debentures, as well as giving Consent. Giving Consent will not effectively tender your Debentures. The manner of tendering Debentures is described in the Exchange Offer Documents. The Company cannot purchase any Debentures, otherwise than in an exchange pursuant to the Exchange Offer, until the expiration of at least ten business days after the termination of the Exchange Offer, and has no intention presently to do so thereafter. A registered Debentureholder's right to Consent will continue despite tendering Debentures in the Exchange Offer, until such tendered Debentures are accepted by the Company in the Exchange. A registered Debentureholder who tenders Debentures in the Exchange Offer will also thereafter be able to revoke a previous Consent. On the date or dates that Debentures are exchanged for Exchange Consideration (the "Exchange Date"), the Debentures accepted for payment will become the Company's, and such aggregate number of Debentures shall be excluded thereafter from voting and from the calculation of the percentage required for Consent. It is each beneficial and record Debentureholder's right to elect not to tender such holder's Debentures. Nevertheless, there can be no assurance that the aggregate market value of the Debentures (plus the default interest paid) after a rescission of acceleration will be as great as the aggregate market value of the Debentures while they continue to be immediately due and payable. Debentureholders are urged, in addition to Consenting, to carefully consider the Exchange Offer. After the Exchange Offer, the trading in the Debentures may become more thin and sporadic, which could adversely affect the liquidity of an investment in the Debentures. A rescission of acceleration of the Debentures will not alter the rights, pursuant to the Indenture, of Debentureholders to accelerate the Debentures following any future Event of Default by the Company. In anticipation that rescission of acceleration will be accomplished, the Company is concurrently making the Exchange Offer. Concurrently with the Debenture Consent Solicitation, therefore, each Debentureholder will find it necessary 36 43 to decide whether or not to tender Debentures based on either the current acceleration or the possibility that a rescission of acceleration will be effected, which may have the significant effect of reinstating the Debentures' original maturity date of April 15, 2010. In doing so, each Debentureholder should consider the information set forth in the Exchange Offer Documents pertaining to the Exchange Offer and not only the information set forth herein. The Exchange Offer is being made by the Company in reliance upon the exemption from the registration requirements of the Securities Act afforded by Section 3(a)(9) of the Securities Act. The Company, therefore, will not pay any commission or other remuneration to any broker, dealer, salesman or other person for soliciting Debentureholders to give Consents or to exchange Debentures. Directors, officers and regular employees of the Company, who will not receive additional compensation therefor, may solicit Debentureholders to give Consents and/or to exchange Debentures. BACKGROUND The Debentures were issued by the Company on April 25, 1985. On October 17, 1994, the Company failed to make an interest payment as described in the next paragraph. On or about February 10, 1995, an acceleration of all principal and interest due under the Debentures was declared. Thereafter, on February 24, 1995, an involuntary bankruptcy petition was filed against the Company. The petition was dismissed on March 6, 1995 with the consent of the petitioners. The Company has missed four semi-annual interest payments, due October 15, 1994, April 15, 1995, October 15, 1995, and April 15, 1996, respectively, and another semi-annual interest payment is due October 15, 1996. It is estimated that the interest (and default interest thereon) accrued through November 15, 1996 will aggregate $1,993,294. Except for the effects of acceleration of the Debentures, the maturity date of the Debentures would be April 15, 2010, and interest would be payable semi-annually on each April 15 and October 15. See "Default on Debentures" below. The Company has outstanding $9,538,000 in principal amount of Debentures. The Debentures were issued for a price equal to 100% of the aggregate original principal amount of $46.0 million. Since that time, $36,462,000 aggregate principal amount of Debentures have been converted by their holders into Common Stock. No sinking fund obligations under the Debentures apply to the Company on account of the cancellation of such Debentures. See "The Proposals--Proposal No. 4" above. The interest cost to the Company under the Debentures is 7 1/2% of the outstanding principal amount per year and, while a nonpayment continues, includes interest at the annual rate of 7 1/2% on the overdue amounts. If the Exchange is accomplished, the reduction of the Debenture's debt service requirement would decrease the Company's future cash flow requirement. The Debentures currently are redeemable, in whole or in part, by the Company at 100% of face value. DEFAULT ON DEBENTURES The Company's losses in fiscal 1995 caused the Company to suspend interest payments to the holders of the Company's Debentures. As a result, the Company notified the Trustee that the Company was proposing a default interest payment date. After the default interest payment date was announced, but prior to payment, a group of Debentureholders and others purporting to hold an aggregate of 25% of the principal amount of the Debentures then outstanding declared on or about February 10, 1995 an acceleration of the principal in the aggregate amount of $9,538,000 plus interest and default interest accrued from April 15, 1994, which thereby became immediately due and payable. A subset of 37 44 such persons filed an involuntary petition on February 24, 1995 in United States Bankruptcy Court for the Northern District of Texas against the Company under Chapter 7 of the U.S. Bankruptcy Code, which was dismissed, with the consent of the petitioners, on March 6, 1995 following the execution of the Letter Agreement described below. AGREEMENT OF PARTICIPATING SECURITYHOLDERS On March 3, 1995 the Company entered into a letter agreement (sometimes herein called the "Letter Agreement") with Mr. Jay H. Lustig, an individual who was representing certain holders of Debentures ("Participating Securityholders") owning or purporting to own approximately 25% in outstanding principal amount of Debentures who had taken the action to accelerate Debentures and filed an involuntary petition for bankruptcy of the Company on February 24, 1995. For the reasons set forth below, the Company believes that it is not bound by the Letter Agreement. The Exchange is being made by the Company voluntarily and includes certain of the concepts of the Letter Agreement as a framework for the currently proposed Exchange. Some of the terms of the proposed Exchange Offer are different from the Letter Agreement. See "Differences Between the Exchange Offer and the Letter Agreement's Contemplated Exchange" below. The Letter Agreement provided for a consensual out-of-court resolution that the Company's Board of Directors approved as being in the best interests of the Company and its stockholders and other stakeholders. Pursuant to the Letter Agreement, the holders' representative agreed to provide notices of waiver of the interest non-payment default, notices of rescission of the Debenture acceleration and the effects thereof, and consent to the immediate dismissal of the involuntary Chapter 7 petition filed on February 24, 1995 from holders of $2.5 million in outstanding principal amount of Debentures by March 31, 1995 and to use best efforts to provide waivers of the interest default and notice of rescission of acceleration from the additional amount necessary to constitute a majority of outstanding principal amount of Debentures. In return, the Company agreed to provide an opportunity within 180 days to holders of Debentures to tender their Debentures to the Company pursuant to an exchange offer to be made by the Company to the holders of Debentures. The exchange offer consideration was to consist of a payment of $500 in cash; $120 worth in shares of Common Stock at a defined value equal to an average market price calculated based on every round-lot trade over a specified trading period; and an $80 portion, in cash, of the accrued and unpaid interest. The balance of accrued interest and default interest in excess of such $80 was required to be waived by the record holder at the record date for interest payment. In addition, the Letter Agreement provided for a pledge by the Company after 150 days of all of the shares of CareUnit, Inc., a wholly-owned operating subsidiary of the Company, to secure the Company's obligation to complete the exchange on the agreed upon terms or otherwise to purchase Debentures, provided that the holder's representative and the Participating Securityholders had in each material respect performed their obligations required to be performed. Under the Letter Agreement, one of the material objectives was to obtain from the holders of a majority interest in the Company's outstanding Debentures a consent to, or waiver of, certain incidents of non-compliance with, and to rescind acceleration of, the Debentures. The Company believes the continuing acceleration results in material part from non-performance of material obligations by the Participating Securityholders. Although the Letter Agreement is not binding upon the Company, in its view, the currently proposed Exchange Offer is being made by the Company voluntarily and includes certain of the concepts of the Letter Agreement as a framework for the proposed 38 45 Exchange. The Company believes that the Exchange Offer as presently contemplated will substantially comply with all material terms of the Letter Agreement in any case. The Debentureholders represented by Mr. Lustig consented to withdrawal of the bankruptcy petition, and the Company was advised by Mr. Lustig that each of them submitted notices of rescission of acceleration. Such Participating Securityholders did not hold a majority in principal amount of the Debentures. Management believes that the Participating Securityholders nevertheless did not use best efforts to solicit or to cause the Trustee to solicit notices of rescission of acceleration from other Debentureholders as necessary in order that notices of rescission of acceleration would be given by a majority in principal amount of the Debentures. DIFFERENCES BETWEEN THE EXCHANGE OFFER AND THE LETTER AGREEMENT'S CONTEMPLATED EXCHANGE The Exchange Consideration includes a precise number of shares of Common Stock that was calculated as closely as practicable based on a formula from the Letter Agreement. The Letter Agreement provided for a number of shares of Common Stock calculated based on the reported prices on the NYSE Composite Tape during a defined trading period -- March 6, 1995 through May 19, 1995. The Exchange Consideration is based on the same trading period. The Exchange Consideration was calculated based on the weighted average closing price, although the Letter Agreement specified that the price "averaging" calculation was to have been based on the average price of each and every round-lot trade (100 shares or more). The information necessary for the specified calculation, as the Company experienced, is obtainable only within a short time following the trading day involved. When the Company's request for the specified dates was received by one of the few appropriate sources for such data, such data was no longer available for the beginning half of the trading period. The $7.50 defined worth per share is an approximation of $7.47, which was the "weighted average" trading price during the specified period (price times volume reported on the NYSE Composite Tape). The actually calculated value of $7.47 would have produced fractional shares. The $7.47 amount was calculated based on the daily closing prices over the same trading period, with the weighted daily closing prices for daily composite volume to follow the framework of the Letter Agreement by making trading volume a factor. This method is believed to approximate the Letter Agreement method as well as reasonably possible throughout the specified trading period. The Company was unable to utilize the individual round-lot trading prices to know the results of such a calculation, but believes the results would not be materially different from $7.50. The Letter Agreement provided that the previously proposed exchange would be consummated within 180 days; provided, however, that the Company promised to use "best efforts" and its obligation to consummate the exchange was expressly conditioned upon the satisfaction of Participating Securityholders' obligations. Management of the Company believes that the continuance of the nonpayment of the Debentures by approximately one year beyond such 180 days contemplated in the Letter Agreement makes its offer of an additional eight (8) shares of Common Stock per $1,000 principal amount exchanged, as interest, comparable in attractiveness to the offer contemplated by the Letter Agreement and reasonable in the circumstances, although no assurance is given as to the actual amount of value that should be given to one share of Common Stock or the proceeds thereof at any particular date, and no assurance is given that the additional shares compensate financially for the time value of the money not received previously. The Letter Agreement provided for an agreement by the Company in favor of all of the Debentureholders not to pledge the shares of CareUnit after the 39 46 date of the Letter Agreement in order for the Company to be prepared to satisfy a future obligation, as of approximately July 29, 1995, to pledge those shares under the Letter Agreement. The Company was willing and ready to do so, but only if the Participating Securityholders had performed all of their material obligations under the Letter Agreement (with opportunity for cure if cure was possible). The Company has not pledged the shares to any person, and has no intention of doing so. Such pledge would have been to secure "the Company's obligation to purchase the Debentures on and subject to the terms and conditions of the Letter Agreement or otherwise." Management of the Company believes that the Company's obligations to perform the pledge of CareUnit shares did not arise because Participating Securityholders did not use best efforts to provide notices of rescission of acceleration signed by a majority of the outstanding principal amount of Debentures. The Letter Agreement also provided that a disposition of the shares for the benefit of satisfying the Debentures would have been permitted at any time after approximately August 28, 1995, which was 180 days after March 3, 1995. No pledge of the CareUnit shares is contemplated by the Company because in its view the particular provision of the Letter Agreement related thereto is not binding upon the Company because of the failure on the part of the other parties thereto to perform under the conditions thereof. The Company's management determined that making such a pledge would materially impair the Company's business and financial prospects. Pursuant to the Letter Agreement, every holder of Debentures who tendered them for exchange was to receive interest in an amount of $80 in cash in lieu of receiving the full actual amount of the interest. The Exchange Offer interest payment as contemplated today differs by including an additional eight (8) shares of Common Stock. To the extent the accrual exceeded the designated $80 in cash as interest, the tender of Debentures was to constitute a waiver of excess accrued interest. At November 15, 1996, $208.98 of interest will have accrued per $1,000 of principal amount. The Company believes that increasing the interest payment with shares of Common Stock should provide Debentureholders an Exchange Offer that offers comparable incentive taking into account the original framework of the Letter Agreement and conserves the Company's cash funds for future needs. Because of the failure, in the Company's judgment, of the Participating Securityholders to use best efforts to deliver the rescissions of the acceleration and waiver of defaults by the registered owners of a majority in principal amount of the Debentures, the Company is seeking the Consent of Debentureholders through this solicitation. The Letter Agreement did not contemplate a Company solicitation similar to this Statement, or the Company's resulting costs, expenses and time consumed. PRICE OF DEBENTURES AND COMMON STOCK PRIOR TO ANNOUNCEMENT As of March 2, 1995, the date preceding the public announcement of the intention to make the Exchange Offer, the bid price for Debentures per each $1,000 principal amount was $360 and the asked price was $390. Debenture prices were reported to the Company informally, directly from brokers in the over-the-counter market, and such reports are not intended to indicate that active trading exists. As of March 2, 1995, the NYSE Composite Tape reported that the Company's Common Stock high sales price was $6, low sales price was $5 5/8, and closing sales price was $5 3/4. As of September 5, 1996, the bid and asked prices for the Debentures were $740 and $790, respectively, as reported by a broker. The low and high sales prices for the Company's Common Stock on October 1, 1996 were $12 1/4 40 47 and $12 7/8, respectively, as reported on the NYSE Composite Tape, and the closing sales price was $12 7/8. EXCHANGE OFFER FUNDING REQUIREMENTS AND SOURCES The proposed Exchange Offer will require, if accomplished at all, the issuance of up to 228,912 shares of the Company's Common Stock to fund the stock portion of the Exchange. Principal of $500 in cash and sixteen (16) shares of Common Stock will be a designated principal portion of the Exchange Consideration. Accrued interest to the extent of $80 in cash plus eight (8) shares of Common Stock per $1,000 principal amount of Debentures will be a designated interest portion of the Exchange Consideration. Assuming that a majority in principal amount of Debentures consent to give notice of rescission of acceleration, then the acceleration will be rescinded if and only if the Company pays the interest due on the Debentures that are not tendered. The interest includes four semi-annual interest installments (interest from approximately April 15, 1994 to April 15, 1996) plus the semi-annual interest installment due October 15, 1996 (interest from approximately April 15, 1996 to October 15, 1996) plus interest on defaulted interest payments accrued or accruing and unpaid to the date that the interest is paid (the "Interest Payment Date"). At November 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 a Debentureholder who surrenders a Debenture will immediately become the holder of a right to receive the Exchange Consideration. Assuming that 100% of the principal amount of Debentures are exchanged, the Company will require a maximum of $5,532,040 to pay the cash portion of the Exchange Consideration. At May 31, 1996, the Company had approximately $4.4 million in short-term cash equivalent investments. The Company estimates that $3.1 million would be sufficient to exchange approximately 30% of the outstanding principal amount of the Debentures and pay interest due on the 70% Debentures remaining. The Company also anticipates utilizing one or more of the following potential sources of cash to provide funds for its additional cash needs if more than that percentage of the Debentures are tendered for exchange. - The Company's freestanding hospital facility in Jacksonville, Florida is under a contract for sale, and the transaction is scheduled to be completed during the second quarter of fiscal 1997. The sale proceeds are expected to be $1.3 million. - 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 directly from the Company in a private placement at least $5.0 million of face amount of 15% fully secured promissory notes due no earlier than 15 months from the date of issue, such commitment to remain open until at least August 1997. - In connection with the sale of a hospital facility in the first quarter of fiscal 1997, the Company took back a note on the property with provisions that allow the buyer a discount if the note is redeemed in the first six months. In the event the buyer 41 48 exercises this option, the proceeds to the Company would be $1.55 million; however, no assurance can be made when such proceeds might be received. These potential needs for and 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 rescission of acceleration will not occur until after the Exchange has been funded fully. SUMMARY COMPARISON OF TERMS OF DEBENTURES AND EXCHANGE CONSIDERATION THE DEBENTURES EXCHANGE CONSIDERATION -------------- ---------------------- PRINCIPAL While the Debentures are The Exchange Consideration accelerated, $1,000 of includes, as principal, for principal and interest accrued each $1,000 in principal on the principal to the date amount exchanged, $500 in cash of payment is payable, along plus 16 shares of Common with interest on unpaid Stock. As of October 1, interest to the extent lawful 1996, the reported closing is due and payable in cash. price of the Common Stock on See "Interest" below. If the the NYSE was $12 7/8. The acceleration is rescinded, the rights of holders of Common principal amount will be due Stock are junior to the rights in full April 15, 2010, of Debentureholders and all subject to earlier redemption other creditors. See "Ranking" in the Company's discretion. below. No sinking fund payments will be due. See "The Proposals-- Proposal No. 4." 42 49 INTEREST Interest accrues at the The Exchange rate of 7 1/2% per annum Consideration includes, calculated on a 30-day as interest, for each month and 360 day year $1,000 in principal basis. Interest has not amount exchanged, $80 in been paid since the cash plus eight (8) payment that was made on shares of Common Stock. April 15, 1994 on the No additional payment of Debentures. Four Exchange Consideration semi-annual interest will be due on account of installments are in interest accruing or arrears (October 1994, accrued or any other April 1995, October 1995 claim under such and April 1996), and a Debentures. As of semi-annual interest October 1, 1996, the installment is due reported closing price of October 15, 1996. the Common Stock on the Debentures earn interest NYSE was $12 7/8. on default interest at 7 1/2% per annum, to the extent permitted by law. Approximately $208.98 of interest in the aggregate will have accrued on each $1,000 face value to November 15, 1996. If the acceleration is to be rescinded, the interest required to be paid prior to rescission of acceleration includes all accrued interest except interest accruing on the principal amount from and after October 15, 1996. MATURITY While the Debentures are Upon the Exchange being accelerated, all completed, the tendering principal and interest is Debentureholders will due and payable receive Exchange immediately. If the Consideration, and the acceleration is Debentures tendered and rescinded, the principal exchanged will be amount will mature on cancelled. Completion of April 15, 2010, subject the Exchange Offer is to optional redemption at subject to a high degree 100.00% of face amount, of risk. See "Special and also subject to 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. See "the Proposals--Proposal No. 4." CONVERSION Each $1,000 in principal See "Principal" above. OR EXCHANGE amount is convertible into 4 43 50 whole Common shares (and a Debentureholder will not be entitled to convert a Debenture in a principal amount less than $1,000) at the current conversion price of $248.57 per share. The conversion price is subject to adjustment to prevent dilution in certain events. The conversion price adjustments are made generally whenever shares are sold by the Company at a price below the average closing price on the NYSE during a specified period. See "Additional Risk Factors-- Conversion Price Far Above Share Prices." See the "Notice of Conversion Price Adjustment" attached as Exhibit 99.18 hereto. RANKING Unsecured general Payments received in the obligations of the Exchange Offer by Company subordinate to Debentureholders may be all existing and future subject to claims of Senior Debt of the Senior Debt holders or Company (as defined). other creditors, and, if Secured Senior Debt competing creditors totalled approximately prevail in asserting $2.0 million at August their claims, the 31, 1996. Exchange Consideration may be forfeitable. See "Priorities of Securities and Other Considerations Relating to Any Future Bankruptcy of the Company." Shares of Common Stock received in the Exchange constitute "equity" securities, which by their nature are subordinate to all indebtedness of the Company. REDEMPTION Redeemable at any time in No redemption. AT OPTION OF whole or in part at the THE option of the Company at COMPANY the principal amount, together with accrued interest. NO FAIRNESS OPINION The Company has not advised Debentureholders to exchange or to refrain from exchanging Debentures because, among other reasons, the Company has not obtained a fairness opinion concerning the Exchange Offer from any investment banking firm or an appraisal or any other investigation of the consequences of an Exchange. 44 51 DESCRIPTION OF DEBENTURES $46,000,000 principal amount, at a price of 100% of face amount plus accrued interest, of the Company's 7 1/2% Convertible Subordinated Debentures Due April 15, 2010 (the "Debentures") were issued under an Indenture dated as of April 15, 1985 (the "Indenture") between the Company and Bank of America National Trust and Savings Association, as trustee (the "Trustee"). In March 1991, over $36 million in principal amount of Debentures were converted by their holders into shares of the Company's common stock, as then classified. As of the date hereof, $9,538,000 in principal amount remained outstanding. The terms of the Debentures include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (the "1939 Act") as in effect on the date of the Indenture. The Debentures are subject to all such terms, and persons interested in those terms are referred to the Indenture and the 1939 Act for a statement thereof. This summary makes use of certain terms defined in the Indenture or the 1939 Act and does not purport to be complete, and is qualified in its entirety by references to the Indenture and the 1939 Act. All references to "Section," "Article" or "Paragraph" in this section refer to the applicable Section or Article of the Indenture or the applicable Paragraph in the form of Debenture included in the Indenture, as the case may be. GENERAL The Debentures represent general unsecured obligations of the Company, subordinate in right of payment to certain other obligations of the Company as described under "Subordination of Debentures." The Debentures are convertible into the Company's Common Stock as described under "Conversion of Debentures." The Debentures are issued in fully registered form only in denominations of $1,000 or any whole multiple thereof, and will mature on April 15, 2010. The Debentures are traded in the over-the-counter market. Such trading is sporadic. The Company pays interest on the Debentures at the rate of 7 1/2% per annum to the persons who are registered holders of Debentures at the close of business on the April 1 or October 1 next preceding the interest payment date. Interest is payable semiannually on April 15 and October 15 of each year. Interest is computed on the basis of a 360-day year of twelve 30-day months. The Company may pay principal and interest by its check and may mail interest checks to a holder's registered address. Principal and premium, if any, will be payable, and the Debentures may be presented for conversion, registration of transfer and exchange, without service charge, at the office of the Trustee. The Trustee's office for this purpose is 180 E. Fifth Street, Suite 200, St. Paul, Minnesota 55101. CONVERSION OF DEBENTURES The holder of any Debenture will be entitled at any time prior to the close of business on April 15, 2010, subject to prior redemption, to convert the Debentures or portions thereof which are $1,000 or whole multiples thereof, at the principal amount thereof, into shares of Common Stock of the Company, at the adjusted conversion price of $248.57 per share, subject to further adjustment as described below. On each semi-annual interest payment date, interest will be paid to the registered holder as of the record date for payment. Debentures that are surrendered for conversion after the record date for the payment of interest would receive the interest payable (Paragraph 2). No other payment or adjustment will be made on conversion of any Debenture for interest accrued thereon or dividends on any Common Stock issued (Section 10.02). The Company will not issue fractional shares of Common Stock upon conversion of Debentures and, in lieu thereof, will pay a cash adjustment 45 52 based upon the market price of the Common Stock on the last business day prior to the date of conversion (Section 10.03 and Paragraph 8). In the case of Debentures called for redemption, conversion rights will expire at the close of business the fifth business day prior to the redemption date (Section 3.03 and Paragraph 8). The conversion price, which, as adjusted, was $248.57 per share as of May 31, 1996, is subject to adjustment as set forth in the Indenture in certain events, including: the issuance of stock of the Company as a dividend or distribution on the Common Stock; subdivisions and combinations of the Common Stock; the issuance of stock of the Company upon certain reclassifications of its Common Stock; the issuance to all holders of Common Stock of certain rights or warrants entitling them to subscribe for Common Stock at less than the current market price (as defined); the distribution to all holders of Common Stock of debt securities or assets of the Company or rights or warrants to purchase assets or securities of the Company (excluding cash dividends or distributions paid out of current or retained earnings); the issuance of shares of Common Stock (with certain exceptions) for less consideration than the current market price; and the issuance of securities convertible into or exchangeable for shares of Common Stock (other than pursuant to transactions described above and with certain exceptions) for a consideration per share of Common Stock deliverable on such conversion or exchange that is less than the current market price (as defined) of the Common Stock. No adjustment in the conversion price will be required unless such adjustment would require a change of at least 1% in the price then in effect; but any adjustment that would otherwise be required to be made shall be carried forward and taken into account in any subsequent adjustment. No adjustment need be made for rights to purchase Common Stock pursuant to a Company dividend or interest reinvestment plan. In addition, no adjustment need be made if holders of Debentures are to participate in such transactions on a basis and with notice that has been determined to be fair and appropriate in light of the basis and notice on which holders of Common Stock participate in the transaction. The Company may at any time reduce the conversion price by any amount, provided that any such reduction must be effective for a minimum period of 15 days. In March 1991, the Company temporarily reduced the conversion price pursuant to such provision. If the Company consolidates or merges into or transfers or leases all or substantially all of its assets to any person, the Debentures will become convertible into the kind and amount of securities, cash or other assets which the holders of the Debentures would have owned immediately after the transaction if the holders had converted the Debentures immediately before the effective date of the transaction (Sections 10.06-10.18). If the Company makes a distribution resulting in an adjustment to the conversion price and such adjustment is considered to result in an increase in the proportionate interests of the holders of the Debentures in the assets or earnings and profits of the Company, holders of the Debentures may be viewed as receiving a "deemed distribution" that is taxable as a dividend under Sections 301 and 305 of the Code (as it exists on the date thereof). OPTIONAL REDEMPTION The Company may, at its option, redeem all or part of the Debentures, on at least 15 days' but not more than 60 days' notice to each holder of Debentures to be redeemed at the holder's registered address, at the redemption price (expressed as a percentage of principal amount) of 100%, plus accrued interest to the redemption date. 46 53 SINKING FUND Subject to certain conditions, the Company is required to redeem, through operation of a sinking fund, 5% of the aggregate principal amount of Debentures on April 15, 1996, and on each April 15 thereafter through April 15, 2009, at a redemption price of 100% of principal amount thereof, plus accrued interest to the redemption date. Such sinking fund payments are calculated to retire 70% of the Debentures prior to maturity. Provided, however, the Company may reduce the principal amount of Debentures to be redeemed by subtracting 100% of the principal amount of any Debentures that holders of the Debentures have converted on or before such April 15 or any Debentures that the Company has delivered to the Trustee for cancellation or that the Company has redeemed other than through operation of the sinking fund on or before such April 15. Approximately $36 million in principal amount of Debentures was converted by Debentureholders in 1991, which the Company has elected to utilize to extinguish the sinking fund obligations at April 15, 1996 and in all subsequent years (Paragraph 6). See "The Proposals--Proposal No. 4." SUBORDINATION OF DEBENTURES The payment of the principal of, premium, if any, and interest on the Debentures is subordinated in right of payment, as set forth in the Indenture, to the prior payment in full of all Senior Debt, as defined in the Indenture, whether outstanding on the date of the Indenture or thereafter created, incurred, assumed or guaranteed. Upon (i) the maturity of Senior Debt, including by acceleration or otherwise, or (ii) any distribution of the assets of the Company upon any dissolution, winding up, liquidation or reorganization of the Company, the holders of Senior Debt will be entitled to receive payment in full before the holders of Debentures are entitled to receive any payment (Sections 11.03-11.04). "Senior Debt" means all defined Debt (present or future) created, incurred, assumed or guaranteed by the Company (and all renewals, extensions or refundings thereof), unless the instrument governing such Debt expressly provides that such Debt is not senior or superior in right of payment to the Debentures. Provided also that Senior Debt shall not include any defined Debt of the Company to any of its subsidiaries (Section 11.02). The principal amount of Senior Debt at August 31, 1996 was estimated at $2.1 million. "Debt" means any indebtedness, contingent or otherwise, in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of the Company or only to a portion thereof), or evidenced by bonds, notes, debentures or similar instruments or letters of credit, or representing obligations of the Company as lessee under leases of real or personal property, or representing the deferred and unpaid balance of the purchase price of any property or interest therein, except any such balance that constitutes a trade payable, if and to the extent such indebtedness would appear as a liability upon a balance sheet of the Company prepared on a consolidated basis in accordance with generally accepted accounting principles (Section 11.02). In addition, the claims of third parties to the assets of the Company's subsidiaries incurring such obligations will be superior to those of the Company as a stockholder, and, therefore the Debentures may be deemed to be effectively subordinated to the claims of such third parties. Certain substantial operations of the Company are conducted through such subsidiaries, and the Debentures are effectively subordinated to repayment of the Company's liabilities arising from those operations. 47 54 The Indenture does not limit the amount of additional indebtedness, including Senior Debt, which the Company or any subsidiary can create, incur, assume or guarantee. As a result of these subordination provisions, in the event of insolvency, holders of the Debentures may recover less ratably than other creditors of the Company or its subsidiaries. EVENTS OF DEFAULT AND REMEDIES An Event of Default is: default for 30 days in payment of interest on the Debentures; default in payment when due of principal and premium, if any, on the Debentures; failure by the Company for 30 days after notice to comply with any of its other agreements in the Indenture or the Debentures; and certain events of bankruptcy or insolvency (Section 6.01). If any Event of Default occurs and is continuing, the Trustee, or the holders of at least 25% in the principal amount of the Debentures then outstanding can give notice to the Company and the Trustee in order to accelerate and to declare all the Debentures to be due and payable immediately, except that in the case of an Event of Default arising from certain events of bankruptcy or insolvency, and subject to applicable law, all outstanding Debentures become due and payable without further action or notice (Section 6.02). If an Event of Default occurs and is continuing, the Trustee may pursue any remedy available at law or in equity to collect the payment of principal or interest on the Debentures or to enforce the performance of any provision of the Indenture or the Debentures. A delay or omission by the Trustee or any Debentureholder in exercising any right or remedy shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default (Section 6.03). Holders of the Debentures may not enforce the Indenture or the Debentures except as provided in the Indenture. A holder of Debentures may enforce a remedy with respect to the Indenture or the Debentures only if the Trustee gives notice of a continuing Event of Default, the holders of at least 25% in principal amount of then outstanding Debentures make a request to the Trustee to pursue the remedy, such holders offer to the Trustee an indemnity satisfactory to the Trustee against loss, liability or expense, the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity, and during such 60-day period the holders of a majority in principal amount of then outstanding Debentures do not give the Trustee a direction inconsistent with the request (Section 6.06). Subject to certain limitations, holders of a majority in principal amount of the then outstanding Debentures may direct the Trustee regarding the time, method and place of exercising any trust or power conferred on it (Section 6.05). The Trustee is required, within 90 days after the occurrence of any Event of Default which is known to the Trustee and continuing, to give the holders of the Debentures notice of such Event of Default. The Trustee may withhold from holders of the Debentures notice of any continuing Default or Event of Default (except a Default or Event of Default in payment of principal or interest) if it determines that withholding notice is in their interest (Section 7.05). The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and upon becoming aware of any Default or Event of Default, a statement specifying such Default or Event of Default (Section 4.03). 48 55 MERGER, CONSOLIDATION, OR SALE OF ASSETS The Company may not consolidate or merge into, or transfer all or substantially all of its assets to, another corporation, person or entity unless (i) the successor is a United States corporation, (ii) it assumes all of the obligations of the Company under the Debentures and the Indenture, and (iii) after such transaction no Event of Default exists (Article 5). AMENDMENT, SUPPLEMENT AND WAIVER Subject to certain exceptions, the Indenture or the Debentures may be amended or supplemented with the consent of the holders of at least two-thirds in principal amount of such then outstanding Debentures, and any existing default or non-compliance with any provision may be waived with the consent of the holders of at least two-thirds in principal amount of the then outstanding Debentures (Sections 9.02 and 6.04). Without the consent of any holder of the Debentures, the Company and the Trustee may amend or supplement the Indenture or the Debentures to cure any ambiguity, defect or inconsistency, to provide for uncertificated Debentures in addition to or in place of certificated Debentures, to provide for the assumption of the Company's obligations to holders of the Debentures in the case of a merger or acquisition, or to make any change that does not adversely affect the rights of any holder of the Debentures (Section 9.01 and Paragraph 12). Without the consent of each Debentureholder affected, the Company may not reduce the principal amount of Debentures, the holders of which must consent to in order to amend the Indenture; reduce the rate or change the interest payment time of any Debenture; reduce the principal of or change the fixed maturity of any Debenture; make any Debenture payable in money other than that stated in the Debenture, i.e., U.S. dollars; make any change in the provisions concerning waiver of Defaults or Events of Default by holders of the Debentures or rights of holders to receive payment of principal or interest; or make any change that adversely affects conversion rights or adversely affects Debentureholders under the Indenture's and the Debenture's subordination provisions (Section 9.02). TRANSFER AND EXCHANGE A holder may transfer or exchange Debentures in accordance with the Indenture. The Registrar may require a holder, among other things, to furnish appropriate endorsements and transfer documents, and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar is not required to transfer or exchange any Debenture selected for redemption. Also, the Registrar is not required to transfer or exchange any Debenture for a period of 15 days before a selection of Debentures to be redeemed (Section 2.06 and Paragraph 10). The registered holder of a Debenture may be treated as the owner of the Debenture for all purposes. CONCERNING THE TRUSTEE The Trustee acts as Debenture Conversion Agent, Paying Agent and Registrar (Section 12.10). The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest (as defined) it must eliminate such conflict or resign (Article 7). 49 56 The holders of a majority in principal amount of the then outstanding Debentures will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee. The Indenture provides that in case an Event of Default shall occur (which shall not be cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any of the holders of the Debentures, unless they shall have offered to the Trustee security and indemnity satisfactory to it (Section 7.01). INCORPORATION BY REFERENCE PROVIDED HEREWITH, FOR THE PURPOSE OF PROVIDING DEBENTUREHOLDERS WITH SUBSTANTIALLY THE FINANCIAL INFORMATION THAT ITEM 13 OF SCHEDULE 14A UNDER THE SECURITIES EXCHANGE ACT IDENTIFIES, ARE THE COMPANY'S SCHEDULE 13E-4, AS AMENDED, INCLUDING THE OFFERING CIRCULAR THAT COMPRISES A PORTION THEREOF, AS FILED WITH THE COMMISSION ON OR ABOUT OCTOBER 4, 1996, AND CERTAIN PORTIONS OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K, INCLUDED IN THE COMPANY'S 1996 ANNUAL REPORT TO STOCKHOLDERS, RELATED TO THE FISCAL YEAR ENDED MAY 31, 1996. REGARDING THE COMPANY'S FORM 10-K, ONLY THE RESPECTIVE AUDITORS' REPORTS, FINANCIAL STATEMENTS AND THE NOTES THERETO, OTHER SELECTED FINANCIAL INFORMATION, THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND ALL OF THE INFORMATION IN, OR REFERRED TO IN, RISK FACTORS, ARE INCORPORATED HEREIN BY THIS REFERENCE. MANAGEMENT REQUESTS A CONSENT FOR PROPOSALS NO. 1, 2, 3 AND 4. BY ORDER OF THE BOARD OF DIRECTORS Kerri Ruppert Senior Vice President, Secretary/Treasurer and Chief Financial Officer October 8, 1996 Corona del Mar, California 50 57 [FORM OF FRONT OF CARD] COMPREHENSIVE CARE CORPORATION CONSENT THIS CONSENT IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF COMPREHENSIVE CARE CORPORATION (the "Company"). The Board of Directors of Comprehensive Care Corporation RECOMMENDS CONSENT on every proposal. Debentureholders are urged to mark, sign, date and mail promptly this Consent Card in the envelope provided. Consents must be received at the address of the Trustee by 5:00 p.m. St. Paul , Minnesota time, on or before October 30, 1996, unless the deadline is extended without further notice. If not otherwise terminated, the Consent Solicitation Period terminates 60 days after the earliest-dated Consent. THIS CONSENT CARD IS INTENDED TO OBTAIN CONSENT; AND THIS CARD SHALL BE DEEMED TO INDICATE A CONSENT TO EACH PROPOSAL IF NOT INDICATED TO THE CONTRARY AS TO EACH PROPOSAL. EACH CONSENT MUST BE SIGNED AND DATED. Sign exactly as addressed to you. Joint owners should each sign. If signing as executor, administrator, attorney, trustee, or guardian, give title as such. If a corporation, sign in full corporate name by authorized officer. If a partnership, sign in the name of authorized person. Please do not forget to sign and date this Consent Card. Please return this Consent Card promptly, using the enclosed envelope. No postage is required if mailed in the United States of America. 51 58 [FORM OF BACK OF CARD] PLEASE SIGN, DATE AND INDICATE APPROVAL BELOW. PROPOSAL 1: / / APPROVE / / DISAPPROVE / / ABSTAIN Proposal 1. To consent to rescind the acceleration, and hereby to notify First Trust of California, National Association, successor to Bank of America National Trust and Savings Association (the "Trustee"), pursuant to Section 6.02 of the Indenture dated April 25, 1985 (the "Indenture") between the Company and the Trustee, of a rescission of the acceleration of all principal and interest due under the Company's 7 1/2% Convertible Subordinated Debentures Due April 15, 2010 (the "Debentures"). PROPOSAL 2: / / APPROVE / / DISAPPROVE / / ABSTAIN Proposal 2. To consent to waive, and hereby to waive and to notify the Trustee of a waiver of, any other Events of Default and any other defaults (known or unknown) under the Debentures (other than any nonpayment of principal and interest due) that exist at the time, if any, when the Company's consummation of the Exchange and the rescission of the Acceleration results in termination of the Consent Solicitation Period. PROPOSAL 3: / / APPROVE / / DISAPPROVE / / ABSTAIN Proposal 3. To consent to instructions, and hereby to instruct the Trustee, not to pursue any remedy under the Debentures or the Indenture upon anything less than future directions given by a majority in outstanding principal amount of Debentures during the Consent Solicitation Period and a period of up to 30 calendar days thereafter pending rescission of acceleration and competition of the Exchange. PROPOSAL 4: / / APPROVE / / DISAPPROVE / / ABSTAIN Proposal 4. To consent to the waiver of notice provisions required under the Indenture requiring notice from the Company with respect to the Company's cancellation of a sinking fund payment obligation and to waive any claim to receive the sinking fund installment payment that purportedly was due April 15, 1996. SIGNATURE(S) _______________________________ Signature _______________________________ Signature (if held jointly) Title or authority (if applicable) Date: ______________________, 1996 THIS WRITTEN CONSENT IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY. MANAGEMENT AND THE BOARD OF DIRECTORS RECOMMENDS A CONSENT TO "APPROVE" EACH OF PROPOSALS NO. 1, NO. 2, NO. 3 AND NO. 4 IN ORDER TO FACILITATE RESCISSION OF ACCELERATION OF THE DEBENTURES. THIS CONSENT CARD WILL BE COUNTED AS YOU DIRECT; IN THE ABSENCE OF SUCH DIRECTION, IT WILL BE DEEMED TO INDICATE CONSENT TO "APPROVE" EACH OF THE FOREGOING PROPOSALS. 52 59 EXHIBIT INDEX Exhibit No. Description 23.3 Consent of Ernst & Young LLP 23.4 Consent of Arthur Andersen LLP 99.11 Notices of Default to the Debentureholders from the Trustee dated November 22, 1994; February 13, 1995; May 23, 1995; November 24, 1995; and June 10, 1996. 99.12 Form of Notice to Debentureholders of Interest Payment Record Date. 99.13 Form of Cover Letter describing Proposals to accompany Debenture Exchange Offer. 99.15 Script for explanation of the Debenture Exchange Offer. 99.18 Notice to Debentureholders of Conversion Price Adjustment. 99.20 Letter Agreement dated March 3, 1995 between the Company and Mr. Jay H. Lustig, individually and as representative of Participating Securityholders. 99.21 Letter dated March 21, 1996 from Mr. Jay H. Lustig to Mr. Marvin Feigenbaum, a director of the Company. 99.22 Letter dated March 1, 1996 from the Trustee to the Company. 99.23 Letters dated March 27, 1996 from the Company to the Trustee. 99.24 No-Action Letters regarding the Section 3(a)(9) exemption under the Securities Act of 1933 for an exchange of securities. 99.25 Mutual Fund's Firm Commitment dated August 8, 1996. 99.27 The Company's Schedule 13E-4, as amended, originally filed with the Securities and Exchange Commission on September 14, 1995 (the "Exchange Offer Statement"), incorporated herein by this reference. 53 EX-23.3 2 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Schedule 14A and Schedule 13E-4 of our report dated August 27, 1996 with respect to the consolidated financial statements of Comprehensive Care Corporation and subsidiaries included in Comprehensive Care Corporation's Annual Report (Form 10-K) for the year ended May 31, 1996 filed with the Securities and Exchange Commission. /s/ ERNST & YOUNG LLP Orange County, California September 30, 1996 EX-23.4 3 CONSENT OF ARTHUR ANDERSON, LLP 1 EXHIBIT 23.4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Schedule 14A and Schedule 13E-4 of our report dated August 22, 1994, included in Comprehensive Care Corporation's Annual Report (Form 10-K) for the year ended May 31, 1996. It should be noted that we have not audited any financial statements of the Company subsequent to May 31, 1994, or performed any audit procedures subsequent to the date of our report. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, October 4, 1996 EX-99.11 4 NOTICES OF DEFAULT TO THE DEBENTUREHOLDERS 1 EXHIBIT 99.11 TO THE HOLDERS OF COMPREHENSIVE CARE CORPORATION 7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE APRIL 15, 2010 (CUSIP NO. 204620AA6) NOTICE IS HEREBY given to the holders of the above-referenced Debentures, as provided for under the Indenture dated as of April 25, 1985 between Comprehensive Care Corporation, a Delaware Corporation (the "Company"), and Bank of America National Trust and Savings Association (the "Trustee"), that the Company failed to make its interest payment on the Debentures which was due and payable on October 17, 1994. Pursuant to Section 6.01 of the Indenture, the Company is in default under the Indenture effective as of November 17, 1994. Pursuant to Section 6.02 of the Indenture, based on this default by the Company, the Trustee by notice to the Company, or the holders of at least 25% in principal amount of the outstanding Debentures by notice to the Company and the Trustee, may declare the principal of and accrued interest on all the Debentures to be due and payable. The Trustee wishes to further inform the holders of the Debentures that, pursuant to Section 6.05 of the Indenture, the holders of not less than a majority of the $9,538,000 aggregate principal amount of outstanding Debentures have the right to direct the Trustee's actions concerning this default by the Company, subject to the conditions contained in the Indenture. If the Trustee does not receive directions from the requisite number of holders of the Debentures, the Trustee will formulate a course of action to take concerning this default by the Company. The Trustee has not as of this date declared the principal of and accrued interest on all the Debentures to be due and payable, and the Trustee is continuing to consider whether such a notice of acceleration would presently be in the best interest of the holders of the Debentures. 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 Debentures 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, Associate Administrator, 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) 345-46452. 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 Debentures. Dated: November 22, 1994 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Trustee 1 2 TO THE HOLDERS OF COMPREHENSIVE CARE CORPORATION 7 1/2% OF CONVERTIBLE SUBORDINATED DEBENTURES DUE APRIL 15, 2010 (CUSIP NO. 204620AA6) (THE "SECURITIES") 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) as more fully described below, the Holders of at least 25% in principal amount of the currently outstanding Securities have by written notice to the Company and the Trustee declared the principal of and accrued interest on all the Securities to be due and payable, and (2) as more fully described below, the Company has delivered to the Trustee, and has requested the Trustee to mail to the Holders, both (a) the enclosed notice from the Company setting February 28, 1995, as the special record date and also as the payment date for the interest payment on the Securities which the Company failed to make on October 17, 1994 (the "Company Notice"), and (b) the enclosed Notice of Rescission of Acceleration. Capitalized terms not otherwise defined herein shall have the same meanings as set forth in the Indenture. As the Holders are aware, on November 23, 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. The Trustee has received written notices dated February 6 and 9, 1995, from twenty-one (21) Holders of the Securities declaring the principal of and accrued interest on all the Securities to be due and payable (the "Written Notices"). The Trustee understands that the Company has also received the Written Notices. The aggregate principal amount of the outstanding Securities registered in the names of the twenty-one (21) Holders who sent the Written Notices is $3,017,000. The aggregate principal amount of all currently outstanding Securities is $9,538,000. Thus, the aggregate principal amount of the outstanding Securities registered in the names of the twenty-one (21) Holders who sent the Written Notices is approximately 31.63% of the aggregate principal amount of all currently outstanding Securities. Pursuant to Section 6.02 of the Indenture, upon receipt by the Company and the Trustee of the Written Notices, the principal of and accrued interest on all the Securities become immediately due and payable. Section 6.02 of the Indenture provides that "[t]he Holders of a majority in principal amount of the then outstanding Securities by notice to the Trustee may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if any existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration." The Trustee has not as of this date been notified of any judgment or decree with which a rescission of the acceleration of the Securities would conflict; and as of this date the only existing Event of Default of which the Trustee has been notified is the failure of the Company to make the interest payment on the Securities which became due and payable on October 17, 1994. The Company has delivered to the Trustee, and has requested the Trustee to mail to the Holders, both (1) the enclosed Company Notice setting February 28, 1995, as the special record date and also as the payment date for the interest payment on the Securities which the Company failed to make on October 17, 1994, and (2) the enclosed Notice of Rescission of Acceleration. Please note that, as set forth on the Company Notice, the Company's payment of the missed October 17, 1994 interest payment (together with interest thereon from and including October 15, 1994, and to but not including February 28, 1995) is expressly conditioned upon the effective rescission of the acceleration of the Securities by Holders of a majority in principal amount of the currently outstanding Securities executing and returning to the Trustee the enclosed Notice of Rescission of Acceleration on or before February 28, 1995. If a Holder wants the principal of and accrued interest on all the Securities to remain immediately due and payable, a Holder does not need to do anything. If a Holder wants to rescind the acceleration of the principal of and interest on the Securities, a Holder must execute the enclosed Notice of Rescission of Acceleration and return that executed Notice of Rescission of Acceleration to the Trustee at the address for the Trustee set forth in the following paragraph. An executed Notice of Rescission of Acceleration must be received by the Trustee by no later than 1:00 p.m., Los Angeles, California time, on February 28, 1995. 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, Associate Administrator, 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: February 13, 1995 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Trustee 1 3 THIRD NOTICE TO THE HOLDERS OF COMPREHENSIVE CARE CORPORATION 7 1/2% OF CONVERTIBLE SUBORDINATED DEBENTURES DUE APRIL 15, 2010 (CUSIP NO. 204620AA6) (THE "SECURITIES") THIS THIRD 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 April 17, 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 May 18, 1995, and (2) as more fully described below, certain additional developments have occurred since the Trustee's last notice to the Holders dated February 13, 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. The Company has informed the Trustee and has issued a press release announcing that on March 3, 1995, the Company reached an agreement in principal with an ad hoc committee of Holders. The Company has informed the Trustee that such agreement with the ad hoc committee of Holders provides, among other things, for the Company to offer to purchase the outstanding Securities with cash and common stock of the Company. The Company has further informed the Trustee that such agreement provides that the Company will submit such offer to the Holders and will complete such offer within 180 days from March 3, 1995. If the Company has not completed such offer by that time, the Trustee intends to communicate at that time with the Holders once again and seek directions from the Holders concerning the exercise of appropriate remedies against the Company. Pursuant to the agreement with the ad hoc committee of Holders, the involuntary bankruptcy petition which had been filed against the Company was dismissed on March 7, 1995. 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, 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: May 23, 1995 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Trustee 1 4 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. 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 1 5 TO THE HOLDERS OF COMPREHENSIVE CARE CORPORATION 7 1/2% OF CONVERTIBLE SUBORDINATED DEBENTURES DUE APRIL 15, 2010 (CUSIP NO. 204620AA6) NOTICE IS HEREBY GIVEN to the holders ("Holders") of the above-referenced securities (the "Securities") pursuant to Section 7.05 of the Indenture, dated as of April 25, 1985 (the "Indenture"), between Comprehensive Care Corporation, a Delaware Corporation (the "Company") and First Trust of California, National Association (as successor trustee of Bank of America National Trust and Savings Association, (the "Trustee") as follows: Interest Due April 15, 1996. The Company failed to pay interest on the Securities due on April 15, 1996 and failed to pay such interest within thirty (30) days after it became due and payable. Such failure is an Event of Default under Section 6.01(1) of the Indenture. Principal Due April 15, 1996. Section 6 of the Securities provides that five percent (5%) of the aggregate principal amount of the Securities were to be redeemed by the Company on April 15, 1996. Such amount was subject to reduction as provided in Section 6 of the Securities and Section 3.01 of the Indenture upon notice to the Trustee from the Company at least fifty (50) days prior to the redemption date. Notice from the Company, dated March 27, 1996, was received by the Trustee on April 1, 1996-- fourteen days prior to the redemption date. Accordingly, the Trustee determined that no credit or reduction was applicable to the April 15, 1996 principal redemption. The Company failed to pay such amount due and payable on April 15, 1996. Such failure is an Event of Default under Section 6.01(2) of the Indenture. ADDITIONAL NOTICE IS HEREBY GIVEN that the Trustee has not received notice from the Holders of a majority in principal amount of outstanding securities to rescind the previously declared acceleration of principal of and accrued interest on the Securities. Accordingly, such acceleration is still in effect. Reference is made to the Fourth Notice to the Holders, dated November 24, 1995 (the "Fourth Notice"). The Company has informed the Trustee that it is diligently pursuing the tender offer for the outstanding Securities referenced in the Fourth Notice, in that regard, has filed with the United States Securities and Exchange Commission (the "Commission") certain documents including a Schedule 13E-4 Issuer Tender Offer Statement and amendments and exhibits thereto. Such documents which are public information are available from the Commission. The Company has further informed the Trustee that the Company intends to submit to the Holders a tender offer for the Securities upon receipt of clearance from the Commission but that the Company cannot at this time specify an exact date by which such submission will be made. The Trustee will continue with its duties under the Indenture. Consistent with the foregoing, the Trustee will continue to monitor developments in this matter and, as the Trustee deems appropriate, communicate the same with the Holders. Any directions or inquiries regarding this matter should be directed to the Trustee at the following address: First Trust of California, National Association c/o First Trust National Association First Trust Center, Suite 200 1800 East Fifth Street Saint Paul, Minnesota 55101 Dated June 10, 1996 NOTE: Recipients of this Notice that are a nominee or depository of a beneficial holder or beneficial holders of the Securities are asked to please immediately forward copies of this Notice to their respective beneficial holder(s). 1 EX-99.12 5 FORM OF NOTICE OF INTEREST PAYMENT RECORD DATE 1 EXHIBIT 99.12 [GRAPHIC: COMPREHENSIVE CARE CORPORATION LETTERHEAD ("COMPCARE LOGO")] 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 interest payments, and default interest on each missed payment, plus the regular semi-annual interest payment, calculated as follows: (1) The interest payment on the Securities in the aggregate amount of $357,675 ($37.50 per each $1,000 of principal amount of a Security) which was due and payable by the Company on October 17, 1994, together with interest on such missed interest payment (at the rate of 7 1/2% per annum from and including October 15, 1994, and to but not including the Payment Date) in the aggregate amount of $___________ ($_____ per each $1,000 of principal amount of a Security); (2) The interest payment on the Securities in the aggregate amount of $357,675 ($37.50 per each $1,000 of principal amount of a Security) which was due and payable by the Company on April 17, 1995, together with interest on such missed interest payment (at the rate of 7 1/2% per annum from and including April 15, 1995, and to but not including the Payment Date) in the aggregate amount of $__________ ($______ per each $1,000 of principal amount of a Security); (3) The interest payment on the Securities in the aggregate amount of $357,675 ($37.50 per each $1,000 of principal amount of a Security) which was due and payable by the Company on October 16, 1995, together with interest on such missed interest payment (at the rate of 7 1/2% per annum from and including October 15, 1995, and to but not including the Payment Date) in the aggregate amount of $_________ ($_______ per each $1,000 of principal amount of a Security); (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); and (5) 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 October 15, 1996, together with interest on such missed interest payment (at the rate of 7 1/2% per annum from and including the Payment Date) in the aggregate amount of $_______ ($______ per each $1,000 of principal amount of a Security). Such payments by the Company will be made to Holders in whose name a Security is registered as of _________, 1996. Such payment by the Company is conditioned upon the concurrent effectiveness of rescission of the acceleration of the Securities by Holders of a majority in principal amount of the outstanding Securities. Dated: November __, 1996 COMPREHENSIVE CARE CORPORATION, a Delaware corporation By:___________________________ Its: _________________________ 1 EX-99.13 6 COVER LETTER FOR DEBENTURE EXCHANGE OFFER 1 EXHIBIT 99.13 [COMPCARE LOGO] October 8, 1996 Dear Holder of Comprehensive Care Corporation 7 1/2% Convertible Subordinated Debentures Due April 15, 2010 (the "Debentures" or "Securities"): The Board of Directors of Comprehensive Care Corporation solicits holders of its 7 1/2% Convertible Subordinated Debentures Due April 15, 2010 (collectively called the "Debentures" or "Securities") for the following purposes: (1) For a majority in principal amount of the Securities to give notice to First Trust of California, National Association, successor to Bank of America National Trust and Savings Association (the "Trustee") to rescind the acceleration of the Securities ("Proposal 1"); and (2) For two-thirds in principal amount of the Securities to waive any other Events of Default (other than nonpayment of principal or interest due) or other defaults under the Debentures that exist at the time, if any, when the Company's consummation of the Exchange and the rescission of the Acceleration results in termination of the Consent Solicitation Period ("Proposal 2"); and (3) For a majority in principal amount of the Securities to instruct the Trustee to forebear from effecting any remedy for the Events of Default to permit completion of an Exchange Offer 60-day during the Consent Solicitation Period and 30 calendar days after ("Proposal 3"); and (4) For two-thirds in principal amount of the Securities to agree to waive the notice provision of the sinking fund reduction provision and to waive any claim to receive the sinking fund installment payment that purportedly was due April 15, 1996 ("Proposal 4"). Proposals 1, 2, 3 and 4, and the possible advantages and disadvantages of each proposal, are described in the enclosed Debenture Consent Solicitation Statement. Proposals 1, 2, 3 and 4 are recommended by your Board of Directors. A consent card (the "Consent") is enclosed for the purpose of giving such a notice to the Trustee. The Board of Directors recommends the Proposals because it believes that some of the Company's Securityholders would like to accept a proposed exchange offer (the "Exchange Offer"). The other purposes include elimination of the various undesirable effects of an acceleration, such as: (a) An acceleration of indebtedness can impair the Company's business and financial prospects. (b) An acceleration of indebtedness could result in defaults under other debts and obligations of the Company. (c) An acceleration of indebtedness decreases the Company's attractiveness to investors. (d) An acceleration of indebtedness also creates an unfavorable impression with the Company's vendors and clients. Although Securityholders will be offered an exchange of cash and Common Stock for their Securities, a Securityholder is not required to exchange. The Company will pay the entire amount of interest due on all non-tendered Debentures, and the Securities will be reinstated. The Company will accept properly tendered Securities in the Exchange Offer described in the Offering Circular. A rescission of acceleration of the Securities would effect a reinstatement of the Securities on their original non-accelerated terms and that should result in an immediate improvement in the Company's business and financial condition, and thus an improvement in its debt-carrying ability. A rescission of acceleration has other adverse effects on the rights exercisable by or for Securityholders. 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. Giving Consent will not effectively tender your Debentures. The manner of tendering Debentures is described in the Letter of Transmittal and the Offering Circular. It is each beneficial and record Debentureholder's right to elect not to tender such holder's Debentures. Nevertheless, there can be no assurance that the aggregate market value of your Securities after a rescission will be as great as the aggregate market value of your Securities before a rescission plus the interest payment received. A rescission of acceleration of the Debentures will not alter rights of Securityholders to accelerate the Securities upon any future Event of Default. The Board of Directors is hopeful that a rescission of acceleration of the Securities will help position the Company for a more successful long-term future. Please SIGN, DATE and MAIL the enclosed Consent Card as soon as possible. Sincerely, Chriss W. Street Chairman of the Board of Directors, President & Chief Executive Officer EX-99.15 7 SCRIPT EXPLAINING THE DEBENTURE EXCHANGE OFFER 1 EXHIBIT 99.15 SCRIPT -- QUESTIONS AND ANSWERS 1. WHAT IS THE DEBENTURE CONSENT FOR? All Debentureholders are separately asked to consent to four proposals, including that the Debenture acceleration be rescinded. Rescission of Acceleration is a precondition of consummation of the Exchange, and is the most important proposal for your consent. Debentureholders holding aggregately at least a majority of the outstanding principal amount of Debentures can consent to rescind the acceleration. The other proposals are intended to facilitate the Exchange. Depending on the circumstances, the other proposals may not be essential to a successful exchange. We request Debentureholders to consider all of the proposals and consent so that the Exchange can be accomplished. Only Debentures that are tendered and accompanied by a Consent will be accepted for exchange. 2. WHAT DO I RECEIVE IN EXCHANGE FOR DEBENTURES THAT I TENDER? For every $1,000 of principal amount, and a waiver of default interest and interest accrued on default interest, you will receive $580 in cash and 24 shares of Common Stock of Comprehensive Care Corporation. Part of the amount will be considered interest. The tax consequences for a typical holder are described in the Offering Circular. 3. HOW MUCH INTEREST HAS ACCRUED PER $1,000? If the Debenture acceleration is rescinded, the amount of interest that would be due will include five missed semi-annual interest payments of $37.50 each. The five interest installments due aggregate $187.50, and interest has accrued and will accrue on that default interest and will have added another $21.44 as of November 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. If the acceleration is rescinded, whatever portion of the next $37.50 interest payment that has accrued from October 15, 1996 on the outstanding principal amount (approximately $.21 per day) will be included in the $37.50 semi-annual interest payment due and payable April 15, 1997. 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. 1 2 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. 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 November 15, 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. 2 3 11. WHAT SHOULD I KNOW ABOUT TAXES? The circumstances of a particular holder sometimes affect the tax consequences. There is no federal tax consequence of any kind to adoption of the Proposals. The tax effects for typical persons of the Exchange 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. 3 EX-99.18 8 NOTICE OF CONVERSION PRICE ADJUSTMENT 1 EXHIBIT 99.18 NOTICE OF CONVERSION PRICE ADJUSTMENT
Shares Out- Number of Adjusted standing Prior Shares Aggregate Price Shares Current Average to Issuance Outstanding Dollar Paid 30 Day Issued or Conversion Conversion of Additional After Consideration Per Market Issuable Shares Price Price Shares Issuance Received Share Price - --------------- ----- ----- ------ -------- -------- ----- ----- 333,333(1) $259.69 $256.99 2,214,541 2,547,874 $2,000,000 $6.00 $6.517 115,000(2) $256.99 $255.50 2,547,874 2,662,874 $ 600,000 $5.21 $6.029 172,500(3) $255.50 $252.91 2,662,874 2,835,374 $ 975,000 $5.65 $6.783 135,000(4) $252.91 $250.51 2,835,347 2,970,374 $ 810,000 $6.00 $7.579 4,100(5) $250.51 $250.46 2,970,374 2,974,474 $ 24,600 $6.00 $7.104 5,000(6) $250.46 $250.38 2,974,474 2,979,474 $ 30,000 $6.00 $7.342 10,833(7) $250.38 $250.22 2,979,474 2,990,307 $ 64,998 $6.00 $7.342 132,560(8) $250.22 $248.57 2,990,307 3,122,867 $1,000,000 $7.54 $8.925
- -------- 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 Funds, Inc. 2 Shares of Common Stock issued under the Common Stock Purchase Agreement dated February 1, 1996 between the Company and Lindner Funds, 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 amended Common Stock Purchase Agreement dated April 15, 1995 between the Company and James R. Moriarty. 4 Shares of Common Stock issued, at the price of $6.00 per share, under the Amended Common Stock Purchase Agreement dated June 29, 1995 between the Company and Lindner Funds, Inc. 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 W.V.C. Limited. 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 Investments. 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 Helen Jean Quinn. 8 Shares of Common Stock issued upon effectuation of the Secured Conditional Exchangeable Note dated November 30, 1995, at a price of approximately $7.54 per share issued to Dreyfus Strategic Growth, L.P. 1 EX-99.20 9 LETTER AGREEMENT WITH JAY H. LUSTIG DATED 3/3/95 1 EXHIBIT 99.20 COMPREHENSIVE CARE CORPORATION 4350 Von Karman Suite 280 Newport Beach, CA 92660 Tel: 714-798-0468 Fax: 714-752-0585 March 3, 1995 HAND DELIVERED Mr. Jay H. Lustig Individually and as representative of the Participating Securityholders (defined below) Re: Proposed Rescission of Acceleration of Securities Dear Mr. Lustig: Based on the various discussions that we have had among or between Comprehensive Care Corporation (the "Company"), the Trustee of its 7-1/2% Convertible Subordinated Debentures Due April 15, 2010 (the "Securities"), and you as a representative of certain holders, and individually as a holder, of certain Securities which we understand aggregate $4.653 million in original principal amount (the "Participating Securityholders"), certain of whom were Securityholders who gave notice of acceleration in February, 1995, and our understanding of the type of transaction that is feasible for rescission of acceleration and of interest to us, we outline the basis for this proposed rescission relative to the proposed agreement to pay cash and issue shares to Participating Securityholders, and permitted assigns (collectively, the "Consideration"). In this regard, we propose the principal terms of an agreement (the "Agreement") to be as set out in this letter as follows: 1. Voting of Securities; "Lock-Up." Upon the dismissal of the involuntary Chapter 7 petition filed against the Company, the Participating Securityholders will give notices of rescission of acceleration reasonably acceptable and at times as determined by the Trustee and the Company, will vote in favor of each related proposal to be made to all of the Securityholders of the Company, including without limitation a proposed supplemental indenture if necessary, and will tender their Securities for exchange for cash and shares as described herein (the "Offer"). Furthermore the Participating Securityholders will neither submit any notice or demand of acceleration, nor pursue any remedies available under the Indenture nor join or participate in any Securities Exchange Act of 1934 Rule 13(d) group or participate against the Board or management in any proxy or other solicitation of any of the Securities or Common Stock of the Company, and the Participating Securityholders agree that they will give the Company any information they receive about anyone trying to form such a group. Jay H. Lustig represents that he is authorized to execute and deliver this Agreement on behalf of and to bind at least $2.5 million in original principal amount of the Securities and further represents that he shall cause the holders of at least $2.5 million of the outstanding principal amount of Securities to rescind acceleration and waive the interest payment defaults, substantially as provided in the attached Notice of Rescission of Acceleration on or before March 31, 1995, and use his best efforts to cause holders of an additional amount of Securities necessary to aggregately comprise more than 50% of the outstanding principal amount of Securities to rescind such acceleration and waive such interest payment defaults substantially as provided in such notice. 2. Rights Non-Assignable. Until the earlier of the expiration of this Agreement or the completion of the exchange of Securities contemplated 1 2 herein, nothing contained in this Agreement will permit any Participating Securityholder to at any time sell or dispose of in any manner the rights or obligations of the said Participating Securityholder under this Agreement. However, the Participating Securityholders may transfer their Securities provided that the recipient, and each subsequent transferee, is irrevocably bound hereby and so agrees in writing. Until the earlier of the expiration of this Agreement or the completion of the exchange of Securities contemplated herein, each Participating Securityholder shall notify the Company of any private or public sale, and agrees to placement of an appropriate legend on the Securities bound hereby. 3. Standstill. Until the earlier of the expiration of this Agreement or the completion of the exchange of Securities contemplated herein, if any Participating Securityholders, directly or indirectly, acquires beneficial or record ownership of any Securities or other equity securities of the Company or interest, such Securities will become and remain subject to this Agreement. 4. The Offer. The Offer shall incorporate the following features and specifications upon first being given to Securityholders, subject to requirements of law: / / The Offer shall be made pursuant to Section 3(a)(9) of the Securities Act of 1933 for up to 100% of the Securities. Shares issuable pursuant to the Offer are intended to be freely tradeable under the Securities Act of 1933. / / The Board of the Company shall use best efforts to complete this transaction within 120 days, but shall have a reasonable period of additional time, ending not later than 180 days after the date hereof, in order to consummate legal requisites to the Offer. / / The Company shall not, during the term of this Agreement, pledge or otherwise dispose of, or issue or commit to issue any additional, capital stock, or any interest therein, or securities convertible into shares of such stock, of CareUnit, Inc., a Delaware corporation ("Care Unit"), 100% of whose outstanding shares (the "Shares") are held beneficially and of record by the Company free of any other liens or claims. At 150 days after the date of this Agreement, provided that the Participating Securityholders have in each material respect performed (with opportunity to cure if a cure is possible) their obligations required to be performed hereunder on or prior to such date, and if the Offer has not then been consummated, the Company shall pledge (with the Trustee, or an alternate acceptable to the Company, to act as pledgeholder on terms of a written agreement containing standard terms reasonably acceptable to the Participating Securityholders) all of the Shares as collateral for its obligation to purchase the Securities pursuant to the Offer or otherwise. Such pledge may only be foreclosed upon following 180 days after the date hereof at the request of any Securityholder or the Trustee if the Offer is not consummated on or prior to such date, provided that the Participating Securityholders have in each material respect performed (with opportunity to cure if a cure is possible) their obligations required to be performed hereunder on or prior to such date. From day 150 through day 180 after the date hereof, or the earlier consummation of the Offer, the tendered (or all Participating Securityholders' Securities if the Offer has not been commenced without fault of the Participating Securityholders) Securities of the Participating Securityholders shall accrue and be paid upon purchase thereof additional interest at the rate of 7-1/2% per annum on the original principal amount). Upon consummation of the Offer, the said pledges shall be released. The Company represents that Care Unit is the subsidiary generating operating profits under the CareUnit name, and all of its other subsidiaries with similar names are substantially inactive. / / The Participating Securityholders shall support the proposed Offer and shall not speak or write publicly against the proposed Offer. In addition, the Participating Securityholders will not solicit or support any solicitation of proxies or consents inconsistent with the purposes or spirit of this Agreement. 2 3 / / The Offer shall allow the Securityholders to participate pro-rata to the amounts tendered, up to 100% of the amount of Securities outstanding, provided that all tendering Securityholders also give notice of rescission of acceleration and consent to any proposals reasonably made by the Company that are incidental to the Offer. / / The tendering Securityholders shall receive, net to the Securityholder, for each $1,000.00 of original principal amount tendered, $500.00 in cash, plus $120.00 in shares of Common Stock of the Company (based on a fair value of the Common Stock equalling the average round-lot traded price reported on the NYSE Composite Tape for all trading days during the 75 calendar days commencing with and as of March 6, 1995). Additionally, for each $1,000.00 of original principal amount, tendering Securityholders will receive $80 in cash (approximately 1 year's interest) representing the amount agreed upon to represent all interest owing and accrued to the payment date, in return for which they will waive all other obligations including all default interest accrued from April 15, 1994 which was due as of October 17, 1994, and all interest (or interest on interest) accruing from and after October 15, 1994 through the date on which the Offer is consummated. / / The Offer and the Company's completion of an exchange as described herein are subject to all relevant conditions provided in the Indenture relating to the Securities dated as of April 25, 1985 between the Company and the Trustee, as defined therein, and receipt of all reasonably necessary governmental, and third-party, consents, filings, or approvals necessary to consummate the Offer. / / The Company may condition the Offer upon a minimum of tendered Securities of $2.5 million from the Participating Securityholders. 5. Costs. The Company shall pay legal fees of Weil, Gotshal & Manges incurred by the accelerating Participating Securityholders from January 1, 1995 to date in the amount of between $35,000 and $40,000. Otherwise, the parties each will bear their own respective costs. 6. Release. Upon dismissal of the involuntary Chapter 7 case, referred to further below, the Company shall release each Participating Securityholder and its officers, employees, agents, representatives, attorneys, and advisors from any and all claims and causes of action arising or occurring prior to the date hereof, including without limitation any and all claims or causes of action arising out of or related to the delivery of the notice of acceleration of the Securities or the filing of an involuntary Chapter 7 petition against the Company, provided that the effectiveness of the release shall be conditioned upon and subject only to the execution and delivery by each respectively released Participating Securityholder of the notice of rescission of acceleration described in paragraph 1 hereof and each Participating Securityholder using its best efforts to achieve consummation of the transactions contemplated herein. 7. News Release. Upon the execution by you and return to us of this Agreement, the Company shall prepare the news release. Each news release concerning this Agreement or the Offer shall be in form and substance and at times reasonably determined by the Company after reasonable notice to you and reasonable prior consultation with you, with your reasonable cooperation, as representative of the Participating Securityholders. 8. Bankruptcy Petition. The Participating Securityholders that are petitioning creditors in the involuntary Chapter 7 bankruptcy petition filed against the Company shall support and cause their attorneys to execute and indicate consent to the Order Dismissing Involuntary Petition (the "Order") attached hereto. The Participating Securityholders that are petitioning creditors shall support entry of the Order and dismissal of the involuntary petition at the hearing scheduled for March 7, 1995. If such order is not entered by the court prior to or on March 8, 1995, the Company thereafter shall have the option to terminate this Agreement upon written notice and, prior to such termination, to require additional reasonable cooperation of the Participating Securityholders for the purpose contemplated in this paragraph. 3 4 9. Survival. If the Offer is consummated, the terms and provisions of this Agreement shall survive the consummation of the Offer. If the foregoing meets with your approval, so signify by signing and returning the enclosed duplicate copy of this letter, whereupon this letter shall constitute the final agreement between the parties in accordance with the terms and provisions set forth above. This offer will expire if not accepted on March 3, 1995. We shall look forward to receiving your prompt acceptance. Very truly yours, COMPREHENSIVE CARE CORPORATION By: /s/ Chriss W. Street --------------------------------------------------- Chriss W. Street, Chairman of the Board, Chief Executive Officer and President AGREED AND CONFIRMED: By: /s/ Jay H. Lustig Dated: March 3, 1995 ---------------------------------------- Jay H. Lustig APPROVED AS TO FORM: WEIL, GOTSHAL & MANGES By: /s/ Martin A. Sosland - ------------------------------------------- Martin A. Sosland 4 EX-99.21 10 JAY H. LUSTIG LETTER TO MARVIN FEIGENBAUM 1 EXHIBIT 99.21 MAR-21-96 THU 11:59 JHL HOLDINGS INC FAX NO. 13104518518 March 21, 1996 Mr. Marvin Feigenbaum c/o Goldstein, Axelrod & DiGioia 399 Lexington Avenue - 18th Floor New York, NY 10017 Dear Marvin: I have been unable to contact Sohail Masood. Nevertheless, my opinion is that bondholders would be willing to tender their bonds upon receiving a revised offer that compensates them for the delay in completing the transaction. The old offer was for bondholders to receive $580 cash and 16 shares of fully registered stock. It also provided for additional interest in the event the transaction was not completed in 180 days (September 3, 1995). In keeping consistent with this theme, a revised offer that incorporates this would be $635 in cash and 16 shares of stock. In the event CompCare wanted to pay the additional $55 in stock (which would have to be based on the same formula price as the 16 shares). That would make the revised alternative offer of $580 in cash and 23 1/3 shares per bond.
Old Offer New Offer or Stock Option/Offer --------- --------- --------------------- Cash $580 $635 $580 Shares 16 shares 16 shares 23 1/3 shares
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. EX-99.22 11 LETTER FROM TRUSTEE TO THE COMPANY DATED 3/1/96 1 EXHIBIT 99.22 MAR 01 '96 10:25 FR LSD-1710 612 335 1710 TO 1585#6327#3#1714 P. 02 [GRAPHIC: 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:
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
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 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 EX-99.23 12 LETTERS FROM THE COMPANY TO TRUSTEE DATED 3/27/96 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. 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: /s/KERRI RUPPERT ---------------------------------------- Kerri Ruppert, Senior Vice President, Chief Accounting Officer and Secretary/Treasurer cc: Steven Rensig, Esq. 2 COMPREHENSIVE CARE CORPORATION 350 W. Bay Street Costa Mesa, California 92627 Tel: (714) 222-2273 Fax: (714) 574-3030 March 27, 1996 VIA U.S. FIRST CLASS MAIL & CERTIFIED MAIL -- RETURN RECEIPT REQUESTED First Trust of California 180 East Fifth Street, Suite 200 St. Paul, Minnesota 55101 Attention: Joe Roach: Bank of America Trust Administration No. 8510 RE: Indenture dated April 25, 1985 (the "Indenture") between Comprehensive Care Corporation (the "Company") and First Trust of California, National Association, as successor to Bank of America National Trust and Savings Association (the "Trustee") Ladies and Gentlemen: Pursuant to Section 3.01 of the Indenture, the Company is to notify the Trustee of the amount and basis for a reduction of the principal amount of Securities to be redeemed pursuant to paragraph 6 of the Securities. The Company is to give each notice provided for in Section 3.01 at least 50 days before the redemption date. The Company has given a notification today in a separate letter. The Company understands that the Trustee has no objection to the timing of such notification effecting independently a series of successive reductions of the amount of redemptions pursuant to paragraph 6 of the Securities as to 5% of the aggregate principal amount of Securities on April 15 in each of the successive years from and including 1997 through and including 2009. By letter dated March 1, 1996, the Trustee indicates that notice was not given at least 50 days prior to the redemption date in 1996. The Company has provided one or more such notifications in any case. The Company respectfully draws the Trustee's attention to the fact that the Company has previously notified the Trustee of the reduction by providing the Trustee with copies of the Company's SEC filings made September 14, 1995, September 15, 1995, and February 6, 1996, among others, that stated in clear and unequivocal terms the Company's intention not to make any payments of principal on the Securities prior to April 15, 2010 and, contingent upon rescission of acceleration, to recommence to pay only interest until April 15, 2010. Such statements reflect the Company's intentions not to pay sinking fund redemption payments, and the only way to do that is by the Company electing to reduce such obligations to zero through the mechanics of paragraph 6 of the Securities, based upon previous cancellation by the Trustee of $36,462,000 of Securities. 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) 3 clearly describe the redemption date as the date on which "interest on Securities called for redemption ceases to accrue." If April 15 were the redemption date, interest could cease to accrue before payments were made. iii. The Company is required to pay all accrued interest on April 15 each year, and no additional interest would accrue if April 15 were also "the redemption date." It would be unnecessary to describe interest accruing after April 15 unless the redemption date can be after April 15. iv. Section 3.03 of the Indenture contemplates that prior to every redemption the Company will mail a notice of redemption that states the redemption date, a date chosen by the Company. In fact, the notice must state a redemption date not less than 15 nor more than 60 days after the mailing of the notice, which does not contemplate that the redemption date under paragraph 6 would always be April 15. v. We do not understand how can 5% of the aggregate amount of Securities on April 15 reasonably or practicably be called for redemption by the Company 15 days or more before April 15. It would seem impracticable to give the redemption notice until after April 15, and the redemption date needs to be from 15 to 60 days after mailing the redemption notice. In accordance with the Company's intentions to solicit Securityholders to rescind the present acceleration of the Securities, the Company proposes therein not to pay any amount on the Securities prior to rescission of acceleration, which is anticipated to be at least 50 days into the future. Therefore, not only has adequate notice for purposes of Section 3.01 of the Indenture been given at least 50 days prior to April 15, 1996, the notice given today shall have been given at least 50 days prior to the earliest date that potentially might be the redemption date. 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: /s/KERRI RUPPERT ------------------------------------------- Kerri Ruppert, Senior Vice President, Chief Accounting Officer and Secretary/Treasurer cc: Steven Rensig, Esq. EX-99.24 13 NO-ACTION LETTERS RE THE SECTION 3(A)(9) EXEMPTION 1 EXHIBIT 99.24 THE TABLE OF CONTENTS FOR THIS EXHIBIT IS FOUND AT PAGE 92 1978 SEC No-Act. LEXIS 560 Securities Act of 1933 - Section 3(a) (9) Feb 9, 1978 [*1] Barnett Winston Investment Trust TOTAL NUMBER OF LETTERS: 2 SEC-REPLY-1: SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 OCT 11 1977 William D. King, Esquire Mahoney Hadlow & Adams Barnett Bank Building 100 Laura Street P.O. Box 4099 Jacksonville, Florida 32201 Re: Barnett Winston Investment Trust (the "Trust") Dear Mr. King: This is in response to your letter of September 22, 1977 regarding a proposed tender/exchange offer to be made by the Trust to existing debenture holders without compliance with the registration requirements of the Securities Act of 1933 (the "Act") in reliance upon the exemption provided by Section 3(a) (9) of the Act. We understand that the Trust proposes an offer to exchange new debentures and cash for its outstanding 8 1/4% Subordinated Debentures ("8 1/4% Debentures") to be made simultaneously with an offer to accept tenders of the 8 1/4% Debentures for cash. Acceptance of the exchange offer will result in elimination of accrued interest on the 8 1/4% Debentures. Trustees, officers and regular employees of the Trust may contact holders of 8 1/4% Debentures (the "holders") and recommend that they accept the tender and/or exchange offers. In addition, officers and employees [*2] of Barnett Winston Investment Counselors, Inc. (the "Adviser") may also solicit acceptances of the proposed tender and/or exchange offers. The Adviser has had a continuing relationship with the Trust through which it performs most administrative functions of the Trust. None of these persons will be specifically compensated for their efforts. The Trust intends to engage an investor relations firm to perform the following ministerial services: (a) advise and consult with the Trust as to terms of the offers and in the preparation of communications to the holders; (b) notify the holders of all appropriate details; (c) confirm the accuracy of the addresses of the holders; (d) ascertain by telephone whether each holder has received the Trust's mailing and understand the mechanics of the offers and answer questions relating to the mechanics of the offers; (e) responds to questions not concerning the mechanical requirements which are answered in the offering circular by directing the holder to the pertinent portion of the offering circular; (f) remind holders of all appropriate deadlines; (g) ascertain what action the holder plans to take with regard to the offers, communicate the response [*3] to the Trust, and maintain documentary records of the offers; and (h) communicate with the back office personnel of brokers, banks, and other nominees who hold 8 1/4% Debentures for the benefit of others to make sure the offer material is being forwarded properly and to request the back office personnel to check with the beneficial owners as to whether they have received the material and understand the mechanics of the offer. The investor relations firm will be instructed that it may not make any recommendation regarding acceptance or rejection of the offers and that if it is 1 2 asked for such advice by a holder it will respond that the holders should obtain such advice from his own advisers or contact appropriate officers or employees of the Trust. Fees for the services of the investor relations firm would be based on a flat, per holder or per contact basis plus reimbursement for expenses and would not be affected by or contingent upon the action of any holder with respect to the offers or the success or failure or the offers. In order to comply with local law requirements, the Trust will be required to engage a broker-dealer to act as its agent in connection with the offers in [*4] certain states. The broker-dealers will perform those functions outlined above to be performed by the investor relations firm; they will also deliver the new debentures issued to holders pursuant to the offers. The broker-dealers also will be under instructions to make no recommendations regarding acceptance or rejection of the exchange offer and will be compensated on a flat fee basis. The Trust will pay a fee to broker-dealers for soliciting acceptances of the cash tender offer but such broker-dealers may not directly or indirectly solicit acceptances or rejections of the exchange offer. On the basis of the information presented, as more fully set forth in your letter, and provided that broker-dealers who receive compensation for soliciting acceptances of the tender offer do not solicit acceptances or rejections of the exchange offer, directly or indirectly, the Division will not recommend any enforcement action to the Commission if the exchange and tender offers are made in the manner described in your letter without compliance with the registration requirements of the Act in reliance upon your opinion as counsel that the exemption afforded by Section 3(a) (9) of the Act is [*5] available. In connection with your request for confidential treatement of the correspondence for a period of 90 days after the thirtieth day following the staff's response, your letter and our response will not become publicly available until 120 days after the date of this letter. The Division of Market Regulation will respond separately to the questions raised in your letter concerning Sections 3(a) (4) and 3(a) (5) of the Securities Exchange Act of 1934 and Rule 10b-6 thereunder. Sincerely, Richard K. Wulff Attorney Adviser INQUIRY-1: MAHONEY HADLOW & ADAMS ATTORNEYS AND COUNSELLORS BARNETT BANK BUILDING 100 LAURA STREET POST OFFICE BOX 4099 JACKSONVILLE, FLORIDA 32201 (904) 354-1100 September 22, 1977 Securities and Exchange Commission 500 North Capitol Street, N.W. Washington, D.C. 20549 Attention: Office of Chief Counsel Division of Corporation Finance Office of Chief Counsel Division of Market Regulation Re: Barnett Winston Investment Trust Gentlemen: Barnett Winston Investment Trust (the "Trust") proposes to make tender/exchange offers to the holders of its outstanding issue of 8-1/4% Subordinated Debentures due 1998 (the "8-1/4% Debentures"). Each holder [*6] 2 3 of 8-1/4% Debentures would be solicited, at the option of the holder, to: (1) tender his 8-1/4% Debentures for purchase by the Trust for cash, or (2) exchange his 8-1/4% Debentures for new debentures to be issued by the Trust (the "new debentures") and cash. On behalf of the Trust, we respectfully request that the Staff of the Securities and Exchange Commission indicate that it will not recommend that the Commission take any action with respect to: (1) the proposed exchange of 8-1/4% Debentures of the Trust, without registration under the Securities Act of 1933, as amended (the "1933 Act"), because such exchanges will be exempt from registration under the 1933 Act by virtue of Section 3(a) (9); (2) solicitations of such tenders for purchase and/or exchange, by Trustees, officers, and regular employees of the Trust, because such activities will not cause the exemption under Section 3(a) (9) of the 1933 Act to be unavailable, and will not cause any such Trustee, officer, or employee to be a "broker" or "dealer" as such terms are defined in Sections 3(a) (4) and 3(a) (5) of the Securities Exchange Act of 1934, as amended (the "1934 Act"); (3) solicitations of such tenders for purchase [*7] and/or exchange, by certain officers and regular employees of the Trust's Adviser, because such activities will not cause the exemption under Section 3(a) (9) of 1933 Act to be unavailable, and will not cause any such officer or employee to be a "broker" or "dealer" as such terms are defined in Sections 3(a) (4) and 3(a) (5) of the 1934 Act; and (4) the Trust's employment of and payment of compensation to a professional investor relations firm and registered broker-dealers, for certain activities on behalf of the Trust as more fully described below, because such activities will not cause the exemption under Section 3(a) (9) of the 1933 Act to be unavailable. Further, we request, on behalf of the Trust, that the Staff indicate that it will recommend no action to the Commission under Rule 10b-6 under the 1934 Act, with respect to the proposed tender/exchange offers by the Trust, or, alternatively, that the Commission grant an exemption from Rule 10b-6 pursuant to subsection (f) thereof. A. The Trust. The Trust is an unincorporated business trust organized under the laws of the State of Florida pursuant to a Declaration of Trust dated as of April 21, 1972, as amended (the "Declaration [*8] of Trust"). The outstanding equity securities of the Trust are registered under Section 12(g) of the 1934 Act, and the Trust is subject to the reporting and proxy solicitation requirements of the 1934 Act. B. Outstanding Securities. The following table shows the title, amount, and approximate number of record holders as of July 25, 1977, of each class of publicly owned securities of the Trust:
Approx. No. of Amount Record Holders Title of Class Outstanding as of 7/25/77 Shares of Beneficial Interest, $.10 par value ("Shares") 1,663,310 4,330 Warrants (expiring July 13, 1978), to purchase Shares ("Warrants") 1,656,690 3,509 8-1/4% Convertible Subordinated Debentures due 1998 ("8-1/4% Debentures") $30,000,000 1,943
The Shares, Warrants, and 8-1/4% Debentures are traded in the over-the-counter market. The Warrants represent the right to purchase 1,656,690 Shares at an exercise price of $20 per Share (subject to adjustment in accordance with anti-dilution provisions) at any time until expiration on July 13, 1978 (subject to one or more extensions by the Trust to a date not later than July 13, 1982). None of the Warrants have been exercised since December [*9] 19, 1973. The 8-1/4% Debentures presently are convertible into Shares at a price of$31 3 4 per Share until December 1, 1978. On and after December 1, 1978, and until maturity, the 8-1/4% Debentures will be convertible, unless previously redeemed (which may not occur prior to May 1, 1979), at a price per share equal to 80% of the average market price of the Shares as determined during a prescribed trading period prior to December 1, 1978, but not to exceed $31 per Share; however, in the event that the conversion price on December 1, 1978, computed as described above, would be less than $31 per Share, the Trust will have the option to offer at that time to purchase at a price equal to 125% of the principal amount all 8-1/4% Debentures surrendered for such purchase on or after December 1, 1978, and before September 1, 1979. If the Trust exercises such option, the 8-1/4% Debentures will remain convertible at $31 per Share. The conversions prices are subject to adjustment in accordance with certain anti-dilution provisions set forth in the Indenture. On and after September 1, 1979, the 8-1/4% Debentures will be redeemable at the option of the Trust at declining call premiums specified [*10] in the Indenture. The Indenture requires sinking fund payments of $1.5 million to be made in each year from 1983 to 1997, except as reduced by the surrender of 8-1/4% Debentures purchased or otherwise acquired by the Trust. None of the 8-1/4% Debentuures have been converted since their issuance in November, 1973. The Trust has not issued any Shares, Warrants, or 8-1/4% Debentures since more than three years ago. Enclosed is a table showing for the periods indicated the range of low bid and high asked prices in the over-the-counter market for each of the outstanding publicly owned securities of the Trust, as reported by the National Quotation Bureau Incorporated. C. Management of the Trust; the Adviser. The Trust is managed under the general supervision and control of seven Trustees. The Trust pays each Trustee a fee. Five of the Trustees have other principal occupations or business activities. The remaining two Trustees, one of whom devotes substantially all of his time and one of whom devotes approximately one half of his time to the business and affairs of the Trust, also receive compensation from Barnett Winston Investment Counselors, Inc., the Adviser to the Trust [*11] (the "Adviser") or from Barnett Winston Company, which owns 100% of the Adviser. The Trust has four executive officers, none of whom receive direct remuneration from the Trust for their services as such. One of those officers, the President, is also one of the two Trustees of the Trust referred to above. Since prior to the commencement of business by the Trust in 1972, the Adviser has furnished services to the Trust under an Advisory Contract, dated July 7, 1972, as amended, and as renewed from year to year. Under the Advisory Contract, subject to the managerial control of the Trustees, the Adviser furnishes investment advice and policy recommendations to the Trustees, administeres the day-to-day investment operations of the Trust and performs or supervises the performance of most administrative functions of the Trust, selects and conducts relations on behalf of the Trust with persons doing business with the Trust, and provides and pays the expenses of office space and equipment and the necessary executive, clerical, and secretarial personnel for the performance of the foregoing services. Prior to 1976, the Trust had no employees of its own, and any functions which would have [*12] been performed by employees of the Trust were performed on behalf of the Trust by the Adviser, through its employees or employees of Barnett Winston Company, or by independent contractors. Since 1976, the Trust has employed persons as on-site project employees in connection with the operation of its real estate properties acquired by or in lieu of foreclosure of mortgage loans, such as resident managers, leasing agents, and maintenance personnel. However, the Adviser or independent contractors, acting as property managers, continue to supervise the operations of the property by the on-site employees of the Trust. Prior to the beginning of the Trust's fiscal year ended September 30, 1975, the Adviser was compensated on a fee basis, based upon factors such as the amount committed by the Trust for mortgage loans and certain other permitted 4 5 investments, the "net profits" of the Trust and the relationship of certain expenses of the Trust (including the Adviser's fee) to the assets and income of the Trust. For the year ended September 30, 1975, the Adviser was paid a minimum fee of $650,000. Since the beginning of the fiscal year ended September 30, 1976, the Trust has compensated [*13] the Adviser in an amount equal to its actual expenses (including allocated portions of the general overhead and administrative expenses of Barnett Winston Company) as approved by a majority of the Trustees who are not "Affiliates" (as defined) of the Adviser. Thus, while the Trust does not pay any direct remuneration to its officers as such, or to the officers and employees of the Adviser, it indirectly bears the cost of remuneration and other employment expenses incurred by the Adviser. D. Proposed Tender/Exchange Offers. The Trust in reliance on the exemption contained in Section 3(a) (9) of the 1933 Act does not intend to register the proposed exchange offer under the 1933 Act. The Trust proposes to deliver or mail to existing holders of the 8-1/4% Debentures an offering circular setting forth the terms of the offers, the terms of the new debentures, and material information concerning the Trust. The Trust understands that the exchange offer will be subject to certain anti-fraud provisions of the 1933 Act, and that the tender/exchange offers will be subject to certain anti-fraud provisions of the 1934 Act. As indicated above, it is expected that existing holders of 8-1/4% [*14] Debenrures will be given the option to tender their 8-1/4% Debentures for purchase by the Trust for cash, or to exchange their 8-1/4% Debentures for new debentures and cash. The Trust does not intend to consummate any purchases or exchanges pursuant to the offers unless the Trustees of the Trust determine that the results of the offers are satisfactory to the Trust. The cash tender offer price for 8-1/4% Debentures will be at a substantial discount from the face amount. The Trust does not expect at the time of consummation of the offers to have sufficient funds available for the purchase of all the outstanding 8-1/4% Debentures pursuant to the tender offer. In the event that the total of the cash tender offer prices for 8-1/4% Debentures tendered for purchase during the first ten days of the offering exceeds the amount of funds which the Trust has available for such purchases, purchases by the Trust of 8-1/4% Debentures tendered for purchase during such ten-day period will be prorated, and the 8-1/4% Debentures tendered for purchase but not purchased will be returned to their respective holders. Otherwise, 8-1/4% Debentures tendered for purchase will be purchased in the order [*15] in which they are tendered, until the available funds are exhausted. The face amount of the new debentures to be issued in exchange for 8-1/4% Debentures, plus the amount of any additional cash consideration to be paid by the Turst, will be equal to or less than the face amount of the 8-1/4% Debentures exchanged. The new debentures will not provide for a sinking fund but will probably have a shorter maturity than the 8-1/4% Debentures, the new debentures will carry a substantially lower interest rate than the 8-1/4% Debentures, and the new debentures will not be convertible. The new debentures will be made senior or superior in right of payment to any 8-1/4% Debentures which are not tendered or exchanged, but will be subordinate in right of payment to "Superior Indebtedness" of the Trust, to the same extent as the 8-1/4% Debentures. The new debentures will be governed by an indenture qualified under the Trust Indenture Act of 1939, as amended. The net effect of the tender/exchange offers will be to give the holders of 8-1/4% Debentures of the Trust an option to accept the cash tender offer, or to accept new debentures and possibly additional cash consideration in exchange for [*16] 8-1/4% Debentures, or to accept neither of the offers and to remain as holders of 8-1/4% Debentures. Trustees, officers, and regular employees of the Trust will solicit acceptances of the offers by holders of 8-1/4% Debentures through the mail, telephone calls, or personal visits. All of the employees of the Trust who engage in such activities will be regular, full time personnel of the Trust who 5 6 have significant responsibilities other than the solicitation of the offers and who have not been hired for or just prior to the offers. No trustee, officer, or employee of the Trust will receive any special remuneration for solicitations in connection with the offers, although the Trust will reimburse them for any expenses incurred in connection with such solicitations. The Trust also proposes to use officers and regular employees of the Adviser to solicit acceptances of the exchange offer by the holders of 8-/14% Debentures, through the mail, telephone calls, or personal visits. All of such persons will be regular, full time personnel of the Adviser who have significant responsibilities with respect to the Trust's business other than the solicitation of the exchange offers and who [*17] have not been hired for or just prior to the offers. None of such officers or employees of the Adviser will receive any special remuneration for solicitations in connection with the offers, although the Trust will reimburse them for any expenses incurred in connection with such solicitations. The Trust intends to engage an investor relations firm to perform certain ministerial services in connection with the offers. It is presently anticipated that such firm will provide the following services: (a) advise and consult with the Trust as to terms of the offers and in the preparation of communications from the Trust to the holders of 8-1/4% Debentures; (b) notify the holders of 8-1/4% Debentures of all appropriate details; (c) confirm the accuracy of the addresses of holders of 8-1/4% Debentures; (d) ascertain by telephone whether each holder of 8-1/4% Debentures has received the Trust's mailing and understands the mechanics of the offers, and answer questions relating to the mechanics of the offers; (e) respond to questions not concerning the mechanical requirements which are answered in the offering circular, by directing the holder to the pertinent portion of the offering circular; [*18] (f) remind holders of 8-1/4% Debentures of all appropriate deadlines; (g) ascertain what action the holder of 8-1/4% Debentures plans to take with regard to the offers, communicate the response to the Trust and maintain documentary records of the offers; (h) communicate with the back office personnel of brokers, banks, and other nominees who hold 8-1/4% Debentures for the benefit of others to make sure the offer material is being forwarded properly and to request the back office personnel to check with the beneficial owners as to whether they have received the material and understand the mechanics of the offers. The investor relations firm will be instructed that it may not make any recommendation regarding acceptance or rejection of the offers, and if it is asked for such advice by a holder of 8-1/4% Debentures it will respond that the holders should obtain such advice from his own advisers or contact appropriate officers or employees of the Trust. Fees for the services of the investor relations firm will be based on a flat, per holder or per contact basis, plus reimbursement for expenses such as postage and long distance telephone charges. The fees paid to the investor relations [*19] firm will not be affected in any manner by the action of any holder of 8-1/4% Debentures with respect to the offers or contingent upon the success or failure of the offers. In order to comply with the securities or blue sky laws of several states the Trust will be required to make the offers through a broker-dealer registered in each of those states to act as its agent in connection with the offers. The functions of such broker-dealer will be limited to the services outlined above to be performed by the investor relations firm, and to delivering to holders of the 8-1/4% Debentures the new debentures to be issued pursuant to the offers. The broker-dealers will be instructed to make no recommendations regarding acceptance or rejection of the offers. The broker-dealers will be compensated on a flat fee, per holder or per contact, basis plus reimbursement of expenses. In connection with the cash tender offer to purchase 8-1/4% Debentures, the Trust may engage broker-dealers to solicit acceptances of the tender offer and may pay a commission to broker-dealers who tender 8-1/4% Debentures on behalf of their clients. The offering circular will clearly state that fees will be paid [*20] to broker-dealers only for 8-1/4% Debentures tendered for cash, that no fee will be paid for 8-1/4% Debentures exchanged for new debentures or for new debentures plus additional cash consideration, and that broker-dealers soliciting acceptances of the tender offer may not directly or indirectly 6 7 solicit acceptances or rejections of the exchange offer. E. Section 10(b) and Rule 10b-6. The 8-1/4% Debentures were originally issued in a registered public offering (pursuant to Form S-11 Registration Statement No. 2-49369) in November, 1973, and presently are convertible into Shares at $31 per share. No 8-1/4% Debentures have been converted into Shares since their issuance. The Warrants were originally issued together with Shares as "Units" in a registered public offering (pursuant to Form S-11 Registration Statement No. 2-44298) in July, 1972, each Unit consisting of one Share and a Warrant to purchase one additional Share. The Shares and Warrants were made separately transferable effective July 30, 1972. As discussed above, the Warrants are exercisable at a price of $20 per share, and no Warrants have been exercised since December 19, 1973. We have been advised by the Trust [*21] that no distribution of Shares, 8-1/4% Debentures, Warrants, or a security of the same classes and series, by the Trust or any person in a control relationship with the Trust, is now in progress or pending. It is the Trust's view that Rule 10b-6 was not intended to preclude an issuer's exchange of its own securities under the circumstances of the proposed offers. It is our understanding, however, that for the purposes of Rule 10b-6, the Commission might view the existence of convertible debentures or warrants, or both, as a continuing "distribution" of the securities for which they are convertible or exercisable, as well as a continuing "distribution" of the convertible debentures or warrants themselves as "rights" to purchase the underlying securities. As a practical matter, no such distribution of the Trust's equity securities is taking place in fact, since the 8-1/4% Debentures are not being converted and the Warrants are not being exercised. In view of the wide disparity between the conversion price of the 8-1/4% Debentures and the exercise price of the Warrants on the one hand and the current market valu of the Shares on the other hand, it is not reasonable to expect that [*22] any conversions or exercises of these securities will occur during the continuance of the offers. We have advised the Trust that if the Staff indicates that it will not recommend that the Commission take enforcement action under Rule 10b-6 or, alternatively, if the Commission grants an exemption under subsection (f) of Rule 10b-6 with regard to the proposed tender/exchange offers, that other anti-fraud and anti-manipulative provisions of the 1934 Act, including Section 9(a) (2), Section 10(b) (including Rule 10b-5) and Section 14(e), are applicable to certain aspects of the proposed offers. The Trust also understands that Rule 10b-13 prohibits the Trust from making any purchases of its equity securities otherwise than pursuant to such offers, from the time the offers are publicly announced until the expiration of the offers. F. Conclusions and Requests. Based upon the foregoing, we have reached the following conclusions: 1. The combination of the proposed cash tender offer with the proposed exchange offer will not cause the exemption from registration under Section 3(a) (9) of the 1933 Act to be unavailable. Charne Industries, Inc., available February 28, 1974. 2. [*23] The relinquishment or surrender of unpaid, accrued interest on the 8-1/4% Debentures will not cause the exemption under Section 3(a) (9) of the 1933 Act to be unavailable. See NJB Prime Investors, available May 14, 1976; Four-Phase Systems, Inc., available November 8, 1973; Conrad Precision Industries, Inc., available August 28, 1973; Wright Airlines, Inc., available August 23, 1973. 3. Trustees, officers, and regular employees of the Trust, consistent with the exemption from registration in Section 3(a) (9) of the 1933 Act, may contact holders of 8-1/4% Debentures and recommend that they accept the tender and/or exchange offers. Further, such soliciting activities will not cause any 7 8 Trustee, officer, or employee of the Trust to be a "broker" or "dealer" as such terms are defined in Sections 3(a) (4) and 3(a) (5) of the 1934 Act. 4. In view of the continuing relationship between the Trust and the Adviser and the fact that officers and employees of the Adviser perform most administrative functions of the Trust, subject to the managerial control of the Trustees, solicitation of acceptances of the proposed tender/exchange offers from holders of 8-1/4% Debentures, by officers and [*24] employees of the Adviser, will not cause the exemption under Section 3(a) (9) of the 1933 Act to be unavailable. Further, such soliciting activities will not cause any officer or employee of the Adviser to be a "broker" or "dealer" as such terms are defined in Sections 3(a) (4) and 3(a) (5) of the 1934 Act. 5. The Trust may employ an investor relations firm to perform certain ministerial functions, as set out on pages 7-8 of this letter, without causing loss of the exemption under Section 3(a) (9) of the 1933 Act. See Valhi, Inc., available February 17, 1977; Dominion Mortgage & Realty Trust, available October 29, 1975; The Carter Organization, Inc., available April 7, 1975; Georgeson & Co., available June 11, 1973. 6. The Trust, consistent with Section 3(a) (9) of the 1933 Act, may pursuant to the requirements of certain state securities or blue sky laws engage broker-dealers registered in such states to perform ministerial functions, similar to those performed by an investor relations firm. See Western Pacific Industries, Inc., available October 11, 1976. 7. The Trust may compensate broker-dealers for soliciting acceptances from holders of 8-1/4% Debentures of the cash [*25] tender offer, provided that such broker-dealers do not solicit acceptances or rejections of the exchange offer. Charen Industries, Inc., available February 28, 1974. We respectfully request that the Commission Staff indicate that it concurs in the above stated conclusions and will recommend no action to the Commission if the proposed tender/exchange offers are made in the manner set forth above. Further, we request that the Commission Staff indicate that it will recommend no action to the Commission under Rule 10b-6 if the proposed tender/exchange offers are made in accordance with this letter; or, in the alternative, if the Staff finds that Rule 10b-6 is applicable, we request the Commission to grant a formal exemption under subsection (f) of that Rule. In a separate letter, we request, pursuant to the provisions of the Freedom of Information Act, 5 U.S.C. @ 552, and Commission Rules 17 C.F.R. @@ 200.81 and 200.82, that the Staff give this request confidential treatment until such time as the Trust has definitively determined the terms of the proposed tender/exchange offers and has made such terms public. We would be pleased to answer any questions which the Staff may [*26] have with respect to matters which are the subject of this request and to supply any requested information. In the event the Staff believes that its response may be other than favorable, it is respectfully requested that you contact the undersigned prior to reaching a definite conclusion and that we be given the opportunity to discuss the matter with you. Very truly yours, MAHONEY HADLOW & ADAMS By William D. King 8 - ------------------------------------------------------------------------------- 9 1976 SEC No-Act. LEXIS 319 Securities Exchange Act of 1934 - Section 10(b) - Rule 10b-6 Feb 5, 1976 [*1] Barnett Winston Investment Trust TOTAL NUMBER OF LETTERS: 2 SEC-REPLY-1: JAN 6 1976 William D. King, Esq. Mahoney, Hadlow, Chambers & Adams Barnett Bank Building 100 Laura Street Jacksonville, Florida 32201 Re: Barnett Winston Investment Trust Dear Mr. King: Reference is made to your letter dated November 20, 1975 concerning certain proposed acquisitions by Barnett Winston Investment Trust ("Trust") of its 8 1/4% convertible subordinated debentures due 1998 ("debentures"). Reference is also made to several telephone conversations between you and members of the staff regarding your letter. In your letter you state: "The Trust reported a loss of approximately $14.4 million for the year ended September 30, 1975, primarily as a result of: (1) the addition of approximately $12.0 million to the Trust's allowance for possible investment losses, including approximately $5.2 million provided for the projected future cost of funds to carry investments; (2) a high level of "non-accruing" investments (approximately 39% of total invested assets as of year end) and a high level of properties acquired through foreclosure, lease termination or action in lieu thereof (approximately 34% of total invested assets as of year end); [*2] and (3) the continued high cost of Trust borrowings (a weighted average effective cost of borrowed funds (including Debentures) of approximately 9.53% for that year). Shareholders' equity of the Trust has been reduced by a deficit in the undistributed net income of approximately $14.2 million, to a net of approximately $16.1 million, as of September 30, 1975. The Trust expects to have a significant tax net operating loss for the year ended September 30, 1975, to carry forward as an offset against any taxable income for the succeeding five fiscal years, but the amount has not been determined." The Trust has commenced negotiations with its senior bank lenders for possible exchanges of Trust investments for cancellation or satisfaction of debt under short-term bank notes. The Trust also wishes to be in a position to negotiate for and accept its debentures, $30,000,000 principal amount of which is outstanding. Since the Trust presently does not have cash available to purchase debentures, it would consider proposals to exchange debentures for investments. Types of transactions that the trust would like to engage in are: "(1) a complete or partial satisfaction or release of property [*3] encumbered by a Trust mortgage in exchange for Debentures assigned to the Trust by the mortgagor, any person interested in the mortgagor or liable to the Trust for the related obligations or any person who is purchasing the encumbered property from the borrower; and (2) a conveyance of real property owned by the Trust (whether owned subject to a lease or acquired by foreclosure, lease termination or action in lieu thereof) in exchange for assignment to the Trust of Debentures by any person who is or has been a mortgagor or leasee of the Trust, or interested in any mortgagor or lessee of the Trust or liable to the Trust for related obligations, or any other person desiring to acquire such 9 10 property." It may be necessary for persons desiring to engage in any such transactions with the trust to purchase additional debentures either in the open market or through privately negotiated transactions. The Trust believes it would be appropriate to issue a news release stating: (1) that the Trust is willing to negotiate with existing or past borrowers or lessees of the Trust, or other experienced real estate investors or developers, to exchange real estate assets for debentures, (2) that no person [*4] should acquire debentures or refrain from disposing of debentures, in anticipation of possible transactions with the Trust, unless and until an agreement in principle with the Trust is reached in writing and signed by both parties, (3) that if such an agreement is reached, the other party may bid for or purchase debentures in the open market to satisfy the terms of the agreement, and (4) that any such bids or purchases, or any resulting increase in the volume of trading in the debentures in the open market, should not be viewed as an indication of increased interest of investors in the ownership of debentures, shares or warrants of the Trust, or as an indication of increasing value for such securities. Quotations for the debentures in the over-the-counter market are sporadic. Bid-ask prices on October 17, 1975 were 28-31. Since no distribution of the debentures or a security of the same class and series by the Trust or any insider is now in progress or pending, this Division will not raise any question under Rule 10b-6 with respect to the Company's acquisitions of its debentures in the manner described in your letter. However, this position is strictly limited to Rule 10b-6. [*5] Neither this Division nor the Division of Corporation Finance expresses any view regarding the applicability of other federal securities laws to such acquisitions of debentures by the Company or to purchases of debentures by persons who intend to exchange them for real estate assets. The Company and such purchasers of debentures must, of course, assume full responsibility for compliance with those provisions. In this regard your attention is directed to the anti-fraud and anti-manipulative provisions of the Securities Exchange Act, particularly Section 9(a) (2) and Section 10(b) (and Rule 10b-5 thereunder). Your attention is also directed to Securities Exchange Act Release No. 11231 (Feb. 7, 1975) and to proposed Rule 13e-3A and Rule 13e-3B which were published for comment therein. The Commission announced in that Release it was ordering a public investigation and rulemaking proceeding to ascertain facts, conditions, practices and other matters relating to so-called "going private" transactions. In this connection, it was noted that the two rules were proposed to provide a framework for the hearing and comments, and that the Commission had reached no conclusions as yet with [*6] respect to such rules, The Commission also noted that the announced proceeding and proposed rules in no way should be read to limit the present applicability of exiting provisions of the federal securities laws to such transactions. Sincerely, Robert C. Lewis Deputy Director INQUIRY-1: MAHONEY, HADLOW, CHAMBERS & ADAMS PROFESSIONAL ASSOCIATION BARNETT BANK BUILDING 100 LAURA STREET POST OFFICE BOX 4099 JACKSONVILLE, FLORIDA 32201 (904) 354-1100 November 20, 1975 Securities and Exchange Commission 500 North Capitol Street, N.W. Washington, D.C. 20549 Attention: Robert King, Division of Market Regulation Room No. 304 10 11 Re: Barnett Winston Investment Trust Gentlemen: We represent Barnett Winston Investment Trust (the "Trust"). The Trust proposes to acquire up to $20,000,000 principal amount (66-2/3% of the amount outstanding) of its 8-1/4% Convertible Subordinated Debentures Due 1998 ("Debentures") in one or more transactions. On behalf of the Trust, we respectfully request a "no-action" letter stating that neither the Division of Corporation Finance nor the Division of Market Regulation will recommend any action to the Commission if the Trust does so in the manner described [*7] below. If the Staff considers it necessary, an exemption from Rule 10b-6 under the Securities Exchange Act of 1934, as amended (the "Act") is also requested. A. The Trust The Trust is an unincorporated business trust organized under the laws of the State of Florida pursuant to a Declaration of Trust dated April 21, 1972, as amended and restated (the "Declaration of Trust"). The outstanding equity securities of the Trust are registered under Section 12(g) of the Act. The Trust files reports under Section 13 and solicits proxies under Section 14 of the Act. It also furnishes annual and quarterly reports to shareholders and Debenture holders. B. Outstanding Securities The following table shows the title, amount and approximate number of record holders as of October 31, 1975, of each class of equity securities of the Trust (the Trust has no other publicly-owned securities):
Amount Approx. No. of Title of Class Outstanding Record Holders Shares of Beneficial Interest, $.10 par value ("Shares") $1,663,310 4,786 Warrants to Purchase Shares of Beneficial Interest ("Warrants") $1,656,690 3,777 8-1/4% Convertible Subordinated Debentures due 1998 ("Debentures") $30,000,000 2,101 [*8]
The Shares are traded in the over-the-counter market and quoted in the National Association of Securities Dealers Automated Quotation (NASDAQ) system. The Warrants represent the right to purchase 1,656,690 Shares at an exercise price of $20 per Share (subject to adjustment in accordance with anti-dilution provisions and to reduction at the discretion of the Trustees) at any time until the expiration date, July 13, 1977 (subject to extension by the Trust to a date not later than July 13, 1982). The Warrants were issued together with Shares in "Units," each Unit consisting of one Share and a Warrant to purchase one additional Share ("Units"), but Shares and Warrants were not physically attached and were made separately transferable effective July 30, 1972. However, Units have continued to be quoted, while Warrants are not separately quoted, in the NASDAQ system. No Warrants have been exercised since December 19, 1973. The Debentures, which are presently convertible into Shares at a price of $31 per Share until December 1, 1978 (subject to adjustments in accordance with anti-dilution provisions and to reduction effective December 1, 1978, in accordance with a specified formula), [*9] are traded in the over-the-counter market but are not quoted in the NASDAQ system. No Debentures have been converted since their issuance in November, 1973. Attached is a copy of a report from the National Quotation Bureau, Inc., showing certain information as to market activity for each class of the Trust's equity securities for the period October 14 through November 7, 1975. C. Certain Recent Developments The Trust has endeavored to qualify for taxation as a real estate investment trust ("REIT") under the Internal Revenue Code of 1954, as amended (the "Code") 11 12 through its fiscal year year ended September 30, 1974. As of September 30, 1975, the Declaration of Trust and the Indenture governing the Debentures were amended to permit action which would result in nonqualification for taxation as a REIT under the Code beginning with the fiscal year ended that date. The Trust has taken action which is believed to have caused it not to qualify for the year then ended, and the Trustees have determined that continued nonqualification is in the best interests of all security holders. The Trust reported a loss of approximately $14.4 million for the year ended September 30, 1975, primarily [*10] as a result of: (1) the addition of approximately $12.0 million to the Trust's allowance for possible investment losses, including approximately $5.2 million provided for the projected future cost of funds to carry investments; (2) a high level of "non-accruing" investments (approximately 39% of total invested assets as of year end) and a high level of properties acquired through foreclosure, lease termination or action in lieu thereof (approximately 34% of total invested assets as of year end); and (3) the continued high cost of Trust borrowings (a weighted average effective cost of borrowed funds (including Debentures) of approximately 9.53% for that year). Shareholders' equity of the Trust has been reduced by a deficit in the undistributed net income account of approximately $14.2 million, to a net of approximately $16.1 million, as of september 30, 1975. The Trust expects to have a significant tax net operating loss for the year ended September 30, 1975, to carry forward as an offset against any taxable income for the succeeding five fiscal years, but the amount has not been determined. It is a major objective of the Trust to reduce assets and liabilities, on the most favorable [*11] terms available, with a view to maintaining or possibly increasing shareholders' equity. The Trust has commenced negotiations with its senior bank lenders for possible exchanges of Trust investments for cancellation or satisfaction of debt under short-term bank notes. In addition, the Trust wishes to be in a position to negotiate for and accept a significant portion of its Debentures. Because the Trust does not presently have cash available to purchase Debentures, it would consider proposals to exchange Debentures for investments. The Trust believes that cancellation and retirement of Debentures at a discount from the principal amount would be practicable, fair and in the best interest of shareholders, holders of Debentures which remain outstanding and senior bank lenders. Such transactions would generate income offsetting or possibly exceeding any loss on disposition of the investment, while reducing interest expense and potential future dilution of shareholders' equity. D. Proposed Transactions The Trust would like to be in a position to engage in any one or more of the following types of transactions: (1) a complete or partial satisfaction or release of property encumbered [*12] by a Trust mortgage in exchange for Debentures assigned to the Trust by the mortgagor, any person interested in the mortgagor or liable to the Trust for the related obligations or any person who is purchasing the encumbered property from the borrower; and (2) a conveyance of real property owned by the Trust (whether owned subject to a lease or acquired by foreclosure, lease termination or action in lieu thereof) in exchange for assignment to the Trust of Debentures by any person who is or has been a mortgagor or lessee of the Trust, or interested in any mortgagor or lessee of the Trust or liable to the Trust for related obligations, or any other person desiring to acquire such property. The Trust does not propose to engage in any such transaction with persons who are not experienced real estate investors or developers unless they are represented by reputable, unaffiliated real estate or mortgage brokers of their own choice. Furthermore, the Trust does not propose to engage in any such transactions with Trustees or officers of the Trust, or with the Adviser to the Trust or any of the Adviser's affiliates. As an example, an existing mortgagor of the Trust, which owns $650,000 in [*13] principal amount of Debentures, has offered to exchange $1,000,000 in principal amount of Debentures for a credit of $500,000 to the outstanding principal amount of the Trust's mortgage loan and a partial release of part of 12 13 the encumbered property. The mortgagor would have income before expenses to the extent that the fair market value of the released property (which the Trust estimates at approximately $500,000) exceeds the mortgagor's basis in the Debentures (assuming an average cost of $32 per $100 in principal amount, the basis would be approximately $320,000). The Trust would have net income before expenses of $500,000. Taxable income would be offset by tax net operating losses carried forward from the year ended September 30, 1975. Because the mortgagor owns only $650,000 in principal amount of Debentures, it would be necessary for the mortgagor to acquire an additional $350,000, either in the open market or in one or more privately negotiated transactions solicited by the mortgagor, most likely from or through a broker or dealer. We understand that the Trust, based on our advice, has informed the mortgagor that possible securities law ramifications may not permit consummation [*14] of the proposed exchange, that the mortgagor should not acquire additional Debentures in anticipation of the proposed exchange unless and until the Trust advises him of its willingness to proceed further, and that possible securities law restrictions could be imposed on purchases of additional Debentures to be acquired for exchange to the Trust. The Trust does not believe that the mortgagor is accumulating additional Debentures, but has made no effort to verify this belief or to discourage any purchases or sales of Debentures which the mortgagor may elect to make on his own accord and for whatever reasons he deems appropriate. The Trust believes that it would be appropriate, before any further negotiations of a similar nature with that mortgagor or others persons, to issue a news release covering the following points: (1) The Trust is willing to negotiate privately with existing or past borrowers or lessees of the Trust, or other experienced real estate investors or developers, to exchange real estate assets for the Debentures. (2) No person should acquire Debentures, or refrain from disposing of Debentures, in anticipation of possible transactions with the Trust, unless and [*15] until an agreement in principal with the Trust is reached in writing and signed by both parties. (3) If the Trust reaches any written agreements in principal to exchange real estate for Debentures, the other parties may bid for or purchase Debentures in the open market to satisfy the terms of such agreements. (4) Any such bids or purchases, or any resulting increase in the volume of Debenture transactions in the open market, should not be viewed as an indication of increased interest of investors in the ownership of Debentures, Shares or Warrants of the Trust, or as an indication of increasing value for such securities. E. Section 10(b) We suggest that the foregoing should not be deemed to constitute a manipulative or deceptive device or contrivance under Section 10(b) of the Act, or comprehended within the purposes of Rules 10b-5 and 10b-6. It is doubtful whether Rule 10b-6 applies to repurchases by an issuer of convertible securities, especially where the issuer is not engaged in any distribution of equity securities other than by virtue of having warrants outstanding. However, we are unable to express a conclusive opinion that Rule 10b-6 would not be asserted as a basis [*16] for action by the Commission and believe it appropriate for the Trust to obtain a "no-action" letter confirming that this Rule would not be applied or, if necessary, an exemption pursuant to subsection (f) of the Rule. As stated above, the Debentures are not being converted and the Warrants are not being exercised. There is no actual distribution of the Trust's equity securities taking place in fact. It is not reasonable to expect any conversions of Debentures or exercises of Warrants in view of the wide disparity between the conversion and exercise prices of those securities and the current market value of the Trust's Shares. 13 14 In connection with this request, in addition to other sources we have considered the terms and conditions of proposed Rule 13e-2 and Exchange Act Releases No. 8930 and No. 10539. The advance news release should obviate any possible need for bidding, purchase price or volume restrictions, or for limiting all bids or purchases of any one day to the supervision and control of only one broker or dealer, such as set forth under proposed Rule 13e-2. In view of current market conditions it would be difficult to apply meaningful limitations of a similar nature. [*17] Furthermore, subsection (g) (9) of this proposed Rule shows that the Commission did not regard the terms and conditions specified in the proposed Rule as requirements to be applied in every case. The proposed transactions would not have any of the effects described in subsection (a) (5) (ii) of proposed Rule 13e-3A or in subsection (b) of proposed Rule 13e-3B, except that the Trust might acquire up to $20,000,000 (66-2/3%) in principal amount of outstanding Debentures. The Trust does not believe that such transactions would cause the Debentures to be eligible for termination of registration under Section 12(g) of the Act, because the number of persons engaging in such transactions is expected to be very small. In any event, the transactions would not cause the Trust's Shares and Warrants to be eligible for termination of registration under Section 12(g). We have advised the Trust that exchanges of real property for Debentures could give rise to possible "private" claims for damages by the other party under Rule 10b-5 of the Act, and that such claims are considerably easier to recover upon than claims under state law governing fraud and deceit in real estate transactions. We [*18] have also advised the Trust of possible claims by non-participants under Rule 10b-5, and that favorable action on this request would not necessarily provide full protection against either type of possible claim. F. Requests It is requested that the Division of Corporation Finance and Market Regulation state whether or not they will recommend any action to the Commission if the Trust acts in accordance with the foregoing, and if necessary that an exemption for the proposed transactions be granted pursuant to paragraph (f) of Rule 10b-6. If any additional information is required or we should furnish a copy of this letter to any other person, please contact the undersigned by collect call at Area 904, telephone 354-1100. In the event that any additional conditions or restrictions are proposed, we would appreciate the opportunity to discuss them with the Staff prior to any final action. The Trust wishes to proceed as soon as possible. If the Trust or we can help to expedite this matter, please let us know. Very truly yours, MAHONEY, HADLOW, CHAMBERS & ADAMS By William D. King 14 - ------------------------------------------------------------------------------- 15 1988 SEC No-Act. LEXIS 1509 Securities Act of 1933 -- Section 3(a)(9) Nov 4, 1988 [*1] The Royale Group Ltd. TOTAL NUMBER OF LETTERS: 3 SEC-REPLY-1: SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 November 4, 1988 RESPONSE OF THE OFFICE OF CHIEF COUNSEL DIVISION OF CORPORATION FINANCE Re: Royale Group, Ltd. Incoming letters dated March 15, and April 26, 1988 Based on the facts presented, this Division will not recommend enforcement action to the Commission if the Royale Group, Ltd., in reliance on your opinion as counsel that the exemption provided by section 3(a)(9) of the Securities Act of 1933 is available, proceeds with the described exchange offer without registration under the 1933 Act. Because this position is based on representations made to the Division in your letter, it should be noted that any different facts or conditions might require a different conclusion. Moreover, this letter only expresses the Division's position on enforcement action and does not express any legal conclusions on the question presented. Sincerely, Michael Hyatte Special Counsel INQUIRY-1: CURTIS, MALLET-PREVOST, COLT & MOSLE ATTORNEYS AND COUNSELLORS AT LAW 101 PARK AVENUE NEW YORK, N.Y. 10178-0061 TELEPHONE: (212) 696-6000 1933 Act/3(a)(9) April 26, 1988 VIA FEDERAL EXPRESS Mike Prozan, Esq. Division of Corporation [*2] Finance Mail Stop 7-2 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: The Royale Group Ltd.; Exchange Offer Dear Mr. Prozan: We refer to our letter dated March 15, 1988 in which we sought the Staff's concurrence with our view that the exchange by The Royale Group Ltd. of shares of its common stock, $ .01 par value (the "Common Shares"), for its outstanding 9% Revised Convertible Subordinated Debentures due August 15, 1991 (the "Debentures"), all pursuant to a proposed exchange offer, will be exempt from registration pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended (the "1933 Act"). You have asked us to consider whether the Section 3(a)(9) exemption would be available for the proposed exchange of Common Shares for Debentures, given that the Debentures were originally issued in 1976 without registration under the 1933 Act, pursuant to an exemption contained in Section 393 of the Bankruptcy Act. In this connection, you have asked us to address the prefatory language of Section 3(a)(9) which provides that the Section 3(a)(9) exemption applies "except with respect to a security exchanged in a case under 15 16 title 11 of the [*3] United States Code." We do not believe that the prefatory language of Section 3(a)(9) applies to this case. First, the Debentures were issued pursuant to Section 393 of the Bankruptcy Act and not pursuant to the United States Bankruptcy Code. More importantly, the prefatory language excepts "a security exchanged in a case under title 11 of the United States Code" (emphasis added). The language thus does not apply to securities exchanged for securities previously issued under the bankruptcy laws. Rather, the language is intended to except those securities exchanged in a case under title 11, which are afforded an exemption from registration by title 11, thereby avoiding duplicative exemptions. This interpretation is supported by the legislative history of the Bankruptcy Reform Act of 1978, P.L. 95-598 (the "Bankruptcy Reform Act") which added the prefatory language. The legislative history of the Bankruptcy Reform Act indicates that the prefatory language was added to Section 3(a)(9) in order to make it clear that the Bankruptcy Code, rather than the 1933 Act, governs an exchange of securities when the exchange is made pursuant to a reorganization. The Senate [*4] report provides: This section makes two changes in the Securities Act of 1933, that conform it to proposed 11 U.S.C. 1145 (Exemption from securities laws). . . . Second, exempt status is denied for securities issued in a bankruptcy case (primarily reorganizations) in exchange for other securities of the same issuer. . . . Section 306 of this bill inserts at the beginning of each of those paragraphs the phrase "Except with respect to a security exchanged in a case under title 11 of the United States Code." These kinds of securities are dealt with by 11 U.S.C. 1145(a)(2) and (3). (Emphasis added) Senate Judiciary Committee, Bankruptcy Reform Act of 1978, S. Rep. 95-989, reprinted in 1978 U.S. Code Cong. & Admin. News 5787, 5946. A copy of the pertinent portions of the Senate Report is enclosed for your reference. In the event the Staff does not agree with our interpretation, we respectfully request that you contact the undersigned so that we may be given the opportunity to discuss the matter with you. Pursuant to your rules of procedure, we are enclosing seven additional copies of this letter. Very truly yours, Jeffrey N. Ostrager INQUIRY-2: CURTIS, MALLET-PREVOST, COLT [*5] & MOSLE ATTORNEYS AND COUNSELLORS AT LAW 101 PARK AVENUE NEW YORK, N.Y. 10178-0061 TELEPHONE: (212) 696-6000 1933 Act/3(a)(9) March 15, 1988 Office of Chief Counsel Division of Corporation Finance - Stop 3-3 Securities and Exchange Commission 450 5th Street, N.W. Washington, D.C. 20549 Attention: Mr. William Morley Re: The Royale Group Ltd.; Exchange Offer Gentlemen: On behalf of our client, The Royale Group Ltd. (previously named Cavanagh Communities Corporation), a Delaware corporation (the "Company"), we respectfully request that the Staff concur in our opinion that the exchange by the Company of shares of its common stock, $ .01 par value (the "Common Stock") 16 17 for the Company's outstanding 9% Revised Convertible Subordinated Debentures due August 15, 1991 (the "Debentures"), all pursuant to the proposed exchange offer described herein (the "Exchange Offer"), will be exempt from registration pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended (the "1933 Act"). General The Company or its subsidiaries are engaged in the acquisition and development of real estate properties, including properties in the resort and hospitality industry. The Company [*6] and its subsidiaries are more fully described in the Company's Annual Report on Form 10-K for the three fiscal years ended December 31, 1984, December 31, 1985 and December 31, 1986 filed with the Commission on September 30, 1987, as amended by a Form 8 Amendment No. 1 filed on October 13, 1987 and as amended by a Form 8 Amendment No. 2 filed on October 29, 1987. Background During 1975, the Company filed a petition under Chapter XI of the Bankruptcy Act. Pursuant to the Order Confirming Modified Arrangement filed by the United States Bankruptcy Judge, Southern District of New York on December 15, 1976, the Company issued the Debentures without registration under the 1933 Act based upon the exemption contained in Section 393(a) of the Bankruptcy Act. The Commission issued a no-action letter on June 21, 1976 with respect to the issuance of the Debentures without registration. Pursuant to the Indenture, dated as of December 1, 1976 (the "Indenture"), between the Company and United States Trust Company of New York (the "Indenture Trustee"), interest on the Debentures was payable, at the option of the Company, either in cash or by issuing shares of Common Stock at a price equal [*7] to $ 5.125 per share through August 15, 1985. Semi-annual payments of interest from February 15, 1986 until maturity are payable only in cash. The Company has failed to make semi-annual interest payments on the Debentures since February 15, 1986 and is currently in default under the Indenture, although neither the Indenture Trustee nor the Debentureholders have elected to accelerate. The Debentures initially were convertible into shares of Common Stock at a price equal to $ 5.125 per share (or 195.12 shares of Common Stock for each $ 1,000 principal amount of Debentures), subject to certain antidilution provisions. Of an original principal amount of up to $ 8,133,000, the Company currently has $ 1,780,000 principal amount of the Debentures outstanding. The Indenture also requires annual sinking fund payments, beginning August 15, 1986, equal to 10% of the principal amount of Debentures outstanding on August 15, 1986, each such payment to be used in the year made to redeem outstanding Debentures. The Company has not made the August 15, 1987 sinking fund payment. The Company has experienced significant financial reverses and is currently facing a shortage of capital. The Company [*8] initially considered amending the Indenture to provide for payment of overdue interest in shares of Common Stock upon conversion of the Debentures and sent notice to the Debentureholders (the "Notice") informing the Debentureholders that the Company was reducing the conversion price of the Debentures and would convert both principal and overdue interest into shares of Common Stock upon conversion. No conversions have been made pursuant to the Notice. The Company now believes that the proposed Exchange Offer would better enable it to cure its ongoing default under the Indenture and place the Company in a more secure financial position. In connection with the proposed Exchange Offer, the Notice will be revoked. The Exchange Offer The Company proposes to make an Exchange Offer to its Denbentureholders pursuant to which the Debentureholders would be given the opportunity to exchange their Debentures for an as yet undetermined number of shares of Common Stock per Debenture, which would be greater than the number of shares of Common 17 18 Stock into which a Debenture presently could be converted. Pursuant to the exchange, the tendering Debentureholders would relinquish their claims [*9] for accrued and unpaid interest on the Debentures. The Exchange Offer will be made pursuant to an Offering Statement setting forth the complete terms of the Exchange Offer. In connection with the Exchange Offer, the Company may retain an exchange agent (the "Exchange Agent") to perform certain ministerial services in connection with the Exchange Offer. The Company would obtain representations from the Exchange Agent that it would not make any recommendations, either directly or indirectly, regarding acceptance or rejection of the Exchange Offer, and the fee payable to the Exchange Agent would not be affected in any manner by the action of any Debentureholder with respect to the Exchange Offer, nor contingent upon the success or failure of the Exchange Offer. The Company also may retain registered brokers and dealers to effect the Exchange Offer on behalf of the Company in any jurisdiction in which the securities, blue sky or other jurisdiction in which the securities, blue sky or other laws require the Exchange Offer to be made by a registered broker or dealer. The Company anticipates that any broker or dealer retained to effect the Exchange Offer on behalf of the Company in [*10] such states and other jurisdiction: (a) will be paid a flat fee for its services; (b) may be indemnified by the Company with respect to its participation in the Exchange Offer; (c) may be reimbursed for its reasonable expenses; and (d) will not make any recommendation, either directly or indirectly, regarding acceptance or rejection of the Exchange Offer. Applicability of Section 3(a)(9) Section 5 of the 1933 Act requires that a registration statement be effective prior to the offer and sale of a security. However, Section 3(a)(9) of the Act provides: Section 3(a). Except as hereinafter expressly provided, the provisions of this title shall not apply to any of the following classes of securities: * * * (9) Except with respect to a security exchanged in a case under title 11 of the United States Code, any security exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange; It is our opinion that the exemption from registration provided by Section 3(a)(9) of the 1933 Act covers the Exchange Offer. An exchange of securities will qualify for exemption [*11] from registration under the 1933 Act pursuant to Section 3(a)(9) if security holders are not required to part with any value other than the securities sought by the issuer. Tendering Debentureholders are required by the terms of the Exchange Offer to waive their right to receive accrued and unpaid interest. We do not believe that this should preclude the availability of the exemption afforded by Section 3(a)(9). The waiver of the right to receive overdue interest is not the type of additional consideration flowing from security holders to the issuer that would cause the Section 3(a)(9) exemption to be unavailable. In that regard, we note that the Commission staff has granted no-action requests on the basis of Section 3(a)(9) where tendering security holders have relinquished their right to unpaid accrued interest on debt securities or unpaid accrued dividends on preferred stock. See ECL Industries, Inc. & Norlin Corp. (available December 16, 1985) (joint exchange offer involving, in relevant part, exchange of new debentures for outstanding debentures on which certain accrued interest payments and the right to receive future interest payments would be waived by the holders); [*12] Barnett Winston Investment Trust (available 18 19 February 9, 1978) (exchange of new debentures and cash for outstanding debentures in which acceptance of the exchange offer would result in the elimination of accrued interest on the outstanding debentures); Geoscience Technology Services Corp. (available February 9, 1976) (exchange of common stock for outstanding debentures on which no interest payments or sinking fund deposits had been made for over a year and which debentures would be cancelled after the exchange); NJB Prime Investors (available May 14, 1976) (exchange of beneficial interest in a trust plus cash for outstanding debentures upon which accrued interest was to be eliminated by means of the exchange); Four-Phase Systems, Inc. (available December 10, 1973) (exchange of common and new preferred stock for outstanding preferred with dividend arrearages); Canrad Precision Industries, Inc. (available September 27, 1973) (election between exchange of outstanding preferred with dividend arrearages for new class of preferred or adjusting the conversion price of the outstanding shares downward, subject to the shareholders agreeing to convert their shares immediately); Diversa-Graphics, [*13] Inc. (available July 20, 1972) (exchange included waiver by holders of all unpaid accrued interest on debt securities and all unpaid accrued dividends on preferred stock). The decision whether to exchange the Debentures, together with accrued interest, for Common Stock of the Company will be entirely at the option of the Debentureholders. The proposed exchange will be exclusively with existing security holders of the Company. The Company will not pay any commission or other remuneration directly or indirectly in connection with the exchange. Accordingly, it is our opinion that the proposed transaction is exempt from registration under the 1933 Act by virtue of the exemption contained in Section 3(a)(9) of the 1933 Act. We respectfully request that the Staff indicate that it concurs in the above-stated conclusions and that it will not recommend that the Commission take enforcement action if the proposed Exchange Offer is made in the manner set forth above. In the event the Staff believes that its response may be other than favorable or if the Staff has any questions, it is respectfully requested that you contact the undersigned prior to reaching a definite conclusion so that [*14] we be given the opportunity to discuss the matter with you. Respectfully submitted, Laishley P. Wragg, Jr., Esq. CURTIS, MALLET-PREVOST, COLT & MOSLE 101 Park Avenue New York, N.Y. 10178 (212) 696-6032 19 - ------------------------------------------------------------------------------- 20 1985 SEC No-Act. LEXIS 2810 Securities Act of 1933 -- Section 3(a)(9) Dec 16, 1985 [*1] ECL Industries, Inc. & Norlin Corp. TOTAL NUMBER OF LETTERS: 2 SEC-REPLY-1: SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 RESPONSE OF THE OFFICE OF CHIEF COUNSEL DIVISION OF CORPORATION FINANCE Re: ECL Industries, Inc. and Norlin Corporation: Joint Exchange Offer Incoming letter dated October 31, 1985 On the basis of the facts presented in your letter, this Division will not recommend enforcement action to the Commission if the companies, in reliance upon your opinion of counsel that the exemption provided by Section 3(a)(9) of the Securities Act of 1933 (the "1933 Act") is available, proceeds with the Joint Exchange Offer without compliance with the registration requirements of the 1933 Act. Because this position is based upon representations made to the Division in your letter, it should be noted that any different facts or conditions might require a different conclusion. Further, this letter only expresses the Division's position on enforcement action and does not purport to express any legal conclusions on the questions presented. Sincerely, David H. Potel Attorney Adviser INQUIRY-1: FINLEY, KUMBLE, WAGNER, HEINE, UNDERBERG, MANLEY & CASEY A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS 425 PARK AVENUE NEW [*2] YORK, N.Y. 10022 (212) 371-5900 October 31, 1985 BY HAND William E. Morley, Esquire Chief Counsel Division of Corporation Finance Securites and Exchange Commission 450 5th Street, N.W. Washington, D.C. 20549 Re: ECL Industries, Inc. and Norlin Corporation: Joint Exchange Offer Dear Mr. Morley: On behalf of Norlin Corporation, a Panamanian corporation ("Norlin"), and ECL Industries, Inc., a Delaware corporation wholly-owned by Norlin ("ECL") (ECL and Norlin, collectively, the "Companies"), we request the advice of the Division of Corporation Finance that it will not recommend any enforcement action to the Securities and Exchange Commission (the "Commission") if ECL and Norlin effect the Exchange Offer of 1933, as amended (the "Act") in reliance on the exemption from registration contained in Section 3(a)(9) thereof. (The Offering Circular, dated October 28, 1985, as amended by a Supplement, dated October 30, 1985, (collectively, the "Offering Circular"). A copy of the Offering Circular is enclosed for your information. The Exchange Offer was commenced subject to the satisfaction of a no-action letter from the Commission or an opinion of counsel that the Exchange Offer is [*3] exempt from the 20 21 registration requirements of the Securities Act pursuant to Section 3(a)(9) thereof. It is for the purpose of satisfying such conditions that this request is being made.) A. The Companies (1) General Background. Norlin was incorporated in the Bahamas in 1937 and reincorporated in the Republic of Panama in 1969. ECL, which was originally incorporated in 1960, was acquired by Norlin in 1969. Norlin and ECL were formerly engaged in various business operations which have been sold or discontinued. In December 1983, ECL purchased all of the stock of Chas. P. Young Company (formerly known as Ticor Print Network, Inc.) ("CPY"), one of the leading financial printers in the United States, which today is ECL's only continuing business. Norlin has always been a holding company with its various operations conducted through wholly-owned direct and indirect subsidiaries; today Norlin has no material business or assets other than its stock ownership in ECL. Almost all of the proceeds received by Norlin from the disposition of different subsidiaries previously owned by it have been contributed to ECL to enable ECL to purchase CPY and to pay its corporate and operating [*4] expenses, including repayment of bank debt and payment of interest on the Old Debentures described below. As a result of the sale of all of its various operating subsidiaries and the downstreaming of funds to ECL over the past several years, there is today virtually nothing left in Norlin other than its stock ownership interest in ECL. Simply stated, Norlin is, as a practical matter, a mere holding company for ECL which, in turn, on a continuing operations basis is a holding company for CPY. (In addition to its stock ownership interest in ECL, Norlin owns a small building in Staten Island, New York which generates a monthly rental of approximately $1,000, which is clearly de minimus in the context of a corporation with annual consolidated net sales from continuing operations of $127.6 million. In addition, Norlin still retains at the parent company level certain proceeds from the disposition of assets, most notably a portion of the funds received by Norlin in May 1985 upon the sale of the lease for its former corporate headquarters. A comparison of the financial statements of Norlin and ECL (pages F-1 through F-48 of the enclosed Offering Circular) evidences the relative [*5] mirror-image nature of Norlin and ECL. Total assets of Norlin and ECL as of December 31, 1984 were $136.2 million and $135.8 million, respectively, and as of June 30, 1985 were $119.5 million and $117.7 million, respectively. Net Sales the fiscal year ended December 30, 1984 were $127.6 million for both Norlin and ECL, and for the six months ended June 30, 1985, were $71.1 million for both Norlin and ECL. The Net Loss for Norlin for the six months ended June 30, 1985 was $8.3 million, compared to a Net Loss for ECL for the same period as $10.0 million, with almost all of the difference accountable by the fact that the full $3.3 million gain realized upon the sale of the lease for the Companies' headquarters was allocated to Norlin, while only $1.5 million of such gain was allocated to ECL. (2) Issuance of Old Securities. In December 1969, ECL issued $34,961,100 principal amount 9% subordinated debentures (the "Old Debentures") under an indenture dated October 15, 1969 (the "Old Indenture"). The Old Debentures are secured by guarantees thereof by Norlin (the "Norlin Guarantees") pursuant to the Old Indenture and written guarantees by Norlin affixed to the reverse of each debenture [*6] certificate. The Old Indenture requires ECL to make sinking fund payments in variable amounts annually sufficient to retire at maturity 55% of the Old Debentures originally issued. Pursuant to the Old Indenture, ECL is required to make sinking fund payments of $2,098,000 on each of November 14, 1985, November 14, 1986 and November 14, 1987. The Old Indenture provides that, as an alternative to making a sinking fund payment in cash, ECL is permitted, under certain circumstances, to satisfy such obligation by the delivery to the trustee under the Old Indenture is payable in two installments. The first installment consists of 10% of the principal amount of the Old Debenture and will become due and payable on November 15, 1988 to the person in whose name the Old Debenture is registered on the 15th day preceding such payment date. The second and final installment consists of 90% of the principal amoutn of the Old Debenture and will become due and payable on November 15, 1989 to the persons in whose name the Old Debenture is registered on the 15th day preceding such date. 21 22 (3) Current Financial Situation. As set forth in detail in the Offering Circular, the Companies anticipate [*7] that their working capital requirements through the end of 1985 will be approximately $3,000,000 and that they must either consummate certain possible transactions they are considering or effect borrowings in order to meet their working capital requirements through the end of 1985. The Offering Circular discloses the severe liquidity problems presently facing the Companies, as follows: "No assurance can be given that the Companies will have sufficient cash to meet their obligations through the end of 1985 and thereafter. . . . Without obtaining additional funds there is a substantial risk that the Companies will not have sufficient cash to meet their obligations in 1986, including their obligations under the Old Securities and the New Securities. . . . If at any time the Companies are unable to meet their obligations, they may elect or be required by their creditors to seek protection under federal bankruptcy laws." (emphasis in original) The Companies' independent public accountants have recently revised their opinions with respect to the audited financial statements of the Companies for the year ended December 31, 1984 to express a "going concern" qualification as a result [*8] of the Companies' liquidity problems. On October 7, 1985, the Companies issued a Special Issue 12% Note in the original principal amount of $1,995,000 (the "Special Note") to an unrelated party in exchange for $2,100,000 principal amount of Old Debentures (the "Special Exchange"). The Special Exchange was effected in reliance upon the exemption from the registration requirements of the Securities Act contained in Section 3(a)(9) thereof. See Loss, L., Fundamentals of Securities Regulation (1983) at 304 (". . . there is no requirement that [an exempt offering under Section 3(a)(9)] be made to all members of a given class of holders.") The purpose of the Special Exchange was to obtain Old Debentures in an amount of the Special Exchange was to obtain Old Debentures in an amount sufficient to satisfy ECL's obligation to make the $2,098,000 sinking fund payment due November 14, 1985. The Special Note, which is a joint and several obligation of ECL and Norlin, will mature on March 14, 1986, provided, however, that either of the Companies may, at its option, extend the maturity of the Special Note for 90 days upon payment of $9,975. The Companies intend to make an offer to the [*9] holder of the Special Note to exchange the Special Note for New Securities (as defined below) at an interest rate and upon such other terms and conditions as may be negotiated by the Companies and the holder of the Special Note. The continued viability of the Companies is immediately threatened by a substantial risk of default on the payment of interest on the Old Debentures due November 15, 1985 (the "November Interest Payment"). Without giving effect to the Exchange Offer, semi-annual interest of $896,288 is due on the Old Debentures on November 15, 1985, representing interest accrued on the Old Debentures since May 15, 1985. The Exchange Offer described below is being made by the Companies for the purpose of restructuring the existing debt of the Companies: (i) by substantially reducing ECL's obligation to make the November Interest Payment through the exchange of Old Debentures for New Debentures (as defined below) with respect to which no interest is payable until November 15, 1986 (ii) by eliminating or substantially reducing ECL's obligation to make sinking fund payments in cash in 1986 and 1987 through the tender of Old Debentures sufficient to satisfy such sinking fund [*10] payments, (iii) by deferring the payment of all or a substantial amount of the principal indebtedness represented by the Old Debentures through the exchange of New Debentures which will mature on November 15, 1988 and 1989, and (iv) by reducing Norlin's corresponding obligation under the Norlin Guarantees with respect to ECL's obligations under clauses (i), (ii) and (iii). B. The Exchange Offer (1) Joint Exchange Offer. ECL is offering (the "ECL Exchange Offer"), to holders of Old Debentures, to exchange $1,000 principal amount of its 11-1/2% Senior Subordinated Debentures Due 1994 (the "New Debentures") for each $1,000 principal amount of Old Debentures, and Norlin is jointly offering (the "North 22 23 Exchange Offer"), to holders of the Norlin Guarantees, to exchange 30 warrants (the "Warrants") to purchase common stock of Norlin (the "Norlin Common Stock") for the Norlin Guarantees with respect to such $1,000 principal amount of Old Debentures. (The Old Debentures and the Norlin Guarantees thereof are hereinafter sometimes collectively referred to as the "Old Securities". The New Debentures and the Warrants are hereinafter sometimes collectively referred to as the "New Securities". The ECL Exchange Offer and the Norlin Exchange Offer are hereinafter sometimes collectively referred to as the "Exchange [*11] Offer".) The ECL Exchange Offer and the Norlin Exchange Offer are being made jointly by ECL and Norlin and acceptance of one is a condition of acceptance of the other such that holders of Old Securities must tender both their Old Debentures and Norlin Guarantees thereof for New Debentures and Warrants. Interest on the New Debentures will accrue through November 15, 1985 and will be payable on November 15, 1986, and thereafter semi-annually on May 15 and November 15 of each year through November 15, 1994, at which time the New Debentures will be due and payable. The Warrants may not be exercised unless a registration statement under the Securities Act is in effect as to the Norlin Common Stock issuable upon exercise of such Warrants. Norlin has undertaken to use its best efforts to register the Norlin Common Stock issuable upon exercise of the Warrants as soon as practicable. In the event the underlying Norlin Common Stock is not registered by October 28, 1986, Norlin will promptly redeem the Warrants at $1.00 per Warrant. (2) Interest on Old Debentures. The Exchange Offer provides that tendering holders of Old Debentures will not be entitled to the November Interest Payment [*12] or any other interest accruing on their Old Debentures after November 15, 1985. By accepting the Exchange Offer, holders of Old Debentures will affirmatively waive their right to receive the November Interest Payment and any other interest accruing on their Old Debentures after November 15, 1985. Tendering holders of Old Debentures who become holders of Old Debentures after October 31, 1985 (the record date for the November Interest Payment on the Old Debentures) must, upon tender of their Old Debentures, pay ECL $45 for every $1,000 principal amount of Old Debentures tendered to reimburse ECL for the November Interest Payment which ECL will be obligated to make to the persons who were the holders of such Old Debentures as of such date. (3) Information Agent. The Companies have retained The Carter Organization, Inc. ("Carter") to perform certain ministerial services in connection with the Exchange Offer. Carter has represented to the Companies that it will not make any recommendations, either directly or indirectly, regarding acceptance or rejection of the Exchange Offer, and the fee payable to Carter will not be affected in any manner by the action of any debentureholder [*13] with respect to the Exchange Offer, nor contingent upon the success or failure of the Exchange Offer. (4) Brokers and Dealers. The Companies have reserved the right to retain registered brokers and dealers to effect the Exchange Offer on behalf of the Companies in any jurisdiction in which the securities, blue sky or other laws require the Exchange Offer to be made by a registered broker or dealer. The Companies anticipate that any broker or dealer retained to effect the Exchange Offer on behalf of the Companies in such states and other jurisdictions: (a) will be paid a flat fee for its services; (b) may be indemnified by the Companies with respect to its participation in the Exchange Offer; (c) may be reimbursed for its reasonable expenses; (d) will only perform the following limited functions; (1) forward copies of the Offering Circular to debentureholders, (2) forward Letters of Transmittal and Old Securities to the Exchange Agent, and (3) forward New Securities to tendering debentureholders; and (e) will not make any recommendation, either directly or indirectly, regarding acceptance or rejection of the Exchange Offer. C. Discussion. (1) Joint Exchange Offer. [*14] Section 3(a)(9) of the Securities Act is applicable to exchanges "by the issuer with its existing security holders exclusively . . ." (emphasis added). The Commission has interpreted this language as requiring (i) that both the security issued and the security surrendered in an exchange by those of the same issuer (the "Issuer Identity 23 24 Requirement"), and (ii) that the Exchange Offer be made exclusively to existing security holders (the "Existing Security Holder Requirement"). The fact that the Old Securities (i.e., the Old Debentures and the Norlin Guarantees thereof) are being exchanged for separate securities of separate issuers (i.e., the New Debentures of ECL and the Warrants of Norlin) raises potential questions as to compliance with the Issuer Identity Requirement. The fact that the ECL Exchange Offer and the Norlin Exchange Offer are being made jointly raises potential questions as to compliance with the Existing Security Holders Requirement. While the Old Debentures are treated as a single security by the trading community, they in fact constitute two separate securities that were issued jointly and trade jointly. The definition of a "security" in Section [*15] 2(1) of the Securities Act includes "a guarantee of" any bond or debenture and, by reason thereof, the definition of "issuer" in Section 2(4) as any person who issues a security would necessarily include a guarantor of a bond or debenture. In his treatise on exempted transactions, Professor Hicks states that: "[T]he presence of a guarantee in a transaction, otherwise qualified under Section 3(a)(9), raises some troublesome questions. Assume, for purposes of illustration, that P Corporation guaranteed the securities of its wholly owned subsidiary, S Corporation, at the time that S sold its debentures to the public. Since P's guarantee is itself a security, both P and S function as issuers in the transaction involving the S debentures. If, subsequently, P and S determine that a recapitalization is necessary, they may decide to exchange new S debentures with P's guarantee for the outstanding S debentures. Although two different issuers would be involved in the contemplated recapitalization, each entity would be exchanging one of its new securities for one of its old securities -- i.e., new S debentures for old S debentures and new P guarantee for old P guarantee -- and Section [*16] 3(a)(9) would be available to each issuer for its respective exchange transaction." J. Hicks, Exempted Transactions Under the Securities Act of 1933, 1985 rev. at 2-42 to 2-43. (emphasis added). The Old Debentures are securities of ECL and the Norlin Guarantees thereof are securities of Norlin. The ECL Exchange Offer is an exchange by ECL of certain new securities of ECL (i.e., the New Debentures) for certain previously issued securities of ECL (i.e., the Old Debentures) and thus satisfies the Issuer Identity Requirement. The Norlin Exchange Offer is an exchange by Norlin of certain new securities of Norlin (i.e., the Warrants) for certain previously issued securities of Norlin (i.e., the Norlin Guarantees) and thus should also satisfy the Issuer Identity Requirement. The Commission has long recognized the status of a guarantee as a separate security. First Federal Savings Bank (available November 15, 1985); Union Planters Corp. (availalbe January 10, 1983). It would be inconsistent with the long held position of the Commission and clearly contradictory to the plain language of the Securities Act to treat the guaranteed debenture as a single security and the two co-issuers [*17] as a single issuer for purposes of Section 3(a)(9), and to limit the exemption under Section 3(a)(9) to an exchange of such guaranteed debenture for another security co-issued by both the primary obligor and the guarantor of the original security. (It should be noted that the reason the New Debentures do not include a guarantee by Norlin is due in part to the fact that Companies could not obtain a satisfactory opinion of counsel from Panama, the jurisdiction of Norlin's incorporation, that Norlin could guarantee the New Debentures without shareholder approval.) Indeed, the Commission has issued guaranteed security solely for a new security of the guarantor of the originally issued security. American Motors Corporation, available July 8, 1982, Baxter Travenol Laboratories, Inc., available July 8, 1983, and National Can Corporation, available September 22, 1983. In a letter to Southern Railway Co. (available September 14, 1981), the Commission stated that it would take no action with respect to "the "exchange" of Southern's obligations as guarantor of the Bonds for its obligations as primary obligor." It would be logically inconsistent to permit one of the co-issuers of two jointly [*18] issued securities to exchange its new securities for the securities orginally issued by the other co-issuer and not permit each co-issuer to exchange its new securities for the securities originally issued by it. The fact that the ECL Exchange Offer and the Norlin Exchange Offer are being 24 25 conducted jointly means that the ECL Exchange Offer is being made to Norlin security holders (i.e., holders of the Norlin Guarantees), as well as to ECL security holders (i.e., holders of the Old Debentures) and that the Norlin Exchange Offer is being made to ECL security holders (i.e., holders of Old Debentures) as well as to Norlin security holders (i.e., holders of Norlin Guarantees). This should not be deemed a violation of the Existing Security Holder Requirement limiting an exchange offer exempt under Section 3(a)(9) to one with an issuer's existing security holders exclusively. The holders of the Norlin Guarantees and the holders of the Old Debentures are obviously one and the same group by reason of the fact that the Old Debentures and the Norlin Guarantees were co-issued and remain non-separable securities as the Norlin Guarantees would be meaningless apart from the Old Debentures [*19] to which they relate. The Commission has recognized the status of a guarantee and the underlying obligation as co-issued securities. Warner and Swasey Company, available October 25, 1972. It is a natural consequence of the co-issued status of a guarantee and the primary obligation that an offer to the holders of one security is necessarily an offer to the holders of the other security. The various transactions in which the Commission has taken no action with respect to the exchange of a security of a guarantor for the primary debt obligation originally issued by the guarantor's subsidiary are, at least theoretically, more extreme as these cases involve an offer by the guarantor to the holders of the original debt obligation (who, of course, are again one and the same group as the holders of the guarantees), rather than, as in the proposed Exchange Offer, an offer by the guarantor to its security holders made jointly with an offer by the primary obligor to its security holders. See American Motors Corporation. Baxter Travenol Laboratories, Inc., and National Can Corporation cited above. The matters in which the Commission has stated that it would take no action with respect [*20] to the exchange of a debt instrument or preferred stock of a subsidiary for common stock of the parent corporation that originally guaranteed the debt instrument of preferred stock, as the case may be, have noted that "as a practical matter" the exchange involved "securities of a single issues (Baxter Travenol Laboratories, Inc.), and that as an "'economic reality" the guarantees and primary debt obligations constituted securities of the same issuer (American Motors Corp.). As discussed above, Norlin has no material assets other than its stock ownership interest in ECL and, for all practical p urposes, the two issuers can be viewed as one and the same. It should be noted that both the Norlin Common Stock and the Old Debentures are listed and traded on the New York Stock Exchange. See the Baxter Travenol Laboratories, Inc. no-action letter (available July 8, 1983) in which the Commission relied, among other things, on the fact that the parent guarantor was a reporting company under the 1934 Act in concluding that the issuance of common stock by a parent in exchange for preferred stock of the subsidiary guaranted by the parent could be effected without registration pursuant to the [*21] exemption contained in Section 3(a)(9). Finally, it should be noted that the application of the exemption provided by Section 3(a)(9) to the Exchange Offer proposed by Norlin and ECL may be the specific type of transaction for which such exemption was originally intended. The Section 3(a)(9) exemption specifically has been seen as resting: "on a balancing of interests between the corporation and its security holders, and to indicate a recognitioin that the burden of delay and expense involved in registration might well be disproportionately heavy in a purely intracorporate readdjustment where the very fact of the readjustment would tend in the majority of instances to indicate an embarrassed financial condition. In such cases, it may be supposed, the interest of the security holders in being afforded full information as to the corporate affairs is made to yield to their interest, in common with the issuer itself, in expeditious and economical readjustments. Throop & Lane, "Some Problems of Exemption Under the Securities Act of 1933," quoted in Hicks, supra, at 2-6 to 2-7. See Grolier, Inc. (available December 7, 1977) in which the Commission issued a no-action letter with [*22] respect to the issuance of various securities by a parent-guarantor in exchange for the debt instruments of the subsidiary-obligor in a situation in which the parent and subsidiary were "in the process of restructuring a substantial portion of 25 26 their debt and equity in an effort to avoid the necessity of filing for relief under the Bankruptcy Act." The consummation of the Exchange Offer may well be the only means by which the Companies can avert default on the November Interest Payment and avoid the necessity of seeking protection under the Federal bankruptcy laws. (2) Interest on Old Debentures. An exchange of securities will qualify for exemption from registration under the Securities Act pursuant to Section 3(a)(9) if security holders are not required to part with any value other than the securities sought by the issuer. Tendering debentureholders are required by the terms of the Exchange Offer to (i) waive their right to receive the November Interest Payment and any other interest accruing on their Old Debentures after November 15, 1985, and (ii) to pay $45 for each $1,000 principal amount of Old Debentures tendered if they become holders of the tendered Old Debentures after [*23] the record date for the November Intererst Payment. We do not believe that either of these requirements should preclude the availability of the exemption afforded by Section 3(a)(9). (i) The waiver of the right to receive the November Interest Payment and any other interest accrusing on the Old Debentures after November 15, 1985 is not the type of additional consideration flowing from security holders to the issuer that Section 3(a)(9) prohibits. In this regard, we note that the Commission staff has granted no-action letters on the basis of Section 3(a)(9) where tendering security holders have relinquished their right to unpaid accrued interest on debt securities. See Barnett Winston Investment Trust (available October 11, 1977); Geoscience Technology Services Corp. (available May 14, 1976), where the issuer proposed to exchange its common stock for subordinated notes that were indefault. (ii) The requirement that certain tendering debentureholders make a payment of $45 for each $1,000 principal amount of Old Debentures represents an "'equitable adjustment" in respect of interest payments due on Old Debentures within the meaning of Rule 149, and, thus, the exemption remains [*24] available notwithstanding such cash payment. Rule 149 permits the security holder in a Section 3(a)(9) exchange to make whatever cash payments may be necessary "to effect an equitable adjustment, in respect of dividends or interest paid or payable on the securities involved in the exchange, as between such security holder and other security holders of the same class accepting the offer of exchange." The record date for determining the debentureholders entitled to the November Interest Payment is October 31, 1985 (the "Record Date"). Some of the tendering debentureholders will have purchased their Old Debentures after the Record Date and will have no right to waive the November Interest Payment that is payable to the persons who were the holders of such Old Debentures on the Record Date for the November Interest Payment. The Exchange Offer requires that the tendering debentureholder in such circumstances make a payment of $45 for each $1,000 principal amount of Old Debentures tendered, representing the amount of the November Interest Payment. ECL will pay the $45 to the person who was the holder of the tendered Old Debentures on the Record Date. Thus, ECL is a conduit through [*25] which the November Interest Payment will be channeled to its rightful recipient; this cash payment is merely an equitable adjustment among persons who have held the same security at different times. While there are no relevant no-action letters on the issue, the following example should prove the equitable nature of the cash payment and the logic of applying Rule 149 in this situation. Assume two debentureholders, A and B, purchase Old Debentures on October 29th. On November 2nd, B sells his Old Debentures to C. A and C thereafter tender their Old Debentures pursuant to the Exchange Offer. In accordance with the terms of the Exchange Offer, A will, by his acceptance with the terms of the Exchange Offer, be deemed to waive his right to the November Interest Payment. However, C has no right to the November Interest Payment as he was not a debentureholder on the Record Date, and, accordingly, he is not entitled to waive the November Interest Payment with respect to the Debentures he purchaed on November 2nd. Moreover, even if C tenders his Old Debentures pursuant to the Exchange Offer, ECL will be required to pay the November Interest Payment to B, the holder of the Old Debentures [*26] on the Record Date. Presumably, the price paid by C to B for his Old 26 27 Debentures was reduced to reflect the fact that the purchase was effected "ex-dividend". Accordingly, it is only fair to require C to reimburse ECL for the November Interest Payment ECL must make to B with respect to the Old Debentures tendered by C, thereby placing C on a parity with A, who did not purchase his Old Debentures for the lower "ex-dividend" price and who must now waive his right to the November Interest Payment. Finally, it should be noted that the Old Debentures trade very sporadically, and the requirement that purchasers of Old Debentures after October 31, 1985 make payments to ECL should apply in only a very few situations. See generally Hicks, Exempted Transactions Under the Securities Act of 1933, at 2-53. (3) Information Agent. The Companies have enlisted the services of The Carter Organization, Inc. ("Carter"), an investor relations firm, to perform certain ministerial functions in connection with the Exchange Offer. Carter will do no more than (i) notify debentureholders of the appropriate details of the Exchange Offer; (ii) confirm the accuracy of the addresses of debentureholders; [*27] (iii) ascertain, by telephone, whether debentureholders have received the Offering Circular and understand the mechanics of tendering Old Securities, and answer questions relative thereto; (iv) ascertain what action the debentureholders plan to take and communicate the same to the Companies; (v) remind debentureholders of all appropriate deadlines; and (vi) communicate with the back office personnel or brokers, banks and nominees who hold securities for the benefit of others to make sure that the Offering Circular and the accompanying materials are forwarded properly and urge the back office personnel to check with the beneficial owners as to whether they have received the material and understand the mechanics of the Exchange Offer. Carter has been instructed that it may not make any recommendation regarding the tender of Old Securities and that if it is asked for advice by a debentureholder, it will respond that it is not authorized to give investment advice, and that the debentureholder should obtain such advice from his own advisors or contact appropriate officers of the Companies. It is our understanding that if Carter performs only the services enumerated above on a per debentureholder [*28] basis, not contingent upon the number of Old Securities tendered, the exemption provided by Section 3(a)(9) would not be rendered inapplicable. See Mortgage Investors of Washington (available October 8, 1980); Hamilton Brothers Petroleum Corp. (available August 14, 1985); Barnett Winston Investment Trust (available February 9, 1978); Valhi, Inc. (available October 15, 1976); The Carter Organization, Inc. (available April 7, 1975). (4) Brokers and Dealers. The use of a broker dealer could arguably violate the requirement that a transaction exempt under Section 3(a)(9) be one in which "no commission or other remuneration is paid or given direclty or indirectly for soliciting such exchange." In view of the fact that certain blue sky laws may require the use of a registered broker or dealer to effect the Exchange Offer on behalf of the Companies in certain states notwithstanding the fact that the Exchange Offer is exempt under Section 3(a)(9) of the Securities Act, the Companies have reserved the right to retain a broker or dealer to effect the Exchange Offer on their behalf in such states. The Companies have provided, however, that any such broker or dealer will receive a flat [*29] fee and will not be compensated on the basis of the decision of any debentureholder or the success of the Exchange Offer. The Companies have further provided that any broker or dealer so retained by them will limit his services to the minimum extent required to comply with applicable blue sky laws and, in no event, will such broker or dealer make any recommendation or other solicitation, either directly or indirectly, regarding acceptance or rejection of the Exchange Offer. We believe the retention of a broker or dealer on such basis would be in line with procedures previously approved by the Commission and would not cause the Companies to lose their exemption under Section 3(a)(9). Western Pacific Securities, Inc. (available October 11, 1976). Based upon the foregoing, it is our opinion that the issuance of the New Securities pursuant to the Exchange Offer may be effected without registration under the Securities Act in reliance upon the exemption from registration contained in Section 3(a)(9) of the Securities Act. 27 28 The Exchange Offer is scheduled to expire on Thursday, November 14, 1985. While the Companies have reserved the right to extend the Exchange Offer, their ability [*30] to extend the Exchange Offer much beyond that date is limited by the fact that the November Interest Payment is due November 15, 1985, provided that a default can be cured by the payment of interest within 10 days of its due date. However, as noted on page 22 of the Offering Circular, the Companies' failure to make the November Interest Payment on or before November 15th may result in an event of default under various debt instruments and contractual obligations to which the Companies are parties. In no event may the Exchange Offer be extended beyond November 25th when the failure to pay the November Interest Payment will mature into an Event of Default under the Old Indenture and, through various cross-default provisions, will also constitute a default under the other debt instruments and contractual obligations to which the Companies are parties. Accordingly, your immediate attention to this request will be greatly appreciated. If you require any additional information, or if we may otherwise be of assistance, please feel free to call the undersigned collect at (212) 371-5900. Very truly yours, Martin A. Bell 28 - ------------------------------------------------------------------------------- 29 1981 SEC No-Act. LEXIS 4208 Securities Act of 1933 -- Section 3(a)(9) Oct 14, 1981 [*1] Shop Rite Foods, Inc. TOTAL NUMBER OF LETTERS: 2 SEC-REPLY-1: SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 September 14, 1981 RESPONSE OF THE OFFICE OF CHIEF COUNSEL DIVISION OF CORPORATION FINANCE Re: Shop Rite Foods, Inc. Incoming letter dated August 10, 1981 On the basis of the facts presented, this Division will not recommend any action to the Commission if the Company, in reliance upon your opinion as counsel that the exemption afforded by Section 3(a)(9) of the 1933 Act is available, makes the proposed exchange without compliance with the registration requirements of the 1933 Act. Because this position is based upon the representations made to the Division in your letter, it should be noted that any different facts or conditions might require a different conclusion. Further, this letter only expresses the Division's position on enforcement action and does not purport to express any legal conclusion on the question presented. Sincerely, Norman Schou Special Counsel INQUIRY-1: BRANCH, PERKAL AND ASSOCIATES, P.A. ATTORNEYS AND COUNSELORS AT LAW SUITE 301 NEWPORT WEST 2501 YALE BOULEVARD, S.E. ALBUQUERQUE, NEW MEXICO 87106 August 10, 1981 1933 Act/3(a)(9) VIA FEDERAL EXPRESS [*2] Division of Corporation Finance Securities and Exchange Commission Room 616 500 North Capitol Street N.W. Washington, D.C. 20549 Re: Shop Rite Foods, Inc. Commission File No. 0-1257 Dear Sirs: This letter is submitted on behalf of Shop Rite Foods, Inc., a New Mexico corporation ("Shop Rite" or the "Company") to request your concurrence in our advice with respect to the proposed solicitation by Shop Rite, without compliance with the registration provisions of the Securities Act of 1933 (the "Act"), of proxies of holders of its Common Stock, no par value ("Common Stock") and $ 2.04 Cumulative Convertible Preferred Stock ("Preferred Stock") concerning proposed amendments to the Articles of Incorporation of Shop Rite and subsequent proposed redemption of the Preferred Stock. Shop Rite has 907,293 shares of Common Stock outstanding held by 29 30 approximately 1,270 security holders and 287,013 shares of Preferred Stock held by approximately 1,282 security holders. Shop Rite was incorporated under the laws of the State of New Mexico in 1953, and operates a small chain of retail food supermarkets and convenience stores in the states of New Mexico and Texas. At March 1, 1981, [*3] Shop Rite operated 15 supermarkets. During recent years, the Company has significantly contracted its operations to reduce outdated and unprofitable retail operations, reduce administrative expense and improve its cash position. In the last five fiscal years, the Company has sold or closed 209 supermarkets and convenience stores. Sales for the year ended January 3, 1981, and for the two previous fiscal years were approximately $ 64 million, $ 93 million and $ 181 million, respectively. Net losses for the three years were $ 935,418 in 1980, $ 3,819,334 in 1979 and $ 9,104,903 in 1978. The disposition of unprofitable operations has resulted in a gradual improvement in net results. Quarterly losses for the first through the third quarters of 1980 were $ 498,289, $ 338,543 and $ 119,512, respectively. In the fourth quarter, the Company recorded a net income of $ 20,926 and recorded a net income of $ 6,500 in the first quarter of 1981. THE PREFERRED STOCK The Company is required to redeem or repurchase and deliver to the sinking fund agent 10,243 shares of Preferred Stock annually to satisfy the Preferred Stock sinking fund requirements. The sinking fund redemption price [*4] is $ 50 per share but the Company may deliver to the sinking fund agent convertible Preferred Stock certificates which were repurchased or redeemed otherwise than through operation of the sinking fund or which were converted, and receive credit on sinking fund payments. A total of 225,022 shares of Preferred Stock has previously been repurchased, converted or redeemed of which 112,673 shares were applied against the sinking fund requirements through January 15, 1981 leaving 112,349 shares available for credit against future requirements. Thus the Company will not be required to contribute any amounts to the sinking fund (other than the 10,243 shares delivered annually) for another eleven years. The Preferred Stock is callable for redemption, other than by way of the sinking fund, in whole or in part, at the option of the Company on thirty days notice at redemption prices (plus accrued dividends) as follows: Prior to January 14, 1981-$ 54 per share; January 15, 1981 through January 14, 1986-$ 53 per share; and January 15, 1986 through January 14, 1991-$ 52 per share; January 15, 1991 through January 15, 1996 and thereafter-$ 50 per share. As accrued dividends are now in arrears [*5] $ 2,781,159 or $ 9.69 per preferred share, each share of Preferred Stock would at present be redeemable by Shop Rite under its existing Articles of Incorporation at $ 62.69 per share. Upon voluntary liquidation, preferred stockholders are entitled to receive the redemption price plus accrued dividends. Upon any involuntary liquidation, the holders of Preferred Stock are entitled to receive par value of $ 20.50 per share, plus accrued dividends, and are entitled to participate thereafter with Common Stock on the same basis as if the Preferred Stock had been converted, provided that the total amount received may not exceed $ 50 per share, plus accrued dividends. The Preferred Stock is presently convertible into Common Stock at the ratio of one share of Preferred Stock for 1.32 shares of Common Stock. No shares of Preferred Stock were converted during 1980, 1979 or 1978. The Company's Common Stock is not traded on an exchange. The high and low bids, based upon quotations obtained from the Dallas, Texas office of a brokerage firm making a market in the Company's securities ranged from a low of one-quarter (1/4) to a high of one-half (1/2) in 1980. THE PROPOSED TRANSACTION [*6] 30 31 In view of the generally poor performance of the Company over the past five years, and the substantial continuing burden of the cash dividend and redemption provisions of the Preferred Stock, Shop Rite's Board of Directors intends to submit for approval at a Special Meeting of Shareholders on October 30, 1981, a proposal to amend Shop Rite's Articles of Incorporation to lower the current redemption price of $ 53 per share plus the accrued dividends of $ 9.69 per share, to $ 10 per share. If the proposed amendment is approved by the shareholders, Shop Rite will immediately redeem all of the Preferred Stock at the new redemption price of $ 10 per share, with $ 5 payable immediately upon surrender of the certificate representing such shares and $ 5 payable in eighteen (18) months plus interest on said amount at the rate of 12% per annum with said debt evidenced by a convertible debenture. Preferred stockholders would have the right to convert the debenture into shares of Common Stock upon default and such conversion would result in the present owners of Preferred Stock owning 80% of the then outstanding Common Stock, pursuant to the Articles of Incorporation as amended. In order [*7] to provide sufficient additional shares of Common Stock to be available in the event of a default and conversion of the debentures, the Company is proposing to increase its authorized Common Stock to 5,000,000 shares. The proposal includes a waiver of the accrued dividend arrearage. A copy of the proposed amendments is attached hereto as Exhibit A. Under the present terms of the New Mexico Business Corporation Act, the vote of two-thirds (2/3) of the outstanding shares of Preferred Stock voting as a separate class and the vote of two-thirds (2/3) of the outstanding shares of Common Stock voting as a separate class are required to authorize the amendments and subsequent redemption. Shop Rite considers the dividend arrearages of the Preferred Stock, which increase at the rate of $ 2.04 per share per year or $ 585,507 in the aggregate, as a deterrent to the consideration of ever declaring a dividend on the Common Stock, a depressant to the market price of the Common Stock and a handicap to the securing of additional financing. Moreover, the unrealistic conversion rate of the Preferred Stock in relation to the present market price of the Common Stock presents a deterrent to further [*8] financing through the issuance of additional equity, due to the anti-dilution provisions of the Preferred Stock. AVAILABILITY OF SECTION 3(a)(9) OF THE ACT We are of the opinion that the proposed amendments to Shop Rite's Articles of Incorporation modifying the rights of the Preferred Stock and the subsequent redemption of such stock by the payment of $ 5 in cash and the delivery of a $ 5 convertible debenture note payable within eighteen months is an exempt transaction under Section 3(a)(9) of the Act. Our opinion is consistent with the position taken by the Staff in no-action letters to e.g. Diverse Graphics, Inc. (June 20, 1972) (exchange included waiver of unpaid accrued dividends); Canrad Precision Industries, Inc. (August 28, 1973) (election between exchange of existing preferred for new class of preferred or adjusting the conversion price of existing shares downward subject to the shareholders agreeing to convert their shares immediately); Four-Phase Systems, Inc. (November 8, 1973) (exchange of new preferred and common for old preferred with arrearages); USM Corp. (April 27, 1973) (elimination of artificial price for preferred where no market [*9] existed); and Brookwood Health Services, Inc., (November 9, 1977) (conversion privilege had adverse effect on market price of common stock). Full disclosure of the proposed amendments and subsequent redemption will be made in accordance with Section 14(a) of the Securities Exchange Act of 1934 and Schedule 14A thereunder. The management of Shop Rite will solicit proxies from its stockholders for purposes of seeking approval of the proposed amendments. In that regard, Shop Rite expects to employ the services of a solicitor, (the "Solicitor"), to assist in the distribution of the proxy statement to be used in connection with the Special Meeting, the Notice of the Special Meeting, and the form of proxy (collectively, the "proxy materials") to each registered holder of Common Stock, and Preferred Stock. The Solicitor would be expressly instructed not to make any recommendation, either directly or indirectly, regarding how a holder of Preferred Stock should vote on the question presented in the proxy 31 32 materials. The modification of the rights of the Preferred Stock will involve existing shareholders at the record date exclusively. The Solicitor will be compensated on a flat [*10] fee basis plus out-of-pocket disbursements. Under no circumstances will the fee be increased or reduced as a result of the number of affirmative proxies granted to management or the outcome of any of the proposals. In addition, officers, and regular employees of Shop Rite may contact stockholders, including holders of Preferred Stock, to inquire whether they have received and understand the proxy materials and will be authorized to comment to such holders on the merits of, and recommend that they vote for, the amendments to be considered at the meeting in the manner prescribed by the Staff in its no-action letters to Chris-Craft Industries, Inc. (September 8, 1972), Valhi, Inc., (September 15, 1976), Hamilton Brothers Petroleum Corporation, (August 14, 1978), and Time, Inc. (March 19, 1979). No remuneration, other than the regular salary and compensation, will be paid to any such officer or employee in connection with such activities. Directors may also contact stockholders and recommend a vote for or against said amendments. Jack Evans, a director and owner of 28,800 shares of Preferred Stock, has indicated he will attempt to contact stockholders and that he [*11] will recommend a vote against said amendments. Based on the foregoing, subject to the Staff's concurrence, we are prepared to advise Shop Rite that it may proceed with the proposed solicitation, amendments and redemption in the manner described above without compliance with the registration provisions of the Act on the basis of the exemption under Section 3(a)(9) of the Act. We would appreciate your advising us whether the Staff of the Commission agrees with this view and would recommend to the Commission that no action be taken if the solicitation is made and the amendments and redemption effected on the basis of the foregoing. Our timetable contemplates mailing of the proxy materials no later than September 21, 1981, and we would greatly appreciate your assurance that you concur in our opinion prior to September 10,1981, in order that we may deliver the proxy materials to you for review in accordance with Section 14(a) of the Securities Exchange Act of 1934. If there is any further information that you require with respect to this matter, please call the undersigned collect at (505) 243-3501. In compliance with Securities Act Release No. 5127, two copies of this request have [*12] been enclosed. Sincerely, BRANCH, PERKAL & ASSOCIATES, P.A. Ross B. Perkal 32 - ------------------------------------------------------------------------------- 33 1976 SEC No-Act. LEXIS 243 Securities Act of 1933 - Section 3(a) (9), 4(2) Feb 9, 1976 [*1] Geoscience Technology Services Corp. TOTAL NUMBER OF LETTERS: 2 SEC-REPLY-1: SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 JAN 8 1976 David E. Wise, Esq. Geary, Stahl, Koons, Rohde & Spencer 2500 LTV Tower Dallas, Texas 75201 Re: Geoscience Technology Services Corp. Dear Mr. Wise: This is in response to your letter of December 8, 1975 and subsequent telephone conversations with the staff concerning proposals by Geoscience Technology Services Corporation ("GTS") to: (1) issue warrants to purchase GTS Common Stock to First National Bank of Commerce, New Orleans, Louisiana (the "Bank"), and (2) offer its debentureholders GTS Common Stock in exchange for its outstanding debentures, without compliance with the registration requirements of the Securities Act of 1933 (the "Act"). We understand the pertinent facts to be as follows. With respect to the first proposal, you state that in December, 1974 GTS began renegotiation its definitive loan agreement with the Bank, its primary lender. The general parameters of a plan of refinancing (the "Plan") have been defined in a proposal by the Bank, and the specifics of the Plan are presently being negotiated. Pursuant to the Plan, GTS has already granted and [*2] issued to the Bank warrants (the "Warrants") to purchase an aggregate of 76,500 shares of GTS Common Stock on or before November 9, 1985, at an exercise price of one cent per share. These warrants were issued as partial consideration for the Bank's consent to the sale by GTS of a 99% owned subsidiary, the entire shares of which GTS has pledged to the Bank as collateral for the Bank's loan. As additional consideration for the Bank's agreement to refinance the GTS debt, the Bank will require GTS to issue to the Bank additional warrants (the "Subsequent Warrants") to purchase GTS Common Stock equal to 10% of the outstanding Common Stock of GTS. You mentioned over the telephone that upon exercise of both the Warrants and the Subsequent Warrants, GTS will issue restricted stock to the Bank, the certificates of which will bear legends describing the restrictions upon their transfer. You state that GTS believes that the issuance of both the Warrants and the Subsequent Warrants constitute transactions by an issuer not involving any public offering and therefore are exempt by virtue of Section 4(2) of the Act. As a matter of policy, the staff does not express its view on transactions [*3] already completed. Further, the staff does not issue "no-action" letters under Section 4(2) of the Act, except in the most compelling circumstances. For these reasons we are unable to comment on either the prior issuance of the Warrants or the proposed issuance of the Subsequent Warrants. With respect to the second proposal, GTS presently has issued and outstanding $945,000.00 principal amount of its 7% Sinking Fund Debentures due May 1, 1979 (the "Debentures"). The Debentures were issued in 1969 pursuant to a registration statement filed with the Commission. GTS has not made any interest payments on the Debentures or the required sinking fund deposits for over a year and therefore it is in default. As a condition to the Bank's agreement to refinance the GTS debt, the Bank will require GTS to retire at least 80% of the 33 34 oustanding principal amount of the Debentures. GTS intends to accomplish this by making an exchange offer to its approximately 231 debentureholders, whereby GTS would issue 300 shares of Common Stock for each $1,000 principal amount of Debentures, which would be cancelled after the exchange. No commission or other remuneration will be paid or given directly [*4] or indirectly for soliciting such exchange. Based upon the facts presented regarding the second proposal, this Division will not recommend any enforcement action to the Commission if the proposed exchange is effected without compliance with the registration requirements of the Act in reliance upon the exemption provided by Section 3(a) (9) thereof. Because this position is based upon the representations made to the Division in your letter, it should be noted that any different facts or conditions might require a different conclusion. Further, this letter only expresses the Division's position on enforcement action and does not purport to express any legal conclusions on the questions presented. Sincerely, Norman Schou Attorney Adviser INQUIRY-1: GEARY, STAHL, KOONS, ROHDE & SPENCER A PROFESSIONAL CORPORATION ATTORNEYS AND COUNSELORS 2500 LTV TOWER DALLAS, TEXAS 75201 AREA CODE 214 TELEPHONE 748-9901 December 8, 1975 Securities and Exchange Commission Division of Corporation Finance 500 N. Capitol Street, N.W. Washington, D.C. 20549 Re: Geoscience Technology Services Corporation Commission File No. 0-5575 Gentlemen: This letter is being written on behalf of our client, [*5] Geoscience Technology Services Corporation ("GTS"). In December, 1974, GTS began renegotiating its definitive loan agreement with its primary lender, First National Bank of Commerce, New Orleans, Louisiana (the "Bank"). The negotiations have continued through the present date, with the general parameters of the plan of refinancing having been defined in a proposal by the Bank. However, the specifics of the plan of refinancing are yet to be agreed upon. In November, 1975, GTS sold, with the Bank's consent, controlling interest in GTS" theretofore ninety-nine percent (99%) owned subsidiary, Sigma Explorations Ltd. ("Sigma"), to Sigma's President. GTS had previously pledged ninety-nine percent (99%) of the outstanding shares of Sigma stock to the Bank, and consideration for the Bank's consent to the sale of Sigma, GTS granted and issued to the Bank unregistered warrants (the "Warrants") to purchase an aggregate of 76,500 shares of GTS Common Stock, such Warrants being exercisable on or before November 9, 1985, at an exercise price of one cent ($.01) per share. Upon exercise of the Warrants, GTS will issue restricted stock to the Bank. GTS presently has issued and outstanding [*6] $945,000.00 principal amount of its 7% Sinking Fund Debentures Due May 1, 1979. GTS has not paid any interest payments or made required sinking fund deposits for over a year and is, therefore, in default. (See GTS" Form 8-K Current Report for the Month of April, 1975, as previously filed with the Commission.) As a condition to the Bank's agreement to refinance GTS" debt, the Bank will require GTS to retire at 34 35 least 80% of the outstanding principal amount of the debentures. In order to accomplish the latter, GTS intends to make an exchange offer to its approximately 231 debentureholders, whereby GTS would issue 300 shares of Common Stock (the "Exchange Stock") for each $1,000 principal amount of debentures. The debentures would thereafter be cancelled. As additional consideration for the Bank's agreement to refinance GTS" debt, the Bank will require GTS to issue to the Bank warrants (the "Subsequent Warrants") to purchase GTS Common Stock equal to 10% of the outstanding Common Stock of GTS. GTS believes that the issuance of the Warrants to the Bank in connection with the sale and transfer of the Sigma stock to its purchaser is exempt from the registration provisions of Section [*7] 5 of the Securities Act of 1933, as amended (the "Act"), by virtue of the exemption contained in Section 4(2) of the Act for "transactions by an issuer not involving any public offering." GTS also believes that the shares of its Common Stock to be issued pursuant to the proposed exchange offer with its debentureholders will be exempt from the provisions of Section 5 of the Act by virtue of the exemption contained in Section 3(a) (9) of the Act, as no commission or other remuneration will be paid or given directly or indirectly for soliciting such exchange. Furthermore, GTS believes that the issuance of the Subsequent Warrants will constitute a transaction by an issuer not involving any public offering and, therefore, be exempt by virtue of Section 4(2) of the Act. GTS believes the exemptions discussed above adequately cover each transaction consummated or contemplated, and that the issuance of the Warrants, the Exchange Stock and the Subsequent Warrants will not constitute a public offering of securities. The failure of GTS to achieve this plan of refinancing will result in the failure of GTS as an operating entity. The purpose of the plan of refinancing is to breathe life into [*8] GTS and to avoid total losses of the investments of GTS" shareholders and debentureholders, and not to contravene the provisions, intent and policy of the Act. Full and adequate disclosure has been heretofore made to the Bank and will hereafter be made to shareholders, debentureholders, the Commission and the public. For the reasons we have outlined above, we ask that you provide only your assurance that you will take no action under the Act with respect to the issuance of the Warrants, and the proposed issuance of the Exchange Stock and Subsequent Warrants. If you require any additional information before complying with our request, or if we can be of assistance to you in reaching a decision as to whether to comply with our request, please do not hesitate to call upon the writer. Your prompt reply will be greatly appreciated. Very truly yours, GEARY, STAHL, KOONS, ROHDE & SPENCER By David E. Wise 35 - ------------------------------------------------------------------------------- 36 1973 SEC No-Act. LEXIS 952 Securities Act of 1933 - Section 3(a) (9), 4(2) Dec 10, 1973 [*1] Four-Phase Systems, Inc. TOTAL NUMBER OF LETTERS: 2 SEC-REPLY-1: NOV 8 1973 Bruce Alan Mann, Esq. Pillsbury, Madison & Sutro Standard Oil Building 225 Bush Street San Francisco, California 94104 Re: Four-Phase Systems, Inc. Dear Mr. Mann: This is in response to your letter of October 22, 1973 in which you request the views of the Division regarding the applicability of the Securities Act of 1933 (the "Act") to a proposed distribution of securities by Four-Phase Systems, Inc. (the "Company"). The Company presently plans to issue $14 million principal amount of Convertible Subordinated Notes (the "Notes") in reliance upon Section 4(2) of the Act. The Notes will be issued for cash and for cancellation of indebtedness for money advanced by certain principal shareholders. The Notes are convertible into common stock at $6.50 per share and will be sold accompanied by purchase agreements providing for registration rights with respect to the common stock into which they are convertible. The sale of the Notes is contingent upon the modification of the Company's four presently outstanding series of preferred stock. The amendment of the agreements under which the series of preferred stock were first issued will, among [*2] other things, adjust the registration rights of the preferred stock and make the dividends due on the preferred shares payable in common stock or cash. It is your opinion that (a) a previous public offering of common stock, which was withdrawn due to market conditions, should not be integrated with the private offering of the Notes; (b) the modification of the four series of preferred stock and the payment of stock dividends is an exempt transaction under Section 3(a) (9) of the Act; and (c) the issuance of the modified preferred stock and common stock in such exchange should not be integrated with the concurrent Note offering. On the basis of the facts presented, as more fully set forth in your letter, this Division will not recommend any action to the Commission if the company exchanges its new preferred stock and common stock for its old preferred stock without compliance with the registration provisions of the Act, in reliance upon your opinion as counsel that the exemption provided by Section 3(a) (9) of the Act is available. This Division also concurs in your view that the company's proposed offering of notes would not be integrated with the company's proposed public offering [*3] of common stock, which was withdrawn, or with the proposed exchange offer. While the exemption provided by Section 4(2) of the Act may be available for the proposed note offering, the determination whether or not the prospective offerees meet the tests set down by the Supreme Court in S.E.C. v. Ralston Purina is a factual one. That is it must be determined whether the offerees need the protection that registration affords or that they would have access to the kind of information that would be available in a registration statement. Since the staff is not in a position to make the investigation necessary to 36 37 ascertain the requisite factual information, and since this information is more readily available to the issuer and its counsel, we are unable to express any opinion as to whether that proposed transaction may be completed without compliance with the registration provisions of the Act in reliance upon the exemption provided by Section 4(2). $ Sincerely yours, William E. Morley Attorney Adviser INQUIRY-1: LAW OFFICES OF PILLSBURY, MADISON & SUTRO STANDARD OIL BUILDING 225 BUSH STREET SAN FRANCISCO, CALIFORNIA 94104 TELEPHONE 421-6133 AREA CODE 415 October 22, 1973 Office of Chief [*4] Counsel Division of Corporation Finance Securities and Exchange Commission 500 North Capitol Street Washington, D.C. 20549 Attention: John J. Heneghan, Esq., Deputy Chief Counsel Gentlemen: We are special counsel for the proposed purchasers of approximately $14,000,000 principal amount of Convertible Subordinated Notes (the "Notes") of Four-Phase Systems, Inc. (the "Company"). The Company has outstanding 1,547,469 shares of common stock held by 97 institutions and persons and 97,748 shares of preferred stock (the "Old Preferred") held by 80 institutions and persons. All outstanding common stock and Old Preferred were issued between February 11, 1969, and February 28, 1973, in private placements in reliance on the exemption for transactions by an issuer not involving any public offering provided by section 4(2) of the Securities Act of 1933 (the "Act") and are subject to restrictions on transfer designed to prevent the distribution of any part thereof in violation of the Act. The Old Preferred is subdivided into the following four series: 23,334 shares of Series A Senior Convertible Income Voting Preferred Stock (the "Series A Senior Preferred"), 11,667 shares of Series [*5] B Senior Convertible Income Voting Preferred Stock (the "Series B Senior Preferred"), 45,000 shares of Series A Convertible Income Voting Preferred Stock (the "Series A Preferred") and 17,747 shares of Series B Income Preferred Stock (the "Series B Preferred"). The Series A Senior Preferred and Series B Senior Preferred are entitled to quarterly cumulative dividends, from January 1, 1973, prior to the payment of any other dividends. The Series A Preferred and Series B Preferred have the same dividend rights, subordinated only to the payment of dividends on the two senior series. Each series of Old Preferred provides for mandatory serial redemption at a price of $100 per share plus accrued but unpaid dividends. The redemption of Series A Senior Preferred and Series B Senior Preferred is scheduled to commence on February 1, 1977, and the redemption of Series A Preferred is scheduled to commence on May 15, 1976. On each such redemption date and annually thereafter, 25 per cent of the originally outstanding shares of the respective series is to be redeemed. The first partial redemption of Series B Preferred occurred on February 28, 1973, when six per cent of the originally issued [*6] shares was redeemed. On February 28, 1974, and annually thereafter, 23.5 per cent of the originally 37 38 issued shares is to be redeemed. The Series A Senior Preferred, Series B Senior Preferred and Series A Preferred are convertible prior to redemption into common stock. The conversion prices currently in effect are $4.50, $6.50 and $4 per share of common stock, respectively. The Series B Preferred is not convertible. On April 2, 1973, the Company filed a registration statement on Form S-1 (Registration No. 2-47545), covering the proposed underwritten sale to the public of 600,000 shares of common stock. The net proceeds of the offering at a proposed public offering price of $14 per share were to have been used to repay bank borrowings used to finance the cost of equipment and to finance the future cost of such equipment. Twenty-five thousand preliminary prospectuses were printed and an unknown number reached the public. Although none of the offerees of the Notes were solicited in connection with such offering, some received the preliminary prospectus pursuant to contractual rights to receive all filings of the Company with the Commission or through their representatives on [*7] the Board of Directors. In a few instances, a separate division of an offeree of the Notes may have received the preliminary prospectus in connection with the public offering. For example, the trust department of a large bank may have received it while the venture capital department to which the offer of the Notes was made did not. However, each offeree of the Notes received a copy of the preliminary prospectus as a part of the Notes offering circular after the registration statement relating to the offering of common stock was withdrawn. On June 21, 1973, prior to any sales of such common stock, the Company requested that its registration statement be withdrawn, solely in view of adverse market conditions. On June 28, 1973, the Commission issued an order consenting to such withdrawal. The Company commenced negotiations for the offering of the Notes on July 9, 1973, in reliance on the exemption under section 4(2) of the Act. The Notes will be issued for cash and for cancellation of indebtedness for money advanced by certain principal shareholders. An investment banker will receive a fee in connection with the placement of the Notes but will not solicit the exchange described [*8] below. The Notes are convertible into common stock at $6.50 per share (subject to adjustment for diluting issues) and will be sold pursuant to comprehensive purchase agreements, providing for registration rights with respect to the common stock into which they are convertible and other continuing obligations of the Company. The obligation of the purchasers to purchase the Notes is conditioned upon: (1) the amendment of the agreements pursuant to which the Series A Preferred, and the Series A Senior Preferred and Series B Senior Preferred, respectively, were originally issued to adjust registration rights relating to the common stock into which such preferred stock is convertible; (2) the amendment of the Series A Preferred, Series A Senior Preferred and Series B Senior Preferred, respectively, (a) to eliminate its serial redemption provisions and to provide that it is to be redeemed in full on its last redemption date (May 15, 1979, for the Series A Preferred and February 1, 1980, for the Series A Senior Preferred and Series B Senior Preferred); (b) to provide that it shall be converted automatically upon a defined public offering of common stock; and (c) to provide that dividends [*9] shall be payable: (i) from January 1, 1973, through December 31, 1974: quarterly at the rate of $5 per share per annum, payable in common stock at $6.50 per share; (ii) from January 1, 1975, through December 31, 1975: as in (i) above but payable in common stock at $6.50 per share or in cash, at the option of the Company; and (iii) after December 31, 1975: as currently provided; and 38 39 (3) the amendment of the Series B Preferred to provide that (a) the partial redemption on February 28, 1974, shall be paid in common stock at $6.50 per share; and (b) dividends shall be payable as described in 2(c) above. The preferred stock as so amended and the common stock issuable pursuant to such amendments are hereinafter collectively referred to as the "New Preferred" and "Common Stock," respectively. All accrued but unpaid dividends on the New Preferred will be paid in Common Stock upon the exchange. The amendments of the Old Preferred will be effected by the written consent of shareholders pursuant to the provisions of the Delaware Corporation Law. Although the Company is not subject to the proxy rules, each shareholder will receive a proxy statement containing substantially the information [*10] which would be required in a prospectus for securities registered on Form S-14 and describing the proposed sale of the Notes. No person will receive, directly or indirectly, any commission or other remuneration for soliciting the exchange. A. Nonintegration of Registered Public Offering with Private Offering. In our opinion, based on the following, the public offering of common stock should not be integrated with the offering, issuance and sale of the Notes: 1. The Notes offering is a bona fide private offering and not a product of the public offering of common stock. The common stock offering was not used as a vehicle for initiating interest in the Notes offering but was a bona fide attempt to raise money in the manner described in the registration statement, which was discontinued solely by reason of adverse market conditions. 2. The two offerings involve the issuance of entirely different securities. 3. The consideration to be received by the Company in the common stock offering consisted solely of cash. The consideration to be received by the Company in the Notes offering consists of cash and cancellation of indebtedness. 4. The manner and terms of the respective [*11] offerings are materially different (see generally In re Unity Gold Corporation (1938) 3 SEC 618). The common stock was to be sold through underwriters at approximately $14 per share. The Notes are to be placed directly and are initially convertible into common stock at $6.50 per share. The Notes will be issued pursuant to comprehensive purchase agreements, and their issuance will require the prior consent of holders of 90 per cent of the Series A Senior Preferred and the Series B Senior Preferred. 5. The Notes will be issued not less than four months after the conclusion of the common stock offering. 6. The integration of the two offerings is not appropriate under the circumstances, as it would achieve no objective of the Act. The public interest was protected in the common stock offering through compliance with the registration requirements of the Act, and the termination of the offering upon the withdrawal of the registration statement. No public interest would be served in requiring registration of the Notes and the underlying common stock in the current offering, as each of the offerees is a sophisticated investor capable of fending for itself and will receive restricted [*12] securities. B. Availability of Section 3(a) (9) of the Act for the Exchange. In our opinion, based upon the following, the issuance of the New Preferred and Common Stock in exchange for the Old Preferred is an exempt transaction under section 3(a) (9) of the Act: 1. The New Preferred and Common Stock will be exchanged for the Old Preferred by the Company with its existing shareholders exclusively. 39 40 2. The settlement of accrued cash dividends with Common Stock is not a primary purpose of, but is incidental to, the exchange offer. The primary purpose of the exchange is to eliminate the substantial continuing burdens of the cash dividend and redemption provisions of the Old Preferred. Sixty-five thousand seven hundred ninety-two shares of Common Stock will be issued in settlement of dividends accrued to the date of the exchange, constituting approximately four per cent of the then outstanding common stock and approximately one per cent of the common stock on a fully diluted basis. 3. No commission or other remuneration is to be paid or given, directly or indirectly, for soliciting the exchange. As the investment banker will not solicit the exchange, no part of its fee [*13] in connection with the placement of the Notes is allocable thereto. C. Nonintegration of the Exchange with the Note Offering. In our opinion, based on the following, the offering and issuance of the New Preferred and Common Stock should not be integrated with the offering, issuance and sale of the Notes (see SEC Securities Act Release No. 2029 (August 9, 1939)): 1. The two offerings involve the issuance of entirely different securities. 2. The consideration to be received by the Company in the exchange consists principally of the amendment of the provisions of the Old Preferred. The consideration to be received by the Company in the sale of the Notes consists of cash and cancellation of indebtedness. 3. The offerings are not being made for the same general purpose. The exchange is offered to defer or eliminate certain continuing cash burdens and to simplify (upon the subsequent conversions) the capital structure of the Company. The Notes are offered to raise funds to repay bank borrowings used to finance the cost of equipment and to finance the future cost of such equipment. 4. The manner and terms of the respective distributions are materially different. The Notes [*14] will be issued pursuant to comprehensive purchase agreements, and a commission is payable in connection with their issuance. The exchange will require shareholder action not required for the issuance and sale of the Notes (see generally Smith v. Jackson Tool & Die, Inc. (5 Cir. 1969) 419 F.2d 152). 5. The integration of the two offerings is not appropriate under the circumstances, as it would achieve no objective of the Act. Section 3(a) (9) of the Act reflects a judgment that under the circumstances described therein, no public interest is served by requiring registration. That judgment is equally applicable to the circumstances described herein where a materially different security is being concurrently privately placed. This is not a case where a single plan of distribution is being segmented to avoid the rigors of the Act. 6. The integration of the two offerings is inimical to the philosophy underlying the Act as reflected by the Background and Purpose sections of Release No. 5223 and Release No. 5430 under the Act. The Company is not presently a registered issuer, and there is no float in its securities. If the two offerings were registered, securities would be issued [*15] which would otherwise be restricted, and a thin and unrealistic market in the securities of the Company could develop. 7. The offerings are not part of a single plan of financing. The exchange, as such, does not provide cash payments or other financing to the Company. In our opinion, under the circumstances described above (a) the offer to sell common stock to the public should not be integrated with the private offering, issuance and sale of the Notes; (b) the issuance of New Preferred and Common Stock in exchange for Old Preferred is an exempt transaction under section 3(a) (9) of the Act; and (c) the offering and issuance of the New Preferred and Common Stock in such exchange should not be integrated with the concurrent offering, issuance and sale of the Notes. We respectfully request that you advise us that the staff of the Commission will not recommend that the 40 41 Commission take any action in the event the proposed transactions are consummated in the manner described. If you wish to discuss this matter or to be furnished with any further information in connection therewith, please call the undersigned or Mr. Michael J. Halloran or Mr. Glenn Frese of this firm. Yours [*16] very truly, Bruce Alan Mann 41 - ------------------------------------------------------------------------------- 42 1973 SEC No-Act. LEXIS 388 Securities Act of 1933 - @ 3(a) (9) - Rule 144; Rule 145 Sep 27, 1973 [*1] Canrad Precision Industries, Inc. TOTAL NUMBER OF LETTERS: 3 SEC-REPLY-1: SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AUG 28, 1973 Daniel P. Lund, Esq. Fink, Weinberger, Levin & Charney 551 Fifth Avenue New York, New York 10017 Re: Canrad Precision Industries, Inc. Dear Mr. Lund: This is with reference to your letters of July 27, 1973 and August 2, 1973, and the telephone conversation which you had with Mr. Stuart Brown of the staff on August 10, 1973, concerning the Division's interpretation of Section 3(a) (9) and Rules 144 and 145 of the Securities Act of 1933 ("the Act") as they apply to the situation of Canrad Precision Industries, Inc. ("Canrad"). We understand the facts to be as follows. Canrad presently has outstanding the following securities: 1) 1,630,120 shares of Common Stock 2) 11,000 shares of 7% Cumulative Convertible prior preferred stock ($100 par value) 3) 10,000 shares of 6% Cumulative Convertible junior preferred stock ($100 par value) The issuance of both classes of preferred stock ("Preferred Stock") was deemed by Canrad to have been exempt from the registration requirements of the Act pursuant to Section 4(2). These shares of Preferred Stock are convertible [*2] into shares of Common Stock at the rate of $7.50 per share. Since Canrad's Common Stock is currently trading in the range of $2.50 - $3.00 per share, no Preferred Stock has been converted. As of June 30, 1973, there existed dividend arrearages totaling $759,208 with such arrearages increasing at the rate of $137,000 annually. Since these arrearages make it difficult for Canrad to obtain favorable financing, the Board of Directors wishes to either modify or eliminate the presently outstanding Preferred Stock and they propose to offer the preferred stockholders an opportunity to either (1) Exchange their existing Preferred Stock for a new class of Preferred which will provide for non-cumulative dividends and will be convertible at $6 per share, or (2) Adjust the concision ratio of existing shares of Preferred Stock from $7.50 to $6.00, subject to the shareholders agreeing to convert their shares immediately. It is your opinion that the exchange transaction proposed above would be exempt under Section 3(a) (9) of the Act, and that Canrad would not be required to comply with Rule 145 of the Act. You also express the view that the holders of Common Stock received upon conversion [*3] of New Preferred Stock could sell such shares of Common Stock in accordance with the provisions of Rule 144, including the holding period provision. It is your opinion that the 42 43 shareholders converting New Preferred Stock received in exchange for Preferred Stock will be permitted to "tack" the holding period of the New Preferred Stock to the holding period for the common stock. Based on the facts presented, this Division will not recommend any action to the Commission if the plan is carried out as proposed without compliance with Rule 145, and in reliance on your opinion that Section 3(a) (9) is available. In computing the holding period for purposes of Rule 144, the holding period relating to the New Preferred Stock may be tacked to that of the underlying common. Sincerely, William E. Toomey Assistant Chief Counsel INQUIRY-1: Fink, Weinberger, Levin & Charney Attorneys at Law 551 Fifth Avenue New York, N.Y. 10017 (212) 682-0546 August 2, 1973 Securities and Exchange Commission Washington, DC 20549 Attention: Division of Corporation Finance Gentlemen: Enclosed is a copy of our letter to you of July 27, 1973 concerning a proposed reclassification of securities [*4] of our client Canrad-Hanovia, Inc. (f/k/a Canrad Precision Industries, Inc.). The second full sentence at page 4 of such letter is in error concerning the proposed proxy statement to be furnished to Canrad's shareholders. It is contemplated that such proxy statement will be furnished in connection with a special meeting to be held in or about October, 1973. Accordingly, such sentence should read as follows: It should be noted that a complete description of of the proposed transaction and of the new classes of Preferred Stock will be made in the proxy statement to be furnished to shareholders in connection with the special meeting of Canrad's shareholders, which should be filed in preliminary form with the Commission in or about September 1973, in the event Canrad's Board of Directors decides to proceed with the proposed transaction. I apologize for the error in our letter to you. Sincerely yours, Daniel P. Lund INQUIRY-2: Fink, Weinberger, Levin & Charney Attorneys at Law 551 Fifth Avenue New York, N.Y. 10017 (212) 682-0546 July 27, 1973 Securities and Exchange Commission Washington, D.C. 20549 Attention: Division of Corporation Finance Gentlemen: 43 44 We are [*5] counsel to Canrad Precision Industries, Inc. ("Canrad"), a corporation with has its Common Stock registered under Section 12(g) (Commission File No. 0-4780) of the Securities and Exchange Act of 1934, as amended, and are writing in order to request your advice as to whether any action will be recommended by your Division (i) if an exchange or reclassification of securities as described below is effected without complying with Rule 145 under the Securities Act of 1933, as amended (the "Act") and (ii) if sales are made upon conversion of convertible preferred stock as described below pursuant to Rule 144 under the Act. FACTS Canrad presently has an authorized capitalization consisting of 5,000,000 shares of Common Stock, $.75 par value ("Common Stock"), of which 1,630,120 shares are now issued and outstanding; 11,000 shares of 7% cumulative convertible prior preferred stock, $100 par value ("7% Convertible Preferred"), allof which are outstanding; and 10,000 shares of 6% cumulative convertible junior preferred stock, $100 par value ("6% Convertible Preferred"), and with the 7% Convertible Preferred referred to collectively as the "Preferred Stock"), all of which are outstanding. [*6] The Preferred Stock was issued in August 1966 to 32 persons, all of whom took such shares for investment only and not with a view towards resale or other public distribution thereof. The issuance of such shares was accordingly deemed by Canrad to have been exempt from the registration requirements under the Act pursuant to Section 4(2) of the Act. Such shares are now held by 34 persons. The Preferred Stock is presently convertible into shares of Common Stock at a rate of $7.50 per share, so that each share of Preferred Stock may be converted into 13-1/3 shares of Common Stock. Canrad's Common Stock is traded in the over-the-counter market and quoted on the NASDAQ System. On July 27, 1973, such Common Stock was quoted at 2-1/2 bid and 3 asked. None of Canrad's Preferred Stock has been converted. No dividends have ever been paid on the Preferred Stock and, as of June 30, 1973, there existed dividend arrearages in an aggregate amount of $759,208, or $38.79 per share of 7% Convertible Preferred and $33.25 of 6% Convertible Preferred. Canrad's Board of Directors considers such dividend arrearages, which increase at an aggregate annual rate of $137,000, as a deterrent to the consideration [*7] of declaring dividends upon the Common Stock, a "blanket" over the market price of the Common Stock, and a handicap to the securing of additional financing. The high conversion rate of the Preferred Stock in relation to the present market price of Canrad's Common Stock presents a deterrent to further financing through the issuance of equity securities, because of the anti-dilution provisions of the Preferred Stock. Annual provisions for Preferred Stock dividend requirements also act to reduce Canrad's per share earnings or increase its per share loss. Accordingly, Canrad's Board of Directors has considered various methods of eliminating or Hodifying the presently outstanding Preonerred Stock. Canrad is presently considering a plan to offer its preferred shareholders an opportunity to either (i) exchange their existing shares of Preferred Stock for new classes of Preferred Stock which will provide for non-cumulative dividends and will be convertible at $6 per share, or (ii) adjust the conversion ratio of the existing shares of Preferred Stock from $7.50 to $6, subject to the agreement of the holders of such Preferred Stock to immediately convert upon the lowering of the conversion [*8] rate. In the event that Canrad's Board of Directors decides to proceed in this manner, Canrad's common and preferred shareholders will be requested, at a special meeting of shareholders to be held in or about October 1973, to amend Canrad's Certificate of Incorporation to authorize two new classes of Preferred Stock (the "New Preferred Stock"), which will be identical to the existing Preferred Stock except that dividends will be non-cumulative and the conversion ratio will be at $6 per share rather than $7.50 per share, and to adjust the conversion ratio of the presently outstanding Preferred Stock from $7.50 to $6.00. The filing of the amendment to the Certificate of Incorporation will be conditioned upon the agreement of the holders of not less than two thirds of the issued and outstanding Preferred Stock to convert such Preferred Stock to Common Stock within a short period after the lowering of the converion rate and the agreement of all other holders of Preferred Stock to exchange such Proferred Stock for New Preferred Stock. Alternatively, Canrad may request that its shareholders approve the New Preferred Stock, but filing of the Certificate of Amendment will be conditioned [*9] upon the agreement of all holders to 44 45 exchange Preferred Stock for New Preferred Stock as well as the agreement of the holders of not less than two thirds of the Preferred Stock to convert New Preferred Stock to Common Stock within a short period after the exchange. Acceptance of either alternative will eliminate the present dividend arrearages with respect to outstanding Preferred Stock. DISCUSSION It is our opinion that holders of Preferred Stock who receive shares of New Preferred Stock will have exchanged their existing Preferred Stock with the issuer, that there will have been no commission or other remuneration paid or given directly or indirectly in connection with the solicitation of such exchange, and, therefore, the New Preferred Stock will be an exempt security under Section 3(a) (9) of the Act. Accordingly, it is our further opinion that Canrad is not required to comply with Rule 145 under the Act. It should be noted that a complete description of the proposed transaction and of the new classes of Preferred Stock will be made in the proxy statement to be furnished to shareholders in connection with the annual meeting of Canrad's shareholders, which should be [*10] filed in preliminary form with the Commission in or about April 1973, in the event Canrad's Board of Directors decides to proceed with the proposed transaction. In the event Canrad's Board of Directors decides to proceed with the proposed transaction, it is anticipated that holders of the presently outstanding Preferred Stock will inquire of both Canrad and their own legal counsel as to whether Common Stock received upon conversion of New Preferred Stock, and Common Stock received upoh conversion of the presently outstanding classes of Preferred Stock after adjustment of the conversion rate from $7.50 to $6.00, will be "restricted" upon receipt, or whether the holding period from August 1966, when the original Preferred Stock was purchased, will be applicable to sales of Common Stock received upon conversion of either the New Preferred Stock or the presently outstanding Preferred Stock after adjustment of the conversion ratio. We assume that holders of Common Stock received upon conversion of either New Preferred Stock or presently outstanding Preferred Stock after adjustment of the conversion rate will comply with all provisions of Rule 144 so that the only question that is likely [*11] to arise will relate to applicable holding period. Subparagraphs (d) (4) (A) and (d) (4) (B) of Rule 144 provide that for purposes of determining the two year holding period required under such Rule, securities acquired from theissuer pursuant to a recapitalization or for consideration consisting solely of other securities of the issuer [*] for conversion, shall be deemed to have been acquired upon the date of the original acquisition of the securities surrendered in connection with the recapitalization or surrendered for conversion. It is our opinion that shareholders convering New Preferred Stock received in exchange for Preferred Stock will be permitted to "tack" the holding period of the Preferred Stock. Under subparagraph (d) (4) (A), Common Stock acquired on conversion shall be deemed to have been acquired at the same time as the securities surrendered for conversion. Tacking of the holding period of the New Preferred Stock to the holding period of the Preferred Stock should be permitted in a Section 3(a) (9) exchange and, in any event, a voluntary exchange under Section 3(a) (9) should constitute a "recapitalization" as such term is used in subparagraph (d) (4) (A) of Rule [*12] 144. See the "no action" letter relating to International Systems and Controls Corporation, available October 15, 1972; BNA Sec. Reg. & L. Rep. No. 173 at C-1 (October 18, 1972). The same result should also follow with respect to Common Stock received upon conversion of Preferred Stock after adjustment of the conversion rate. We would appreciate your advising us whether you concur with our opinion as set forth herein and whether, on the basis of the information submitted, any action will be recommended by the staff to the Commission if (i) Canrad does not comply with Rule 145 in connection with the solicitation of approval from its shareholders with respect to the authorization of new classes of Preferred Stock and adjustment of the conversion rate of the presently outstanding Preferred Stock, and (ii) shares of Common Stock received upon conversion of New Preferred Stock or Preferred Stock after adjustment of the conversion rate are sold under Rule 144 based upon a holding period commencing at the time the original Preferred Stock was acquired. 45 46 If there is any further information or documentation the staff may require, please let us know. The staff is authorized to telephone, [*13] collect, Daniel P. Lund or Charles J. Moos of this firm in the event there are any questions. Very truly yours, FINK, WEINBERGER, LEVIN & CHARNEY 46 - ------------------------------------------------------------------------------- 47 1972 SEC No-Act. LEXIS 2763 Securities Act of 1933 - @ 3(a) (9) Jul 20, 1972 [*1] Diversa-Graphics, Inc. TOTAL NUMBER OF LETTERS: 5 SEC-REPLY-1: JUN 20 1972 Richard B. Persinger, Esq. Jacobs Persinger & Parker 70 Pine Street New York, New York 10005 $ Re: Diversa-Graphics, Inc. Dear Mr. Persinger: This is with reference to your letters of May 24, June 5, and 7, 1972 concerning the proposed recapitalization plan of your client, Diversa-Graphics, Inc. Diversa-Graphics, Inc has proposed a voluntary plan of recapitalization in which it will exchange all of the outstanding securities, other than common stock and certain secured notes, for common stock of the company. At the same time, the holders of common stock will reduce their holdings substantially by surrendering a major part of the shares held by each of them. All unpaid accrued interest and dividends on preferred stock would be waived. On the basis of the facts presented, this Division will not recommend any action to the Commission if the Company proceeds with the proposed recapitalization and exchange of stock without registration under the Securities Act of 1933, in reliance upon your opinion as counsel that the exemption provided by Section 3(a) (9) of the Act is available. With respect to the development of an active trading [*2] market in these shares, this Division expresses no opinion, but we direct your attention to Rule 10b-5 of the General Rules and Regulations under the Securities Exchange Act of 1934. Sincerely, William E. Toomey Assistant Chief Counsel INQUIRY-1: JACOBS PERSINGER & PARKER 70 PINE STREET NEW YORK, N.Y. 10005 CABLE ADDRESS: JAPERPAR June 7, 1972 Securities and Exchange Commission Division of Corporation Finance 500 North Capitol Street, N.W. Washington, D.C. 20549 Attention: Barry Thorpe, Esq. Re: Diversa-Graphics, Inc. Dear Sirs: It has come to our attention that in our letter dated May 24, 1972 with 47 48 regard to the above designated Corporation, on page 2, third paragraph, there is an erroneous reference to the issuance of common stock to U.O. Colson Company in October, 1967 when in fact, as set forth in Item 26, paragraph (c) of the Registration Statement filed by Diversa-Graphics, Inc. on October 28, 1969, the stock actually issued was 3,000 shares of Senior Preferred Stock, $100 par value, First Series. While we do not consider that this variation is significant with regard to the matters being considered by you, we are writing this letter to correct the [*3] erroneous statement. Very truly yours, Jocobs Persinger & Parker INQUIRY-2: JACOBS PERSINGER & PARKER 70 PINE STREET NEW YORK, N.Y. 10005 CABLE ADDRESS: JAPERPAR 212 344-1866 June 5, 1972 Barry Thorpe, Esq. Securities and Exchange Commission Division of Corporation Finance 500 North Capitol Street, N.W. Washington, D.C. 20549 Re: Diversa-Graphics, Inc. Dear Sir: This letter is written with reference to Mr. Persinger's telephone conversation with you today regarding the Issuer's position as to any common stock which may be issued upon consummation of the Plan of Recapitalization. In connection with the original issuance of the various securities, the Issuer claimed exemptions under Section 4(2) of the Securities Act of 1933 or under Rule 133, as indicated in Item 26 of the Registration Statement filed in 1969, a copy of which Item 26 accompanied our letter of May 24, 1972. As indicated in our said letter, we are aware that in the letter of comment dated February 24, 1970 it was suggested that the issuance of stock as described in Item 26(a) may have been in violation of the registration provisions of the Securities Act of 1933. Notwithstanding this or any [*4] other issuance of securities as to which any question might be raised with regard to the applicable exemption as claimed, it is our opinion that after the expiration of three years from the latest date of issuance on June 27, 1969, none of the outstanding securities will be subject to further restriction on transfer, and all of the common stock issued in exchange for any of such securities will have the same status; provided, however, that any sales made by persons who acquired their securities pursuant to exemption under Rule 133 will continue to be subject to the requirements of that Rule in the disposition of common stock received in exchange for such securities. If you require any additional information or have any other questions, we would appreciate it if you would call Mr. Persinger or Mr. Feinberg of this office. Very truly yours, Jocobs Persinger & Parker INQUIRY-3: JACOBS PERSINGER & PARKER 48 49 70 PINE STREET NEW YORK, N.Y. 10005 CABLE ADDRESS: JAPERPAR May 24, 1972 Peter J. Romeo, Esq. Securities and Exchange Commission Division of Corporation Finance 500 North Capitol Street, N.W. Washington, D.C. 20549 Re: Diversa-Graphics, Inc. Dear Sir: On Tuesday [*5] Bob Feinberg of this firm spoke to you about a proposed voluntary plan of recapitalization which Diversa-Graphics, Inc. proposes to put into effect and certain questions which have been raised in connection therewith. At the same time he mentioned the urgency of the matter in view of the need for prompt arrangements to relieve financial pressures being experienced by that Corporation. We are enclosing herewith a request for a no-action letter with regard to this matter. We would very much appreciate it if you would route this request to an appropriate person so that it may receive attention at the earliest possible time. Very truly yours, Jacobs Persinger & Parker JACOBS PERSINGER & PARKER 70 PINE STREET NEW YORK, N.Y. 10005 CABLE ADDRESS JAPERPAR 212 344-1866 May 24, 1972 Securities and Exchange Commission Division of Corporation Finance 500 North Capitol Street, N.W. Washington, D.C. 20549 Re: Diversa-Graphics, Inc. Dear Sirs: We are special counsel to Diversa-Graphics, Inc., a Delaware corporation, whose principal office is at 51 Madison Avenue, New York, New York. We are addressing this letter to you on behalf of said Corporation and [*6] for the purpose of ascertaining whether the Division of Corporation Finance would recommend to the Commission that any action be taken in the event that the Corporation should proceed with its plan of recapitalization. Diversa-Graphics, Inc. proposes to accomplish a recapitalization by the voluntary exchange of all of its outstanding securities, other than common stock and certain secured notes, for common stock of the Corporation. At the same time, the holders of common stock will reduce their holdings substantially by surrendering a major part of the shares held by each of them. All unpaid accrued interest and dividends on preferred stock would be waived upon such surrender. This proposed recapitalization is shown on Exhibit A enclosed with this letter. 49 50 The history of the capitalization of the Corporation is reflected in a Registration Statement, File No. 2-35174, filed by the Corporation on October 28, 1969, and withdrawn some months later. Enclosed herewith is a photocopy of Item 26 of Part II to said Registration Statement. The primary change in the capitalization of the Corporation since that time resulted from the conversion of all of the 1,000 shares of Series VI [*7] Convertible Preferred Stock then outstanding into Common Stock. Except for the issuance of common stock upon exercise of employee stock options (see Item 26(o)), the last issuance of securities (other than secured notes not included in the reorganization plan) was on June 27, 1969. By the time the proposed recapitalization is completed, not earlier than the end of June, 1972, the three year statute of limitations pursuant to Section 13 of the Securities Act of 1933 will apply with respect to the issuance of securities on and prior to June 27, 1969. After the filing of the Registration Statement, an extended letter of comment, dated February 24, 1970, was addressed to special counsel to the Corporation for purposes of the Registration Statement. A copy of said letter of comment is enclosed herewith. In that letter, on page 2 under Item 8, it is suggested that the initial sale of securities described in Part II under Item 26(a) should be described in the Prospectus and that it should be pointed out that such sale may have been in violation of the registration provisions of the Securities Act of 1933. The unregistered issuances of the securities up to the date of filing of [*8] the aforesaid Registration Statement are set forth under Item 26 of Part II. The instance other than the initial sale of securities, in which there was a major issuance of securities to a substantial number of people involved the acquisition of U.O. Colson Company in October, 1967. In that instance, a single certificate for shares of the present common stock of the Corporation was issued to the Colson Company whose assets had been acquired. Subsequently, in 1969, after an opinion had been given by Messrs. Debevoise, Plimpton, Lyons & Gates that Rule 133 was applicable (accompanied by the suggestion that persons who might be deemed affiliates of the Colson Company should deliver appropriate letters with regard to restriction on further transfer of their stock), the common stock was distributed to approximately 144 shareholders of the Colson Company. On the basis of the foregoing circumstances, our opinion is as follows: 1) Even if, as suggested in the letter of comment dated February 24, 1970, the initial sales of securities by the Corporation and/or other issuances of securities prior to June 28, 1969, were in violation of the registration provisions of the Securities Act of [*9] 1933, this factor does not affect the availability of the exemption pursuant to Section 3(a) (9) of the Securities Act of 1933 in connection with the proposed recapitalization by exchange of securities to be effectuated after June 30, 1972. 2) To the extent that securities of the Corporation as presently held are not subject to restriction on transfer without registration, the common stock received in exchange therefor would have the same unrestricted status. 3) Specifically, with regard to the second point, the result would not be affected even if some of such presently held securities were acquired originally in transactions which were in violation of the registration provisions of the Securities Act of 1933. We request your advice as to whether, if a) the proposed recapitalization plan is consummated after June 30, 1972, and b) unrestricted transfers are subsequently made from time to time by the holders of common stock received in connection with the recapitalization, you would be disposed to take any action as a result thereof. The Corporation has already received assurances that the holders of some $7,500,000 of indebtedness of the Corporation as well as holders of the [*10] 50 51 other securities of the Corporation will agree to the recapitalization plan. The management believes that not only can the Corporation be a viable business organization, but that it is in a position to move forward in a constructive way to substantial improvement in its financial position and operations. However, it is essential that the capitalization of the Corporation be restructured at the earliest possible date in order to relieve the Corporation from the heavy burden of interest accruals, some of which are overdue and have not been paid, and to relieve it from other serious financial pressures through an early and substantial improvement in its working capital position. Accordingly, it is urgently requested that we receive a response to the request contained in this letter at the earliest possible date. We would welcome the opportunity for a conference in order to supply any additional information which may be required. If such a conference may be arranged or if you have any questions, please telephone Mr. Persinger or Mr. Feinberg of this firm. Very truly yours, Jocobs Persinger & Parker 51 - ------------------------------------------------------------------------------- 52 1976 SEC No-Act. LEXIS 1075 Securities Act of 1933 - Section 3(a) (9) May 14, 1976 [*1] NJB Prime Investors TOTAL NUMBER OF LETTERS: 2 SEC-REPLY-1: SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 APR 14 1976 Benjamin Zelermyer, Esquire Morrison, Paul, Stillman & Beiley 110 East 59th Street New York, New York 10022 Re: NJB Prime Investors ("NJB") Dear Mr. Zelermyer: This refers to your letter dated April 10, 1976 describing a proposed exchange of securities with existing securityholders of NJB without compliance with the registration requirements of the Securities Act of 1933 ("the Act"). Pertinent facts are as follows. The Trustees of NJB have decided to reorganize its capital structure in order to either reduce or eliminate its subordinated indebtedness. The proposal is an exchange by the holders of its 6 3/4% Convertible Subordinated Debentures due 1991 and 7% Subordinated Debentures due 1980 for 10 shares of beneficial interest in the Trust plus $20 for each $100 principal amount, without account for accrued interest. NJB will not pay or give any commission or other remuneration to any person for soliciting exchanges. The trust is concerned that elimination of accrued interest on the debt by way of the exchange offer may be construed as a cash payment by the securityholders, [*2] thus precluding the availability of the exemption provided by Section 3(a) (9) of the Act. On the basis of the facts presented, as more fully set forth in your letter, this Division will not recommend any enforcement action to the Commission if the proposed transaction is effectuated without registration under the Act, in reliance upon your opinion as counsel that the transaction will be exempt by virtue of Section 3(a) (9) of the Act. Because this position is based upon representations made to the Division in your letter, it should be noted that any different facts or conditions might require a different conclusion. Further, this letter only expresses the Division's position on enforcement action and does not purport to express any legal conclusion on the question presented. Sincerely, Richard K. Wulff Attorney Adviser 52 53 INQUIRY-1: LAW OFFICES OF MORRISON, PAUL, STILLMAN & BEILEY 110 EAST 59TH STREET NEW YORK 10022 AREA CODE 212-593-0100 April 10, 1976 Division of Market Regulation Securities and Exchange Commission 500 North Capitol Street Washington, D.C. 20549 Attention: Andrew M. Klein, Esq. Associate Director Room 312 Re: NJB Prime Investors Commission File No. 1-6899 [*3] Gentlemen: On behalf of NJB Prime Investors, we are writing to request an exemption from Commission Rule 10b-6, pursuant to subsection (f) thereof, in order to permit NJB Prime to conduct an exchange offer for its outstanding subordinated debentures. NJB Prime's Trustees have determined that it is in the best interests of the Trust to reduce or eliminate subordinated indebtedness.Accordingly, the Trust is now preparing to invite tenders of its outstanding 6 3/4% Convertible Subordinated Debentures due 1991 and 7% Subordinated Debentures due 1980. NJB intends to offer ten Shares of Beneficial Interest in the Trust and $20 for each $100 principal amount, without payment for accrued interest. The terms and conditions of the offer will be set forth in an Invitation for Tenders and a Letter of Transmittal. As of March 31, 1976, $3,044,900 principal amount of the 6 3/4% debentures were outstanding, as were $12,859,000 principal amount of the 7% debentures. The Trust will seek to borrow the funds for the cash portion of the exchange offer under its Revolving Credit Agreement, as amended as of July 29 and July 31, 1975; the Trust's obligation to consummate the exchange is conditioned [*4] on its ability to borrow these funds. Defaults under the insolvency and net worth provision of the Revolving Credit Agreement resulting from the Trust's negative net worth of $5,775,644 as of November 30, 1975 have been waived by the senior lenders. The further reduction of the Trust's net worth as of March 1, 1976 is a breach of the Revolving Credit Agreement, although the senior lenders have not declared it to be a default and the Trust has not sought a waiver. While the Trust's senior lenders have not committed themselves, they have indicated a willingness to consider providing the requisite funds. It is anticipated that the Invitation will first be made as soon as possible and will remain open, unless extended, until Friday, April 30, 1976. Debentures tendered may be withdrawn at any time on or before the seventh day following the transmittal of the Invitation to debentureholders. NJB Prime's 6 3/4% Convertible Subordinated Debentures due 1991 were originally issued in a registered public offering in November 1971 and are convertible into Shares of Beneficial Interest in the Trust at $21 per share. The Shares have recently been quoted in the over-the-counter market at [*5] a bid of 1/8; as of April 1, 1976, no asked price was being quoted. The Trust also has outstanding 250,000 Warrants to purchase Shares of Beneficial Interest. The Warrants, however, are not exercisable before April 1, 1977. 53 54 It is our understanding that for the purposes of Rule 10b-6, the Commission may view the existence of the convertible debentures as a continuing "distribution" of the shares and the convertible debentures themselves as "rights" to purchase the shares. As a practical matter, however, because of the great disparity between the conversion price and current market values, there is no likelihood that any holder will convert his debentures into Shares of Beneficial Interest. In any event, it is the Trust's view that Rule 10b-6 was not intended to preclude an issuer's exchange of its own securities in the circumstances described above. Accordingly, NJB Prime respectfully requests an exemption from Rule 10b-6 in order to permit it to conduct its proposed exchange offer. A previous request by the Trust was granted on August 23, 1975, and during August and September 1975, the Trust repurchased an aggregate of $13,158,900 principal amount of its debentures. The [*6] proposed invitation will be addressed to the Trust's remaining debentureholders. For your information, the Trust is also seeking a "no-action" letter under Section 3(a) (9) of the Securities Act of 1933. A copy of the request is enclosed. The Trust will appreciate your prompt attention to this request. Should you require any additional information, please call the undersigned at the number shown above or Patricia Ireland, at 201/473-6550. Very truly yours, Benjamin Zelermyer 54 - ------------------------------------------------------------------------------- 55 1992 SEC No-Act. LEXIS 653 Securities Exchange Act of 1934 -- Section 15(d) May 15, 1992 [*1] The News Corporation Limited; News America Holdings Incorporated TOTAL NUMBER OF LETTERS: 2 SEC-REPLY-1: SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 May 15, 1992 RESPONSE OF THE OFFICE OF CHIEF COUNSEL DIVISION OF CORPORATION FINANCE RE: The News Corporation Limited ("TNCL") News America Holdings Incorporated ("NAHI") Incoming Letter dated April 21, 1992 Based on the facts presented, and considering that TNCL has fully and unconditionally guaranteed the various obligations of NAHI under the notes described in your letter (the "Notes"), the Division will not raise objection if NAHI does not file periodic reports with respect to the Notes pursuant to sections 13 and 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"). As you know, this position is subject to the condition that the Exchange Act reports of TNCL contain summarized financial information concerning NAHI which should include at least the information described in Rule 1-02 (aa) of Regulation S-X. Because this position is based on the representations made to the Division in your letter, it should be noted that any different facts or conditions might require a different conclusion. Further, this response only expresses the [*2] Division's position on enforcement action and does not purport to express any legal conclusion on the question presented. The staff will respond separately to the Securities Act issues raised in your letter. Sincerely, Anthony G. Barone Attorney-Advisor INQUIRY-1: SQUADRON, ELLENOFF, PLESENT & LEHRER 551 FIFTH AVENUE NEW YORK, N.Y. 10176 (212) 661-6500 TELECOPIER (212) 697-6686 Securities Act of 1933 -- Sections 3(a)(9) and 4(1); Securities Exchange Act of 1934 -- Section 13 and 15(d) April 21, 1992 United States Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Attention: Office of Chief Counsel Division of Corporation Finance 55 56 Re: The News Corporation Limited SEC File No. 1-9141 News America Holdings Incorporated Sec File No. 33-46196 Dear Ladies and Gentlemen: We are counsel for The News Corporation Limited, a corporation organized under the laws of the State of South Australia, Commonwealth of Australia ("TNCL"), and News America Holdings Incorporated, a corporation organized under the laws of the State of Delaware and an indirect, wholly-owned subsidiary of TNCL ("NAHI"). On March 24, 1992, the Securities and Exchange Commission [*3] (the "Commission") declared effective a registration statement on Form F-3 (File No. 33-46196) filed by TNCL and NAHI (the "Registration Statement"), pursuant to the Securities Act of 1933, as amended (the "1933 Act"). Pursuant to the Registration Statement, NAHI sold for cash US $ 641,712,000 aggregate principal amount ("Principal Amount") at maturity of Zero Coupon Exchangeable Subordinated Notes of NAHI due March 31, 2002 (the "Notes"), unconditionally guaranteed on a subordinated basis by TNCL (the "Guaranty"). The Notes were issued pursuant to an Indenture (the "Indenture") dated as of March 31, 1992, by and among NAHI, TNCL and Morgan Guaranty Trust Company of New York, as Trustee. On behalf of TNCL and NAHI, we hereby apply, pursuant to Section 12(h) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), for an order exempting NAHI from the periodic reporting requirements of Sections 13 and 15(d) of the 1934 Act which became applicable as a result of the registration of the Notes, or, in the alternative, we request confirmation from the Staff that it will not recommend any enforcement action to the Commission if NAHI does not comply with such reporting requirements. [*4] We believe that such an exemption would not be inconsistent with the public interest or the protection of investors. If the relief requested herein is granted, TNCL intends to include in its Annual Reports on Form 20-F filed pursuant to the 1934 Act summarized financial information (as defined in Rule 1-02(aa) of Regulation S-X under the 1933 Act) with respect to NAHI. The Notes are exchangeable, at the option of their holders (the "Noteholders"), into either American Depositary Shares of TNCL ("TNCL ADSs"), each representing two Ordinary Shares, par value A $ .50 per share, of TNCL ("TNCL Ordinary Shares") or directly into TNCL Ordinary Shares (the "Exchange Rights"). In addition, Noteholders can, at their option, require NAHI to purchase their Notes on March 31, 1997 (the "Purchase Rights") for a purchase price (the "Purchase Price") per Note of US $ 683.74 (representing the issue price plus accrued original issue discount to the date of purchase). NAHI is permitted to pay the Purchase Price for the Notes in cash and/or TNCL ADSs. NAHI is required, before the payment of the Purchase Price, to inform the Noteholders exercising their Purchase Rights whether the Purchase Price will [*5] include TNCL ADSs. Such Noteholders are permitted to withdraw the exercise of their Purchase Rights at any time prior to March 31, 1997. In this connection, and in addition to the 1934 Act relief described above, we further request confirmation from the Staff that it will not recommend any enforcement action to the Commission if TNCL Ordinary Shares issuable upon the exercise of Exchange Rights, or TNCL Ordinary Shares underlying the TNCL ADSs issuable upon the exercise of Purchase Rights, are issued without their continued, or in the case of the TNCL Ordinary Shares relating to the Purchase Rights, initial and continued, registration under the 1933 Act, pursuant to the exemption provided by Section 3(a)(9) under the 1933 Act. We also request confirmation from the Staff that the TNCL Ordinary Shares acquired pursuant to the exercise of Exchange Rights or Purchase Rights, as aforesaid, without their continued, or in the case of TNCL Ordinary Shares relating to the Purchase Rights, initial and continued, registration under the 1933 Act, will not be deemed "restricted securities" within the meaning of Rule 144 under the 1933 Act. For purposes of this request, we are assuming that TNCL [*6] will, at all relevant times, keep a sufficient number of TNCL ADSs registered so as to satisfy its and NAHI's obligation to deliver TNCL ADSs with respect to the exercise of Exchange Rights and Purchase Rights. 56 57 I. Background Information A. The News Corporation Limited. TNCL is a diversified international communications company principally engaged in the production and distribution of motion pictures and television programming, television broadcasting, publishing of newspapers, magazines and books and publication of promotional free-standing inserts. TNCL's activities are conducted principally in the United States, the United Kingdom, and Australia and the Pacific Basin. The sole class of voting securities of TNCL is the TNCL Ordinary Shares. The TNCL Ordinary Shares are listed on the Australian Stock Exchange Limited (the "ASX") which operates stock exchanges in the capital cities of each State in Australia, and are also listed on several other non-United States securities exchanges. The ASX presently constitutes the principal non-United States trading market for the TNCL Ordinary Shares. In the United States, the TNCL ADSs are listed on the New York Stock Exchange (the [*7] "NYSE"). In accordance with the rules of the NYSE, the TNCL Ordinary Shares are also listed on the NYSE for technical reasons and without trading privileges. As of March 20, 1992, TNCL had outstanding approximately 382,539,263 TNCL Ordinary Shares, held by approximately 11,549 record holders. As of April 10, 1992, 27,635,613 TNCL ADSs (representing 55,271,226 TNCL Ordinary Shares) were outstanding and held by 389 record holders. Because certain of these TNCL Ordinary Shares and TNCL ADSs were held by brokers or other nominees, the number of record holders in the United States may not be representative of the actual number of such beneficial holders. n1 n1 TNCL has two additional classes of shares. The additional classes of shares consist of preferred limited voting ordinary shares (the "TNCL Preferred Shares") of A $ .50 each and non-voting ordinary shares (the "TNCL Non-Voting Shares") of A $ .50 each. As of the date hereof, no TNCL Preferred Shares or TNCL Non-Voting Shares had been issued. TNCL is a foreign private issuer that has filed annual reports and made other filings with the Commission since 1986 when TNCL ADSs were first registered under the 1933 Act and listed [*8] on the NYSE. TNCL has reported for the year ended June 30, 1991, revenues of A $10,970,543,000 (approximately US $ 8,586,644,000), income before abnormal items of A $ 321,321,000 (approximately US $ 251,498,000) and net income of (A $392,876,000) (approximately (US $ 307,504,000)), all calculated in accordance with accounting principles generally accepted in Australia. B. News America Holdings Incorporated. (i) Introduction. NAHI, the principal subsidiary in the United States of TNCL, is a holding company which conducts the United States activities of TNCL. All of the outstanding voting securities of NAHI are held indirectly, through subsidiaries, by TNCL. In March 1992, NAHI sold the Notes, which are unconditionally guaranteed on a subordinated basis by TNCL. n2 A copy of the prospectus from the offering is attached hereto as Exhibit A, for your convenience. As of April 6, 1992 the Notes were held by approximately 63 record holders. Because certain of the Notes were held by brokers and other nominees, the number of record holders may not be representative of the actual number of beneficial holders. The net proceeds from the sale of the Notes have been, or [*9] will be, used for capital expenditures (e.g., additional construction and printing plant equipment upgrades) and to repay certain indebtedness. n2 The terms of the guaranty are discussed beginning on page 6 of this letter. As a result of the effectiveness of the Registration Statement, NAHI became subject to the informational and reporting requirements of Section 13 of the 1934 Act. The Notes are listed on the NYSE. 57 58 (ii) The Notes. The following is a summary of some of the principal terms of the Notes. The actual terms of the Notes are set forth in the Indenture relating to the Notes, a copy of which is attached hereto as Exhibit B. (a) General. The Notes are unsecured, subordinated obligations of NAHI and will mature on March 31, 2002. The Notes were issued in denominations of US $1,000 Principal Amount (or integral multiples thereof) but were sold at an issue price ("Issue Price") of US $467.50 per US $1,000 Principal Amount. The difference between the Issue Price and the Principal Amount (the "Original Issue Discount") is accrued to the holders of the Notes (the "Noteholders") on a semi-annual bond equivalent basis until maturity or other satisfaction [*10] of the Notes (e.g., exchange or redemption). This accretion represents a yield to maturity of 7.75% per annum. There will be no periodic payments of interest on the Notes. (b) Subordination of Notes. The Notes represent subordinated obligations of NAHI. As such, they are subordinated in right of payment to the prior payment in full of all existing and future "Senior Indebtedness" of NAHI. n3 As of December 31, 1991, after giving effect to the use of the proceeds of the Notes to repay certain indebtedness, NAHI's Senior Indebtedness aggregated approximately US $5.78 billion. The Indenture does not contain any provisions that limit the ability of NAHI to incur indebtedness. n3 "Senior Indebtedness" of NAHI means, generally, (A) the principal, premium (if any) and unpaid interest on all present and future (i) indebtedness of NAHI, for borrowed money; (ii) obligations of NAHI evidenced by notes or similar instruments; (iii) indebtedness incurred, assumed or guaranteed by NAHI in connection with the acquisition by it or a subsidiary of any business or assets (except accounts payable); (iv) obligations of NAHI, as lessee under leases required to be capitalized on the balance sheet of the lessee under U.S. GAAP; (v) obligations of NAHI with respect to Interest Rate Protection Agreements; (vi) all obligations secured by a lien to which the property of NAHI is subject; (vii) reimbursement obligations of NAHI in respect of letters of credit relating to indebtedness or other obligations of NAHI that qualify as indebtedness or obligations of the kind referred to in clauses (i) through (vi) above; (viii) obligations of NAHI under guarantees in respect of, and obligations to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of indebtedness or obligations of others of the kinds referred to in clauses (i) through (vii) above; (ix) certain obligations of NAHI under guarantees in respect of preferred stock issued by subsidiaries of TNCL; and (x) any deferrals, renewals, extensions, exchanges or refinancings of any indebtedness or obligations of the kind referred to in clauses (i) through (ix) above; provided that, the indebtedness described in (i) - (viii) and (x) above shall not constitute "Senior Indebtedness" to the extent that the related instruments provides that the indebtedness is not superior to the Notes or the indebtedness is to an Affiliate of NAHI, and (B) obligations of NAHI under the arrangements of TNCL with certain of its banks, unless the related instrument provides that the indebtedness is not superior to the Notes or the indebtedness is to an Affiliate of NAHI. The obligations of NAHI under the Notes do not constitute Senior Indebtedness. [*11] The subordination provisions operate generally as follows. No payment in respect of the Notes may be made if (i) any payment default on any Senior Indebtedness has occurred and is continuing; or (ii) a default other than a payment default, on any Senior Indebtedness, is continuing, or any event occurs and is continuing that would, with the giving of notice and/or lapse of time, constitute a default that would permit acceleration or, in the case of certain specified debt arrangements, the termination thereof. Payments are permitted to resume when the default with respect to the Senior Indebtedness has been cured or waived or, in the case of a non payment default, 180 days after the notice of the default was received by NAHI. In addition, in the event that the Notes are declared due and payable earlier than their stated maturity as a result of an event of default thereunder, no payment may be made until the earlier of (i) 120 days after the date of acceleration, or (ii) the payment in full of all Senior indebtedness. In the event of a distribution of NAHI assets to creditors in a dissolution 58 59 or reorganization, the holders of the Senior Indebtedness will be entitled to receive payment [*12] in full before the Noteholders will be entitled to receive any payment on the Notes. Therefore, in the event of a NAHI insolvency, holders of the Senior Indebtedness of NAHI will be entitled to recover more, ratably, than the Noteholders. The Indenture provides that the subordination provisions shall not prevent NAHI from delivering TNCL ADSs or TNCL Ordinary Shares in exchange for Notes upon the exercise by the Noteholders of Exchange Rights or Purchase Rights. The foregoing subordination provisions are applicable to TNCL's obligations under the Guaranty in an identical manner as they are applicable to NAHI. (c) Exchange Rights. Each Noteholder has the right to exchange with NAHI its Notes for TNCL ADSs or TNCL Ordinary Shares at any time before maturity or, in the case of a redemption, the redemption date. Each exchange will be effected at the rate of 15.042 TNCL ADSs (or 30.084 TNCL Ordinary Shares, as applicable) per US $ 1,000 Principal Amount of Notes, subject to certain adjustments. If the calculation of the number of TNCL ADSs or TNCL Ordinary Shares to which a Noteholder would be entitled would result in fractional securities being issued, such fractions will be [*13] satisfied in cash (based on a market price calculation) in lieu of the issue of such fractional securities. (d) Purchase Rights. On March 31, 1997, at the option of each Noteholder, NAHI will have the obligation to purchase any or all of the outstanding Notes held by such Noteholder. The Purchase Price payable in respect of each NAHI Note to be purchased shall be US $ 683.74 per NAHI Note (the Issue Price plus accrued Original Issue Discount to but excluding the purchase date). NAHI, at its option, may elect to pay such Purchase Price in cash or in TNCL ADSs, or in any combination thereof. If NAHI elects to pay the Purchase Price, in whole or in part, in TNCL ADSs, the number of TNCL ADSs to be delivered in respect of the specified percentage of the Purchase Price to be paid in TNCL ADSs shall be based upon the average market price of a TNCL ADS. No fractional TNCL ADSs will be delivered upon any purchase by NAHI of Notes in payment, in whole or in part, of the Purchase Price. Instead, NAHI will pay cash based on the market price for any fractional TNCL ADS. All holders whose Notes are purchased shall receive the same percentage of cash or TNCL ADSs in payment of the Purchase [*14] Price of such Notes, except as described above with regard to the payment of cash in lieu of fractional TNCL ADSs. NAHI's right to purchase Notes, in whole or in part, with TNCL ADSs is subject to NAHI's satisfaction of various conditions, including the registration of such ADSs and the Ordinary Shares represented thereby under the Securities Act, unless there exists an applicable exemption from registration thereunder. In addition, NAHI is required, before the payment of the Purchase Price, to inform the Noteholders exercising their Purchase Rights as to whether the Purchase Price will include TNCL ADSs. Such Noteholders are permitted to withdraw their exercise of Purchase Rights at any time prior to March 31, 1997. n4 n4 In addition to the Exchange Rights and Purchase Rights, the NAHI Notes may be redeemed ("Redemption") for cash at the option of NAHI, at any time after March 31, 1995 and prior to March 31, 2002. Also, at the option of the Noteholders, upon a change of control of TNCL (e.g., acquisition by a non-affiliate of 50% or more of TNCL's common equity or a merger of TNCL where TNCL is not the survivor) at any time on or before March 31, 1997, each Noteholder will have the right to require NAHI to purchase for cash all or any part of such Noteholder's NAHI Notes ("Change of Control Purchase"). [*15] C. The Terms of the Guaranty. (i) General. Pursuant to the Indenture, TNCL fully, unconditionally and irrevocably guarantees (the "Guaranty") to the Noteholders, on a subordinated basis, the payment by NAHI of the due and punctual payment of the Principal Amount at maturity, Issue Price plus accrued Original Issue Discount and the 59 60 cash amounts to be paid to Noteholders in the event of a Redemption, a Change in Control Purchase or upon the exercise by Noteholders of their Purchase Rights. In addition, TNCL guarantees the performance by NAHI of each of the covenants of NAHI contained in the Notes and, to the extent permitted by applicable law, the delivery of TNCL ADSs or TNCL Ordinary Shares, as applicable, upon any exercise of Purchase Rights or Exchange Rights. In the event that TNCL were to be prevented by applicable law from delivering the TNCL ADSs or TNCL Ordinary Shares as aforesaid, TNCL would satisfy its guaranty obligations with respect thereto through the payment of the cash value of such TNCL ADSs or TNCL Ordinary Shares, as applicable. The Indenture provides that the Guaranty is unconditional and absolute, irrespective of the validity, regularity or enforceability [*16] of the Notes or the Indenture, the absence of any action to enforce the same or any other circumstance that might otherwise constitute a legal or equitable defense against a guarantor. TNCL has waived any right to require a proceeding first against NAHI as a precondition to the enforcement of the Guaranty. (ii) Subordination to Senior Indebtedness. The obligations of TNCL under the Guaranty are subordinated to the prior payment in full of the Senior Indebtedness of TNCL in the identical manner as Notes are subordinated to the prior payment in full of the Senior Indebtedness of NAHI. n5 n5 See pages 4 and 5 for a discussion of the subordination provisions. The definition of "Senior Indebtedness" as relates to TNCL is identical to the definition of that term as used in respect of the subordinated nature of the obligation of NAHI under the NAHI Notes. In other words, to obtain a summary of the definition of Senior Indebtedness as it applies to TNCL, simply replace "NAHI" with "TNCL" in the appropriate places in footnote 3. As of December 31, 1991, after giving effect to the use of the proceeds of the Notes to repay certain indebtedness, TNCL's Senior Indebtedness aggregated [*17] approximately US $ 7.14 billion. This amount includes the Senior Indebtedness of NAHI as of such date of US $ 5.78 billion. The Indenture does not contain any provisions that limit the ability of TNCL to incur indebtedness. (iii) Subrogation. Upon the prior payment in full of all Senior Indebtedness, the Noteholders will be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions until all amounts due with respect to the Notes shall have been paid in full. (iv) Unconditional Nature of the Guaranty/Subordination Provisions to Define Relative Rights. The Indenture specifically provides that the subordination provisions only define the relative rights of the holders of the Senior Indebtedness and the Noteholders and that nothing contained therein is intended to or shall impair as among NAHI or TNCL, and the Noteholders, the obligations of NAHI or TNCL, which are absolute and unconditional. The Indenture also provides that nothing in the subordination provisions affects the relative rights of the Noteholders against NAHI or TNCL (other than with respect to the holders of Senior Indebtedness), or prevents the Trustee or any Noteholder [*18] from exercising all remedies otherwise permitted by applicable law upon default under the Indenture, subject to the rights of the holders of Senior Indebtedness. As noted above, TNCL has waived any right to require a proceeding against NAHI prior to the assertion against TNCL of its obligations under the Guaranty. II. Analysis A. Sections 13 and 15(d) of the 1934 Act. (i) General. The Commission's position on the applicability of the 1934 Act reporting requirements to an issuer of securities guaranteed by its parent is set forth in footnote 2 to Section G of Topic 1 of Staff Accounting Bulletin No. 53 ("SAB 53"). SAB 53, "Financial Statement Requirements in Filings Involving the Guarantee of Securities of a Parent," provides with respect to the 1933 Act, that where the issuer of the guaranteed security is wholly-owned (as defined in Rule 1-02(z) of Regulation S-X) by the guarantor but has more than minimal independent operations of its own, and where the guarantee is full and 60 61 unconditional, the Staff generally will not require the issuer of the guaranteed security to present all the financial information specified by the applicable registration form if the registration [*19] statement contains summarized financial information regarding the subsidiary. In accordance with such instruction, the financial statements of TNCL contained in the Registration Statement included summarized financial information regarding NAHI. With respect to 1934 Act requirements, SAB 53 provides that "generally, the staff will apply the same criteria used in determining the level of disclosure for the issuer of a guaranteed security under the Securities Act to govern questions regarding that issuer's obligation under the Exchange Act." However, footnote 2 to such item provides that "in situations where the parent guarantor of an issuer subsidiary in the . . . second category [described in the immediately preceding paragraph] is a reporting company under the Exchange Act, upon application to the Commission such a subsidiary would be conditionally excepted pursuant to Section 12(h) of the Exchange Act from reporting obligations under such Act." (ii) "Wholly-Owned Subsidiary." NAHI is a "wholly-owned subsidiary" within the meaning of Rule 1-02(z) of Regulation S-X. The only class of voting securities issued by NAHI are owned indirectly, through wholly owned subsidiaries, by [*20] TNCL. (iii) More than Minimal Independent Operations. NAHI has more than minimal independent operations of its own. NAHI is the principal subsidiary in the United States of TNCL. It is a holding company which conducts the U.S. activities of TNCL. (iv) Unconditional Guaranty. TNCL fully and unconditionally guarantees, on a subordinated basis, the various obligations of NAHI under the Notes. Upon default, there will be no condition precedent to TNCL's liability under the Guaranty, and the holders of the Notes will not be required to proceed first against NAHI before attempting to collect from TNCL under the Guaranty. The fact that TNCL's Guaranty is subordinated should not have any effect upon the relief requested. The subordination terms to which the Guaranty is subject, as described above, are customary types of provisions for the issuance of subordinated debt. In the event of a default on the Senior Indebtedness, TNCL remains fully liable to make payments under the Guaranty if and when the default is cured or waived. In addition, the Indenture specifically provides that the subordination provisions only define the relative rights of the holders of Senior Indebtedness and [*21] the holders of the Notes and that nothing contained therein impairs the obligation of TNCL to pay all amounts due in respect of the Guaranty, which obligation is absolute and unconditional, or prevents the holders of the Notes from exercising all remedies permitted by law, subject to the rights of the holders of Senior Indebtedness. This means that the Indenture does not inhibit the Noteholders from bringing an action against TNCL to enforce the terms of the Guaranty, subject to the obligation upon such Noteholders to respect the prior position of the holders of Senior Indebtedness with respect to any property of TNCL which might be recovered in such action. In other words, in any such action, property recovered by a Noteholder may, if required by the subordination provisions of the Indenture, be required to be turned over to the holders of the Senior Indebtedness. This obligation, however, should not act as an inhibition in any such action by a Noteholder to enforce his rights under the Guaranty. The Staff has found in response to prior no-action requests that subordinated guarantees were sufficient to satisfy the full and unconditional guarantee requirement of Topic 1-G of SAB [*22] 53. See, e.g., The News Corporation Limited and Newscorp Cayman Islands Limited (avail. December 31, 1991) (copy attached as Exhibit C), Promus Companies Inc./Embassy Suites Inc. (avail. March 27, 1990) (copy attached as Exhibit D), RBSG Capital Corporation (avail. June 23, 1989) (copy attached as Exhibit E), and Calton, Inc./Calton Funding Inc. (avail. November 18, 1988) (copy attached as Exhibit F). (v) SEC Prior No-Action Treatment of NAHI. On February 21, 1992, the Staff took a no-action position with respect to the prospective non-fulfillment by NAHI of its 1934 Act reporting obligations following the issuance of $ 400 61 62 million of its 12% Senior Notes (the "Senior Notes"). The Senior Notes are guaranteed by TNCL. In connection with the issuance of such no-action relief, the Staff was informed by NAHI that the 1934 Act Annual Reports of TNCL on Form 20-F will contain summarized financial information concerning NAHI substantially comparable to that set forth in Note 20 to the Consolidated Financial Statements of TNCL for the fiscal year ended June 30, 1991 (the "Consolidated Financial Statements"). After considering the operations and financial structure [*23] of NAHI and TNCL, the Division of Corporation Finance, had earlier determined that the registration statement relating to the Senior Notes did not need to include financial statements of NAHI other than those set forth in Note 20 referred to above. On the basis of the foregoing, (and, in particular, satisfaction of the criteria under SAB 53), NAHI should be exempted from the periodic reporting requirements under Sections 13 and 15(d) of the 1934 Act. Pursuant to the terms of the Indenture, TNCL will send its Annual Reports on Form 20-F to NAHI's Noteholders. Also, as mentioned above, TNCL's Ordinary Shares are registered pursuant to the 1934 Act and, therefore, TNCL is subject to the periodic reporting requirements of Section 13 of the 1934 Act. TNCL will, of course, continue to file its periodic reports under the 1934 Act. B. Section 3(a)(9) of the 1933 Act. (i) Section 3(a)(9) and the Notes. In his letter concerning the Registration Statement dated March 20, 1992 to Jeffrey W. Rubin, Mr. William Friar, Branch Chief, Division of Corporation Finance, requested advice as to whether Section 3(a)(9) would be relied upon for exchanges or purchases of Notes. By letter dated [*24] March 23, 1992, Mr. Rubin replied that this firm was reviewing the appropriateness of seeking no-action relief with respect to Section 3(a)(9). This letter is the related no-action request. Section 3(a)(9) under the 1933 Act exempts from registration "any security exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange." It is our view that Section 3(a)(9) is applicable to the delivery by NAHI of TNCL Ordinary Shares upon the exercise of Exchange Rights by Noteholders and to the delivery by TNCL of such securities pursuant to its Guaranty in the event that NAHI does not perform. The exemption afforded by Section 3(a)(9) should be equally available for the issuance by TNCL of any TNCL Ordinary Shares underlying TNCL ADSs issuable as a part of the Purchase Price in respect of the exercise of Purchase Rights and in respect of the issuance of such securities by TNCL under its Guaranty if NAHI does not perform. n6 n6 Under the Registration Statement NAHI and TNCL registered under the Securities Act, in addition to the NAHI Notes, the Guaranty as well as the TNCL Ordinary Shares issuable upon exercise of the Exchange Rights. The TNCL ADSs issuable upon the exercise of such rights were the subject of a separate registration statement on Form F-6. The TNCL ADSs and the underlying TNCL Ordinary Shares, issuable upon exercise of the Purchase Rights, have not been registered under the 1933 Act. [*25] For the following reasons, it is our view that NAHI and TNCL should not be required to maintain further registration of the TNCL Ordinary Shares issuable in connection with the exchange of Notes into such securities or to register the TNCL Ordinary Shares underlying the TNCL ADSs issuable upon exercise of the Purchase Rights. The Commission has interpreted the language of Section 3(a)(9) to require, among other things, that the security issued and the security surrendered in an exchange be those of the same "issuer". Although NAHI is a separate legal entity which is the holding company for the substantial U.S. operations of TNCL and is distinct from TNCL for federal and state income tax purposes, we believe that the foregoing requirement of Section 3(a)(9) is met in the subject circumstances for the reasons set forth below. In this connection, we would like to emphasize our view that, in making their investment decisions to acquire the 62 63 Notes, investors considered the obligations of TNCL under the Guaranty and the business and financial condition of TNCL and its subsidiaries as a whole to be essential components of their investment. (See Calton, Inc. and Subsidiaries (avail. September [*26] 30, 1991) (copy attached as Exhibit G). (a) The TNCL Guaranty. As is more fully set forth in the description of the Guaranty above, TNCL has fully, unconditionally and irrevocably guaranteed to the Noteholders the performance by its wholly-owned subsidiary NAHI of the covenants contained in the Notes and, to the extent permitted by applicable law, the delivery of TNCL ADSs or TNCL Ordinary Shares upon any exercise of Purchase Rights or Exchange Rights (in the event TNCL were prevented by applicable law from delivering TNCL ADSs or TNCL Ordinary Shares as aforesaid, TNCL would be required to satisfy its guaranty obligations through the payment of the cash value of such securities). (b) Financial Statements and Other Information in Registration Statement. The Registration Statement for the Notes contained full financial statements for TNCL, but only summarized financial statements for NAHI. Therefore, the financial condition of TNCL (rather than that of NAHI alone) was important to investors when they made their investment decisions. The importance of TNCL in investors' decisions to acquire Notes is also demonstrated by the Certain Considerations discussion, the Management's [*27] Discussion and Analysis of Financial Condition and Results of Operations and the Business descriptions contained in the Registration Statement, all of which focus on the financial condition and business activities of TNCL and its subsidiaries as a whole. (c) TNCL a Reporting Company under the 1934 Act. TNCL is a reporting company under the 1934 Act and the TNCL ADSs are listed on the NYSE. Although the Notes are listed on the NYSE, NAHI itself was not a reporting company under the 1934 Act prior to the issuance of the Notes. See Baxter Travenol Laboratories, Inc. (avail. July 8, 1983) (copy attached as Exhibit H). For the foregoing reasons, the exchange of Notes pursuant to the Exchange Rights or Purchase Rights should satisfy the above-cited requirements of Section 3(a)(9), on the basis that any such exchange involves the surrender by the Noteholder of his rights under the TNCL Guaranty for TNCL Ordinary Shares or TNCL ADSs. In addition, in our view, Section 3(a)(9) should be applicable with respect to the delivery of the TNCL Ordinary Shares, whether such securities are to be delivered by NAHI under the Notes, or by TNCL in satisfaction of its obligations under the Guaranty. [*28] (It should be noted that the foregoing analysis is intended to apply exclusively to the question of whether the subject exchanges are eligible for the exemption of Section 3(a)(9) and not to matters unrelated to the U.S. securities laws.) Further, in compliance with Section 3(a)(9), no commission or other remuneration will be paid to any party for soliciting the exercise of Exchange Rights or Purchase Rights. (ii) Lack of Payments Required on the Part of Noteholders. The Section 3(a)(9) exemption is not available in instances where the exchanging security holders are asked to part with anything other than their old securities. Except as described below, the Noteholders will be required to give up no more than their Notes upon exercise of the Exchange Rights or Purchase Rights. In this connection, two points require clarification: (a) Payment of Taxes by NAHI. In the case of the exercise of Exchange Rights and Purchase Rights, NAHI will be required to pay any documentary stamp or similar issue or transfer taxes due on the issuance of the related TNCL ADSs or TNCL Ordinary Shares. However, the Noteholder will be required to pay such taxes in instances where the Noteholder [*29] requests that such securities be issued into a name other than that of the Noteholder. The fact of any such payments by Noteholders does not appear significant to us for Section 3(a)(9) purposes. (b) Deemed Payment of Original Issue Discount. The calculation of the number of TNCL Ordinary Shares issuable upon exercise of the Exchange Rights contemplates no waiver by Noteholders of any accrued rights with respect to the Notes. Upon an Exchange, a Noteholder will not receive any cash payment 63 64 representing accrued Original Issue Discount. The Indenture, however, provides that the delivery to the Noteholders of TNCL ADSs or TNCL Ordinary Shares will be deemed to satisfy NAHI's obligation to pay the Principal Amount, including the accrued Original Issue Discount attributable to the period from the issue date to the exchange date. Thus, the accrued Original Issue Discount will be deemed paid in full, rather than canceled, extinguished or forfeited. In connection with the exercise of Purchase Rights which may be effected by Noteholders on March 31, 1997, the Purchase Price (any portion of which may be paid in TNCL ADSs) is an amount equal to the issue price plus accrued original issue [*30] discount to the date of purchase. Even if the non-payment to the Noteholders of a cash amount with respect to their accrued Original Issue Discount upon an Exchange were to be considered a giving of value by the Noteholder in such Exchange or upon a Purchase, the Commission has taken the position in several prior no-action letters that confirm the availability of the Section 3(a)(9) exemption for an exchange that requires a waiver of accrued interest or dividends. See, e.g., NJB Prime Investors (avail. May 14, 1976) (copy attached as Exhibit I). While the Noteholders will not be required to consider the waiver of any economic benefit under their Notes, this line of no-action letters supports the proposition that any such replacement of the Original Issue Discount with the exchanged securities should not inhibit the availability of the Section 3(a)(9) exemption. (iii) Inclusion of Cash with TNCL ADSs in Purchase Price The availability of the Section 3(a)(9) exemption with respect to the exercise of Purchase Rights by NAHI should not be inhibited by the fact that a cash component may be included with TNCL ADSs in connection with the payment of the Purchase Price. Such a [*31] payment would clearly be permitted under Rule 150 of the 1933 Act which provides in pertinent part that: "the term "commission or other remuneration" in Section 3(a)(9) shall not include payments made by the issuer . . . to its security holders in connection with an exchange of securities for outstanding securities, when such payments are part of the terms of the offer of exchange." See, e.g., Medi-Ray, Inc. (avail. June 28, 1975) (copy attached as Exhibit J). (iv) Cash Payments for Fractional Interests The availability of the Section 3(a)(9) exemption should also not be inhibited by virtue of the fact that, with respect to the exercise of both Exchange Rights and Purchase Rights, payments for fractional interests of Notes will be satisfied with a cash payment based on market value, rather than with securities. This result is clearly contemplated by 1933 Act Rule 150 cited above and by Section 3(a)(9) and the no-action letters issued by the Staff thereunder. See, e.g., Equimark Corp. (avail. March 28, 1973) (attached as Exhibit K). In Equimark, the Staff determined that the Section 3(a)(9) exemption would remain available in an exchange by an issuer of common stock [*32] for its preferred stock, notwithstanding the fact that the issuer planned to pay for fractional shares of preferred stock through a cash payment based on the market value of the common stock to be exchanged therefor. C. "Restricted Securities" The Staff has taken the view in several no-action letters that securities issued in connection with an exchange offer pursuant to Section 3(a)(9) do not constitute "restricted securities" within the meaning of Rule 144 under the 1933 Act. See, e.g., Calton, Inc. and Subsidiaries, supra. and Siliconix Incorporated (avail. May 16, 1988) (copy attached as Exhibit L). In that connection, we request confirmation from the Staff that the Noteholders will acquire unrestricted securities upon their exercise of Exchange Rights and Purchase Rights. Request Based upon the foregoing discussion, we respectfully request on behalf of 64 65 TNCL and NAHI that: (a) The Staff grant, pursuant to Section 12(h) of the 1934 Act, an order exempting NAHI from the periodic reporting requirements of Sections 13 and 15(d) of the 1934 Act, or, in the alternative, confirm that it will not recommend to the Commission any enforcement action if NAHI does not comply [*33] with such reporting requirements; (b) The Staff confirm, pursuant to Section 3(a)(9) of the 1933 Act, that it will not recommend any enforcement action to the Commission if NAHI and TNCL, as applicable, issue or deliver TNCL Ordinary Shares pursuant to the exercise of Exchange Rights or Purchase Rights, as described herein without maintaining (or, in the case of Purchase Rights, initially filing and maintaining) a registration statement with respect to the securities to be issued pursuant to such rights; and (c) The Staff confirm, that the TNCL Ordinary Shares issuable upon exercise of Exchange Rights or underlying the TNCL ADSs issuable upon exercise of Purchase Rights, without their continued, or in the case of Purchase Rights, initial or continued, registration under the 1933 Act, will not be deemed "restricted securities" within the meaning of Rule 144 under the 1933 Act. * * * Since NAHI's next Quarterly Report on Form 10-Q is due on or before May 15, 1992, your prompt response to this letter will be greatly appreciated. In addition, if it appears that you will be able to grant the relief requested in (a) above but will require additional time to make a determination as to [*34] the relief requested by (b) and (c) above we would appreciate your responding to (a) separately, and following with a response on the other points at a later date. We would appreciate the opportunity to discuss this matter with you further prior to your issuance of a response if it appears that you will not be able to grant the relief requested herein. If you have any questions or require additional information with respect to the matters discussed herein, please call the undersigned or Jeffrey W. Rubin at (212) 661-6500. Seven additional copies of this letter, with one set of exhibits, are enclosed. You should receive an additional six sets of exhibits by overnight courier on April 23, 1992. Very truly yours, Michael R. Butowsky 65 - ------------------------------------------------------------------------------- 66 1982 SEC No-Act. LEXIS 2386 Securities Act of 1933 -- Section 3(a)(9) Apr 30, 1982 [*1] Baywater Realty & Capital Corp. TOTAL NUMBER OF LETTERS: 3 SEC-REPLY-1: SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 RESPONSE OF THE OFFICE OF CHIEF COUNSEL DIVISION OF CORPORATION FINANCE Re: Bayswater Realty & Capital Corp. Incoming letters dated February 5 and March 18, 1982 On the basis of the facts presented, this Division will not recommend any enforcement action to the Commission if Bayswater Realty & Capital Corp., in reliance upon your opinion as counsel that the exemption provided by Section 3(a)(9) of the 1933 Act is available, makes the Exchange Offer without compliance with the registration requirements of the 1933 Act. Because this position is based upon the representations made to the Division in your letters, it should be noted that any different facts or conditions might require a different conclusion. Further, this response only expresses the Division's position on enforcement action and does not purport to express any legal conclusion on the question presented. Finally, we understand that the issue relating to Rule 10b-6 will be responded to separately by the Division of Market Regulation. Sincerely, William E. Morley Deputy Chief Counsel INQUIRY-1: ARVEY, HODES, COSTELLO [*2] & BURMAN LAW OFFICES ONE EIGHTY NORTH LASALLE STREET, CHICAGO, ILL. 60601 (312) 855-5000 March 18, 1982 Mr. George Fitzsimmons Secretary Securities and Exchange Commission 500 North Capitol Street Washington, D.C. 20549 Re: Bayswater Realty & Capital Corp. Dear Mr. Fitzsimmons: On February 5, 1982, we wrote on behalf of our client Bayswater Realty & Capital Corp. (the "Corporation") requesting the Commission to issue an order exempting the exchange offer described therein from the provisions of Rule 10b-6 (17 C.F.R. @ 240.10b-6) and further requesting the Staff to issue a no-action letter advising that it will not recommend any action be taken with respect to the non-registration of the exchange offer. In our letter, we advised that the Corporation was planning to offer holders of its 6 3/4% convertible debentures (6 3/4% Debentures) the opportunity to exchange $ 100 in principal amount for $ 80 in principal amount of a 15% debenture. The Corporation has determined to amend its offer. It will now offer each 6 3/4% debenture holder the opportunity to exchange $ 100 in principal amount of a 6 3/4% debenture for $ 100 in principal amount of a 12% debenture. [*3] The other terms of the 12% debentures remain as stated in our letter of February 5. 66 67 We do not believe that this change affects the discussion in our letter of February 5, 1982, with respect to the relief requested and the reasons therefor. Very truly yours, ARVEY, HODES, COSTELLO & BURMAN By: Jeffrey R. Liebman INQUIRY-2: ARVEY, HODES, COSTELLO & BURMAN LAW OFFICES ONE EIGHTY NORTH LASALLE STREET, CHICAGO, ILL. 60601 (312) 855-5000 February 5, 1982 Mr. George Fitzsimmons Secretary Securities and Exchange Commission 500 North Capitol Street Washington, D.C. 20549 Re: Bayswater Realty & Capital Corp. Dear Mr. Fitzsimmons: On behalf of our client BAYSWATER REALTY & CAPITAL CORP. (the "Corporation"), formerly Bayswater Realty & Investment Trust (the "Trust"), we hereby request that the Commission issue an order exempting the transactions described below from the provisions of Rule 10b-6 (17 C.F.R. @ 240.10b-6). We further request that the Staff issue a no action letter advising that it will not recommend that any action be taken with respect to the non-registration of the EXCHANGE OFFER described below. BACKGROUND The Corporation's predecessor was organized [*4] as an Illinois business trust. It's initial investment objective was to invest in real property, mortgage loans, and other investments related to real property. It endeavored to and did qualify as a real estate investment trust under the applicable provisions of the Internal Revenue Code ("FEIT Provisions"). On May 4, 1979, two special meetings of the shareholders of the Corporation's predecessor Trust were held for the purposes of deciding (1) whether to remove the elected Trustees and replace them with a slate of nominees led by Mr. Carl Icahn, then a non-management shareholder; and (2) whether to adopt a plan of liquidation proposed by the then encumbent Trustees. At special meetings of the shareholders, the Trustees were removed and opposing nominees were elected. The liquidation plan failed to receive sufficient votes and was defeated. The new Trustees later determined that it would be in the best interest of the Trust, its shareholders and its Debenture holders to free the Trust from the restrictive income and asset tests and other requirements of the REIT Provisions in order to conduct active real estate operations and to pursue other business opportunities in investments [*5] should they become available. The Trustees adopted a proposal which was presented to and approved by the shareholders of the Trust at the annual meeting held on December 14, 1979, to merge the Trust into the Corporation which might not then qualify under the REIT Provisions. The Trust thereafter solicited and obtained the consent of holders of its outstanding 6 3/4% Convertible Subordinated Debentures due May 15, 1991 ("6 3/4% Debentures"), to a proposal to amend the Indenture under which the 6 3/4% Debentures were issued to delete therefrom a covenant so as to permit the Trust and then the Corporation to conduct business without qualifying under the REIT Provisions of the Internal Revenue Code. In soliciting the consent of the holders of the 6 3/4% Debentures, the Trust undertook to offer to such holders the opportunity to exchange their 6 3/4% Debentures for a like principal amount of new issue 10% Subordinated Debentures due May 15, 1991. These 10% Debentures would rank pari passu with the 6 3/4% Debentures but would bear interest at the rate of 10% per annum. The 10% Debentures, unlike the 6 3/4% Debentures, would 67 68 not be convertible into equity shares of the then [*6] Trust and now Corporation and would not be entitled to the benefits of any sinking fund. The Corporation expects to fulfill the Trust's undertaking to make that EXCHANGE OFFER as soon as practicable. However, the Corporation has determined, in view of the delay in implementing the offer and the current level of interest rates, that for each $100 principal amount of a 6 3/4% Debenture, the Corporation will now offer $80 in principal amount of a 15% Debenture rather than $100 in principal amount of a 10% debenture. On December 17, 1979, certain shareholders of the Corporation filed a class action lawsuit captioned Vala, et al. v. Bayswater Realty & Investment Trust, et al., 80 Civ. 4558 (WK). The complaint alleged violations of federal and state securities laws, common law fraud and breach of fiduciary duties relating to the annual meeting of shareholders of the Corporation held on December 14, 1979, at which time the shareholders approved the merger of the Trust into its wholly-owned Delaware corporate subsidiary, Bayswater Realty & Capital Corp. The class consisted of all shareholders of record of the predecessor Trust as of the close of business on October 29, 1979, [*7] the record date for the December 14, 1979, meeting, but specifically excluded any defendants and any trustees, directors, officers and employees of any of the defendants. In March, 1981, the court scheduled a hearing for May 14, 1981, on the fairness of a proposed settlement of the lawsuit, and ordered that notice be given describing the terms of the proposed settlement and advising members of the class of the hearing and their rights with respect to the proposed settlement. On May 19, 1981, subsequent to both the notice and the hearing, the Court approved the fairness of the settlement and ordered the entry of final judgment thereon and that a second notice be sent to class members advising them of their rights under the settlement. The settlement conferred benefits on all class members except those who sold their shares on or after January 21, 1981, the date following the public announcement of the proposed settlement. The settlement presented to eligible class members the following options: (A) In the case of class members who continued to own any shares which they owned on October 29, 1979, the right to exchange such shares for $ 10 in principal amount, 15% subordinated [*8] debentures due 1991 plus $ 4.19 in cash, and (B) In the case of class members who have sold or otherwise disposed of their shares prior to January 21, 1981, the right to pay in cash the equivalent of the "net proceeds" from the disposition of each share less $ 4.25 to the Corporation for $ 10 in principal amount 15% Debentures, plus $ 1.19 as the initial interest payment on the 15% debentures. The Corporation commenced the SETTLEMENT OFFER on November 13, 1981, at which time it filed Forms 13e-3 and 13e-4 and an Application for Qualification of an Indenture (File No. 22-11374). It also obtained a no action letter regarding non-registration in reliance upon Section 3(a)(10) of the Securities Act of 1933. The SETTLEMENT OFFER terminated on January 20, 1982, following an extension of the initial termination date of December 31, 1981. The EXCHANGE OFFER will not be commenced until more than ten business days after the expiration of the SETTLEMENT OFFER. RULE 10b-6. Rule 10b-6 makes it unlawful for an issuer to bid for or purchase for any account in which he has a beneficial interest, any security which is the subject of a distribution. Subparagraph (f) thereof, exempts from [*9] the rigors of the Rule bids for or purchases of any equity security pursuant to a tender offer if the Rule would otherwise apply solely because the issuer has outstanding securities which are immediately convertible into or exchangeable or exercisable for the security for which the tender offer is to be made, provided that such tender offer is made in accordance with the provisions of Rule 13(e)-4 or Section 14(d) of the Exchange Act. The Rule omits to define "distribution" and subparagraph (e) suggests (by its literal language) that the existence of outstanding securities convertible into 68 69 equity securities may be considered a "distribution" of those equity securities although the actual distribution process has long come to rest. The SETTLEMENT OFFER was a "tender offer" for existing equity securities made in accordance with the provisions of Rule 13e-4 and the exemption was available to the Corporation for that offer. Yet, the literal language of the Rule suggests the exemption is not available where, as in the case of the EXCHANGE OFFER, the subject security of the tender offer is not the equity security in distribution, but rather a right to acquire such equity security. [*10] Regardless, the perceived evil which the Rule was designed to remedy does not exist, even if the transactions fall within the language of the Rule. NON-REGISTRATION The Corporation intends to make its EXCHANGE OFFER in reliance upon the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933 ("Securities Act") which exempts from the registration requirements of Section 5 of the Securities Act: ... any security exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. As noted above, the Corporation proceeded with its SETTLEMENT OFFER in reliance upon the exemption from registration provided by Section 3(a)(10) of the Securities Act, and received a no action letter in connection therewith. The Corporation believes that both exemptions are available to it regardless of the timing of the respective offers. The Corporation understands that should the two offerings be deemed to be "intergrated" the result might be the unavailability of the Section 3(a)(9) exemption. For the reasons set forth below, the Corporation respectfully [*11] suggests that the two offers should not be integrated. SEC Release 33-44334 (December 6, 1961), sets forth a number of criteria with respect to the integration of offerings under the intra-state exemption (Section 3(a)(11)) of the Securities Act. Whether an offering is to be integrated with another offering either previously made or proposed to be made is primarily a question of fact and depends essentially upon whether the offerings are a related part of a single plan or program. The criteria enumerated in the Release are adaptable for analysis with respect to the subject offering. A significant factor is whether or not the two offers are part of a single plan of financing. Here, neither offer is intended to be (or will result in) any type of financing. The Corporation will not realize any net proceeds with respect to either offer. The EXCHANGE OFFER results from the desire of the Corporation to rid itself of restrictive covenants; the SETTLEMENT OFFER results solely from a judicially approved settlement of a lawsuit. Neither is an attempt to raise money. Similarly, neither is part of any common plan. At the time the EXCHANGE OFFER was conceived, the negotiated settlement [*12] of the lawsuit could not have been foreseen. A second consideration is whether or not the offerings involve the issuance of the same class of security. Here, in fact, both offerings are of subordinate debt securities maturing in 1991 and now both will bear an interest rate of 15 percent. * However, we do not believe this criteria alone should be controlling. The virtually identical characteristics of the EXCHANGE OFFER debentures should serve the interests of persons who acquire these debentures by creating the possibility of a more active trading market; the similarity of the two issues serves no other purpose of the Corporation. If the staff takes the position that the two offers should be integrated solely because of the similarity of the debentures, the Corporation would consider the possibility of changing the terms of the EXCHANGE OFFER debentures in order to make them dissimilar to the SETTLEMENT OFFER debentures. * The new terms of the EXCHANGE OFFER have not been publicly announced, pending the Staff's response to this request. 69 70 A third consideration is the timing of the offerings. Here, it is contemplated that the EXCHANGE OFFER will be made shortly following [*13] the SETTLEMENT OFFER, but not less than ten days thereafter. This timing is the result of circumstance. The delay in the EXCHANGE OFFER occurred in part because of the Staff's investigation of the Corporation which postponed the EXCHANGE OFFER because of disclosure problems. During the course of the investigation, the Corporation's auditors resigned, which further delayed the offering. Only recently have events permitted the EXCHANGE OFFER to be made. The Corporation did not plan on making the offerings in the proximity now contemplated. Next, the respective offers will be made for different consideration. The consideration to be paid in connection with the Exchange Offer is solely the exchange of the 6 3/4% Debentures. With respect to the SETTLEMENT OFFER, the consideration was either common stock of the Corporation or cash depending on whether or not a class member continued to hold common stock. Finally, and again significant, the respective offers are not being made for the same general purpose. The EXCHANGE OFFER was conceived as an inducement to obtain the waiver by 6 3/4% Debenture holders of the restrictive covenants contained in the indenture so as to permit the [*14] Corporation to pursue new and different business opportunities. The SETTLEMENT OFFER was the result of a negotiated (and court approved) settlement of a lawsuit brought against the Corporation. For the reasons set forth above, the Corporation respectfully requests that the Commission exempt the EXCHANGE OFFER from Rule 10b-6 and that the Staff confirm that it will not recommend any action with respect to the non-registration of the EXCHANGE OFFER. Very truly yours, ARVEY, HODES, COSTELLO & BURMAN By: Jeffrey R. Liebman 70 - ------------------------------------------------------------------------------- 71 1972 SEC No-Act. LEXIS 3996 Securities Act of 1933 - @ 3(a) (9); Securities Exchange Act of 1934 - @ 14(a) Nov 13, 1972 [*1] Daitch Crystal Dairies, Inc. TOTAL NUMBER OF LETTERS: 2 SEC-REPLY-1: OCT 12 1972 Stephen H. Gore, Esq. Guggenheimer & Untermyer 80 Pine Street New York, New York 10005 Re: Daitch Crystal Dairies, Inc. Dear Mr. Gore: This will refer to your letter of September 1, 1972 regarding the proposed solicitation by Daitch Crystal Dairies, Inc. of the consents of holders of its 5-1/2% Convertible Subordinated Debentures due October 1, 1979 to amend the indenture therefor. The changes in the indenture proposed by the Company are as follows: 1. To add a new clause defining the term "Real Estate Subsidiary" to mean a subsidiary of the company engaged primarily in the business of constructing, acquiring, owning, mortgaging or financing real property and improvements thereon, and to add a new clause allowing the company to have such Real Estate Subsidiaries. 2. To add a new clause allowing the company to own less than 100% of the voting stock of any Real Estate Subsidiary, to enter joint ventures with respect to any Real Estate Subsidiary, and to sell or transfer stock in any Real Estate Subsidiary to other persons. 3. To add a clause excluding from "Funded Indebtedness" as used in Section 6.12 and 6.14 of the [*2] indenture present and future indebtedness of the company secured by non-recourse mortgages on property owned by the company. 4. To add a clause excluding the liabilities and obligations of any Real Estate Subsidiary from "Funded Indebtedness" as used in sections 6.12 and 6.14 of the indenture. 5. To add a clause excluding capitalized rent from the definition of "Funded Indebtedness" as defined in Section 1.01 of the indenture. 6. To add a clause excluding the company's investments in and advances to Real Estate Subsidiaries from "Consolidated Net Current Assets" as used in Section 6.14 and changing the "Consolidated Net Current Assets" requirement on the payment of dividends or other distributions from $3,000,000 or 60% of Funded Indebtedness, whichever is greater, to $3,000,000, less all sums advanced or invested in Real Estate Subsidiaries or 60% of Funded Indebtedness, whichever is greater. In consideration of the consent to the above changes by the holders of at least 66-2/3% in total principal amount of the above Debentures, the company will increase the interest rate on these Debentures from 5-1/2% to 6% as of the interest payment date next succeeding the effective [*3] date of the changes. Based upon the information in your letter, this Division will not recommend any action to the Commission if the solicitation is effected in the manner proposed therein in reliance upon your opinion as counsel that the securities as modified will be exempt from the registration requirements of the Securities Act 71 72 of 1933 by virtue of section 3(a) (9) thereof, that the solicitation will be exempt from the proxy rules promulgated under Section 14(a) of the Securities Exchange Act of 1934 because the securities with respect to which the solicitation will be made are not registered pursuant to section 12 thereof, and that amendment of the indenture does not require qualification under the Trust Indenture Act of 1939. Sincerely, Peter J. Romeo Attorney Adviser INQUIRY-1: GUGGENHEIMER & UNTERMYER 80 PINE STREET, NEW YORK, N.Y. 10005 CABLE ADDRESS MELPOMENE NEW YORK TELEPHONE: DIGBY 4-2040 September 1, 1972 John J. Heneghan, Esq. Deputy Chief Counsel Division of Corporation Finance Securities and Exchange Commission Washington, D.C. Re: Daitch Crystal Dairies, Inc. Proposed amendment of Indenture relating to 5-1/2% Convertible Subordinated Debentures [*4] due October 1, 1979 Dear Sirs: We are general counsel to Daitch Crystal Dairies, Inc., a Delaware corporation (the Company). The Company has outstanding among other securities an issue of 5-1/2% Convertible Subordinated Debentures due October 1, 1979, S-1 Registration #2-15600, issued under an Indenture dated as of October 1, 1959 between the Company and Chase Manhattan Bank as Trustee, (Form T-1, Trust Indenture Act). The original issue was in the principal amount of $3,500,000. There are presently outstanding $2,117,500 principal amount of Debentures; and in addition $32,500 principal amount are presently in the treasury of the Company, purchased in the open market for the purpose of tendering the same to the sinking fund. The Debentures and the related coupons are in bearer form and none is in registered form. The Debentures are not listed upon any Exchange and are not registered under Section 12(g) of the Securities Exchange Act of 1934. The common stock into which the Debentures are convertible is listed upon the American Stock Exchange. The Company intends to ask the Debentureholders (in accordance with the provisions in that regard contained in the Indenture) [*5] to consent to the execution of a Supplemental Indenture and if the requisite percentage (viz. not less than 66-2/3% in principal amount of the Debentures at the time outstanding, (Indenture, Section 12.02) is secured, to then enter into a Supplemental Indenture with the Trustee. Pursuant to the Indenture, the Debentures held by the Company are not to be included for the purpose of computing the Debentures outstanding (Indenture, Section 10.04). The Company does not contemplate paying a commission or other remuneration directly or indirectly for soliciting consents. It has retained D.F. King & Co. to advise it on how to ascertain and locate Debentureholders and procedures for modifying the Indenture, and the Company has consulted with Bear, Stearns & Co., its financial advisor, who is on an annual retainer. 72 73 The substance of the proposed changes in the Indenture is as follows: 1. To add a new clause defining the term "Real Estate Subsidiary" to mean a subsidiary of the Company engaged primarily in the business of constructing, acquiring, owning, mortgaging or financing real property and improvements thereon, and to add a new clause allowing the Company to have such Real Estate [*6] Subsidiaries. 2. To add a new clause allowing the Company to own less than 100% of the voting stock of any Real Estate Subsidiary, to enter joint ventures with respect to any Real Estate Subsidiary, and to sell or transfer stock in any Real Estate Subsidiary to other persons. 3. To add a clause excluding from "Funded Indebtedness" as used in Section 6.12 and 6.14 of the Indenture present and future indebtedness of the Company secured by non-recourse mortgages on property owned by the Company. We are informed that the only present indebtedness so secured is on property located on Boston Post Road, Bronx, New York, in the amount of $3,200,000. 4. To add a clause excluding the liabilities and obligations of any Real Estate Subsidiary from "Funded Indebtedness" as used in Sections 6.12 and 6.14 of the Indenture. 5. To add a clause excluding capitalized rent from the definition of "Funded Indebtedness" as defined in Section 1.01 of the Indenture. 6. To add a clause excluding the Company's investments in and advances to Real Estate Subsidiaries from "Consolidated Net Current Assets" as used in Section 6.14 and changing the "Consolidated Net Current Assets" requirement on [*7] the payment of dividends or other distributions from $3,000,000 or 60% of Funded Indebtedness, whichever is greater to $3,000,000, less all sums advanced or invested in Real Estate Subsidiaries or 60% of Funded Indebtedness, whichever is greater. In consideration of the consent to the above changes by the holders of at least 66-2/3% in total principal amount of the above Debentures, the Company will increase the interest rate on these Debentures from 5-1/2% to 6% as of the interest payment date next succeeding the effective date of the foregoing changes. The underlying purposes of seeking the above mentioned amendments are as follows: The Company is engaged primarily in the business of operating supermarkets in which foods and household products are sold at retail. In pursuance of the business of the Company and for its best interests, it has become necessary in the past and may become necessary in the future, to purchase land for the purpose of erecting store premises, warehouses or other imporvements, or to purchase land for the purpose of erecting shopping centers in which the Company or a subsidiary may operate supermarkets, with portions of the improvements rented to others, [*8] or to have a financial interest in any such purchase and construction by others, in connection with any or all of which financing may be required. As presently written, Section 6.10 of the Indenture provides that the Company will not permit any subsidiary to borrow money except from the Company or another subsidiary and contains certain other limitations. Under the restrictions therein contained a subsidiary would be debarred from obtaining any financing from outside the Company organization. The Company desires to permit Real Estate Subsidiaries to obtain outside financing without the Company becoming responsible for any such obligations. It is further envisaged that Real Estate Subsidiaries may be jointly owned or may be engaged in joint ventures in order to enable such subsidiaries to participate in the development of shopping centers and thereby enable the Company to open large volume supermarkets at attractive rentals that would not otherwise be available. The Company also believes that other restrictions relating to incurring additional Funded Debt and the declaration of dividends should be modified to take into account the non-liability of the Company on nonrecourse mortgages [*9] and 73 74 for debt of Real Estate Subsidiaries. It is our opinion that: (a) The proposed action by the Company requesting the Debentureholders to consent to amendment of the Indenture in the respects indicated above does not constitute the issuance or distribution of a security, and thus is not subject to the registration requirements of the Securities Act of 1933 or the Proxy Rules under the Securities Exchange Act of 1934 or the Trust Indenture Act of 1939. (b) If such request for consent can be considered tantamount to the offer of a new security, then, inasmuch as the offer is to be made by the issuer to its existing securityholders exclusively, and the Company does not contemplate paying a commission or other remuneration directly or indirectly for soliciting consents, the transaction would be an exempted transaction under Section 3(a) (9) of the Securities Act of 1933. (c) Inasmuch as the Debentures are not registered under Section 12(g) of the Securities Act of 1934, it is unnecessary for the Company to comply with the Proxy Rules. It is the intention of the Company to address a communication to the Debentureholders in substantially the form attached hereto as Exhibit I informing [*10] them of the substance of the requested modifications to the Indenture and the reasons therefor, and requesting consent thereto. * In this connection it is our opinion that it will be unnecessary for the Company to clear with the Commission the communication to be addressed to the Debentureholders, although there is no present objection on the part of the Company to doing so should it be your view that such clearance is necessary or desirable. (d) No further qualification is required under the Trust Indenture Act of 1939. If, however, you believe such qualification is necessary, we would appreciate being so advised. * In addition there may be a transmittal letter from the President or Chairman of the Board. If you desire any further information, please advise us and we shall endeavor to submit the same as promptly as possible. If there is no further information you require, we would appreciate hearing from you as soon as possible to the effect that the staff will recommend no action be taken in the event the Company requests consents from Debentureholders as indicated above without further registration under the Securities Act of 1933, as amended, and without compliance with the Proxy Rules under the Securities Exchange Act of 1934, as amended. Very truly yours, GUGGENHEIMER & UNTERMYER $ By Stephen H. Gore [*11] 74 - ------------------------------------------------------------------------------- 75 1989 SEC No-Act. LEXIS 1014 Securities Act of 1933 -- Section 3(a)(9) October 10, 1989 [*1] Seaman Furniture Co., Inc. TOTAL NUMBER OF LETTERS: 3 SEC-REPLY-1: SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 October 10, 1989 RESPONSE OF THE OFFICE OF CHIEF COUNSEL DIVISION OF CORPORATION FINANCE Re: Seaman Furniture Company, Inc. ("Company") Incoming letters dated September 29 and October 4, 1989 Based on the facts presented, the Division will not recommend enforcement action to the Commission if the Company, in reliance on your opinion as counsel that the exemption provided by section 3(a)(9) of the Securities Act of 1933 ("Securities Act") is available, proceeds with the described exchange offer without registration under the Securities Act. Because this position is based on representations made to the Division in your letters, it should be noted that any different facts or conditions might require a different conclusion. Moreover, this letter only expresses the Division's position on enforcement action and does not express any legal conclusions on the question presented. Sincerely, Abigail Arms Deputy Chief Counsel INQUIRY-1: SIMPSON THACHER & BARTLETT A PARTNERSHIP WHICH INCLUDES PROFESSIONAL CORPORATIONS 425 LEXINGTON AVENUE NEW YORK, N.Y. 10017-3909 (212) 455-2000 October 4, 1989 Abigail Arms, [*2] Esq. Office of Chief Counsel Division of Corporation Finance Securities and Exchange Commission 450 5th Street, N.W. Washington, D.C. 20549 Re: Seaman Furniture Company Inc. Dear Ms. Arms: On behalf of our client, Seaman Furniture Company, Inc. (the "Company"), we hereby confirm that it is the Company's understanding that the financial advisors and legal counsel selected by the Committee (as defined in our letter dated September 29, 1989) will not solicit exchanges in connection with the Company's proposed Exchange Offer (as defined in our letter dated September 29, 1989). We also hereby confirm on behalf of the Company that the letter agreements pursuant to which the Company agreed to pay the fees and expenses of 75 76 the Committee's legal counsel and financial advisors do not provide for the payment of any portion of such compensation being contingent on the consummation of the proposed Exchange Offer and that the Company has not and will not agree to pay any compensation to the Committee's legal counsel or financial advisors which is contingent on the consummation of the proposed Exchange Offer. Your attention to this matter is greatly appreciated. If you require any additional [*3] information, please call (collect) Peter J. Gordon (212-455-2605), Charles I. Cogut (212-455-2550) or Robert E. Spatt (212-455-2685) of this firm. Very truly yours, SIMPSON THACHER & BARTLETT INQUIRY-2: SIMPSON THACHER & BARTLETT A PARTNERSHIP WHICH INCLUDES PROFESSIONAL CORPORATIONS 425 LEXINGTON AVENUE NEW YORK, N.Y. 10017-3909 (212) 455-2000 September 29, 1989 Office of Chief Counsel Division of Corporation Finance Securities and Exchange Commission 450 5th Street, N.W. Washington, D.C. 20549 Attention: Abigail Arms, Esq. Re: Seaman Furniture Company, Inc. Dear Sirs: On behalf of our client, Seaman Furniture Company, Inc. (the "Company"), we request the advice of the Staff that it will not recommend any enforcement action to the Securities and Exchange Commission (the "SEC") if the Company effects the exchange offer described below (the "Exchange Offer") in reliance on the exemption from registration contained in Section 3(a)(9) ("Section 3(a)(9)") of the Securities Act of 1933, as amended (the "Act"). In accordance with Release No. 33-6269 under the Act, an original and seven copies of this letter are enclosed. Factual Background On December 15, 1987, SFC Acquisition [*4] Corp., a Delaware corporation ("Acquisition") and a wholly owned subsidiary of SFC Holdings, Inc., a Delaware corporation ("Holdings"), purchased approximately 77% of the outstanding shares of common stock of the Company pursuant to a cash tender offer (the "Tender Offer") commenced in accordance with a merger agreement among Holdings, Acquisition and the Company. On February 25, 1988, Acquisition was merged into the Company (the "Merger"), the shares of common stock of the Company which were not purchased pursuant to the Tender Offer were converted into the right to receive 15% Junior Subordinated Debentures due 1999 of Acquisition (the "Existing Sub Debt"), and the Company became a wholly owned subsidiary of Holdings and assumed the Existing Sub Debt. Over 98% of the outstanding shares of common stock of the Company were tendered into the cash tender offer and received cash on a pro rata basis. Approximately 80% of the common stock of Holdings outstanding on a fully diluted basis is beneficially owned by limited partnerships of which KKR Associates, L.P., a New York limited partnership ("KKR"), is the sole general partner. Approximately 17% and 3%, respectively, of the common stock [*5] of Holdings outstanding on a fully diluted basis is beneficially owned by Mr. Morton Seaman, the chief executive officer of the Company, and other members of management of the Company, respectively. As of today, two members of the Seaman family, four representatives of KKR and the executive vice president of the Company constitute the Board of Directors of Holdings and the Company. 76 77 The Existing Sub Debt issued to the Company's public stockholders in connection with the Merger was covered by a Registration Statement on Form S-4 (No. 33 - 19882). Following the Merger, the Company continued to file periodic reports (including its Annual Report on Form 10-K for the fiscal year during which the Registration Statement on Form S-4 became effective) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), until the Existing Sub Debt was deregistered in December, 1988 because it was held of record by less than 300 holders. The Company is a specialty retailer of furniture targeted to appeal to the price conscious, middle income consumer. The Company operates a chain of 26 furniture stores and three clearance centers in the New York/New Jersey/Connecticut metropolitan area, [*6] and four stores in the Philadelphia, Pennsylvania trading area, all of which sell a variety of furniture. The Company's merchandising policy is to offer no special orders so as to attempt to achieve high volume by providing low prices and fast delivery to its customers. In the last half of its fiscal year ended April 30, 1989 the Company experienced sluggish sales which it believes were indicative of the economic climate prevalent in the marketplace in which it operates. As these trends continued into the 1990 fiscal year, the Company became convinced that it would have to attempt to restructure its outstanding indebtedness. In July, 1989 formal negotiations with officers of Manufacturers Hanover Trust Company, the agent bank under the Company's bank credit agreement, were commenced to discuss the Company's weakened financial condition. Discussions with a steering committee of the Company's 26 bank lenders (all of which are large commercial banking institutions) continued through early September, at which time a proposed restructuring of the Company's bank debt was agreed to in principle. During July, 1989 the Company hired investment bankers from Merrill Lynch Capital Markets to [*7] act as its financial advisors in connection with a possible restructuring of the Company's debt. On August 23, 1989, following the distribution by the Company to its securityholders of the Company's audited financial statements for the year ended April 30, 1989 and a letter to the holders of Existing Sub Debt stating, among other things, that the Company would no longer be able to service its bank debt, a meeting was arranged with institutional investors which were believed to hold a substantial percentage of the Existing Sub Debt. Also attending this meeting were officers and directors of the Company, the Existing Sub Debt trustee and its counsel, counsel to various of the investors, and the Company's legal and financial advisors. At the meeting, officers and directors of the Company advised the holders of Existing Sub Debt that, among other things, the Company would be formulating a proposal to restructure the Company. The trustee and seven of the holders of Existing Sub Debt which attended the meeting subsequently formed a committee (the "Committee"). At the request of the Committee, the Company subsequently agreed to pay the fees and expenses of legal counsel and financial advisors [*8] selected by the Committee to represent the Committee. In early September, the Company submitted a restructuring proposal to the financial advisors and legal counsel for the Committee. Active discussions and negotiations with the Committee's legal and financial advisors took place from September 12, 1989 through September 20, 1989. By September 22, 1989, the seven holders of Existing Sub Debt which constituted the Committee executed and delivered to the Company the form of letter attached hereto as Exhibit A, and on September 25, 1989 the Company issued the press release attached hereto as Exhibit B. The Company understands that all of such members of the Committee are sophisticated institutional investors, and these investors have represented to the Company that they own approximately 42% in principal amount of the Existing Sub Debt. The Company also has been advised that the high yield debt trading unit of Merrill Lynch Capital Markets (the "ML Trading Unit") owns, for the ML Trading Unit's own account, approximately 16% in principal amount of the Existing Sub Debt, which the Company believes is the largest position that any holder has in these securities. The ML Trading Unit attended [*9] the 77 78 meeting on August 23, 1989 referred to above, but it is not a member of the Committee. At the request of the Company, the ML Trading Unit has executed and delivered to the Company the form of letter attached hereto as Exhibit A in its capacity as a holder of Existing Sub Debt. The investment bankers from Merrill Lynch Capital Markets who have acted as the Company's financial advisors have advised the Company that they have no responsibility for the Existing Sub Debt owned by the ML Trading Unit, have no involvement in the management of such investment and, as a result of the "chinese wall" between their department and the ML Trading Unit, have had no substantive contact with the persons responsible for the management of the ML Trading Unit's investment in Existing Sub Debt concerning the management of such investment, the Company's various restructuring proposals or the Exchange Offer. It is the Company's belief that the ML Trading Unit and most, if not all, of the members of the Committee acquired Existing Sub Debt following the Merger in the ordinary course of their business as entities which are regularly engaged in the business of investing in securities. The restructuring [*10] proposal can be summarized as follows: (1) pursuant to the Exchange Offer, the Company will exchange $ 20.8 million in principal amount of its new junior subordinated debentures (the "New Sub Debt") and approximately 8% of its common stock (subject to dilution) for approximately $83 million in principal amount (90%) of the Existing Sub Debt, (2) the principal amount of the Company's senior bank debt will be reduced from approximately $270 million to $ 150 million and the Company will issue to the banks $ 25 million in principal amount of its senior subordinated notes and approximately 44.5% of its common stock (subject to dilution), (3) Mr. Seaman and KKR and its affiliates will purchase for cash $ 42 million in principal amount of the Company's senior subordinated debt and (4) Mr. Seaman, KKR and the banks will participate in a new $ 15 million revolving letter of credit facility for the Company. The terms of the restructuring are outlined in more detail in the term sheets annexed to Exhibit A. The parties to the restructuring also have agreed to grant each other releases from potential litigation claims with respect to Existing Sub Debt which is exchanged pursuant to the Exchange [*11] Offer (as opposed to the Existing Sub Debt which is expected to remain outstanding) to the extent such claims arise out of the fender Offer and the Merger. In addition, holders of Existing Sub Debt will waive accrued interest on Existing Sub Debt exchanged pursuant to the Exchange Offer. As contemplated by the term sheets, the Company will attempt to register the New Sub Debt under the Exchange Act and resume filing periodic reports after the Exchange Offer is consummated. The Company's obligations under the Existing Sub Debt are not, and the Company's obligations under the New Sub Debt will not be, guaranteed by Holdings. The Company's independent public accountants have qualified their opinion with respect to the audited financial statements of the Company for the fiscal year ended April 30, 1989 and unfavorable publicity concerning the Company's financial condition has adversely affected the Company. The negotiation of the proposed restructuring among the banks, the Committee's financial and legal advisors, and the Company was more difficult and time consuming than originally expected. The viability of the Company is dependent upon the willingness of its suppliers to provide it [*12] with furniture to sell. Understandably, the Company's trade creditors will remain very concerned about the Company's creditworthiness until the restructuring is consummated. Likewise, the restructuring proposal provides for, and is dependent upon, an additional investment of $ 42 million by existing shareholders of the Company. If it takes a great deal of time to effectuate the restructuring, changed circumstances could conceivably put this investment at risk. Accordingly, it is imperative that the Company consummate the proposed restructuring quickly in order, among other things, to: (a) fully restore the confidence of the Company's trade creditors; (b) receive the infusions of cash to be made upon the closing of the restructuring; and (c) reduce interest expense. Definitive documentation for the restructuring of the Company's senior bank debt is presently being prepared and should be finalized in the next few weeks. Clearly, the most time consuming aspect of the restructuring will be the Exchange Offer. It is our belief that the most expeditious manner to effectuate the Exchange Offer would be in reliance upon the exemption from registration under the Act contained in Section 3(a)(9), [*13] which, as discussed below, we believe should be available to 78 79 the Company. Discussion As contemplated by the term sheets annexed to Exhibit A, the letter of transmittal executed by exchanging securityholders will contain provisions whereby holders of Existing Sub Debt will grant to, and receive from, the banks, the Company, Mr. Seaman and his family, and KKR and its affiliates releases from potential litigation claims to the extent such claims arise out of the Tender Offer and the Merger. Such releases will be granted and received only with respect to Existing Sub Debt which is exchanged pursuant to the Exchange Offer (as opposed to the Existing Sub Debt which is expected to remain outstanding). The New Sub Debt to be issued pursuant to the Exchange Offer, and the indenture relating thereto, will contain provisions giving effect to such releases, which are intended to be binding upon subsequent holders of the New Sub Debt. Section 3(a)(9) generally has been interpreted as requiring an exchange by existing securityholders exclusively of securities of the issuer. This requirement, however, has not been considered to be absolute. In First Pennsylvania Mortgage Trust (February 4, [*14] 1977), holders of policly-traded convertible debentures filed a class action against the issuer of the debentures alleging a failure to disclose material information in the prospectus pursuant to which the debentures were issued. Pursuant to a settlement agreement to be approved by the court, the debentureholders agreed to dismiss the lawsuit with prejudice in return for the issuer exchanging for the convertible debentures held by the members of the class who chose to participate in the settlement new convertible debentures with a lower conversion price. Counsel for the issuer opined that the exchange was exempt from registration under the Act pursuant to Section 3(a)(9) (as well as Section 3(a)(10)) because "the relinquishment of a cause of action by the participants of the settlement is [not] [sic] the type of additional consideration flowing from the securityholders that would preclude the availability of the exemption." After specifically reciting this rationale, the Staff granted the no-action request with respect to Section 3(a)(9) (as well as Section 3(a)(10)). Based on the First Pennsylvania Mortgage Trust no-action letter, it is our view that the relinquishment of potential [*15] causes of action by holders of Existing Sub Debt which participate in the Exchange Offer should not be deemed to preclude the availability of the Section 3(a)(9) exemption. No holder of Existing Sub Debt has filed, or has threatened to file, any suit against any of the proposed recipients of the releases. Accordingly, unlike in the case of First Pennsylvania Mortgage Trust, it is unclear whether or not the holders of Existing Sub Debt actually have any meritorious causes of action. Our view that the relinquishment by exchanging securityholders of a potential cause of action should not preclude the availability of the Section 3(a)(9) exemption also is consistent with a long line of no-action requests granted by the Staff with respect to the waiver by exchanging securityholders of accrued and unpaid interest and dividends. See e.g., The Royale Group Ltd. (November 4, 1988); ECL Industries, Inc. & Norlin Corp. (December 16, 1985); Shop Rite Foods, Inc. (September 14, 1981); Barnett Winston Investment Trust (October 11, 1977); NJB Prime Investors (April 14, 1976); Geoscience Technology Services Corp. (January 8, 1976); Four-Phase Systems, Inc. (November 8, 1973); Canrad Precision [*16] Industries, Inc. (August 28, 1973); and Diversa-Graphics, Inc. (June 20, 1972). That view also is consistent with no-action requests granted under Section 3(a)(9) with respect to Exchange Offers in which the issuer also received the consent of the existing securityholders to amendments to the terms of the existing securities. See, e.g., Baywater Realty & Capital Corp. (April 30, 1982); Shop Rite Foods, Inc. (avail. September 14, 1981); Four-Phase Systems, Inc. (January 29, 1975 and November 8, 1973); and Daitch Crystal Dairies, Inc. (October 12, 1972). 79 80 As noted in Four-Phase Systems, Inc. with respect to the settlement of accrued dividends with common stock, the settlement of potential causes of action with New Sub Debt and common stock is not the primary purpose of, but is incidental to, the proposed Exchange Offer by the Company. In addition, the causes of action contemplated by the releases can be viewed as running with the Existing Sub Debt being exchanged pursuant to the Exchange Offer. Viewed in this manner, the relinquishment of such potential causes of action would not be deemed an investment decision separate from the decision to exchange the related security and, therefore, [*17] should not be deemed to be additional consideration for purposes of Section 3(a)(9). Similarly, the grant of releases to the holders of Existing Sub Debt by the Company, the banks, KKR and its affiliates, and the Seaman family also should be permissible. See, e.g., Le Blond Inc. (June 19, 1981); and Carolina Wholesale Florists, Inc. (August 27, 1976). Since their engagement by the Company in July, 1989, the investment bankers from Merrill Lynch Capital Markets who have acted as the Company's financial advisors have performed the following services for the Company: (1) performed financial analyses; (2) assisted the Company in formulating a restructuring proposal; (3) advised the Company with respect to the terms of the new securities to be issued in connection with the restructuring and the new capital structure of the Company; (4) participated in meetings between representatives of the Company, on the one hand, and the banks, on the other hand; (5) participated in meetings between representatives of the Company, on the one hand, and the legal and financial advisors to the Committee, on the other hand; and (6) conversed by telephone with representatives of the banks and the legal [*18] and financial advisors to the Committee. Merrill Lynch Capital Markets will not: (1) be named as a dealer manager of the Exchange Offer; (2) deliver a fairness opinion with respect to the Exchange Offer; or (3) communicate directly with any holder of Existing Sub Debt with respect to substantive matters relating to the restructuring or the Exchange Offer. The Company understands that during the aforementioned telephone conversations and meetings its financial advisors have: (1) outlined the current status of negotiations between the Company and the other creditors of the Company; (2) discussed the Company's financial statements and projections; (3) presented the Company's current proposals with respect to the terms of the Exchange Offer and the restructuring to the banks and the legal and financial advisors to the Committee; and (4) received and discussed the counterproposals of the banks and the legal and financial advisors to the Committee and relayed such counterproposals to the Company. We understand that the Company's financial advisors have not (1) expressed to the banks or the legal or financial advisors to the Committee their views as to (a) the fairness of the proposed restructuring [*19] or the Exchange Offer or (b) the value of the securities to be issued in connection with the Exchange Offer or (2) made any recommendation to the banks or the legal and financial advisors to the Committee with respect to the restructuring or the Exchange Offer. Merrill Lynch will be paid a fixed fee prior to or upon the commencement of the Exchange Offer. The compensation of Merrill Lynch is not contingent upon the success of the Exchange Offer. It is clear under Section 3(a)(9) that officers, directors and employees of the Company can "solicit" exchanges if they were not hired for the purpose of soliciting, have other duties to which they continue to attend, and are not paid additional compensation for their soliciting activities. For all other persons, the specific nature of their activities becomes significant. The Chief of the Securities Division of the Federal Trade Commission (which administered the Act at the time) once wrote: "The dividing line to be drawn between commission or other remuneration,' which necessitates registration of such an exchange, and expenses,' the payment of which would not withdraw the exemption from an otherwise exempt exchange, must have regard [*20] to the purposes of this particular exemption. That purpose is to be found in the fact that the Act recognizes that one of the 80 81 causes for governing the flotation of securities lay in the excessive promoters' or sponsors' interests that were too often concealed from the investor. The dividing line would thus distinguish between payments which are in essence for promotional activity as distinguished from payments which cover the expenses incident to such an exchange. These expenses would, of course, . . . include a payment to third persons for services in connection with affecting but not promoting such an exchange." Fed. Sec. L. Rep. (CCH) para. 2165.17 (Mar. 18, 1987) (emphasis supplied in part). In the case at hand, there has been no direct contact between the Company's financial advisors and any holder of Existing Sub Debt with respect to substantive matters relating to the restructuring or the Exchange Offer. The Company's financial advisors did not make any substantive statements to securityholders during the August 23 meeting or the related telephone calls referred to above, all of which occurred prior to the Company formulating its first proposal to the holders of Existing [*21] Sub Debt. The relevant contacts by the Company's financial advisors have been with their "opposite numbers" advising the Committee and the Committee's lawyers. Moreover, the members of the Committee are sophisticated institutional investors. Accordingly, it is our view that such contacts are not of the type which Section 3(a)(9) was intended to prohibit. In addition, it is our view that the activities of the Company's financial advisors constitute "effecting" rather than "promoting" an exchange. First, an Exchange Offer has not been made by the Company, the Company is not legally obligated to make such an offer and no holder of Existing Sub Debt is legally obligated to accept any such offer. Second, the Company's financial advisors have not made and will not make any recommendation to the Company's securityholders or their advisors with respect to the proposed Exchange Offer. Third, it is customary for a Company involved in a complex financial transaction to employ an investment banker to act as a go-between among the parties to a negotiation, particularly when the other parties are professional legal and financial advisors. Such a service, if not mechanical, is by its nature ancillary [*22] to the effective mechanical operation of the process of formulating a restructuring proposal in a work-out situation, and therefore is analogous to the services provided by legal counsel in such situations. It also is our view that the activities of the Company's financial advisors not only have been consistent with the activities of other advisors which have been permitted in a long line of no-action letters, but have been and will be substantially less extensive than such permitted activities. Such permitted activities include: 1. consulting with and advising the issuer as to the terms of the exchange offer and the securities to be issued pursuant to the exchange offer; 2. rendering a formal opinion as to the fairness of the exchange offer to securityholders from a financial point of view; 3. performing tasks which are permitted to be performed by investor relations firms, e.g., ascertaining what action individual securityholders intend to take with respect to the exchange offer and communicating that information to the issuer; 4. being named as dealer manager in the offering circular; 5. contacting securityholders to inquire whether they have received the offering [*23] circular and related material or have any questions concerning such documents, but limiting each answer to information contained in the offering materials; 6. advising the issuer and its employees in procedures to be used in conversations with securityholders; and 7. consulting with and advising the issuer in the preparation of various 81 82 communications from the issuer to its securityholders, See, e.g., Mortgage Investors of Washington (September 8, 1980); Hamilton Brothers Petroleum Corp. (August 14, 1978); Valhi., Inc. (September 15, 1976); and Dean Witter & Co., Inc. (January 22, 1975). By contrast, the Company's financial advisors will not, among other things, opine as to the fairness of the Exchange Offer or contact securityholders concerning the Exchange Offer. Because Merrill Lynch Capital Markets has had in place an effective "chinese wall" between the individuals acting as financial advisors to the Company and the ML Trading Unit and because the activities of the ML Trading Unit are the product of the ML Trading Unit's independent judgment as to how to best manage its investment in Existing Sub Debt, the existence of that investment and the activities of the ML Trading [*24] Unit should not alter the analysis. The Company heretofore has not publicly disclosed the fact that the ML Trading Unit is a holder of Existing Sub Debt and a signatory of a letter in the form attached hereto as Exhibit A and will not publicly disclose such information with a view to inducing other holders of Existing Sub Debt to accept the Exchange Offer, although such information may be set forth in the text of the offering circular in the interest of full disclosure. In 1937, then SEC General Counsel Allen E. Throop and then SEC Assistant General Counsel Chester T. Lane wrote with respect to Section 3(a)(9): "the final inclusion of a provision exempting the issuance of such securities upon specified conditions would appear to rest on a balancing of interests between the corporation and its security holders, and to indicate a recognition that the burden of delay and expense involved in registration might well be disproportionately heavy in a purely intracorporate readjustment where the very fact of the readjustment would tend in the majority of instances to indicate an embarrassed financial condition. In such cases, it may be supposed, the interest of the security holders in being [*25] afforded full information as to the corporate affairs is made to yield to their interest, in common with the issuer itself, in expeditious and economical readjustment." Throop & Lane, "Some Problems of Exemption Under the Securities Act of 1933," 4 Law & Contemp. Probs. 89, 97-98 (1937). It is our view that the financial condition of the Company tips the scales heavily in favor of permitting the restructuring to proceed as expeditiously as possible. See, e.g., ECL Industries, Inc. and Norlin Corporation (December 16, 1985); Grolier, Inc. (November 2, 1977); and UST Corp. February 23, 1977). As noted by Mr. Throop, the interest of the Company in proceeding quickly is an interest shared by its creditors and securityholders. Based on the foregoing, it is our opinion that the issuance of the New Sub Debt and common stock of the Company pursuant to the Exchange Offer may be effected without registration under the Act in reliance upon the exemption from registration contained in Section 3(a)(9). Your prompt attention to this matter is greatly appreciated. If you require any additional information or we can otherwise be of assistance, please call (collect) Charles I. Cogut (212-455-2550), [*26] Peter J. Gordon (212-455-2605) or Robert E. Spatt (212-455-2685) of this firm. Very truly yours, SIMPSON THACHER & BARTLETT 82 - ------------------------------------------------------------------------------- 83 1973 SEC No-Act. LEXIS 591 Securities Act of 1933 - Section 3(a) (9), 3(a) (11) Oct 26, 1973 [*1] Wright Air Lines, Inc. TOTAL NUMBER OF LETTERS: 2 SEC-REPLY-1: SEP 26 1973 Mr. James J. Conway, Secretary Wright Air Lines, Inc. Burke Lakefront Airport Cleveland, Ohio 44114 Re: Wright Air Lines, Inc. Dear Mr. Conway: This is in reply to your letter of September 7, 1973 concerning the proposed issuance of shares of Wright Air Lines, Inc., common stock in exchange for Wright's 6 1/2% subordinated debentures without compliance with the registration requirements of the Securities Act of 1933 ("the Act") in reliance upon the exemption contained in the Section 3(a) (9) of the Act. The exchange is a part of a commitment with Wright's principal creditor for the refinancing of Wright's indebtedness. The 6 1/2% subordinated debentures are in default with respect to the payment of principal and interest. The 6 1/2% subordinated debentures were issued in 1966 and 1967. On the basis of the facts presented, this Division will not recommend any action to the Commission if shares of common stock are exchanged for the 6 1/2% subordinated debentures without compliance with the registration requirements of the Act in reliance upon your opinion as counsel that the transaction is exempt therefrom. Although the common stock [*2] received in the exchange will be unrestricted, any public non-registered sales by an "affiliate" of the company would be subject to the provisions of Rule 144. Sincerely, John Heneghan Deputy Chief Counsel INQUIRY-1: WRIGHT AIR LINES, INC. BURKE LAKEFRONT AIRPORT, CLEVELAND, OHIO 44114 September 7, 1973 Office of the Chief Counsel Division of Corporation Finance Securities and Exchange Commission Washington, D.C. 20549 Re: Wright Air Lines, Inc. Dear Sir: Wright Air Lines, Inc., an Ohio corporation ("Wright"), has been registered pursuant to Section 12(g) of the Securities Exchange Act of 1934 since 1967. As such, it has filed reports required to be filed by it under the Securities Exchange Act of 1934. In 1966 and 1967 Wright issued certain 6-1/2% seven year subordinated 83 84 debentures in the principal amount of $750.00. The aggregate consideration received for the debentures was $72,750.00. The debentures were issued in an intrastate placement in reliance upon Section 3(a) (11) of the Securities Exchange Act of 1933 ("Act"). Wright has paid the interest due on the debentures through August 31, 1973. As of September 1, 1973, Wright is in default with respect to the payment [*3] of principal and interest on the 6-1/2% subordinated debentures. Wright has been and is still currently experiencing severe financial difficulties. In an effort to alleviate its financial strains, Wright has engaged in a program with its principal lender, the Union Commerce Bank, Cleveland, Ohio ("Bank") to reset its debt. As a result of reaching an agreement with the Bank in regard to its debt, Wright has offered holders of its 8% subordinated notes the right to exchange said notes for common stock of Wright. This exchange offer was a condition the Bank placed upon Wright in order to reset the terms of indebtedness it has with the Bank. This exchange is more fully set forth in Wright's previous letter to your Division and your reply, copies of which are attached hereto. In conjunction with the above transactions, Wright made an informal commitment to the Bank to continue its efforts to relieve its debt burden relative to Wright's 6-1/2% debenture holders. Thus, Wright is offering its 6-1/2% debenture holders the right to exchange such debentures for common stock of Wright. This exchange offer is made pursuant to the terms of Section 3(a) (9) of the Act and therefore no registration [*4] under the Act would be required. The specific question which we are herein raising for which we respectfully request interpretive advice is whether those holders of the 6-1/2% debentures who accept the exchange offer would be free to resell immediately, and without registration under the Act, the common stock received in exchange for their 6-1/2% debentures. The conclusion that the common stock would be resaleable immediately, and without registration under the Act, is supported by the following reasons: 1. The 6-1/2% debentures were acquired in 1966 and 1967 by Ohio residents in an intrastate placement in reliance on Section 3(a) (11) of the Act. These debentures have been held by their holders since then and it is clear that the securities have actually come to rest in the hands of resident investors. This fact clearly seems to indicate that the investors purchased the 6-1/2% debentures without a view to further distribution or resale to non-residents. In fact, it appears reasonable to conclude these holders purchased only with an investment intent for themselves. Accordingly, the holders are free to resell their debentures any time. Therefore, the common stock received [*5] in exchange for such unregistered securities in a transaction pursuant to Section 3(a) (9) of the Act should be resaleable immediately without any registration. 2. SEC proposed Rule 147 has placed a one year limitation on reoffers and resales under the Section 3(a) (11). 147(e) Limitations on Reoffers and Resales "During the distribution of any part of the issue and for a period of twelve months from the date of the last sale of securities which are any part of that issue, all reoffers, reoffers for sale and resales of any part of the issue, by any person, shall be made only to persons resident within such state or territory." The original purchasers of the 6-1/2% debentures have held their securities for six or seven years and may desire to sell the common stock received pursuant to the exchange offer. Clearly in light of proposed Rule 147 and the length of time the holders have held their debentures, the holders are permitted to sell their debentures immediately without registration. Thus, as stated previously, the common stock received in a transaction pursuant to Section 3(a) (9) of the Act also should be resaleable immediately upon registration. Wright respectfully [*6] requests that the SEC issue interpretive advice 84 85 that the common stock received in the exchange offer would be resaleable immediately and without registration under the Act, since the 6-1/2% debentures, which have been held from six to seven years, have come to rest in the hands of resident investors and could be resold immediately and the common stock received therefore should also be able to be resold immediately, pursuant to the exchange under Section 3(a) (9). Wright would greatly appreciate your consideration of this request at the earliest possible time. Very truly yours, WRIGHT AIR LINES, INC. James J. Conway Secretary 1973 SEC No-Act. LEXIS 35 Securities Act of 1933 - @ 3(a) (9) - Rule 144 Sep 24, 1973 [*1] Wright Air Lines, Inc. TOTAL NUMBER OF LETTERS: 2 SEC-REPLY-1: AUG 23, 1973 Mr. Robert C. Sterbank, Vice President Wright Air Lines, Inc. Burke Lakefront Airport Cleveland, Ohio 44114 Re: Wright Air Lines, Inc. Dear Mr. Sterbank: This is in reply to your letter of April 19, 1973 concerning the proposed issuance of shares of Wright Air Lines, Inc., common stock in exchange for Wright's 8% Subordinated Notes without compliance with the registration requirements of the Securities Act of 1933 ("Act") in reliance upon the exemption contained in Section 3(a) (9) of the Act. The exchange is a condition precedent to an arrangement with Wright's principal creditor for the refinancing of Wright's indebtedness. The 8% Subordinated Notes are in default. The 8% Subordinated Notes were issued in January and February, 1969 and are not "convertible" securities within the meaning of Rule 144. No commission or other renumeration will be paid or given directly or indirectly for soliciting the exchange. On the basis of the facts presented, this Division will not recommend any action to the Commission if shares of common stock are exchanged for the 8% Subordinated Notes without compliance with the registration requirements [*2] of the Act in reliance upon your opinion as counsel that the transaction is exempt therefrom. It is the view of the Division, however, that the shares of common stock so issued will be deemed to be "restricted securities" as that term is defined in Rule 144, and, if Rule 144 is utilized for their resale, that for purposes of Rule 144, will be deemed to have been acquired on the date the notes were acquired for purposes of computing the holding period under the Rule. Sincerely, William E. Toomey Assistant Chief Counsel INQUIRY-1: WRIGHT AIR LINES, INC. BURKE LAKEFRONT AIRPORT CLEVELAND, OHIO 44114 85 86 April 19, 1973 William E. Toomey Office of The Chief Counsel Division of Corporation Finance Securities and Exchange Commission Washington, D.C. 20549 Re: Wright Air Lines, Inc. Dear Sir: This letter will refer to the general subject matter of the telephone conversation between Albert Borowitz of the firm of Hahn, Loeser, Freedheim, Dean & Wellman and you on the morning of April 12, 1973. Wright Air Lines, Inc., an Ohio corporation ("Wright"), has been registered pursuant to Section 12(g) of the Securities Exchange Act of 1934 since 1967. As such it has filed reports [*3] required to be filed by it under the Securities Exchange Act of 1934. In January and February, 1969 Wright issued certain investment units consisting of an 3% Subordinated Note due January 1, 1976 in the principal amount of $12,500 per unit ("8% Subordinated Notes"), Class A Stock Purchase Warrants for 6,250 shares of Wright common stock per unit ("Class A Warrants") and Class B Stock Purchase Warrants for 500 shares of Wright common stock per unit ("Class B Warrants"). The total purchase price per investment unit was $25,000, which reflected $12,500 for the 8% Subordinated Notes and $12,500 for the Class A Warrants; the Class B Warrants were issued at an exercise price considerably in excess of the then market value of the common stock so that none of the purchase price was allocated to the Class B Warrants. The aggregate consideration received for the investment units was $1,000,000, representing an issuance of 40 investment units. The investment units were issued in a private placement in reliance upon Section 4(2) of the Securities Act of 1933 ("Act"). By letter dated May 15, 1972 Wright requested interpretive advice as to whether the investment units could be considered [*4] convertible securities within the contemplation of Section (d) (4) (B) of Rule 144 of the General Rules and Regulations under the Act ("Rule 144") promulgated by the Securities and Exchange Commission ("Commission"). By letter dated June 16, 1972 Wright was informed that the investment units were not convertible securities within the meaning of Rule 144. Wright is currently experiencing severe financial difficulties which are principally attributable to the heavy burden of debt which it bears. The principal holders of debt securities are The Union Commerce Bank, Cleveland, Ohio ("Bank"), which holds secured demand notes in the amount of approximately $1,300,000 and the holders of the 8% Subordinated Notes, the face value of which is approximately $490,000. Wright is in default with respect to the payment of principal and interest on the 8% Subordinated Notes. The Bank has instructed Wright to withhold the principal and interest payments on the 8% Subordinated Notes. For the year ended December 31, 1972 Wright incurred a net loss of $475,984. As of that date Wright's balance sheet reflected a net deficit of $988,097 in shareholders' equity and a working capital deficiency of [*5] $2,308,034. Wright's management has announced that there is serious question as to the company's ability to continue operations unless substantial debt relief can be obtained through agreements with the Bank and the holders of 8% Subordinated Notes. To this end Wright's management has conducted negotiations with the Bank which have resulted in the Bank's commitment, in essence, to reset the terms of the note by extending the term thereof, reducing the interest thereunder and postponing payments of principal. The commitment by the Bank is subject to the condition (which the Bank reserves the right to waive) that all holders of the 8% Subordinated Notes exchange such notes for common stock. Wright plans to make an offer to all holders of the 8% Subordinated Note to effect such an 86 87 exchange and to make certain adjustments in the terms of the warrants. The exchange would be conditioned upon participation therein by the holders of all of the 8% Subordinated Notes (or waiver of this requirement by the Bank) and the Bank's resetting the terms of its note. This exchange offer would be made pursuant to the terms of Section 3(a) (9) of the Act and thus no registration under the Act would [*6] be required. The specific issue which we are herein raising and as to which we respectfully request interpretive advice is whether, assuming successful completion of the exchange offer, the former holders of 8% Subordinated Notes would be free to resell immediately, and without registration under the Act, the common stock received in exchange for their 8% Subordinated Notes. The conclusion that the common stock would be resaleable immediately, and without registration under the Act, seems to be compelled on two grounds. I. Resales May Be Accomplished Without Reliance Upon Rule 144 Since the 8% Subordinated Notes were acquired in early 1969 in a private placement in reliance upon Section 4(2) of the Act their resale may be accomplished pursuant to the law which existed prior to the adoption of Rule 144. These notes have been held by their holders for more than four years and accordingly the holders should be free to resell them at any time. Therefore, securities received in exchange for such unrestricted securities in a transaction pursuant to Section 3(a) (9) of the Act also should be resaleable immediately without registration. II. Alternatively, Resales Are Permitted [*7] Under Rule 144 If the holders of the common stock to be received in exchange for the 8% Subordinated Notes elect to be governed by the provisions of Rule 144, immediate resales would be permitted within the quantity limitations of Rule 144. The 8% Subordinated Notes have been held for more than 4 years and clearly satisfy the holding period requirements of Rule 144. The exchange of 8% Subordinated Notes for common shares pursuant to Section 3(a) (9) of the Act should be a "recapitalization" within the meaning of Section (d) (4) (a) of Rule 144 and accordingly the holding period of the 8% Subordinated Notes may be "tacked" to the holding period of the common stock to be received in exchange therefor with the result that the holding period requirements of Rule 144 with respect to the common stock would be satisfied immediately upon the exchange. This conclusion with respect to the interpretation of the word "recapitalization" seems compelled by the following: (a) Precisely this position was taken by your office on nearly identical facts in giving interpretive advice, available October 16, 1972, in the matter of International Systems and Controls Corporation [*8] . (b) The recapitalization proposed by Wright is tantamount to a recapitalization pursuant to shareholder action since the exchange would be conditioned by the Bank upon the participation of the holders of all of the 8% Subordinated Note (or the waiver of this requirement by the Bank). (c) In two recent situations, interpretive advice was given by your office determining that certain transactions were not recapitalizations within the meaning of Section (d) (4) (a) of Rule 144. 30th of these situations are clearly distinguishable from the exchange proposed by Wright. Interpretive advice, available January 8, 1973, re Computer Response Corporation involved the exchange of convertible subordinated debentures. In this situation your office held that the holding period of securities received in exchange therefor was determined pursuant to Rule 155. As indicated above, in June 1972 your office determined that the 8% Subordinated Notes of Wright were not convertible securities; therefore Rule 155 is not applicable to them. Your interpretive advice re Computer Network Corporation, available January 26, 1973, involved an exchange of securities with a single [*9] large security holder, which your office concluded was a negotiated exchange rather than a bona fide recapitalization. As indicated above the proposed recapitalization is tantamount to a recapitalization pursuant to shareholder vote since it is conditioned upon 87 88 participation of all of the holders of 8% Subordinated Notes. Wright respectfully requests that the Commission issue interpretive advice to the effect that the common stock to be received upon the successful completion of the proposed exchange offer would be resalable immediately, and without registration under the Act, upon the grounds that (a) the 8% Subordinated Notes could be resold without regard to the provisions of Rule 144 and thus the common stock to be received in exchange therefore may also be resold on such basis, and/or (b) since the exchange pursuant to Section 3(a) (9) of the Act would be a recapitalization within the meaning of Section (d) (4) (a) of Rule 144, the holding period of the 8% Subordinated Notes would be tacked to the holding period of the common stock with the result that the common stock would immediately be resaleable within the quantity limitations of Rule 144. In view of the current financial [*10] condition of Wright and the urgency of prompt completion of the proposed exchange offer, Wright would greatly appreciate your consideration of this request at the earliest possible moment. Very truly yours, Robert C. Sterbank Vice President - ------------------------------------------------------------------------------- 1973 SEC No-Act. LEXIS 4299 Securities Act of 1933 -- Section 3(a)(9) -- Rule 144 September 24, 1973 [*1] Wright Air Lines, Inc. TOTAL NUMBER OF LETTERS: 2 SEC-REPLY-1: SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 August 23, 1973 Mr. Robert C. Sterbank, Vice President Wright Air Lines, Inc. Burke Lakefront Airport Cleveland, Ohio 44114 Re: Wright Air Lines, Inc. Dear Mr. Sterbank: This is in reply to your letter of April 19, 1973 concerning the proposed issuance of shares of Wright Air Lines, Inc., common stock in exchange for Wright's 8% Subordinated Notes without compliance with the registration requirements of the Securities Act of 1933 ("Act") in reliance upon the exemption contained in Section 3(a)(9) of the Act. The exchange is a condition precedent to an arrangement with Wright's principal creditor for the refinancing of Wright's indebtedness. The 8% Subordinated Notes are in default. The 8% Subordinated Notes were issued in January and February, 1969 and are not "convertible" securities within the meaning of Rule 144. No commission or other renumeration will be paid or given directly or indirectly for soliciting the exchange. On the basis of the facts presented, this Division will not recommend any action to the Commission if shares of common stock are exchanged for the 8% Subordinated Notes [*2] without compliance with the registration requirements of the Act in reliance upon your opinion as counsel that the transaction is exempt therefrom. It is the view of the Division, however, that the shares of common stock so issued will be deemed to be "restricted securities" as that term is defined in Rule 144, and, if Rule 144 is utilized for their resale, that for purposes of Rule 144, will be deemed to have been acquired on the date the notes were acquired for purposes of computing the holding period under the Rule. 88 89 Sincerely, William E. Toomey Assistant Chief Counsel INQUIRY-1: WRIGHT AIR LINES, INC. BURKE LAKEFRONT AIRPORT, CLEVELAND, OHIO 44114 April 19, 1973 1933 Act/Rule 144 1933 Act/ @ 3(a)(9) William E. Toomey Office of The Chief Counsel Division of Corporation Finance Securities and Exchange Commission Washington, D. C. 20549 Re: Wright Air Lines, Inc. Dear Sir: This letter will refer to the general subject matter of the telephone conversation between Albert Borowitz of the firm of Hahn, Loeser, Freedheim, Dean & Wellman and you on the morning of April 12, 1973. Wright Air Lines, Inc., an Ohio corporation ("Wright"), has been registered pursuant to Section 12(g) of [*3] the Securities Exchange Act of 1934 since 1967. As such it has filed reports required to be filed by it under the Securities Exchange Act of 1934. In January and February, 1969 Wright issued certain investment units consisting of an 8% Subordinated Note due January 1, 1976 in the principal amount of $ 12,500 per unit ("8% Subordinated Notes"), Class A Stock Purchase Warrants for 6,250 shares of Wright common stock per unit ("Class A Warrants") and Class B Stock Purchase Warrants for 500 shares of Wright common stock per unit ("Class B Warrants"). The total purchase price per investment unit was $25,000, which reflected $ 12,500 for the 8% Subordinated Notes and $ 12,500 for the Class A Warrants; the Class B Warrants were issued at an exercise price considerably in excess of the then market value of the common stock so that none of the purchase price was allocated to the Class B Warrants. The aggregate consideration received for the investment units was $ 1,000,000, representing an issuance of 40 investment units. The investment units were issued in a private placement in reliance upon Section 4(2) of the Securities Act of 1933 ("Act"). By letter dated May 15, 1972 Wright requested [*4] interpretive advice as to whether the investment units could be considered convertible securities within the contemplation of Section (d)(4)(B) of Rule 144 of the General Rules and Regulations under the Act ("Rule 144") promulgated by the Securities and Exchange Commission ("Commission"). By letter dated June 16, 1972 Wright was informed that the investment units were not convertible securities within the meaning of Rule 144. Wright is currently experiencing severe financial difficulties which are principally attributable to the heavy burden of debt which it bears. The principal holders of debt securities are The Union Commerce Bank, Cleveland, Ohio ("Bank"), which holds secured demand notes in the amount of approximately $1,300,000 and the holders of the 8% Subordinated Notes, the face value of which is approximately $ 490,000. Wright is in default with respect to the payment of principal and interest on the 8% Subordinated Notes. The Bank has instructed Wright to withhold the principal and interest payments on the 8% Subordinated Notes. For the year ended December 31, 1972 Wright incurred a net loss of $475,984. As of that date Wright's balance sheet reflected a net deficit [*5] of $988,097 in shareholders' equity and a working capital deficiency of $2,308,034. Wright's management has announced that there is serious question as 89 90 to the company's ability to continue operations unless substantial debt relief can be obtained through agreements with the Bank and the holders of 8% Subordinated Notes. To this end Wright's management has conducted negotiations with the Bank which have resulted in the Bank's commitment, in essence, to reset the terms of the note by extending the term thereof, reducing the interest thereunder and postponing payments of principal. The commitment by the Bank is subject to the condition (which the Bank reserves the right to waive) that all holders of the 8% Subordinated Notes exchange such notes for common stock. Wright plans to make an offer to all holders of the 8% Subordinated Note to effect such an exchange and to make certain adjustments in the terms of the warrants. The exchange would be conditioned upon participation therein by the holders of all of the 8% Subordinated Notes (or waiver of this requirement by the Bank) and the Bank's resetting the terms of its note. This exchange offer would be made pursuant to the terms of [*6] Section 3(a)(9) of the Act and thus no registration under the Act would be required. The specific issue which we are herein raising and as to which we respectfully request interpretative advice is whether, assuming successful completion of the exchange offer, the former holders of 8% Subordinated Notes would be free to resell immediately, and without registration under the Act, the common stock received in exchange for their 8% Subordinated Notes. The conclusion that the common stock would be resaleable immediately, and without registration under the Act, seems to be compelled on two grounds. I. Resales May Be Accomplished Without Reliance Upon Rule 144 Since the 8% Subordinated Notes were acquired in early 1969 in a private placement in reliance upon Section 4(2) of the Act their resale may be accomplished pursuant to the law which existed prior to the adoption of Rule 144. These notes have been held by their holders for more than four years and accordingly the holders should be free to resell them at any time. Therefore, securities received in exchange for such unrestricted securities in a transaction pursuant to Section 3(a)(9) of the Act also should be resaleable immediately without [*7] registration. II. Alternatively, Resales Are Permitted Under Rule 144 If the holders of the common stock to be received in exchange for the 8% Subordinated Notes elect to be governed by the provisions of Rule 144, immediate resales would be permitted within the quantity limitations of Rule 144. The 8% Subordinated Notes have been held for more than 4 years and clearly satisfy the holding period requirements of Rule 144. The exchange of 8% Subordinated Notes for common shares pursuant to Section 3(a)(9) of the Act should be a "recapitalization" within the meaning of Section (d)(4)(a) of Rule 144 and accordingly the holding period of the 8% Subordinated Notes may be "tacked" to the holding period of the common stock to be received in exchange therefor with the result that the holding period requirements of Rule 144 with respect to the common stock would be satisfied immediately upon the exchange. This conclusion with respect to the interpretation of the word "recapitalization" seems compelled by the following: (a) Precisely this position was taken by your office on nearly identical facts in giving interpretive advice, available October 16, 1972, in the matter of International Systems [*8] and Controls Corporation. (b) The recapitalization proposed by Wright is tantamount to a recapitalization pursuant to shareholder action since the exchange would be conditioned by the Bank upon the participation of the holders of all of the 8% Subordinated Note (or the waiver of this requirement by the Bank). (c) In two recent situations, interpretive advice was given by your office determining that certain transactions were not recapitalizations within the meaning of Section (d)(4)(a) of Rule 144. Both of these situations are clearly distinguishable from the exchange proposed by Wright. Interpretive advice, available January 8, 1973, re Computer Response Corporation involved the 90 91 exchange of convertible subordinated debentures. In this situation your office held that the holding period of securities received in exchange therefor was determined pursuant to Rule 155. As indicated above, in June 1972 your office determined that the 8% Subordinated Notes of Wright were not convertible securities; therefore Rule 155 is not applicable to them. Your interpretive advice re Computer Network Corporation, available January 26, 1973, involved an exchange of securities with a single [*9] large security holder, which your office concluded was a negotiated exchange rather than a bona fide recapitalization. As indicated above the proposed recapitalization is tantamount to a recapitalization pursuant to shareholder vote since it is conditioned upon participation of all of the holders of 8% Subordinated Notes. Wright respectfully requests that the Commission issue interpretive advice to the effect that the common stock to be received upon the successful completion of the proposed exchange offer would be resalable immediately, and without registration under the Act, upon the grounds that (a) the 8% Subordinated Notes could be resold without regard to the provisions of Rule 144 and thus the common stock to be received in exchange therefore may also be resold on such basis, and/or (b) since the exchange pursuant to Section 3(a)(9) of the Act would be a recapitalization within the meaning of Section (d)(4)(a) of Rule 144, the holding period of the 8% Subordinated Notes would be tacked to the holding period of the common stock with the result that the common stock would immediately be resaleable within the quantity limitations of Rule 144. In view of the current financial [*10] condition of Wright and the urgency of prompt completion of the proposed exchange offer, Wright would greatly appreciate your consideration of this request at the earliest possible moment. Very truly yours, Robert C. Sterbank Vice President 91 92 TABLE OF CONTENTS * CITATIONS TO EXHIBIT TITLE SEC No-Act. LEXIS PAGE NO. - ----- ----------------- -------- Barnett Winston Investment Trust 1978 * 560 1 Royale Group Ltd. 1988 * 1509 15 ECL Industries, Inc. and Norlin Corp. 1985 * 2810 20 Shop Rite Foods, Inc. 1981 * 4208 29 Geoscience Technology Services Corp. 1976 * 560 33 Four Phase Systems, Inc. 1973 * 952 36 Canrad Precision Industries 1973 * 388 42 Diversa Graphics, Inc. 1972 * 2763 47 NJB Prime Investors 1976 * 1075 52 The News Corporation Limited 1992 * 653 55 Bayswater Realty and Capital Corp. 1982 * 2386 66 Daitch Crystal Dairies, Inc. 1972 * 3996 71 Seaman Furniture Company, Inc. 1989 * 1014 75 Wright Air Lines, Inc. 1973 * 591 83 Wright Air Lines, Inc. 1973 * 4299 88 92 EX-99.25 14 MUTUAL FUND'S FIRM COMMITMENT DATED AUGUST 8, 1996 1 [GRAPHIC] EXHIBIT 99.25 LINDNER F U N D S ADVISED BY RYBACK MANAGEMENT CORPORATION 7711 CARONDELET AVENUE, SUITE 700 ST. LOUIS, MISSOURI 63105 TEL. (314) 727-5305 FAX (314) 727-9306 - -------------------------------------------------------------------------------- August 8, 1996 Mr. Chriss Street Comprehensive Care Corporation 1111 Bayside Drive Corona del Mar, CA 92625 Dear Mr. Street: Lindner Fund, a registered Mutual Fund, hereby offers a firm commitment to purchase directly from Comprehensive Care Corporation at least $5 million of face amount of a private placement of 15% fully secured notes that will not be due or callable for at least fifteen months from the date of issue. Lindner Fund currently has in excess of $1,400,000,000 under management and has demonstrated its ability to invest in securities for many years. Such commitment shall remain open for a minimum of twelve months. Sincerely, /s/ Larry Callahan Larry Callahan Portfolio Manager LINDNER GROWTH FUND LINDNER DIVIDEND FUND LINDNER UTILITY FUND LINDNER/RYBACK SMALL-CAP FUND LINDNER BULWARK FUND LINDNER INTERNATIONAL FUND RYBACK MANAGEMENT CORPORATION IS REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE INVESTMENT ADVISERS ACT OF 1940 2 ACCESSION NUMBER: CONFORMED SUBMISSION TYPE: PRER14A/A-4 PUBLIC DOCUMENT COUNT: FILED AS OF DATE: SUBJECT COMPANY:
COMPANY DATA: COMPANY CONFORMED NAME: COMPREHENSIVE CARE CORP CENTRAL INDEX KEY: 0000022872 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 952594724 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: PRER14A/A-4 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09927 FILM NUMBER: 96503975 BUSINESS ADDRESS: STREET 1: 1111 BAYSIDE DRIVE STREET 2: STE 100 CITY: CORONA DEL MAR STATE: CA ZIP: 92625 BUSINESS PHONE: 7142222273 MAIL ADDRESS: STREET 1: 1111 BAYSIDE DRIVE STREET 2: STE 100 CITY: CORONA DEL MAR STATE: CA ZIP: 92625 BUSINESS PHONE: 7142222273 FORMER COMPANY: FORMER CONFORMED NAME: NEURO PSYCHIATRIC & HEALTH SERVICES INC DATE OF NAME CHANGE: 19721226
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