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[NEXTHEALTH LOGO]
NEXTHEALTH, INC.
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY , 1997
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Notice is hereby given that a Special Meeting of Stockholders of
NextHealth, Inc., a Delaware corporation (the "Company"), will be held at 10:00
a.m., M.S.T. at _______________________________________________________________,
Tucson, Arizona, on January ____, 1997 to approve the issuance of an additional
28,956 shares of Series A Preferred Stock, par value $0.01 per share.
On November 15, 1996 the Company's Board of Directors authorized the
creation of the Series A and Series B Preferred Stock and approved the sale to
AP NH LLC, a Delaware limited liability company ("APNH"), of 17,109 shares of
Series A Preferred Stock and 28,956 shares of Series B Preferred Stock. The
Board of Directors also authorized the sale to APNH of a warrant to purchase
500,000 shares of the Company's Common Stock which does not become exercisable
until March 15, 1997.
The Company's Common Stock, $.01 par value ("Common Stock") is listed on
the NASDAQ/NMS. Rule 4460(I) of the NASDAQ Stock Market requires that any sale
of securities having voting power of 20% or more of the outstanding voting power
for a price less than the current market price or book value of the Company's
Common Stock first be approved by the stockholders of the Company. As explained
in more detail in the Proxy Statement, because the Series A Preferred Stock
possesses voting rights and is convertible into Common Stock, the Company is
seeking the approval of its stockholders before issuing shares of Series A
Preferred Stock representing more than 19.9% of the presently outstanding Common
Stock.
Only stockholders of record at the close of business on December , 1996,
shall be entitled to notice of and to vote at the Special Meeting or any
postponements or adjournments thereof.
By order of the Board of Directors,
Bertha B. Kenny
Secretary
December , 1996
Tucson, Arizona
PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED
PROXY CARD AND RETURN IT IN THE POSTAGE PREPARED,
ENCLOSED ENVELOPE. IF YOU ATTEND THE SPECIAL MEETING,
YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE
PREVIOUSLY RETURNED YOUR PROXY CARD.
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[NEXTHEALTH LOGO]
NEXTHEALTH, INC.
16600 N. Lago Del Oro Parkway
Tucson, Arizona 85739
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PROXY STATEMENT
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SPECIAL MEETING OF STOCKHOLDERS
January , 1997
This Proxy Statement is furnished in connection with the solicitation of
proxies on behalf of the Board of Directors of NextHealth, Inc., a Delaware
corporation (the "Company"), for use at a Special Meeting of Stockholders (the
"Special Meeting") to be held at 10:00, a.m., M.S.T. at _______________________,
Tucson, Arizona, on January , 1997 or at any and all postponements or
adjournments thereof, for the purposes set forth in the accompanying Notice of
Meeting.
This Proxy Statement, the Notice of Meeting and the accompanying Proxy
Card are first being mailed to stockholders on or about December , 1996.
GENERAL INFORMATION
Only stockholders of record at the close of business on December , 1996,
(the "Record Date"), will be entitled to notice of and to vote the shares of
common stock of the Company, par value $.01 per share ("Common Stock") or
Convertible Preferred Stock, Series A, par value $.01 per share ("Series A
Preferred Stock"), held by them on such date at the Special Meeting or any and
all postponements or adjournments thereof. On the Record Date, ____________
shares of Common Stock and 17,109 shares of Series A Preferred Stock were
outstanding and entitled to vote at the Special Meeting.
Each share of Common Stock entitles the holder thereof to cast one (1)
vote and each share of Series A Preferred Stock is entitled to cast one-hundred
(100) votes on the matter to be voted upon at the Special Meeting. In addition,
the holders of Series A Preferred Stock are entitled to vote separately as a
class on the matter to be voted on at the Special Meeting.
If the accompanying proxy card is properly signed and returned to the
Company and not revoked, it will be voted in accordance with the instructions
contained therein. Unless contrary instructions are given, the persons
designated as proxy holders in the accompanying proxy card will vote for the
issuance of additional shares of Series A Preferred Stock. Each such proxy
granted may be revoked by the stockholder giving such proxy at any time before
it is exercised by filing with the Secretary of the Company a revoking
instrument or a duly executed proxy bearing a later date. The powers of the
proxy holders will be suspended if the person executing the proxy attends the
Special Meeting in person and so requests in writing. Attendance at the Special
Meeting will not, in itself, constitute revocation of the proxy.
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The presence at the Special Meeting, in person or by proxy, of a
majority of the shares of Common Stock (including shares of Common Stock
represented by the Series A Preferred Stock on an "as converted" basis) and
Series A Preferred Stock outstanding on the Record Date, will constitute a
quorum.
The tabulation of proxies and the votes cast at the Special Meeting will
be conducted and certified to by an independent inspector of election.
REQUESTED APPROVAL OF ISSUANCE OF ADDITIONAL SHARES
OF SERIES A PREFERRED STOCK
BACKGROUND AND DESCRIPTION
As discussed in previous public filings, the costs of construction of
Miraval, the introduction of a significant new business line and ongoing
operating losses during the continuing period of strategic transition
substantially reduced the Company's capital resources and severely affected its
liquidity. After exploring alternative mechanisms to finance its capital needs,
on November 15, 1996 ("Transaction Date"), the Company completed separate equity
and debt transactions with affiliates of Apollo Real Estate Advisors, L.P.
("Apollo") that resulted in the Company's receipt of approximately $12,340,000
in cash and, subject to compliance with certain conditions, a $5,000,000 loan
commitment (the "Apollo Transactions"). The Apollo Transactions consisted of:
(a) the sale to AP NH LLC, a Delaware limited liability company ("APNH")
pursuant to a Preferred Stock and Warrant Purchase Agreement (the "Purchase
Agreement") of (I) shares of two series of Preferred Stock for an aggregate
purchase price of $4,250,000 (the "Preferred Stock Transaction") and (ii) a
warrant (the "Warrant") to purchase 500,000 shares of the Company's Common
Stock, $0.01 par value ("Common Stock") and (b) a secured loan in the amount of
$13,090,000 (the "Debt Transaction") with AP LOM LLC, a Delaware limited
liability company ("APLOM"). The Debt Transaction includes a $5,000,000 stand-by
loan commitment, subject to compliance with certain conditions, (the "Stand-by
Commitment").
On October 11, 1996 the Company signed a Letter of Interest ("Letter of
Interest") with Apollo which outlined the terms of the debt and equity
financings represented by the Apollo Transactions. Because of the Company's
financial condition at the time, an affiliate of Apollo provided a short-term
working capital line of credit of $750,000; of which, $500,000 had been borrowed
and was repaid at the Transaction Date with the proceeds from the Apollo
Transactions. In addition, the Apollo affiliate received a warrant to purchase
100,000 shares of Common Stock at an exercise price of $1.50 per share. The
average closing price of the common stock during the 20 trading days prior to
October 11, 1996 was $1.266. The closing prices of the Common Stock on October
11, 1996 and on the Transaction Date were $1.75 and $2.06 per share,
respectively.
The net proceeds from the funded portion of the Apollo Transactions were
used to retire certain short-term and working capital obligations (approximately
$5,000,000), pay-off the balance due to the general contractor for Miraval
(approximately $2,680,00) and the balance to fund immediate cash flow
requirements and provide working capital for the continued operations of Miraval
until it can be operated at a profit. The Stand-by Commitment, if available
pursuant to its terms, will be used to support the Company's operations and the
long-term expansion of Miraval.
The Preferred Stock Transaction consisted of the sale of 17,109 shares
of Preferred Stock, Series A ("Series A Preferred Stock") at a price of $92.26
per share ($1,578,476, in the aggregate) and 28,956 shares of Cumulative
Preferred Stock, Series B ("Series B Preferred Stock") at a price of $92.26 per
share ($2,671,480, in the aggregate). At the time of their issuance, the shares
of the Series A Preferred Stock represented approximately 19.9% of outstanding
voting power of the Company. Although APNH desired to purchase Series A
Preferred Stock having voting rights of up to 35% of the shares of outstanding
Common Stock, because of the provisions of Rule 4460(I) of the NASDAQ Stock
Market ("NASDAQ"), the Company does not intend to issue additional shares of
Series A Preferred Stock until stockholder approval is obtained. NASD Rule
4460(I) provides that sales of securities by a company listed on NASDAQ/NMS
having or representing 20% or more of the outstanding voting power on the date
of issuance for less than current market price or book value must be first
approved by the stockholders.
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The Company's stockholders are being asked to approve the issuance to
APNH of an additional 28,956 shares of Series A Preferred Stock ("Proposed
Issuance"). If the Company's stockholders approve such issuance, the 28,956
outstanding shares of Series B Preferred Stock will be automatically converted
into a like number of shares of Series A Preferred Stock.
Based on its analysis of the Company's business structure, Apollo
recommended that the assets of Sierra Tucson, the Company's treatment center for
substance abuse, addictions and other behavioral health disorders, be sold to a
newly formed entity, partially owned by APNH. Consequently, on November 13,
1996, the assets of Sierra Tucson were sold to Soften Realty, L.L.C., a Delaware
limited liability company ("Soften") for $8,000,000. The purchase price is
evidenced by Soften's non-negotiable promissory note which is secured by a
security interest in the assets of Sierra Tucson. Such assets consist of the
business of Sierra Tucson, the tangible and intangible assets used in connection
with the business and a possessory right to use certain land and buildings owned
by the Company. The Company is the manager of and owns a 98% interest in Soften;
the remaining 2% is owned by APNH.
The Board of Directors recognized that the transfer of Sierra Tucson's
assets to Soften would facilitate the operations and utilization of the business
and strengthen its identity as a separate and distinct business operation. In
addition, it will provide greater flexibility to the Company in the development
of strategic alternatives for Sierra Tucson.
NEED FOR ADDITIONAL CAPITAL
The significant changes that occurred in the behavioral health and
addictions recovery segments of the health care industry in the early to
mid-1990's severely impacted the Company's business and financial operations. In
response to these conditions, the Company modified its operations and programs
in these segments and sought alternative uses for its excess room capacity and
other physical facilities. After extensive market research and analysis, the
Company developed a long-term strategy to capitalize on what it believes to be
an emerging opportunity in the health care services industry: the combination of
alternative programs for self-discovery and improvement, stress management and
recreational activities in a luxury health resort environment. The Company's
initial entry into this emerging field, Miraval, opened for business in
December, 1995 following an extensive and accelerated remodeling and renovation
of what had been the facilities used in connection with the operations of Sierra
Tucson.
Although it continues to receive highly favorable reviews from both its
guests and numerous travel and leisure, business and other publications and
media sources, Miraval was unable during its first year of operation to generate
sufficient revenues to meet its operating costs. Although the Company's other
principal line of business, Sierra Tucson, has operated successfully, it has not
been able to provide the additional capital needed to cover Miraval's operating
short-fall. Consequently, in early 1996, the Board of Directors began to develop
strategic alternatives to provide the capital to fund the financial needs of
Miraval until it achieves financial self-sufficiency. During 1996, the Company
undertook various short-term financial measures while it explored more
comprehensive financing alternatives; which included long-term debt, equity and
other forms of financing. The Company received expressions of interest for
financing from various parties, however, until it received the Letter of
Interest from Apollo, no proposals were made on terms deemed acceptable by the
Board. At the time of the Letter of Interest, the Company was faced with a
serious liquidity problem that threatened to interfere with the operations of
Miraval and Sierra Tucson. The revenues from operations and other sources of
short-term capital were insufficient to meet day-to-day financial needs of the
Company.
The Company retained the services of Victor Capital to review the terms
of the Apollo Transactions and advise the Board of Directors on the fairness of
such terms. After considering and based upon the Company's financial condition,
the alternative sources of capital available at the time, and other conditions
affecting the Company, Victor Capital advised the Board that the financial terms
of the Apollo Transactions are commercially reasonable and therefore fair to the
Company and its stockholders from a financial point of view.
The Board of Directors believes that the relationship with Apollo that
has been developed and that will exist in the future as a result of the Apollo
Transactions will enhance the Company's efforts to achieve profitability at
Miraval and to capitalize on the Miraval concept. Apollo and the Preferred
Directors have extensive experience in financial and investment management and
the resort
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hotel industry and can assist the Company in improving and implementing its
business plan and in developing strategic relationships with others.
The completion of the Apollo Transactions has provided the Company with
the additional capital resources that will enable it to continue to focus on its
business plan for the development and expansion of Miraval and its unique
approach to wellness and preventative health care in a luxury resort
environment. The Board of Directors believes that the additional capital and
other benefits of the relationship with Apollo, combined with successful
development and expansion of Miraval, will position the Company for future
growth and profitability in the luxury resort market in the United States.
Description of Preferred Stock Transaction
Immediately prior to the Transaction Date, the Company's Board of
Directors created two series of Preferred Stock consisting of 46,065 shares of
Series A Preferred Stock and 28,956 shares of Series B Preferred Stock. The
following is a summary of the respective designations, preferences and rights of
the Series A and Series B Preferred Stock as set forth in the Certificate of
Designation, Preference and Rights filed with the State of Delaware, Office of
the Secretary of State ("Series Designation"). Reference herein to "Preferred
Stock" shall include Series A Preferred Stock and Series B Preferred Stock.
1. Dividends. The holders of Series A Preferred Stock are not entitled
to receive dividends except upon an event of default as defined in the Series
Designation in which event, the dividend rate on the Series A Preferred Stock
will be 18% per annum. The holders of Series B Preferred Stock are entitled to
receive cumulative, preferred dividends at the rate of 12% per annum from
January 1, 1997 to January 31, 1997 and at the rate of 18% per annum from
February 1, 1997 and thereafter and upon a Default of the provisions of the
Series Designation.
So long as any shares of Preferred Stock remain outstanding, the
Company may not declare or pay any cash dividend or make any other distributions
with respect to the Common Stock.
2. Liquidation Preference. In the event of any liquidation, dissolution
or winding-up of the Company, the holders of Preferred Stock shall be entitled
to a liquidation preference over the holders of Common Stock in the amount of
any accrued but unpaid dividends. There are no other liquidation preferences.
3. Voting Rights. The holders of Series B Preferred Stock do not possess
any voting rights. The holders of Series A Preferred Stock are entitled to vote
on all matters presented to the Company's stockholders for a vote and, except
with respect to the election of Directors, each share of Series A Preferred
Stock shall entitle the holder thereof to such number of votes per share as
shall equal the number of shares of the Common Stock into which such share of
Series A Preferred Stock is then convertible. Initially, each share of Series A
Preferred Stock is convertible into 100 shares of Common Stock. In addition, the
holders of Series A Preferred Stock are entitled to vote separately as a
separate class on all matters other than the election of directors. This means
that matters submitted for a vote of the stockholders of the Company must
receive the approval of the requisite percentage of the holders of Common Stock
(with the holders of Series A Preferred Stock being entitled to vote on an "as
converted" basis) as well as of the holders of the Series A Preferred Stock.
In addition, the holders of Series A Preferred Stock, as a class,
are entitled to elect four directors to the Company's Board of Directors
("Preferred Directors").
Upon the occurrence of an event of default as defined in the
Series Designation, the holders of Series A Preferred Stock will become entitled
to elect a majority of the Company's Board of Directors.
A majority vote of the holders of the outstanding Series A
Preferred Stock voting as a separate class is required in order to approve
certain transactions including: (I) the amendment of the Company's Certificate
of Incorporation so as to adversely affect the rights of the holders of Series A
Preferred Stock or any of the provisions of the Certificate of Designation; (ii)
authorize, create or issue any class of capital stock that is senior to or pari
passu with the Series A Preferred Stock or (iii) enter into a transaction having
a total value in excess of $250,000 per transaction except under certain
conditions.
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As part of the Apollo Transactions, effective on the Transaction
Date, the Company's Board of Directors was expanded from five to nine persons
and the following Preferred Directors were elected to represent the holder of
Series A Preferred Stock:
LEE S. NEIBART - Mr. Neibart has been employed by Apollo since 1993 and
a partner since 1994. Apollo Real Estate Advisors acts as managing general
partner of The Apollo Real Estate Investment Funds, two private investment funds
with investment parameters ranging from direct and indirect real property
interests, to public and private debt securities and bank and mortgage debt and
to public and private equity investments. Prior to 1993, Mr. Neibart was
Executive Vice President and Chief Operating Officer of the Robert Martin
Company, a private real estate development/management firm based in Westchester
County, New York. Mr. Neibart is a director of Roland International, Inc., and
Koger Equity, Inc. Mr. Neibart holds a BA in Real Estate from the University of
Wisconsin and an MBA from New York University. He is also the past President of
the New York Chapter of the NAIOP.
W. EDWARD SCHEETZ - Mr. Scheetz has been a partner of Apollo since 1993
and has directed the investment activities for The Apollo Real Estate Investment
Funds since that time. Prior to 1993, Mr. Scheetz was a principal of Trammell
Crow Ventures, a national real estate firm. Mr. Scheetz is a director of Koger
Equity, Inc., Koll Management Services, Inc., Capital Apartment Properties,
Inc., Roland International, Inc., Allright Corp., and Western Pacific Housing,
Inc. Mr. Scheetz holds an A.B. in Economics, Magna Cum Laude, from Princeton
University.
BRUCE SPECTOR - Mr. Spector has been a senior consultant to Apollo since
1993 and has advised on matters of reorganization strategy. Mr. Spector is a
partner of the Apollo organization, a group of entities affiliated with Apollo
and engaged in corporate investment activities. Prior to 1993, Mr. Spector was a
member of the law firm of Stutman, Treister and Glatt, spending a substantial
amount of that time as senior partner and head of the firm's executive
committee. Mr. Spector has specialized in restructurings, insolvency
reorganizations and related bankruptcy matters, serving as lead debtor counsel
in a number of major reorganizations including Wickes Companies and Storage
Technology, Inc. Mr. Spector is a director of United International Holdings,
Inc., Telemundo Group, Inc., Gillett Holdings, Inc. and Vail Associates, Inc.
Mr. Spector holds a BA in Economics, Phi Beta Kappa, from the University of
Southern California and a JD from the UCLA School of Law.
ALFRED C. TRIVILINO - Mr. Trivilino has been associated with Apollo
since 1995, most recently in the acquisitions group and prior to that as a Vice
President of Winthrop Financial Associates, L.P., a Boston based real estate
investor, property manager and owner. Prior to 1995, Mr. Trivilino specialized
in mergers and acquisitions at Victor Capital Group, a New York based real
estate merchant banking firm. From 1988 to 1993, Mr. Trivilino was Manager of
Treasury Services at Pearson Inc., the U.S. holding company for Pearson plc, a
major multi-national British company. Mr. Trivilino began his career at Lazard
Freres & Co., a New York based investment bank. Mr. Trivilino holds a BS in
Finance from St. Johns University and has completed graduate level coursework at
Fordham University.
4. Conversion of Series B Preferred Stock into Series A Preferred Stock.
Each share of Series B Preferred Stock is automatically converted into Series A
Preferred Stock, on a one for one basis, upon the approval by a majority of the
total votes cast by the stockholders of the Company of the issuance of
additional shares of Series A Preferred Stock in excess of 17,109 shares;
("Stockholder Approval"). The approval of the Proposed Issuance will constitute
Stockholder Approval.
Each share of Series B Preferred Stock will be convertible, at the
option of the holder, into one share of Series A Preferred Stock after March 15,
1997, unless Stockholder Approval has been obtained.
5. Conversion of Series A Preferred Stock into Common Stock. As of the
date hereof, each share of Series A Preferred Stock is convertible into 100
shares of Common Stock or 1,710,900 shares in the aggregate. Shares of Series B
Preferred Stock are not convertible into Common Stock. The number of shares of
Common Stock issuable upon conversion of the Series A Preferred Stock is subject
to adjustment to reflect certain transactions affecting the Common Stock such as
the issuances of Common Stock at less than $0.9226 per share, stock dividends,
splits, reverse splits, etc. Upon Stockholder Approval, each of the 28,956
shares of Series B Preferred Stock will be automatically converted into one
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share of Series A Preferred Stock. Such additional shares of Series A Preferred
Stock will be convertible into 2,895,600 shares of Common Stock.
6. Redemption. Commencing on January 1, 2001, the Company may, at its
option, redeem shares of Preferred Stock at a price per share equal to the
redemption price of $92.26 per share ("Redemption Price") plus all accrued but
unpaid dividends.
If Stockholder Approval has not been obtained on or before March
15, 1997, the holders of Preferred Stock have the option to require the Company
to redeem all or any portion of their Preferred Stock at a price equal to the
Redemption Price plus all accrued and unpaid dividends.
Unless and until Stockholder Approval is obtained, upon a "change
in control" as defined in the Series Designation, the holders of Preferred Stock
shall have the option to require the Company to redeem all but not less than all
of their shares of Preferred Stock at a price equal to the greater of 200% of
the Redemption Price or the fair market value of the aggregate number of shares
of Common Stock into which such shares of Preferred Stock are convertible on the
effective date of such change in control. A change of control includes the
acquisition of 20% or more of the outstanding voting stock of the Company, the
merger or consolidation or sale of substantially all of the assets of the
Company or if the Preferred Directors cease to constitute at least forty percent
(40%) of the Board of Directors.
Unless and until Stockholder Approval is obtained, upon the
occurrence of any default as described below ("Default"), the holders of Series
A and Series B Preferred Stock shall have the option to require the Company to
redeem all but not less than all of the shares of Preferred Stock held by such
person at a price equal to the Redemption Price plus all accrued but unpaid
dividends. Events of default include the failure to pay dividends for any two
quarterly periods, a default of the Purchase Agreement and the passage of
fifteen days thereafter, or a default under the Credit Agreement relating to the
Debt Transaction.
Other Provisions
The Purchase Agreement requires the approval of a majority of the
Preferred Directors in connection with certain matters presented to the Board of
Directors including annual budgets and operating forecasts of the Company; and
transactions with affiliates. In addition, APNH has the right to approve all
future nominations to the Board of Directors other than those individuals
serving as directors on the Transaction Date.
Warrant
The Warrant entitles APNH to purchase 500,000 shares of Common Stock at
an exercise price of $1.50 per share. The Warrant is exercisable only on or
after March 15, 1997 and before November 14, 2006. The exercise price of and
number of shares purchasable under the Warrant are subject to adjustment to
reflect certain transactions affecting the Common Stock such as issuances of
Common Stock at less than $1.50 per share, stock dividends, splits, reverse
splits, etc.
Debt Transaction
The Debt Transaction was made pursuant to a Credit Agreement ("Credit
Agreement") between the Company and APLOM and consisted of a loan funded on the
Transaction Date in the principal amount of $8,090,000 together with a
$5,000,000 standby commitment subject to compliance with certain conditions. The
promissory notes evidencing the Debt Transaction ("Promissory Notes") bear
interest at the rate of 10% per annum during the first year; 11% during the
second year and 12% during the third year. The interest rate increases to 18%
per annum upon the occurrence of an event of default (as defined in the Credit
Agreement) or on February 1, 1997 if Stockholder Approval has not been obtained
by that date. The Promissory Notes mature on the third anniversary of the
Transaction Date but, the Promissory Notes become immediately due and payable if
Stockholder Approval has not been obtained on or before March 15, 1997.
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The obligations and indebtedness under the Credit Agreement and
Promissory Notes ("Credit Documents") are secured by a deed of trust to
essentially, all of the land and buildings of the Company, a security interest
in all of the Company's and its subsidiaries (including Soften) ("Subsidiaries")
personal property and by the collateral pledge of the Company's stock or other
interest in the Subsidiaries. In addition, each of the Subsidiaries guaranteed
performance of the Credit Documents.
GENERAL EFFECTS OF PREFERRED TRANSACTION ON COMMON STOCKHOLDERS
The Preferred Stock Transaction significantly impacts the rights of
existing stockholders. Since the Series A Preferred Stock is convertible into
Common Stock and currently has voting rights and because the Preferred Directors
effectively have a veto right with respect to certain matters presented to the
Board of Directors for a vote, the voting rights of the current stockholders are
diluted.
All matters presented to the Company's stockholders for a vote, other
than the election of directors, must receive the requisite percentage approval
of the holders of Series A Preferred Stock as well as of the holders of Common
Stock (with the holders of Series A Preferred Stock voting with the Common
stockholders on an "as converted" basis).
In addition, the Series A Preferred Stock is convertible into Common
Stock at the current conversion rate of 100 shares of Common Stock for each
share of Series A Voting Preferred Stock. Upon conversion of the Series B
Preferred Stock into Series A Voting Preferred Stock (if stockholders approve
the Proposed Issuance), there will be 46,065 shares of Series A Voting Preferred
Stock outstanding which will be convertible into 4,606,500 shares of Common
Stock representing approximately 35% of the outstanding Common Stock on the date
hereof. As indicated above, if Stockholder Approval has not been obtained on or
before March 15, 1997, each share of Series B Preferred Stock is convertible
into one share of Series A Preferred Stock at the option of the holder thereof.
The issuance of Series A Preferred Stock will also have a dilutive
effect on the holders of Common Stock because it was sold at an equivalent price
per share of Common Stock less than the then current market price and book value
of the Common Stock. Series A Preferred Stock is convertible into Common Stock
at an equivalent conversion price of $0.9226 per share of Common Stock. The
average closing price of the Common Stock during the 20 trading days prior to
October 11, 1996 was $1.266. The closing prices of the Common Stock on October
11, 1996 and on the Transaction Date were $1.756 and $2.06 per share,
respectively. Although the shares of Common Stock issuable on conversion of the
Series A Preferred Stock or on exercise of the Warrant are subject to a
Registration and Pre-Emptive Rights Agreement granting APNH certain piggy-back
and demand registration rights (the "Registration Rights Agreement"), such
shares are restricted and may not be publicly traded at this time without
registration pursuant to the Securities Act of 1933.
The Registration Rights Agreement grants APNH the right to purchase
additional shares of capital stock as necessary to allow it to maintain its
proportionate interest in the Company.
IMPACT OF FAILURE TO APPROVE PROPOSED ISSUANCE
If the Proposed Issuance is not approved by the stockholders prior to
March 15, 1997, the Company will be in default under the Credit Agreement and
the Purchase Agreement and the holders of Preferred Stock will receive certain
rights of redemption and conversion. The following are the consequences of a
failure to obtain Stockholder Approval of the Proposed Issuance on or before
March 15, 1997:
1. Credit Agreement Default. The Credit Agreement will be in default,
the interest rates on the Promissory Notes will increase to 18% per annum and
the Promissory Notes will become immediately due and payable.
2. Increase in Dividend Rate. The Series A Preferred Stock will begin to
be entitled to receive an 18% per annum cumulative dividend.
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3. Convertibility of Series B Preferred Stock. The Series B Preferred
Stock will become immediately convertible, at the option of the holder thereof,
into Series A Preferred Stock.
4. Redemption of Preferred Stock. The holder of Preferred Stock shall be
entitled to require the Company to redeem his shares of Preferred Stock.
Vote Required
The approval of the Proposed Issuance requires the affirmative vote of a
majority of the total votes cast in person or by Proxy represented by the
outstanding shares of Common Stock and Series A Preferred Stock present in
person or by Proxy and entitled to vote thereon at the Special Meeting as well
as the affirmative vote of the holders of the Series A Preferred Voting Stock
separately as a separate class.
For this purpose, an abstention and broker non-vote is considered to be
present and entitled to vote on the Proposed Issuance at the Special Meeting and
is, in effect, a negative vote, but a stockholder who does not give authority to
a Proxy to vote, or withholds authority to vote on the Proposed Issuance shall
not be considered present and entitled to vote on the Proposed Issuance.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE "FOR" THE PROPOSED ISSUANCE
OF ADDITIONAL SHARES OF SERIES A PREFERRED STOCK
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VOTING STOCK OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
As of the record date, there were 8,554,938 shares of Common Stock and
17,109 shares of Series A Preferred Stock outstanding. Each share of Common
Stock will entitle the holder to one vote and each share of Series A Preferred
Stock will entitle the holder to 100 votes at the Special Meeting. The combined
voting power of the Common Stock and the Series A Preferred Stock will be
10,265,838.
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND MANAGEMENT
The following table sets forth, as of the record date, certain
information with respect to the beneficial ownership of the Company's voting
securities by (I) each person known by the Company to be the beneficial owner of
more than five percent (5%) of the Company's outstanding voting securities, (ii)
each director of the Company, (iii) the Company's most highly compensated
executive officers in 1996, and (iv) all directors and executive officers of the
Company as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME BENEFICIAL OWNERSHIP PERCENT OF CLASS
---- -------------------- ----------------
<S> <C> <C>
Common Stock
William T. O'Donnell, Jr.(1) 2,294,578 Shares 26.82
AP NH LLC(2) 1,710,900 16.67
BIL (Far East Holdings)(3) 842,900 9.85
Richardson Greenshields Customer(4) 650,000 7.60
Oppenheimer & Co. (Steven Kolow)(5) 605,000 7.07
John H. Schmitz(6) 596,684 6.97
Dimensional Fund Advisors, Inc.(7) 514,300 6.01
Neil E. Jenkins(8) 133,901 1.56
Dr. Joseph R. Cruse(9) 39,000 *
Stephen L. Berger 10,000 *
Livingston Platt(10) 25,000 *
Terry A. Stephens(11) 18,750 *
George L. Ruff(12) 10,000 *
Lee S. Neibart(3) *
W. Edward Scheetz(13) *
Bruce Spector(13) *
Alfred C. Trivilino(13) *
All Named Executive Officers and
Directors as a Group (___ persons)(14)
Series A Preferred Stock
AP NH LLC 17,109 Shares 100%
</TABLE>
*Represents less than one percent (1%) of the Company's outstanding voting
stock.
(1) Does not include 103,901 shares held in a trust the trustee of which is
Mr. Jenkins, for the benefit of Mr. O'Donnell's children, and as to
which Mr. O'Donnell disclaims any beneficial interest. Includes options
which are exercisable within the next sixty (60) days to purchase 37,500
shares granted pursuant to the Company's 1992 Stock Option Plan and
17,000 shares granted pursuant to the Company's 1993 Non-Employee
Directors Stock Option Plan. Mr. O'Donnell's address is c/o ODE, L.L.C.,
144 Green Bay Road, Winnetka, Illinois 60093.
(2) Represents shares issuable upon the conversion of Series A Preferred
Stock into Common Stock in accordance with the Series Designation.
9
<PAGE> 11
(3) As of December 31, 1993, the address of BIL (Far East Holdings) Ltd. is
2801 Three Exchange Square, Central Hong Kong. This information is based
upon a Schedule 13G filing with the Securities and Exchange Commission
dated January 22, 1993. The Company has not received copies of any more
recent filings from BIL (Far East Holdings) Ltd.
(4) As of December 1, 1996, the Company has received no 13G or 13D filing
for Richardson Greenshields.
(5) As of April 2, 1996, Mr. Kolow's address is c/o Mitchel S. Ross, Esq.,
Stroock & Stroock & Lavan, 100 Federal Street, Boston, Massachusetts
02110. This information is based upon a Schedule 13D filing as of April
2, 1996.
(6) Includes options to purchase 300,000 shares granted to Mr. Schmitz
pursuant to the Company's 1990 and 1992 Stock Option Plans.
(7) As of February 9, 1996, the address of Dimensional Fund Advisors, Inc.,
is 1299 Ocean Avenue, 11th Floor, Santa Monica, California 90401. This
information is based upon a Schedule 13G filing with the Securities and
Exchange Commission dated February 9, 1996.
(8) Includes options to purchase 26,000 shares granted to Mr. Jenkins
pursuant to the Company's 1993 Non-Employee Directors Stock Option Plan.
Also includes 103,901 shares held in a trust, of which Mr. Jenkins is
trustee, for the benefit of Mr. O'Donnell's children.
(9) Includes options, which are exercisable within the next sixty (60) days,
to purchase 6,000 shares granted to Dr. Cruse pursuant to the Company's
1992 Stock Option Plan and 33,000 shares granted pursuant to the
Company's 1993 Non-Employee Directors Stock Option Plan.
(10) Includes options, which are exercisable within the next sixty (60) days,
to purchase 25,000 shares granted to Mr. Platt pursuant to the Company's
1992 Stock Option Plan.
(11) Includes options, which are exercisable within the next sixty (60) days,
to purchase 18,750 shares granted to Mr. Stephens pursuant to the
Company's 1990 and 1992 Stock Option Plans.
(12) Includes options to purchase 10,000 shares granted to Mr. Ruff pursuant
to the Company's 1993 Non-Employee Directors Stock Option Plan.
(13) Messrs. Neibart, Scheetz, Spector and Trivilino each received options to
purchase 10,000 shares pursuant to the Company's Non-Employee Directors
Stock Option Plan. Does not include 1,710,900 votes entitled to be cast
by APNH on the Proposed Issuance represented by the 17,109 shares of
Series A Preferred Stock held by APNH as to which each of them disclaims
any beneficial interest.
(14) Includes options, which are exercisable within the next sixty (60) days,
to purchase shares granted to members of this group pursuant to the
Company's 1990, 1992 and Non-Employee Directors Stock Option Plans.
The Board has been advised that the shares of common stock beneficially
owned by, William T. O'Donnell, Jr., the Company's Chairman of the Board, and
interim President and Chief Executive Officer (2,240,078 shares, or
approximately 21.8% of the votes entitled to be cast at the Special Meeting) and
by John H. Schmitz (296,684 shares, or approximately 2.9% of the votes entitled
to be cast at the Special Meeting) will be voted for the Proposed Issuance. Each
of the other directors has indicated that he intends to vote for the Proposed
Issuance.
In addition, APNH is required to vote its shares of Series A Preferred
Stock (1,710,900 votes or approximately 16.67% of the votes entitled to be cast
at the Special Meeting) in favor of the Proposed Issuance.
10
<PAGE> 12
INDEPENDENT AUDITORS
The accounting firm of Ernst & Young LLP has served as the Company's
independent auditors since 1988. Representatives of Ernst & Young LLP will be
present at the Special Meeting to respond to appropriate questions and make such
statements as they desire.
FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION
The following financial statements and other financial information
relating to the Company's Form 10-K fiscal year ended December 31, 1995 are
hereby incorporated herein by reference to the Company's Form 10-K for the year
then ended:
1. Audited Consolidated Financial Statements.
2. Selected Quarterly Financial Data
3. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Consolidated Financial Statements (unaudited) and Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
three and nine months ended September 30, 1996 are hereby incorporated herein by
reference to the Company's Amended Form 10-Q for that period.
ADDITIONAL INFORMATION
The cost of preparing, assembling, mailing and all other expenses of
soliciting proxies in the enclosed form will be borne by the Company. In
addition, directors, officers and regular employees of the Company may, but
without compensation other than their regular compensation, solicit proxies by
further mailing, personal conversations, or by telephone or telegraph. The
Company has employed Corporate Investor Communications, Inc., a proxy
solicitation firm, to solicit proxies from brokers and banks at a cost of
approximately $4,000 plus reasonable expenses. The Company will, upon request,
reimburse brokerage firms and others for their reasonable expenses in forwarding
solicitation material to the beneficial owners of stock.
By order of the Board of Directors
Bertha Kenny
Secretary
December ______, 1996
11
<PAGE> 13
December ___, 1996
NextHealth Stockholders
Dear Stockholders:
Your Board of Directors has called a special Meeting of Stockholders for
____________, January ____, 1997 at ___________________________________, Tucson,
Arizona.
At this meeting you will be asked to consider and vote upon a proposal that will
enable NextHealth to meet certain requirements of a previously announced
$17,340,000 combination debt/equity transaction with two affiliates of Apollo
Real Estate Advisors, L.P., New York. If stockholder approval is obtained, the
Board believes that NextHealth will have the financial resources necessary to
stabilize operations and complete the process of revitalizing the Company.
As you know, the Company embarked on a diversification strategy some three years
ago in order to broaden the prospect base for our unique holistic approach to
wellness and preventive health care. This was in part a response to an
increasingly difficult business environment for recovery facilities, and also a
recognition of profound change and opportunity in the American consumer
marketplace.
The result of our efforts, Miraval, was launched one year ago as a new direction
in wellness offering enjoyable and meaningful self-improvement in a luxury
resort environment. Feedback from guests and the media has been uniformly
positive.
Our new collaborative relationship with Apollo will enable us to take advantage
of our strong start with Miraval, and continue to grow our core business, Sierra
Tucson. Apollo's expertise and experience in financial and investment management
and the resort hotel industry, when combined with our background in cutting edge
therapeutic health care services, should position NextHealth at the forefront of
the wellness segment of the health care market.
Authorizing the issuance of additional shares of Series A Preferred Stock will
allow NextHealth to complete the Apollo transaction. Failure to approve this
proposal will result in the acceleration of the maturity date of the debt
portion of the Apollo transaction, entitling holders of Preferred Stock to elect
a majority of the Board of Directors and requiring the Company to redeem their
holdings.
The Board of Directors believes that approval of this proposal is in the best
interest of NextHealth and its stockholders. The Board of Directors has
unanimously approved the proposals and recommends that stockholders vote for
APPROVAL OF THE PROPOSED ISSUANCE.
<PAGE> 14
NextHealth Stockholders
December ____, 1996
Page 2
Whether or not you expect to attend this Special Meeting of Stockholders in
person, you are encouraged to date, sign and return the Proxy Card or voting
instructions form in the addressed, postage prepaid envelope provided. Your vote
is important, regardless of the size of your holdings. To vote in accordance
with the recommendation of your Board of Directors, you need only date, sign and
return the Proxy Card or voting instructions form.
If you need assistance in voting your shares, please call NextHealth's counsel
Lawrence M. Hecker or L. Matthew Muehlebach at 405 W. Franklin, Tucson, Arizona
85701 (520) 798-3804.
Very truly yours,
William T. O'Donnell, Jr.
Chairman of the Board,
President and Chief Executive Officer
<PAGE> 15
PROXY
NEXTHEALTH, INC.
16600 N. Lago Del Oro Parkway
Tucson, Arizona 85739
The undersigned hereby appoints William T. O'Donnell, Jr. and Stephen L.
Berger, and each of them, with power of substitution, to represent and to vote
on behalf of the undersigned all of the shares of NextHealth, Inc. Common Stock
which the undersigned is entitled to vote at the Special Meeting of Stockholders
to be held at [INSERT LOCATION], Tucson, Arizona on [INSERT DATE] at 10:00 a.m.,
Mountain Standard Time and at any adjournment or adjournments thereof, hereby
revoking all proxies heretofore given with respect to such stock, upon the
following proposals more fully described in the notice of and proxy statement
for the meeting (receipt whereof is hereby acknowledged).
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSED ISSUANCE
OF 28,956 SHARES OF SERIES A PREFERRED STOCK.
PROPOSAL TO ISSUE 28,956 SHARES OF SERIES A PREFERRED STOCK
TO AP NH LLC, A DELAWARE LIMITED LIABILITY COMPANY
("PROPOSED ISSUANCE")
FOR ____ AGAINST ____
ABSTAIN ____
In their discretion, the proxies are authorized to vote upon such other
matters as may properly come before the meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED STOCKHOLDER, IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR THE PROPOSED ISSUANCE.
(Please Sign and Date the Other Side)
<PAGE> 16
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by president or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
________________________________ ____________________________________
Date Signature
[Please return in the enclosed postage-paid envelope. __________________________
I will ________ will not _______ attend the meeting.] Signature, if held jointly
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS
