<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A NO. 1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from ___________ to ___________
Commission File Number: 0-17969
_______
NEXTHEALTH, INC.
______________________________________________________
(Exact Name of Registrant as Specified in its Charter)
Delaware 86-0589712
________ __________
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
16600 N. Lago Del Oro Parkway, Tucson, Arizona 85739
______________________________________________ __________
(Address of Principal Executive Offices) (Zip Code)
(520) 792-5800
____________________________________________
(Registrant's Telephone Number, including Area Code)
N/A
___________________________________________________________
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1)has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2)has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
On November 1, 1996, there were 8,554,938 shares of the registrant's Common
Stock outstanding.
Reference is made to the listing beginning on page 21 of all exhibits filed as a
part of this report.
<PAGE> 2
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
============================== ====
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996 (unaudited) and
December 31, 1995 ......................................................... 3
Unaudited Consolidated Statements of Operations for the three and nine month
periods ended September 30, 1996 and 1995 ................................ 4
Unaudited Consolidated Statements of Cash Flows for the nine month periods
ended September 30, 1996 and 1995 ................................... 5
Unaudited Consolidated Statement of Changes in Stockholders' Equity for the
nine month period ended September 30, 1996 ................................. 6
Unaudited Notes to the Consolidated Financial Statements ........................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................. 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ............................................................... 16
Item 2. Changes in Securities ........................................................... 16
Item 5. Other Information ............................................................... 16
Item 6. Exhibits and Reports on Form 8-K ................................................ 21
Signatures ............................................................................... 22
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000s, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents ....................................... $ 430 $ 2,864
Short-term investments ..................................... -- 1,635
Accounts receivable, less allowance for doubtful accounts
of $380 and $431, respectively .......................... 889 1,340
Prepaid expenses ........................................... 672 476
Other current assets ....................................... 421 478
-------- --------
Total current assets .................................... 2,412 6,793
Property and equipment, net .................................... 39,554 40,158
Long-term receivables, less allowance for doubtful accounts
of $62 and $70, respectively .............................. 185 211
Intangible assets, less amortization of $7 and $33, respectively 108 704
Other assets ................................................... 495 76
-------- --------
Total assets ............................................ $ 42,754 $ 47,942
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade .................................... $ 2,730 $ 2,410
Accounts payable, construction ............................. -- 4,517
Current portion of long-term debt .......................... 3,052 --
Accrued expenses and other liabilities ..................... 4,333 3,451
-------- --------
Total current liabilities ............................... 10,115 10,378
Long-term debt and financing obligation, less current
portion .................................................... 4,642 985
-------- --------
Total liabilities ....................................... 14,757 11,363
-------- --------
Stockholders' Equity:
Preferred stock, $.01 par value, 4,000,000 shares
authorized; no shares issued and outstanding ............. -- --
Common stock, $.01 par value, 16,000,000 shares
authorized; 8,554,938 shares outstanding at September 30,
1996 and December 31, 1995 ............................... 86 86
Additional paid-in capital ................................. 43,453 43,453
Accumulated deficit ........................................ (15,542) (6,960)
-------- --------
Total stockholders' equity .............................. 27,997 36,579
-------- --------
Total liabilities and stockholders' equity .............. $ 42,754 $ 47,942
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 4
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000s, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30, September 30,
---------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Net operating revenue ............ $ 4,255 $ 3,005 $ 13,502 $ 9,368
Investment income ................ 10 258 40 1,188
Other revenue .................... 61 75 248 523
-------- -------- -------- --------
Total net revenue .......... 4,326 3,338 13,790 11,079
Operating expenses:
Salaries and related benefits .... 3,695 1,953 11,225 5,784
General and administrative ....... 3,017 1,893 8,759 5,799
Business expansion ............... -- 2,601 -- 3,430
Interest ......................... 266 21 374 71
Depreciation and amortization .... 681 402 2,014 1,184
-------- -------- -------- --------
Total operating expenses ... 7,659 6,870 22,372 16,268
-------- -------- -------- --------
Loss before income tax benefit ..... (3,333) (3,532) (8,582) (5,189)
Income tax benefit ................. -- -- -- --
-------- -------- -------- --------
Net loss ........................... $ (3,333) $ (3,532) $ (8,582) $ (5,189)
======== ======== ======== ========
Weighted average shares of common
stock outstanding .................. 8,554 8,549 8,554 8,545
======== ======== ======== ========
Net loss per share of common stock.. $ (0.39) $ (0.41) $ (1.00) $ (0.61)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s)
(Unaudited)
<TABLE>
<CAPTION>
` Nine months Ended
September 30,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................... $ (8,582) $ (5,189)
Adjustments to reconcile net loss to cash (used in)
provided by operating activities:
Depreciation and amortization ............................................... 2,014 1,184
Provision (benefit) for bad debts ........................................... (122) 155
Changes in operating assets and liabilities net of effects from acquisitions:
Decrease (increase) in assets:
Accounts receivable ...................................................... 598 1,991
Prepaid and other assets ................................................. (473) (495)
Increase in liabilities:
Accounts payable and accrued liabilities ................................. 2,225 5,156
Income taxes receivable .................................................. -- 4,507
-------- --------
Net cash (used in) provided by operating activities ............................ (4,340) 7,309
-------- --------
Cash flows for investing activities:
Purchase of property and equipment, net ..................................... (1,103) (8,710)
Business acquisitions, net of cash acquired ................................. (88) (130)
Sale of Hilton Head Health Institute ........................................ 199 --
Purchase of long-term investments ........................................... -- (14,162)
Sale of long-term investments ............................................... -- 9,325
--------
Net cash used in investing activities .......................................... (992) (13,677)
-------- --------
Cash flows from financing activities:
Exercise of Common Stock Options ............................................ -- 22
Proceeds from long-term debt ................................................ 3,929 --
Reduction of long-term debt ................................................. (2,666) (119)
-------- --------
Net cash used in financing activities .......................................... 1,263 (97)
-------- --------
Net decrease in cash and cash equivalents ...................................... (4,069) (6,465)
Cash and equivalents at beginning of period .................................... 4,499 11,741
-------- --------
Cash and equivalents at end of period .......................................... $ 430 $ 5,276
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(000s, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Cost Shares Capital Deficit Equity
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 86 8,554,938 $ 43,453 $ (6,960) $ 36,579
Net loss for the nine months
ended September 30, 1996 -- -- -- (8,582) (8,582)
--------- --------- --------- --------- ---------
Balance at September 30, 1996 $ 86 8,554,938 $ 43,453 $ (15,542) $ 27,997
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE> 7
NEXTHEALTH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(000s)
(Unaudited)
NOTE 1 - ORGANIZATION
NextHealth, Inc. is a leading provider of wellness and preventive health care
services in diverse retail markets. For over ten years, the Company has
developed effective treatment models which address individual wellness and
quality of life issues through a whole person, mind-body approach.
The Company operates in two distinct business segments. The Treatment segment
includes Sierra Tucson, Inc. ("STI"), a state licensed, special psychiatric
hospital and behavioral health care center for the treatment of substance abuse
and mental health disorders, including eating disorders and dual diagnosis and
Onsite Workshops, Inc. ("Onsite"), which offers short-term therapeutic
experiences and workshops. (See Note 3.) The Health and Leisure segment includes
Miraval(TM), a unique vacation experience blending stress management and
self-discovery programs in a luxury health resort environment, which opened in
late 1995 and Hilton Head Health Institute, Inc. ("HHHI"), a provider of weight
management programs for the development and maintenance of healthy lifestyles as
well as fitness, nutrition, stress management and other lifestyle change
programs, acquired in March 1996. (See Note 3.)
NOTE 2 - BASIS OF PRESENTATION
The unaudited consolidated financial statements presented herein should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1995. The accompanying interim consolidated financial statements as of
September 30, 1996 and for the three and nine-month periods ended September 30,
1996 and 1995 included herein are unaudited, but reflect, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary to fairly present the results for such periods. Operating
results for the three and nine-month periods ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1996.
NOTE 3 - DIVESTITURES
On October 18, 1996, the Company announced the divestiture of Onsite Workshops,
Inc. and Hilton Head Health Institute in order to further reduce corporate
overhead, eliminate long-term debt obligations and focus on its two primary
lines of business, Miraval and Sierra Tucson, Inc. The Onsite sale, which was
completed on November 30, 1996, was made to the original owners in exchange for
the assumption of existing obligations. Goodwill of $281,000 recorded in
connection with the Onsite acquisition was written-off in anticipation of this
sale. The HHHI was purchased by NextHealth's President and Chief Executive
Officer, John Schmitz on October 1, 1996 for cash of $275,000 and assumption of
certain debt obligations, including the purchase of real property, such that no
gain or loss was realized by the Company on the sale. The Company guarantees up
to $130,000 of any loss related to the sale of the real property by John Schmitz
to an unaffiliated third party. The HHHI sales transaction was recorded in the
accompanying September 30, 1996 financial statements. This transaction was
reviewed and approved by an independent committee of the Company's Board of
Directors. In considering the divestiture of these two lines of business, the
Board concluded that neither offered a significant long-term profit potential
when compared to Miraval and Sierra Tucson, Inc. In addition, the divestitures
have a minimal impact on the Company's financial position, operations or cash
flow.
7
<PAGE> 8
NOTE 4 - FINANCING TRANSACTIONS
On April 10, 1996, the Company obtained a $2,000 line of credit (the "LOC") from
the National Bank of Arizona for a term of six months. The LOC had a variable
interest rate based upon the prime rate as published in the Western Edition of
the Wall Street Journal plus 1 percent. The initial interest rate was 9.25%,
payable in monthly installments. The LOC was secured by certain real estate
owned by the Company. The LOC was paid off in full with the proceeds from the
$4,000 financing mentioned below.
On April 3, 1996, the Company negotiated an agreement with Sundt Corporation
("Sundt"), the general contractor of the Miraval project, for the payment of
approximately $3,700, which represented the remaining balance due Sundt at that
date for the construction of Miraval. This agreement has a term of eighteen
months and bears interest at an annual rate equal to the prime rate as
established by Bank One, N.A. plus 4 percent. Sundt received a $300 payment at
the closing of the LOC and will receive payments of $125 per month for a period
of eleven months commencing in May 1996. The balance remaining after the
aforementioned payments will be paid evenly in six monthly installments. Sundt
has agreed to subordinate the master Mechanics' Lien recorded against Miraval's
real property on March 28, 1996 to the LOC and additional borrowings up to
$5,000. Additionally, as part of this agreement, if the Company were to obtain
secured borrowings in excess of $5,000 or unsecured borrowings in excess of
$3,000, the unpaid balance due Sundt would immediately become due. At December
31, 1995, the amount due Sundt was classified as accounts payable, construction.
At June 30, 1996, as a result of the agreement negotiated with Sundt, the
long-term portion of this obligation has been classified as long-term debt.
On June 28, 1996, the Company amended its agreement with Sundt to facilitate the
closing of the $4,000 financing noted below. Sundt received an additional $100
payment in connection with this amendment.
On June 28, 1996, the Company secured financing in the amount of $4,000 with
Mortgages Ltd. Principal and interest at 13.75% is payable in monthly
installments of $53 through March, 1998 at which time all unpaid principal is
due and payable. The financing is collateralized by certain real estate and
property, plant and equipment owned by the Company. Proceeds were used to repay
the existing balance on the LOC and to assist with meeting short-term working
capital requirements.
On November 15, 1996, the Company completed separate equity and debt
transactions with affiliates of Apollo Real Estate Advisors, L.P. (See Part II,
Item 5). Both Sundt and Mortgages Limited were paid in full. See discussion in
the "Liquidity and Capital Resources" section.
NOTE 5 - SUBSEQUENT EVENTS
See Part II - Other Information, Item 5, Other Information.
NOTE 6 - RECLASSIFICATIONS
Certain prior period amounts in the unaudited consolidated financial statements
have been reclassified to conform to the presentation used in 1996.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis relates to factors which have affected the
consolidated financial condition and results of operations of the Company for
the three and nine-month periods ended September 30, 1996 and 1995. Certain
prior year amounts have been reclassified to conform to the presentation used in
1996. Reference should also be made to the Company's unaudited consolidated
financial statements and related notes thereto included elsewhere in this
document.
GENERAL
NextHealth, Inc. is a leading provider of wellness and preventive health care
services in diverse retail markets. For over ten years, the Company has
developed effective treatment models which address individual wellness and
quality of life issues through a whole person, mind-body approach.
The Company operates in two distinct business segments. The Treatment segment
includes Sierra Tucson, Inc., a state licensed, special psychiatric hospital and
behavioral health care center for the treatment of substance abuse and mental
health disorders, including eating disorders and dual diagnosis and Onsite,
which offers short-term therapeutic experiences and workshops. The Health and
Leisure segment includes Miraval, a unique vacation experience blending stress
management and self-discovery programs in a 106 room luxury health resort
environment, which opened in late 1995 and HHHI, a provider of weight management
programs for the development and maintenance of healthy lifestyles as well as
fitness, nutrition, stress management and other lifestyle change programs which
was acquired in March 1996. Agreements to sell both Onsite and HHHI were
executed after September 30, 1996.
The Company, as part of its long range plan, believes that it has positioned
itself to capitalize on the newly emerging health and leisure segment of the
health care services industry by developing Miraval, a luxury health resort
providing a full range of self-discovery, stress management and recreational
activities. For the nine-month period ended September 30, 1996, the Treatment
segment accounted for approximately 62% of all the Company's operating revenues
and approximately 37% of operating expenses while the Health and Leisure segment
accounted for approximately 37% of the Company's operating revenue and
approximately 46% of operating expenses. However, the Company believes that the
Health and Leisure segment will make significant contributions to the Company's
operating results in the future.
9
<PAGE> 10
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 COMPARED TO THREE-MONTH PERIOD ENDED
SEPTEMBER 30, 1995
The significant changes in results of operations and net cash provided by (used
in) operating activities for the three-month period ended September 30, 1996,
compared to the same period in 1995 are discussed below.
<TABLE>
<CAPTION>
Three Months Ended
September 30
------------------------------------------
1996 1995 % Change
------- ------- --------
<S> <C> <C> <C>
FINANCIAL RESULTS: (000s, except per share amounts)
Total net revenue ................................. $ 4,326 $ 3,338 29.6 %
Total operating expenses, less business expansion
costs ......................................... 7,659 4,269 79.4 %
Business expansion costs .......................... -- 2,601 (100.0)%
Net loss .......................................... (3,333) (3,532) 5.6 %
Net loss per share of common stock ................ (.39) (.41) 4.9 %
Net cash provided by (used in) operating activities (902) 334 (370.1)%
OPERATING DATA:
Patient days - STI ................................ 3,470 4,266 (18.7)%
Average daily census - STI ........................ 38 46 (17.4)%
Participant days - Onsite ......................... 1,927 2,137 (9.8)%
Average daily census - Onsite ..................... 21 23 (8.7)%
Participant days - HHHI (1) ....................... 2,569 -- --
Average daily census - HHHI (1) ................... 28 -- --
Guest days - Miraval (2) .......................... 4,893 -- --
Average daily guest count - Miraval (2) ........... 53 -- --
</TABLE>
(1) HHHI was acquired effective March 1, 1996.
(2) Miraval commenced operations in December 1995. Complimentary guest days of
334 are included in the stated figures.
For the three-month period ended September 30, 1996, the loss before income tax
benefit and net loss decreased from $3.5 million in 1995 to $3.3 million in
1996. Net cash provided by operating activities was $334,000 in 1995 compared to
net cash used in operating activities of $902,000 in 1996.
Total net revenue increased $1.0 million to $4.3 million, an increase of 30%
when compared to the same period in 1995. Results reflect commencement of
operations at Miraval and the acquisition of HHHI. This increase was offset by a
decrease in investment income attributable to the use of cash and investments
for the development of Miraval.
Salaries and related benefits increased $1.7 million to $3.7 million, an
increase of 89% when compared to the same period in 1995. The increase was
primarily due to staffing requirements related to the operations at Miraval.
General and administrative expense increased $1.1 million to $3.0 million, an
increase of 59% when compared to the same period in 1995. The increase was due
primarily to operational costs related to Miraval. This increase was partially
offset by a decrease in general and administrative expense of $356,000 at Sierra
Tucson, Inc.
The Company recognized a pre-tax loss of $3.3 million for the three-month period
ended September 30, 1996.
10
<PAGE> 11
No provision or benefit for income taxes was recorded during this period. The
Company will be able to carry forward the current period loss to offset future
tax liabilities.
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 COMPARED TO NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 1995
The significant changes in results of operations and net cash provided by (used
in) operating activities for the nine-month period ended September 30, 1996,
compared to the same period in 1995 are discussed below.
<TABLE>
<CAPTION>
Nine months Ended
September 30,
---------------------------------------------
1996 1995 % Change
-------- -------- --------
<S> <C> <C> <C>
FINANCIAL RESULTS: (000s, except per share amounts)
Total net revenue ................................. $ 13,790 $ 11,079 24.5 %
Total operating expenses, less business expansion
costs .......................................... 22,372 12,838 74.3 %
Business expansion cost ........................... -- 3,430 (100.0)%
Net loss .......................................... (8,582) (5,189) (65.4)%
Net loss per share of common stock ................ (1.00) (0.61) (63.9)%
Net cash provided by (used in) operating activities (4,340) 7,309 (159.4)%
OPERATING DATA:
Patient days - STI ................................ 11,682 13,182 (11.4)%
Average daily census - STI ........................ 43 48 (10.4)%
Participant days - Onsite ......................... 5,800 5,862 (1.1)%
Average daily census - Onsite ..................... 21 22 (4.5)%
Participant days - HHHI (1) ....................... 7,077 -- --
Average daily census - HHHI (1) ................... 26 -- --
Guest days - Miraval (2) .......................... 12,617 -- --
Average daily guest count - Miraval (2) ........... 46 --
</TABLE>
(1) HHHI was acquired effective March 1, 1996 and was sold on October 1, 1996.
(2) Miraval commenced operations in December 1995. Complimentary guest days of
1,895 are included in the stated figures.
For the nine-month period ended September 30, 1996, net loss increased $3.4
million to $8.6 million and net cash provided by operating activities decreased
$14.0 million resulting in net cash used in operating activities of $6.7 million
compared to the same period in 1995.
Total net revenue increased $2.7 million to $13.8 million, an increase of 24%
when compared to the same period in 1995. Results reflect commencement of
operations at Miraval and the acquisition of HHHI. This increase was offset by a
decrease in investment income attributable to the use of cash and investments
for the development of Miraval.
Salaries and related benefits increased $5.4 million to $11.2 million, an
increase of 94% when compared to the same period in 1995. The increase was
primarily due to staffing requirements related to the operations at Miraval.
11
<PAGE> 12
General and administrative expense increased $3.0 million to $8.8 million, an
increase of 51% when compared to the same period in 1995. The increase was
primarily due to operational costs related to Miraval. The Company recognized a
pre-tax loss of $8.6 million for the nine-month period ended September 30, 1996.
No provision or benefit for income taxes was recorded during this period. The
Company will be able to carry forward the current period loss to offset future
tax liabilities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources have typically
been cash provided by the Treatment segment's operating activities and funds
generated from the sale of investments and proceeds from public equity
offerings. Historically, these sources have been sufficient to meet the needs
and finance the operations and growth of the Company's business. Net cash
provided by the Treatment segment's operating activities has been primarily
affected by census levels and net revenue per patient day. This segment
contributed positive cash flow to the Company's operations during the three and
nine-month periods ended September 30, 1996.
Primarily as a result of operating expenditures required to support the Health
and Leisure segment until it is self sufficient, the Company's cash from
operations has decreased significantly. For the three-month period ended
September 30, 1996, the Company's net cash used in operating activities was
$902,000.
For the nine-month period ended September 30, 1996 the Company had net capital
expenditures of approximately $1.1 million. Primarily as a result of operating
expenditures required to support the Health and Leisure segment until it is
self-sufficient and the aforementioned capital expenditures, the Company's cash
reserves have decreased significantly. For the nine-month period ended September
30, 1996 the Company's net cash used in operating activities was $4.3 million.
The Treatment segment's operational results for the three-month period ended
September 30, 1996 reflect the segment's focus on attracting a high percentage
of retail patients. During this period, 74% of patient revenue was derived from
retail payments and the remaining 26% from third party payors. STI continues to
experience pressure from third party payors and managed care organizations to
restrict patient access to and payment for treatment services. Based on current
census levels and operating expenses, STI believes that it will generate
adequate cash flows to sustain the Treatment segment's ongoing operational
requirements.
Miraval, the Company's Health and Leisure segment's primary line of business,
commenced operations in December 1995. This segment's results are primarily
affected by occupancy, average annual room rates and the segment's ability to
manage costs. Miraval believes that it operates in a unique niche in an emerging
health and leisure market. Marketing and advertising initiatives for creating
marketplace awareness and demand for Miraval's services resulted in a room
occupancy rate of approximately 31% through September 30, 1996 of which 83% were
paying guests and 17% non-paying guests. As part of the segment's marketing
strategy, media, travel and trade representatives as well as other key
influencers have been invited to experience Miraval with the anticipation that
Miraval will be promoted in the marketplace. Management believes the Health and
Leisure segment will, in time, make a significant contribution to the Company's
financial condition. However, until such time that it generates positive cash
flow, short and long-term financing and the implementation of cost containment
measures will be necessary to sustain its operations.
To meet its current liquidity requirements, the Company entered into debt and
equity financing transactions. (See Item 5.) The financing transactions closed
on November 15, 1996. The proceeds from the transactions were approximately
$12,340,000. The source and use of funds are as follows:
<TABLE>
<CAPTION>
Source of Funds
- ---------------
<S> <C>
- - Preferred Stock - Series A $ 1,578,000
- - Preferred Stock - Series B 2,672,000
- - Debt 8,090,000
-----------
Total Source of Funds 12,340,000
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
Use of Funds
- ------------
<S> <C>
- - Payoff of contractor obligations to Sundt Corporation 2,680,000
- - Funds placed into escrow to pay off the first mortgage with Mortgages Ltd. (1) 4,235,000
- - Payoff short term working capital loans 800,000
-----------
Total Debt Repayments 7,715,000
- - Funds available to meet operating cash requirements and alleviate net
working capital deficit (2) 4,625,000
-----------
Total Use of Funds $12,340,000
===========
</TABLE>
(1) Funds were placed in escrow to avoid a prepayment penalty of
approximately $158,000. The funds placed in escrow will be used to pay
off the principal balance on January 4, 1997. The Company expects to
receive approximately $260,000 from the escrow monies after paying off
the balance on January 4, 1997.
(2) The funds available to meet operating cash requirements and alleviate
net working capital deficit will be utilized to bring trade accounts
payable and other current liabilities up to a current status. After
disbursing the funds necessary to bring trade payables and other current
liabilities to a current status, the Company expects to have
approximately $1,500,000 in cash (cash on hand) available to meet future
operating cash requirements.
The debt financing transaction (see Item 5) contains certain provisions related
to a stand by commitment for an additional $5,000,000. To the extent that cash
on hand is not enough to meet future operating cash requirements, the stand by
funds will be utilized to provide the cash necessary to fund future operating
cash requirements.
The Company must receive shareholder approval for certain items related to the
equity financing transaction (see Item 5). If shareholder approval of these
items is not obtained prior to March 15, 1997, the debt of $8,090,000 becomes
immediately due and payable as well as any accrued interest thereon and the
$4,250,000 of Preferred Stock is redeemable at the option of the holders, out of
funds legally available therefor. To the extent that shareholder approval is not
obtained related to those items required in the equity financing transaction,
this would create an immediate and significant liquidity crisis for the Company.
The effect of this potential liquidity crisis would have a major impact on the
Company's ability to continue operations.
Also, in order to alleviate current liquidity requirements, it is necessary for
the Company to increase occupancy levels and to implement additional cost
controls. Insufficient occupancy levels at Miraval or any significant decrease
in STI's patient levels would adversely affect the Company's financial position,
results of operations and cash flows. Management does not anticipate any
significant impact upon operations as a result of inflation, nor has the Company
historically experienced any such impact.
BUSINESS OUTLOOK
In 1997, the Company expects to realize a contribution to net income and cash
flow from its primary lines of business -- Treatment and Health & Leisure.
Performance in the Treatment segment (Sierra Tucson, Inc.) will be driven by
continued aggressive implementation of cost controls and new marketing
initiatives. Particular emphasis will be placed on increasing the number of
self-pay patients through a combination of innovative treatment programs and
focused advertising, direct mail, field sales and outbound telemarketing
campaigns.
Recently introduced programs such as Recovery Plus(TM) and Sierra Care(TM) will
continue to be promoted to major referent and retail market sectors, and will
likewise be introduced to the corporate marketplace. Recovery Plus(TM) is a
unique product which ensures that a chemically-dependent patient who relapses
during the first six months following discharge will be readmitted for an
additional 10-14 days at a very modest per diem rate. This program is the first
of its kind in the treatment field, and visible evidence of STI's commitment to
the long-term recovery of each patient, and the proven effectiveness of the
Sierra Model(TM).
Sierra Care(TM) is an all-inclusive addictions package which provides the
patient with the tools necessary to
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meet their recovery goals within a 24 day time frame -- and at a substantially
reduced cost. Sierra Care(TM) is designed for addiction patients with a lower
acuity on the mental health diagnosis, and those who fall more into a straight
chemical dependency diagnosis.
STI will continue its traditional marketing efforts to the referent therapist
community, and look for the continued double-digit growth of prospective
patients which has characterized the third quarter of 1996.
Miraval, the Company's initial entry in the Health & Leisure category, has now
been in operation for nine months, and appears poised for steadily improving
performance in 1997. The resort has received extensive press coverage in such
diverse media as CNN, InStyle, Gourmet, and Vogue magazine (to name a few), and
has likewise gained a high level of awareness among consumers and travel
professionals.
Management's primary objective for Miraval in 1997 is to build short and
long-term occupancy levels while maintaining our unique program structure and
operational excellence. Marketing initiatives will be aimed primarily at upscale
consumers and top-echelon travel agents as well as corporate and incentive
groups. The Miraval message will be delivered through a blend of direct sales
and advertising -- including print, data base-driven direct mail, and public
relation activities.
Cost containment measures will continue to be a critical management objective in
1997. Variable staffing relative to seasonal occupancy fluctuations, a more
structured program format, and self-directed internal work teams focusing on all
aspects of operational quality should further improve efficiencies and cash
flow.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Management's Discussion and Analysis of Results of Operations and Financial
Condition contains forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 that involve a number of risks and
uncertainties. While management believes that such forward looking statements
are accurate as of the date hereof, the actual results and conditions could
differ materially from the statements contained herein. The information below
should be read in conjunction with the Company's unaudited consolidated
financial statements and related notes thereto included elsewhere and in other
portions of this document.
In addition, the following other factors could cause actual results and
conditions relating to liquidity and capital resources to differ materially.
Miraval represents a new and significant line of business for the Company.
Miraval is the Company's initial entry into a unique niche in the emerging
health and leisure market for which there is little, if any, industry market
data available. Its products and services are different than those of
traditional destination resorts or destination "spa" facilities. The Company has
little experience in the marketing, management or operation of a facility of
this nature, although it has hired qualified and experienced personnel from
related operations.
The Company is unable to project with any degree of accuracy the future
occupancy levels or revenues of Miraval because the facility is in its first
year of operation. The Company has no historical operating data for projecting
occupancy levels during peak and non-peak periods, marketing, operating or
maintenance costs and expenses. Although the Company believes that there is
strong consumer demand for Miraval's products and services because it represents
a unique vacation alternative, the Company cannot be certain that its current
marketing strategy will successfully attract the targeted clientele.
The Company cannot be certain that Miraval will generate sufficient revenues to
cover its operating expenses. Management believes that the existing capital
resources of the Company are insufficient to meet its short-term capital needs.
Additional capital may be available through short and long-term financing;
however, the Company cannot predict the terms or availability of such financing.
Miraval competes in the competitive resort hotel/spa industry. In many
instances, its competitors have greater name recognition and financial resources
as well as long-standing relationships with travel agents and tour and trip
planners. Management cannot anticipate what impact this will have on future
occupancy levels.
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The entities comprising the Company's Treatment segment participate in the
highly competitive mental and behavioral health industry characterized by
intense competition for market share resulting from aggressive pricing practices
and increasing competition from companies with greater resources, including tax
exempt, non-profit status, government subsidized or endowment-related financial
support which may provide lower costs of capital.
While the Company anticipates continued growth in revenues and is committed to a
return to profitability, operating results could be adversely impacted if the
businesses are unable to anticipate customer demand accurately, are unable to
differentiate their products from those of their competitors, are unable to
offer services expeditiously in response to customer demand, or are negatively
impacted by managed care restrictions on payor reimbursement.
The Company must receive shareholder approval for certain items related to the
equity financing transaction (see Item 5). If shareholder approval of these
items is not obtained prior to March 15, 1997, the debt of $8,090,000 becomes
immediately due and payable as well as any accrued interest thereon and the
$4,250,000 of Preferred Stock is redeemable at the option of the holders, out of
funds legally available therefor. To the extent that shareholder approval is not
obtained related to those items required in the equity financing transaction,
this would create an immediate and significant liquidity crisis for the Company.
The effect of this potential liquidity crisis would have a major impact on the
Company's ability to continue operations.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various litigation and administrative proceedings
arising in the normal course of business. In the opinion of management, any
liabilities that may result from these claims will not, individually or in the
aggregate, have a material adverse effect on the Company's financial position,
results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES
See Item 5 - Other Information - "Financing Transaction".
ITEM 5. OTHER INFORMATION
Financing Transactions
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
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<PAGE> 17
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.
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.
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.
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").
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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.
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, W. Edward Scheetz, Bruce Spector and Alfred C.
Trivilino.
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").
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. The Series Designation also provides
that the Series B Preferred Stock is convertible, at the option of the holders
thereof, into Series A Preferred Stock if the stockholders of the Company have
not approved an amendment to the Company's Certificate of Incorporation deleting
Article 9 thereof on or before June 15, 1997. Article 9 imposes a 66 2/3%
affirmative stockholder voting requirement in connection with certain change of
control transactions such as a merger, consolidation, sale of all or
substantially all of the assets of the Company, etc. APNH, as the holder of the
Series B Preferred Stock has waived the operation of this provision until such
time as it gives not less than 90 days written request to the Company to present
a proposal to the stockholders to delete Article 9. The stockholders of the
Company must approve the deletion of Article 9 (and other related provisions)
within 90 days of such notice.
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
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
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<PAGE> 19
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.
The Company anticipates that a meeting of the stockholders will be held prior to
March 15, 1997 in order to consider the issuance of 28,956 shares of Series A
Preferred Stock to APNH. The Company has been advised that the shares of Common
Stock beneficially owned by Messrs. William T. O'Donnell, Jr. (2,240,078 shares)
and John H. Schmitz (296,684 shares) will be voted to approve such issuance. In
additional, APNH is required to vote its shares of Series A Preferred Stock
(representing 1,710,900 votes) to approve such issuance.
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 (retroactive to November 15, 1996) 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.
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.
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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.
Transfer of Assets of Sierra Tucson, Inc.
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.
Management Changes
On November 14, 1996, John H. Schmitz resigned as the Company's President, Chief
Executive Officer and Chief Financial Officer and as a director. The Company's
Chairman of the Board and founder, Mr. William T. O'Donnell, Jr., was appointed
acting Chief Executive Officer and President and Ms. Loree Thompson was
appointed as acting Chief Financial Officer. Mr. Stephen Berger was elected to
fill the vacancy created by the resignation and to serve the remaining term of
Mr. Schmitz. Mr. Berger is a partner in the Chicago law firm of Neal, Gerber and
Eisenberg.
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Immediately following the closing of the Preferred Stock Transaction, the Board
of Directors of the Company increased the size of the Board to nine persons and
elected the following persons as directors of the Company: Lee S. Neibart, W.
Edward Scheetz, Bruce Spector and Alfred C. Trivilino. Each of the Preferred
Directors is affiliated with Apollo.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.70 Asset Purchase agreement between Sierra Tucson, Inc. and
Soften Realty, LLC
10.71 Operating Agreement of Soften Realty, Inc. between
NextHealth, Inc. and AP NH, LLC
10.72 Security Agreement between Sierra Tucson, Inc. and Soften
Realty, LLC
10.73 Non-negotiable Secured Promissory Note
10.74 Assumption agreement
10.75 Bill of Sale and Assignment between Sierra Tucson, Inc. and
Soften Realty, LLC
10.76 Preferred Stock and Warrant Purchase agreement between
NextHealth, Inc. and AP LOM LLC
10.77 Registration and Pre-emptive Rights agreement between
NextHealth, Inc. and AP LOM LLC
10.78 Credit agreement between NextHealth, Inc. and AP LOM LLC
10.79 Pledge agreement between NextHealth, Inc. and AP LOM LLC
(b) Reports on Form 8-K
NONE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NextHealth, Inc.
Registrant
DATE: December 19, 1996 BY:/s/ William T. O'Donnell, Jr.
_____________________________
WILLIAM T. O'DONNELL, JR.
President and Chief Executive Officer
DATE: December 19, 1996 BY:/s/ Loree Thompson
_____________________________
LOREE THOMPSON
Principal Financial and Accounting Officer
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<PAGE> 1
Exhibit 10.70
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into
as of November 13, 1996, among SOFTEN REALTY, L.L.C., a Delaware limited
liability company ("Buyer") and SIERRA TUCSON, INC., a Delaware corporation
("Seller"). Capitalized terms used herein and not otherwise defined are defined
in Section 8 hereof.
W I T N E S S E T H:
WHEREAS, Seller is engaged in, among other things, the business of
operating a state licensed, special psychiatric hospital and behavioral health
center for the treatment of substance abuse and mental health disorders,
including, without limitation, eating disorders, dual diagnosis and on-site
workshops (the "Business");
WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase
from Seller, certain assets related to the Business; and
WHEREAS, the parties hereto desire to set forth herein their agreements
and understandings with respect to the subject matter hereof.
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements and covenants hereinafter set forth and for other good and valuable
consideration the receipt and sufficiency of which are hereby acknowledged, the
Purchaser and Seller hereby agree as follows:
SECTION 1. PURCHASE AND SALE OF ASSETS.
(a) Acquired Assets. On and subject to the terms and conditions of this
Agreement, at the Closing, Buyer shall purchase from Seller, and Seller shall
sell, transfer, convey and deliver to Buyer, all right, title and interest of
Seller, individually and collectively, in and to each of the following assets
(collectively, the "Acquired Assets"):
(i) all accounts, notes and other receivables relating to the
Business or the Acquired Assets (it being
<PAGE> 2
understood that in the event that Seller at any time collects any amounts
in respect of the Accounts Receivable included within the Acquired Assets
subsequent to Closing, Seller shall promptly remit to Buyer all amounts so
collected);
(ii) all raw materials and supplies, works-in-process, finished
goods and other items of inventory relating to the Business or the
Acquired Assets (collectively, the "Inventory");
(iii) all machinery, office and computer equipment, tools,
furniture, fixtures, leasehold improvements and other tangible personal
property and fixed assets relating to the Business or the Acquired Assets,
wherever located, including, without limitation (collectively, the "Fixed
Assets");
(iv) Seller's interest in all leases for real and personal
property relating to the Business (collectively, the "Leases");
(v) all Intellectual Property relating to the Business or the
Acquired Assets, goodwill associated therewith, licenses and sublicenses
granted and obtained with respect thereto and rights thereunder and all
remedies against infringements thereof and rights to protection of
interests therein under the laws of all jurisdictions;
(vi) all franchises, approvals, permits, licenses, orders,
registrations, qualifications, certificates, variances and similar rights
(collectively, "Permits") relating to the Business or the Acquired Assets
obtained from governmental agencies to the extent transferable to Buyer;
(vii) all rights to receive mail and other communications
addressed to Seller sent to the office of Seller (including, without
limitation, mail and communications from customers, suppliers,
distributors, agents and others and payments) relating to the Business or
the Acquired Assets;
(viii) all books, records (including maintenance records, product
tracing records, quality assurance/control records), ledgers, files,
photographs, archives, reference materials, documents, correspondence,
lists, drawings, specifications, advertising and promotional materials,
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studies, reports, research and other printed or written materials relating
to the Business or the Acquired Assets; and
(ix) all other property owned by Seller or in which Seller has an
interest that relates to the Business or the Acquired Assets, including,
without limitation, the names "Sierra Tucson Hospital" and any derivatives
thereof and the Business as a going concern and the goodwill thereof.
(b) Excluded Assets. Notwithstanding the foregoing, the following assets
are specifically excluded from the Acquired Assets and shall remain the property
of Seller (collectively, the "Excluded Assets"):
(i) all cash or cash equivalents of Seller;
(ii) the corporate seal, certificate of incorporation, minute
books, stock books, tax returns, books of account or other records having
to do with the corporate organization of Seller; and
(iii) all right, title and interest of Seller in, to and under
this Agreement.
(c) Assumed Liabilities. On and subject to the terms and conditions of
this Agreement, Buyer shall assume the following obligations and liabilities of
Seller (collectively, the "Assumed Liabilities"):
(i) all liabilities of Seller relating to the Business reflected
on the Financial Statements or incurred in the ordinary course subsequent
to the date of the Financial Statements; and
(ii) all liabilities of Seller relating to the Employee Benefit
Plans, as well as the Employee Benefit Plans.
(d) Excluded Liabilities. Notwithstanding anything to the contrary
contained in this Agreement, Buyer shall not assume or be liable for any
liabilities or obligations (whether known or unknown, whether asserted or
unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due) of Seller
other than the Assumed Liabilities (collectively, the "Excluded
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Liabilities). Seller hereby acknowledges that it is retaining the Excluded
Liabilities and Seller shall pay, discharge and perform all such liabilities and
obligations promptly when due, except to the extent contested by Seller in good
faith and by proper proceedings.
(e) Purchase Price. The purchase price for the Acquired Assets shall be an
amount equal to $8,000,000 (plus assumption of the Assumed Liabilities), payable
at the Closing, by Buyer's delivery to Seller of Buyer's secured promissory note
(the "Note") substantially in the form of attached Exhibit A. Buyer's
obligations under the Note shall be secured by Buyer's grant to Seller of a
security interest in and to certain of Buyer's assets pursuant to a Security
Agreement (the "Security Agreement") substantially in the form of attached
Exhibit B.
(f) Allocation of Purchase Price. It is the express intention of the
parties that the Purchase Price shall be allocated among the Acquired Assets in
accordance with and as provided by Section 1060 of the Code. The parties agree
that any tax returns or other information they may file or cause to be filed
with any government authority shall be prepared and filed consistently with the
allocations agreed upon hereunder. In this regard, the parties agree that, to
the extent required, they will each properly prepare and timely file Form 8594
in accordance with Section 1060 of the Code. Within 90 days after the Closing
Date, the parties shall jointly prepare an allocation of the Purchase Price
consistent with the requirements of Section 1060 of the Code.
SECTION 2. CLOSING.
(a) The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Battle Fowler LLP,
Park Avenue Tower, 75 East 55th Street, New York, New York 10022, at 10:00 a.m.,
local time, on November 13, 1996, or such other time and place as Buyer and
Seller shall mutually determine (the "Closing Date").
(b) Seller's Deliveries at the Closing. At the Closing, Seller (except as
otherwise noted below) shall deliver to Buyer the following:
(i) a bill of sale and assignment;
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(ii) transfer documents, including, without limitation, copyright
and trademark assignments, in form and substance reasonably acceptable to
Buyer, to effect the transfer of the Intellectual Property to Buyer;
(iii) releases of Liens affecting any of the Acquired Assets,
including, without limitation, termination statements on Form UCC-3 and a
payoff letter from each creditor of the Business indicating that upon
payment of a specified amount, such creditor shall release all Liens
relating to the Business or any of the Acquired Assets;
(iv) all third party consents required in connection with
consummation of the transactions contemplated by this Agreement;
(v) all state tax clearances required by the State of Arizona or
other appropriate documentation from such state certifying the payment by
Seller of all applicable sales taxes; and
(vi) such other instruments of sale, transfer, conveyance and
assignment as Buyer reasonably may request, in form reasonably
satisfactory to Buyer.
(c) Buyer's Deliveries at the Closing. At the Closing, Buyer (except as
otherwise noted below) shall deliver to Seller the following:
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(i) the Note;
(ii) the Security Agreement;
(iii) a bill of assumption; and
(iv) such other instruments of assumption as Seller may
reasonably request in form reasonably satisfactory to Buyer.
SECTION 3. CONDITIONS TO OBLIGATION TO CLOSE.
(a) Conditions to Obligation of Buyer. The obligation of Buyer to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions as of the Closing:
(i) Buyer shall have received from Seller each of the documents
referred to in Section 2(b) hereof;
(ii) the representations and warranties of Seller set forth in
Section 4 hereof shall be true and correct in all material respects;
(iii) Seller shall have performed and complied in all material
respects with all of their respective covenants hereunder;
(iv) no action, suit or proceeding shall be pending or threatened
before any court, arbitrator or other body or administrative agency of any
federal, state or local jurisdiction wherein an unfavorable injunction,
judgment, order, decree, ruling or charge would subject Buyer to damages
in respect of the consummation of the transaction contemplated hereby this
Agreement or prevent consummation of any of the transactions contemplated
by this Agreement (and no such injunction, judgment, order, decree, ruling
or charge shall be in effect);
(v) Seller shall have delivered to Buyer one or more
certificates to the effect that each of the conditions specified in
Section 3(a)(i) through (iv) hereof, inclusive, have been satisfied;
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(vi) Buyer shall be satisfied with its business, legal,
environmental and accounting due diligence investigation and review of the
Business, the Acquired Assets and the Seller;
(vii) Seller shall have provided Buyer with a certificate of
amendment to its articles of incorporation, in form acceptable for filing
with the Secretary of State of the State of Delaware, changing Seller's
corporate name to a name substantially dissimilar to its present name, to
be filed by Seller immediately following the Closing; and
(viii) all documents incident the transactions contemplated hereby
shall be satisfactory in form and substance to Buyer and its counsel.
Buyer may waive any condition specified in this Section 3(a) if it executes a
writing so stating at or prior to the Closing.
(b) Conditions to Obligation of Seller. The obligation of Seller to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions as of the Closing:
(i) Seller shall have received from Buyer each of the documents
referred to in Section 2(c) hereof;
(ii) the representations and warranties of Buyer set forth in
Section 5 hereof shall be true and correct in all material respects;
(iii) Buyer shall have performed and complied in all material
respects with all of its covenants hereunder;
(iv) no action, suit or proceeding shall be pending or threatened
before any court, arbitrator or other body or administrative agency of any
federal, state or local jurisdiction wherein an unfavorable injunction,
judgment, order, decree, ruling or charge would subject Seller to damages
in respect of the consummation of the transactions contemplated this
Agreement or prevent consummation of any of the transactions contemplated
by this Agreement (and no such injunction, judgment, order, decree, ruling
or charge shall be in effect);
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(v) Buyer shall have delivered to Seller a certificate to the
effect that each of the conditions specified in Section 3(b)(i) through
(iv), inclusive, have been satisfied; and
(vi) all documents incident the transactions contemplated by this
Agreement shall be satisfactory in form and substance to Seller and its
counsel.
Seller may waive any condition specified in this Section 3(b) if it executes a
writing so stating and signed by Seller at or prior to the Closing.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF SELLER.
Seller represents and warrants to Buyer that the representations and warranties
set forth in this Section 4 are true and correct and will be so as of the
Closing Date, in each case regardless of any investigation or lack of
investigation by any party hereto:
(a) Organization and Qualification. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and is qualified to do business in every jurisdiction in which the
failure to so qualify would reasonably be expected to have a material adverse
effect on the financial condition, operating results, assets, operations or
business prospects of Seller.
(b) Authority of Seller; Validity. Seller has all requisite corporate
power and authority and all material licenses, permits and authorizations
necessary to own and operate its properties, to carry on its businesses as now
conducted and to execute and deliver this Agreement and to perform its
obligations hereunder. Seller has all requisite power, authority and capacity to
execute and deliver this Agreement and the relevant Exhibits hereto and to
perform his or her respective obligations hereunder and thereunder, as the case
may be. This Agreement and any applicable Exhibits hereto constitute the valid
and legally binding obligation of Seller, enforceable in accordance with their
respective terms and conditions.
(c) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, shall
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
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order, decree, ruling, charge or other restriction of any government,
governmental agency, or court to which Seller is subject or any provision of the
certificate of incorporation or bylaws of Seller or (ii) conflict with, result
in a breach of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify, or cancel, or
require any notice under, any agreement, contract, lease, license, instrument or
other arrangement to which Seller is a party or by which it is bound or to which
any of the Acquired Assets is subject, or (iii) result in the imposition of any
Lien upon any of the Acquired Assets. Seller is not required to give any notice
to, make any filing with, or obtain any authorization, consent, or approval of
any governmental agency to consummate the transactions contemplated by this
Agreement.
(d) Financial Statements. The financial statements of Seller (consisting
of a balance sheet, a statement of operations and a statement of cash flow and
the related notes thereto) as at and for the two years ended December 31, 1995
and as at and for the nine months ended September 30, 1996) (the "Financial
Statements"), in the forms which have previously been provided to Purchaser (i)
are true and correct, have been prepared in accordance with generally accepted
accounting principles consistently applied, except as otherwise indicated in the
notes to such financial statements and subject in the case of interim financial
statements to the absence of footnotes and year-end adjustments consisting only
of normal recurring accruals, and (ii) present fairly the results of operations
of Seller for the periods covered thereby.
(e) Brokers' Fees. Seller has no liability or obligation to pay any fees
or commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement.
(f) Legal Compliance. Seller has complied, and are in compliance, with all
applicable laws, rules and regulations of federal, state, local and foreign
governments (and all agencies thereof), including, without limitation, laws
relating to environmental protection, hazardous waste, health and safety, and no
action, suit, proceeding, hearing, investigation, charge, complaint, claim,
demand, or notice has been filed or commenced against any of them alleging any
failure to so comply.
(g) Taxes. Seller has filed, on a timely basis, all required federal,
state and local income, sales, franchise and other tax
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returns or reports relating to Seller, the Business and the Acquired Assets,
accurately reflecting any and all income or other taxes owing to the United
States, or any subdivision thereof, or any taxing authority, and immediately
subsequent to the Closing, there will be no tax deficiencies (including
penalties and interest) of any kind assessed against Buyer with respect to
Seller, the Business or the Acquired Assets for any taxable periods ending on or
before the Closing Date.
(h) Title to Acquired Assets. Seller has good and marketable title to, or
a valid leasehold interest in, each of the Acquired Assets, free and clear of
any Lien or restriction on transfer, except for any required third party
consents necessary to assign the same to Buyers.
(i) Leased Property. The Leases constitute all of the leases relating to
the Business. Each of such leases is in full force and effect. With respect to
the Leases: (i) such Leases are legal, valid and binding obligations of, and
enforceable against, the parties thereto in accordance with their terms, and
(ii) except for the failure to make monthly payments on certain personal
property leases, neither Seller and, to the best of Seller's knowledge, no third
party, is in breach or default, and no event has occurred (including the
consummation of the transactions contemplated hereby) which, with or without the
lapse of time or the giving of notice, would constitute such a breach or default
or permit termination, modification, or acceleration under any Lease.
(j) Intellectual Property. Seller is, and upon consummation of the
transactions contemplated hereby Buyer will be vested with, good, sole and
marketable right, title and interest in and to the Intellectual Property
(including, without limitation, the exclusive right to, or to permit or cause
others to, see, display, distribute, reproduce, create, develop, sell, license
and otherwise exploit the Intellectual Property and all derivative works
thereof). To the best of Seller's knowledge, Seller, with respect to the
operation of the Business, has not interfered with, infringed upon,
misappropriated or otherwise come into conflict with any Intellectual Property
rights of any third party. Seller has never received any charge, complaint,
claim, demand or notice alleging any interference, infringement,
misappropriation or violation referred to in the preceding sentence. To the best
of Seller's knowledge, except as disclosed to Buyer in writing prior to the
Closing Date, no third party has interfered with, infringed
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upon, misappropriated, or otherwise come into conflict with any of the
Intellectual Property.
(k) Sufficiency and Condition of Assets. The Acquired Assets include all
of the assets, both tangible and intangible, used by Seller in the conduct of
the Business or necessary to operate the Business as presently conducted. Each
of the Fixed Assets has been maintained in good operating condition and its
capabilities have been maintained (subject to normal wear and tear) in
accordance with industry practice.
(l) Accounts Receivable. Each of the Accounts Receivable arose in the
ordinary course of the Business. There exists no condition or circumstance that
would threaten or impair the collection of any of the Accounts Receivable.
Seller's accounts receivable ledger has been maintained in accordance with
generally acceptable accounting principles consistently applied.
(m) Inventory. The Inventory consists of items actually on hand which are
usable in the normal course of the Business as heretofore operated, and the
dollar amounts at which the Inventory is carried on Seller's books and records
reflect the normal inventory valuation policy of the Seller. The Inventory is
maintained at normal levels consistent with past practice and business needs.
(n) Contracts. Seller has delivered to Buyer a correct and complete copy
of each written agreement included in the Acquired Assets or Assumed
Liabilities. Seller has also delivered to Buyer a brief description of all oral
contracts, agreements and other arrangements to which Seller is a party and
which relate to the Acquired Assets or the Assumed Liabilities. With respect to
Seller's contracts, agreements and other arrangements: (i) to the best of
Seller's knowledge, such contract, agreement or arrangement is legal, valid,
binding, enforceable in accordance with its terms and in full force and effect,
(ii) Seller is not in breach or default, and no event has occurred which with
notice or lapse of time would constitute a breach or default by Seller or permit
any third party to terminate, modify, or accelerate, such agreement,
(iii) Seller has not repudiated any provision of such agreement, contract or
arrangement, (iv) to the best of Seller's knowledge, no third party is in breach
or default, and no event has occurred which with notice or lapse of time would
constitute a breach or default by such third party or permit Seller to
terminate, modify,
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or accelerate, such agreement, contract or arrangement, (v) Seller does not have
any present expectation or intention of not fully performing any obligation on
its part to be performed pursuant to any contract, and (vi) Seller does not have
any knowledge of any breach or anticipated breach by any other party to any
contract to which it is a party.
(o) Litigation. No Seller (i) is subject to any outstanding injunction,
judgment, order, decree, ruling or charge of any judicial or administrative body
or agency or (ii) is a party or, to the best of Seller's knowledge, is
threatened to be made a party to, any action, suit, proceeding, hearing or
investigation of, in, or before any court, arbitrator or other body or
administrative agency of any federal, state, local, or foreign jurisdiction.
(p) Employees. To the best of Seller's knowledge, no executive, employee,
or group of employees of Seller has any plans to terminate such individual's
employment by Seller. Seller has complied with all laws relating to the
employment of labor, including provisions thereof relating to wages, hours,
equal opportunity, collective bargaining and the payment of social security and
other taxes, and, to the best of Seller' knowledge, Seller does not have any
material labor relations problems (including any union organization activities,
threatened or actual strikes or work stoppages or material grievances).
(q) Employee Benefits. With respect to all employees and former employees
of Seller, Seller does not maintain, contribute to or have any liability under
(or with respect to) any (i) Employee Pension Benefit Plan, whether or not
terminated, (ii) Employee Welfare Benefit Plan, whether or not terminated, which
provides medical, health, life insurance or other welfare-type benefits for
current or future retirees or current or future former employees or their
spouses or dependents (other than in accordance with Sec. 4980B(f) of the Code),
(iii) (A) Multiemployer Plan or (B) any plan of the type described in Section
4063 and 4064 of ERISA or Section 413(c) of the Code, and Seller has not
incurred any current or potential withdrawal liability as a result of a complete
or partial withdrawal (or potential partial withdrawal) from any Multiemployer
Plan or (iv) deferred compensation or retirement plans or arrangements, employee
welfare, fringe benefit or bonus plan, program, policy or other arrangement for
employees or any other arrangement for employees or former employees of Seller,
their spouses or dependents, whether or not terminated.
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(r) Permits, Etc. All or the Permits necessary for the conduct of the
Business are assignable to Buyer. No event has occurred and continuing which
would allow any such Permit to be revoked or terminated.
(s) Customers and Suppliers. None of the ten largest customers of and the
ten largest suppliers of Seller has terminated or materially reduced its
business with Seller within the last 12 months. No Seller has received any
notice that any such customer or supplier intends to terminate or materially
reduce its business with Seller and to the best knowledge of Seller, none of
such customers or suppliers has such intention.
(t) Full Disclosure. To the best of Seller's knowledge, as of the date of
this Agreement (and as of the Closing), neither this Agreement nor any of the
schedules, exhibits, attachments, written statements, documents, certificates or
other items prepared and/or supplied to Buyer by or on behalf of Seller with
respect to the transactions contemplated hereby contain (or as of the Closing
shall contain) any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements and information
contained in this Section 4 not misleading.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and
warrants that the representations and warranties set forth in this Section 5 are
true and correct and will be so as of the Closing Date, in each case regardless
of any investigation or lack of investigation by any party hereto:
(a) Organization of Buyer. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
(b) Authority of Buyer; Validity. Buyer has full corporate power and
authority to execute and deliver this Agreement and the Exhibits hereto and to
perform its obligations hereunder. This Agreement constitutes the valid and
legally binding obligation of Buyer, enforceable in accordance with its terms
and conditions.
(c) Noncontravention. Neither the execution and the delivery of this
Agreement and the Exhibits hereto, nor the consummation of the transactions
contemplated hereby, shall (i) violate any constitution, statute, regulation,
rule, injunction, judgment, order, decree, ruling, charge, or other restriction
of any
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government, governmental agency, or court to which Buyer is subject or any
provision of its certificate of incorporation or bylaws or (ii) conflict with,
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice under any agreement, contract, lease, license, instrument,
or other arrangement to which Buyer is a party or by which it is bound or to
which any of its assets is subject. Buyer is not required to give any notice to,
make any filing with, or obtain any authorization, consent, or approval of any
government or governmental agency in order for the parties to consummate the
transactions contemplated by this Agreement.
(d) Brokers' Fees. Buyer has no liability or obligation to pay any fees or
commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement for which Seller could become liable or
obligated.
SECTION 6. ADDITIONAL AGREEMENTS.
(a) Survival. Subject to Section 6(b) hereof, the representations,
warranties, covenants and agreements set forth in this Agreement or in any
certificate or other writing delivered in connection with this Agreement shall
survive the Closing and the consummation of the transactions contemplated hereby
notwithstanding any examination made for or on behalf of Buyer or Seller.
(b) Indemnification.
(i) Indemnification of Buyer. From and after the date hereof,
Seller shall indemnify and hold harmless Buyer from and against any loss,
damage or expense, including, without limitation, reasonable attorneys'
and consultants' fees, suffered by Buyer arising or resulting from (a) any
inaccuracy in or breach of any of the representations, warranties,
covenants or agreements made by Seller in this Agreement or any other
agreement, document or instrument delivered in connection herewith; (b)
the operation of the Business prior to the Closing Date; (c) any act or
omission of Seller, or their employees or agents, occurring prior to the
Closing Date; (d) any claim against Buyer for any taxes relating to the
Business in respect of any period ending prior
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to the Closing Date; or (e) any liability or obligation of Seller which
are not Assumed Liabilities.
(ii) Indemnification of Seller. From and after the date hereof,
Buyer shall indemnify and hold harmless Seller from and against any loss,
damage or expense, including, without limitation, reasonable attorneys'
and consultants' fees, suffered by Seller arising or resulting from: (a)
any inaccuracy in or breach of any of the representations, warranties,
covenants or agreements made by Buyer in this Agreement or any other
agreement, document or instrument delivered in connection herewith; (b)
the operation of the Business after the Closing Date; (c) any act or
omission of Buyer, or its employees and agents, occurring after the
Closing Date; (d) any claim against Seller for any taxes relating to the
Business in respect of any period beginning after the Closing Date; or (e)
any liability or obligation which is an Assumed Liability.
(iii) Third Party Claims. If any third party shall notify any
party to this Agreement (the "Indemnified Party") with respect to any
matter which may give rise to a claim for indemnification against any
other party to this Agreement (the "Indemnifying Party") under this
Section 6(b), then the Indemnified Party shall notify each Indemnifying
Party thereof. Within 30 days after receipt of notice of a particular
matter, the Indemnifying Party may assume the defense of such matter if
the Indemnifying Party admits responsibility and reaffirms its obligation
for indemnification with respect to such matter; provided, however, that
(A) the Indemnifying Party shall retain counsel reasonably acceptable to
the Indemnified Party, (B) the Indemnified Party, at its sole cost and
expense which shall not be included as part of the loss, damage or
expense, including, without limitation, reasonable attorneys' and
consultants' fees, suffered by it, may participate in the defense of such
claim with co-counsel of its choice to the extent that the Indemnified
Party believes in its sole discretion that such matter shall affect its
ongoing business and (C) the Indemnifying Party shall not consent to the
entry of any judgment with respect to the matter or enter into any
settlement with respect to the matter which does not include a provision
whereby the plaintiff or claimant in the matter releases the Indemnified
Party from all liability with respect
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thereto. If, within such 30-day period, the Indemnifying Party does not
assume the defense of such matter, the Indemnified Party may defend
against the matter in any manner that it reasonably may deem appropriate
and may consent to the entry of any judgment with respect to the
matter or enter into any settlement with respect to the matter without the
consent of the Indemnifying Party, subject to the right of the
Indemnifying Party to contest its obligation to indemnify and hold
harmless the Indemnified Party.
(iv) Amount of Indemnification. The amount to which an
Indemnified Party shall be entitled under this Section 6(b) shall be
determined: (a) by the written agreement between the Indemnified Party and
the Indemnifying Party; (b) by a final judgment or decree of any court of
competent jurisdiction or (c) by any other means to which the Indemnified
Party and the Indemnifying Party shall agree. The judgment or decree of a
court shall be deemed final when the time for appeal, if any, shall have
expired and no appeal shall have been taken or when all appeals taken have
been finally determined.
(c) Transaction Expenses. Except as otherwise provided herein, each of
Buyer and Seller shall bear his, her or its own costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby (whether
or not consummated).
(d) Further Assurances. Seller shall execute and deliver such further
instruments of conveyance and transfer and take such additional action as Buyer
may reasonably request (including assisting Buyer in the collection of
receivables) to effect, consummate, confirm or evidence the transfer to Buyer of
the Acquired Assets, and Seller shall execute such documents as may be necessary
to assist Buyer in preserving or perfecting its rights in the Acquired Assets.
(e) Confidentiality. Whether or not the transactions contemplated hereby
are consummated, Buyer and Seller shall keep confidential all information and
materials regarding the other party(ies) reasonably designated by such
party(ies) as confidential at the time of disclosure thereof. If the
transactions contemplated hereby are consummated, Seller shall maintain
confidential and shall not use or disclose, directly or indirectly (except as
required by law or as authorized in writing by Buyer
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prior to such disclosure), any confidential or proprietary information or
materials regarding the other party.
(f) Seller' Noncompete and Nonsolicitation.
(i) In consideration of the Closing Date Payment, Seller hereby
agrees that during the period beginning on the Closing Date and ending on
the fifth anniversary of the Closing Date (the "Noncompete Period"), it
shall not, directly or indirectly, either for itself or for any other
Person, permit its name to be used by or Participate (as hereinafter
defined) in any business located anywhere in the continent of North
America or enterprise identical or similar to or competitive with the
Business or Buyer's business. For purposes of this Section 6(f), the term
"Participate" includes any direct or indirect interest in any enterprise,
whether as an officer, director, stockholder, employee, partner, sole
proprietor, agent, representative, independent contractor, consultant,
franchisor, franchisee, creditor, owner or otherwise. Seller agrees that
this covenant is reasonable with respect to its duration, geographical
area and scope.
(ii) During the Noncompete Period Seller shall not (A) induce or
attempt to induce any employee of Buyer or its Affiliates to leave his or
her employ or in any way interfere with the relationship between Buyer or
its Affiliates and any of their respective employees or (B) induce or
attempt to induce any supplier, licensee, licensor, franchisee, or other
business relation of Buyer or its Affiliates to cease doing business with
them or in any way interfere with the relationship between Buyer or its
Affiliates and any customer or business relation.
(iii) The parties hereto agree that Buyer may suffer irreparable
harm from a breach by Seller of any of the covenants or agreements
contained in this Section 6(f). In the event of an alleged or threatened
breach by Seller of any of the provisions of this Section 6(f), Buyer or
its successors or assigns may, in addition to all other rights and
remedies existing in its favor, apply to any court of competent
jurisdiction for specific performance and/or injunctive or other relief in
order to enforce or prevent any violations of the provisions hereof
(including the extension of the Noncompete Period by a period equal to the
length of
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the violation of this Section 6(f)). In the event of an alleged breach or
violation by Seller of any of the provisions of this Section 6(i), the
Non-Competition Period shall be tolled until such alleged breach or
violation is resolved. Seller agrees that these restrictions are
reasonable.
(iv) If, at the time of enforcement of any of the provisions of
this Section 6(f), a court holds that the restrictions stated herein are
unreasonable under the circumstances then existing, the parties hereto
agree that the maximum period, scope or geographical area reasonable under
such circumstances shall be substituted for the stated period, scope or
area.
(v) Seller agrees that the covenants made in Section 6(f)(i) and
(ii) shall be construed as an agreement independent of any other provision
of this Agreement and shall survive any order of a court of competent
jurisdiction terminating any other provision of this Agreement.
(g) Employees. Immediately after the Closing, all employees employed by
Seller immediately prior to the Closing shall become employees of Buyer on terms
and conditions substantially similar to their employment by Seller. Each such
employee shall be entitled to participate in all Buyer employee benefit and
employee welfare plans to the same extent as similarly situated employees of
Buyer (it being understood that each of Seller's employees shall be entitled to
prior service credit in respect of Buyer's vacation policy). When employed by
Buyer, all former employees of Seller shall be employees-at-will of Buyer and
nothing contained herein shall entitle any employee to remain in the employment
of Buyer or affect the right of Buyer to terminate any employee at any time.
SECTION 7. TERMINATION. This Agreement may be terminated:
(a) by mutual written consent of Buyer and Seller at any time
prior to the Closing; or
(b) by Buyer or Seller, by giving written notice to the other party (the
"Nonterminating Party") at any time prior to Closing (i) in the event that the
Nonterminating Party has breached any representation, warranty or covenant
contained in this Agreement in any material respect, or (ii) if the Closing
shall not have occurred on or before December 31, 1996.
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<PAGE> 19
If any party terminates this Agreement pursuant to this Section 7, all rights
and obligations of the parties hereunder shall terminate without any liability
of any party to any other party, except for any liability of Seller for a breach
of Section 6(e) hereof.
SECTION 8. DEFINITIONS.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act of 1934, as amended.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Employee Benefit Plan" means any (i) nonqualified deferred compensation
or retirement plan or arrangement which is an Employee Pension Benefit Plan,
(ii) qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (iii) qualified defined benefit retirement plan
or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (iv) Employee Welfare Benefit Plan, fringe benefit,
bonus plan or other plan or program.
"Employee Pension Benefit Plan" shall have the meaning set forth in
Section 3(2) of ERISA.
"Employee Welfare Benefit Plan" shall have the meaning set forth in
Section 3(1) of ERISA.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Intellectual Property" means (i) all inventions, all improvements
thereto, and all patents, patent applications, and patent disclosures, together
with all reissuances, continuations, continuations-in-part, revisions,
extensions, and reexaminations thereof, (ii) all registered and unregistered
trademarks, service marks, trade dress, logos, trade names, and corporate names,
including all goodwill associated therewith, and all applications,
registrations, and renewals in connection therewith, (iii) all copyrightable
works, all copyrights, and all applications, registrations, and renewals in
connection therewith, (iv) all trade secrets, know-how and confidential business
information, (v) all
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<PAGE> 20
computer software, (vi) all other proprietary rights, and (vii) all copies and
tangible embodiments thereof.
"Lien" shall mean any security interest, pledge, bailment (in the nature
of a pledge or for purposes of security), mortgage, deed of trust, the grant of
a power to confess judgment, conditional sales and title retention agreement
(including any lease in the nature thereof), charge, encumbrance or other
similar arrangement or interest in real or personal property, other than (i)
leases (other than financing leases) and (ii) Liens of landlords and lessors of
real property.
"Multiemployer Plan" shall have the meaning set forth in Section 3(37) of
ERISA.
"Person" means any individual, partnership, corporation, limited liability
company, association, trust, joint venture or other organization or entity.
SECTION 9. MISCELLANEOUS.
(a) No Third Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the parties hereto and their
respective successors and permitted assigns.
(b) Entire Agreement. This Agreement and the Schedules and Exhibits hereto
(including the documents referred to herein and therein) constitute the entire
agreement among the parties hereto and supersedes any prior understandings,
agreements or representations by or between the parties hereto, written or oral,
that may have related in any way to the subject matter hereof.
(c) Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective legal representatives,
successors, heirs and permitted assigns. No Seller nor Buyer may assign either
this Agreement or any of his, her or its rights, interests, or obligations
hereunder without the prior written approval of the other party; provided,
however, that Buyer may (i) assign any or all of its rights and interests
hereunder to one or more of its Affiliates and (ii) designate one or more of its
Affiliates to perform its obligations hereunder.
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<PAGE> 21
(d) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
(e) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(f) Notices. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand, claim
or other communication hereunder shall be deemed duly given when delivered
personally to the recipient or sent to the recipient by reputable express
courier service (charges prepaid), and addressed to the intended recipient as
set forth below:
If to Seller:
Sierra Tucson, Inc.
16600 North Lago Del Oro Parkway
Tucson, Arizona 85739
Telephone: (520) 792-5800
Telecopy: (520) 792-5884
If to Buyer:
Soften Realty, L.L.C.
c/o Apollo Real Estate Advisors, L.P.
1301 Avenue of the Americas
38th Floor
New York, New York 10019
Telephone: (212) 261-4000
Telecopy: (212) 261-4060
Any party may send any notice, request, demand, claim or other communication
hereunder to the intended recipient at the address set forth above using any
other means, but no such notice, request, demand, claim or other communication
shall be deemed to have been duly given unless and until it actually is received
by the intended recipient. Any party may change the address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other party notice in the manner herein set forth.
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<PAGE> 22
(g) Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Delaware without giving effect
to any choice or conflict of law provision or rule that would cause the
application of the laws of any jurisdiction other than the State of Delaware.
(h) Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by Buyer
and Seller. No waiver by any party of any default, misrepresentation, or breach
of warranty or covenant hereunder, whether intentional or not, shall be deemed
to extend to any prior or subsequent default, misrepresentation, or breach of
warranty or covenant hereunder or affect in any way any rights arising by virtue
of any prior or subsequent such occurrence.
(i) Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
(j) Construction. The language used in this Agreement shall be deemed to
be the language chosen by the parties to express their mutual intent, and no
rule of strict construction shall be applied against any party.
(k) Remedies. The parties shall each have and retain all other rights and
remedies existing in their favor at law or equity, including, without
limitation, any actions for specific performance and/or injunctive or other
equitable relief (including, without limitation, the remedy of rescission) to
enforce or prevent any violations of the provisions of this Agreement. Without
limiting the generality of the foregoing, Seller hereby agrees that in the event
Seller fails to convey the Acquired Assets to Buyer in accordance with the
provisions of this Agreement, Buyer's remedy at law may be inadequate. In such
event, Buyer shall have the right, in addition to all other rights and remedies
it may have, to specific performance of the obligations of Seller to convey the
Acquired Assets.
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<PAGE> 23
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
BUYER:
SOFTEN REALTY, L.L.C., a Delaware
limited liability company
By: NEXTHEALTH, INC., a Delaware
corporation
By: /s/ Bob Walton
____________________________________
Name: Bob Walton
Title: Authorized Representative
SELLER:
SIERRA TUCSON, INC., a Delaware
corporation
By: /s/ Bob Walton
____________________________________
Name: Bob Walton
Title: Authorized Representative
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<PAGE> 24
EXHIBIT B-1
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT HAS BEEN REGISTERED UNDER THE ACT
AND SUCH LAWS OR (1) REGISTRATION UNDER APPLICABLE STATE SECURITIES LAWS IS NOT
REQUIRED AND (2) AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS FURNISHED
TO THE COMPANY TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED.
A TERM NOTE
$8,090,000 November 14, 1996
FOR VALUE RECEIVED, NEXTHEALTH, INC., a Delaware corporation (the
"Borrower"), hereby promises to pay to the order of AP LOM LLC (the "Lender"),
in lawful money of the United States of America in immediately available funds,
at Lender's office located at 1301 Avenue of the Americas, 38th Floor, New York,
New York 10019, or at such other office as may be designated, from time to time,
by the holder hereof in writing, on the Maturity Date the principal sum of EIGHT
MILLION NINETY THOUSAND DOLLARS ($8,090,000), or, if less, the unpaid principal
amount of the A Term Loan made by the Lender pursuant to the Credit Agreement.
Unless otherwise defined herein, capitalized terms used herein shall have the
meanings ascribed to such terms in the Credit Agreement referred to below.
The Borrower promises also to pay interest on the unpaid principal amount
hereof in like money at said office from the date hereof until paid at the rates
and at the times provided in Section 2.4 of the Credit Agreement.
This Note is the A Term Note referred to in the Credit Agreement, dated as
of November 14, 1996 (as amended, modified or supplemented from time to time,
the "Credit Agreement"), between the Borrower and the Lender and is entitled to
the benefits thereof and of the other Loan Documents. This Note is secured by
the Mortgage, the Security Agreement and the Pledge Agreement and is entitled to
the benefits of the Guaranty. This Note is subject to voluntary prepayment and
mandatory repayment, in whole or in part, prior to the Maturity Date as provided
in the Credit Agreement.
Lender shall, and is hereby authorized by Borrower to, endorse on the
Schedule annexed to this Note, or otherwise record in Lender's internal records,
an appropriate notation evidencing the date and amount of all principal
disbursed by the Lender hereunder, as well as the date and amount of each
repayment and prepayment hereunder; provided, however, that the failure of
Lender to make such a notation or any error in such notation shall not affect
the obligation of the Borrower under this Note. The Lender shall provide to the
Borrower on request from time to time copies of the Schedule annexed to this
Note showing all endorsements thereto at the time of each such request.
In case an Event of Default shall occur and be continuing, the principal
of and accrued interest on this Note may become or be declared to be due and
payable in the manner and with the effect provided in the Credit Agreement.
<PAGE> 25
The Borrower hereby waives presentment, demand, protest, notice of
dishonor, notice of nonpayment, notice of protest and diligence in collection,
and assents to the terms hereof and to any extension or postponement of the time
for payment or any other indulgence in connection with this Note. The Borrower
consents that the property securing this Note, or any part of such security, may
be released, exchanged, added to or substituted for by the Lender, without in
any way modifying, altering, releasing, affecting or limiting its liability
hereunder or the liens of the Mortgage, Security Agreement and Pledge Agreement,
and further agrees that the Lender shall not be required to first institute any
suit, or to exhaust any of its remedies against the Borrower or any other person
or party liable or to become liable hereunder, in order to enforce payment of
this Note.
This Note shall be construed in accordance with and governed by the laws
of the State of New York.
NEXTHEALTH, INC.
(Seal)
By:__________________
Name:
Title:
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<PAGE> 26
EXHIBIT B-2
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT HAS BEEN REGISTERED UNDER THE ACT
AND SUCH LAWS OR (1) REGISTRATION UNDER APPLICABLE STATE SECURITIES LAWS IS NOT
REQUIRED AND (2) AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS FURNISHED
TO THE COMPANY TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED.
B TERM NOTE
$5,000,000 November 14, 1996
FOR VALUE RECEIVED, NEXTHEALTH, INC., a Delaware corporation (the
"Borrower"), hereby promises to pay to the order of AP LOM LLC (the "Lender"),
in lawful money of the United States of America in immediately available funds,
at Lender's office located at 1301 Avenue of the Americas, 38th Floor, New York,
New York 10019, or at such other office as may be designated, from time to time,
by the holder hereof in writing, on the Maturity Date the principal sum of FIVE
MILLION DOLLARS ($5,000,000), or, if less, the unpaid principal amount of the B
Term Loans made by the Lender pursuant to the Credit Agreement. Unless otherwise
defined herein, capitalized terms used herein shall have the meanings ascribed
to such terms in the Credit Agreement referred to below.
The Borrower promises also to pay interest on the unpaid principal amount
hereof in like money at said office from the date hereof until paid at the rates
and at the times provided in Section 2.4 of the Credit Agreement.
This Note is the B Term Note referred to in the Credit Agreement, dated as
of November 14, 1996 (as amended, modified or supplemented from time to time,
the "Credit Agreement"), between the Borrower and the Lender and is entitled to
the benefits thereof and of the other Loan Documents. This Note is secured by
the Mortgage, the Security Agreement and the Pledge Agreement and is entitled to
the benefits of the Guaranty. This Note is subject to voluntary prepayment and
mandatory repayment, in whole or in part, prior to the Maturity Date as provided
in the Credit Agreement.
Lender shall, and is hereby authorized by Borrower to, endorse on the
Schedule annexed to this Note, or otherwise record in Lender's internal records,
an appropriate notation evidencing the date and amount of all principal
disbursed by the Lender hereunder, as well as the date and amount of each
repayment and prepayment hereunder; provided, however, that the failure of
Lender to make such a notation or any error in such notation shall not affect
the obligation of the Borrower under this Note. The Lender shall provide to the
Borrower on request from time to time copies of the Schedule annexed to this
Note showing all endorsements thereto at the time of each such request.
In case an Event of Default shall occur and be continuing, the principal
of and accrued interest on this Note may become or be declared to be due and
payable in the manner and with the effect provided in the Credit Agreement.
<PAGE> 27
The Borrower hereby waives presentment, demand, protest, notice of
dishonor, notice of nonpayment, notice of protest and diligence in collection,
and assents to the terms hereof and to any extension or postponement of the time
for payment or any other indulgence in connection with this Note. The Borrower
consents that the property securing this Note, or any part of such security, may
be released, exchanged, added to or substituted for by the Lender, without in
any way modifying, altering, releasing, affecting or limiting its liability
hereunder or the liens of the Mortgage, Security Agreement and Pledge Agreement,
and further agrees that the Lender shall not be required to first institute any
suit, or to exhaust any of its remedies against the Borrower or any other person
or party liable or to become liable hereunder, in order to enforce payment of
this Note.
This Note shall be construed in accordance with and governed by the laws
of the State of New York.
NEXTHEALTH, INC.
(Seal)
By:_____________
Name:
Title:
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<PAGE> 1
Exhibit 10.71
OPERATING AGREEMENT
OF
SOFTEN REALTY, L.L.C.
OPERATING AGREEMENT (this "Agreement") of SOFTEN REALTY, L.L.C., dated
as of November 13, 1996, between NEXTHEALTH, INC., a Delaware corporation
("NextHealth"), and AP NH, LLC, a Delaware limited liability company ("Apollo"),
as members (the "Members").
W I T N E S S E T H:
WHEREAS, the Members desire to organize a limited liability company
pursuant to and in accordance with the Delaware Limited Liability Company Act,
as amended from time to time (the "Act") upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing, of the mutual
covenants set forth herein and for other good and valuable consideration, the
receipt, adequacy and sufficiency of which are hereby acknowledged, the parties
hereto, intending legally to be bound, hereby agree as follows:
1. Name. The name of the limited liability company organized hereby is
SOFTEN REALTY, L.L.C. (the "Company").
2. Articles of Organization; Etc. The Members shall execute, deliver
and file, or cause to be executed, delivered and filed, articles of organization
of the Company (and any amendments and/or restatements thereof) and any other
certificates (and any amendments and/or restatements thereof) necessary for the
Company to qualify to do business in a jurisdiction in which the Company may
wish to conduct business.
3. Purpose. The Company is formed for the object and purpose of, and
the nature of the business to be conducted and promoted by the Company is,
engaging in any lawful act or activity for which limited liability companies may
be formed under the Act. Notwithstanding the generality of the foregoing, and
without any limitation thereof, a purpose of the Company shall be to engage in
the business of operating a state licensed, special psychiatric hospital and
behavioral health center for the treatment of substance abuse and mental health
disorders, dual diagnosis and on-site workshops.
4. Powers. In furtherance of its purposes, but subject to all of the
provisions of this Agreement, the Company shall have the power and is hereby
authorized to:
<PAGE> 2
(a) acquire by purchase, lease, contribution of property or
otherwise, own, hold, sell, convey, transfer or dispose of any real or
personal property which may be necessary, convenient or incidental to
the accomplishment of the purpose of the Company;
(b) act as a trustee, executor, nominee, bailee, director,
officer, agent or in some other fiduciary capacity for any person or
entity and to exercise all of the powers, duties, rights and
responsibilities associated therewith;
(c) take any and all actions necessary, convenient or
appropriate as trustee, executor, nominee, bailee, director, officer,
agent or other fiduciary, including the granting or approval of
waivers, consents or amendments of rights or powers relating thereto
and the execution of appropriate documents to evidence such waivers,
consents or amendments;
(d) operate, purchase, maintain, finance, improve, own, sell,
convey, assign, mortgage, lease or demolish or otherwise dispose of any
real or personal property which may be necessary, convenient or
incidental to the accomplishment of the purposes of the Company;
(e) borrow money and issue evidences of indebtedness in
furtherance of any or all of the purposes of the Company, and secure
the same by mortgage, pledge or other lien on the assets of the
Company;
(f) invest any funds of the Company pending distribution or
payment of the same pursuant to the provisions of this Agreement;
(g) prepay in whole or in part, refinance, recast, increase,
modify or extend any indebtedness of the Company and, in connection
therewith, execute any extensions, renewals or modifications of any
mortgage or security agreement securing such indebtedness;
(h) enter into, perform and carry out contracts of any kind,
including, without limitation, contracts with any person or entity
affiliated with any of the Members, necessary to, in connection with,
convenient to, or incidental to the accomplishment of the purposes of
the Company;
(i) employ or otherwise engage employees, managers,
contractors, advisors, attorneys and consultants and pay reasonable
compensation for such services;
(j) enter into partnerships, limited liability companies,
trusts, associations, corporations or other ventures with other persons
or entities in furtherance of the purposes of the Company; and
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<PAGE> 3
(k) do such other things and engage in such other activities
related to the foregoing as may be necessary, convenient or incidental
to the conduct of the business of the Company, and have and exercise
all of the powers and rights conferred upon limited liability companies
formed pursuant to the Act.
5. Principal Office. The address of the principal office of the Company
is 16600 North Lago Del Oro Parkway, Tucson, Arizona 85739.
6. Registered Agent and Registered Office. The Company shall at all
times maintain a registered agent and a registered office in the State of
Delaware as provided in the Act. Until changed by the Members in accordance with
this Agreement and the Act, the registered agent of the Company shall be The
Corporation Trust Company, and the registered office of the Company shall be
1209 Orange Street, Wilmington, New Castle County, Delaware 19801.
7. Members. Each of the Members named in the preamble to this Agreement
has been admitted to the Company as an initial Member. The names and the mailing
addresses of the Members are set forth on Schedule A attached hereto.
8. Limited Liability. Except as otherwise provided by the Act, the
debts, obligations and liabilities of the Company, whether arising in contract,
tort or otherwise, shall be solely the debts, obligations and liabilities of the
Company, and the Members shall not be obligated personally for any such debt,
obligation or liability of the Company solely by reason of being a member of the
Company.
9. Capital Contributions.
(a) On or prior to November 30, 1996, the Members shall
contribute to the Company the amount of cash and the contracts, personal
property, properties and other assets, subject to the liabilities (which the
Company shall assume), set forth opposite the names of the Members on attached
Schedule A.
(b) The ownership percentages ("Ownership Percentages") of the
Members are as follows:
NEXTHEALTH 98%
APOLLO 2%
10. Additional Contributions. No Member is required to make any
additional capital contribution to the Company. However, a Member may make
additional capital contributions to the Company with the written consent of the
other Members.
11. Capital Accounts. The Company shall maintain for each Member a
separate capital account ("Capital Account") in accordance with the rules
prescribed pursuant to
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<PAGE> 4
Sections 704(b) and (c) of the Internal Revenue Code of 1986, as amended (the
"Code"), and the Treasury Regulations (the "Treasury Regulations") promulgated
thereunder, including but not limited to Treasury Regulations Section
1.704-1(b)(2)(iv).
12. Book Basis. The book basis ("Book Basis") of an asset of the
Company shall mean the asset's adjusted tax basis, as determined for federal
income tax purposes; provided, however, that (i) if property is contributed to
the capital of the Company, the initial Book Basis of such property shall be its
fair market value on the date of contribution, as determined in good faith by
the Members; (ii) if the Capital Accounts of the Company are adjusted pursuant
to Treasury Regulations Section 1.704-1(b)(2)(iv)(f) to reflect the fair market
value of the Company's assets, the Book Basis of each such asset shall be
adjusted to equal its fair market value, as determined in good faith by the
Members as of the time of such adjustment in accordance with such Regulation;
and (iii) the Book Basis of all assets shall be adjusted thereafter by
depreciation and amortization as provided in Treasury Regulations Section
1.704-1(b)(2)(iv)(g).
13. No Interest. Except as otherwise expressly provided in this
Agreement, no interest shall be paid by the Company on capital contributions,
balances in Member's Capital Accounts or any other funds contributed to the
Company or distributed or distributable by the Company under this Agreement.
14. No Withdrawal; Return of Contribution. No Member shall have the
right to withdraw any portion of such Member's Capital Account without the
consent of all the other Members. Except as required by the Act, no Member shall
be personally liable to any other Member for the return of any capital
contributions (or any additions thereto), it being agreed that any return of
capital as may be made from time to time shall be made solely from the assets of
the Company and only in accordance with the terms hereof.
15. Allocation of Profits and Losses.
(a) Except as provided in Sections 15(b), 15(c) and 15(d)
hereof, all income, loss, deductions and credits, and each and every item
thereof, of the Company shall be allocated between the Members in proportion to
their Ownership Percentages. No Member shall have priority over any other Member
with respect to allocations pursuant to this Section 15.
(b) In accordance with Section 704(c) of the Code and the
applicable Treasury Regulations thereunder, income, gain, loss, deduction and
tax depreciation with respect to any property which has a Book Basis different
from its adjusted basis as determined for federal income tax purposes shall,
solely for income tax purposes (and without adjusting any Member's Capital
Account therefor), be allocated among the Members so as to take into account any
variation between the adjusted tax basis of such property to the Company and the
Book Basis of such property. The Members hereby agree that the assets
contributed by the Members to the Company have at the date of contribution the
fair market values set forth under the heading "Agreed Values" on
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<PAGE> 5
Schedule A attached hereto and made a part hereof for all purposes; the values
set forth on Schedule A attached hereto shall be used as the initial book values
of the listed assets on the books of the Company and shall be used in applying
the requirements of Section 704(c) of the Code and the Treasury Regulations
thereunder.
(c) The following special allocations shall, except as
otherwise provided, be made in the following order:
(1) Except as otherwise provided in Treasury
Regulations Section 1.704-2(f), notwithstanding any other provision of
this Section 15, if there is a net decrease in partnership minimum gain
or partner nonrecourse debt minimum gain (within the meaning of
Treasury Regulations Section 1.704-2) during any taxable period, items
of income and gain for such taxable period (and, if necessary,
subsequent taxable periods) shall be allocated among the Members in
accordance with Treasury Regulations Sections 1.704-2(d), 1.704-2(f),
1.704-2(g) and 1.704- 2(i). The items to be so allocated, and the order
in which such items must be allocated, shall be determined in
accordance with Treasury Regulations Section 1.704-2(j)(2). This
Section 15(c)(1) is intended to comply with the minimum gain chargeback
requirements set forth in Treasury Regulations Section 1.704-2 and
shall be interpreted consistently therewith.
(2) If any Member unexpectedly receives an
adjustment, allocation, or distribution described in Treasury
Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), then items of
income and gain shall be specially allocated to such Member in
accordance with the requirements of Treasury Regulations Section 1.704-
1(b)(2)(ii)(d). This Section 15(c)(2) is intended to comply with the
"qualified income offset" provision of the Regulation last cited and
shall be interpreted consistently therewith.
(3) Nonrecourse deductions (within the meaning of
Treasury Regulations Section 1.704-2(b)(1)) for any fiscal year or
other period shall be allocated among the Members under Treasury
Regulations Section 1.704-2(e) in accordance with the Members'
respective Ownership Percentages.
(4) Any partner nonrecourse deductions (within the
meaning of Treasury Regulations Section 1.704-2(i)) for any period
shall be allocated to the Member that bears an economic risk of loss
with respect to the partner nonrecourse debt (within the meaning of
Treasury Regulations Section 1.704-2(b)(4)) to which such partner
nonrecourse deductions are attributable, all in accordance with the
principles of Treasury Regulations Section 1.704-2(i)(1) and (2).
(d) If any interest in the Company is transferred, or upon the
admission or withdrawal of a Member, in accordance with the provisions of this
Agreement, the income or loss attributable to such interest in the Company for
such calendar year shall be
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<PAGE> 6
divided and allocated ratably between the Members on a daily basis; provided,
however, that, to the extent permitted by the applicable provisions of the Code
and Treasury Regulations, for all Company items which are reasonably determined
to be "extraordinary items" by the Members, applying the principles of Treasury
Regulations Section 1.1502- 76(b)(2)(ii)(C), any such extraordinary item shall
be allocated solely to the parties owning interests in the Company as of the
date such item is required to be taken into account by the Company for federal
income tax purposes.
(e) Any "excess nonrecourse liabilities" (as defined in
Treasury Regulations Section 1.752-3(a)(3)) shall be allocated among the Members
in accordance with their respective Ownership Percentages.
(f) To the extent an adjustment to the adjusted tax basis of
any Company asset pursuant to Code Section 734(b) or Code Section 743(b) is
required, pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(m), to be
taken into account in determining Capital Accounts, the amount of such
adjustment to the Capital Accounts shall be treated as an item of gain or loss
and such gain or loss shall be specially allocated to the Members in accordance
with Treasury Regulations Section 1.704-1(b)(2)(iv)(m).
16. Distributions. Distributions shall be made to the Members at the
times and in the aggregate amounts determined by the Members pursuant to
Section 17. Such distributions shall be allocated among the Members in the same
proportion as their then Ownership Percentages.
17. Management.
(a) In accordance with Section 18-402 of the Act, management of the
Company shall be vested in the Members. The Members shall have the power to do
any and all acts necessary, convenient or incidental to or for the furtherance
of the purposes described herein, including all powers, statutory or otherwise,
possessed by members of a limited liability company under the laws of the State
of Delaware. All decisions regarding the management of the Company shall be
determined by a majority vote, or written consent in lieu of a meeting, of the
Members, as determined in accordance with their respective Ownership
Percentages. Notwithstanding any provisions herein to the contrary, the Members
may delegate to one or more Members of the Company responsibility for the
day-to-day operation of the Company.
(b) Without the prior consent of all of the Members (which consent
shall not be unreasonably withheld), the Company shall not:
(i) amend, alter or repeal any of the
provisions of the Company's Certificate of Formation, or this
Agreement, so as to adversely affect any right, preference or
voting power of any Member;
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<PAGE> 7
(ii) authorize, create or issue any class or
series of equity security of the Company that is senior to or
pari passu with the limited liability company interests of the
Members of the date hereof (the "Existing LLC Interests");
(iii) enter into any transaction or series of
transactions having a total value in excess of $250,000 per
transaction or series of related transactions, or grant or
consent to, or otherwise permit, any amendment to, supplement
of, or waiver under, any agreement or contract with any
affiliate;
(iv) consolidate with or merge into, or
transfer all or substantially all of its assets to, another
person unless (A) in the case of a merger or consolidation,
the Company is the surviving entity, the rights and
preferences of the Existing LLC Interests are not modified and
the Company, as the surviving entity, does not have
outstanding any equity security of the Company that is senior
to or pari passu with the Existing LLC Interests, or (B) (I)
the surviving, resulting or acquiring person is a person
organized under the laws of the United States, any state
thereof or the District of Columbia, or a person organized
under the laws of a foreign jurisdiction whose equity
securities are listed on a national securities exchange in the
United States or authorized for quotation on the NASDAQ
National Market System, and (II) the Company shall make
effective provision such that, upon consummation of such
transaction, the Members shall receive equity securities of
the surviving entity having substantially identical terms as
the Existing LLC Interests, and the surviving, resulting or
acquiring person do not have outstanding any equity security
that is senior to or pari passu with the Existing LLC
Interests; or
(v) (A) incur any additional indebtedness
(excluding trade payable and accrued expenses incurred in the
ordinary course of business) not outstanding on the date
hereof in excess of $250,000 or (B) enter into
any acquisition, financing or other transaction or series of
related transactions having a total value in excess of
$250,000.
18. Other Business. The Members and any person or entity affiliated
with any of the Members may engage in or possess an interest in other business
ventures (unconnected with the Company) of every kind and description,
independently or with others. None of the Company or the other Members shall
have any rights in or to such independent ventures or the income or profits
therefrom by virtue of this Agreement.
19. Exculpation and Indemnification. No Member shall be liable to the
Company, any other Members or any other person or entity who has an interest in
the Company for any loss, damage or claim incurred by reason of any act or
omission performed or omitted by such Member in good faith on behalf of the
Company and in a manner reasonably believed to be within the scope of the
authority conferred on such Member by this
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<PAGE> 8
Agreement, except that a Member shall be liable for any such loss, damage or
claim incurred by reason of such Member's gross negligence or willful
misconduct. To the full extent permitted by applicable law, a Member shall be
entitled to indemnification from the Company for any loss, damage or claim
incurred by such Member by reason of any act or omission performed or omitted by
such Member in good faith on behalf of the Company and in a manner reasonably
believed to be within the scope of the authority conferred on such Member by
this Agreement, except that no Member shall be entitled to be indemnified in
respect of any loss, damage or claim incurred by such Member by reason of gross
negligence or willful misconduct with respect to such acts or omissions;
provided, however, that any indemnity under this Section 19 shall be provided
out of and to the extent of Company assets only, and no Member shall have
personal liability on account thereof.
20. Assignments. A Member may not assign, transfer or otherwise dispose
of in whole or in part its limited liability company interest without the
written consent of the other Members. If a Member transfers all of its interest
in the Company pursuant to the preceding sentence, the transferee shall be
admitted to the Company upon its execution of an instrument signifying its
agreement to be bound by the terms and conditions of this Agreement. Such
admission shall be deemed effective immediately prior to the transfer, and,
immediately following such admission, the transferor Member shall cease to be a
member of the Company. In such event, the Company shall not dissolve if the
business of the Company is continued without dissolution in accordance with
Section 23(d) hereof.
21. Resignation. A Member may not resign or retire as a Member of the
Company without the written consent of the other Members. A Member which resigns
or retires in contravention of this Agreement shall be liable to the Company for
any damages occasioned by such resignation or retirement and, in addition to any
remedies the Company may have at law or in equity, the Company may offset
against any amounts it may owe to such resigning or retiring Member (in
connection with a distribution or otherwise) any such damages occasioned by such
resignation or retirement. If a Member is permitted to resign pursuant to this
Section 21, an additional member shall be admitted to the Company, subject to
Section 22 hereof, upon its execution of an instrument signifying its agreement
to be bound by the terms and conditions of this Agreement. Such admission shall
be deemed effective immediately prior to the resignation, and, immediately
following such admission, the resigning Members shall cease to be a member of
the Company. In such event, the Company shall not dissolve if the business of
the Company is continued without dissolution in accordance with Section 23(d)
hereof.
22. Admission of Additional Members. One or more additional members of
the Company may be admitted to the Company with the written consent of the
Members pursuant to Section 17.
23. Dissolution. The Company shall dissolve, and its affairs shall be
wound up upon the earliest to occur of the following:
(a) December 31, 2050;
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<PAGE> 9
(b) the written consent of the Members;
(c) the sale of all or substantially all of the assets of the
Company;
(d) the death, retirement, resignation, bankruptcy, court
declaration of incompetence with respect to, or dissolution of a
Member, unless the remaining Members agree by unanimous vote to admit
one or more new members and unless the business of the Company is
continued by the consent of all of the remaining members of the Company
within 60 days following the occurrence of any such event; and
(e) the entry of a decree of judicial dissolution of the
Company under Section 18-802 of the Act.
24. Liquidation Upon Dissolution.
(a) Upon the dissolution of the Company, sole and plenary
authority to effectuate the liquidation of the assets of the Company shall be
vested in NextHealth and, in the event of NextHealth's resignation, dissolution,
liquidation or bankruptcy, in a liquidator to be appointed upon the written
consent of the other Members holding a majority of the remaining Ownership
Percentages, (the "Liquidator"). The Liquidator shall have full power and
authority to sell, assign and encumber any and all of the Company's assets and
to wind up and liquidate the affairs of the Company in an orderly and
business-like manner.
(b) The Liquidator shall determine, in its sole discretion,
the fair market value of all assets of the Company as at the date of
distribution of such assets and the profits and losses resulting from such
distribution shall be allocated in accordance with Section 15 hereof.
(c) The proceeds of liquidation of the assets of the Company
distributable upon a dissolution and winding up of the Company shall be applied
in the following order of priority:
(1) first, to the creditors of the Company, including
creditors who are Members, in the order of priority provided by law, in
satisfaction of all liabilities and obligations of the Company (of any
nature whatsoever, including, without limitation, fixed or contingent,
matured or unmatured, legal or equitable, secured or unsecured),
whether by payment or the making of reasonable provision for payment
thereof; and
(2) thereafter, in accordance with the Capital
Accounts of the Members.
25. Tax Matters
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<PAGE> 10
(a) NextHealth shall, on behalf of the Company, arrange,
supervise and oversee the preparation and timely filing, and prior review by
independent certified public accountants, of all returns of Company income,
gain, deductions, losses, credits and other items necessary for federal, state,
local and foreign income tax purposes and shall use all reasonable efforts to
furnish to the Members, within 90 days after the close of the taxable year, the
tax information reasonably required for federal, state, local and foreign income
tax reporting purposes. The taxable year of the Company shall be the calendar
year unless another year is required by the Code (the "Company Year").
(b) NextHealth shall be the "Tax Matters Partner," as such
term is defined in Section 6231(a)(7) of the Code. In the event of an income tax
audit of any tax return of the Company, the filing of any amended return or
claim for refund in connection with any item of income, gain, loss, deduction or
credit reflected on any tax return of the Company, or any administrative or
judicial proceedings arising out of or in connection with any such audit,
amended return, claim for refund or denial of such claim, (i) the Tax Matters
Partner shall be authorized to act for, and its decision shall be final and
binding upon, the Company and all the Members (it being understood that the Tax
Matters Partner shall not agree to waive or extend any statute of limitations
without the consent of Apollo, which consent shall not be unreasonably
withheld), (ii) all expenses incurred by the Tax Matters Partner in connection
therewith (including, without limitation, attorneys', accountants' and other
experts' fees and disbursements) shall be expenses of the Company and (iii) no
other Members shall have the right to (A) participate in the audit of any
Company tax return, (B) file any amended return or claim for refund in
connection with any item of income, gain, loss, deduction or credit reflected on
any tax return of the Company, (C) participate in any administrative or judicial
proceedings arising out of or in connection with any such audit, amended return,
claim for refund or denial of such claim, or (D) appeal, challenge or otherwise
protest any adverse findings in any such audit or with respect to any such
amended return or claim for refund or in any such administrative or judicial
proceedings. Each Member agrees to indemnify and hold harmless the Company and
all other Members from and against any and all liabilities, obligations,
damages, deficiencies and expenses resulting from (y) any tax liability incurred
by the Company attributable to such Member, including, without limitation, any
liability incurred by the Company for failure to withhold taxes on distributions
to such Member or (z) any breach or violation by such Members of the provisions
of this Section 25, and from all actions, suits, proceedings, demands,
assessments, judgments, costs and expenses, including reasonable attorneys' fees
and disbursements, incident to any such liability, breach or violation.
26. Miscellaneous.
(a) Each provision of this Agreement shall be considered
separable and if for any reason any provision or provisions herein are
determined to be invalid, unenforceable or illegal under any existing or future
law, such invalidity, unenforceability or illegality shall not impair the
operation of or affect those portions of this Agreement which are valid,
enforceable and legal.
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<PAGE> 11
(b) This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original of this Agreement.
(c) This Agreement constitutes the entire agreement between
the parties hereto with respect to the subject matter hereof, and supersedes all
prior understandings or agreements between the parties.
(d) This Agreement and all rights and remedies hereunder shall
be governed by, and construed under, the laws of the State of Delaware, without
regard to the conflicts of law principles thereof.
(e) This Agreement may not be modified, altered, supplemented
or amended except pursuant to a written agreement executed and delivered by all
of the Members.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound
hereby, have duly executed this Agreement as of the date and year first above
written.
NEXTHEALTH, INC., a Delaware corporation
By: /s/ Bob Walton
-------------------------------------
Name: Bob Walton
Title: Authorized Representative
AP NH, LLC, a Delaware limited liability
company
By: Alfred Trivilino
-------------------------------------
Name:
Title:
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<PAGE> 12
SCHEDULE A
<TABLE>
<CAPTION>
Name, Address
and Facsimile Initial Capital Ownership
Number of Members Contribution Percentages
------------------ --------------- -----------
<S> <C> <C>
NextHealth, Inc. $ 490,000 98%
16600 N. Lago Del Oro Parkway
Tucson, Arizona 85739
Tel: (520) 792-5800
Fax: (520) 792-5884
AP NH, LLC $ 10,000 2%
----
1999 Avenue of the Stars
Suite 1900
Los Angeles, California 90067
Tel: (212) 261-4000
Fax: (212) 261-4060 100%
====
</TABLE>
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<PAGE> 1
Exhibit 10.72
EXECUTION COPY
SECURITY AGREEMENT
SECURITY AGREEMENT, (this "Agreement") dated as of November 13, 1996
between SOFTEN REALTY, L.L.C., a Delaware limited liability company ("Grantor"),
and SIERRA TUCSON, INC., a Delaware corporation ("Secured Party").
W I T N E S S E T H:
WHEREAS, pursuant to the Secured Promissory Note of Grantor dated
November 13, 1996 (as the same may be amended, supplemented or otherwise
modified from time to time, the "Note") Secured Party has made loans aggregating
$8,000,000 (the "Loans") to Grantor;
WHEREAS, as a condition to Secured Party making such Loans to Grantor,
Grantor has agreed to grant to Secured Party a security interest in the
Collateral (as hereinafter defined); and
WHEREAS, capitalized terms, unless otherwise defined herein, are used
herein with the same meanings given to such terms in the Note.
NOW, THEREFORE, in consideration of the foregoing and for good and
valuable consideration, receipt, adequacy and sufficiency of which is hereby
acknowledged by Grantor, the parties hereto, intending legally to be bound,
hereby agree as follows:
I. GRANT OF SECURITY INTEREST; REMEDIES
1.1 Security Interests. As security for all of its obligations as
Borrower under the Note, including, without limitation, the obligation to make
payment when due of all principal of and interest on the Loans, (collectively,
the "Obligations"), Grantor hereby pledges, assigns, transfers, sets over and
delivers to Secured Party and grants to Secured Party a security interest in all
of its right, title and interest in and to the Collateral.
"Collateral" shall mean all of the assets and properties of Grantor and
all other personal property of Grantor, tangible and
<PAGE> 2
intangible, wherever located or situated and whether now owned or hereafter
acquired or created, including without limitation, all goods, accounts,
documents, instruments, chattel paper, inventory, contract rights, general
intangibles and equipment and any proceeds thereof or income therefrom.
1.2 Use of Collateral. So long as no Event of Default shall have
occurred and be continuing, and subject to the various provisions of this
Agreement and the Note, Grantor may use and dispose of the Collateral in any
lawful manner.
1.3 Application of Proceeds. Upon the request of Secured Party during
the continuation of an Event of Default, Grantor agrees to take all steps
necessary to cause all sums, monies, royalties, fees, commissions, charges,
payments, advances, income, profit, and other proceeds constituting proceeds of
the Collateral to be applied to the satisfaction of the Obligations.
1.4 Collections, etc. Upon the occurrence of an Event of Default, and
during the continuation of such Event of Default, Secured Party may, in its sole
discretion, in its name or in the name of Grantor or otherwise, demand, sue for,
collect or receive any money or property at any time payable or receivable on
account of or in exchange for, or make any compromise or settlement deemed
desirable with respect to, any of the Collateral, but shall be under no
obligation to do so, or Secured Party may, to the fullest extent permitted by
applicable law extend the time of payment, arrange for payment in installments,
or otherwise modify the terms of, or release, any of the Collateral, without
thereby incurring responsibility to, or discharging or otherwise affecting any
liability of Grantor. Secured Party will not be required to take any steps to
preserve any rights against prior parties to the Collateral. If Grantor fails to
make any payment or take any action required hereunder, Secured Party may, after
notice to Grantor, make such payments and take all such actions as Secured Party
reasonably deems necessary to protect Secured Party's security interest in the
Collateral and/or the value thereof, and Secured Party is hereby authorized
(without limiting the general nature of the authority hereinabove conferred) to
pay, purchase, contest, or compromise any encumbrances, charges or liens that in
the judgment of Secured Party appear to be equal to, prior to or superior to the
security interest of Secured Party in the Collateral and any Liens not expressly
permitted by this Agreement.
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<PAGE> 3
1.5 Possession, Sale of Collateral, etc.
(a) Upon the occurrence of an Event of Default, and during the
continuation of such Event of Default, to the extent permitted by applicable
law, Secured Party may enter upon the premises of Grantor, or wherever the
Collateral may be, and take possession of the Collateral, and may reasonably
demand and receive such possession from any Person who has possession thereof,
and Secured Party may take such measures as it may deem necessary or proper for
the care or protection thereof, including, without limitation, the rights to
remove all or any portion of the Collateral, and with or without taking such
possession may sell or cause to be sold, whenever Secured Party shall decide, in
one or more sales or parcels, at such prices as Secured Party may deem best, and
for cash or on credit or for future delivery, without assumption of any credit
risk, all or any portion of the Collateral, at any broker's board or at public
or private sale, without demand of performance or notice of intention to sell or
of time or place of sale (except 10 days' written notice to Grantor of the time
and place of such sale or sales and such other notices as may be required by
applicable law and cannot be waived), and any person or entity may be the
purchaser of all or any portion of the Collateral so sold and thereafter hold
the same absolutely, free from any claim or right of whatever kind, including
any equity of redemption of Grantor, any such demand, notice, claim, right or
equity being hereby expressly waived and released to the extent permitted by
applicable law.
(b) At any sale or sales made pursuant to this Article I,
Secured Party may bid for or purchase, free (to the fullest extent permitted by
applicable law) from any claim or right of whatever kind, including any equity
of redemption of Grantor (any such demand, notice, claim, right or equity being
hereby expressly waived and released) any part of or all of the Collateral
offered for sale, and may make any payment on account thereof by using any claim
for moneys then due and payable to Secured Party with respect to the Obligations
as a credit against the purchase price. Secured Party shall in any such sale
make no representations or warranties with respect to the Collateral or any
part thereof, and Secured Party shall not be chargeable with any of the
obligations or liabilities of Grantor.
(c) Grantor hereby agrees (i) that it will indemnify and hold
Secured Party harmless from and against any and all claims
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<PAGE> 4
with respect to the Collateral asserted before the taking of actual possession
or control of the Collateral by Secured Party pursuant to this Article I, or
arising out of any act of, or omission to act on the part of, any party other
than Secured Party prior to such taking of actual possession or control by
Secured Party, or arising out of any act on the part of Grantor, or its agents
before or after the commencement of such actual possession or control by Secured
Party; and (ii) Secured Party shall have no liability or obligation to Grantor
arising out of any such claim except for acts of willful misconduct or gross
negligence. In any action hereunder, Secured Party shall be entitled to the
appointment of a receiver without notice, to take possession of all or any
portion of the Collateral and to exercise such powers as the court shall confer
upon the receiver.
(d) Notwithstanding the foregoing, upon the occurrence of an
Event of Default, and during the continuation of such Event of Default, Secured
Party shall be entitled to apply, without prior notice to Grantor, any cash or
cash items constituting Collateral in the possession of Secured Party to payment
of that portion of the Obligations secured hereby.
1.6 Application of Proceeds on Default. Upon the request of Secured
Party after the occurrence of an Event of Default, all income on the Collateral,
and all proceeds from any sale of the Collateral pursuant hereto shall be
applied (in such order as Secured Party shall in its sole discretion determine)
to the payment in full of the Obligations of Grantor to Secured Party. Any
amounts remaining after such payment in full shall be remitted to Grantor or as
a court of competent jurisdiction may otherwise direct.
1.7 Power of Attorney. Upon the occurrence of an Event of Default and
during the continuation of such Event of Default, (a) Grantor does hereby
irrevocably make, constitute and appoint Secured Party or any of its officers or
designees its true and lawful attorney-in-fact with full power in the name of
Secured Party or such other person or entity to endorse any notes, checks,
drafts, money orders or other evidences of payment relating to the Collateral
that may come into the possession of Secured Party, and to do any and all other
acts necessary or proper to carry out the intent of this Agreement and the grant
of the security interests hereunder and thereunder, and Grantor hereby ratifies
and confirms all that Secured Party or its substitutes shall properly do by
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<PAGE> 5
virtue hereof; and (b) Grantor does hereby further irrevocably make, constitute
and appoint Secured Party or any of its officers or designees its true and
lawful attorney-in-fact in the name of Secured Party or Grantor (i) to enforce
Grantor's rights under and pursuant to all agreements with respect to the
Collateral, all for the sole benefit of Secured Party, (ii) to enter into and
perform such agreements as may be necessary in order to carry out the terms,
covenants and conditions of this Agreement that are required to be observed or
performed by Grantor, (iii) to execute such other and further mortgages, pledges
and assignments of the Collateral, and related instruments or agreements, as
Secured Party may reasonably require for the purpose of perfecting, protecting,
maintaining or enforcing the security interests granted to Secured Party
hereunder, and (iv) to do any and all other things necessary or proper to carry
out the intention of this Agreement and the grant of the security interests
hereunder.
1.8 Financing Statements, Direct Payments, Confirmation of Receivables
and Audit Rights. So long as the Obligations are outstanding, Grantor hereby
authorizes Secured Party to file UCC financing statements and any amendments
thereto or continuations thereof and any other documents or instruments and to
give any notices necessary or desirable to perfect the lien of Secured Party on
the Collateral, in all cases with regard to the Collateral without the
signatures of Grantor or to execute such items as attorney-in-fact for Grantor.
Grantor further authorizes Secured Party, upon the occurrence of an Event of
Default and during the continuation of such Event of Default, (i) to notify any
account debtors that all sums payable to Grantor relating to the Collateral
shall be paid directly to Secured Party and (ii) to confirm with any account
debtors the amounts payable by them to Grantor with regard to the Collateral and
to participate with Grantor in the audits of its account debtors. Secured Party
hereby agrees to provide Grantor with copies of any notification or written
requests sent by Secured Party to such account debtors at the same time as the
mailing of such documents.
1.9 Termination. The security interests granted under this Article I
shall terminate when all the Obligations have been fully paid and performed, and
the Commitment shall have terminated. Upon such termination Secured Party will
take, at the expense of Grantor, all action and do all things reasonably
necessary to release the security interest granted to it hereunder.
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<PAGE> 6
1.10 Remedies Not Exclusive. The remedies conferred upon or reserved to
Secured Party in this Article I are intended to be in addition to, and not in
limitation of, any other remedy or remedies available to Secured Party. Without
limiting the generality of the foregoing, Secured Party shall have all rights
and remedies of a secured creditor under Article 9 of the Uniform Commercial
Code as enacted in the State of Arizona.
II. REPRESENTATIONS AND WARRANTIES
Grantor makes the following representations and warranties to Secured
Party and acknowledges that Secured Party has relied on the same in connection
with the making of Loans to Grantor, all of which shall survive the execution
and delivery of this Agreement and the Note and the Note delivered by Grantor
and the making of the Loan to Grantor:
(i) Grantor has been duly organized and is validly
existing in good standing under the laws of its jurisdiction of
organization and is in good standing in all jurisdictions where the
nature of its properties or business require it. Grantor has the
requisite power to own its properties and carry on its business as now
being conducted, to execute, deliver and perform its obligations under
this Agreement and to grant to Secured Party a security interest in the
Collateral.
(ii) The execution, delivery and performance of this
Agreement and the grant to Secured Party of a security interest in the
Collateral (a) have been duly authorized by all necessary corporate
action on the part of Grantor, (b) will not violate, or involve Secured
Party in a violation of, any provision of any law or regulation or any
order of any governmental authority or any judgment of any court
applicable to Grantor or its property, (c) will not violate any
provision of the certificate of formation or operating agreement of
Grantor or any indenture, any agreement for borrowed money, any bond,
note or other similar instrument or any other material agreement to
which Grantor is a party or by which Grantor or any of its property is
bound, (d) will not be in conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a default under
any such indenture, agreement, bond, note, instrument or other material
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<PAGE> 7
agreement and (e) will not result in the creation or imposition of any
lien, charge or encumbrance of any nature whatsoever upon any property
or assets of Grantor other than pursuant to this Agreement.
(iii) This Agreement creates, as security for the
Obligations purported to be secured thereby, a valid and enforceable
perfected security interest in and lien on all of the Collateral in
favor of Secured Party. Grantor has good and marketable title to all of
the Collateral free and clear of all liens, except liens created
hereby.
(iv) This Agreement constitutes the legal, valid
obligation of Grantor, enforceable in accordance with its terms,
subject (a) as to the enforcement of remedies, to applicable
bankruptcy, reorganization, insolvency and other laws affecting
creditors' rights generally and to moratorium laws from time to time in
effect, (b) to general equitable principles which may limit the right
to obtain the remedy of specific performance and (c) the qualification
that the enforceability of indemnification provisions may be limited by
applicable federal and state securities laws, rules and regulations.
III. MISCELLANEOUS
3.1 Further Assurances. Upon the request of Secured Party, Grantor
hereby agrees to duly execute and deliver, or cause to be duly executed and
delivered, at the cost and expense of Grantor, such further instruments as may
be necessary or proper, in the reasonable judgment of Secured Party, to carry
out the provisions and purposes hereof, and to do all things necessary to
perfect and preserve the security interests of Secured Party hereunder and in
the Collateral or any portion thereof.
3.2 Notices. Any notice shall be conclusively deemed to have been
received by Grantor and be effective on the day on which delivered in writing
(which shall include telegraphic communications) to Grantor as provided for in
the Note. Any notice to Secured Party shall be effective on the day on which
delivered in writing (which shall include telegraphic communications) to the
address for Secured Party provided for in the Note.
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<PAGE> 8
3.3 Successors. Each reference herein to a party hereto shall be deemed
to include their respective successors and assigns including but not by way of
limitation with respect to Secured Party, any party in whose favor the
provisions of the Note shall inure. Each reference herein to Grantor shall be
deemed to include the successors thereto and assigns thereof, all of whom shall
be bound by the provisions of this Agreement.
3.4 Governing Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of Arizona.
3.5 No Waiver, etc. Neither a failure nor a delay on the part of
Secured Party in exercising any right, power or privilege under this Agreement
shall operate as a waiver thereof, nor shall a single or partial exercise
thereof preclude any other or further exercise of any right, power or privilege.
The rights, remedies and benefits of Secured Party herein expressly specified
are cumulative and not exclusive of any other rights, remedies or benefits which
Secured Party may have under this Agreement, at law, in equity, by statute, or
otherwise.
3.6 Modification, etc. No modification, amendment or waiver of any
provision of this Agreement, nor the consent to any departure by Grantor
therefrom, shall in any event be effective unless the same shall be in writing
and signed by Secured Party, and then such waiver or consent shall be effective
only in the specific instance and for the purpose for which given. No notice to
or demand on Grantor in any case shall entitle Grantor to any other or further
notice or demand in the same, similar or other circumstances.
3.7 Severability. If any one or more of the provisions contained in
this Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall in no way be affected or impaired thereby.
3.8 Headings. Section headings used herein are for convenience of
reference only and are not to affect the construction of, or be taken into
consideration in interpreting, this Agreement.
3.9 Limitation of Law. All rights, remedies and powers provided by this
Agreement herein may be exercised only to the
-8-
<PAGE> 9
extent that the exercise thereof does not violate any applicable provision of
law, and all the provisions hereof are intended to be subject to all applicable
mandatory provisions of law which may be controlling and to be limited by the
extent necessary so that they will not render this Agreement invalid,
unenforceable in whole or in part or not entitled to be recorded, registered or
filed under provisions of applicable law.
IN WITNESS WHEREOF, Grantor has caused this Agreement to be executed by
its duly authorized officer as of the date first written above.
GRANTOR:
SOFTEN REALTY, L.L.C., a Delaware
limited liability company
By: NEXTHEALTH, INC., a
Delaware corporation,
Manager
By /s/ Bob Walton
--------------------------------
Name: Bob Walton
Title: Authorized Representative
SECURED PARTY:
SIERRA TUCSON, INC., a Delaware
corporation
By /s/ Bob Walton
--------------------------------
Name: Bob Walton
Title: Authorized Representative
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<PAGE> 1
Exhibit 10.73
NON-NEGOTIABLE SECURED PROMISSORY NOTE
$8,000,000 TUCSON, ARIZONA
NOVEMBER 13, 1996
1. Principal Amount. For Value Received, SOFTEN REALTY,
L.L.C., a Delaware limited liability company ("Maker"), promises to
pay to the order of SIERRA TUCSON, INC., a Delaware corporation
("Payee"), the principal amount of $8,000,000 upon the terms and
conditions herein contained.
2. Interest.
(a) Maker shall pay interest on the unpaid principal amount
hereof from the date hereof until such unpaid principal is paid in full at a per
annum rate equal to 8%. Payments of interest on the unpaid principal amount
hereof shall be due and payable pursuant to Section 3 hereof.
(b) Any amount of principal and/or interest hereof which is
not paid when due, whether at stated maturity, by acceleration or otherwise,
shall bear interest from the date when due until said principal and/or interest
amount is paid in full, payable on demand, at an interest rate equal to 2% per
annum in excess of the interest rate determined pursuant to Section 2(a) hereof.
3. Payments. The principal amount hereof and all accrued
and unpaid interest thereon shall be due and payable as follows:
(a) $500,000 of the principal amount hereof, together
with accrued interest hereon, shall be due and payable on
December 31, 1996; and
(b) The remainder of the principal amount hereof, together
with accrued interest hereon, shall be due and payable in 72 equal
monthly installments of $104,166.67 each commencing on February 1, 1997
and continuing on the first day of each and every calendar month
thereafter until the principal amount hereof, together with accrued
interest thereon, is paid in full.
<PAGE> 2
All payments of principal and interest in respect of this Note shall be
made in lawful money of the United States of America in immediately available
funds and delivered to Payee on the date due at 16600 North Lago Del Oro
Parkway, Tucson, Arizona 85739, or at such other place as the holder hereof may
from time to time designate in writing.
4. Prepayment. Maker, without premium or penalty, may
prepay this Note in whole or in part, with accrued interest to the
date of such prepayment on the amount prepaid.
5. Security. This Note, and the obligations of Maker hereunder,
are secured by Maker's grant to Payee of a security interest in and to certain
collateral pursuant to that certain Security Agreement dated as of the date
hereof between Maker, as grantor, and Payee, as secured party (the "Security
Agreement").
6. Events of Default. The occurrence of any one or more of
the following events shall constitute an event of default ("Event
of Default") hereunder:
(a) Maker shall fail to pay any principal or interest on this
Note when due, whether at maturity, by acceleration, by notice of
prepayment or otherwise, and such failure shall continue for two days
after the date due;
(b) Maker shall default in the due performance of any other
covenant contained in any of this Note or the Security Agreement and
such default shall remain unremedied for ten days following
notification by Payee of such default;
(c) any representation or warranty made by Maker in
this Note or the Security Agreement shall prove to have
been false or misleading when made;
(d) default in payment shall be made with respect to any
indebtedness of Maker in excess of $50,000;
(e) final judgment(s) for the payment of money in excess of
$50,000 shall be rendered in the aggregate against Maker;
-2-
<PAGE> 3
(f) a Change of Control (as hereinafter defined shall occur);
(g) any of the Note or the Security Agreement shall, for any
reason, not be or shall cease to be in full force and effect or is
declared to be null and void or the Security Agreement shall not give
or shall cease to give Maker the liens, rights, powers and privileges
purported to be created thereby (including a first priority perfected
security interest in, and lien on, all of the collateral subject
thereto) in favor Maker; or
(h) Maker shall (i) file any proceeding in bankruptcy or
reorganization, (ii) make an assignment for the benefit of creditors or
(iii) fail to vacate, discharge or dismiss within 60 days of its
initiation either (a) the filing of a proceeding in bankruptcy or
reorganization against it or (b) the appointment of a receiver or
trustee for all or any part of Maker's assets or property.
For purposes of this Note, the term "Change of Control" shall mean (i)
the consolidation, merger of Maker with or into any other person or entity; (ii)
the sale or other transfer of all or majority of the outstanding equity
securities of Maker (other than to persons or entities which are affiliated with
the present beneficial owners thereof); or (iii) the sale of substantially all
of Maker's assets to another person or entity.
7. Remedies. Upon or at any time after the occurrence of an Event
of Default specified in Section 6(a) through 6(g) hereof, this Note shall, at
the option of Payee, become due and payable forthwith, without demand upon or
notice to Maker, and upon the occurrence of any such Event of Default Payee
shall have all the rights and remedies provided under applicable law. If an
Event of Default specified in Section 6(h) hereof shall have occurred, this
Note, and all amounts payable hereunder, shall thereupon and concurrently become
due and payable without presentment, demand, protest, notice of acceleration,
notice of intent to accelerate or other notice of any kind, all of which are
hereby expressly waived by Maker, anything in this Note to the contrary
notwithstanding.
8. Non-Negotiable Note. This Note is non-negotiable.
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<PAGE> 4
9. Notices. Unless otherwise specifically provided herein, any
notice or other communication herein required or permitted to be given shall be
in writing and may be personally served, telecopied, telexed or sent by United
States mail and shall be deemed to have been given when delivered in person,
upon receipt of telecopy or telex or five days after deposit in the United
States mail, registered or certified, with postage prepaid and properly
addressed. For the purpose hereof, the addresses of the parties hereto (until
notice of a change thereof is delivered as provided in this Section 9) shall be
in the case of Payee, its address as set forth in Paragraph 3 hereof, and in the
case of Maker, c/o Apollo Real Estate Advisors, L.P., 1301 Avenue of the
Americas, 38th Floor, New York, New York 10019.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 5
IN WITNESS WHEREOF, Maker has executed and delivered this Note as of
the day and year first above written.
MAKER:
SOFTEN REALTY, L.L.C., a Delaware
limited liability company
By: NEXTHEALTH, INC., a Delaware
corporation
By: /s/ Bob Walton
-----------------------------------
Name: Bob Walton
Title: Authorized Representative
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<PAGE> 1
Exhibit 10.74
ASSUMPTION AGREEMENT
THIS ASSUMPTION AGREEMENT is executed and delivered this 13th day of
November, 1996, by SOFTEN REALTY, L.L.C., a Delaware limited liability company
("Purchaser").
W I T N E S E T H:
WHEREAS, Purchaser, and Sierra Tucson, Inc. a Delaware corporation,
have entered into that certain Asset Purchase Agreement, dated as of November
13, 1996 (the "Purchase Agreement"), pursuant to which Purchaser has agreed to
purchase substantially all of the assets of Seller for the consideration set
forth therein.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Purchaser hereby agrees as follows:
1. Definitions. Capitalized terms used herein and not otherwise defined
shall have the meanings set forth in the Purchase Agreement.
2. Assumption of Assumed Liabilities. Purchaser does hereby assume from
Seller the Assumed Liabilities. Purchaser shall perform, satisfy and discharge
all of the Assumed Liabilities in accordance with their terms, effective as of
12:01 a.m. on November 14, 1996.
3. Liabilities Not Assumed. Purchaser is not assuming, and nothing in
this Assumption Agreement shall obligate Purchaser to assume, any liabilities of
Seller or any other Person other than the Assumed Liabilities.
4. Miscellaneous.
(a) The assumption by Purchaser of the Assumed Liabilities
shall in no way expand the rights or remedies of any third party against
Purchaser as compared to the rights and remedies such third party would have had
against Seller had Purchaser not assumed the Assumed Liabilities.
(b) This instrument is being delivered pursuant to the
Purchase Agreement and shall be construed consistently therewith.
<PAGE> 2
This instrument is not intended to, and does not in any manner, enlarge,
diminish or modify the rights and obligations of the parties to the Purchase
Agreement.
(c) This instrument shall be governed by and construed in
accordance with the laws of the State of Delaware without reference to the
choice of law provisions thereof.
IN WITNESS WHEREOF, Purchaser has caused this Assumption Agreement to
be duly executed and delivered as of the day and year first above written.
PURCHASER:
SOFTEN REALTY, L.L.C., a Delaware
limited liability company
By: NEXTHEALTH, INC., a Delaware
corporation, Manager
By /s/ Bob Walton
_______________________________
Name: Bob Walton
Title: Authorized Representative
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<PAGE> 1
Exhibit 10.75
BILL OF SALE AND ASSIGNMENT
THIS BILL OF SALE AND ASSIGNMENT is executed and delivered this 13th day
of November, 1996, by and between SIERRA TUCSON, INC., a Delaware corporation
("Seller"), and SOFTEN REALTY, L.L.C, a Delaware limited liability company
("Purchaser").
W I T N E S E T H:
WHEREAS, Seller and Purchaser have entered into that certain Asset
Purchase Agreement, dated as of November 13, 1996 (the "Purchase Agreement"),
pursuant to which Purchaser is acquiring all of the assets of Seller for the
consideration therein provided.
NOW, THEREFORE, in consideration of the foregoing and of other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Seller and Purchaser hereby agree as follows:
1. Definitions. Capitalized terms used herein and not otherwise defined
shall have the meanings set forth in the Purchase Agreement.
2. Sale of Assets. Seller hereby grants, sells, conveys, assigns,
transfers and delivers to Purchaser all right, title and interest of Seller in
and to the Acquired Assets, effective as of 12:01 a.m. on November 14, 1996.
3. Acceptance of Assignment. Purchaser hereby accepts the assignment of
the Acquired Assets.
4. Miscellaneous.
(a) All of the representations, warranties, covenants and agreements
contained in the Purchase Agreement with respect to the Acquired Assets being
sold, conveyed, assigned, transferred and delivered hereby shall survive the
delivery of this Bill of Sale and Assignment and the Closing of the transactions
referred to in the Purchase Agreement to the extent set forth in the Purchase
Agreement.
(b) This instrument is being delivered pursuant to the Purchase
Agreement and shall be construed consistently therewith. This instrument is not
intended to, and does not, in any manner
<PAGE> 2
in any manner diminish or modify the rights and obligations of the parties to
the Purchase Agreement.
(c) This instrument shall be governed by and construed in accordance
with the laws of the State of Delaware without reference to the choice of law
principles thereof.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
duly executed and delivered as of the day and year first above written.
SELLER:
SIERRA TUCSON, INC., a Delaware
corporation
By /s/ Bob Walton
---------------------------------
Name: Bob Walton
Title: Authorized Representative
PURCHASER:
SOFTEN REALTY, L.L.C., a Delaware
limited liability company
By: NEXTHEALTH, INC., a
Delaware corporation,
Manager
By /s/ Bob Walton
----------------------------------
Name: Bob Walton
Title: Authorized Representative
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<PAGE> 1
Exhibit 10.76
NEXTHEALTH, INC.
17,109 SHARES OF SERIES A PREFERRED STOCK
28,956 SHARES OF SERIES B PREFERRED STOCK
WARRANT TO PURCHASE 500,000 SHARES OF COMMON STOCK
PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
NOVEMBER 14, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 1. TERMS OF PURCHASE.............................................................................. 1
1.1 Sale of Preferred Stock and Warrant............................................................ 1
1.2 Purchase Price................................................................................. 1
1.3 Closing........................................................................................ 1
1.4 Reserved Shares................................................................................ 2
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION.............................................. 2
2.1 Corporate Status............................................................................... 2
2.2 Corporate Power and Authority.................................................................. 2
2.3 Capitalization................................................................................. 2
2.4 Title to Properties............................................................................ 3
2.5 Effect of Transactions......................................................................... 3
2.6 Litigation..................................................................................... 3
2.7 Offerees....................................................................................... 3
2.8 Subsidiaries................................................................................... 3
2.9 Employees...................................................................................... 4
2.10 Contracts...................................................................................... 4
2.11 Permits, Licenses, Technology, Trademarks, Patents and Other Rights............................ 4
2.12 Absence of Certain Changes..................................................................... 4
2.13 Tax Returns and Payments....................................................................... 5
2.14 Publicly Filed Documents and Financial Statements.............................................. 5
2.15 Use of Proceeds................................................................................ 6
2.16 No Brokers..................................................................................... 6
2.17 Material Misstatements or Omissions............................................................ 6
SECTION 3. CONDITIONS OF PURCHASE......................................................................... 6
3.1 Certificate of Corporation..................................................................... 6
3.2 Authorization.................................................................................. 6
3.3 Credit Agreement............................................................................... 7
3.4 Collateral Documents........................................................................... 7
3.5 Registration and Pre-Emptive Rights Agreement.................................................. 7
3.6 Irrevocable Proxy.............................................................................. 7
3.7 Opinion of Counsel............................................................................. 7
3.8 Compliance..................................................................................... 7
3.9 Tender of Aggregate Purchase Price............................................................. 7
3.10 Representations and Warranties................................................................. 7
3.11 Credit Agreement............................................................................... 7
3.12 Amendment of Earlier Warrant................................................................... 7
3.13 Registration and Pre-Emptive Rights Agreement.................................................. 8
SECTION 4. COVENANTS OF THE CORPORATION................................................................... 8
4.1 Financial Statements........................................................................... 8
4.2 Budget and Operating Forecast.................................................................. 8
4.3 Stockholder Approval........................................................................... 9
4.4 Payment of Taxes, Compliance with Laws, Etc.................................................... 9
4.5 Adverse Changes................................................................................ 9
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C> <C>
4.6 Insurance...................................................................................... 9
4.7 Maintenance of Properties...................................................................... 9
4.8 Affiliated Transactions........................................................................ 9
4.9 Management and Compensation.................................................................... 10
4.10 Inspection..................................................................................... 10
4.11 Board of Directors............................................................................. 10
4.12 Distributions or Redemption of Capital Stock................................................... 10
4.13 Maintenance of Corporate Existence, Etc........................................................ 10
SECTION 5. REPRESENTATIONS AND COVENANTS OF PURCHASER..................................................... 11
SECTION 6. GENERAL........................................................................................ 12
6.1 Indemnification................................................................................ 12
6.2 Amendments, Waivers and Consents............................................................... 12
6.3 Survival of Representations, Warranties and Covenants; Assignability
of Rights...................................................................................... 12
6.4 Section Headings............................................................................... 13
6.5 Counterparts................................................................................... 13
6.6 Notices and Demands............................................................................ 13
6.7 Waiver of Jury Trial........................................................................... 14
6.8 Specific Performance........................................................................... 14
6.9 Severability................................................................................... 15
6.10 Expenses....................................................................................... 15
6.11 Governing Law. ............................................................................... 15
</TABLE>
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<PAGE> 4
PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
AGREEMENT dated as of November 14, 1996 by and between
NextHealth, Inc., a Delaware corporation (the "Corporation"), and AP NH LLC, a
Delaware limited liability company (the "Purchaser").
WHEREAS, the Corporation desires to sell, and the Purchaser
desires to purchase, at the Closing (as defined below), subject to the terms and
conditions set forth herein, (i) 17,109 shares of the Corporation's Series A
Preferred Stock (as defined below), (ii) 28,956 shares of the Corporation's
Series B Preferred Stock (as defined below) and (iii) a warrant to purchase up
to 500,000 shares of the Corporation's Common Stock (as defined below); and
WHEREAS, the Corporation has authorized and reserved for
issuance and sale (i) 17,109 shares of Series A Preferred Stock, (ii) 28,956
shares of Series B Preferred Stock and (iii) a warrant to purchase up to 500,000
shares of Common Stock;
NOW, THEREFORE, in consideration of the mutual promises set
forth herein, the Corporation agrees with the Purchasers as follows:
SECTION 1. TERMS OF PURCHASE
1 SALE OF PREFERRED STOCK AND WARRANT. Subject to the terms
and conditions set forth herein, at the Closing the Corporation shall issue and
sell to the Purchaser, and the Purchaser shall purchase from the Corporation,
for the consideration specified in Section 1.2 (i) 17,109 shares of the
Corporation's authorized but unissued Convertible Preferred Stock, Series A, par
value $0.01 per share (the "Series A Preferred Stock"), (ii) 28,956 shares of
the Corporation's authorized but unissued Cumulative Preferred Stock, Series B,
par value $0.01 per share (the "Series B Preferred Stock" and together with the
Series A Preferred Stock, the "Preferred Stock"), and (iii) a warrant (the
"Warrant") representing the right to purchase up to 500,000 shares of the
Corporation's common stock, par value $0.01 per share (the "Common Stock"). The
Preferred Stock shall have the terms and preferences set forth in Exhibit A
hereto, and the Warrant shall be subject to the terms and conditions set forth
in the Warrant Certificate evidencing the Warrant, which Certificate shall be in
the form of Exhibit B hereto.
2 PURCHASE PRICE. The aggregate purchase price for (i) the
Series A Preferred Stock shall be $1,578,476.34 (or $92.26 per share), (ii) the
Series B Preferred Stock shall be $2,671,480.56 (or $92.26 per share and (iii)
the Warrant shall be $43.10.
3 CLOSING. The closing (the "Closing") of the sale and
purchase of the Preferred Stock and the Warrant shall take place at 10:00 a.m.
New York time on November 14, 1996 at the offices of Battle Fowler LLP, located
at 75 East 55th Street, New York, New York 10022, or at such other time, date or
place as shall be mutually agreed upon by the Corporation and the Purchaser. The
date on which the Closing occurs shall be referred to herein as the "Closing
Date". At the Closing, the Corporation will deliver to the Purchaser
certificates representing the number of shares of Series A Preferred Stock and
Series B Preferred Stock, as the case may be, and the Warrant to be purchased by
the Purchaser against payment of the purchase price therefor. Payment of the
purchase price for the shares of Preferred Stock and the Warrant shall be by
wire transfer or by certified or bank cashier's check.
<PAGE> 5
4 RESERVED SHARES. The Corporation will authorize and reserve,
and covenants to continue to reserve, for issuance a sufficient number of shares
of Common Stock to satisfy the (x) rights of conversion of the holders of the
Preferred Stock and (y) right to exercise the Warrant.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION
In order to induce the Purchaser to enter into this Agreement,
the Corporation represents and warrants to the Purchaser as follows:
1 CORPORATE STATUS. The Corporation (i) is a duly organized
and validly existing corporation in good standing under the laws of the State of
Delaware, (ii) has the corporate power and authority to own its property and
assets and to transact the business in which it is presently engaged and (iii)
is duly qualified and authorized to do business and is in good standing in all
jurisdictions where it is required to be so qualified and where the failure to
be so qualified could have a material adverse effect on the business,
properties, liabilities, operations or condition (financial or otherwise) of the
Corporation.
2 CORPORATE POWER AND AUTHORITY. The Corporation has the
corporate power and authority to execute, deliver and carry out the terms and
provisions of this Agreement and has taken all necessary corporate action to
authorize the execution, delivery and performance of this Agreement. The
Corporation has duly executed and delivered this Agreement and this Agreement
constitutes the legal, valid and binding obligation of the Corporation
enforceable in accordance with its terms, except to the extent that the
enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws generally affecting creditors' rights
and by equitable principles (regardless of whether enforcement is sought in
equity or at law).
3 CAPITALIZATION. As of the Closing Date and after taking into
account the transactions contemplated by this Agreement, the Corporation's total
authorized capital shares will consist of (i) 4,000,000 shares of Preferred
Stock, comprised of (x) 46,065 shares of Series A Preferred Stock, of which
17,109 shares of Series A Preferred Stock shall be issued and outstanding as of
the Closing Date, (y) 28,956 shares of Series B Preferred Stock, all of which
will be issued and outstanding as of the Closing Date, and (z) 3,924,979 of
authorized but undesignated preferred stock, none of which will be issued and
outstanding as of the Closing Date, (ii) 16,000,000 shares of Common Stock, of
which 8,554,938 shares of Common Stock will be issued and outstanding and
5,106,500 shares of Common Stock will be reserved for issuance upon (x) the
conversion of all of the authorized shares of Series A Preferred Stock and (y)
the exercise of the Warrant. As of the Closing Date and after giving effect to
the transactions contemplated by this Agreement, all of the issued and
outstanding shares of capital stock of the Corporation (including the shares of
Preferred Stock being issued under this Agreement) shall be duly and validly
authorized and issued and are fully paid and non-assessable. The relative
rights, preferences, restrictions and other provisions relating to the Preferred
Stock are as set forth in Exhibit A. Except as provided for in this Agreement or
disclosed in the Company Publicly Filed Documents or in Schedule 2.3 to this
Agreement: (a) there are no outstanding warrants, options or other rights to
purchase or acquire any shares of the Corporation's capital stock, nor any
outstanding securities convertible into such shares or outstanding warrants,
options or other rights to acquire any such convertible securities; (b) there
are no preemptive rights with respect to the issuance or sale of the
Corporation's capital stock; and (c) as of the Closing Date there will be no
restrictions on the transfer of the Corporation's capital stock other than those
arising from federal and state securities laws.
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<PAGE> 6
4 TITLE TO PROPERTIES. The Corporation has good and marketable
title to its assets used in conducting its business, free and clear of all
liens, restrictions or encumbrances after application of the proceeds of the
financing contemplated hereby and under the Credit Agreement.
5 EFFECT OF TRANSACTIONS. Except as set forth in Schedule 2.5
to this Agreement, the execution, delivery and performance by the Corporation of
this Agreement and the agreements and transactions contemplated hereby will not
conflict with or result in any default under any material contract, obligation
or commitment of the Corporation, or any charter provision, by-law or corporate
restriction of the Corporation, or the creation of any lien, charge, restriction
or encumbrance of any nature upon any of the properties or assets of the
Corporation, except pursuant to this Agreement and the Collateral Documents (as
defined in the Credit Agreement referred to below). Except as set forth in
Schedule 2.5 to this Agreement, the Corporation's execution and delivery of this
Agreement and its performance of the transactions contemplated hereby will not
violate any material instrument, agreement, judgment, decree, order, statute,
rule or regulation of any federal, state or local government or agency
applicable to the Corporation.
6 LITIGATION. There is no litigation or governmental
proceeding or investigation pending or, to the best knowledge of the
Corporation, threatened against the Corporation affecting any of its properties
or assets, or which has a reasonable possibility of calling into question the
validity, or materially hindering the enforceability or performance, of this
Agreement, or any action taken or to be taken pursuant hereto; nor, to the best
knowledge of the Corporation, has there occurred any event or does there exist
any condition on the basis of which any litigation, proceeding or investigation
might properly be instituted with any substantial chance of a recovery which
could be materially adverse to the Corporation.
7 OFFEREES. Neither the Corporation nor any other party
authorized to act on behalf of the Corporation has in the past or will hereafter
sell, offer for sale or solicit offers to buy any securities of the Corporation
so as to bring the offer, issuance or sale of the Preferred Stock, as
contemplated by this Agreement, within the provisions of Section 5 of the
Securities Act of 1933, as amended (the "Securities Act"), unless such offer,
issuance or sale was or shall be within the exemptions of Section 4 thereof.
8 SUBSIDIARIES. Except as set forth in Schedule 2.8, the
Corporation has no subsidiaries and does not own of record or beneficially any
capital stock or equity interest or investment in any corporation, association,
partnership, joint venture or business entity.
9 EMPLOYEES. To the best of the Corporation's knowledge and
belief after due inquiry, no employee of the Corporation is, or is now expected
to be, in violation of any term of any employment contract, patent disclosure
agreement, non-competition agreement, or any other contract or agreement or any
restrictive covenant or any other common law obligation to a former employer
relating to the right of any such employee to be employed by the Corporation
because of the nature of the business conducted or to be conducted by the
Corporation or to the use of trade secrets or proprietary information of others,
and to the best of the Corporation's knowledge and belief, the employment of the
Corporation's employees does not subject the Corporation or the Purchaser to any
liability. There is neither pending nor, to the Corporation's knowledge and
belief, threatened any actions, suits, proceedings or claims, or to its
knowledge any basis therefor or threat thereof with respect to any contract,
agreement, covenant or obligation referred to in the preceding sentence. All
employment, non- disclosure, confidentiality or non-competition agreements with
any
-3-
<PAGE> 7
employees of the Corporation or its subsidiaries and any collective bargaining
agreement covering any Corporation or subsidiary employees are set forth on
schedule 2.9.
10 CONTRACTS. Except as set forth in Schedule 2.10 or as an
exhibit to the Company Filed Documents, the Corporation does not have any
currently existing contract, obligation, agreement, plan, arrangement,
commitment or the like (written or oral) which is material to the Corporation
and its business. The Corporation has complied in all material respects with the
provisions of all said contracts, obligations, agreements, plans, arrangements
and commitments and is not in default thereunder.
11 PERMITS, LICENSES, TECHNOLOGY, TRADEMARKS, PATENTS AND
OTHER RIGHTS. The Corporation has all franchises, permits, licenses and other
similar authority necessary for the conduct of its business as now being
conducted by it and as planned to be conducted, the lack of which could
materially and adversely affect the prospects, operations or condition,
financial or otherwise, of the Corporation, and it is not in default in any
material respect under any of such franchises, permits, licenses or other
similar authority. The Corporation possesses all technology, technology rights,
patents, patent rights, trademarks, trademark rights, trade names, trade name
rights, copyrights, trade secrets, proprietary rights and processes known by the
Corporation to be necessary to conduct its business as now being conducted and
as planned to be conducted, without, to the knowledge of the Corporation after
due inquiry, conflict with or infringement upon any valid rights of others and
the lack of which could materially and adversely affect the operations or
condition, financial or otherwise, of the Corporation, and has not received any
notice of infringement upon or conflict with the asserted rights of others.
12 ABSENCE OF CERTAIN CHANGES. Since September 30, 1996,
except to the extent described in Schedule 2.12 or as described in or
contemplated by the Company Publicly Filed Documents or the Financial
Statements, there has not been any event or condition of any character which has
adversely affected the Corporation's business or prospects, including but not
limited to:
(a) Any material adverse change in the condition, assets,
liabilities or business of the Corporation from that shown on the Corporation's
balance sheet dated September 30, 1996;
(b) Any damage, destruction or loss of any of the properties
or assets of the Corporation (whether or not covered by insurance) materially
adversely affecting the business or plans of the Corporation;
(c) Any declaration, setting aside or payment or other
distribution in respect of any of the Corporation's capital stock, or any direct
or indirect redemption, purchase or other acquisition of any of such shares by
the Corporation; or
(d) Any labor trouble, or any event or condition of any
character, materially adversely affecting the business or plans of the
Corporation.
13 TAX RETURNS AND PAYMENTS. Each of the Corporation and its
subsidiaries has filed all Federal income tax returns, domestic and foreign,
required to be filed by it and has paid all Federal taxes and assessments shown
to be due on such returns and all other material taxes and assessments, domestic
and foreign, in each case payable by it which have become due, other than those
not yet delinquent and except those contested in good faith and for which
adequate
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reserves have been provided in accordance with generally accepted accounting
principles ("GAAP").
14 PUBLICLY FILED DOCUMENTS AND FINANCIAL STATEMENTS.
(a) The Corporation has previously furnished or made available
to the Purchaser true and complete copies of (i) its Annual Reports on Form 10-K
for each of the three fiscal years ended December 31, 1995, 1994 and 1993, as
each such Annual Report has been amended through the date hereof, and as each
was filed with the United States Securities and Exchange Commission (the "SEC");
(ii) its Quarterly Reports on Form 10-Q for each of the quarterly periods ended
June 30, 1996, and March 31, 1996, as each such quarterly report has been
amended through the date hereof, and as each was filed with the SEC; (iii) its
proxy statements relating to all meetings of its stockholders (whether annual or
special) since January 1, 1995; and (iv) all other reports or registration
statements filed by the Corporation with the SEC since January 1, 1996, as each
has been amended through the date hereof (collectively, the "Company Publicly
Filed Documents"). None of the Company Publicly Filed Documents, and including,
without limitation, any financial statements or schedules included in any
Company Publicly Filed Documents, at the time filed contained any untrue
statement of material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of any
circumstances under which they were made, not misleading, which untrue
statements or omissions have not been corrected or updated in a document
subsequently filed with the SEC. The financial statements contained in the
Company Publicly Filed Documents (the "Financial Statements") comply as to form
in all material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP applicable to year-end financial statements
(except, in the case of unaudited interim financial statements, for the absence
of footnotes and normal year-end adjustments) consistently applied during the
periods involved, and present fairly the consolidated financial condition and
results of operations and cash flow of the Corporation and its subsidiaries as
of such dates and for such periods. There is no material liability or obligation
of any kind, whether accrued, absolute, fixed or contingent, of the Corporation
or any subsidiary of the Corporation that is required to be disclosed under GAAP
and that is not reflected or reserved against in the unaudited consolidated
balance sheet of the Corporation as of June 30, 1996 contained in the
Corporation's quarterly report on Form 10-Q for the quarterly period ended June
30, 1996 or reflected in the notes thereto, other than liabilities incurred in
the ordinary course of business, consistent with past practice, since June 30,
1996, none of which has had or could reasonably be expected to have a material
adverse effect on the financial condition or results of operations of the
Corporation.
15 USE OF PROCEEDS. The Corporation shall use the proceeds of
the sale of the Preferred Stock and Warrant as set forth in Schedule 2.13.
16 NO BROKERS. The Corporation does not have nor will have any
obligation to pay any finder's fee, brokerage commission or similar payment in
connection with the transactions contemplated hereby which has not been
satisfied in full and disclosed to the Purchaser.
17 MATERIAL MISSTATEMENTS OR OMISSIONS. No representations or
warranties by the Corporation in this Agreement, nor any document, exhibit,
statement, certificate or schedule furnished or to be furnished to Purchaser
pursuant hereto (including, without limitation, the Schedules hereto), or in
connection with the transactions contemplated hereby, contains or will contain
any untrue statement of a material fact, or omits or will omit to state any
material fact
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<PAGE> 9
necessary to make the statements or facts contained therein not misleading. The
Corporation has disclosed all events, conditions and facts materially affecting
(i) the business or the condition (financial or otherwise), properties,
liabilities, reserves, working capital, earnings, prospects or relations with
customers, suppliers, distributors or employees of the Corporation and (ii) the
right or ability of the Corporation to consummate the transactions contemplated
hereby.
SECTION 3. CONDITIONS OF PURCHASE
The Purchaser's obligation to purchase and pay for the
Preferred Stock and the Warrant and to take the other actions required to be
taken by the Purchaser at the Closing shall be subject to compliance by the
Corporation with its agreements herein contained and to the fulfillment to the
Purchaser's satisfaction on or before the Closing Date of the following
conditions:
1 CERTIFICATE OF CORPORATION. The representations and
warranties of the Corporation contained in this Agreement, including but not
limited to the representations and warranties made in Section 2, shall be true
and correct in all material respects; each of the conditions hereafter specified
in this Section 3 shall have been satisfied in all material respects; and on the
Closing Date a certificate to such effect executed by the President or a Vice
President of the Corporation shall be delivered to the Purchaser.
2 AUTHORIZATION. The Board of Directors of the Corporation
shall have duly adopted resolutions in form and substance reasonably
satisfactory to the Purchaser authorizing the Corporation to consummate the
transactions contemplated hereby in accordance with the terms hereof, and the
Purchaser shall have received a duly executed certificate of the Secretary or an
Assistant Secretary of the Corporation setting forth such resolutions and such
other matters as may be requested by the Purchaser.
3 CREDIT AGREEMENT. On or prior to the Closing Date, the
Corporation shall have executed and delivered to the Purchaser a counterpart to
the Credit Agreement, dated as of the date hereof (the "Credit Agreement"),
between the Corporation and the Purchaser.
4 COLLATERAL DOCUMENTS. On or prior to the Closing Date, the
Corporation and its subsidiaries shall have executed and delivered to the
Purchaser each of the Collateral Documents (as defined in the Credit Agreement)
as required by the Credit Agreement.
5 REGISTRATION AND PRE-EMPTIVE RIGHTS AGREEMENT. The
Corporation shall have executed and delivered to the Purchaser a counterpart to
the Registration and PreEmptive Rights Agreement, dated as of the date hereof
(the "Registration Rights Agreement") between the Purchaser and the Corporation.
6 IRREVOCABLE PROXY. The Purchaser shall have received the
executed irrevocable proxy of Messers. O'Donnell and Schnitz in the form
attached hereto as Exhibit C.
7 OPINION OF COUNSEL. The Purchaser shall have received the
opinion of Neal, Gerber & Eisenberg, counsel to the Corporation, dated the
Closing Date, which opinion shall be in form and substance satisfactory to the
Purchaser.
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<PAGE> 10
8 COMPLIANCE. The issuance and sale of the Preferred Stock and
the Warrant to the Purchaser shall be made in conformity with all applicable
state and federal securities laws.
The Corporation's obligation to sell the Preferred Stock and
the Warrant to the Purchaser shall be subject to the fulfillment on or before
the Closing Date of the following conditions:
9 TENDER OF AGGREGATE PURCHASE PRICE. The Purchaser shall have
tendered to the Corporation at Closing the aggregate consideration set forth in
Section 1.2
10 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Purchaser contained in Section 5 hereof shall be true and
correct in all material respects as of the Closing Date.
11 CREDIT AGREEMENT. On the Closing Date, the Purchaser shall
have executed and delivered to the Corporation a counterpart to the Credit
Agreement and advanced all amounts so required thereunder.
12 AMENDMENT OF EARLIER WARRANT. On or prior to the Closing
Date, Purchaser shall have obtained the agreement of the holder of Warrant No.
W-1 for 100,000 shares of Common Stock to the amendment of such warrant to defer
exercisability thereof until March 15, 1997.
13 REGISTRATION AND PRE-EMPTIVE RIGHTS AGREEMENT. On or prior
to the Closing Date, the Purchaser shall have executed and delivered to the
Corporation a counterpart to the Registration Rights Agreement.
SECTION 4. COVENANTS OF THE CORPORATION
The Corporation shall comply, and the Corporation shall cause
any direct or indirect subsidiaries of the Corporation to comply, with the
following covenants until the first to occur of (i) January 1, 2001, or (ii) the
Purchaser, its transferees and assigns shall cease to hold shares of capital
stock or securities convertible into or exercisable for shares of capital stock
of the Corporation representing 5% or more of all outstanding shares of capital
stock of the Corporation (all references to "the Corporation" in this Section 4
shall be deemed to refer to the Corporation and its direct and indirect
subsidiaries, if applicable, on a consolidated basis):
1 FINANCIAL STATEMENTS. The Corporation will maintain a system
of accounts in accordance with GAAP, keep full and complete financial records
and furnish to the Purchaser the following reports: (i) as soon as practicable
and, in any event, within 30 calendar days after the close of each calendar
month, consolidated and consolidating (x) statements of income and of cash flows
of the Corporation and its subsidiaries for such monthly period and (y) balance
sheets of the Corporation and its subsidiaries as of the end of such monthly
period, all in reasonable detail and including year to date information, and
certified by the chief financial officer of the Corporation to have been
prepared in accordance with GAAP (other than any requirement for footnote
disclosure and the recording of non-cash items), subject to year-end audit
adjustments; (ii) as soon as practicable and, in any event, within 90 calendar
days after the close of each fiscal year of the Corporation, a copy of the
annual audited report for such year for the Corporation, including consolidated
(x) statements of income and of cash flows of the Corporation and its
subsidiaries for such fiscal year, and (y) balance sheets of the Corporation and
its subsidiaries as of the end of such
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<PAGE> 11
fiscal year, each setting forth in comparative form, if applicable, the
corresponding figures for the previous year, all in reasonable detail; the
statements of income and of cash flows and balance sheet to be audited by
independent, nationally recognized, certified public accountants, and certified
(without a "going concern" qualification or other qualification or exception of
similar gravity or any qualification arising out of the scope of the audit (but
not arising out of changes in financial accounting standards)) by such
accountants to have been prepared in accordance with GAAP, consistently applied
(except to the extent any inconsistency is disclosed in the notes to such
financial statements and approved by such accountants); and (iii) promptly, and
in any event within one calendar day after the filing thereof, a copy of any
annual, quarterly or interim report, proxy statement, information statement,
Schedule 13D or 13G or any other filing made by or with respect to the
Corporation with the SEC or Nasdaq.
2 BUDGET AND OPERATING FORECAST. The Corporation will prepare
and submit to the Board of Directors of the Corporation and the Purchaser a
budget for each fiscal year of the Corporation at least 30 days prior to the
beginning of such fiscal year, together with management's written discussion and
analysis of such budget. The budget shall be accepted as the budget for such
fiscal year when it has been approved by a majority of the entire Board
of Directors of the Corporation (including a majority of Preferred Directors (as
defined in Exhibit A hereto)). The Corporation shall review the budget
periodically and shall advise the Board of Directors and the Purchaser of all
material changes therein and all material deviations therefrom.
3 STOCKHOLDER APPROVAL. The Corporation will take all steps
necessary in accordance with applicable law and its Certificate of Incorporation
and By-Laws duly to call, give notice of, convene and hold (a) a special meeting
of stockholders as soon as practicable after the date hereof for the purpose of
approving the issuance to the Purchaser of common stock upon conversion of the
Series B Preferred Stock, and (b) a regular meeting of stockholders no later
than June 15, 1997 for the purpose of approving the elimination of Article 9 of
the Corporation's Certificate of Incorporation. The Board of Directors of the
Corporation will (i) recommend to the stockholders of the Company the approval
and adoption of the two foregoing proposals, and (ii) use all reasonable efforts
to obtain the approval by the stockholders of the Company of the two foregoing
proposals.
4 PAYMENT OF TAXES, COMPLIANCE WITH LAWS, ETC. The Corporation
will pay and discharge all lawful taxes, assessments and governmental charges or
levies imposed upon it or upon its income or property before the same shall
become in default, as well as all lawful claims for labor, materials and
supplies which, if not paid when due, might become a lien or charge upon its
property or any part thereof; provided, however, that the Corporation shall not
be required to pay and discharge any such tax, assessment, charge, levy, or
claim so long as the validity thereof is being contested by the Corporation in
good faith by appropriate proceedings and an adequate reserve therefor has been
established on its books. The Corporation will comply in all material respects
with all applicable laws and regulations in the conduct of its business.
5 ADVERSE CHANGES. The Corporation will promptly advise the
Purchaser of any event which represents a material adverse change in the
business, properties, liabilities, operations or condition (financial or
otherwise) of the Corporation. The Corporation will also promptly notify the
Purchaser of any facts which, if such facts had existed at the Closing, would
have constituted a material breach of the representations and warranties
contained herein.
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<PAGE> 12
6 INSURANCE. The Corporation will keep its insurable
properties insured by financially sound and reputable insurers against the
perils of liability, casualty, fire and extended coverage in amounts of coverage
not less than those currently maintained by the Corporation. The Corporation
will also maintain with such insurers insurance against other hazards and risks
and liability to persons and property to the extent and in the manner currently
maintained.
7 MAINTENANCE OF PROPERTIES. The Corporation will maintain all
properties used or useful in the conduct of its business in good repair, working
order and condition as necessary to permit such business to be properly and
advantageously conducted.
8 AFFILIATED TRANSACTIONS. All transactions by and between the
Corporation and any officer, key employee or shareholder of the Corporation, or
persons controlled by or affiliated with such officer, key employee or
shareholder, shall be conducted on an arm's- length basis, shall be on terms and
conditions no less favorable to the Corporation than could be obtained from
non-related persons and shall be approved in advance by the Board of Directors,
including approval by a majority of the Preferred Directors, after full
disclosure of the terms thereof; provided, however, that the foregoing shall not
apply to any transaction or series of transactions involving in the aggregate an
expenditure or transfer of not more than $5,000 in money or money's worth.
9 MANAGEMENT AND COMPENSATION.
(a) The Corporation will not employ any person in any position
deemed to be suitable only for "key management personnel" unless approved by a
majority of the Board of Directors.
(b) Compensation paid by the Corporation to its management
will be reasonably comparable to compensation paid to management in companies in
similar industries of similar size and of similar maturity.
10 INSPECTION. The Corporation will permit the Purchaser and
its authorized representatives to visit and inspect any of the properties of the
Corporation, including its books of account (and to make copies thereof and take
extracts therefrom), and to discuss its affairs, finances and accounts with its
officers, administrative employees and independent accountants, all at such
reasonable times and as often as may be reasonably requested.
11 BOARD OF DIRECTORS. The Purchaser will have the right to
approve all future nominations to the Board of Directors othe than those
individuals serving as directors immediately prior to the Closing. The
Corporation shall ensure that meetings of its Board of Directors are held at
least four (4) times each year and at intervals of not more than four (4) months
and will reimburse Directors for their reasonable travel expenses, including the
cost of airfare and any necessary meals and lodging, incurred in connection with
attending meetings of the Board of Directors. Officers of the Corporation who
also serve as directors of the Corporation shall not be paid any fee for such
service (other than reimbursements for expenses).
12 DISTRIBUTIONS OR REDEMPTION OF CAPITAL STOCK. Except as
otherwise provided in this Agreement or Exhibit A hereto, the Corporation will
not declare or pay any dividends (other than a dividend payable in shares of its
Common Stock) or make any distributions of cash, property or securities of the
Corporation with respect to any shares of its Common Stock or Preferred Stock or
any other class of its capital stock, or directly or indirectly redeem,
purchase, or
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otherwise acquire for consideration any shares of its Common Stock or Preferred
Stock or any other class of its capital stock (other than repurchases of shares
from its employees, directors and consultants, at the same price as paid by such
employees, or any other price with the approval of the Board of Directors, under
stock restriction agreements).
13 MAINTENANCE OF CORPORATE EXISTENCE, ETC. The Corporation
shall maintain in full force and effect its corporate existence, rights and
franchises and all licenses and other rights in or to use patents, processes,
licenses, trademarks, trade names or copyrights owned or possessed by it or any
subsidiary and deemed by the Corporation to be necessary to the conduct of its
or such subsidiary's business without, to the Corporation's best knowledge, any
conflict with any rights of others to use such patents, processes, licenses,
trademarks, trade names or copyrights.
SECTION 5. REPRESENTATIONS AND COVENANTS OF PURCHASER
The Purchaser hereby represents and warrants to the
Corporation as follows:
(a) The execution of this Agreement has been duly authorized
by all necessary action on the part of the Purchaser; this Agreement has been
duly executed and delivered by the Purchaser; and this Agreement constitutes a
valid, binding and enforceable agreement of the Purchaser.
(b) Purchaser is acquiring the Preferred Stock (and the shares
of Common Stock issuable upon conversion of shares of Series A Preferred Stock)
and the Warrant (and the shares of Common Stock issuable upon the exercise of
the Warrant (the "Warrant Stock")) for its own account, for investment, and not
with a view to any "distribution" thereof within the meaning of the Securities
Act.
(c) Purchaser understands that because the Preferred Stock,
the Warrant and the Warrant Stock have not been registered under the Securities
Act, it cannot dispose of any or all of the Preferred Stock or the Common Stock
issuable upon conversion of shares of Series A Preferred Stock or the Warrant or
the Warrant Stock unless such securities are subsequently registered under the
Securities Act or exemptions from such registration are available. The Purchaser
acknowledges and understands that, except as provided in the Registration Rights
and Pre-emptive Rights Agreement, dated as of the date hereof, between Purchaser
and the Corporation, it has no independent right to require the Corporation to
register the Preferred Stock, the Common Stock issuable upon conversion of
shares of Series A Preferred Stock, the Warrant or the Warrant Stock. The
Purchaser further understands that the Corporation may, as a condition to the
transfer of any of the Preferred Stock, the Common Stock issuable upon
conversion of shares of Series A Preferred Stock, the Warrant or the Warrant
Stock, require that a written request for transfer be delivered to the
Corporation accompanied by an opinion of counsel, in form and substance
satisfactory to the Corporation, to the effect that the proposed transfer does
not result in a violation of the Securities Act or that such transfer is covered
by an effective registration statement under the Securities Act. The Purchaser
understands that each certificate representing the Preferred Stock and the
Warrant will bear the following legend or one substantially similar thereto:
"THIS SECURITY AND SHARES ISSUABLE ON CONVERSION OR EXERCISE OF THIS
SECURITY MAY NOT HAVE BEEN REGISTERED UNDER THE
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<PAGE> 14
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE
SECURITIES LAWS BY REASON OF EXEMPTIONS FROM THE REGISTRATION
REQUIREMENTS OF THE ACT AND SUCH STATE SECURITIES LAWS AND MAY NOT BE
SOLD, PLEDGED, ASSIGNED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN EXEMPTION THEREFROM UNDER SUCH ACT OR LAWS."
(d) The Purchaser is knowledgeable and experienced in the
making of equity investments, and is able to bear the economic risk of loss of
its investment in the Corporation.
(e) The Purchaser has been advised that the shares of
Preferred Stock and the Warrant issued hereunder have not been and are not being
registered under the Securities Act or under the "blue sky" laws of any
jurisdiction (except in the case of certain state filings) and that the
Corporation in issuing the Preferred Stock and the Warrant is relying upon,
among other things, the representations and warranties of Purchaser contained in
this Section 5 in concluding that each such issuance is a "private offering" and
does not require compliance with the registration provisions of the Securities
Act.
(f) The Purchaser has adequate means of providing for its
current needs and possible contingencies, has no need for liquidity of its
investment in the Preferred Stock or the Warrant and can bear the economic risk
of losing its entire investment therein.
(g) The Purchaser is controlled by or under common control
with Apollo Real Estate Advisors II, L.P.
The Purchaser covenants and agrees to vote the Series A Preferred Stock
in favor of the stockholder proposals referred to in Section 4.3.
SECTION 6. GENERAL
1 INDEMNIFICATION. The Corporation hereby agrees to indemnify
and hold harmless the Purchaser and its affiliates and their respective
officers, directors, employees and agents from and against any and all losses,
liabilities, claims, damages, costs and expenses (including, without limitation,
reasonable attorneys' fees and disbursements) incurred by any of them in excess
of an aggregate of $100,000 and up to a maximum of $10 million in the aggregate
in connection with (i) any breach of any representation or warranty made by the
Corporation in this Agreement, (ii) any breach of any covenant, agreement or
obligation of the Corporation in this Agreement and (iii) any investigation,
litigation or other proceeding related to the entering into and/or performance
of this Agreement or the consummation of the transactions contemplated hereby.
2 AMENDMENTS, WAIVERS AND CONSENTS. For the purposes of this
Agreement and all agreements, documents and instruments executed pursuant
hereto, except as otherwise specifically set forth herein or therein, no course
of dealing between the Corporation and the Purchaser and no delay on the part of
any party hereto in exercising any rights hereunder or thereunder shall operate
as a waiver of the rights hereof and thereof. No covenant or other provision
hereof or thereof may be waived otherwise than by a written instrument signed by
the party so waiving such covenant or other provision. Any amendment or waiver
effected in accordance with this Section 6.2 shall be binding upon each holder
of Preferred Stock purchased under this
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<PAGE> 15
Agreement at the time outstanding, each future holder of all such Preferred
Stock and the Corporation.
3 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS;
ASSIGNABILITY OF RIGHTS.
(a) All representations and warranties of the Corporation made
herein and in the certificates, lists, exhibits, schedules or other written
information delivered or furnished to Purchaser in connection herewith shall be
deemed material and to have been relied upon by Purchaser, shall survive the
delivery of the Preferred Stock and the Warrant until December 31, 1998 (except
for Section 2.2, which shall survive indefinitely, and Section 2.13, which shall
survive until termination of any applicable statute of limitations), and shall
bind the Corporation's successors and assigns, whether so expressed or not, and,
except as provided otherwise in this Agreement, all such representations and
warranties shall inure to the benefit of the Purchaser, its successors and
assigns and to transferees of the Preferred Stock and the Warrant, whether so
expressed or not.
(b) All covenants of the Corporation made herein shall survive
the delivery of the Preferred Stock and the Warrant until the later of (i)
December 31, 2000 or (ii) the term specified herein for such covenant, and shall
bind the Corporation's successors and assigns, whether so expressed or not, and,
except as provided otherwise in this Agreement, all such covenants shall inure
to the benefit of the Purchaser, its successors and assigns and to transferees
of the Preferred Stock and the Warrant, whether so expressed or not.
4 SECTION HEADINGS. Article and Section headings used in this
Agreement are for convenience of reference only and shall not constitute a part
of this Agreement for any purpose or affect the construction of this Agreement
5 COUNTERPARTS. This Agreement may be executed in any number
of counterparts and by different parties on separate counterparts, each of which
counterparts, when so executed and delivered, shall be deemed to be an original
and all of which counterparts, taken together, shall constitute one and the same
Agreement. This Agreement shall become effective upon the execution of a
counterpart hereof by each of the parties hereto.
6 NOTICES AND DEMANDS. All notices, demands, instructions and
other communications required or permitted to be given to or made upon any party
hereto shall be in writing delivered to the parties at the addresses set forth
below (or such other address as may be provided by one party in a notice to the
other):
If to Apollo:
c/o Apollo Real Estate Advisors, L.P.
1301 Avenue of the Americas
38th Floor
New York, New York 10019
Attention: Alfred Trivilino
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<PAGE> 16
with a copy to:
Apollo Real Estate Advisors, L.P.
1999 Avenue of the Stars
Suite 1900
Los Angeles, CA 90067
Attention: Michael D. Weiner, Esq.
and a copy to:
Battle Fowler LLP
75 East 55th Street
New York, NY 10022
Attention: Les Loffman, Esq.
If to the Corporation:
NextHealth, Inc.
16600 N. Lago Del Oro Parkway
Tucson, AZ 85739
Attention: John H. Schmitz
with a copy to:
Neal, Gerber & Eisenberg
2 North LaSalle Street
Chicago, IL 60602
Attention: Steve Berger, Esq.
Notice delivered in accordance with the foregoing shall be effective (i) when
delivered, if delivered personally or by facsimile transmission, (ii) two days
after being delivered in the United States (properly addressed and all fees
paid) for overnight delivery service to a courier (such as Federal Express)
which regularly provides such service and regularly obtains executed receipts
evidencing delivery or (iii) five days after being deposited (properly addressed
and stamped for first-class delivery) in a daily serviced United States mail
box.
7 WAIVER OF JURY TRIAL. The Corporation hereby waives all
right to trial by jury in any action, proceeding or counterclaim arising out of
or relating to this Agreement, or any other agreement or instrument contemplated
hereby.
8 SPECIFIC PERFORMANCE. The Purchaser and each transferee or
assignee of the Purchaser shall have the right to specific performance by the
Corporation of Sections 1, 4.2, 4.3, 4.8, 4.9, 4.10 and 4.11 of this Agreement.
The Corporation hereby irrevocably waives, to the extent that it may do so under
applicable law, any defense based on the adequacy of a remedy at law which may
be asserted as a bar to the remedy of specific performance in any action brought
against the Corporation for specific performance of this Agreement by Purchaser
or its transferees and assignees.
9 SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be deemed
prohibited or invalid under such applicable law, such provision
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<PAGE> 17
shall be ineffective to the extent of such prohibition or invalidity, and such
prohibition or invalidity shall not invalidate the remainder of such provision
or the other provisions or this Agreement.
10 EXPENSES. The Corporation shall pay all costs and expenses
incurred by it or the Purchaser with respect to the negotiation, execution,
delivery and performance of this Agreement and any modifications hereof.
11 GOVERNING LAW. This Agreement shall be deemed to have been
made in the State of Delaware and the validity of this Agreement, the
construction, interpretation, and enforcement thereof, and the rights of the
parties thereto shall be determined under, governed by, and construed in
accordance with the internal laws of the State of Delaware, without regard to
principles of conflicts of law.
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<PAGE> 18
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first above written.
NEXTHEALTH, INC.
BY /s/ WILLIAM T. O'DONNELL, JR.
_________________________________
NAME: WILLIAM T. O'DONNELL, JR.
TITLE: PRESIDENT AND CEO
AP NH LLC
BY AP GP NH LLC, ITS MANAGING MEMBER
BY KRONUS PROPERTY, INC.,
ITS MANAGING MEMBER
BY: /s/ ALFRED TRIVILINO
__________________________
NAME: ALFRED TRIVILINO
TITLE: VICE PRESIDENT
<PAGE> 1
Exhibit 10.77
REGISTRATION AND PRE-EMPTIVE RIGHTS AGREEMENT
AGREEMENT, dated as of November 14, 1996, by and between NextHealth,
Inc., a Delaware corporation (the "Corporation"), and AP NH LLC, a Delaware
limited liability company ("Apollo").
PRELIMINARY STATEMENT
Apollo and the Corporation have entered into a Preferred Stock and
Warrant Purchase Agreement dated as of the date hereof (the "Stock Purchase
Agreement") pursuant to which the Corporation issued to Apollo (i) convertible
preferred stock (the "Preferred Stock") convertible under stated conditions into
a number of shares of the Corporation's Common Stock, par value $0.01 per share
(the "Common Stock") and (ii) a stock purchase warrant (the "Warrant")
evidencing Apollo's right to purchase a number of shares of Common Stock, (such
shares of Common Stock, together with any additional shares of Common Stock
issued or issuable to Apollo under a stock purchase warrant dated October 15,
1996, the anti-dilution provisions of the Warrant, Article 3 hereof or the terms
of the Preferred Stock, being referred to hereinafter as the "Shares").
In consideration of Apollo's execution and delivery of the Loan
Agreement and the premises and mutual covenants and agreements hereinafter
contained, the parties hereto agree as follows:
ARTICLE 1.
DEFINITIONS
Section 1 DEFINITIONS. For purposes of this Agreement, capitalized
terms used herein and not defined elsewhere herein shall have the following
meanings:
"ACT" means the Securities Act of 1933, as amended, or any similar
Federal statute, and the rules and regulations of the Commission issued under
the Act, as they each may, from time to time, be in effect.
"COMMISSION" means the Securities and Exchange Commission, or any other
Federal agency at the time administering the Act.
"COMMON STOCK" means the shares of common stock, $0.01 par value, of
the Corporation.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
or any similar Federal statute, and the rules and regulations of the Commission
issued under the Exchange Act, as they each may, from time to time, be in
effect.
"HOLDER" shall mean Apollo, any original registered holder of
Registrable Securities, and any registered transferee of a Holder.
"STOCK PURCHASE AGREEMENT" shall mean the Preferred Stock and Warrant
Purchase Agreement dated as of the date hereof between Apollo and the
Corporation.
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<PAGE> 2
"NEW SECURITIES" means any capital stock of the Corporation whether now
authorized or not, and rights, options or warrants to purchase capital stock,
and securities of any type whatsoever which are, or may become, convertible into
capital stock; provided, however, that the term "New Securities" does not
include (i) the Shares or any additional shares of Common Stock issuable upon
conversion of the Shares; (ii) the issued shares of capital stock and the other
securities exchangeable for or convertible into shares of capital stock of the
Corporation described in Section 2.1 hereof; (iii) securities issued for the
acquisition of another corporation by the Corporation by merger, purchase of
substantially all the assets of such corporation or other reorganization
resulting in the ownership by the Corporation of not less than 51% of the voting
power of such corporation; (vi) shares of Common Stock (or options to purchase
Common Stock) issued or issuable to employees or consultants of the Corporation
pursuant to the Corporation's existing stock option plans; (v) securities issued
as a result of any stock split, stock dividend or reclassification of Common
Stock, distributable on a pro rata basis to all holders of Common Stock; or
(vii) securities issued to third parties in payment for services rendered or
goods provided to the Corporation.
"PREFERRED STOCK" means, collectively, the Series A Preferred Stock and
the Series B Preferred Stock.
"REGISTRABLE SECURITIES" means (i) the Shares, and (ii) any other
shares of Common Stock of the Corporation issued in respect of the Shares
(because of stock splits, stock dividends, reclassifications, recapitalizations,
or similar events).
"SERIES A PREFERRED STOCK" means the shares of series A preferred
stock, $0.01 par value, of the Corporation.
"SERIES B PREFERRED STOCK" means the shares of series B preferred
stock, $0.01 par value, of the Corporation.
ARTICLE 2.
CAPITALIZATION
Section 1 CAPITALIZATION. The Corporation represents and warrants to
Apollo that, on the date hereof, the authorized capitalization and the issued
and outstanding shares of capital stock and securities of the Corporation are as
set forth on Schedule I hereto.
ARTICLE 3.
PRE-EMPTIVE RIGHTS
Section 1 PRE-EMPTIVE RIGHT.
(a) In the event of future issuances of New Securities by the
Corporation, the Corporation hereby grants to Apollo a right to purchase
additional shares of capital stock sufficient (the "Sufficient Number") to
maintain Apollo's percentage ownership interest in the Corporation, at a price
equal to the offering price of such additional shares of capital stock. Apollo's
percentage ownership interest, for purposes of this Section 3.1(a), shall equal
a fraction, the numerator of which is the number of shares of Common Stock then
held by Apollo or issuable upon conversion or exercise of any Shares,
convertible securities, options, rights or warrants then held by Apollo, and the
denominator of which is the total number of shares of Common Stock then
outstanding plus the number of shares of Common Stock issuable upon conversion
or exercise of then outstanding Preferred Stock, convertible securities,
options,
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<PAGE> 3
rights or warrants. The rights granted to Apollo pursuant to this Article 3
shall expire on December 31, 2006.
(b) In the event the Corporation intends to issue New Securities, it
shall give Apollo written notice of such intention, describing the type of New
Securities to be issued, the price thereof and the general terms upon which the
Corporation proposes to effect such issuance. Apollo shall have 20 days from the
date of any such notice to agree to purchase up to the Sufficient Number of
shares of additional New Securities for the price and upon the general terms and
conditions specified in the Corporation's notice by giving written notice to the
Corporation stating the quantity of such New Securities to be so purchased.
Apollo shall have a right of overallotment such that if any other person or
entity entitled to pre-emptive rights fails to exercise his or its right to
purchase his or its total number of shares of additional New Securities to which
he or it is entitled, Apollo may purchase the portion not purchased by such
other person or entity on a pro rata basis (based upon the relative percentage
ownership interests of Apollo and those other investors exercising their
overallotment right), by giving written notice to the Corporation within five
days from the date that the Corporation provides written notice to the other
investors of the amount of New Securities with respect to which such
nonpurchasing investor has failed to exercise its or his right hereunder.
ARTICLE 4.
REGISTRATION RIGHTS
1 OPTIONAL REGISTRATIONS. If at any time or times after the
date hereof, the Corporation shall determine to register any of its Common Stock
or securities convertible into or exchangeable or exercisable for Common Stock
under the Securities Act (whether in connection with a public offering of
securities by the Corporation (a "primary offering"), a public offering thereof
by shareholders (a "secondary offering"), or both, but not in connection with a
registration effected solely to implement an employee benefit plan or a
transaction to which Rule 145 or any other similar rule of the Commission under
the Securities Act is applicable), it agrees to do the following:
(a) The Corporation shall promptly give written notice of
registration under this Section 4.1 to the holders of Registrable Securities
then outstanding (the "Holders"), and will use its best efforts to effect the
registration under the Securities Act of all Registrable Securities for which
the Holders may request registration in a writing delivered to the Corporation
within fifteen (15) days after such notice given by the Corporation; provided,
however, that in the case of the registration of Common Stock by the Corporation
in connection with an underwritten public offering, the Corporation shall not be
required to register Registrable Securities of the Holders in excess of the
amount, if any, of Common Stock which the principal underwriter of an
underwritten offering shall reasonably and in good faith agree in writing to
include in such offering.
(b) If any Registrable Securities are not to be registered
pursuant to this Section 4.1 because the number of Registrable Securities for
which registration has been requested by the Holders pursuant to paragraph (a)
above exceeds the amount of Common Stock which the principal underwriter of an
underwritten offering shall reasonably and in good faith agree in writing to
include in such offering, the Holders who have requested participation shall be
entitled to participate in such registration and offering
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<PAGE> 4
proportionately in accordance with the number of shares of Common Stock owned or
obtainable by them upon exercise of rights (including conversion rights) with
respect to other securities (including Preferred Stock) owned by them.
(c) If the Corporation includes in a registration under this
Section 4.1 any securities to be offered by it, all expenses of the registration
and offering and the reasonable fees and expenses of not more than one
independent counsel for the Holders shall be borne by the Corporation, except
that the Holders shall bear underwriting commissions attributable to their
Registrable Securities being registered and transfer taxes on shares being sold
by such Holders. If the registration under this Section 4.1 is exclusively a
secondary offering, as defined in this Section 4.1, the Holders shall bear their
proportionate share of the expenses of the registration and offering (provided
all shareholders registering shares thereunder bear their proportionate share of
expenses), except expenses which the Corporation would have incurred whether or
not registration was attempted, including, without limitation, the expense of
preparing normal audited or unaudited financial statements or summaries
consistent with this Agreement or applicable Commission filings.
(d) Without in any way limiting the types of registrations to
which this Section 4.1 shall apply, in the event that the Corporation shall
effect a "shelf registration", under Rule 415 promulgated under the Securities
Act, or any other similar rule or regulation ("Rule 415"), the Corporation shall
take all necessary action, including, without limitation, the filing of
post-effective amendments, to permit the Holders to include their shares in such
registration in accordance with all of the terms of this Section 4.1.
2 REQUIRED REGISTRATIONS. If on any two (2) occasions at least
one year apart, after September 30, 1997, one or more of the Holders of an
aggregate of 10% or more of the Registrable Securities then outstanding and held
by all Holders, shall notify the Corporation in writing that he or they intend
to offer or cause to be offered for public sale all or any portion of their
Registrable Securities having an offering price of not less than $2,000,000, the
Corporation will notify all of the Holders who would be entitled to notice of a
proposed registration under Section 4.1 of its receipt of such notification from
such Holder or Holders. Upon the written request of any such Holder delivered to
the Corporation within fifteen (15) days after receipt from the Corporation of
such notification, the Corporation will either (i) elect to make a primary
offering in which case the rights of the Holders shall be as set forth in
Section 4.1, except that the Corporation shall not be permitted to limit the
number of shares which may be registered by any Holder, or (ii) use its best
efforts to cause such of the Registrable Securities as may be requested by any
Holders (including the Holders giving the initial notice of intent to register
hereunder) to be registered under the Securities Act in accordance with the
terms of this Section 4.2. All expenses of such registrations and offerings and
the reasonable fees and expenses of not more than one independent counsel for
the Holders shall be borne by the Corporation, except that the Holders shall
bear underwriting commissions attributable to their Registrable Securities being
registered, transfer taxes on shares being sold by such Holders and the expense
of any special audit of the Corporation's financial statements if the notice
requesting registration does not reasonably permit the use of existing or
contemplated audited statements. The Corporation shall not be required to cause
a registration statement requested pursuant to this Section 4.2 to become
effective prior to sixty (60) days following the effective date of a
registration statement initiated by the Corporation, if the request for
registration has been received by the Corporation subsequent to the giving of
written notice by the Corporation, made in good faith, to the Holders of
Registrable Securities to the effect that the Corporation is commencing to
prepare a Corporation-initiated registration statement (other than a
registration effected solely to implement an employee benefit plan or a
transaction to which Rule 145 or any other similar rule of the Commission under
the Securities Act is applicable); provided, however, that the Corporation shall
use its best efforts to achieve such effectiveness
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<PAGE> 5
promptly following such sixty (60) day period if the request pursuant to this
Section 4.2 has been made prior to the expiration of such sixty (60) day period.
The Corporation may postpone the filing of any registration statement required
hereunder for a reasonable period of time, not to exceed thirty (30) days, if
the Corporation has been advised by legal counsel that such filing would require
the disclosure of a material transaction or other factor and the Corporation
determines reasonably and in good faith that such disclosure would have a
material adverse effect on the Corporation.
3 SELECTION OF UNDERWRITER. In the case of any registration
effectuated pursuant to Section 4.1, the Corporation shall have the right to
designate the managing underwriter subject to the approval of a majority of the
Holders who have requested registration, and each Holder whose shares are
registered for sale through such underwriter shall enter into an underwriting
agreement in form and on terms customary for such transactions.
4 STAND OFF AGREEMENT. Each Holder of Registrable Securities,
if requested by the Corporation and an underwriter of Common Stock or other
securities of the Corporation, shall agree not to sell or otherwise transfer or
dispose of any Registrable Securities or other securities of the Corporation
held by such Holder for a specified period of time (not to exceed 180 days)
following the effective date of a Registration Statement, provided all persons
holding not less than the number of shares of Common Stock held by such Holder
(including shares of Common Stock issuable upon the conversion of Shares, or
other convertible securities, or upon the exercise of options, warrants or
rights) enter into similar agreements. Such agreements shall be in writing in a
form satisfactory to the Corporation and such underwriter. The Corporation may
impose stop-transfer instructions with respect to the Registrable Securities or
other securities subject to the foregoing restriction until the end of the
standoff period.
5 FURTHER OBLIGATIONS OF THE CORPORATION. Whenever under the
preceding sections of this Article 4 the Corporation is required to register
Common Stock, it agrees that it shall also do the following:
(a) Use its best efforts diligently to prepare for filing with
the Commission a registration statement and such amendments and supplements to
said registration statement and the prospectus used in connection therewith as
may be necessary to keep said registration statement effective and to comply
with the provisions of the Securities Act with respect to the sale of securities
covered by said registration statement for the period necessary to complete the
proposed public offering (but not in excess of 180 days);
(b) Furnish to each selling Holder such copies of each
preliminary and final prospectus and such other documents as such Holder may
reasonably request to facilitate the public offering of his or its Common Stock;
(c) In the case of Section 4.1, enter into an underwriting
agreement with provisions reasonably required by the proposed underwriter for
the selling Holders, if any; and
(d) Use its best efforts to register or qualify the Common
Stock covered by said registration statement under the securities or "blue-sky"
laws of such jurisdictions as any selling Holder may reasonably request,
provided that the Corporation shall not be required to register in any states
which require it to qualify to do business or subject itself to general service
of process.
6 FORM S-3. If the Corporation becomes eligible to use Form
S-3 under the Securities Act or a comparable successor form, the Corporation
shall use its best efforts to continue to qualify at all
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<PAGE> 6
times for registration on Form S-3 or such successor form. At any time and from
time to time after the Corporation becomes eligible to use Form S-3 or such
successor form, the Holders of an aggregate of not less than ten percent (10%)
of Registrable Securities then outstanding and held by the Holders shall have
the right to request and have effected a registration of shares of Registrable
Securities on Form S-3 or such successor form for a public offering of shares of
Registrable Securities having an aggregate proposed offering price of not less
than $2,000,000 (such requests shall be in writing and shall state the number of
shares of Registrable Securities to be disposed of and the intended method of
disposition of such shares by such Holder or Holders). The Corporation shall not
be required to cause a registration statement requested pursuant to this Section
4.6 to become effective prior to ninety (90) days following the effective date
of a registration statement initiated by the Corporation, if the request for
registration has been received by the Corporation subsequent to the giving of
written notice by the Corporation, made in good faith, to the Holders of
Registrable Securities to the effect that the Corporation is commencing to
prepare a Corporation-initiated registration statement (other than a
registration effected solely to implement an employee benefit plan or a
transaction to which Rule 145 or any other similar rule of the Commission under
the Securities Act is applicable); provided, however, that the Corporation shall
use its best efforts to achieve such effectiveness promptly following such
ninety (90) day period if the request pursuant to this Section 4.6 has been made
prior to the expiration of such ninety (90) day period. The Corporation may
postpone the filing of any registration statement required hereunder for a
reasonable period of time, not to exceed sixty (60) days, if the Corporation has
been advised by legal counsel that such filing would require the disclosure of a
material transaction or other factor and the Corporation determines reasonably
and in good faith that such disclosure would have a material adverse effect on
the Corporation. The Corporation shall give notice to all Holders of the receipt
of a request for registration pursuant to this Section 4.6 and shall provide a
reasonable opportunity for such Holders to participate in the registration.
Subject to the foregoing, the Corporation will use its best efforts to effect
promptly the registration of all shares of Common Stock on Form S-3 or such
successor form to the extent requested by the Holder or Holders thereof for
purposes of disposition. If so requested by any Holder in connection with a
registration under this Section 4.6, the Corporation shall take such steps as
are required to register such Holder's Registrable Securities for sale on a
delayed or continuous basis under Rule 415, and to keep such registration
effective until all of such Holder's Registrable Securities registered
thereunder are sold (but not in excess of 365 days). All expenses incurred in
connection with a registration requested pursuant to this Section 4.6,
including, without limitation, all registration, qualification, printing, and
accounting and counsel fees, shall be paid by the Holders participating in such
registration on a pro-rata basis in proportion to such participation.
Notwithstanding the foregoing, the Corporation shall not be required to effect a
registration under this Section 4.6 if, in the opinion of counsel for the
Corporation, which counsel and opinion shall be acceptable to the Holders, such
Holders may then sell all Registrable Securities proposed to be sold in the
manner proposed without registration under the Securities Act.
7 INDEMNIFICATION. Incident to any registration statement
referred to in this Article 4, and subject to applicable law, (a) the
Corporation will indemnify each underwriter, each Holder of Registrable
Securities so registered, and each person controlling any of them, against all
claims, losses, damages and liabilities, including legal and other expenses
reasonably incurred in investigating or defending against the same, arising out
of any untrue statement of a material fact contained therein, or any omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, or arising out of any violation by the
Corporation of the Securities Act, any state securities or "blue-sky" laws or
any rule or regulation thereunder in connection with such registration, except
insofar as the same may have been caused by an untrue statement or omission
based upon information furnished in writing to the Corporation by such
underwriter, Holder, or controlling person, respectively, expressly for use
therein, and (b) with respect to such untrue statement or omission in the
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<PAGE> 7
information furnished in writing to the Corporation by such Holder, such Holder
will indemnify the underwriters, the Corporation, its directors and officers,
the other Holders and each person controlling any of them against any losses,
claims, damages, expenses (including legal or other expenses) or liabilities to
which any of them may become subject to the same extent.
8 RULE 144 REQUIREMENTS. The Corporation will use its best
efforts to file with the Commission such information as the Commission may
require under the reporting requirements of either Section 13 or Section 15(d)
of the Securities Exchange Act of 1934, as amended, and in such event, the
Corporation shall use its best efforts to take all action as may be required as
a condition to the availability of Rule 144 under the Securities Act (or any
successor exemptive rule hereafter in effect). The Corporation shall furnish to
any Holder of Registrable Securities upon request a written statement executed
by the Corporation as to the steps it has taken to comply with the current
public information requirement of Rule 144 or such successor rule.
9 AMENDMENT OR WAIVER OF REGISTRATION RIGHTS. The registration
rights provided for in this Article 4 may not be waived otherwise than by a
written instrument signed by the party so waiving such rights; provided,
however, that changes in or additions to, and any consents required by this
Article 4 may be made, and compliance with any term, covenant, condition or
provision set forth in this Article 4 may be omitted or waived (either generally
or in a particular instance and either retroactively or prospectively) by a
consent or consents in writing signed by Holders holding a majority in interest
of the Registrable Securities held by the Holders and (in the case of any such
change or addition) the Corporation. Any amendment or waiver effected in
accordance with this Section 4.9 shall be binding upon each Holder of
Registrable Securities, each transferee of a Holder under Section 4.10 and the
Corporation.
10 TRANSFER OF RIGHTS.
(a) The rights granted to Apollo under this Agreement may be
transferred by a Holder (a) to another person or entity that is then a
stockholder of the Corporation, (b) to any affiliate of a Holder or to any
person or entity acquiring Registrable Securities representing ownership of, or
the right to acquire at least 500,000 shares of Common Stock (as adjusted for
stock splits, stock dividends, recapitalization or similar events), or (c) to a
shareholder or partner of a Holder who receives Registrable Securities as a
distribution from such Holder. Each such transferee shall be deemed to be a
"Holder" for purposes of this Article 4.
(b) Any transferee (other than a stockholder who is already a party to
an agreement in form and substance similar to this Agreement) to whom rights
under this Agreement are transferred shall, as a condition to such transfer,
deliver to the Corporation a written instrument by which such transferee
identifies itself, give the Corporation notice of the transfer of such rights,
indication the Registrable Securities owned by it and agrees to be bound by the
obligations imposed upon Apollo under this Agreement.
(c) A transferee to whom rights are transferred pursuant to this
Section 4.10 may not again transfer such rights to any other person or entity,
other than as provided in this Section 4.10.
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ARTICLE 5.
MISCELLANEOUS
Section 1 SUCCEEDING SECURITIES. In the event the Common Stock
of the Corporation covered by this Agreement is converted into any other
security of the Corporation or any other corporation, the terms of this
Agreement shall apply with full force and effect to any such other security and
the obligations of the Corporation to effect registration and offer pre-emptive
rights shall include such other filings, qualifications, notices and similar
acts as may be necessary to enable Apollo to realize the benefits of
registration and pre-emptive rights provided by this Agreement.
Section 2 CONSENT. Wherever reference is made in this
Agreement to a request or consent of holders of a certain percentage of
Registrable Securities, the determination of such percentage shall include
shares of Common Stock issuable upon conversion or exercise of the Registrable
Securities held by a holder even if such conversion or exercise has not yet been
effected.
Section 3 WAIVERS; MODIFICATIONS IN WRITING. No failure or
delay on the part of Apollo, or any holder of rights under this Agreement, in
exercising any right, power, or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy. No amendment, modification, supplement,
termination, consent or waiver of or to any provision of this Agreement, nor
consent to any departure therefrom, shall in any event be effective unless the
same shall be in writing and signed by Apollo and the Corporation. Any waiver of
any provision of this Agreement, and any consent to any departure by the
Corporation from the terms of any provisions of this Agreement, shall be
effective only in the specific instance and for the specific purpose for which
given. No notice to or demand on the Corporation in any case shall entitle the
Corporation to any other or further notice or demand in similar or other
circumstances.
Section 4 NOTICES, ETC. All notices, demands, instructions and
other communications required or permitted to be given to or made upon any party
hereto shall be in writing delivered to the parties at the addresses set forth
below (or such other address as may be provided by one party in a notice to the
other):
If to Apollo:
c/o Apollo Real Estate Advisors, L.P.
1301 Avenue of the Americas
38th Floor
New York, New York 10019
Attention: Alfred Trivilino
with a copy to:
Apollo Real Estate Advisors, L.P.
1999 Avenue of the Stars
Suite 1900
Los Angeles, CA 90067
Attention: Michael D. Weiner, Esq.
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<PAGE> 9
and a copy to:
Battle Fowler LLP
75 East 55th Street
New York, NY 10022
Attention: Les Loffman, Esq.
If to the Corporation:
NextHealth, Inc.
16600 N. Lago Del Oro Parkway
Tucson, AZ 85739
Attention: President
with a copy to:
Neal, Gerber & Eisenberg
2 North LaSalle Street
Chicago, IL 60602
Attention: Steve Berger, Esq.
Notice delivered in accordance with the foregoing shall be effective (i) when
delivered, if delivered personally or by facsimile transmission, (ii) two days
after being delivered in the United States (properly addressed and all fees
paid) for overnight delivery service to a courier (such as Federal Express)
which regularly provides such service and regularly obtains executed receipts
evidencing delivery or (iii) five days after being deposited (properly addressed
and stamped for first-class delivery) in a daily serviced United States mail
box.
Section 5 BINDING EFFECT. This Agreement shall be binding upon
and inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto.
Section 6 HEADINGS. Article and Section headings used in this
Agreement are for convenience of reference only and shall not constitute a part
of this Agreement for any purpose or affect the construction of this Agreement.
Section 7 EXECUTION IN COUNTERPARTS. This Agreement may be
executed in any number of counterparts and by different parties on separate
counterparts, each of which counterparts, when so executed and delivered, shall
be deemed to be an original and all of which counterparts, taken together, shall
constitute one and the same Agreement. This Agreement shall become effective
upon the execution of a counterpart hereof by each of the parties hereto.
Section 8 GOVERNING LAW. This Agreement shall be deemed to
have been made in the State of Delaware and the validity of this Agreement, the
construction, interpretation, and enforcement thereof, and the rights of the
parties thereto shall be determined under, governed by, and construed in
accordance with the internal laws of the State of Delaware, without regard to
principles of conflicts of law.
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Section 9 WAIVER OF JURY TRIAL. The Corporation hereby waives
all right to trial by jury in any action, proceeding or counterclaim arising out
of or relating to this Agreement, or any other agreement or instrument
contemplated hereby.
Section 10 SPECIFIC PERFORMANCE. Apollo and each other Holder
shall have the right to specific performance by the Corporation of the
provisions of this Agreement. The Corporation hereby irrevocably waives, to the
extent that it may do so under applicable law, any defense based on the adequacy
of a remedy at law which may be asserted as a bar to the remedy of specific
performance in any action brought against the Corporation for specific
performance of this Agreement by Apollo or any other Holder.
Section 11 SEVERABILITY OF PROVISIONS. Whenever possible this
Agreement and each provision hereof shall be interpreted in such manner as to be
effective, valid and enforceable under applicable law. If and to the extent that
any such provision shall be held invalid and unenforceable by any court of
competent jurisdiction, such holding shall not invalidate or render
unenforceable any other provisions hereof or thereof, and any determination that
the application of any provision hereof or thereof to any person or under any
circumstance is illegal and unenforceable shall not affect the legality,
validity and enforceability of such provision as it may be applied to any other
person or in any other circumstance.
Section 12 SURVIVAL OF AGREEMENTS, REPRESENTATIONS AND
WARRANTIES. All agreements, representations and warranties made herein shall
survive the execution and delivery of this Agreement.
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<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered as of the date first hereinabove set
forth.
Borrower
NEXTHEALTH, INC.
BY: /s/ William T. O'Donnell, Jr.
--------------------------------
NAME: William T. O'Donnell, Jr.
TITLE: President and CEO
Apollo
AP NH LLC
BY AP GP NH LLC, ITS MANAGING MEMBER
BY KRONUS PROPERTY, INC.,
ITS MANAGING MEMBER
BY: /s/ Alfred Trivilino
------------------------
NAME: ALFRED TRIVILINO
TITLE: VICE PRESIDENT
<PAGE> 1
Exhibit 10.78
CREDIT AGREEMENT
DATED AS OF NOVEMBER 14, 1996
BY AND BETWEEN
AP LOM LLC
AND
NEXTHEALTH, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
Page
ARTICLE I
DEFINITIONS
<S> <C>
Section 1.1 Definitions..................................................................................... 1
Section 1.2 Exhibits........................................................................................ 6
ARTICLE II
AMOUNT AND TERMS OF LOANS
Section 2.1 The Commitments................................................................................. 6
Section 2.2 Notice of Borrowing. .......................................................................... 6
Section 2.3 Notes ......................................................................................... 6
Section 2.4 Interest........................................................................................ 7
ARTICLE III
PAYMENTS
Section 3.1 Voluntary Prepayments........................................................................... 8
Section 3.2 Mandatory Repayments............................................................................ 8
Section 3.3 Method and Place of Payment..................................................................... 8
ARTICLE IV
CONDITIONS TO LOANS
Section 4.1 Conditions Precedent to Loans on the Closing Date............................................... 9
Section 4.2 Conditions Precedent to All Loans............................................................... 10
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE BORROWER
Section 5.1 Corporate Status................................................................................ 11
Section 5.2 Corporate Power and Authority................................................................... 11
Section 5.3 Subsidiaries. .................................................................................. 11
Section 5.4 No Conflict. .................................................................................. 12
Section 5.5 Governmental Consents........................................................................... 12
Section 5.6 Lien Priority................................................................................... 12
Section 5.7 Changes, etc.................................................................................... 12
Section 5.8 Title to Properties; Liens...................................................................... 12
</TABLE>
<PAGE> 3
<TABLE>
Page
<S> <C>
Section 5.9 Litigation; Adverse Facts...................................................................... 12
Section 5.10 Capital Stock of the Borrower.................................................................. 13
Section 5.11 Debt ......................................................................................... 13
Section 5.12 Patents, Trademarks, etc....................................................................... 13
Section 5.13 Existing Defaults.............................................................................. 13
Section 5.14 Leases......................................................................................... 14
Section 5.15 Burdensome Agreements, etc..................................................................... 14
Section 5.16 Location of Assets and Chief Executive Offices................................................. 14
Section 5.17 Tax Returns and Payments....................................................................... 14
Section 5.18 Partnerships and Ventures...................................................................... 14
Section 5.19 Publicly Filed Documents and Financial Statements.............................................. 14
ARTICLE VI
AFFIRMATIVE COVENANTS OF THE BORROWER
Section 6.1 Accounting Records.............................................................................. 15
Section 6.2 Financial Statements............................................................................ 15
Section 6.3 Corporate Existence, etc........................................................................ 17
Section 6.4 Inspection and Audits........................................................................... 17
Section 6.5 Taxes ......................................................................................... 17
Section 6.6 Insurance....................................................................................... 18
Section 6.7 End of Fiscal Years; Fiscal Quarters............................................................ 18
Section 6.8 Further Assurances.............................................................................. 18
ARTICLE VII
NEGATIVE COVENANTS OF THE BORROWER
Section 7.1 Debt ......................................................................................... 18
Section 7.2 Liens ......................................................................................... 19
Section 7.3 Sale of Assets.................................................................................. 19
Section 7.4 Transactions with Stockholders and Affiliates................................................... 19
Section 7.5 Conduct of Business............................................................................. 20
Section 7.6 Amendments or Waivers of Certain Documents...................................................... 20
Section 7.7 Partnerships and Joint Ventures................................................................. 20
Section 7.8 Change in Location of Chief Executive Offices and Assets........................................ 20
Section 7.9 Prohibition on Acquisitions..................................................................... 21
Section 7.10 Restrictions on Fundamental Changes............................................................. 21
Section 7.11 Prohibition on Distributions.................................................................... 21
Section 7.12 Issuance of Stock............................................................................... 21
Section 7.13 Consolidated Net Worth.......................................................................... 21
</TABLE>
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<PAGE> 4
<TABLE>
Page
ARTICLE VIII
EVENTS OF DEFAULT
<S> <C>
Section 8.1 Events of Default............................................................................... 21
Section 8.2 Remedies........................................................................................ 24
ARTICLE IX
MISCELLANEOUS
Section 9.1 Waivers; Modifications in Writing............................................................... 25
Section 9.2 Effectiveness................................................................................... 25
Section 9.3 Notices, etc.................................................................................... 25
Section 9.4 Binding Effect; Assignment...................................................................... 26
Section 9.5 Headings........................................................................................ 27
Section 9.6 Execution in Counterparts....................................................................... 27
Section 9.7 Governing Law................................................................................... 27
Section 9.8 Waiver of Jury Trial............................................................................ 27
Section 9.9 Severability of Provisions...................................................................... 27
Section 9.10 Certain Fees.................................................................................... 27
Section 9.11 Independence of Covenants....................................................................... 27
Section 9.12 Complete Agreement.............................................................................. 28
</TABLE>
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<PAGE> 5
CREDIT AGREEMENT
Credit Agreement, dated as of November 14, 1996 by and between
AP LOM LLC, a Delaware limited liability company (including its successors and
assigns, the "Lender") and NextHealth, Inc., a Delaware corporation (the
"Borrower"). Unless otherwise defined herein, capitalized terms used herein
shall have the respective meaning provided such terms in Article I hereof.
PRELIMINARY STATEMENT
WHEREAS, subject to and upon the terms and conditions set
forth herein, the Lender is willing to make available the amounts provided for
herein;
NOW, THEREFORE, in consideration of the premises and covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. For purposes of this Agreement, the
following capitalized terms shall have the following meanings:
"A Term Loan" shall have the meaning provided in Section
2.1(a).
"A Term Note" shall have the meaning provided in Section
2.3(a).
"Affiliate" means, as to any Person, any other Person directly
or indirectly controlling, controlled by, or under common control with, that
Person. For the purposes of this definition, "control" (including with
correlative meanings, the terms "controlling," "controlled by" and "under common
control with"), as to any Person, means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
that Person, whether through the ownership of voting securities, by contract or
otherwise.
"Agreement" means this Credit Agreement, together with all
exhibits and schedules hereto, as the same may be amended, modified and/or
supplemented.
"Apollo" means Apollo Real Estate Advisors II, L.P., a
Delaware limited partnership.
"B Term Loan" shall have the meaning provided in Section
2.1(b).
"B Term Loan Commitment" shall mean a principal amount equal
to $5,000,000, as the same may be reduced pursuant to Article 8.
"B Term Note" shall have the meaning provided in Section
2.3(a).
<PAGE> 6
"Borrower" shall have the meaning provided in the first
paragraph of this Agreement.
"Borrower Publicly Filed Documents" shall have the meaning
provided in Section 5.19.
"Business Day" means a day which is not a Saturday or Sunday
and on which major commercial banks are open for business in New York, New York.
"Capital Expenditures" means, with respect to any Person, all
expenditures by such Person which should be capitalized in accordance with GAAP,
including all such expenditures with respect to fixed or capital assets
(including, without limitation, expenditures for maintenance and repairs which
should be capitalized in accordance with GAAP).
"Closing Date" means the date upon which the A Term Loans are
incurred hereunder.
"Collateral" means and includes the Pledge Agreement
Collateral and the Security Agreement Collateral.
"Collateral Documents" means the Mortgage, the Security
Agreement, the Pledge Agreement, the Guaranty and any and all other documents,
agreements, or instruments, including financing statements, executed and
delivered therewith by the Borrower and its Subsidiaries prior to the Effective
Date in connection with this Agreement, and to be executed or delivered
therewith by the Borrower and its Subsidiaries on the Effective Date in
connection with the transactions contemplated by this Agreement.
"Consolidated Net Income" means, for any period, net after tax
income of the Borrower and its Subsidiaries, determined on a consolidated basis
in accordance with GAAP.
"Consolidated Net Worth" means, as of any date for the
determination thereof, the amount specified on the most recent quarterly or
annual consolidated balance sheet of the Borrower under the heading "Total
Stockholders' Equity" determined in accordance with GAAP, provided, however,
that such amount shall include any redeemable preferred stock.
"Contractual Obligation" means, as to any Person, any
provision of any security issued by that Person or of any material indenture,
mortgage, deed of trust, contract, agreement or other instrument to which that
Person is a party or by which it or any of its owned properties is bound or to
which it or any of its owned properties is subject.
"Debt" means, with respect to any Person, all indebtedness,
obligations and liabilities of such Person, including without limitation (i) all
"liabilities" which would be reflected on a balance sheet of such Person,
prepared in accordance with GAAP, (ii) all obligations of such Person in respect
of any guaranty, (iii) all obligations of such Person in respect of any lease of
property, real or personal, which would be capitalized on a balance sheet of the
lessee prepared in accordance with GAAP (but excluding, in any event, office
leases and equipment leases to the extent capitalized), and (iv) all
obligations, indebtedness and liabilities secured by any lien or security
interest on any property or assets of such Person; except that Debt shall not
include any trade payables and other liabilities incurred in the ordinary course
of the Person's business up to a maximum of $250,000 in the aggregate or
otherwise approved by a majority of the directors designated by the holders of
Preferred Stock. "Guaranty" means, with respect to
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<PAGE> 7
any Person, any contract, lease, loan agreement, indenture, mortgage, security
agreement or other agreement or obligation, whether written or oral, or any
understanding of such Person, pursuant to which such Person guarantees any Debt
of any other Person (the "Primary Obligor") in any manner, whether directly or
indirectly, including without limitation agreements (i) to purchase such Debt or
any property constituting security therefor, (ii) to advance or supply funds for
the purchase or payment of such Debt or to maintain net worth or working capital
or other balance sheet conditions, or otherwise to advance or make available
funds for the purchase or payment of such Debt, (iii) to purchase property,
securities or services primarily for the purpose of assuring the holder of such
Debt of the ability of the Primary Obligor to make payment of the Debt, or (iv)
otherwise to assure the holder of the Debt of the Primary Obligor against loss
in respect thereof; except that "Guaranty" shall not include the endorsement by
the Borrower or by a Subsidiary of the Borrower in the ordinary course of
business of negotiable instruments or documents for deposit or collection.
"Default Rate" shall have the meaning provided in Section
2.4(b).
"Disclosure Schedule" means the Schedules prepared by the
Borrower and delivered to the Lender prior to 5:00 p.m., Eastern time, at least
two Business Days prior to the Effective Date, which sets forth information
regarding, or exceptions to, the representations, warranties and covenants made
by the Borrower herein.
"Effective Date" shall have the meaning provided in Section
9.2.
"Equipment" shall have the meaning accorded to such term in
the Uniform Commercial Code as in effect on the date hereof in the State of
Arizona and includes all of the Borrower's furniture, fixtures, equipment,
apparatus, machinery, tools, vehicles and supplies and other goods, whether now
owned or hereafter acquired by the Borrower, now or hereafter located upon or
used in connection with or held or acquired for use in connection with the
Borrower's business and not included in Inventory, including any and all
additions, attachments, accessories, parts, replacements, accessions and all
proceeds any of the foregoing.
"Excess Cash Flow" means, for any period, Consolidated Net
Income for such period plus, without duplication, the sum of the amount of all
net non-cash charges (including, without limitation, depreciation, amortization,
deferred tax expense and non-cash interest expense) and net non-cash losses
which were included in arriving at Consolidated Net Income for such period minus
the sum of the amount of all net non-cash gains included in arriving at
Consolidated Net Income for such period, operating reserves for working capital
needs in an amount specified in the operating budget for that period submitted
to and approved by the Lender pursuant to Section 6.2(g) and 3% of revenues to
be utilized for Capital Expenditures.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Event of Default" shall have the meaning set forth in Section
8.1 of this Agreement.
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board and
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such
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<PAGE> 8
other statements by such other entity as may be approved by a significant
segment of the accounting profession, which are applicable to the circumstances
as of the date of determination.
"Guaranty" means that certain Guaranty, dated as of November
14, 1996, made by the Subsidiary guarantors thereunder in favor of the Lender as
attached hereto as Exhibit F.
"Inventory" shall have the meaning accorded to such term in
the Uniform Commercial Code as in effect on the date hereof in the State of
Arizona and includes all of the Borrower's present and future goods held for
sale or lease or to be furnished under a contract of service, including work in
progress, finished goods and any and all raw materials used in connection with
the foregoing and any documents of title representing any of the above.
"Lender" shall have the meaning provided in the first
paragraph of this Agreement.
"Lien" means any lien, mortgage, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement or any lease in the nature thereof) and any agreement to
give or refrain from giving any lien, mortgage, pledge, security interest,
charge or other encumbrance of any kind.
"Loan" and "Loans" means each A Term Loan and each B Term
Loan.
"Loan Documents" means this Agreement, the Notes, the
Collateral Documents and the other documents, instruments and agreements
executed and delivered in connection with the transactions contemplated by this
Agreement.
"Maturity Date" means the third anniversary of the Closing
Date.
"Mortgage" means the Deed of Trust, Security Agreement and
Assignment of Rents and Leases by and among the Borrower, Fidelity National
Title Agency, Inc. (the "Title Company"), as Trustee, and the Lender, dated as
of November 14, 1996, as attached hereto as Exhibit C.
"Mortgaged Property" shall have the meaning ascribed to such
term in the Mortgage.
"Note" shall mean each A Term Note and each B Term Note.
"Notice of Borrowing" shall have the meaning provided in
Section 2.2.
"Notice Office" means the office of the Lender located at Two
Manhattanville Road, Purchase, New York 10577 or such other office as the Lender
may designate to the Borrower from time to time.
"Payment Office" means the office of the Lender located at Two
Manhattanville Road, Purchase, New York 10577 or such other office as the Lender
may designate to the Borrower from time to time.
"Permitted Liens" shall have the meaning set forth in Section
7.2 hereof.
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<PAGE> 9
"Person" means natural persons, corporations, partnerships,
trusts, associations, estates, organizations, governmental divisions, agencies
or authorities, firms or entities.
"Pledge Agreement" means that certain Pledge Agreement, dated
as of November __, 1996, among the Borrower, certain Subsidiaries of the
Borrower and the Lender, as pledgee, as attached hereto as Exhibit E.
"Pledge Agreement Collateral" means all "Collateral" as
defined in the Pledge Agreement.
"Preferred Stock" means the Series A Preferred Stock and the
Series B Preferred Stock to be issued to an Affiliate of Apollo.
"SEC" shall have the meaning provided in Section 5.19.
"Security Agreement" means that certain General Security
Agreement, dated as of November 14, 1996, among the Borrower, certain
Subsidiaries of the Borrower and the Lender, as secured party, as attached
hereto as Exhibit D.
"Security Agreement Collateral" means all "Collateral" as
defined in the Security Agreement.
"Series A Preferred Stock" means the cumulative convertible
preferred stock, $0.01 par value per share, of the Borrower.
"Series B Preferred Stock" means the cumulative preferred
stock, $0.01 par value per share, of the Borrower.
"Subsidiary" means (i) any corporation, a majority of whose
securities having ordinary voting power to elect a majority of the directors of
such corporation (other than securities having such voting power only by reason
of the happening of a contingency) are, as of the date of determination thereof,
owned, directly or indirectly, by the Borrower (ii) any partnership,
association, joint venture or other entity in which the Borrower, directly or
indirectly through subsidiaries, has more than 50% equity interest at the time.
"Unmatured Event of Default" means an event, act or occurrence
which with the giving of notice or the passage of time (or both) could become an
Event of Default.
Section 1.2 Exhibits. The Disclosure Schedules delivered by
the Borrower hereunder and all of the exhibits and schedules attached to this
Agreement shall be deemed incorporated herein by reference.
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ARTICLE II
AMOUNT AND TERMS OF LOANS
Section 2.1 The Commitments.
(a) Subject to and upon the terms and conditions set forth
herein, the Lender agrees to make, on the Closing Date, a term loan (each, an "A
Term Loan" and collectively, the "A Term Loans") to the Borrower, which A Term
Loan (i) shall be made pursuant to a single drawing and (ii) shall be made by
the Lender in an initial principal amount equal to $8,090,000. Once repaid, the
A Term Loan incurred hereunder may not be reborrowed.
(b) Subject to and upon the terms and conditions set forth
herein, the Lender agrees, at any time and from time to time on and after the
Closing Date and prior to the Maturity Date, to make, in its good faith
discretion, a term loan or term loans (each a "B Term Loan" and, collectively,
the "B Term Loans") to the Borrower, which B Term Loans (i) shall be made
pursuant to one or more drawings; provided that the principal amount of each
drawing shall not be less than $500,000, and (ii) shall not exceed at any time
outstanding that aggregate principal amount which equals the B Term Loan
Commitment. Once repaid, B Term Loans incurred hereunder may not be reborrowed.
Section 2.2 Notice of Borrowing. Whenever the Borrower desires
to incur Loans hereunder, it shall give the Lender at its Notice Office, prior
to 12:00 Noon (New York time), at least one Business Day's prior written notice
(or telephonic notice promptly confirmed in writing) of each drawing of Loans to
be made hereunder. Each such notice (each, a "Notice of Borrowing") shall be
irrevocable and shall be in the form of Exhibit A, appropriately completed to
specify (i) whether the Loans being incurred are A Term Loans or B Term Loans,
(ii) the aggregate principal amount of such Loans to be made pursuant to such
drawing, and (iii) the date of such drawing (which shall be a Business Day).
Section 2.3 Notes.
(a) The Borrower's obligation to pay the principal of, and
interest on, the Loans shall be evidenced (i) if A Term Loans, by a promissory
note substantially in the form of Exhibit B-1 with blanks appropriately
completed in conformity herewith (each, an "A Term Note" and, collectively, the
"A Term Notes"), and (ii) if B Term Loans, by a promissory note substantially in
the form of Exhibit B-2 with blanks appropriately completed in conformity
herewith (each, a "B Term Note" and, collectively, the "B Term Notes").
(b) The A Term Note issued to the Lender shall (i) be executed
by the Borrower, (ii) be payable to the order of the Lender and be dated the
Closing Date, (iii) be in a stated principal amount equal to the A Term Loan
made by the Lender, (iv) mature on the Maturity Date, (v) bear interest as
provided in Section 2.4, (vi) be subject to voluntary prepayment and mandatory
repayment as provided herein and (vii) be entitled to the benefits of this
Agreement and the other Loan Documents.
(c) The B Term Note issued to the Lender shall (i) be executed
by the Borrower, (ii) be payable to the order of the Lender and be dated the
Closing Date, (iii) be in a stated principal amount equal to the B Term Loan
Commitment and be payable in the principal amount of B Term Loans evidenced
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<PAGE> 11
thereby from time to time, (iv) mature on the Maturity Date, (v) bear interest
as provided in Section 2.4, (vi) be subject to voluntary prepayment and
mandatory repayment as provided herein, and (vii) be entitled to the benefits of
this Agreement and the other Loan Documents.
(d) The Lender will, and is hereby authorized by the Borrower
to, endorse on the schedule attached to each Note, or otherwise record in the
Lender's internal records, an appropriate notation evidencing the date and
amount of each Loan from the Lender, as well as the date and amount of any
prepayment or repayment with respect thereto; provided, that the failure to make
any such notation or any error in such notation shall not affect the Borrower's
obligation in respect of such Loans.
Section 2.4 Interest.
(a) The unpaid principal amount of each Loan shall bear
interest from the date of borrowing thereof until maturity (whether by
acceleration or otherwise) at a rate per annum equal to (i) in the case of the
period from and including the Closing Date to but excluding the first
anniversary of the Closing Date, 10.0%, (ii) in the case of the period from and
including the first anniversary of the Closing Date to but excluding the second
anniversary of the Closing Date, 11.0%, and (iii) in the case of the period from
and including the second anniversary of the Closing Date to but excluding the
Maturity Date, 12.0%; provided, that the interest rate shall automatically
increase to 18.0%, effective from and after the Closing Date and until
stockholder approval of the issuance of common stock of the Borrower to an
Affiliate of Apollo upon conversion of the Preferred Stock has been obtained,
unless such stockholder approval is obtained on or before February 1, 1997.
(b) Overdue principal, and to the extent permitted by
applicable law, overdue interest in respect of each Loan shall bear interest, at
the option of the Lender and upon notice to the Borrower, at the rate of 18.0%
per annum (the "Default Rate").
(c) Interest shall accrue from and including the date of any
borrowing hereunder to but excluding the date of any repayment thereof and shall
be payable (i) in respect of the period from and including the Closing Date to
but excluding the first anniversary of the Closing Date, monthly in arrears from
Excess Cash Flow, provided that if Excess Cash Flow is insufficient to meet such
interest payments, the Borrower may elect to accrue interest, which accrued
interest will compound on a monthly basis, (ii) in respect of the period from
and including the first anniversary of the Closing Date and thereafter, monthly
in arrears and (iii) on any prepayment or repayment (on the amount prepaid or
repaid), at maturity (whether by acceleration or otherwise), and after such
maturity, on demand.
(d) All computations of interest hereunder shall be made on
the actual number of days elapsed over a year of 360 days.
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ARTICLE III
PAYMENTS
Section 3.1 Voluntary Prepayments. The Borrower shall have the
right to prepay the Loans, in whole or in part, without premium or penalty;
provided, that the Borrower shall give the Lender at its Notice Office written
notice (or telephonic notice promptly confirmed in writing) of its intent to
prepay the Loans, whether such Loans are A Term Loans or B Term Loans and the
amount of such prepayment, which notice shall be given by the Borrower prior to
12:00 Noon (New York time) at least one Business Day prior to the date of such
prepayment.
Section 3.2 Mandatory Repayments.
(a) Notwithstanding anything to the contrary contained
elsewhere in this Agreement, all then outstanding Loans shall be repaid in full
on the Maturity Date; provided, that if stockholder approval of the issuance of
common stock of the Borrower to an Affiliate of Apollo upon conversion of the
Preferred Stock has not been obtained on or before March 15, 1997, all then
outstanding Loans shall be repaid in full.
(b) Commencing on the first anniversary of the Closing Date,
the Borrower shall be required to repay the principal of the Loans on a monthly
basis in an amount equal to the lesser of (x) 50% of monthly Excess Cash Flow
and (y) 1.05% of the aggregate principal amount of Loans outstanding on the
Closing Date.
(c) Repayments of principal hereunder shall be made pro rata
between A Term Loans and B Term Loans in accordance with their respective
principal amounts then outstanding.
Section 3.3 Method and Place of Payment. All payments under
this Agreement shall be made to the Lender not later than 12:00 Noon (New York
time) on the date due and shall be made in immediately available funds and in
lawful money of the United States of America at the Payment Office. Any payments
under this Agreement which are made after 12:00 Noon (New York time) shall be
deemed to have been made on the next succeeding Business Day. Whenever any
payment to be made hereunder shall be stated to be due on a day that is not a
Business Day and, with respect to payments of principal, interest shall be
payable during such extension at the applicable rate in effect immediately prior
to such extension.
ARTICLE IV
CONDITIONS TO LOANS
Section 4.1 Conditions Precedent to Loans on the Closing Date.
The obligation of the Lender to make Loans on the Closing Date, in addition to
the conditions set forth in Section 4.2 hereof, is subject to the fulfillment,
to the satisfaction of the Lender and its counsel, of each of the following
conditions:
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<PAGE> 13
(a) The Borrower shall have executed and delivered to the
Lender (x) this Agreement and (y) the Notes;
(b) On the Closing Date, the Borrower shall have paid to the
Lender all costs, fees and expenses (including, without limitation, legal fees
and disbursements) payable to the Lender;
(c) On the Closing Date, the Lender shall have received from
Hecker, Phillips & Zeeb, counsel to the Borrower and its Subsidiaries, an
opinion addressed to the Lender and dated the Closing Date, in form and
substance satisfactory to the Lender.
(d) On or prior to the Closing Date, all transactions relating
to the issuance of the Preferred Stock shall have been consummated and the
Borrower shall have received gross cash proceeds of at least $4,100,000 from the
issuance of the Preferred Stock.
(e) The Lender shall have received the duly executed Pledge
Agreement.
(f) The Lender shall have received the duly executed Guaranty;
(g) On or prior to the Closing Date, all corporate action
required to increase the size of the Borrower's Board of Directors to nine
members and to cause Apollo to be entitled to designate at least four members of
the Board of Directors, effective as of immediately following the Closing Date,
shall have been taken;
(h) The Lender shall have received the duly executed Mortgage;
(i) The Lender shall have received a title insurance policy
issued by the Title Company in an amount satisfactory to the Lender to ensure
that the Mortgage on the Mortgaged Property is a valid and enforceable Mortgage
Lien on the Mortgaged Property, which policy shall be in form and substance
satisfactory to the Lender;
(j) The Lender shall have received the duly executed Security
Agreement;
(k) The Lender shall have received a certificate of corporate
status with respect to the Borrower, dated within ten calendar days of the
Closing Date by the Secretary of State of Delaware, such certificate to be
issued by the Secretary of State of Delaware, which certificate shall indicate
that the Borrower is in good standing in such state;
(l) The Lender shall have received a certificate of corporate
status with respect to the Borrower, dated within ten calendar days of the
Closing Date by the Secretary of State of Arizona, such certificate to be issued
by the Secretary of State of Arizona, which certificate shall indicate that the
Borrower is in good standing in such state;
(m) The Lender shall have received a copy of the Borrower's
Certificate of Incorporation certified by the Secretary of State of the State of
Delaware;
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<PAGE> 14
(n) The Lender shall have received a copy of the by-laws of
the Borrower, certified by its secretary;
(o) The Lender shall have received signature and incumbency
certificates respecting the officer(s) executing this Agreement, the Notes and
the other Loan Documents; and
(p) The Lender shall have received a certificate from the
Borrower's secretary attesting to the resolutions of the Borrower's board of
directors authorizing the execution and delivery of this Agreement, the Note and
the other Loan Documents, and authorizing specific officers to execute same.
(q) On the Closing Date, the Borrower shall have paid to the
Lender a funding fee in an amount equal to $240,000.
(r) On the Closing Date, the Borrower shall have paid to the
Lender a standby fee in an amount equal to $100,000.
(s) On the Closing Date, all indebtedness of the Borrower to
AP GP Kronus Property Holdings, L.P. shall have been repaid in full.
Section 4.2 Conditions Precedent to All Loans. The obligation
of the Lender to make each Loan hereunder (including Loans made on the Closing
Date) is subject to the fulfillment, to the reasonable satisfaction of the
Lender and its counsel, at or prior to the time of the making of such Loan, of
each of the following further conditions:
(a) no Event of Default or no Unmatured Event of Default shall
have occurred and be continuing on the date of such Loan, nor shall either
result from the making of such Loan;
(b) the representations and warranties of the Borrower
contained in this Agreement and the other Loan Documents shall be true and
correct in all material respects at and as of the date of such Loan, as though
made on and as of such date (except to the extent that such representations and
warranties relate solely to an earlier date);
(c) the Title Company shall have issued (i) a continuation of
title showing title to the Mortgaged Property to be vested in Borrower and no
exceptions to the title of the Mortgaged Property other than those exceptions
previously approved by Lender in writing, and (ii) a commitment to insure the
priority of the lien of the Mortgage, subject only to exceptions previously
approved by Lender in writing, for the full amount of each such Loan and all
previous Loans made by Lender to Borrower pursuant to this Agreement; and
(d) the Lender shall have received a Notice of Borrowing
satisfying the requirement of Section 2.2 with respect to each incurrence of
Loans.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE BORROWER
In order to induce the Lender to enter into this Agreement,
the Borrower makes the following representations and warranties, which, except
as set forth in the Disclosure Schedule with a specific reference to the Section
of this Article V affected thereby, are true and correct as of the date hereof,
and shall be true, correct and complete in all material respects at and as of
the date of each Loan made hereunder as though made on and as of the date of
such Loan (except to the extent that such representations and warranties
expressly relate solely to an earlier date), and such representations and
warranties shall survive the execution and delivery of this Agreement and the
Notes and the making of the Loans:
Section 5.1 Corporate Status. Each of the Borrower and each of
its Subsidiaries (i) is a duly organized and validly existing corporation in
good standing under the laws of the jurisdiction of its incorporation, (ii) has
the corporate power and authority to own its property and assets and to transact
the business in which it is presently engaged and (iii) is duly qualified and
authorized to do business and is in good standing in all jurisdictions where it
is required to be so qualified and where the failure to be so qualified could
have a material adverse effect on the business, properties, operations or
condition (financial or otherwise) of the Borrower or the Borrower and its
Subsidiaries taken as a whole.
Section 5.2 Corporate Power and Authority. Each of the
Borrower and each of its Subsidiaries has the corporate power and authority to
execute, deliver and carry out the terms and provisions of the Loan Documents to
which it is a party and has taken all necessary corporate action to authorize
the execution, delivery and performance of the Loan Documents to which it is a
party. Each of the Borrower and each of its Subsidiaries has duly executed and
delivered each Loan Document to which it is a party and each such Loan Document
constitutes the legal, valid and binding obligation of the Borrower and such
Subsidiaries enforceable in accordance with its terms, except to the extent that
the enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws generally affecting creditors' rights
and by equitable principles (regardless of whether enforcement is sought in
equity or at law).
Section 5.3 Subsidiaries. The Borrower has no Subsidiaries
except as set forth on Schedule 5.3. Borrower owns, free and clear of all Liens,
all of the outstanding capital stock of each Subsidiary listed on Schedule 5.3.
Section 5.4 No Conflict. Except as set forth on Schedule 5.4,
the execution, delivery and performance by each of the Borrower and each of its
Subsidiaries of this Agreement, the Notes and the other Loan Documents to which
it is a party do not and will not: (i) violate any provision of federal, state
or local law or regulation applicable to the Borrower or any of its
Subsidiaries, the certificate of incorporation or by-laws (or other charter
documents) of the Borrower or any of its Subsidiaries, or any order, judgment or
decree of any court or other agency of government binding on the Borrower or any
of its Subsidiaries; (ii) conflict with, result in a breach of or constitute
(with due notice or lapse of time or both) a default under any material
Contractual Obligation or material lease to which the Borrower or any of its
Subsidiaries is a party; (iii) result in or require the creation or imposition
of any Lien of any nature whatsoever upon any of the Borrower's or any of its
Subsidiaries' properties or assets, other than Permitted
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<PAGE> 16
Liens; or (iv) require any approval of stockholders or any approval or consent
of any Person under any material Contractual Obligation of the Borrower or any
of its Subsidiaries which has not been obtained.
Section 5.5 Governmental Consents. Other than such as may have
previously been obtained, (i) the execution, delivery and performance of any
Loan Document and (ii) the legality, validity, binding effect or enforceability
of any Loan Document do not and will not require any registration with, consent
or approval of, or notice to, or other action with or by, any federal, state,
foreign or other governmental authority or regulatory body or other Person, the
failure to secure any of which could reasonably be expected to, in the absence,
have a material adverse effect on the business, properties, operations or
condition (financial or otherwise) of the Borrower, the Borrower and its
Subsidiaries taken as a whole, the Mortgaged Property or the Collateral.
Section 5.6 Lien Priority. After giving effect to the
transactions contemplated by this Agreement, the Liens granted by the Borrower
and its Subsidiaries to the Lender in their assets pursuant to the Collateral
Documents are valid, perfected (assuming all necessary filings, registrations
and recordings have been, or within 10 days after the date hereof will be,
accomplished), first priority Liens, subject only to Permitted Liens.
Section 5.7 Changes, etc. Since September 30, 1996, there have
been no material adverse changes in the businesses, properties, operations or
condition (financial or otherwise) of the Borrower or the Borrower and its
Subsidiaries taken as a whole other than changes contemplated by or disclosed in
this Agreement, in Schedule 5.7 or in the Corporation Publicly Filed Documents.
Section 5.8 Title to Properties; Liens. After giving effect to
the transactions contemplated hereby, including the application of the proceeds
of the Loans as set forth on Schedule 5.20, except for Permitted Liens, all of
the properties and assets of the Borrower and each Subsidiary are free from all
Liens of any nature whatsoever. On and after the Closing Date, the Borrower and
each Subsidiary shall have good and marketable title to all of the properties
and assets reflected in the Borrower's or such Subsidiary's books and records as
being owned by it, except for Permitted Liens.
Section 5.9 Litigation; Adverse Facts.
(a) There is no action, suit, proceeding or arbitration at law
or in equity or before or by any federal, state or other governmental agency or
instrumentality pending or, to the knowledge of the Borrower, threatened against
the Borrower or any Subsidiary that could result in any adverse change in the
business, properties, operations or condition (financial or otherwise) of the
Borrower or the Borrower and its Subsidiaries taken as a whole or may reasonably
be expected to adversely affect the Borrower's ability to perform its
obligations hereunder, under the Notes or the other Loan Documents. The lawsuit
recently filed by Sundt Corp. is the suit contemplated by paragraph 5 of that
agreement dated April 3, 1996 between Sundt Corp. and the Borrower, and Sundt is
required pursuant to that Agreement (i) to request an order from the Superior
Court of Pima County continuing any further action therein and (ii) to refrain
from executing on any judgement obtained.
(b) Neither the Borrower nor any Subsidiary is (i) in
violation of any applicable law in a manner which could reasonably be expected
to materially adversely affect the business, properties, operations or condition
(financial or otherwise) of the Borrower or the Borrower and its Subsidiaries
taken
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<PAGE> 17
as a whole or (ii) subject to or in default with respect to any final judgment,
writ, injunction, decree, rule or regulation of any court or federal, state or
other governmental agency or instrumentality, in a manner which could reasonably
be expected to have a material adverse effect on the business, properties,
operations or condition (financial or otherwise) of the Borrower or the Borrower
and its Subsidiaries taken as a whole. There is no action, suit, proceeding or
investigation pending or, to the knowledge of the Borrower, threatened against
the Borrower or any Subsidiary which questions the validity or the
enforceability of this Agreement, the Notes or any of the other Loan Documents.
Section 5.10 Capital Stock of the Borrower. As of the
Effective Date, the authorized, issued and outstanding capital stock of the
Borrower is as set forth on Schedule 5.10 attached hereto.
Section 5.11 Debt. Except as set forth on Schedule 5.11
attached hereto, neither the Borrower nor any Subsidiary of the Borrower has any
Debt outstanding on the Closing Date. On or after the Closing Date, neither the
Borrower nor any Subsidiary of the Borrower will have any Debt outstanding other
than the Debt disclosed in Schedule 5.11 hereto and the Debt permitted by
Section 7.1.
Section 5.12 Patents, Trademarks, etc. The Borrower and each
of its Subsidiaries owns or holds licenses in all necessary trademarks, trade
names, patents, patent rights and licenses required to conduct its business and
to operate its properties as now conducted and currently projected and without
known conflict with the rights of others. The consummation of the transactions
contemplated by this Agreement, the Notes and the other Loan Documents will not
alter or impair any of such rights of the Borrower or any Subsidiary of the
Borrower except to the extent contemplated by the Loan Documents. Neither the
Borrower or any of its Subsidiaries has been charged, or received a written
threat to be charged, with any infringement of, nor has the Borrower or any of
its Subsidiaries knowingly infringed on any unexpired trademark, trademark
registration, patent or other proprietary right of any Person.
Section 5.13 Existing Defaults. Except as set forth on
Schedule 5.13 attached hereto, neither the Borrower nor any Subsidiary of the
Borrower is in default under any mortgage, indenture, deed of trust or other
agreement to which it is a party or by which it or any of the properties owned
by it are bound, the effect of which could reasonably be expected to have a
material adverse effect on the business, properties, operations or conditions
(financial or otherwise) of the Borrower or the Borrower and its Subsidiaries
taken as a whole.
Section 5.14 Leases. The Borrower and each Subsidiary of the
Borrower enjoys peaceful and undisturbed possession under all material leases to
which it is a party or under which it is operating. All of such leases are valid
and subsisting and no default by the Borrower or any Subsidiary of the Borrower
exists under any of them.
Section 5.15 Burdensome Agreements, etc. Neither the Borrower
nor any Subsidiary of the Borrower is a party to any unusual or unduly
burdensome agreement or undertaking, or subject to any unusual or unduly
burdensome court order, writ, injunction or decree of any court or governmental
agency or instrumentality, which could have a material adverse effect on the
business, properties, operations or condition (financial or otherwise) of the
Borrower or the Borrower and its Subsidiaries taken as a whole.
Section 5.16 Location of Assets and Chief Executive Offices.
As of the Effective Date, the Inventory, Equipment and chief executive offices
of the Borrower and its Subsidiaries are located at the
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address or addresses set forth in Schedule 5.16 or, in the case of a change of
location in accordance with Section 7.8 of this Agreement, at the address set
forth in the written notice required under Section 7.8 of this Agreement.
Section 5.17 Tax Returns and Payments. Each of the Borrower
and each of its Subsidiaries has filed all Federal income tax returns, domestic
and foreign, required to be filed by it and has paid all Federal taxes and
assessments shown to be due on such returns and all other material taxes and
assessments, domestic and foreign, in each case payable by it which have become
due, other than those not yet delinquent and except those contested in good
faith and for which adequate reserves have been provided in accordance with
GAAP.
Section 5.18 Partnerships and Ventures. Neither the Borrower
nor any Subsidiary of the Borrower is a general or limited partner in any
partnership or a joint venturer in any joint venture except for such
partnerships or joint ventures where the Borrower's or Subsidiary's partner or
joint venture partner has acknowledged that it has no right, title or interest
in or to any of the Mortgaged Property or Collateral until after the Loans have
been indefeasibly paid in full.
Section 5.19 Publicly Filed Documents and Financial
Statements.
(a) The Borrower has previously furnished or made available to
the Lender true and complete copies of (i) its Annual Reports on Form 10-K for
each of the three fiscal years ended December 31, 1995, 1994 and 1993, as each
such Annual Report has been amended through the date hereof, and as each was
filed with the United States Securities and Exchange Commission (the "SEC");
(ii) its Quarterly Reports on Form 10-Q for each of the quarterly periods ended
June 30, 1996, and March 31, 1996, as each such quarterly report has been
amended through the date hereof, and as each was filed with the SEC; (iii) its
proxy statements relating to all meetings of its stockholders (whether annual or
special) since January 1, 1995; and (iv) all other reports or registration
statements filed by the Borrower with the SEC since January 1, 1996, as each has
been amended through the date hereof (collectively, the "Borrower Publicly Filed
Documents"). None of the Borrower Publicly Filed Documents, and including,
without limitation, any financial statements or schedules included in any
Borrower Publicly Filed Documents, at the time filed contained any untrue
statement of material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of any
circumstances under which they were made, not misleading, which untrue
statements or omissions have not been corrected or updated in a document
subsequently filed with the SEC. The financial statements contained in the
Borrower Publicly Filed Documents (the "Financial Statements") comply as to form
in all material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP applicable to year-end financial statements
(except, in the case of unaudited interim financial statements, for the absence
of footnotes and normal year-end adjustments) consistently applied during the
periods involved, and present fairly the consolidated financial condition and
results of operations and cash flow of the Borrower and its Subsidiaries as of
such dates and for such periods. There is no material liability or obligation of
any kind, whether accrued, absolute, fixed or contingent, of the Borrower or any
Subsidiary of the Borrower that is required to be disclosed under GAAP and that
is not reflected or reserved against in the unaudited consolidated balance sheet
of the Borrower as of June 30, 1996 contained in the Borrower's quarterly report
on Form 10-Q for the quarterly period ended June 30, 1996 or reflected in the
notes thereto, other than liabilities incurred in the ordinary course of
business, consistent with past practice, since June 30, 1996, none of which has
had or could
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<PAGE> 19
reasonably be expected to have a material adverse effect on the financial
condition or results of operations of the Borrower or the Borrower and its
Subsidiaries taken as a whole.
Section 5.20 Use of Proceeds. The Proceeds of the Loans shall
be utilized for the purposes set forth on Schedule 5.20.
ARTICLE VI
AFFIRMATIVE COVENANTS OF THE BORROWER
The Borrower covenants and agrees that, until payment in full
of the Loans and no Note remains outstanding, the Borrower shall perform each
and all of the following:
Section 6.1 Accounting Records. The Borrower will maintain,
and will cause each of its Subsidiaries to maintain, adequate books and records
and prepare its consolidated financial statements in accordance with GAAP,
consistently applied (other than, with respect to any period other than
year-end, any requirement for footnote disclosure and the recording of non-cash
items, and subject to year-end audit adjustments).
Section 6.2 Financial Statements. The Borrower will furnish or
cause to be furnished to the Lender:
(a) as soon as practicable and, in any event, within 30
calendar days after the close of each calendar month, consolidated and
consolidating (i) statements of income and of cash flows of the Borrower and its
Subsidiaries for such monthly period and (ii) balance sheets of the Borrower and
its Subsidiaries as of the end of such monthly period, all in reasonable detail
and including year to date information, and certified by the chief financial
officer of the Borrower to have been prepared in accordance with GAAP (other
than any requirement for footnote disclosure and the recording of non-cash
items), subject to year-end audit adjustments;
(b) as soon as practicable and, in any event, within 90
calendar days after the close of each fiscal year of the Borrower, a copy of the
annual audited report for such year for the Borrower, including consolidated (i)
statements of income and of cash flows of the Borrower and its Subsidiaries for
such fiscal year, and (ii) balance sheets of the Borrower and its Subsidiaries
as of the end of such fiscal year, each setting forth in comparative form, if
applicable, the corresponding figures for the previous year, all in reasonable
detail; the statements of income and of cash flows and balance sheet to be
audited by independent, nationally recognized, certified public accountants, and
certified (without a "going concern" qualification or other qualification or
exception of similar gravity or any qualification arising out of the scope of
the audit (but not arising out of changes in financial accounting standards)) by
such accountants to have been prepared in accordance with GAAP, consistently
applied (except to the extent any inconsistency is disclosed in the notes to
such financial statements and approved by such accountants);
(c) contemporaneously with each monthly and year-end financial
report required by Section 6.2(a) and Section 6.2(b), a certificate of the chief
financial officer of the Borrower, substantially in the form of Exhibit G
attached hereto, stating that he or she has individually reviewed the provisions
of
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this Agreement, the Notes and the other Loan Documents and that a review of the
activities of the Borrower and its Subsidiaries during such year or monthly
period, as the case may be, has been made by or under such individual's
supervision, with a view to determining whether the Borrower and its
Subsidiaries have fulfilled all of their respective obligations under this
Agreement, the Notes and the other Loan Documents and that, to the best
knowledge of such Person, the Borrower and its Subsidiaries have observed and
performed each undertaking contained in this Agreement, the Notes and the other
Loan Documents, and neither the Borrower nor any of its Subsidiaries is in
default in the observance or performance of any of the provisions hereof or
thereof, or if the Borrower or any of its Subsidiaries shall be so in default,
specifying all such defaults and events of which such individual may have
knowledge or belief;
(d) promptly, and in any event within one calendar day after
the filing thereof, a copy of any annual, quarterly or interim report, proxy
statement, information statement, Schedule 13D or 13G or any other filing made
by or with respect to the Borrower with the SEC or Nasdaq;
(e) notice, as soon as practicable and, in any event, within
five calendar days after the Borrower or any of its Subsidiaries has knowledge
of (i) the occurrence of an Event of Default or any Unmatured Event of Default
or (ii) any default or event of default as defined in any evidence of Debt of
the Borrower or such Subsidiary in a principal amount exceeding $50,000 or under
any agreement, indenture or other instrument under which such Debt has been
issued, irrespective of whether such Debt is accelerated or such default is
waived (in either event, the Borrower or such Subsidiary shall also supply the
Lender with a statement from the Borrower's chief financial officer setting
forth the details thereof and the action which the Borrower or such Subsidiary
proposes to take with respect thereto);
(f) promptly upon receipt thereof, copies of all reports or
letters submitted to the Borrower or any of its Subsidiaries by its independent
public accountants in connection with each annual or special audit of the
financial statements of the Borrower or any of its Subsidiaries made by such
accountants, including the comment letter submitted by accountants to management
in respect of the Borrower's or any of its Subsidiaries' internal control
matters in connection with their annual audit;
(g) prior to the end of each fiscal year of the Borrower, a
budget and financial forecast, including a balance sheet, income statement and
cash flow projection covering proposed fundings, repayments, additional
advances, investments and other cash receipts and disbursements for each month
of the forthcoming year, each of which shall be satisfactory to the Lender in
its reasonable discretion;
(h) contemporaneously with each monthly financial report
required by Section 6.2(a), a comparison of actual year-to-date financial
performance to budget;
(i) promptly upon becoming aware of any Person's taking action
to obtain a decree or order for relief with respect to the Borrower or any
Subsidiary of the Borrower in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, a
written notice thereof specifying what action the Borrower or such Subsidiary is
taking or proposes to take with respect thereto;
(j) promptly, copies of all amendments to the certificates of
incorporation or by-laws of the Borrower or any Subsidiary of the Borrower;
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<PAGE> 21
(k) promptly, and in any event within five calendar days after
the receipt thereof, a copy of any material communication from any governmental
agency or instrumentality; and
(l) with reasonable promptness, such other information and
data with respect to the Borrower or any of its Subsidiaries as from time to
time may be reasonably requested by the Lender.
Section 6.3 Corporate Existence, etc. The Borrower will do,
and will cause each of its Subsidiaries to do, or cause to be done, all things
necessary to preserve and keep in full force and effect its corporate existence
and any rights and franchises material to its or their business.
Section 6.4 Inspection and Audits. The Borrower will, and will
cause each of its Subsidiaries to, permit any Persons designated by the Lender
to visit, inspect and audit any of the properties of the Borrower and its
Subsidiaries, including its and their financial and accounting records, and to
make copies and take extracts therefrom, and to discuss its and their affairs,
finances and accounts with its officers and independent public accountants, all
upon reasonable prior notice and during normal business hours, as often as may
be reasonably requested.
Section 6.5 Taxes. The Borrower will pay and discharge, and
will cause each of its Subsidiaries to pay and discharge, when due all taxes,
assessments and governmental charges upon or against the Borrower or any of its
Subsidiaries or the Collateral in each case before the same become delinquent
and before penalties accrue thereon, unless and to the extent that the same are
being contested in good faith by appropriate proceedings and for which adequate
reserves have been established in accordance with GAAP.
Section 6.6 Insurance. The Borrower will maintain, and to
cause each of its Subsidiaries to maintain, in amounts customary for entities
engaged in comparable business activities, (A) to the extent required by
applicable law, workman's compensation insurance (or maintain a legally
sufficient amount of self insurance against worker's compensation liabilities,
with adequate reserves, and (B) fire and "all risk" casualty insurance on its
properties against such hazards as are customary in Borrower's and each
Subsidiary's business. Borrower will obtain and maintain public liability
insurance at a cost deemed reasonable to the Borrower's Board of Directors. At
the request of Lender, Borrower will deliver forthwith a certificate specifying
the details of such insurance in effect. The Borrower further agrees to maintain
directors' and officers' liability insurance in an amount and with such
coverages as are satisfactory to Lender in its sole discretion.
Section 6.7 End of Fiscal Years; Fiscal Quarters. The Borrower
will, for financial reporting purposes, cause (i) each of its, and each of its
Subsidiaries', fiscal years to end on December 31 of each year and (ii) each of
its, and each of its Subsidiaries', fiscal quarters to end on March 31, June 30,
September 30 and December 31 of each year.
Section 6.8 Further Assurances. (a) At any time or from time
to time upon the request of the Lender, the Borrower will, and will cause each
of its Subsidiaries to, execute and deliver such further documents and do such
other acts and things as the Lender may reasonably request in order to effect
fully the purposes of this Agreement, the Notes and the other Loan Documents and
to provide for repayment of the Loans made hereunder with interest thereon in
accordance with the terms of this Agreement and the Notes.
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<PAGE> 22
(b) Within 30 days after the Closing Date, the
Borrower shall have delivered to the Lender a leasehold mortgage with respect to
the leasehold interests of Sierra Tucson AC, Inc. ("STAC") under (i) the
commercial lease dated as of November 15, 1991 between the State of Arizona and
STAC, and (ii) the industrial building lease of the STAC Adolescent Center dated
December 29, 1994, in form and substance satisfactory to the Lender (the
"Leasehold Mortgage"), and a title insurance policy issued by the Title Company
in an amount satisfactory to the Lender to ensure that the Leasehold Mortgage is
a valid and enforceable mortgage Lien, which policy shall be in form and
substance satisfactory to the Lender.
ARTICLE VII
NEGATIVE COVENANTS OF THE BORROWER
The Borrower covenants and agrees that, until payment in full
of the Loans and no Note is outstanding, the Borrower shall perform each and all
of the following:
Section 7.1 Debt. Neither the Borrower nor any Subsidiary of
the Borrower shall create, incur, assume or otherwise become liable with respect
to any Debt except that the Borrower and its Subsidiaries may become and remain
liable with respect to the Debt (i) evidenced by the Notes and this Agreement,
and (ii) set forth in Schedule 5.11 hereto.
Section 7.2 Liens. The Borrower will not, and will not permit
any of its Subsidiaries to, create or permit to exist any Lien on or with
respect to any property or asset of any kind of the Borrower or any Subsidiary
of the Borrower whether now owned or hereafter acquired, or any income or
profits therefrom, except (collectively, the "Permitted Liens"):
(a) Liens for taxes, assessments or governmental charges or
claims, the payment of which is not yet due or which are being contested in good
faith or is not, at such time, required, if reserves or other appropriate
provisions, if any, as shall be required by GAAP shall have been made therefor;
(b) statutory Liens of landlords, carriers, warehousemen,
mechanics, materialmen and other Liens imposed by law and incurred in the
ordinary course of business for sums not yet due and owing or being contested in
good faith;
(c) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other types of social security;
(d) any attachment or judgment Lien in existence less than
thirty (30) calendar days after the entry thereof or with respect to which
execution has been stayed;
(e) pledges or deposits under worker's compensation,
employment insurance and other social security legislation;
(f) Liens with respect to items purchased with purchase money
financing in an aggregate amount of up to $50,000;
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<PAGE> 23
(g) deposits to secure the performance of bids, tenders, trade
contracts, leases, statutory obligations, surety and appeal bonds, performance
bonds and other obligations of the like nature incurred in the ordinary course
of business;
(h) Liens specifically identified on Schedule 7.2; and
(i) Liens granted by the Borrower in favor of the Lender,
pursuant to the Collateral Documents.
Section 7.3 Sale of Assets. Without express written approval
of the Lender, neither the Borrower nor any of its Subsidiaries shall sell,
assign, transfer, convey or otherwise dispose of its assets, or enter into any
licensing arrangement with respect thereto, whether now owned or hereafter
acquired, except for the sale or other disposition by the Borrower or a
Subsidiary of properties or assets of de minimis value.
Section 7.4 Transactions with Stockholders and Affiliates.
Except as permitted hereunder, neither the Borrower nor any Subsidiary of the
Borrower shall, directly or indirectly, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property or
the rendering of any service) by it with any holder of five percent (5%) or more
of any class of equity securities of the Borrower or with any Affiliate of the
Borrower on terms that are less favorable to the Borrower or such Subsidiary
than those terms which might be obtained at the time from Persons who are not
such a holder or Affiliate in a comparable transaction negotiated in good faith
on an arm's length basis.
Section 7.5 Conduct of Business. The Borrower and its
Subsidiaries will not engage in any business other than the business in which
the Borrower and its Subsidiaries are engaged as of the Effective Date or any
business or activities substantially similar or related thereto.
Section 7.6 Amendments or Waivers of Certain Documents.
(a) The Borrower shall not agree to, or permit any Subsidiary
to agree to, any amendment to, or waive any of its rights with respect to, the
terms and provisions regarding interest rates, principal or interest payment
amounts, total principal amounts or similar terms and provisions of the Debt
referred to in Section 7.1 of this Agreement, or any amendments or waivers with
respect to any of the foregoing which make any of such agreements more onerous
or restrictive with respect to the Borrower or such Subsidiary, without in each
case obtaining the prior written consent of the Lender.
(b) The Borrower shall not, and shall not permit any
Subsidiary to, enter into or modify any agreement relating to Debt in a way
which would be materially adverse to the interests of the Lender or as a result
of which the terms of payment of any Debt are accelerated, except that:
(i) the Borrower shall be entitled to the benefit of
its rights and shall be entitled to perform its
obligations respecting the Loans provided for in this
Agreement; and
(ii) the Borrower may repay Debt owed to the Lender
under the Notes in accordance with this Agreement.
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<PAGE> 24
Section 7.7 Partnerships and Joint Ventures. Neither the
Borrower nor any Subsidiary of the Borrower shall become a general or limited
partner in any partnership or a joint venturer in any joint venture unless the
partner or joint venture partner acknowledges that it has no right, title or
interest in or to any of the Collateral until after the Loans have been
indefeasibly paid in full and no Note remains outstanding.
Section 7.8 Change in Location of Chief Executive Offices and
Assets. Neither the Borrower nor any of its Subsidiaries will not relocate its
chief executive office without first giving the Lender 30 calendar days prior
written notice of any proposed relocation. Neither the Borrower nor any of its
Subsidiaries will move its Equipment or Inventory to a location other than as
set forth in Schedule 5.16; provided, however, that the foregoing shall not be
deemed to preclude the Borrower or any Subsidiary of the Borrower from
establishing new locations and moving Equipment or Inventory to such new
locations so long as, prior to relocating such Equipment or Inventory, the
Borrower or such Subsidiary has given the Lender 30 calendar days prior written
notice of such proposed relocation.
Section 7.9 Prohibition on Acquisitions. Neither the Borrower
nor any Subsidiary of the Borrower shall buy, trade for or otherwise acquire the
stock or substantially all the assets of any Person unless such purchase, trade
or acquisition has been approved by the Lender.
Section 7.10 Restrictions on Fundamental Changes. The Borrower
will not, and will not permit any of its Subsidiaries to, change its name,
change the nature of its business, enter into any merger, consolidation,
reorganization or recapitalization or reclassify its capital stock or liquidate,
wind up or dissolve itself (or suffer any liquidation or dissolution), or
convey, sell, assign, lease, transfer or otherwise dispose of, in one
transaction or a series of transactions, all or any substantial part of its
business, property or assets, whether now owned or hereafter acquired.
Section 7.11 Prohibition on Distributions. The Borrower will
not, and will not permit any of its Subsidiaries to, declare or pay any
dividends (other than a dividend payable in shares of its common stock) or make
any distributions of cash, property or other securities of the Borrower or such
Subsidiary with respect to any shares of its capital stock, or directly or
indirectly redeem, purchase or otherwise acquire for consideration any shares of
its capital stock.
Section 7.12 Issuance of Stock. The Borrower will not, and
will not permit any of its Subsidiaries to, directly or indirectly, issue, sell,
assign, pledge or otherwise encumber or dispose of any shares of its or such
Subsidiaries preferred stock or other redeemable equity securities (or warrants,
rights or options to acquire shares of any of the foregoing) except for the
issuance of shares of Preferred Stock to an Affiliate of Apollo.
Section 7.13 Consolidated Net Worth. The Borrower will not
permit its Consolidated Net Worth at any time to be less than $24,000,000.
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ARTICLE VIII
EVENTS OF DEFAULT
Section 8.1 Events of Default. The occurrence of any one or
more of the following events, acts or occurrences shall constitute an event of
default (each an "Event of Default") hereunder:
(a) Failure to Make Payments When Due. The Borrower shall fail
to pay any amount owing under the Notes with respect to principal of or interest
on any Loans within five (5) days of when such amount is due, whether at stated
maturity, by acceleration or otherwise; or
(b) Failure to Make Payments When Due Under Other Agreements.
The Borrower or any Subsidiary of the Borrower shall fail to pay any amount
owing under any monetary obligation on any Debt, whether such Debt now exists or
shall hereafter be created, when such amount is due, whether at stated maturity,
by acceleration or otherwise, which failure shall cause the holder thereof to
cause, or to have the right to cause the obligations of the Borrower or such
Subsidiary in respect thereof to become due prior to maturity and notice of
default from the holder of such Debt (if applicable) has been received; or
(c) Breach of Certain Covenants. The Borrower or any of its
Subsidiaries shall (i) default in due performance or observance by it of any
term, covenant or agreement contained in Section 6.7 or 7 or (ii) default in the
due performance or observance by it of any term, covenant or agreement (other
than those referred to in Section 8.1(a), 8.1(e) or clause (i) of this Section
8.1(c) contained in this Agreement and such default shall continue unremedied
for a period of at least 30 days after notice to the defaulting party by the
Lender; or
(d) Breach of Covenants in other Agreements. The Borrower or
any Subsidiary of the Borrower shall fail or neglect to comply with or to
perform in accordance with any material representation, warranty, covenant,
term, condition or agreement contained in any note, instrument or other
agreement under which there may be issued, or by which there may be secured or
evidenced, any Debt of the Borrower or a Subsidiary of the Borrower in an
outstanding amount in excess of $50,000, whether such Debt now exists or shall
hereafter be created; or
(e) Breach of Warranty. Any financial statement,
representation, warranty or certification made or furnished by the Borrower or
any Subsidiary of the Borrower under this Agreement, any other Loan Document or
in any statement, document, letter or other writing or instrument furnished or
delivered to the Lender pursuant to or in connection with this Agreement or as
an inducement to the Lender to enter into this Agreement and the other Loan
Documents is false or incorrect at the time such statement is made in any
material respect; or
(f) Insolvency. The Borrower or any Subsidiary of the Borrower
shall be insolvent; or
(g) Involuntary Bankruptcy; Appointment of Receiver, etc.
(i) If an involuntary case seeking the liquidation or
reorganization of the Borrower or any Subsidiary under Chapter 7 or Chapter 11
of the Federal Bankruptcy Code or any similar proceeding shall be commenced
against the Borrower or any Subsidiary under any other applicable law and any of
the
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<PAGE> 26
following events occur: (A) the Borrower or such Subsidiary consents to the
institution of the involuntary case; (B) the petition commencing the involuntary
case is not timely controverted; (C) the petition commencing the involuntary
case is not dismissed within 60 calendar days of its filing; or (D) an order for
relief shall have been issued or entered therein; or
(ii) A decree or order of a court shall have been entered for
the appointment of a receiver, liquidator, sequestrator, custodian, trustee or
other officer having similar powers to take possession of all or a substantial
portion of the property or to operate all or a substantial portion of the
business of the Borrower or any Subsidiary; or
(h) Voluntary Bankruptcy; Appointment of Receiver, etc. The
Borrower or any Subsidiary shall institute a voluntary case seeking liquidation
or reorganization under Chapter 7 or Chapter 11 of the Federal Bankruptcy Code;
or the Borrower or any Subsidiary shall file a petition, answer or complaint or
shall otherwise institute any similar proceeding under any other applicable law,
or shall consent thereto; or the Borrower or any Subsidiary shall consent to the
conversion of an involuntary case to a voluntary case; or the Borrower or any
Subsidiary shall consent or acquiesce to the appointment of a receiver,
liquidator, sequestrator, custodian, trustee or other officer with similar
powers to take possession of all or a substantial portion of the property or to
operate all or a substantial portion of the business of the Borrower or such
Subsidiary; or the Borrower or any Subsidiary shall make a general assignment
for the benefit of creditors; or the board of directors of the Borrower or any
Subsidiary (or any committee thereof) adopts any resolution or otherwise
authorizes action to approve any of the foregoing; or
(i) Judgments and Attachments. The Borrower or any Subsidiary
shall suffer any judgment, attachment, lien, execution or levy against it or its
property in any amount in excess of $50,000 which is not paid, discharged,
released, bonded, stayed on appeal or otherwise fully satisfied; or
(j) Dissolution. Any order, judgment or decree shall be
entered decreeing the dissolution of the Borrower or any Subsidiary, whether by
voluntary or involuntary action, and such order shall remain undischarged or
unstayed for a period in excess of 30 calendar days; or
(k) Collateral Documents. (x) Any of the Collateral Documents
shall cease to be in full force and effect for any reason other than (i) any act
or omission of the Lender necessary for the perfection of Liens in favor of the
Lender, (ii) a release or termination thereof upon the full payment of the Loans
and satisfaction of the Notes or (iii) upon the written consent of the Lender or
(y) an Event of Default (as defined in the respective Collateral Documents)
shall have occurred and be continuing under any such Collateral Documents; or
(l) Absence of Preliminary or Definitive Proxy Filing. A (i)
preliminary proxy statement seeking approval by the Borrower's stockholders of
the issuance of voting capital stock or of securities convertible into voting
capital stock of the Borrower to Apollo or a designee of Apollo shall not have
been filed by the Borrower with the SEC by December 15, 1996, or (ii) definitive
proxy statement with respect to such matters shall not have been filed by the
Borrower with the SEC by February 28, 1997.
(m) Certain Change of Control Events. There shall have
occurred one or more of the following:
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<PAGE> 27
(i) the presentation to or approval by the
stockholders of the Borrower of any plan or
proposal for the refinancing,
recapitalization, liquidation or dissolution
of the Borrower or any Subsidiary of the
Borrower, unless such plan or proposal has
been approved by the Lender;
(ii) a merger or consolidation to which the
Borrower is to be a party is announced or
proposed by the Borrower if the stockholders
of the Borrower immediately prior to the
contemplated effective date of such merger
or consolidation are likely to have
"beneficial ownership" (as defined in Rule
13d-3 under the Exchange Act), immediately
following the contemplated effective date of
such merger or consolidation of securities
of the surviving corporation representing
less than 50% of the combined voting power
of the surviving corporation's then
outstanding securities ordinarily having the
right to vote at elections of directors; or
(iii) any person becomes after September 30, 1996
the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or
indirectly, of 20% or more of the combined
voting power of the Borrower's outstanding
securities ordinarily having the right to
vote at elections of directors; provided,
that the foregoing shall not include any
acquisition of securities by Apollo, the
Lender or their affiliates.
Section 8.2 Remedies. Upon the occurrence of an Event of
Default:
The Lender may, by written notice to the Borrower (provided,
that if an Event of Default specified in Section 8.1(f), (g) or (h) shall occur,
the result of which would occur upon the giving of written notice by the Lender
as specified in clauses (i) and (ii) below shall occur automatically without the
giving of any notice), declare (i) the B Term Loan Commitment (or the unutilized
portion thereof) terminated and (ii) the principal of and any accrued interest
in respect of all Loans and all obligations owing hereunder to be, whereupon the
same shall become, forthwith due and payable without presentment, demand,
protest or other notice of any kind, all of which are hereby waived by the
Borrower.
Notwithstanding the foregoing, if, at any time after
acceleration of the maturity of the Notes, the Borrower shall pay all arrears of
interest and all payments on account of principal that shall have become due
other than by acceleration (with interest on principal at the rate specified
herein) and all Events of Default and Unmatured Events of Default (other than
nonpayment of principal and accrued interest under the Notes, due and payable
solely by virtue of acceleration) have been remedied or waived, then (i) at the
Lender's option, by written notice to the Borrower, the Lender may rescind and
annul the acceleration and its consequences and (ii) if the Borrower makes such
payment within 30 days after acceleration of the maturity of the Notes, such
acceleration shall be automatically rescinded and annulled without any further
action by any party, except to the extent action by the Borrower or the Lender
is required to effectuate such rescission and annulment, in which case the
parties agree to promptly take such action; provided, however, that such action
shall not affect any subsequent Event of Default or Unmatured Event of Default
or impair any right consequent thereon.
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<PAGE> 28
Upon acceleration, the Lender, without notice to or demand
upon the Borrower, which are expressly waived by the Borrower, may proceed to
protect, exercise and enforce its rights and remedies hereunder, under the Notes
and under the Collateral Documents, and any other rights and remedies as are
provided by law or equity. The Lender may determine, in its sole discretion, the
order and manner in which the Lender's rights and remedies are to be exercised,
and all payments received by the Lender shall be applied as follows: first, to
all costs and expenses (including, without limitation, reasonable attorneys'
fees and expenses, costs of maintaining, preserving or disposing of any of the
Collateral and costs of settlement) incurred by the Lender in enforcing any Debt
of, or in collecting any payments due from, the Borrower under the Notes by
reason of such Event of Default; second, to accrued interest on the Loans; and
third, to principal amounts outstanding.
ARTICLE IX
MISCELLANEOUS
Section 9.1 Waivers; Modifications in Writing. No failure or
delay on the part of the Lender, or any holder of the Notes, in exercising any
right, power, privilege or remedy under this Agreement, the Notes or the other
Loan Documents shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right, power, privilege or remedy preclude any
other or further exercise thereof or the exercise of any other right, power or
remedy. The remedies provided for under this Agreement, in the Notes and in the
other Loan Documents are cumulative and are not exclusive of any remedies that
may be available to the Lender at law, in equity or otherwise. No amendment,
modification, supplement, termination, consent or waiver of or to any provision
of this Agreement, the Notes and the other Loan Documents, nor consent to any
departure therefrom, shall in any event be effective unless the same shall be in
writing and signed by the Lender and the Borrower. Any waiver of any provision
of this Agreement, the Notes and the other Loan Documents, and any consent to
any departure by the Borrower from the terms of any provisions of this
Agreement, shall be effective only in the specific instance and for the specific
purpose for which given. No notice to or demand on the Borrower in any case
shall entitle the Borrower to any other or further notice or demand in similar
or other circumstances.
Section 9.2 Effectiveness. This Agreement shall become
effective on the date (the "Effective Date") on which the Borrower and the
Lender shall have signed a counterpart hereof (whether the same or different
counterparts).
Section 9.3 Notices, etc. All notices, demands, instructions
and other communications required or permitted to be given to or made upon any
party hereto shall be in writing delivered to the parties at the addresses set
forth below (or such other address as may be provided by one party in a notice
to the other):
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<PAGE> 29
If to the Lender:
c/o Apollo Real Estate Advisors, L.P.
1301 Avenue of the Americas
38th Floor
New York, New York 10019
Attention: Alfred Trivilino
with a copy to:
Apollo Real Estate Advisors, L.P.
1999 Avenue of the Stars
Suite 1900
Los Angeles, CA 90067
Attention: Michael D. Weiner, Esq.
and a copy to:
Battle Fowler LLP
75 East 55th Street
New York, NY 10022
Attention: Les Loffman, Esq.
If to the Borrower:
NextHealth, Inc.
16600 N. Lago Del Oro Parkway
Tucson, AZ 85739
Attention: President
with a copy to:
Neal, Gerber & Eisenberg
2 North LaSalle Street
Chicago, IL 60602
Attention: Steve Berger, Esq.
Notice delivered in accordance with the foregoing shall be effective (i) when
delivered, if delivered personally or by facsimile transmission, (ii) two days
after being delivered in the United States (properly addressed and all fees
paid) for overnight delivery service to a courier (such as Federal Express)
which regularly provides such service and regularly obtains executed receipts
evidencing delivery or (iii) five days after being deposited (properly addressed
and stamped for first-class delivery) in a daily serviced United States mail
box.
Section 9.4 Binding Effect; Assignment. This Agreement shall
be binding upon and inure to the benefit of and be enforceable by the respective
successors and assigns of the parties hereto;
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<PAGE> 30
provided, however, that the Borrower may not assign or transfer any interest
hereunder without the prior written consent of the Lender. The Lender may,
without the consent of the Borrower, assign, transfer or grant participations in
all or any portion of its obligations and rights hereunder to one or more
Persons. In the case of any participation, the participant shall not have any
rights under this Agreement or the other Loan Documents and all amounts payable
by the Borrower hereunder shall be determined as if no participation had been
sold. Each assignee or transferee may become a party to this Agreement by
execution of an assignment and assumption agreement between the Lender and such
Person(s) without action or approval of the Borrower, and, upon surrender of the
old Notes, the Lender and the assignee or transferee shall be entitled to
receive new Notes, such new Notes to be in conformity with Section 2.3.
Section 9.5 Headings. Article and Section headings used in
this Agreement are for convenience of reference only and shall not constitute a
part of this Agreement for any purpose or affect the construction of this
Agreement.
Section 9.6 Execution in Counterparts. This Agreement may be
executed in any number of counterparts and by different parties on separate
counterparts, each of which counterparts, when so executed and delivered, shall
be deemed to be an original and all of which counterparts, taken together, shall
constitute one and the same Agreement.
Section 9.7 Governing Law. This Agreement and the other Loan
Documents shall be deemed to have been made in the State of New York and the
validity of this Agreement, the Notes and the other Loan Documents, the
construction, interpretation, and enforcement thereof, and the rights of the
parties thereto shall be determined under, governed by, and construed in
accordance with the internal laws of the State of New York, without regard to
principles of conflicts of law.
Section 9.8 Waiver of Jury Trial. Borrower hereby waives all
right to trial by jury in any action, proceeding or counterclaim arising out of
or relating to this Loan Agreement, the Notes, any Loan Document, or any other
agreement or instrument contemplated hereby.
Section 9.9 Severability of Provisions. Whenever possible this
Agreement, the Notes and each Loan Document and each provision hereof and
thereof shall be interpreted in such manner as to be effective, valid and
enforceable under applicable law. If and to the extent that any such provision
shall be held invalid and unenforceable by any court of competent jurisdiction,
such holding shall not invalidate or render unenforceable any other provisions
hereof or thereof, and any determination that the application of any provision
hereof or thereof to any person or under any circumstance is illegal and
unenforceable shall not affect the legality, validity and enforceability of such
provision as it may be applied to any other person or in any other circumstance.
Section 9.10 Certain Fees.
(a) Brokers' Fees. The Borrower hereby indemnifies the Lender
against and agrees that it will hold the Lender harmless from any claim, demand
or liability for any broker's or finder's fees alleged to have been incurred by
action of the Borrower in connection with any transaction contemplated hereby
and thereby, and any expenses, including legal fees, arising in connection with
any such claim, demand or liability.
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<PAGE> 31
(b) Transaction Expense. The Borrower shall pay all costs and
expenses incurred by it or the Lender (including, without limitation, reasonable
fees and expenses of counsel) in connection with the negotiation, execution,
delivery and performance of this Agreement or the other Loan Documents.
Section 9.11 Independence of Covenants. All covenants under
this Agreement shall each be given independent effect so that if a particular
action or condition is not permitted by any such covenant, the fact that it
would be permitted by another covenant, by an exception thereto, or be otherwise
within the limitations thereof, shall not avoid the occurrence of an Event of
Default or Unmatured Event of Default if such action is taken or condition
exists.
Section 9.12 Complete Agreement. This Agreement, together with
the exhibits and schedules to this Agreement, the Notes and the other Loan
Documents, is intended by the parties as a final expression of their agreement
and is intended as a complete statement of the terms and conditions of their
agreement.
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<PAGE> 32
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered as of the date first hereinabove set
forth.
Borrower
NEXTHEALTH, INC.
By: /s/ William T. O'Donnell, Jr.
________________________________
Name: William T. O'Donnell, Jr.
Title: President and CEO
Lender
AP LOM LLC
By: AP GP LOM LLC, its Managing Member
By Kronus Property, Inc.
By: /s/ Alfred Trivilino
______________________________
Name: Alfred Trivilino
Title: Vice President
<PAGE> 1
Exhibit 10.79
PLEDGE AGREEMENT
PLEDGE AGREEMENT, dated as of November 14, 1996 (this
"Agreement"), among each of the undersigned (each a "Pledgor" and, collectively,
the "Pledgors") and AP LOM LLC ("Pledgee").
W I T N E S S E T H:
WHEREAS, NextHealth, Inc. (the "Borrower") and Pledgee have
entered into a Credit Agreement, dated as of November 14, 1996 (as amended,
modified or supplemented from time to time, the "Credit Agreement"), pursuant to
which Pledgee has agreed to make certain Loans to the Borrower;
WHEREAS, pursuant to the Guaranty, each Pledgor (other than
the Borrower) has jointly and severally guaranteed to the Pledgee the payment
when due of all obligations and liabilities of the Borrower under or with
respect to the Credit Agreement;
WHEREAS, it is a condition precedent to the making of Loans to
the Borrower under the Credit Agreement that each Pledgor shall have executed
and delivered to the Pledgee this Agreement; and
WHEREAS, each Pledgor desires to execute this Agreement to
satisfy the condition precedent described in the preceding paragraph;
NOW, THEREFORE, in consideration of the benefits accruing to
each Pledgor, the receipt and sufficiency of which are hereby acknowledged, each
Pledgor makes the following representations and warranties to the Pledgee and
hereby covenants and agrees with the Pledgee as follows:
1. Definitions. Unless otherwise defined herein, capitalized
terms used herein shall have the meaning ascribed to such terms in the Credit
Agreement. References to this "Agreement" shall mean this Pledge Agreement as
the same may be in effect at the time such reference becomes operative,
including all amendments, modifications and supplements hereto and any exhibits
or schedules to any of the foregoing.
2. Pledge. In order to secure the full and prompt payment when
due (whether at stated maturity, by acceleration or otherwise) of all
obligations and liabilities of such Pledgor, now existing or hereafter incurred
under, arising out of or in connection with any Loan Document to which it is a
party and the due performance and compliance by such Pledgor with the terms of
each such Loan Document (the "Obligations"), each Pledgor hereby pledges,
assigns, grants a security interest in, transfers and delivers unto Pledgee each
of the following (the "Collateral"):
(a) all of such Pledgor's right, title and interest in and to
all shares (the "Pledged Shares") of capital stock described in Schedule I
hereto and the certificates, if any, representing the Pledged Shares, and all
dividends, cash, instruments and other property from time to time received,
receivable or otherwise distributed in respect of or in exchange for any or all
of the Pledged Shares;
(b) all additional shares (the "Additional Shares") of capital
stock at any time or from time to time acquired by such Pledgor in any manner
(including, without limitation, any shares of preferred stock and the
certificates, if any, representing such Additional Shares), and all dividends,
cash, instruments and other property from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or all of such
shares;
<PAGE> 2
(c) all other rights appurtenant to the property described in
clauses (a) and (b) above (including, without limitation, voting rights); and
(d) all cash and noncash proceeds of any and all of the
foregoing.
Certificates representing the Pledged Shares set forth on Schedule I hereto,
accompanied by proper instruments of assignment duly executed in blank by each
Pledgor, are herewith delivered to Pledgee. Promptly upon each Pledgor's
acquisition of any Additional Shares, such Pledgor will (i) deliver proper
instruments of assignment duly executed in blank by such Pledgor together with
any certificates representing such Additional Shares, whereupon such Additional
Shares shall be Pledged Shares; and (ii) amend Schedule I to include such
Additional Shares.
3. Representations and Warranties. Each Pledgor hereby
represents and warrants to Pledgee that as of the date hereof, and agrees that
each delivery of Additional Shares shall constitute a representation and
warranty that as of the date thereof:
(a) Such Pledgor is the sole holder of record and beneficial
owner of the Pledged Shares set forth on Schedule I hereto, free and clear of
any pledge, hypothecation, assignment, lien, charge, claim, security interest,
option, preference, priority or other preferential arrangement of any kind or
nature whatsoever ("Lien") thereon or affecting the title thereto.
(b) The Pledged Shares have been duly authorized and validly
issued by each of the respective issuers set forth in Schedule I, and are fully
paid and non-assessable, and such Pledgor has the right and all requisite
corporate authority to pledge, assign, grant a security interest in, transfer
and deliver the Collateral to Pledgee as provided herein.
(c) This Agreement has been duly authorized, executed and
delivered by such Pledgor and constitutes the legal, valid and binding
obligation of such Pledgor, enforceable in accordance with its terms, subject to
applicable bankruptcy, insolvency and similar laws affecting creditors' rights
generally and subject, as to enforceability, to general principles of equity.
(d) No consent, approval, authorization or other order of any
Person is required for (i) the execution and delivery of this Agreement or the
delivery of the Collateral to Pledgee as provided herein, or (ii) for the
exercise by Pledgee of the voting or other rights provided for in this Agreement
or the remedies in respect of the Collateral pursuant to this Agreement, except
as may be required in connection with the disposition of the Collateral by laws
affecting the offering and sale of securities generally.
(e) The chief executive office of such Pledgor is set forth
opposite its signature below. Such Pledgor has no trade name.
(f) Upon the delivery to Pledgee of the certificates
representing the Pledges Shares, Pledgee will have a valid and perfected first
priority security interest therein subject to no prior Lien.
The representations and warranties set forth in this Section 3
shall survive the execution and delivery of this Agreement.
4. Rights of Pledgors. Unless an Event of Default shall have
occurred and be continuing:
(a) Each Pledgor shall be entitled to exercise any and all
voting and other consensual rights pertaining to the Pledged Shares or any part
thereof for any purpose not inconsistent with the terms of this Agreement or the
Credit Agreement; provided, that such Pledgor shall not exercise or refrain from
exercising such right if, in such Pledgee's judgment, such action could
reasonably be expected to have a material adverse effect on the value of the
Pledged Shares or any part thereof, and provided, further, that such Pledgor
shall give Pledgee at
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<PAGE> 3
least five days' prior written notice of the manner in which it intends to
exercise, or the reasons for refraining from exercising, any such right.
(b) Each Pledgor shall be entitled, from time to time, to
collect and receive for its own use all cash dividends (except cash dividends
paid or payable in respect of the total or partial liquidation of an issuer or
such other distribution in return of capital) paid on the Pledged Shares;
provided, however, that until actually paid, all rights to such dividends shall
remain subject to the Lien of this Agreement. All dividends (other than cash
dividends governed by the immediately preceding sentence) and all other
distributions in respect of any of the Collateral, whenever paid or made, shall
be delivered to Pledgee and held by it subject to the Lien created by this
Agreement.
5. Covenants. Each Pledgor covenants and agrees that until the
termination of this Agreement:
(a) Such Pledgor will not, without the prior written consent
of Pledgee, sell, assign, transfer, mortgage, pledge or otherwise encumber any
of its rights in or to the Collateral or any dividends or other distributions or
payments with respect thereto or grant a Lien on any thereof.
(b) Such Pledgor will, at its own expense, execute,
acknowledge and deliver all such instruments and take all such action as Pledgee
from time to time may reasonably request in order to ensure to Pledgee the
benefits of the first priority Lien on and to the Collateral intended to be
created by this Agreement.
(c) Such Pledgor will defend the title to the Collateral and
the Lien of Pledgee thereon against the claim of any Person claiming against or
through such Pledgor and will maintain and preserve such Lien so long as this
Agreement shall remain in effect.
(d) Unless such Pledgor shall have given Pledgee not less than
30 days' prior notice thereof, such Pledgor will not change (i) its name,
identity or corporate structure in any manner or (ii) the location of its chief
executive office.
6. Remedies.
(a) Upon the occurrence of an Event of Default, then or at any
time during the continuance of such occurrence, Pledgee is hereby authorized and
empowered, at its election, (i) to transfer and register in its or its nominee's
name the whole or any part of the Collateral, (ii) to exercise all voting rights
with respect thereto, (iii) to demand, sue for, collect, receive and give
acquittance for any and all cash dividends or other distributions or monies due
or to become due upon or by virtue thereof, and to settle prosecute or defend
any action or proceeding with respect thereto, (iv) to sell in one or more sales
the whole or any part of the Collateral or otherwise to transfer or assign the
same, applying the proceeds therefrom to the payment of the Obligations in such
order as Pledgee shall determine, and (v) otherwise to act with respect to the
Collateral or the proceeds thereof as though Pledgee were the outright owner
thereof, each Pledgor hereby irrevocably constituting Pledgee as its proxy and
attorney-in-fact, with full power of substitution to do so.
(b) Pledgee shall give each Pledgor not less than ten days'
prior written notice of the time and place of any sale or other intended
disposition of any of the Collateral except any Collateral that is perishable or
threatens to decline speedily in value or is of a type customarily sold on a
recognized market. Such Pledgor agrees that such notice constitutes "reasonable
notification" within the meaning of Section 9-504(3) of the Uniform Commercial
Code. Any sale shall be made at a public or private sale at Pledgee's place of
business, or at any public building in The City of New York to be named in the
notice of sale, either for cash or upon credit or for future delivery at such
price as Pledgee may deem fair, and, to the extent permitted by applicable law,
Pledgee may be the purchaser of the whole or any part of the Collateral so sold
and hold the same thereafter in its own right free from any claim of such
Pledgor or any right or equity of redemption, which right or equity is hereby
waived and released. Each sale shall be made to the highest bidder, but Pledgee
reserves the right to reject any and all bids at such sale which, in its sole
discretion, it shall deem inadequate. Except as otherwise herein specifically
provided for, demands
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<PAGE> 4
of performance, notices of sale, advertisements and the presence of property at
sale are hereby waived and any sale hereunder may be conducted by an auctioneer
or any officer of agent of Pledgee.
(c) If, at the original time or times appointed for the sale
of the whole or any part of the Collateral, either (i) the highest bid, if there
be but one sale, shall be inadequate to discharge in full all the Obligations,
or (ii) if the Collateral be offered for sale in lots, if at any of such sales
the highest bid for the lot offered for sale would indicate to Pledgee in its
sole discretion the unlikelihood of the proceeds of the sales of the whole of
the Collateral being sufficient to discharge all the Obligations, then in either
such event Pledgee may, on one or more occasions, postpone any of said sales by
public announcement at the time of sale. In the event of any such postponement,
Pledgee shall give such Pledgor notice of such postponement.
(d) If, following an Event of Default, Pledgee, in its sole
discretion, determines that it is necessary or advisable to effect a public
registration of all or part of the Collateral pursuant to the Securities Act of
1933, as amended (the "Act"), then each Pledgor shall use its best efforts to
cause the issuer or issuers of the Pledged Shares contemplated to be sold, to
execute and deliver, and cause the directors and officers of such issuer to
execute and deliver, all at such Pledgor's expense, all such instruments and
documents, and to do or cause to be done all such other acts and things as may
be necessary or, in the reasonable judgment of Pledgee, advisable to register
such shares under the provisions of the Act and to cause the registration
statement relating thereto to become effective and to remain effective for a
period of 9 months from the initial effective date thereof, and to make all
amendments thereto or to the related prospectus or both that, in the reasonable
judgment of Pledgee, are necessary or advisable, all in conformity with the
requirements of the Act and the rules and regulations promulgated thereunder.
Such Pledgor agrees to use its best efforts to cause such issuer or issuers to
(i) comply with the provisions of the securities or "Blue Sky" laws of any
jurisdiction designated by Pledgee and (ii) make available to its security
holders, as soon as practicable, an earnings statement that will satisfy the
provisions of Section 11(a) of the Act.
(e) All expenses incurred in complying with Section 6(d),
including, without limitation, all registration and filing fees (including all
expenses incident to filing with the National Association of Securities Dealers,
Inc.), printing expenses, fees and disbursements of counsel for each Pledgor or
for the issuers of the Pledged Shares, the reasonable fees and expenses of
counsel for Pledgee, expenses of any special audits incident to or required by
any such registration and expenses of complying with the securities or blue sky
laws or any jurisdictions, shall be paid by such Pledgor.
(f) If, at any time when Pledgee shall determine to exercise
its right to sell the whole or any part of the Collateral hereunder, such
Collateral or the part thereof to be sold shall not, for any reason whatsoever,
be effectively registered under the Act, Pledgee may, in its sole and absolute
discretion (subject only to applicable requirements of law), sell such
Collateral or part thereof by private sale in such manner and under such
circumstances as Pledgee may deem necessary or advisable, but subject to the
other requirements of this Section 6, and shall not be required to effect such
registration or to cause the same to be effected. Without limiting the
generality of the foregoing, in any such event Pledgee in its sole and absolute
discretion may (a) proceed to make such private sale notwithstanding that a
registration statement for the purpose of registering such Collateral or part
thereof could be or shall have been filed under the Act (or similar statute),
(b) approach and negotiate with a single possible purchaser to effect such sale,
(c) restrict such sale to a purchaser who will represent and agree that such
purchaser is purchasing for its own account, for investment and not with a view
to the distribution or sale of such Collateral or part thereof, and (d) require
that any sale hereunder (including a sale at auction) be conducted subject to
restrictions (i) as to the financial sophistication and ability of any Person
permitted to bid or purchase at sale, (ii) as to the content of legends to be
placed upon any certificates representing the Collateral sold in such sale,
including restrictions on fixture transfer thereof, (iii) as to the
representations required to be made by each Person bidding or purchasing at such
sale relating to that Person's access to financial information about the
relevant Pledgor, any of the issuers of the Pledged Shares or Pledgee, such
Person's intentions as to the holding of the Collateral so sold for investment,
for its own account, and not with a view to the distribution thereof, and (iv)
as to such other matters as Pledgee may, in its sole discretion, deem necessary
or appropriate in order that such sale (notwithstanding any failure so to
register) may be effected in compliance with the Uniform Commercial Code and
other laws affecting the enforcement of creditors' rights and the Act (or
similar statute) and all applicable state securities laws. Each Pledgor
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will execute and deliver such documents and take such other action as Pledgee
deems necessary or advisable in order that any such sale may be made in
compliance with law.
(g) Each Pledgor acknowledges that: (i) any sale under the
circumstances described in this Section 6 shall be deemed to have been held in a
manner which is commercially reasonable, and (ii) notwithstanding the legal
availability of a private sale or a sale subject to restrictions of the
character described above, Pledgee may, in its sole discretion, elect to seek
registration of the Collateral under the Act (or similar statute or any
applicable state securities laws) in accordance with its rights under this
Section 6. In the event of any such sale under the circumstances described in
this Section 6, Pledgee shall incur no responsibility or liability for selling
the whole or any part of the Collateral at a price which Pledgee may deem
reasonable under the circumstances, notwithstanding the possibility that a
substantially higher price might be realized if the sales were deferred until
after registration as aforesaid. Each Pledgor hereby further acknowledges that
any sale of any of the Collateral which has not been registered under the Act
may be for a price less that which might have been obtained had the Collateral
been registered under the Act.
(h) Each Pledgor agrees that it will not at any time plead,
claim or take the benefit of any appraisal, valuation, stay, extension,
moratorium or redemption law now or hereafter in force in order to prevent or
delay the enforcement of this Agreement, or the absolute sale of the whole or
any part of the Collateral or the possession thereof by any purchaser at any
sale hereunder, and each Pledgor waives the benefit of all such laws to the
extent it lawfully may do so. Each Pledgor agrees that it will not interfere
with any right, power and remedy of Pledgee provided for in this Agreement or
now or hereafter existing at law or in equity or by statute or otherwise, or the
exercise or beginning of the exercise by Pledgee of any one or more such rights,
powers or remedies. No failure or delay on the part of Pledgee to exercise any
such right, power or remedy, and no notice or demand which may be given to or
made upon any Pledgor by Pledgee with respect to any such remedies, shall
operate as a waiver thereof, or limit or impair Pledgee's right to take any
action or to exercise any power or remedy hereunder without notice or demand, or
prejudice its rights as against such Pledgor in any respect.
(i) Each Pledgor jointly and severally agrees to indemnify and
hold harmless Pledgee and each Person who controls Pledgee within the meaning of
either the Act or the Securities Exchange Act of 1934, as amended (the "Exchange
Act") against any and all losses, claims, damages or liabilities, joint or
several, to which Pledgee or such Person may become subject under the Act, the
Exchange Act or other Federal or state statutory law or regulation, at common
law or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the registration
statement for the registration of the Collateral as originally filed or in any
amendment thereof, or in any preliminary prospectus or the prospectus, or in any
amendment thereof or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
agrees to reimburse each such indemnified party for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that no
Pledgor will be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon any such untrue statement or
alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to such
Pledgor by or on behalf of Pledgee specifically for use in connection with the
preparation thereof.
7. Exoneration of Pledgee. Other than the exercise of
reasonable care in the custody and preservation of the Collateral, Pledgee shall
have no duty with respect thereto. Pledgee shall be deemed to have exercised
reasonable care in the custody and preservation of the Collateral in its
possession if the Collateral is accorded treatment substantially equal to that
which it accords its own property, and shall not be liable or responsible for
any loss or damage to any of the Collateral, or for any diminution in the value
thereof, by reason of the act or omission of any agent or bailee selected by
Pledgee in good faith.
8. Waiver. No delay on Pledgee's part in exercising any power
of sale or other right hereunder, and no notice or demand which may be given to
or made upon any Pledgor by Pledgee with respect to
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any power of sale or other right hereunder, shall constitute a waiver thereof,
or limit or impair Pledgee's right to take any action or to exercise any power
of sale or any other right hereunder, without notice or demand, or prejudice
Pledgee's rights as against such Pledgor in any respect.
9. Assignment. Neither party may assign its rights under this
agreement, except that in the event of assignment by Pledgee of its rights under
the Credit Agreement in accordance therewith, the party to whom such assignment
is made shall be entitled to Pledgee's rights hereunder.
10. Termination. At such time as (a) all Obligations have been
fully satisfied and no Note is outstanding and (b) the Credit Agreement shall
have been terminated, Pledgee shall deliver to such Pledgor the Collateral at
the time subject to this Agreement and all instruments of assignment executed in
connection therewith, free and clear of the Lien hereof and all of such
Pledgor's obligations hereunder shall thereupon terminate. When so released,
such Collateral shall be free and clear of any lien or encumbrance hereunder.
11. Release. Each Pledgor consents and agrees that Pledgee may
at any time, or from time to time, in Pledgee's sole discretion, exchange,
release and/or surrender all or any of the Collateral, or any part(s) thereof,
by whomever deposited, which is now or may hereafter be held by Pledgee in
connection with all or any of the Obligations; all in such manner and upon such
terms as Pledgee may deem proper, and without notice to or further assent from
such Pledgor, it being hereby agreed that such Pledgor shall be and remain bound
by this Agreement, irrespective of the existence, value or condition of any
collateral and notwithstanding (i) any such exchange, release and/or surrender
and/or (ii) any settlement, compromise, surrender, release, renewal or extension
of any or all of the Obligations, and/or (iii) that the Obligations may at any
time or from time to time exceed the aggregate principal amount outstanding
pursuant to the Credit Agreement.
12. Expenses. Each Pledgor jointly and severally agrees to
reimburse Pledgee for all expenses (including reasonable expenses for legal
services of every kind) of, or incidental to the preparation or enforcement of
any of the provisions of, this Agreement or any actual or attempted sale, or any
exchange, enforcement, collection, compromise or settlement of any of the
Collateral and for the care of the Collateral and defending or asserting the
rights and claims of Pledgee in respect of the Collateral, by litigation or
otherwise, including but not limited to expenses of insurance and the fees and
expenses of counsel for Pledgee. All such expenses shall be deemed additional
Obligations.
13. Miscellaneous.
(a) Pledgee may execute any of its duties hereunder by or
through agents or employees. Pledgee may consult with legal counsel and any
action taken or suffered in good faith in accordance with the advice of such
counsel shall be fall justification and protection to it.
(b) Neither Pledgee nor any of its officers, directors,
employees, agents or counsel shall be liable for any action lawfully taken or
omitted to be taken by it or them hereunder or in connection herewith, except
for their own gross negligence or willful misconduct and Pledgee shall not be
liable for any error of judgment made by it in good faith.
(c) This Agreement shall be binding upon each Pledgor and its
successors and assigns, and shall inure to the benefit of, and be enforceable
by, Pledgee and its successors, transferees and assigns. None of the terms or
provisions of this Agreement may be waived, altered, modified or amended except
in writing duly signed for and on behalf of Pledgee and each Pledgor directly
affected thereby.
(d) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE.
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<PAGE> 7
(e) Each Pledgor hereby consents to the jurisdiction of any
state or federal court located within New York County, New York, and waives
personal service or any and all process upon such Pledgor, and consents that all
such service of process be made by registered mail directed to such Pledgor at
the address stated in section 15 hereof and service so made shall be deemed to
be completed five (5) Business Days after the same shall have been deposited in
the United States mails, postage prepaid.
To the extent permitted by law, each Pledgor waives trial by jury and waives any
objection to venue of any action instituted hereunder.
14. Further Assurances, Pledgee May Perform.
(a) At each Pledgor's expense, such Pledgor will do all such
acts, and will furnish to Pledgee all such financing statements, certificates,
legal opinions and other documents and will do or cause to be done all such
other things as Pledgee may reasonably request from time to time in order to
give full effect to this Agreement and to secure the rights intended to be
granted to Pledgee hereunder. To the extent permitted by applicable law, each
Pledgor hereby authorizes Pledgee to execute and file, in the name of such
Pledgor or otherwise, Uniform Commercial Code financing statements (which may be
photocopies of this Agreement) which Pledgee in its sole discretion may deem
necessary or appropriate.
(b) If any Pledgor fails to perform any act required by this
Agreement, Pledgee may perform, or cause performance of, such act, and the
expenses of Pledgee incurred in connection therewith shall be governed by
Section 12 hereof.
15. Notices. Except as otherwise provided herein, any notice
required hereunder shall be in writing, and shall be deemed to have been validly
served, given or delivered upon receipt after transmittal by hand or by Federal
Express or similar service, or five business days after deposit in the United
States mails, registered first class mail, with proper postage prepaid, and
addressed to the party to be notified at the following addresses (or such other
address as such party shall designate in a notice delivered to the other party
hereunder):
(a) If to Pledgee, at
AP LOM LLC
c/o Apollo Real Estate Advisors, L.P.
1301 Avenue of the Americas
38th Floor
New York, New York 10019
Attention: Alfred Trivilino
with copies to:
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Attention: Les Loffman, Esq.
(b) If to any Pledgor, at its address set forth opposite its
signature below.
Failure to comply with the provisions set forth above with
respect to the delivery of copies shall not impair the validity of any notice
otherwise complying with the terms hereof.
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<PAGE> 8
16. Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall not invalidate the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
17. Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed and delivered shall be an
original, but all of which shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the date first above written.
AP LOM LLC, as Pledgee
By: AP GP LOM LLC, its Managing Member
By Kronus Property, Inc.
By: /s/ Alfred Trivilino
------------------------------------
Title: Authorized Representative
Address: NEXTHEALTH, INC.
16600 N. Lago del Oro Parkway
Tucson, Arizona 85739
Attention: President By: /s/ William T. O'Donnell, Jr.
------------------------------------
Title: Authorized Representative
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SCHEDULE I
PLEDGED SHARES
<TABLE>
<CAPTION>
ISSUER TYPE OF SHARES NO. OF SHARES CERTIFICATE PERCENT OF
NUMBER ISSUE
<S> <C>
1. Sierra Tuscon, Inc. 100%
2. Sierra Tuscon AC, Inc. 100%
3. Sierra Tuscon Educational
Materials (S.T.E.M.), Inc. 100%
4. Sierra Healthstyles, Inc. 100%
5. Onsite Workshops, Inc. 100%
6. Nexthealth Water
Resources, Inc. 100%
7. Soften Realty, L.L.C.
</TABLE>
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