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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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 May 1, 1996, there were 8,554,938 shares of the registrant's Common Stock
outstanding.
Reference is made to the listing beginning on page 15 of all exhibits filed as a
part of this report.
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NEXTHEALTH, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION> Page
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1996 (unaudited) and December
31, 1995.................................................................. 3
Unaudited Consolidated Statements of Operations for the three months ended
March 31, 1996 and 1995................................................... 4
Unaudited Consolidated Statements of Cash Flows for the three months ended
March 31, 1996 and 1995 .................................................. 5
Unaudited Consolidated Statements of Changes in Stockholder's Equity for the
three months ended March 31, 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 ............................................................. 15
Item 6. Exhibits and Reports on Form 8-K .............................................. 15
Signatures ............................................................................... 16
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000s, except share and per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents ........................................ $ 266 $ 2,864
Short-term investments ...................................... -- 1,635
Accounts receivable, less allowance for doubtful accounts
of $367 and $431, respectively ........................... 826 1,340
Prepaid expenses ............................................ 483 476
Other current assets ........................................ 756 478
------- -------
Total current assets ..................................... 2,331 6,793
Property and equipment, net ..................................... 41,323 40,158
Long-term receivables, less allowance for doubtful accounts
of $63 and $70, respectively ............................... 188 211
Intangible assets, less amortization of $52 and $33, respectively 741 704
Other assets .................................................... 324 76
------- -------
Total assets ............................................. $44,907 $47,942
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade ..................................... $ 2,441 $ 2,410
Accounts payable and accrued expenses, construction ......... 1,343 4,517
Accrued expenses and other liabilities ...................... 4,029 3,452
------- -------
Total current liabilities ................................ 7,813 10,379
Long-term debt and financing obligation ....................... 3,352 985
------- -------
Total liabilities ........................................ 11,165 11,364
------- -------
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 March 31, 1996
and December 31, 1995 ..................................... 86 86
Additional paid-in capital .................................. 43,453 43,453
Accumulated deficit ......................................... (9,797) (6,961)
------- -------
Total stockholders' equity ............................... 33,742 36,578
------- -------
Total liabilities and stockholders' equity ............... $44,907 $47,942
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000s, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1996 1995
---- ----
<S> <C> <C>
Revenue:
Net operating revenue ............. $ 4,501 $ 3,268
Investment income ................. 24 338
Other revenue ..................... 102 328
---------- ----------
Total net revenue ........... 4,627 3,934
---------- ----------
Operating Expenses:
Salaries and related benefits...... 3,789 1,952
General and administrative ........ 2,957 1,976
Interest expense .................. 65 28
Depreciation and amortization 652 387
---------- ----------
Total operating expenses..... 7,463 4,343
---------- ----------
Loss before income taxes ............. ( 2,836) (409)
Income tax provision (benefit) ....... - -
---------- ----------
Net loss ............................. $ ( 2,836) $ (409)
========== ==========
Weighted average shares of common
stock outstanding ................. 8,554,938 8,540,217
========== ==========
Net loss per share of common stock.... $ ( .33) $ (.05)
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ..................................... $ (2,836) $ (409)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation and amortization .......... 652 387
Provision (benefit) for bad debts ...... (110) 72
Changes in operating assets and liabilities
net of effects from acquisitions:
Decrease (increase) in assets:
Accounts receivable .................... 662 1,640
Other assets ........................... (169) (139)
Income taxes receivable ................ -- (32)
Increase (decrease) in liabilities:
Accounts payable, accrued expenses
and other liabilities ................ (833) (227)
-------- -------
Net cash provided by (used in) operating
activities .................................. (2,634) 1,292
-------- -------
Cash flows from investing activities:
Purchase of property and equipment ........ (1,483) (165)
Business acquisitions, net of cash
acquired ............................. (88) (66)
Sale of long-term investments ............. -- 140
Purchase of long-term investments ......... -- (1,000)
-------- -------
Net cash used in investing activities .......... (1,571) (1,091)
-------- -------
Cash flows from financing activities:
Proceeds from long-term borrowings ........ 15 --
Reduction of long-term borrowings and
financing obligation ................. (43) (72)
-------- -------
Net cash used in financing activities .......... (28) (72)
-------- -------
Net increase (decrease) in cash and
equivalents .......................... (4,233) 129
Cash and equivalents at beginning of period .... 4,499 11,741
-------- -------
Cash and equivalents at end of period .......... $ 266 $11,870
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
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NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(000s, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Total
---------------- 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 $(6,961) $36,578
Net loss for the three months
ended March 31, 1996......... - - - (2,836) (2,836)
--- --------- ------- ------- --------
Balance at March 31, 1996...... $86 8,554,938 $43,453 $(9,797) $33,742
=== ========= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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NEXTHEALTH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(000s)
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. 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.
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 March
31, 1996 and for the three-month periods ended March 31, 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-month
period ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1996.
NOTE 3 - ACQUISITIONS
Effective March 1, 1996, the Company acquired the operating assets and
liabilities of HHHI located at The Cottages in Shipyard Plantation, Hilton
Head, South Carolina. HHHI is a provider of clinically-proven weight management
programs as well as fitness, nutrition, stress management and other lifestyle
change programs. The cost of the acquisition, which was accounted for as a
purchase, was not material to the Company's financial position, results of
operations and cash flows at March 31, 1996 or for the three-month period then
ended. In addition, the Company agreed to purchase certain real property
from the former owner of HHHI at a price equal to fair market value which is
estimated to be approximately $1,500 to $2,000. The Company will lease this
real property until such purchase occurs.
NOTE 4 - SUBSEQUENT EVENTS
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 has 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 is 9.25%,
payable in monthly installments. The LOC is secured by certain real estate owned
by the Company. Through May 15, 1996, the Company has utilized approximately
$1.8 million of the LOC for payments on existing trade and construction
payables.
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NEXTHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(000s)
On April 10, 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 represents the remaining balance due Sundt 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 March 31, 1996, as a result of
the agreement negotiated with Sundt, the long-term portion of this obligation
has been classified as long-term debt.
NOTE 5 - RECLASSIFICATIONS
Certain prior period amounts in the unaudited consolidated financial statements
have been reclassified to conform to the presentation used in 1996.
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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-month period ended March 31, 1996. 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 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, 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 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 acquired in
March 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. The Company is also seeking additional opportunities to increase
market share for its existing Treatment segment. For the three-month period
ended March 31, 1996, the Treatment segment accounted for approximately 67% all
of the Company's operating revenues and approximately 36% of operating expenses
while the Health and Leisure segment accounted for approximately 33% of the
Company's operating revenue and approximately 51% 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.
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RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED MARCH 31, 1996 COMPARED TO THREE-MONTH PERIOD ENDED
MARCH 31, 1995
The significant changes in results of operations and net cash provided by (used
in) operating activities for the three-month period ended March 31, 1996,
compared to the same period in 1995 are discussed below.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------------------
1996 1995 % Change
------- ------ --------
<S> <C> <C> <C>
FINANCIAL RESULTS: (000s, except per share amounts)
Total net revenue ....................................... $ 4,627 $3,934 17.6
Total operating expenses ................................ 7,463 4,343 71.8
Net loss ................................................ (2,836) (409) 593.4
Net loss per share of common stock ...................... (.33) (.05) 560.0
Net cash provided by (used in) operating activities...... (2,634) 1,292 -
OPERATING DATA:
Patient days - STI ...................................... 4,146 4,609 (10.0)
Average daily census - STI .............................. 46 51 (10.0)
Participant days - Onsite ............................... 1,892 1,882 0.0
Average daily census - Onsite ........................... 21 21 0.0
Participant days - HHHI (1) ............................. 1,127 - -
Average daily census - HHHI (1).......................... 36 - -
Guest days - Miraval (2)................................. 4,022 - -
Average daily guest count - Miraval (2).................. 44 - -
</TABLE>
(1) HHHI was acquired effective March 1, 1996. The operating data disclosed for
HHHI is for the period from March 1, 1996 to March 31, 1996.
(2) Miraval commenced operations in December 1995.
For the three-month period ended March 31, 1996, loss before income tax benefit
and net loss increased $2.4 million to $2.8 million and net cash provided by
operating activities decreased $3.9 million resulting in net cash used in
operating activities of $2.6 million compared to the same period in 1995.
Excluding the operating results from the Company's Health & Leisure segment and
investment income related to cash and investments used to finance the
construction of Miraval, the Company's net loss was $530,000, or $.06 per share
compared to a net loss of $750,000, or $.09 per share for the same period in
1995.
Total net revenue increased $700,000 to $4.6 million, an increase of 18% 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 decreases in
revenue at STI as a result of a 10% decrease in the average daily census ("ADC")
when compared to the same period in 1995 and a decrease in investment income
attributable to the use of cash and investments for the development of Miraval.
Salaries and related benefits increased $1.8 million to $3.8 million, an
increase of 94% when compared to the same period in 1995. The increase was due
to staffing requirements related to the commencement of operations at Miraval,
the acquisition of HHHI and additional salaries at the parent company incurred
to direct the ongoing operations and future growth of the Company.
General and administrative expense increased $1.0 million to $3.0 million, an
increase of 50% when compared to the same period in 1995. The increase was due
to advertising and operational costs related to the commencement of operations
at Miraval, and costs related to the promotion and operations of existing
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lines of business. This increase was partially offset by a decrease in the
provision for bad debts to reflect STI's current collection experience.
The Company recognized a pre-tax loss of $2.8 million for the three-month
period ended March 31, 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,
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-month period ended March 31, 1996.
For the three-month period ended March 31, 1996 the Company had capital
expenditures of approximately $1.6 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. At March 31, 1996, the Company's cash
and investments were $266,000.
The Treatment segment's operational results for the three-month period ended
March 31, 1996 reflect the segment's focus on attracting a high percentage of
retail patients. During this period, 58% of patient revenue was derived from
retail payments and the remaining 42% 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. Onsite derives
its revenues almost entirely from retail payments by participants. 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 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 30% through March 31, 1996 of which 73% were
paying guests and 27% 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. The Company believes it
has adequate assets available for securing the short-term capital necessary
until such time that Miraval is self sufficient and for securing long-term
capital commitments to meet future liquidity needs and to fund additional
growth opportunities.
To meet its current liquidity requirements, the Company obtained a $2.0 million
line of credit (the "LOC") from the National Bank of Arizona on April 10, 1996
for a term of six months. The LOC has 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 is 9.25%, payable in monthly installments.
The LOC is secured by certain real estate owned by the Company. Through May 15,
1996, the Company has utilized approximately $1.8 million of the LOC for
payments on existing trade and construction payables. In addition, the Company
negotiated an agreement with Sundt Corporation ("Sundt"), the general contractor
of the Miraval project, for the payment of approximately $3.7 million, which
represents the remaining balance due Sundt 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 $300,000 payment
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at the closing of the LOC and will receive payments of $125,000 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 $5.0
million. Additionally, as part of this agreement, if the Company were to obtain
secured borrowings in excess of $5.0 million or unsecured borrowings in excess
of $3.0 million, the unpaid balance due Sundt would immediately become due. The
Company is actively exploring additional financing alternatives which it
believes will be adequate to maintain operations through 1996.
Effective March 1, 1996, the Company acquired certain operating assets
and liabilities from HHHI. The acquisition price was not material to the
Company's financial position, results of operations and cash flows at March 31,
1996 or for the three-month period then ended. In addition, the Company has
agreed to purchase certain real property from the former owner of HHHI at a
price equal to fair market value which is estimated to be approximately $1.5
million to $2.0 million. The Company will lease this real property until the
purchase closes. The Company does not expect HHHI to require significant
capital resources in 1996. However, HHHI will require approximately $150,000 in
capital, of which $125,000 has been funded, for the retirement of certain
outstanding obligations which were assumed by the Company as part of the
acquisition.
To satisfy the Company's operational 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 1996, the Treatment segment is projected to contribute significantly to the
net income and cash flow of the Company. In order to meet this goal, management
has implemented marketing initiatives focusing on increasing the ADC for STI's
and Onsite's programs. Additionally, a 5% rate increase was implemented by STI
on March 1, 1996. To ensure that cash receipts continue to follow historical
trends, STI will continue to focus on the retail segment and will enhance
existing utilization review procedures to improve reimbursement through third
party payors.
In 1995, cost containment efforts were an important factor in the Treatment
segment's results of operations, and as a result, these efforts will continue in
1996. In order to reduce the cost per patient and participant day, the segment
will focus on managing labor and labor related costs. This will be effected
through the increased use of variable staffing which expands or contracts as
determined by the ADC, the combination of certain positions and functions and
the reduction or elimination of the use of consultants and contract labor. In
addition, STI and Onsite are developing long-range plans for assessing the
feasibility of changing certain components of their fixed cost structures.
Miraval commenced operations in December, 1995. As an early entrant into this
emerging market niche, there are no industry-specific financial benchmarks from
which the Company can draw conclusions for projecting future performance.
Management's objective is to increase short- and long-term occupancy. In order
to achieve this objective, Miraval will continue to implement marketing
initiatives aimed primarily at upscale consumers predisposed to similar types of
vacation experiences through travel/trade sources, news media, direct mail
initiatives and with other entities and individuals in positions to influence
consumers' vacation decisions. In addition, the implementation of cost
containment measures in 1996 will be a critical factor in the Company's efforts
to establish positive operating results. This will be effected through the
increased use of variable staffing relative to any seasonal fluctuations in
occupancy and the evaluation of all other operating expenditures in an effort to
identify areas where efficiencies can be realized.
The Company continually monitors the economic performance of each operating
entity to see that it meets desired cash flow objectives. If an operating entity
is not generating the expected cash flows or does not fit
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with the Company's long-term strategic plans, the Company will explore various
options such as consolidation of operations, closing the operating entity or
outright sale. The Company expects each operating entity to meet cash flow
objectives in 1996. However, should conditions change, the Company will
reevaluate its position and take the appropriate corrective action.
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 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 represents the Company's entry into a unique niche in an 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 can not be certain that its current
marketing strategy will successfully attract the targeted clientele.
The Company can not be certain that Miraval will generate sufficient revenues to
cover its operating expenses. Management believes that if the existing capital
resources of the Company are insufficient to meet its capital needs, additional
capital may be available through short and long-term financing; however, the
Company can not 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.
Miraval offers a variety of indoor and outdoor athletic and other physical
activities for its guests. Because of its lack of operating history, the Company
can not predict what impact the summer climate in Tucson, Arizona, will have on
its occupancy levels and pricing structures.
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.
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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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.60 Note Payable between NextHealth, Inc. and Sundt Corporation
dated April 10, 1996 (without exhibits).
10.61 Asset Purchase Agreement by and among NextHealth, Inc. and
Hilton Head Health Institute, Inc. dated February 29, 1996
(without exhibits).
(b) Reports on Form 8-K
NONE
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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: May 14, 1996 BY: /s/ John H. Schmitz
---------------------
JOHN H. SCHMITZ
President and Chief Executive Officer
DATE: May 14, 1996
BY: /s/ Wayne M. Morrison
-----------------------
WAYNE M. MORRISON
Chief Financial Officer
(Principal Financial and Accounting Officer)
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<PAGE> 1
Exhibit 10.60
AGREEMENT
This Agreement is made and entered into this 3rd day of April, 1996 by
and between Sundt Corp., an Arizona corporation ("Sundt"), 4101 E. Irvington
Road, Tucson, Arizona 85714, and NextHealth, Inc., a Delaware corporation,
formerly known as Sierra Tucson Companies, Inc., located at 16600 N. Lago Del
Oro Parkway, Tucson, Arizona 85739 and its subsidiaries Sierra Healthstyles,
Inc., an Arizona corporation doing business as Miraval, and Sierra Tucson,
Inc., an Arizona corporation, all such other corporations located at 16500 N.
Lago Del Oro Parkway, Tucson, Arizona 85739, (collectively
"NextHealth/Sierra").
RECITALS
A. Sundt and NextHealth/Sierra entered into AIA Document A121/Cmc and
AGC Document 565, Standard Form of Agreement Between Owner and Construction
Manager dated May 24, 1995 ("Construction Agreement") for the construction of
Miraval ("Project") which provides in part in Articles 5 and 6 thereof for
payment of compensation\fee and cost of the work to Sundt;
B. NextHealth/Sierra disagrees with Sundt as to the "final unpaid
balance" due and to be paid to Sundt pursuant to the Construction Agreement and
commencing November 1995 failed to make full progress payments to Sundt of
Sundt billings to NextHealth/Sierra;
C. Sundt subcontracted portions of the Project to more than twenty six
subcontractors, three of whom recorded liens against the Project real property
located in Pima County, Arizona after NextHealth/Sierra failed to fully pay
progress payments on billings received from Sundt, and Sundt has similarly
recorded on March 28, 1996 in Docket 10261 at Page 1723 et seq. its master
Mechanics' Lien in Pima County, Arizona against the Project real property as
described in said master Mechanics' Lien, to secure payment to Sundt of the
final unpaid balance disputed by NextHealth/Sierra;
D. NextHealth/Sierra wishes to secure an interim/bridge loan from an
interim/bridge lender to be secured by the Project real property in first
position to Sundt's Mechanics' Lien for funding of operating expenses and
payment to Sundt of the agreed unpaid balance over a period of eighteen months
with Sundt subordinating its master Mechanics' Lien only to the first lien of
the interim/bridge lender upon the terms and conditions set forth hereafter;
E. Sundt and NextHealth/Sierra wish to agree on the final unpaid
balance owed to Sundt under the Construction Agreement, the payment terms of
the final unpaid balance and Sundt is willing to subordinate its first priority
Mechanics' Lien to the superior position of interim/bridge lender, only upon
the terms and conditions set forth herein.
In view of the foregoing Recitals, and in consideration of the
covenants hereinafter set forth, the parties agree as follows:
1. The final unpaid balance owed by NextHealth/Sierra to Sundt as of
the date of this Agreement is Three Million Seven Hundred Twenty Four Thousand
One Hundred Sixty Eight Dollars ($3,724,168.00), plus interest thereon until
paid at the rate per annum equal to four percent (4%) above the Prime Rate (as
hereinafter defined) of interest as it is established from time to time, said
interest to be compounded annually. The term Prime Rate is defined as the
interest rate established from time to time by Bank One, N.A., a national
banking association (the "Bank") by public announcement or by directive to its
lending divisions as the basis for interest charged by the Bank on business and
commercial loans (the "Prime Rate").
2. The foregoing agreed final unpaid balance is not subject to further
dispute and in the event of the failure of NextHealth/Sierra to pay such final
unpaid balance according to the terms set forth hereafter, Sundt may, at its
sole option, file suit to foreclose its Mechanics' Lien and in the event such
suit is filed, the parties agree the sole issues to be decided by the Superior
Court are the amount of payments, if any, received by Sundt from
NextHealth/Sierra after the date of this Agreement which are applicable to the
agreed final unpaid balance, the computation of interest thereon from time to
time and its application, thereby resulting in the calculation of the principal
unpaid balance then due Sundt and entry of judgment thereon foreclosing the
Mechanics' Lien.
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3. NextHealth/Sierra represents and warrants that it has not and will
not assign the Construction Agreement or any rights thereto without the prior
written consent of Sundt, further agreeing that all warranty provisions
contained therein are limited solely to NextHealth/Sierra and are not subject
to assignment in any way.
4. Sundt agrees to subordinate the priority of its Mechanics' Lien
solely to the new first position of a mortgage or deed of trust in favor of an
interim/bridge lender to NextHealth/Sierra of a sum not to exceed Five Million
Dollars ($5,000,000.00), bearing interest not to exceed fifteen percent (15%)
per annum compounded annually, due and payable in full no later than twenty
four (24) months after closing of the interim/bridge loan, provided however,
that such interim/bridge loan is closed within thirty (30) days from the date
of this Agreement and the interim/bridge lender agrees to subordination terms
reasonably acceptable to Sundt not exceeding the limitations set forth above.
5. So long as NextHealth/Sierra is not in default in the performance
of any of its obligations under this Agreement including but not limited to the
payment of the agreed final unpaid balance in the manner set forth hereafter,
Sundt shall not file suit to foreclose its Mechanics' Lien, provided further
however, that upon the passage of five (5) months and fourteen (14) days after
March 28, 1996, Sundt may in any event, file suit to foreclose its Mechanics'
Lien in Pima County Superior Court in order to avoid the running of any statute
of limitations notwithstanding the fact that NextHealth/Sierra is not in
default in performance of any of the terms and conditions of this Agreement or
in payment of the agreed final unpaid balance due Sundt as set forth hereafter.
If Sundt does file suit after the expiration of five (5) months and fourteen
(14) days following March 28, 1996 and NextHealth/Sierra is not in default in
the performance of any of the terms of this Agreement or payment of the agreed
unpaid balance, Sundt shall request an order from the Superior Court continuing
any further action in such litigation until default by NextHealth/Sierra in its
performance of the terms of this Agreement or in failing to pay Sundt according
to the terms set forth hereafter. Should the Superior Court refuse to issue
such order, Sundt shall proceed to obtain judgment of the final unpaid balance
then due Sundt pursuant to the terms of this Agreement and so long as
NextHealth/Sierra is not in default in performing the terms of this Agreement
or in payment of the remaining balance due Sundt according to the terms set
forth hereafter, Sundt shall refrain from executing on such judgment.
6. In the event NextHealth/Sierra successfully negotiates its
interim/bridge loan within the time for closing and within the limitations set
forth in paragraph 4 above and advises Sundt of its desire to have Sundt's
master Mechanics' Lien subordinated to the interim/bridge loan, Sundt shall
execute a subordination agreement upon such terms reasonably acceptable to it
and interim/bridge lender so long as such subordination is second in priority
only to the first lien of the interim/bridge lender, that the terms of the
interim/bridge loan do not exceed the terms set forth in paragraph 4 above and
upon the further condition that Sundt receive at no cost at time of closing a
Litigation Guarantee on Fidelity National Title Company Form T-98(Rev.5-3-73)
as further revised to the mutual satisfaction of Sundt and the issuing title
company, insuring Sundt's master Mechanics' Lien second in priority only to the
first lien of interim/bridge lender against the Project real property, the
amount of such policy in favor of Sundt to be no less than the final unpaid
balance due Sundt at time of such interim/bridge loan closing.
7. In the event such interim/bridge loan closes within thirty (30)
days from the date of this Agreement, Sundt shall be paid at closing from such
interim/bridge loan proceeds the sum of Five Hundred Thousand Dollars
($500,000.00) or in the event such interim/bridge loan is in a sum less than
Five Million Dollars ($5,000,000.00) but at least Two Million Dollars
($2,000,000.00), then Sundt shall be paid at closing from such interim/bridge
loan proceeds a sum of not less than the greater of ten percent (10%) of such
principal loan or Three Hundred Thousand Dollars ($300,000.00) of such
interim/bridge loan and thereafter shall receive on the same day of each month
thereafter from NextHealth/Sierra for a period of eleven (11) months, the sum
of not less than One Hundred Twenty Five Thousand Dollars ($125,000.00) each
month. Commencing with the same day on the twelfth month, Sundt shall be paid
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<PAGE> 3
by NextHealth/Sierra one-sixth of the principal plus accrued and accruing
interest balance then remaining unpaid on the agreed final unpaid principal and
interest balance and a like sum on the same day of each and every month
thereafter until the agreed final balance of principal and interest to Sundt
has been paid in full. Should NextHealth/Sierra through its interim/bridge
lender at time of closing such loan, or otherwise as the case may be, fail to
timely make each of the foregoing payments when due, NextHealth/Sierra shall be
in breach of the terms of this Agreement and Sundt may immediately or
thereafter at its option, file suit to foreclose its Mechanics' Lien or if it
has already filed such suit, may proceed to judgment on such suit, or if it has
obtained a judgment, may execute upon the judgment. NextHealth/Sierra may
prepay in full at any time the then unpaid principal plus accrued interest to
date of payment without any penalty. All payments shall be credited first to
accrued interest to date of payment and then to principal.
8. Any failure by NextHealth/Sierra to perform each and every term of
its agreement with its interim/bridge lender resulting in a breach thereof
shall constitute a like breach of this Agreement and any unpaid principal and
accrued interest balance remaining owed to Sundt pursuant to this Agreement
shall become immediately due and payable together with accruing interest
thereon, court costs and Sundt's reasonable attorneys' fees as awarded by the
Superior Court pursuant to the Arizona State statute.
9. NextHealth/Sierra by its execution hereof does hereby release and
discharge Sundt from any and all claims of every kind and nature arising out of
Sundt's performance of its obligations under the Construction Agreement except
as to warranty obligations, if any there be, including but not limited to
release and discharge of any and all claims relating to all matters set forth
in:
+ January 4, 1996 two page letter with one page attachment from Ken
Whitaker to Robert Musser;
+ February 15, 1996 one page memorandum from Ken Whitaker to Bob Musser;
+ February 29, 1996 one page fax from Ken Whitaker to Bob Musser;
+ March 4, 1996 one page fax from Ken Whitaker to Bob Musser; and
+ March 8, 1996 six page letter from Kenneth J. Whitaker to Robert Musser.
10. Sundt by its execution hereof does hereby release and discharge
NextHealth/Sierra from any and all claims of every kind and nature arising out
of NextHealth/Sierra's performance of its obligations under the Construction
Agreement, save and except all payment obligations arising therefrom and lien
rights incident to the performance of the Work by Sundt giving rise to its
Mechanics' Lien, priority and payment thereof and rights against
NextHealth/Sierra, its architect and agents arising out of or in any way
relating to the design of the Project and preparation of the plans and
specifications therefor giving rise to claims for damage to property or injury
or death to persons.
11. NextHealth/Sierra represents to Sundt that the Project real property
description attached to Sundt's Mechanics' Lien is a true and correct
description of the real property upon which Sundt performed the work required
by the Construction Agreement and that such real property is free of any
encumbrances or liens of any kind or nature except that of Sundt's Mechanics'
Lien. NextHealth/Sierra acknowledges the validity of Sundt's Mechanics' Lien,
that it is not defective in any way including but not limited to service
thereof and that there are no valid defenses to be asserted against such
Mechanics' Lien. Sundt agrees to give NextHealth/Sierra credit between the
difference between the amount of such Mechanics' Lien and the final unpaid
balance set forth in paragraph 1 above so as to achieve the final unpaid
balance agreement set forth in paragraph 1 above.
12. In consideration of the foregoing, Recitals, representations,
acknowledgments, covenants, and agreements of NextHealth/Sierra, Sundt will
defend, indemnify and hold NextHealth/Sierra harmless from any and all claims,
demands, debts and all costs and expenses (including reasonable attorneys'
fees) relating to or in any way arising out of the furnishing of materials or
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<PAGE> 4
performance of work by Sundt's subcontractors, their sub-subcontractors and
suppliers of any tier relating to the performance of the Construction
Agreement, provided however that nothing contained herein shall be construed so
as to apply to the filing of suit by Sundt to foreclose its Mechanics' Lien and
foreclosure thereof or to exercise any right or remedy granted to Sundt by this
Agreement.
13. In the event NextHealth/Sierra amends its interim/bridge loan to
increase the principal amount to exceed Five Million Dollars ($5,000,000.00) or
increase the interest rate to exceed fifteen percent (15%) per annum compounded
annually or extend the maturity date beyond twenty four (24) months after the
closing of the initial interim/bridge loan, or pays off such interim/bridge
loan or obtains an unsecured line of credit in excess of Three Million Dollars
($3,000,000.00), NextHealth/Sierra shall simultaneously pay off the then
balance of the final unpaid balance (principal plus accrued interest) then owed
to Sundt pursuant to this Agreement and upon receipt of such payment, Sundt
shall release its Mechanics' Lien, dismiss any litigation then pending, if any,
or file its satisfaction of judgment, if any then be obtained. Should
NextHealth/Sierra amend its initial interim/bridge loan once or obtain an
additional loan to be secured by the first mortgage, and the amendment terms or
the aggregate terms of the original interim/bridge loan and additional loan do
not exceed the principal, interest percent and maturity from date of closing
allowed for the initial interim/bridge loan as set forth in above paragraph 4,
and NextHealth/Sierra advises Sundt of its desire to have Sundt's subordination
amended to include the amended interim/bridge loan or additional aggregated
loan, then upon the payment to Sundt at time of closing of the amended initial
loan or the additional loan, of an amount from closing equal to the difference
between what Sundt actually received at time of closing of the initial
interim/bridge loan and what Sundt would have been entitled to receive pursuant
to above paragraph 6 had such amended interim/bridge loan or additional loan
aggregate balance been the balance of the initial interim/bridge loan, Sundt
shall execute an amended subordination agreement only upon the same terms and
conditions set forth in above paragraph 6, applying such terms to the amended
initial loan or the additional loan.
14. The invalidity of any one or more covenants, phrases, clauses,
sentences or paragraphs of this Agreement shall not affect the remaining
portions of this Agreement, or any part thereof, and in case of any such
invalidity this Agreement shall be construed as if such invalid covenants,
phrases, clauses, sentences or paragraphs had not been inserted. Neither Sundt
nor NextHealth/Sierra may assign this Agreement to any other person or entity
without the prior written consent of the non-assigning party hereto.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the day and year first above written.
SUNDT
Sundt Corp.
By: /S/SIGNATURE
Its:
NEXTHEALTH/SIERRA
NextHealth, Inc., formerly known as
Sierra Tucson Companies, Inc.
By: /S/SIGNATURE
Its:
Sierra Healthstyles, Inc., doing
business as Miraval
By: /S/SIGNATURE
Its:
Sierra Tucson, Inc.
By: /S/SIGNATURE
Its:
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Exhibit 10.61
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT, dated as of February 29, 1996, by and among
The NextHealth Institute, Inc., an Arizona corporation ("Purchaser"), and
Hilton Head Health Institute, Inc. ("HHHI"), and certain individuals who are
the sole shareholders of HHHI, Dr. Peter and Gabrielle Miller ("the Millers")
(HHHI and the Millers collectively the "Seller").
WITNESSETH:
WHEREAS, HHHI is engaged in the business of providing professional,
scientifically based programs of weight control, fitness, smoking cessation and
stress management (the "Business");
WHEREAS, the Millers own certain real property which is leased to HHHI for use
in the Business;
WHEREAS, Seller desires to sell to the Purchaser, and the Purchaser desires to
purchase from HHHI, the Business, including, without limitation, all right,
title and interest of HHHI in and to certain properties and assets of the
Business, and in connection therewith the Purchaser is willing to assume
certain liabilities of HHHI relating thereto, all upon the terms and subject to
the conditions set forth herein; and
WHEREAS, the Millers desire HHHI to sell the Business and certain real property
used in the Business to the Purchaser.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements and covenants hereinafter set forth, the Purchaser, HHHI and the
Millers hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01 Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings:
"Acquisition Documents" means this Agreement, the Ancillary Agreements,
the Closing Date Balance Sheet, the Financial Statements and any certificate,
report or other document delivered pursuant to this Agreement, the Ancillary
Agreements or the transactions contemplated hereby or thereby.
"Action" means any claim, action, suit, arbitration, inquiry,
proceeding or investigation by or before any Governmental Authority.
NOTE: THIS AGREEMENT IS SUBJECT TO ARBITRATION IN ACCORDANCE WITH THE
SOUTH CAROLINA UNIFORM ARBITRATION ACT
"Affiliate" means, with respect to any specified Person, any other
Person that directly, or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with, such specified
Person.
"Agreement" or "this Agreement" means this Asset Purchase Agreement, by
and among HHHI, the Millers and the Purchaser (including the Exhibits hereto
and the Disclosure Schedule) and all amendments hereto made in accordance with
the provisions of Section 8.09.
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"Ancillary Agreements" means the Bills of Sale, or other conveyance
documents, the Assumption Agreements, the Employment and Covenant Not to
Compete, the Lease Agreement, the Guarantee Agreement and any and all other
documents required by the terms of this Agreement.
"Assets" means those assets specified in Section 2.01(a).
"Assumed Liabilities" has the meaning specified in Section 2.02(a).
"Assumption Agreements" means the Assignment and Assumption Agreements
to be executed by the Purchaser and HHHI and by the Purchaser and the Millers,
and any other necessary parties, respectively, on or before the Closing Date
substantially in the form of Exhibit 2.02(a).
"Bill of Sale" means the Bill of Sale and Assignment to be executed by
HHHI on or before the Closing Date substantially in the form of Exhibit
2.01(c).
"Business" has the meaning specified in the recitals to this Agreement.
"Business Day" means any day that is not a Saturday, a Sunday or other
day on which banks are required or authorized by Law to be closed in the State
of Arizona.
"Closing" has the meaning specified in Section 2.04.
"Closing Date" means on or before February 29, 1996, or any later
mutually agreed upon date.
"Closing Date Balance Sheet" has the meaning specified in Section
2.03(d).
"Code" means the Internal Revenue Code of 1986, as amended through the
date hereof.
"Consents" means those authorizations, consents, waivers, orders,
approvals and clearances of any entity or Persons which are necessary for the
assignment and transfer to the Purchaser of the Material Contracts and all
other notes, bonds, mortgages, contracts, agreements, leases, subleases,
licenses, permits, authorizations, franchises, other instruments or other
rights relating to the Business or the consummation of the transactions
contemplated by this Agreement and the Ancillary Agreements where the approval
of any other Person may be required.
"Control" (including the terms "controlled by" and "under common
control with"), with respect to the relationship between or among two or more
Persons, means the possession, directly or indirectly or as trustee, personal
representative or executor, of the power to direct or cause the direction of
the affairs or management of a Person, whether through the ownership of voting
securities, as trustee, personal representative or executor, by contract or
otherwise, including, without limitation, the ownership, directly or
indirectly, of securities having the power to elect a majority of the board of
directors or similar body governing the affairs of such Person.
"Designated Officers" means the officers of HHHI.
"Disclosure Schedule" means the Disclosure Schedule attached hereto,
dated as of the date hereof, and forming a part of this Agreement.
"Employment Agreement" means the Employment Agreement to be executed by
Peter M. Miller, Ph.D. and Purchaser on or before the Closing Date
substantially in the form of Exhibit 2.03(c)i.
"Encumbrance" means any security interest, pledge, mortgage, lien
(including, without limitation, environmental and tax liens), charge,
encumbrance, adverse claim, preferential arrangement, or restriction of any
kind, including, without limitation, any restriction on the use, voting,
transfer, receipt of income or other exercise of any attributes of ownership.
"Environmental" means matters related to surface waters, groundwaters,
soil, subsurface strata and ambient air.
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"Environmental Claims" means any and all administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens, notices of
non-compliance or violation, investigations, proceedings, consent orders or
consent agreements relating in any way to any Environmental Law or any
Environmental Permit (hereinafter "Claims"), whether asserted before or after
the date hereof, including, without limitation, (a) any and all Claims by
Governmental Authorities for enforcement, cleanup, removal, response, remedial
or other actions or damages pursuant to any applicable Environmental Law, and
(b) any and an Claims by any Person seeking damages, contribution,
indemnification, cost recovery, compensation or injunctive relief resulting
from Hazardous Materials or arising from alleged injury or threat of injury to
health, safety or the environment.
"Environmental Laws" means any Law now in effect and any judicial or
administrative interpretation thereof, including any judicial or administrative
order, consent decree or judgment, relating to the environment, health, safety
or Hazardous Materials.
"Environmental Permits" means all permits, approvals, identification
numbers, licenses and other authorizations required under any applicable
Environmental Law.
"ERISA" has the meaning specified in Section 3.22.
"Excluded Assets" has the meaning specified in Section 2.01(b).
"Excluded Liabilities" has the meaning specified in Section 2.02(b).
"Financial Statements" has the meaning specified in Section 3.07(a).
"Governmental Authority" means any United States federal, state or
local or any foreign government, governmental, regulatory or administrative
authority, agency or commission or any court, tribunal, or judicial or arbitral
body.
"Governmental Order" means any order, writ, judgment, injunction,
decree, stipulation, determination or award entered by or with any Governmental
Authority.
"Hazardous Materials" means (a) petroleum and petroleum products,
radioactive materials, asbestos in any form that is or could become friable,
urea formaldehyde foam insulation, transformers or other equipment that contain
polychlorinated biphenyls, and radon gas, (b) any other chemicals, materials or
substances defined as or included in the definition of "hazardous substances,"
"hazardous wastes," "hazardous materials," "extremely hazardous wastes,"
"restricted hazardous wastes," "toxic substances," "toxic pollutants,"
"contaminants" or "pollutants, " or words of similar import, under any
applicable Environmental Law, and (c) any other chemical, material or substance
exposure to which is regulated by any Governmental Authority.
"Indebtedness" means, with respect to any Person, (a) all indebtedness
of such Person, whether or not contingent, for borrowed money, (b) all
obligations of such Person for the deferred purchase price of property or
services, (c) all obligations of such Person evidenced by notes, bonds,
debentures or other similar instruments, (d) all indebtedness created or
arising under any conditional sale or other title retention agreement with
respect to property acquired by such Person (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), (e) all obligations of
such Person as lessee under leases that have been or should be, in accordance
with U.S. GAAP, recorded as capital leases, (f) all obligations, contingent or
otherwise, of such Person under acceptance, letter of credit or similar
facilities, (g) all indebtedness of others referred to in clauses (a) through
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(f) above guaranteed directly or indirectly in any manner by such Person, or in
effect guaranteed directly or indirectly by such Person through an agreement
(1) to pay or purchase such Indebtedness or to advance or supply funds for the
payment or purchase of such Indebtedness, (2) to purchase, sell or lease (as
lessee or lessor) property, or to purchase or sell services, primarily for the
purpose of enabling the debtor to make payment of such Indebtedness or to
assure the holder of such Indebtedness against loss, (3) to supply funds to or
in any other manner invest in the debtor (including any agreement to pay for
property or services irrespective of whether such property is received or such
services are rendered), or (4) otherwise to assure a creditor against loss, and
(h) all Indebtedness referred to in clauses (a) through (f) above secured by
(or for which the holder of such Indebtedness has an existing right, contingent
or otherwise, to be secured by) any Encumbrance on property (including, without
limitation, accounts and contract rights) owned by such Person, even though
such Person has not assumed or become liable for the payment of such
Indebtedness.
"Indemnified Party" has the meaning specified in Section 7.02(a).
"Inventories" means all inventory, merchandise, finished goods, raw
materials, packaging, supplies and any other personal property related to the
Business, maintained, held or stored by or for either Seller on the Closing
Date and any prepaid deposits for any of the same.
"IRS" means the Internal Revenue Service of the United States.
"Joint Venture" means an association of two or more Persons to carry on
a specified business for profit, including the contribution of capital to, and
the sharing of profits and losses from, the venture.
"Knowledge" means actual knowledge of a Person.
"HHHI Financial Statements" has the meaning specified in Section
3.07(a).
"Law" means any federal, state, local or foreign statute, law,
ordinance, regulation, rule, code, order, decree, requirement or rule of common
law.
"Leased Real Property" means the real property leased by HHHI, as
tenant, together with, to the extent leased by HHHI, all buildings and other
structures, facilities or improvements currently or hereafter located thereon,
all fixtures, systems, equipment and items of personal property of HHHI
attached or appurtenant thereto, and all easements, licenses, rights and
appurtenances relating to the foregoing.
"Liabilities" means any all debts, liabilities and obligations, whether
accrued or fixed, absolute or contingent, matured or unmatured or determined or
determinable, including, without limitation, those arising under any Law
(including, without limitation, any Environmental Law), Action or Governmental
Order and those arising under any contract, agreement, arrangement, commitment
or undertaking.
"Loss" has the meaning specified in Section 7.02(a).
"Material Adverse Effect" means any circumstance, change in, or effect
on, the Business or HHHI that, individually or in the aggregate with any other
circumstances, changes in, or effects on, HHHI or the Business, which: (a) is
materially adverse to the business, operations, financial condition, assets or
liabilities (including, without limitation, contingent liabilities), employee
relationships, customer or supplier relationships, prospects, results of
operations or the condition (financial or otherwise) of the Business or (b)
could materially adversely affect the ability of the Purchaser to operate or
conduct the Business in the manner in which it is currently operated or
conducted by HHHI.
"Material Consents" means those Consents which, if not delivered at the
Closing, would preclude the conduct of the Business or have a Material Adverse
Effect on the operation of the Business by the Purchaser.
"Material Contracts" has the meaning specified in Section 3.15(a).
"Millers' Real Property" means real property owned by the Millers and
leased to HHHI and used in HHHI's business.
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"Non-Competition Agreement" means the Non-Competition Agreement to be
executed by the Millers and Purchaser on or before the Closing Date
substantially in the form of Exhibit 1.0(e).
"Non-Material Consents" means all Consents other than the Material
Consents.
"Permits" has the meaning specified in Section 3.14(a).
"Permitted Encumbrances" means such of the following as to which no
enforcement, collection, execution, levy or foreclosure proceeding shall have
been commenced: (a) liens for taxes, assessments and governmental charges or
levies not yet due and payable; (b) Encumbrances imposed by Law, such as
materialmen's, mechanics', carriers', workmen's and repairmen's liens and other
similar liens arising in the ordinary course of business securing obligations
that (i) are not overdue for a period of more than 30 days and (ii) are not in
excess of $5,000 in the aggregate at any time; (c) pledges or deposits to
secure obligations under workers' compensation laws or similar legislation or
to secure public or statutory obligations; and (d) all exceptions to title
disclosed in the preliminary title report issued by Chicago Title Insurance
Company, Policy Number 08484-008-00-96LWB, or its agent, and that are accepted
by the Purchaser.
"Person" means any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other entity, as well as any
syndicate or group that would be deemed to be a person under Section 13(d)(3)
of the Securities Exchange Act of 1934, as amended.
"Plan" and "Plans" have the meanings specified in Section 3.22.
"Purchase Price" has the meaning specified in Section 2.03.
"Purchase Price Bank Account" means a HHHI bank account in the United
States designated by HHHI in a written notice to the Purchaser at least two
Business Days before the Closing.r
"Purchaser" has the meaning specified in the introductory paragraph of
this Agreement.
"Real Property" means the Leased Real Property.
"Receivables" means any and all contracts, receivables, notes and other
amounts receivable from third parties, including, without limitation, customers
and employees arising from the conduct of the Business before the Closing Date,
whether or not in the ordinary course and whether or not billed to the third
parties before the Closing Date, together with any unpaid financing charges
accrued thereon.
"Regulations" means the Treasury Regulations (including Temporary
Regulations) promulgated by the United States Department of Treasury with
respect to the Code or other federal tax statutes.
"Release" means disposing, discharging, injecting, spilling, leaking,
leaching, dumping, emitting, escaping, emptying, seeping, placing and the like
into or upon any land, water or air or otherwise entering into the Environment.
"Seller" has the meaning specified in the introductory paragraph of
this Agreement.
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"Seller Intellectual Property" has the meaning specified in Section
3.16.
"Sellers' Accountants" means Jim Legg.
"Tangible Personal Property" has the meaning specified in Section
3.18(a).
"Tax" or "Taxes" means any and all taxes, fees, levies, duties,
tariffs, imposts, and other charges of any kind (together with any and all
interest, penalties, additions to tax and additional amounts imposed with
respect thereto) imposed by any government or taxing authority, including,
without limitation: taxes or other charges on or with respect to income,
franchises, windfall or other profits, gross receipts, property, minimum,
alternative minimum, estimated, sales, use, capital stock, payroll, employment,
social security, workers' compensation, unemployment compensation, or net
worth; taxes or other charges in the nature of excise, withholding, ad valorem,
stamp, transfer, value added, or gains taxes; license, registration and
documentation fees; and customs' duties, tariffs, and similar charges.
"Third Party Claims" has the meaning specified in Section 7.02(d).
"U.S. GAAP" means United States generally accepted accounting
principles and practices in effect from time to time applied consistently
throughout the periods involved.
ARTICLE II
PURCHASE AND SALE
SECTION 2.01 Assets to Be Sold.
(a) On the terms and subject to the conditions of this
Agreement, HHHI shall, on the Closing Date, sell, assign, transfer, convey and
deliver to the Purchaser or cause to be sold, assigned, transferred, conveyed
and delivered to the Purchaser, and the Purchaser shall purchase from HHHI, all
the assets, properties, goodwill and business of every kind and description and
wherever located, whether tangible or intangible, real, personal or mixed,
directly or indirectly owned by HHHI or to which HHHI is directly or indirectly
entitled and, in any case, belonging to or used or intended to be used in the
Business, other than the Excluded Assets, including, without limitation, the
following:
(i) the Business as a going concern;
(ii) the goodwill, if any, of HHHI relating to the Business;
(iii) all rights of HHHI as tenants in respect of the Leased Real
Property;
(iv) all the right, title and interest of HHHI in furniture,
fixtures, equipment, machinery and other tangible personal property used or
held for use by HHHI at the locations at which the Business is conducted, or
otherwise owned or held by HHHI at the Closing Date for use in the conduct of
the Business and not otherwise included in clauses (iii) and (iv) above;
(v) all vehicles and rolling stock;
(vi) all Inventories;
(vii) all Receivables;
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(viii) all bank accounts (other than the Purchase Price Bank Account),
books of account, general, financial, tax and personnel records, invoices,
shipping records, supplier lists, correspondence and other documents, records
and files and computer software and programs and any rights thereto owned,
associated with or employed by HHHI or used in, or relating to, the Business at
the Closing Date, other than organization documents, minutes and stock record
books and the corporate seal(s) of the Seller;
(ix) all the right, title and interest of HHHI in, to and under the
Seller Intellectual Property including, without limitation, the name "Hilton
Head Health Institute" or "HHHI";
(x) all claims, causes of action, choses in action, rights of recovery
and rights of set-off of any kind (including rights to insurance proceeds and
rights under and pursuant to all warranties, representations and guarantees
made by suppliers of products, materials or equipment, or components thereof),
pertaining to, arising out of, and inuring to the benefit of HHHI;
(xi) all sales and promotional literature, customer lists and other
sales-related materials owned, used, associated with or employed by HHHI at the
Closing Date;
(xii) to the extent transferable all rights of HHHI under all
contracts, licenses, sublicenses, agreements, leases, commitments, and sales
and purchase orders, and under all commitments, bids and offers;
(xiii) all municipal, state, federal and international franchises,
permits, licenses, agreements, waivers and authorizations held or used by HHHI
in connection with, or required for, the Business, to the extent transferable,
and all experience rating accounts for unemployment and worker's compensation
insurance, to the extent transferable; and
(xiv) all the right, title and interest of HHHI on the Closing Date
in, to and under all other assets, rights and claims of every kind and nature
used or intended to be used in the operation of, or residing with, the
Business.
(b) The Assets shall exclude the following assets owned by the Seller
(the "Excluded Assets"):
(i) the Purchase Price Bank Account;
(ii) all rights and obligations of HHHI under this Agreement and the
Ancillary Agreements;
(iii) the stock issued and outstanding of HHHI;
(iv) any Shareholder Agreement and all rights of HHHI under any
Shareholder's Agreement.
(v) the Note receivable from Jim Legg to HHHI.
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SECTION 2.02 Assumption and Exclusion of Liabilities.
(a) On the terms and subject to the conditions of this Agreement, the
Purchaser shall, on the Closing Date, assume and shall pay, perform and
discharge when due all Liabilities of HHHI at the Closing Date arising out of
or relating to the Business, whether accrued or arising before or after the
Closing, including, without limitation, Liabilities related to or arising out
of Material Contracts assumed by the Purchaser and Liabilities related to or
arising out of any product, service, project or warranty, except for the
Excluded Liabilities (the "Assumed Liabilities").
(b) HHHI shall retain, and shall be responsible for paying, performing
and discharging when due, and the Purchaser shall not assume or have any
responsibility for, the following respective Liabilities of each such Seller as
of the Closing Date (the "Excluded Liabilities"):
(i) any Taxes now or hereafter owed by HHHI or any Affiliate of HHHI,
or attributable to the Assets or the Business, relating to any period, or any
portion of any period, ending on or prior to the Closing Date, other than to
the extent adequate Tax reserves or accruals shall have been reflected on the
Closing Date Balance Sheet;
(ii) any Liabilities relating to or arising out of the Excluded
Assets;
(iii) any Liabilities of the Millers or HHHI between or among each
other or their respective Affiliates;
(iv) any Liabilities for Environmental Claims;
(v) any Liabilities imposed under Title IV, Subtitle E of ERISA on
account of the cessation of the obligation of either Seller to contribute to
any multiemployer pension plans;
(vi) any Liabilities not disclosed in the Disclosure Schedule or for
which adequate reserves or accruals are not reflected on the Closing Date
Balance Sheet, but only to the extent such Liabilities exceed the reserves and
accruals therefor set forth on the Closing Date Balance Sheet; and
(vii) those Liabilities disclosed in the Disclosure Schedule which
the Sellers and Purchaser have identified in the Disclosure Schedule as
nevertheless being Excluded Liabilities.
SECTION 2.03 Purchase Price.
(a) The purchase price for the Assets shall be $200,000.00 subject to
any adjustment required by the provisions of sub-paragraph (d) below.
$125,000.00 of the Purchase Price shall be payable at the Closing by the
Purchaser in immediately available funds to the Purchase Price Bank Account, or
will be distributed in accordance with any other written instructions provided
to Purchaser by HHHI. The remaining balance of the Purchase Price ($75,000.00)
shall be paid to HHHI or its assignee or designee one year after the Closing
Date, subject to the terms of the Purchase Money Note, Exhibit 2.03(a).
(b) No later than ten (10) days prior to the Closing Date the Seller
and the Purchaser shall prepare a balance sheet and income statement of HHHI as
of January 31, 1996. The January 31, 1996 balance sheet of HHHI is referred to
as the "Closing Date Balance Sheet," Exhibit 2.03(b). The Closing Date Balance
Sheet shall fairly and accurately state the financial condition of HHHI. If
the net worth (total assets minus total liabilities excluding the "Excluded
Assets" and "Excluded Liabilities") of HHHI as reflected on the Closing Date
Balance Sheet is $-250,000 or more, there shall be no adjustment to the
Purchase Price. If the net worth of HHHI as reflected on the Closing Date
Balance Sheet is less than $-250,000, the Purchase Price shall be reduced on a
dollar-for-dollar basis by the amount that the net worth of the Sellers is less
than $-250,000. The parties agree that for purposes of any adjustment
contemplated by this Section, the determination of HHHI's net worth based on
the Closing Date Balance Sheet shall be conclusive and binding on the parties.
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SECTION 2.04 Purchase of the Miller's Real Property. In addition to
the foregoing, Purchaser agrees to purchase and Millers agree to sell the
Millers' Real Property pursuant to the following terms and conditions:
(a) Real Property. The Miller's Real Property is defined on Exhibit
2.04(a) attached hereto and incorporated herein. The transfer shall also
include all furniture, fixtures and equipment owned by the Millers and used in
connection with the Miller's Real Property.
(b) Real Property Price. The purchase price for the Miller's Real
Property ("Real Property Price") is to be determined by the parties as soon as
practicable after execution of this Agreement. The purchase price will be based
upon appraisals to be obtained. The Millers have an existing appraisal dated
July 11, 1994, prepared by Dwight Olliff, MAI. A copy has been provided to
Purchaser. The Millers have the option to commission Mr. Olliff to update said
appraisal or to obtain a new appraisal from a qualified appraiser ("Appraisal
#1"). Purchaser, upon receipt of Appraisal #1 may: (i) agree to accept said
appraisal with the resulting appraised value utilized as the purchase price for
the property, or (ii) decide to obtain a second appraisal from a qualified MAI
appraiser, at its sole cost and expense. Such second appraisal ("Appraisal #2")
must be ordered within 30 days from the date of delivery of Appraisal #1 to
Purchaser and must be obtained by Purchaser within 60 days thereafter. Upon
receipt of Appraisal #2, a copy shall be furnished to the Millers for review.
In the event that Appraisal #2 reflects an appraised value 70% or less than
Appraisal #1, then at Millers' sole option, a third appraisal may be obtained,
with the cost of said third appraisal to be evenly divided between the parties.
The resulting Real Property Price shall be the average of the two or three
appraisals. It is important, therefore, that each appraisal have one resulting
bottom line value even though it is recognized by the parties that different
methodologies may be utilized by the appraiser to arrive at said appraised
value. Once the Real Property Price has been determined, then the parties will
proceed toward the next step in the closing process. Notwithstanding the
foregoing, Purchaser's obligations to purchase the Real Property described
herein are subject to the ultimate Real Property Price being at least 120% of
the mortgage amount currently owing on the Real Property or else Purchaser's
obligations under this Section 2.04 become voidable at Purchaser's sole
discretion.
(c) Timing. Closing will then occur within 30 days from the
establishment of the Real Property Price unless otherwise extended by the
parties. At closing the Millers shall be obligated to provide to Purchaser a
general warranty deed, free and clear of all encumbrances, except those
permitted encumbrances currently existing against the Miller's Real Property.
The Millers shall also execute and deliver a bill of sale for any of the
personal property and shall execute all normal and required documentation
relating to such a real estate transaction.
(d) Financing/Assumption. It is understood that the Miller's Real
Property is currently subject to two existing long-term, secured debts as
follows:
(i) A first mortgage in favor of Nations Bank in the original principal
sum of $1,100,000.00. The present balance of said mortgage is approximately
$950,689.69.
(ii) A second mortgage in favor of American Services Corporation of
South Carolina in the original principal sum of $200,000.00 with a present
principal balance of approximately $__________.
The parties' mutual intent is to attempt to structure an assumption
and/or refinancing of both mortgages by Purchaser amortized over 10 years for a
term of not less than 4 years at prevailing market rates and conditions.
Accordingly, upon execution of this Contract, the Millers will take steps to
contact both NationsBank and American Services to request terms and conditions
relating to such an assumption and/or refinancing. It is recognized by
Purchaser that both loans do not allow for assumption and, therefore, the
lenders' consent must be obtained. Purchaser agrees that it will cooperate in
any reasonable request by said lenders with respect to financial information
and qualification of Purchaser. Purchaser also acknowledges that rather than an
assumption, a new substituted loan may be put into place by said lenders, and
such a loan would be satisfactory, as long as the terms and conditions are
consistent with prevailing market conditions. The Millers would also give
consideration to transfer of the Real Property subject to said mortgage
indebtednesses with continuing liability of the Millers on said indebtednesses
so long as the lenders were aware of and consented to such a transfer.
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(e) Balance of Real Property Price. At the time of closing the total
Real Property Price as determined above, less the amount of mortgage assumption
(or new mortgage financing obtained by Purchaser), shall result in a net amount
due to the Millers. The Millers agree to finance this amount for a term ending
four years from the Section 2.04 Closing Date. The amount financed shall be
evidenced by a promissory note and secured by a second mortgage against the
Miller's Real Property, a Security Agreement and Financing Statements, a
Collateral Assignment of Leases, Rent and Profits relating to the Real Property
and other normal, customary collateral documentation acceptable to the Millers.
The financing shall provide for interest at the rate of 0% per annum with
monthly payments amortized over ten years and a balloon payment calling for all
remaining principal due and any accrued interest thereon due and payable on the
fourth anniversary date of the Closing Date. In the event of a default under
said financing documents, interest shall accrue at the rate of Nations Bank
prime plus 2 percent.
(f) Closing Costs. Closing costs for the Miller's Real Property shall
be borne by each party in accordance with the customs in Beaufort County, South
Carolina. As an example of such costs, the Millers shall be responsible for the
state and local documentary stamp tax and all legal costs in connection with
the preparation of the deed and other seller documents. The Millers shall also
be responsible for preparing all of the purchase money financing documents.
Purchaser shall be responsible for the Hilton Head Island transfer tax, if
applicable, costs of any title insurance required, and the costs, if any, of
the lenders relating to the assumption or substitute indebtedness.
(g) Title Insurance/Survey. The Millers will provide to Purchaser a
copy of the survey obtained for the Property dated December 31, 1993. Any
updates requested by Purchaser or required by lenders shall be at Purchaser's
expense. Immediately upon execution of this Agreement, the Millers will cause a
title examination update to be done by its counsel, as an agent for Chicago
Title Insurance Company, and a commitment issued in favor of Purchaser for the
Miller's Real Property. This will be done at no cost to Purchaser. Ultimately,
the premium for the owners and lender's policy, if required, shall be at
Purchaser's expense.
(h) Lease. From the Closing date until the date of the Real Property
Closing, Purchaser will lease the Miller's Real Property from the Millers
pursuant to a Lease Agreement which will provide for a base rental of
$186,000.00 per year payable in monthly installments due on the first day of
each month, together with any and all additional costs related to the Miller's
Real Property such as taxes, insurance, repairs, maintenance, etc. In essence
this shall be a "triple net" Lease. The Millers shall prepare such a Lease for
execution by the parties substantially in conformity with Exhibit 2.04(h). The
terms of the Lease shall be subject to the reasonable approval of Purchaser.
This Lease shall terminate effective with the transfer of the Miller's Real
Property by Millers to Purchaser.
SECTION 2.04A Ancillary Agreements-Miller. In addition to the
foregoing, Purchaser and Seller have agreed as follows:
(a) In accordance with all applicable federal securities laws and
regulations and the provisions of the 1992 NextHealth, Inc., Stock Option Plan,
and pursuant to the terms of the Employment Agreement, 20,000 options to
purchase NextHealth, Inc., stock will be issued to Peter M. Miller, Ph.D. at
the market price on or before the Closing Date subject to a four year vesting
schedule beginning upon the conclusion of the first year of Dr. Miller's
employment with Purchaser, in conformity with Exhibit 2.04A(a), attached.
(b) The Millers will execute an Employment Agreement and a Covenant Not
to Compete with Purchaser, subject to the terms and conditions in substantially
the same form as that contained in Exhibits 2.04A(b)i and 2.04A(b)ii,
respectively.
SECTION 2.05 Closing Deliveries by HHHI and the Millers. At the
Closing, HHHI and the Millers, as the case may be, shall deliver or cause to be
delivered to the Purchaser:
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(a) the Bills of Sale, substantially in conformity with Exhibit
2.05(a), certificates of title for all motor vehicles used in connection with
the Business (duly endorsed for transfer to the Purchaser) and such other
instruments, in form and substance satisfactory to the Purchaser, as may be
requested by the Purchaser to transfer the Assets to the Purchaser or evidence
such transfer on the public records;
(b) executed counterparts of the Assumption Agreements;
(c) a receipt for the Purchase Price less the balance due;
(d) a certificate signed by the Millers and a Designated Officer of
HHHI to the effect that the covenants and agreements contained in this
Agreement to be complied with by HHHI and the Millers on or before the Closing
have been complied with in all material respects;
(e) true and complete copies, certified by a Designated Officer, of the
resolutions duly and validly adopted by the Board of Directors of HHHI
evidencing their authorization of the execution and delivery of this Agreement,
the Ancillary Agreements and all other documents to be delivered hereunder or
thereunder and the consummation of the transactions contemplated hereby and
thereby;
(f) all original executed Material Consents and any Non-Material
Consents obtained by HHHI prior to the Closing Date;
(g) the legal opinion of Bethea, Jordan & Griffin, P. A., counsel to
HHHI, addressed to the Purchaser and dated the Closing Date, substantially in
the form of Exhibit 2.05(g);
(h) an owner's policy of title insurance on the fee interests
comprising part of the Assets in form and substance acceptable to the Purchaser
in its sole and absolute discretion;
(i) an incumbency certificate;
(j) good standing certificates for HHHI from the Corporation Commission
or Secretary of State of South Carolina (or other evidence of such good
standing satisfactory to the Purchaser in its sole and absolute discretion), in
each case accompanied by a certificate of a Designated Officer of HHHI, dated
as of the Closing Date, stating that such good standing certificates are valid
and in effect on the Closing Date;
(k) Employment and Non-Competition Agreements from the Millers to the
Purchaser; and
(l) such other documents as the Purchaser may reasonably request.
SECTION 2.06 Closing Deliveries by the Purchaser. At the Closing, the
Purchaser shall deliver to the Millers and HHHI, as the case may be:
(a) the Purchase Price less the any adjustment made in conformity with
paragraph 2.03 (d) by cashier's check or other form of immediately available
funds;
(b) an executed counterpart of the Assumption Agreement;
(c) true and complete copies, certified by a duly authorized officer of
the Purchaser, of resolutions duly and validly adopted by the Purchaser
evidencing its authorization of the execution and delivery of this Agreement,
the Ancillary Agreements, a certificate of Purchaser's good standing with the
Secretary of State of the State of Arizona, an executed purchase money note and
lease agreement, and all other documents hereunder or thereunder and the
consummation of the transactions contemplated hereby and thereby;
(d) the legal opinion of Hecker, Phillips & Zeeb, P.C., counsel to the
Purchaser, addressed to the Millers and dated the Closing Date, substantially
in the form of Exhibit 2.06(d):
(e) such other documents as Seller may reasonably request.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF HHHI AND THE MILLERS
As an inducement to the Purchaser to enter into this Agreement, HHHI
and the Millers, jointly and severally, hereby makes the following
representations and warranties to the Purchaser. All representations and
warranties in this Article III are made by HHHI and the Millers to the best of
their Knowledge.
SECTION 3.01 Authority of the Millers. Each of the Millers has all
legal capacity to enter into this Agreement and the Employment and
Non-Competition Agreement, and to carry out his/her obligations hereunder and
thereunder and to consummate the transactions contemplated hereby and thereby.
This Agreement has been duly executed and delivered by the Millers, and
(assuming due authorization, execution and delivery by the Purchaser) this
Agreement constitutes a legal, valid and binding obligation of each of them
enforceable against them in accordance with its terms, subject to the effect of
any applicable bankruptcy, reorganization, insolvency, moratorium or similar
laws affecting creditors' rights and remedies generally and subject, as to
enforceability, to the effects of general principles of equity (regardless of
whether such enforceability is considered in a proceeding at law or in equity).
Upon its execution by the Millers, the Employment and Non-Competition Agreement
will constitute a legal, valid and binding obligation of the Millers
enforceable against the Millers in accordance with their respective terms,
subject to the effect of any applicable bankruptcy, reorganization, insolvency,
moratorium or similar laws affecting creditors' rights and remedies generally
and subject, as to enforceability, to the effects of general principles of
equity (regardless of whether such enforceability is considered in a proceeding
at law or in equity).
SECTION 3.02 Organization, Authority and Qualification of HHHI. HHHI
is a corporation duly organized, validly existing and in good standing under
the laws of the State of South Carolina and has all necessary power and
authority to own, operate or lease the properties and assets now owned or
leased by them, to carry on the Business as it has been and is currently
conducted, to enter into this Agreement and the Ancillary Agreements, to carry
out its obligations under this Agreement and the Ancillary Agreements, and to
consummate the transactions contemplated hereby and thereby. HHHI is duly
licensed or qualified to do business and is in good standing in each
jurisdiction in which the properties owned or leased by it or the operation of
its business makes such licensing or qualification necessary or desirable (and
all such jurisdictions are set forth in Section 3.02(a) of the Disclosure
Schedule), except to the extent that the failure to be so licensed or qualified
would not result in a Material Adverse Effect. True and correct copies of the
Articles of Incorporation and Bylaws of HHHI, as in effect on the date hereof,
have been delivered by HHHI to the Purchaser. The execution and delivery of
this Agreement and the Ancillary Agreements by HHHI, the performance by HHHI of
its obligations hereunder and thereunder and the consummation by HHHI of the
transactions contemplated hereby and thereby have been duly authorized by all
requisite action on the part of HHHI and its respective Shareholders. This
Agreement has been, and upon their execution the Ancillary Agreements, will be
duly executed and delivered by HHHI, and (assuming due authorization, execution
and delivery by the Purchaser) this Agreement constitutes, and upon their
execution the Ancillary Agreements will constitute, legal, valid and binding
obligations of HHHI enforceable against HHHI in accordance with their
respective terms, subject to the effect of any applicable bankruptcy,
reorganization, insolvency, moratorium or similar laws affecting creditors'
rights and remedies generally and subject, as to enforceability, to the effects
of general principles of equity (regardless of whether such enforceability is
considered in a proceeding at law or in equity).
SECTION 3.03 Subsidiaries and Joint Ventures.
(a) There are no other corporations, partnerships, joint ventures,
associations or other entities in which HHHI or the Millers own, of record or
beneficially, any direct or indirect equity or other interest or any right
(contingent or otherwise) to acquire the same or which is controlled by either
HHHI or the Millers directly or indirectly through one or more intermediaries
engaged in the Business or any similar business or operation. Other than
Millers' previously existing books, cassettes, etc., neither HHHI nor the
Millers are a member of nor are any part of the Business conducted through any
partnership, joint venture or similar arrangement.
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SECTION 3.04 Corporate Books and Records; Bank Accounts. To the
knowledge of HHHI and the Millers, the minute books of HHHI contain accurate
records of all meetings and accurately reflect all other actions taken by the
Shareholders, Board of Directors and all committees of the Board of Directors
of HHHI. To the knowledge of HHHI and the Millers, complete and accurate
copies of all such minute books and of the stock register of HHHI have been
made available by HHHI for inspection by the Purchaser. Section 3.04 of the
Disclosure Schedule sets forth a true and complete list of all bank accounts
maintained by HHHI, listing for each such account the identity and location of
the bank, the account number and the general purpose of the account.
SECTION 3.05 No Conflict. The execution, delivery and performance of
this Agreement and the Ancillary Agreements by HHHI do not and will not (a)
violate, conflict with or result in the breach of any provision of the Articles
of Incorporation or Bylaws (or similar organizational documents) of HHHI, (b)
to the knowledge of HHHI and the Millers, conflict with or violate (or cause an
event which could have a Material Adverse effect as a result of) any Law or
Governmental Order applicable to HHHI or any of their respective assets,
properties or businesses, or (c) except as set forth in Section 3.05 of the
Disclosure Schedule, conflict with, result in any breach of, constitute a
default (or event which with the giving of notice or lapse of time, or both,
would become a default) under, require any consent or approval under, or give
to any other Person any rights of termination, amendment, acceleration,
suspension, revocation or cancellation of, or result in the creation of any
Encumbrance on any of the assets or properties of HHHI pursuant to any note,
bond, mortgage or indenture, contract, agreement, lease, sublease, license,
permit, authorization, franchise or other instrument or arrangement to which
HHHI is a party or by which any of such assets or properties are bound or
affected.
SECTION 3.06 Governmental Consents and Approvals. Except as set forth
in Section 3.06 of the Disclosure Schedule, to the knowledge of HHHI and the
Millers, the execution, delivery and performance of this Agreement and each
Ancillary Agreement by HHHI and the Millers do not and will not require any
consent, approval, authorization, waiver, clearance or other order of, action
by, filing with or notification to, any Governmental Authority.
SECTION 3.07 Financial Information; Books and Records.
(a) True and complete copies of (i) the balance sheet of HHHI for each
of the two fiscal years ended as of September 30, 1994, and September 30, 1995
and interim financial statements and the Closing Date Balance Sheet, and the
related statement of operations, shareholders' equity and cash flows of HHHI,
together with all related notes and schedules thereto, accompanied by the
reports thereon of HHHI's Accountants (the "Financial Statements"), have been
delivered by HHHI to the Purchaser. To the knowledge of HHHI and the Millers,
the Financial Statements (i) were prepared in accordance with the books of
account and other financial records of HHHI, (ii) present fairly the financial
condition and results of operations of HHHI as of the dates thereof or for the
periods covered thereby.
(b) To the knowledge of HHHI and the Millers, the books of account and
other financial records of HHHI: (i) reflect all items of income and expense
and all assets and Liabilities required to be reflected therein; (ii) are in
all material respects complete and correct, and do not contain or reflect any
material inaccuracies or discrepancies; and (iii) have been maintained in
accordance with good business and accounting practices.
SECTION 3.08 No Undisclosed Liabilities. There are no Liabilities of
HHHI, other than Liabilities (i) reflected or reserved against on the Closing
Date Balance Sheet, or (ii) disclosed in Section 3.08 of or elsewhere in the
Disclosure Schedule. Reserves or accruals are reflected on the Closing Date
Balance Sheet against all Liabilities of HHHI. For purposes of this Section
3.08, the term "Liabilities" shall not include (i) variances between the
estimated and actual cost of, (ii) the amounts required to complete, or (iii)
the estimated profitability of, a project; each as determined in good faith in
accordance with the past practice of HHHI.
SECTION 3.09 Receivables. Except as set forth in Section 3.09 of the
Disclosure Schedule and any receivable which is an Excluded Asset, all
Receivables reflected on the Closing Date Balance Sheet (subject to the reserve
for bad debts, if any, reflected on the Closing Date Balance Sheet) are
collectible and require only minimal follow-up action to provide cash in the
ordinary course of HHHI businesses, and arise from an arm's length transaction
between unrelated parties in the ordinary course of HHHI businesses.
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SECTION 3.10 Inventories.
(a) Subject to amounts reserved therefor on the Closing Date Balance
Sheet, the values at which all Inventories are carried on the Closing Date
Balance Sheet reflect the historical inventory valuation policy of HHHI of
stating such Inventories at cost. Except as set forth in Section 3.10(a) of
the Disclosure Schedule, HHHI has good and marketable title to its respective
Inventories free and clear of all Encumbrances. HHHI is not under any
obligation or liability with respect to accepting returns of items of Inventory
or merchandise in the possession of its customers other than in the ordinary
course of the Business consistent with past practice.
(b) To the knowledge of HHHI and the Millers, except as disclosed in
Section 3.10(b) of the Disclosure Schedule, the Inventories on the Closing Date
Balance Sheet are in good and merchantable condition in all material respects,
and are suitable and usable for the purposes for which they are intended.
SECTION 3.11 Conduct in the Ordinary Course; Absence of Certain
Changes, Events and Conditions. Since the Closing Date Balance Sheet, except
(a) for the execution and delivery of this Agreement and the Ancillary
Agreements and (b) as disclosed in Section 3.11 or elsewhere in the Disclosure
Schedule, the Business has been conducted in all material respects in the
ordinary course and consistent with past practice. As amplification and not
limitation of the foregoing, except as disclosed in Section 3.11 of or
elsewhere in the Disclosure Schedule, since the Closing Date Balance Sheet,
neither HHHI nor the Millers has:
(i) permitted or allowed any of the assets or properties (whether
tangible or intangible) of HHHI to be subjected to any Encumbrance, other than
Permitted Encumbrances and Encumbrances that will be released at or prior to
the Closing;
(ii) except in the ordinary course of Business consistent with past
practice, discharged or otherwise obtained the release of any Encumbrance or
paid or otherwise discharged any Liability, other than current Liabilities
reflected on the Disclosure Schedule and current Liabilities incurred in the
ordinary course of Business consistent with past practice;
(iii) written down or written up (or failed to write down or write up
in accordance with U.S. GAAP) the value of any Inventories or Receivables or
revalued any assets of HHHI other than in the ordinary course of business and
in accordance with U.S. GAAP;
(iv) made any change in any method of accounting or accounting
practice or policy used by HHHI, other than such changes required by U.S. GAAP
and disclosed in Section 3.11 of the Disclosure Schedule;
(v) amended, terminated, canceled or compromised any material claims of
HHHI or waived any other rights of substantial value to HHHI;
(vi) sold, transferred, leased, subleased, licensed or otherwise
disposed of any properties or assets (including, without limitation, real
property, leasehold interests and intangible property), other than the sale of
Inventories in the ordinary course of business consistent with past practice;
(vii) issued or sold any capital stock, notes, bonds or other
securities, or any option, warrant or other right to acquire the same, of HHHI;
(viii) redeemed any of the capital stock or declared, made or paid any
dividends or distributions (whether in cash, securities or other property) to
the holders of capital stock of HHHI;
(ix) made any capital expenditure or commitment for any capital
expenditure in excess of $5,000 individually or $25,000 in the aggregate;
(x) made any material changes in the customary methods of operations of
HHHI or the Business;
(xi) made any express or deemed election or settled or compromised
any Liability with respect to Taxes of HHHI;
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(xii) incurred any Indebtedness in excess of $5,000 individually or
$25,000 in the aggregate;
(xiii) made any loan to, guaranteed any Indebtedness of or otherwise
incurred any Indebtedness on behalf of any Person or entity;
(xiv) failed to pay any creditor any amount owed to such creditor on
a timely basis consistent with past practice, unless such amount is being
contested in good faith by HHHI and is set forth in Section 3.11 of the
Disclosure Schedule;
(xv) (A) granted any increase, or announced any increase, in the
wages, salaries, compensation, bonuses, incentives, pension, severance or other
benefits payable by HHHI to any of its employees or consultants, including,
without limitation, any increase or change pursuant to any Plan, or (B)
established or increased or promised to increase any benefits under any Plan,
in either case except as required by law or involving ordinary increases
consistent with the past practice of HHHI;
(xvi) entered into any contract, agreement, arrangement or
transaction with any of its directors, officers, employees or shareholders (or
with any relative, beneficiary, spouse or Affiliate of such Persons);
(xvii) suffered any Material Adverse Effect;
(xviii) except in the ordinary course of business consistent with past
practices, entered into any contract, agreement, arrangement or transaction,
written or oral, that contains either (A) consideration to be given or
performed by HHHI of a value exceeding $25,000 or (B) a term exceeding one
year; or
(xix) agreed, whether in writing or otherwise, to take any of the
actions specified in this Section 3.11 or granted any options to purchase,
rights of first refusal, rights of first offer or any other similar rights with
respect to any of the actions specified in this Section 3.11, except as
expressly contemplated by this Agreement and the Ancillary Agreements.
SECTION 3.12 Litigation. Except as set forth in Section 3.12 of the
Disclosure Schedule (which, with respect to each Action disclosed therein,
accurately and completely sets forth the parties, nature of the proceeding,
date and method commenced, amount of damages or other relief sought and, if
applicable, paid or granted), there are no Actions by or against HHHI (or by or
against any Affiliate thereof and relating to the Business or HHHI), or
affecting any of the Assets or the Business, pending before any Governmental
Authority or, to the knowledge of HHHI and the Millers, threatened to be
brought by or before any Governmental Authority. None of the matters disclosed
in Section 3.12 of the Disclosure Schedule has had or could have a Material
Adverse Effect or could affect the legality, validity or enforceability of this
Agreement, any Ancillary Agreement or the consummation of the transactions
contemplated hereby or thereby.
SECTION 3.13 Compliance with Laws. Except as set forth in Section
3.13 of the Disclosure Schedule, to the knowledge of HHHI and the Millers, HHHI
has conducted and continues to conduct the Business in accordance with all Laws
and Governmental Orders applicable to HHHI or its properties or assets,
including, without limitation, the Assets or the Business, and HHHI is not in
violation of any such Law or Governmental Order, except where such
noncompliance would not singly or in the aggregate have a Material Adverse
Effect.
SECTION 3.14 Environmental and Other Permits and Licenses; Related
Matters.
(a) Except as disclosed in Section 3.14(a) of the Disclosure Schedule,
HHHI currently holds all the health and safety and other permits, licenses,
authorizations, certificates, exemptions and approvals of Governmental
Authorities (collectively, "Permits"), including, without limitation,
Environmental Permits and contractors' licenses, necessary for the current use,
occupancy and operation of each asset and property of HHHI, including, without
limitation, the Assets, and the conduct of the Business except where the
failure to have such Permit would not have a Material Adverse Effect, and all
such Permits and Environmental Permits are in full force and effect. Section
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3.14(a) of the Disclosure Schedule sets forth those Permits and Environmental
Permits the absence of which would have a Material Adverse Effect. Except as
disclosed in Section 3.14(a) of the Disclosure Schedule, there is no existing
practice, action or activity of HHHI and no existing condition of the
properties or assets of HHHI, including, without limitation, the Assets or the
Business, which will give rise to any civil or criminal Liability under, or
violate or prevent compliance with, any environmental, health or occupational
safety or other applicable Law in effect as of the date hereof. Neither HHHI
nor the Millers has received any notice from any Governmental Authority
revoking, canceling, rescinding, materially modifying or refusing to renew any
Permit or Environmental Permit or providing written notice of violations under
any Environmental Law. Except as disclosed in Section 3.14(a) of the
Disclosure Schedule, HHHI is in all material respects in compliance with the
Permits, all applicable Environmental Laws and the requirements of all
Environmental Permits. Section 3.14(a) of the Disclosure Schedule identifies
all Permits and Environmental Permits that are nontransferable or that will
require the consent of any Governmental Authority in order to be transferred by
the transactions contemplated by this Agreement.
(b) Except as disclosed in Section 3.14(b) of the Disclosure, Schedule:
(i) Hazardous Materials have not been generated, used, treated, handled or
stored on, or transpoiled to or from, or released on any Real Property; (ii)
HHHI has disposed of all wastes, including those containing Hazardous
Materials, in compliance with all applicable Environmental Laws and
Environmental Permits; (iii) there are no past, pending or, to the knowledge of
the Shareholders, threatened Environmental Claims against HHHI or any Real
Property; and (iv) HHHI has not transported or arranged for the transportation
of any Hazardous Materials to any inappropriate location.
(c) Except as disclosed in Section 3.14(c) of the Disclosure Schedule,
to the knowledge of the Millers, there are no circumstances with respect to any
Real Property or any Asset or the operation of the Business which could
reasonably be anticipated (i) to form the basis of an Environmental Claim
against HHHI, any Asset or any Real Property, or (ii) to cause such Real
Property or Asset to be subject to any restrictions on ownership, occupancy,
use or transferability under any applicable Environmental Law.
(d) Except as disclosed in Section 3.14(d) of the Disclosure Schedule,
there are not now and never have been any underground sewage tanks located on
any Real Property.
(e) Environmental Claims are Excluded Liabilities under this Agreement
and the Purchaser shall be indemnified and held harmless in respect thereof,
notwithstanding any disclosure by HHHI concerning Environmental matters in
Section 3.14 of the Disclosure Schedule or elsewhere in this Agreement.
SECTION 3.15 Material Contracts.
(a) Section 3.15(a) of the Disclosure Schedule lists each of the
following contracts and agreements (including, without limitation, oral and
informal arrangements known to HHHI) of HHHI (such contracts and agreements,
together with all contracts, agreements and leases concerning the management or
operation of the Miller's Real Property listed or otherwise disclosed in
Section 3.15(a) of the Disclosure Schedule and all agreements relating to
Seller Intellectual Property set forth in Section 3.16(a) of the Disclosure
Schedule, all being "Material Contracts"). HHHI has, or has caused to be,
delivered to the Purchaser correct and complete copies of all Material
Contracts. Without limiting the generality of the foregoing, Material
Contracts shall include:
(i) each contract, agreement, invoice, purchase order and other
arrangement, for the purchase of Inventory, spare parts, other materials or
personal property with any supplier or for the furnishing of services to HHHI
or otherwise related to the Business under the terms of which HHHI: (A) is
likely to pay or otherwise give consideration of more than $2,500.00 in the
aggregate during the twelve month period ending January 31, 1997, (B) is likely
to pay or otherwise give consideration of more than $2,500.00 in the aggregate
over the remaining term of such contract, or (C) cannot be cancelled by HHHI
without penalty and without more than 30 days' notice;
(ii) each contract, agreement, invoice, sales order and other
arrangement, for the sale of Inventory or other personal property or for the
furnishing of services by HHHI which: (A) is likely to involve consideration of
more than $5,000 in the aggregate during the twelve month period ending January
31, 1997, (B) is likely to involve consideration of more than $5,000.00 in the
aggregate over the remaining term of the contract, or (C) cannot be cancelled
by HHHI without penalty and without more than 30 days' notice;
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(iii) all franchise, agency, sales promotion, market research,
marketing consulting and advertising contracts and agreements to which HHHI is
a party;
(iv) all management contracts and contracts with independent
contractors or consultants (or similar arrangements) to which HHHI is a party
and which are not cancelable without penalty or further payment and without
more than 30 days' notice;
(v) all contracts and agreements relating to Indebtedness of HHHI;
(vi) all contracts and agreements that limit the ability of HHHI to
compete in any line of business or with any Person or in any geographic area or
during any period of time;
(vii) all contracts and agreements between or among HHHI and any
Affiliate of HHHI;
(viii) all contracts and agreements for providing benefits under any
Plan;
(ix) all other contracts and agreements, whether or not made in the
ordinary course of business, which are material to HHHI or the conduct of the
Business, or the absence of which would have a Material Adverse Effect.
For purposes of this Section 3.15 and Sections 3.17, 3.18 and 3.19, the
term "lease" shall include any and all leases, subleases, sale/leaseback
agreements or similar arrangements.
(b) Except as disclosed in Section 3.15(b) of or elsewhere in the
Disclosure Schedule, to the knowledge of HHHI and the Millers, each Material
Contract: (i) is valid and binding on the respective parties thereto and is in
full force and effect, (ii) is freely and fully assignable to the Purchaser
without penalty or other adverse consequences, and (iii) upon consummation of
the transactions contemplated by this Agreement and the Ancillary Agreements
and with the Purchaser's cooperation, shall continue in full force and effect
without penalty or other adverse consequence. HHHI has not received any notice
that HHHI is in breach of, or default under, any Material Contract or that any
event occurred or failed to occur which, with the giving of notice or passage
of time or both, would constitute a breach of or default under, any Material
Contract.
(c) Except as disclosed in Section 3.15(c) of the Disclosure Schedule,
to the knowledge of HHHI and the Millers, no other party to any Material
Contract is in breach thereof or default thereunder in any material respect nor
has any event occurred or failed to occur which, with the giving of the notice
or passage of time or both, would constitute a material breach of or default
under any Material Contract by any other party to any Material Contract.
(d) Except as disclosed in Section 3.15(d) of the Disclosure Schedule,
there is no contract, agreement or other arrangement granting any Person any
preferential right to purchase, other than in the ordinary course of business
consistent with past practice, any of the properties or assets of HHHI,
including, without limitation, the Assets.
SECTION 3.16 Intellectual Property Rights. Section 3.16 of the
Disclosure Schedule lists, as of the date of this Agreement, (a) all material
registrations and applications for registration of any of the material patents,
patent rights, trademarks, service marks, trademark rights, trade names, trade
name rights, and registered copyrights used by HHHI in the conduct of its
business (collectively the "Seller Intellectual Property") and all licenses and
other agreements relating to any of said items or to any of the Seller
Intellectual property, and (b) all agreements relating to third party patents,
trademarks, service marks, trade names, and registered copyrights (other than
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copyrights for computer software and related manuals or similar material) which
HHHI is licensed or authorized to use except where the failure to be licensed
or authorized would not, individually or in the aggregate, have a Material
Adverse Effect. Except as set forth in Section 3.16 of the Disclosure
Schedule, no action is pending based upon or challenging or seeking to deny or
restrict the use by HHHI of any of the Seller Intellectual Property; nor, to
the knowledge of HHHI and the Millers and the Management Shareholders, has any
such action been threatened. Except as set forth in Section 3.16 of the
Disclosure Schedule, HHHI is not aware of any third parties using any of the
Seller Intellectual Property or any marks or names which are confusingly
similar thereto.
SECTION 3.17 Leased Real Property.
(a) HHHI has no Leased Real Property except the property identified in
the Disclosure Schedule as leased property, Section 3.17(a).
SECTION 3.18 Tangible Personal Property.
(a) Section 3.18 of the Disclosure Schedule lists each distinct group
of machinery, equipment, tools, supplies, furniture, fixtures, personalty,
vehicles, rolling stock and other tangible personal property (the "Tangible
Personal Property") used in the Business or owned or leased by HHHI.
(b) HHHI has or has caused to be delivered to the Purchaser correct and
complete copies of all leases and subleases for Tangible Personal Property and
any and all material ancillary documents pertaining thereto (including, but not
limited to, all amendments, consents and evidence of commencement dates and
expiration dates). With respect to each of such leases and subleases:
(i) to the knowledge of HHHI, such lease or sublease, together with
all ancillary documents delivered pursuant to the first sentence of this
Section 3.18(b), is legal, valid, binding, enforceable and in full force and
effect and represents the entire agreement between the respective lessor and
lessee with respect to such property;
(ii) except as set forth in Section 3.18(b) of the Disclosure
Schedule, to the knowledge of HHHI, upon execution by the Purchaser of all
documents reasonably required by the lessor or sublessor, such lease or
sublease will not cease to be legal, valid, binding, enforceable and in full
force and effect on terms identical to those currently in effect as a result of
the consummation of the transactions contemplated by this Agreement and the
Ancillary Agreements, nor will the consummation of the transactions
contemplated hereby or thereby constitute a breach or default under such lease
or sublease or otherwise give the lessor a right to terminate such lease or
sublease;
(iii) except as otherwise disclosed in Section 3.18(b) of the
Disclosure Schedule, with respect to each such lease or sublease: (A) neither
HHHI nor the Millers has received any notice of cancellation or termination
under such lease or sublease and no lessor has any right of termination or
cancellation under such lease or sublease except in connection with the default
of HHHI thereunder, (B) neither HHHI nor the Millers has received any notice of
a breach or default under such lease or sublease, which breach or default has
not been cured, and (C) neither HHHI nor the Millers has granted to any other
Person any rights, adverse or otherwise, under such lease or sublease; and
(iv) neither HHHI nor the Millers nor any other party to such lease
or sublease, is in breach or default in any material respect, and, to the
knowledge of HHHI and the Millers, no event has occurred that, with notice or
lapse of time would constitute such a breach or default or permit termination,
modification or acceleration under such lease or sublease.
(c) HHHI has the full right to exercise any renewal options contained
in the leases and subleases pertaining to the Tangible Personal Property on the
terms and conditions therein and upon due exercise would be entitled to enjoy
the use of each item of leased Tangible Personal Property for the full term of
such renewal options.
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SECTION 3.19 Assets.
(a) Except as disclosed in Section 3.19(a) of the Disclosure Schedule,
HHHI owns, leases or has the legal right to use all the properties and assets,
including, without limitation, the Seller Intellectual Property, the Miller's
Real Property and the Tangible Personal Property, used or intended to be used
in the conduct of the Business or otherwise owned, leased or used by HHHI, and,
with respect to contract rights, HHHI is party to and enjoys the right to the
benefits of all contracts, agreements and other arrangements used or intended
to be used by HHHI in or relating to the conduct of the Business, all of which
properties, assets and rights constitute Assets except for the Excluded Assets.
HHHI has good and marketable title to, or, in the case of leased or subleased
Assets, valid and subsisting leasehold interests in, all the Assets, free and
clear of all Encumbrances, except (i) as disclosed in Section 3.16, 3.17, 3.18
or 3.19(a) of the Disclosure Schedule; and (ii) Permitted Encumbrances.
(b) The Assets and the Excluded Assets constitute all the properties,
assets and rights forming a part of, used, held or intended to be used in, and
all such properties, assets and rights as are necessary in the conduct of, the
Business.
(c) Except as set forth in Sections 3.15(b), 3.16, 3.17, 3.18, 3.19(a)
or 3.19(c) of the Disclosure Schedule: (i) HHHI has the complete and
unrestricted power and unqualified right to sell, assign, transfer, convey and
deliver the Assets to the Purchaser without penalty or other adverse
consequences; and (ii) following the consummation of the transactions
contemplated by this Agreement and the Ancillary Agreements and the execution
of the instruments of transfer contemplated hereby and thereby, the Purchaser
will own, with good, valid and marketable title, or lease, under valid and
subsisting leases, or otherwise acquire the interests of HHHI in the Assets,
free and clear of any Encumbrances, other than Permitted Encumbrances, and
without incurring any material penalty or other adverse consequence, including,
without limitation, any increase in rentals, royalties, or license or other
fees imposed as a result of, or arising from, the consummation of the
transactions contemplated by this Agreement.
SECTION 3.20 Trade Secrets. To the knowledge of HHHI and the Millers,
HHHI is not in any way making an unlawful or wrongful use of any confidential
information, customer lists or trade secrets of any third party, including
without limitation any former employer of any present or past employee of HHHI.
SECTION 3.21 Suppliers. Listed in Section 3.21 of the Disclosure
Schedule are the names and addresses of the 15 most significant suppliers of
raw materials, supplies, merchandise and other goods for HHHI during the
twelve-month period ended December 31, 1995 and the amount for which each such
supplier invoiced HHHI during such period. Except as disclosed in Section 3.21
of the Disclosure Schedule, neither HHHI nor the Millers has received any
notice or has reason to believe that any such supplier will not sell raw
materials, supplies, merchandise and other goods to HHHI at any time after the
Closing Date on terms and conditions similar to those imposed on current sales
to the Business, subject to general and customary price increases.
SECTION 3.22 Employee Benefit Plans. Section 3.22 of the Disclosure
Statement lists all the employee benefit plans, programs and arrangements
maintained for the benefit of any current or former employee, officer or
director of HHHI (individually a "Plan" and collectively the "Plans") and HHHI
has made available to the Purchaser correct and complete copies of each Plan
and each material document prepared in connection with each Plan. Except as
set forth in Section 3.22 of the Disclosure Schedule: (i) none of the Plans is
a multiemployer plan within the meaning of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"); (ii) none of the Plans promises or
provides retiree medical or life insurance benefits to any person; (iii) none
of the Plans promises or provides severance benefits or benefits contingent
upon a change in ownership or control, within the meaning of Section 28OG of
the Code; (iv) none of the Plans is or is required to be qualified under
Section 401(a) of the Code; (v) none of the Plans is subject to Title IV of
ERISA; and (vi) HHHI has not incurred any liability under, and HHHI has
complied in all respects with, the Worker Adjustment Retraining Notification
Act, and no fact or event exists that could give rise to liability under such
act.
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SECTION 3.23 Labor Matters. Except as disclosed in Section 3.23 of
the Disclosure Schedule, no collective bargaining or other labor union
contracts are applicable to persons employed by HHHI. Except as disclosed in
Section 3.23 of the Disclosure Schedule, there never has been, nor is there
pending or threatened, a labor dispute, strike or work stoppage against HHHI.
To the knowledge of HHHI, except as disclosed in Section 3.23 of the Disclosure
Schedule, neither HHHI nor the Millers nor any of their respective
representatives or employees, has committed any unfair labor practices in
connection with the operation of HHHI. There is no pending or threatened
charge or complaint against HHHI with the National Labor Relations Board or any
comparable state, local or foreign agency. No representation question or
written grievance or, to the knowledge of HHHI or the Millers, oral grievance
is pending or threatened against HHHI in connection with the Business.
SECTION 3.24 Taxes. HHHI has paid and discharged or has disclosed all
Taxes shown as due on all federal, state, local and foreign tax returns and has
paid all other Taxes as are due, other than such Taxes as are being contested
in good faith by appropriate proceedings and with respect to which adequate
reserves are being maintained in accordance with U.S. GAAP. All Taxes required
to be withheld, collected or deposited by HHHI have been timely withheld,
collected or deposited and, to the extent required, have been paid to the
relevant Tax authority. Neither the IRS nor any other taxing authority or
agency, domestic or foreign, is now asserting or, to the knowledge of HHHI,
threatening to assert against HHHI any deficiency or claim for additional Taxes
or interest thereon or penalties in connection therewith. HHHI has not granted
any waiver of any statute of limitations with respect to, or any extension of a
period for the assessment of, any federal, state, county, municipal or foreign
Tax. Except as disclosed on Section 3.24 of the Disclosure Schedule, there are
no Tax liens on any Assets of HHHI or the Business. HHHI has not received
notice of any proposed reassessments of any property owned or leased by HHHI or
notice of any other proposals that could increase the amount of any Tax for
which HHHI or the Business could be liable.
SECTION 3.25 Insurance. Section 3.25 of the Disclosure Schedule lists
each material insurance policy (including but not limited to policies providing
property, casualty, liability, workers compensation, theft, omissions, marine
cargo, machinery, bond and surety arrangements) to which HHHI is a party, named
insured or otherwise the beneficiary of coverage. Each such policy is in full
force and effect. Neither HHHI nor, to the knowledge of HHHI and the Millers,
any other party to such a policy, is in breach or default (including any breach
or default with respect to the payment of premiums or the giving of notices),
and to the knowledge of HHHI and the Millers no event has occurred that, with
notice or lapse of time, would constitute such a breach or default or permit
termination or modification of such policy.
SECTION 3.26 Full Disclosure.
(a) HHHI and the Millers are not aware of any facts pertaining to HHHI
or the Business which could have a Material Adverse Effect and which have not
been disclosed in the Disclosure Schedule or the Acquisition Documents or
otherwise disclosed to the Purchaser by HHHI or the Millers in writing.
(b) No representation or warranty of HHHI or the Millers, respectively,
in this Agreement, nor any statement or certificate furnished or to be
furnished to the Purchaser pursuant to this Agreement, or in connection with
the transactions contemplated by this Agreement and the Ancillary Agreements,
contains or will contain any untrue statement of a material fact, or omits or
will omit to state a material fact necessary to make the statements contained
herein or therein not misleading.
SECTION 3.27 Brokers. No broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission or compensation
in connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of HHHI or the Millers.
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ARTICLE III A
REPRESENTATIONS AND WARRANTIES
OF THE MILLERS
As an inducement to the Purchaser to enter into this Agreement, the
Millers, with respect to themselves and not with respect to any other Person,
hereby represent and warrant to the Purchaser as follows:
SECTION 3.01A Authority of the Millers. The Millers have all legal
capacity to enter into this Agreement and the Employment and Noncompetition
Agreement, and to carry out its obligations hereunder and thereunder and to
consummate the transactions contemplated hereby and thereby. This Agreement
and the Employment and Noncompetition Agreement have been duly executed and
delivered by the Millers, and (assuming due authorization, execution and
delivery by the Purchaser) this Agreement and the Employment and Noncompetition
Agreement constitute legal, valid and binding obligations of the Millers
enforceable against the Millers in accordance with their respective terms,
subject to the effect of any applicable bankruptcy, reorganization, insolvency,
moratorium or similar laws affecting creditors' rights and remedies generally
and subject, as to enforceability, to the effects of general principles of
equity (regardless of whether such enforceability is considered in a proceeding
at law or in equity).
ARTICLE IV
REPRESENTATIONS AND
WARRANTIES OF THE PURCHASER
As an inducement to HHHI and the Millers to enter into this Agreement,
the Purchaser represents and warrants to HHHI and the Millers as follows:
SECTION 4.01 Organization and Authority of the Purchaser. The
Purchaser is a corporation duly organized, validly existing and in good
standing under the laws of the State of Arizona and has all requisite power and
authority to enter into this Agreement and the Ancillary Agreements to carry
out its obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement,
and the Ancillary Agreements of the Purchaser, the performance by the Purchaser
of its obligations hereunder and thereunder and the consummation by the
Purchaser of the transactions contemplated hereby and thereby have been duly
authorized by all requisite action on the part of the Purchaser. This
Agreement has been, and upon its execution the Ancillary Agreements will be,
duly executed and delivered by the Purchaser and (assuming due authorization,
execution and delivery by HHHI and the Millers) this Agreement constitutes, and
upon its execution the Ancillary Agreements will constitute, a legal, valid
and binding obligation of the Purchaser enforceable against the Purchaser in
accordance with its terms, subject to the effect of any applicable bankruptcy,
reorganization, insolvency, moratorium or similar laws affecting creditors'
rights and remedies generally and subject, as to enforceability, to the effects
of general principles of equity (regardless of whether such enforceability is
considered in a proceeding at law or in equity).
SECTION 4.02 No Conflict. Except as may result from any facts or
circumstances relating solely to HHHI or the Millers, the execution, delivery
and performance of this Agreement and the Ancillary Agreements by the Purchaser
do not and will not (a) violate, conflict with or result in the breach of any
provision of the organizational documents of the Purchaser, (b) materially
conflict with or materially violate any statute, law, rule, regulation or
Governmental Order applicable to the Purchaser, or (c) conflict with, or result
in any breach or default or other event which would have, or be reasonably
likely to have, a material adverse effect on the ability of the Purchaser to
consummate the transactions contemplated by this Agreement and the Ancillary
Agreements.
SECTION 4.03 Consents and Approvals. The execution and delivery of
this Agreement and the Ancillary Agreements by the Purchaser do not and will
not require any consent, approval, authorization or other order of, action by,
filing with, or notification to, any Governmental Authority.
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<PAGE> 22
SECTION 4.04 Compliance with Laws. To the knowledge of Purchaser,
Purchaser has conducted and continues to conduct its business in accordance
with all Laws and Governmental Orders applicable to its business or its
properties or assets. The Purchaser is not in violation of any such Law or
Governmental Order.
SECTION 4.05 Trade Secrets. To the knowledge of Purchaser, Purchaser
is not in any way making an unlawful or wrongful use of any confidential
information, customer lists or trade secrets of any third party, including
without limitation any former employer of any present or past employee of
Purchaser.
SECTION 4.06 Full Disclosure.
(a) Purchaser is not aware of any facts pertaining to Purchaser which
could have a Material Adverse Effect and which has not been disclosed to HHHI
and the Millers.
(b) No representation or warranty of Purchaser, respectively, in this
Agreement, nor any statement or certificate furnished or to be furnished to
HHHI or the Millers pursuant to this Agreement, or in connection with the
transactions contemplated by this Agreement and the Ancillary Agreements,
contains or will contain any untrue statement of a material fact, or omits or
will omit to state a material fact necessary to make the statements contained
herein or therein not misleading.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.01 Access to Information.
(a) In order to facilitate the resolution of any claims made against or
incurred by HHHI prior to the Closing, for a period of no less than four years
after the Closing, the Purchaser shall (i) retain the books and records of HHHI
which are transferred to the Purchaser pursuant to this Agreement relating to
periods prior to the Closing in a manner reasonably consistent with the prior
practices of HHHI, and (ii) upon reasonable notice, afford the officers,
employees and authorized agents and representatives of HHHI reasonable access
(including the right to make photocopies at HHHI's expense), during normal
business hours, to such books and records.
(b) In order to facilitate the resolution of any claims made by or
against or incurred by the Purchaser after the Closing or for any other
reasonable purpose, for a period of no less than four years following the
Closing, HHHI shall (i) retain all books and records of HHHI which are not
transferred to the Purchaser pursuant to this Agreement and which relate to
either HHHI or its operations or the Business for periods prior to the Closing
and which shall not otherwise have been delivered to the Purchaser, and (ii)
upon reasonable notice, afford the officers, employees and authorized agents
and representatives of the Purchaser reasonable access (including the right to
make photocopies at the expense of the Purchaser), during normal business
hours, to such books and records.
SECTION 5.02 Confidentiality. HHHI covenants and agrees to, and will
cause its Affiliates, officers and directors to: (i) treat and hold as
confidential (and not disclose or provide access to any Person to) all
information relating to trade secrets, processes, patent or trademark
applications, product development, price, customer lists, raw materials,
supplier lists, pricing and marketing plans, policies and strategies,
operations methods, product development techniques and any other confidential
information with respect to the Business of HHHI; (ii) in the event that HHHI
or any such Affiliate, officer or director becomes legally compelled to
disclose any such information, provide the Purchaser with prompt written notice
of such requirement so that the Purchaser may seek a protective order or other
remedy or waive compliance with this Section 5.02; and (iii) promptly furnish
(prior to, at, or as soon as practicable following, the Closing) to the
Purchaser any and afl copies (in whatever form or medium) of all such
22
<PAGE> 23
confidential information then in the possession of HHHI or its Affiliates,
officers and directors and destroy any and all additional copies then in the
possession of HHHI or its Affiliates, officers and directors of such
information and of analyses, compilations, studies or other documents prepared,
in whole or in part, on the basis thereof; provided, however, that this
sentence shall not apply to any information that, at the time of disclosure, is
available publicly and was not disclosed in breach of this Agreement by HHHI or
its Affiliates, officers or directors. HHHI agrees and acknowledges that
remedies at Law for any breach of their obligations under this Section 5.02 are
inadequate and that in addition thereto the Purchaser shall be entitled to seek
equitable relief, including injunctive relief and specific performance, in the
event of any such breach, without the necessity of demonstrating the inadequacy
of monetary damages.
SECTION 5.03 Excluded Liabilities. HHHI covenants and agrees that
they shall pay and discharge the Excluded Liabilities as and when the same
become due and payable, and that Purchaser has no liability responsibility for
these Excluded Liabilities.
SECTION 5.04 Further Action. Each of the parties hereto shall use all
reasonable efforts to take, or cause to be taken, all appropriate action, do or
cause to be done all things necessary, proper or advisable under applicable
Laws, and execute and deliver such documents and other papers, as may be
required to carry out the provisions of this Agreement and the Ancillary
Agreements and to consummate and make effective the transactions contemplated
hereby and thereby. Without limiting the generality of the foregoing, HHHI
shall use its best efforts and the Purchaser shall cooperate in good faith to
obtain any Non-Material Consents not obtained as of the Closing as soon as
possible after the Closing. HHHI shall not assign at the Closing any
agreement, lease, license, permit, authorization or other right included in the
Assets if an attempted assignment thereof without a Consent would constitute a
breach thereof or would be ineffective, but shall hold the same for the use and
benefit of the Purchaser and, in that connection, shall consult with the
Purchaser and take such actions as are requested by the Purchaser so that the
benefits thereof accrue to the Purchaser as of the Closing Date, and shall
assign the same to the Purchaser when the Consent is received. The Purchaser
agrees to execute and deliver such documents and instruments as may be
reasonably required to obtain a Non-Material Consent post-Closing and further
agrees to deliver any information reasonably requested concerning the Purchaser
or its financial condition to obtain such Non-Material Consents.
SECTION 5.05 Survival of HHHI; Insurance. HHHI agrees that it shall
retain its corporate existence in good standing and not voluntarily or
involuntarily dissolve until no earlier than 60 days after the Closing Date.
At all times after the Closing and prior to dissolution, HHHI shall maintain
adequate insurance to cover any Liabilities it may be subject to on account of
or arising out of its remaining operations, and shall provide to the Purchaser
at the Closing and thereafter from time to time at the Purchaser's request
certificate(s) of insurance evidencing the insurance coverage described in this
sentence. In furtherance of the covenants set forth in this Section 5.05, HHHI
agrees to continue in force at the existing limits until dissolution the
following insurance policies more particularly described in Section 3.25 of the
Disclosure Schedule: the Employee Group Health Insurance Plans between HHHI and
Blue Cross and Blue Shield of South Carolina, the Companion Life Insurance
Company group life insurance contract for HHHI employees, the Royal
Indemnity/Zurich Re Property and Casualty Policy (policy number 941201020), the
St. Paul Insurance Company Package, Auto and Umbrella Policy (policy number
FK06803241), Unisum Insurance Company flood insurance (policy numbers
FLC9820900, FLC9820340, FLC9820339), Companion Insurance Company, worker's
compensation coverage, (policy number WC103180010), North River Insurance
Liquor Bond (policy number 6101915841), Aetna C&S Computer Policy (policy
number 25IZ2Y553226), and National Union Fire Insurance Company of Pittsburgh,
Pa. Professional Liability Insurance Policy (policy number PSY-3676043).
SECTION 5.06 Name Change. On the Closing Date, HHHI shall file with
the South Carolina Secretary of State and with appropriate Governmental
Authorities in other states where HHHI is qualified to transact business as a
foreign corporation such documents as may be necessary or required and shall
take such additional action as may be necessary or required to change HHHI's
name to a corporate name not including the words "Hilton Head Health
Institute." HHHI and the Millers understand and acknowledge that, after
closing, it is the Purchaser's intention to operate the Business as an on-going
concern doing business as the "Hilton Head Health Institute."
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<PAGE> 24
ARTICLE VI
TAX MATTERS
SECTION 6.01 Cooperation and Exchange of Information. Upon the terms
set forth in Section 5.01, HHHI, the Millers and the Purchaser will provide
each other with such cooperation and information as any of them reasonably may
request of the other in filing any Tax return, amended Tax return or claim for
refund, determining a liability for Taxes or a right to a refund of Taxes,
participating in or conducting any audit or other proceeding in respect of
Taxes or making representations to or furnishing information to parties
subsequently desiring to purchase all or a part of the Business from the
Purchaser. Such cooperation and information shall include providing copies of
relevant Tax returns or portions thereof, together with accompanying schedules,
related work papers and documents relating to rulings or other determinations
by Tax authorities. At the Purchaser's expense, HHHI shall make their
independent accountants available on a basis mutually convenient to the parties
to provide explanations of any documents or information provided hereunder to
the Purchaser. HHHI, the Millers and the Purchaser shall retain all Tax
returns, schedules and work papers, records and other documents in its
possession relating to Tax matters of HHHI or the Business for each taxable
period first ending after the Closing Date and for all prior taxable periods
until the later of (i) the expiration of the statute of limitations of the
taxable periods to which such Tax returns and other documents relate,
considering any extensions for the respective Tax periods, or (ii) six years
following the due date (with any extension) for such Tax returns. Any
information obtained under this Section 6.01 shall be kept confidential except
as may be otherwise necessary in connection with the filing of Tax returns or
claims for refund or in conducting an audit or other proceeding.
SECTION 6.03 Miscellaneous.
(a) As provided in Section 2.02(b) hereof, Taxes of HHHI and their
respective Affiliates are Excluded Liabilities. Notwithstanding any provision
in this Agreement to the contrary, the representations and warranties contained
in Section 3.24 shall terminate at the close of business on the 30th day
following the expiration of the applicable statute of limitations with respect
to the Tax liabilities in question (giving effect to any waiver, mitigation or
extension thereof).
(b) From and after the date of this Agreement, neither HHHI nor the
Millers shall, without the prior written consent of the Purchaser (which may,
in its sole and absolute discretion, withhold such consent), make, or cause or
permit to be made, any Tax election that would affect the Business.
(c) HHHI shall use its best efforts to cause any "10% owner" (as
defined in Section 1060(e) of the Code) to cooperate with the Purchaser in
complying with any reporting obligations under Section 1060(e) of the Code.
ARTICLE VII
INDEMNIFICATION
SECTION 7.01 Survival of Representations and Warranties. All
representations and warranties of the Sellers and the Purchaser, and its
Parent, contained herein or made pursuant hereto shall survive the Closing;
provided, however, each party shall not be entitled to seek indemnification
from the other party after the last day of February, 2000.
SECTION 7.02 Indemnification by the Sellers. Subject to the
provisions of this Article VII, each Seller shall severally indemnify, defend
and hold harmless the Purchaser, any parent, subsidiary or affiliate of the
Purchaser, and its parent, and any director, officer, employee, agent or
advisor of any of them, or any of their respective successors or assigns
("Purchaser Indemnified Party"), from and against any and all liabilities,
losses, damages, claims, costs and expense, interest, awards, judgments, and
penalties (including, without limitation, attorney's fees and expenses)
("Loss") asserted against, resulting to, imposed upon or incurred by any
Purchaser Indemnified Party, directly or indirectly, by reason of or resulting
from:
24
<PAGE> 25
a) The material breach of or any material inaccuracy in any of the
representations and warranties of the Sellers contained in or made pursuant to
any section of this Agreement, or the Ancillary Agreements (except for the
Covenant Not to Compete and the Employment Agreement), or any facts and
circumstances constituting such a material breach or material inaccuracy; and
b) The material breach or non-performance of any covenant or
agreement of the Sellers contained in or made pursuant to this Agreement, or
the Ancillary Agreements (except for the Covenant Not to Compete and the
Employment Agreement), or any facts or circumstances constituting such a
material breach or non-performance.
SECTION 7.03 Indemnification by the Purchaser, and its Parent. Subject
to the provisions of this Article VII, the Purchaser, and its Parent, shall
indemnify, defend and hold harmless the Sellers, any parent, subsidiary or
affiliate of the Sellers, and any director, officer, employee, agent or advisor
of any of them or any of their respective heirs, successors or assigns ("Seller
Indemnified Party"), from and against any and all losses asserted against,
resulting to, imposed upon or incurred by any Seller Indemnified Party,
directly or indirectly, by reason of or resulting from:
a) the material breach of or any material inaccuracy in any of the
representations and warranties of the Purchaser, and its Parent, contained in
or made pursuant to this Agreement, or the Ancillary Agreements (except for the
Covenant Not to Compete and the Employment Agreement), or any facts or
circumstances constituting such material breach or material inaccuracy; and
b) the material breach or non-performance of any agreement of the
Purchaser, and its Parent, contained in or made pursuant to this Agreement, or
the Ancillary Agreements (except for the Covenant Not to Compete and the
Employment Agreement), or any facts or circumstances constituting such material
breach or non-performance.
SECTION 7.04 Indemnification Procedures.
a) If any legal proceeding shall be threatened or instituted, or any
claim or demand shall be asserted by any Purchaser Indemnified Party or Seller
Indemnified Party in respect of which indemnification may be sought under the
provisions of this Agreement, or the Ancillary Agreement (except for the
Covenant Not to Compete and the Employment Agreement), the Party seeking
indemnification ("Claiming Party"), shall promptly cause written notice of the
assertion of any such claims, demands or proceedings of which it has knowledge
to be forwarded to the party to whom it is claiming indemnification
("indemnitor"). Such notice shall contain a reference to the provisions hereof
or of such other agreement, instrument or certificate delivered pursuant
hereto, in respect of which such claim is being made, and shall specify, in
reasonable detail, the amount of such loss if determinable at such time. The
Claiming Party's failure to give the Indemnitor prompt notice shall not
preclude the Claiming Party from seeking indemnification from the Indemnitor
unless the Claiming Party's failure has materially prejudiced the Indemnitor's
ability to defend the claim, demand, or proceeding.
b) Third Party Claims. If the Claiming Party seeks indemnification
from the Indemnitor as a result of a claim or demand being made by a third
party ("Third Party Claim"), the Indemnitor shall have the right to promptly
assume the control of the defense of such Third Party Claim, including, at its
own expense, employment by it of counsel reasonably satisfactory to the
Claiming Party. The Claiming Party may, in its sole discretion and its sole
expense, employ counsel to represent it in the defense of the Third Party
Claim, and in such event counsel for the Indemnitor shall cooperate with
counsel for the Claiming party in such defense, provided that the Indemnitor
shall have direct and control the defense of such Third Party Claim or
proceeding. Except with the written consent of the Claiming Party, the
Indemnitor shall not consent to the entry of any judgment or enter into any
settlement of such Third Party Claim which (i) does not include an
unconditional term thereof for release of the Claiming Party from all liability
in respect of such Third Party Claim and (ii) result in the imposition on the
Claiming Party of any remedy other than money damages; provided, however, that
the Claiming Party shall not unreasonably withhold or delay its consent to the
25
<PAGE> 26
entry of any judgment or any settlement of a Third Party Claim. If the
Indemnitor elects not to exercise its right to assume the defense of the Third
Party Claim, or if the injunctive relief is sought which would have an adverse
effect on the Claiming Party, the Claiming Party may, but shall have no
obligation, to, defend against such Third Party Claim or legal proceeding in
such a manner as it may deem appropriate, and the Claiming Party may compromise
or settle such Third Party Claim and proceeding without the Indemnitor's
consent so long as the Claiming Party acts in a reasonable manner (without
regard to the Claiming Party's indemnification rights hereunder).
c) Payment. After any final judgment or award shall have been
rendered by a court, arbitration board or administration agency of competent
jurisdiction in a time in which to appeal therefrom shall have expired, or a
settlement shall have been consummated, or the Claiming Party and the
Indemnitor shall arrive at a mutually binding agreement with respect to each
separate matter alleged to be indemnified by the Indemnitor hereunder, the
Claiming Parties shall forward to the Indemnitor written notice of any sums due
and owing by it with respect to such matters (in accordance with Section 8.02)
and the Indemnitor shall pay all of the sums so owing to the Claiming Party.
SECTION 7.05. Limitation on Seller's and Purchaser's Indemnification.
Notwithstanding the obligation of the parties to indemnify each other under
this Article VII, the obligation of the parties to indemnify each other shall
be limited to the Purchase Price, as long as the Sellers receive in cash or
cash equivalent those sums and the Purchaser receives the benefit of its
bargain.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.01 Expenses. Except as otherwise specified in this
Agreement, all costs and expenses, including, without limitation, fees,
disbursements and commissions of financial advisors, counsel, accountants, and
other third parties incurred by HHHI or the Millers in connection with this
Agreement, and the Ancillary Agreements and the transactions contemplated
hereby and thereby shall be paid by HHHI. All costs and expenses, including,
without limitation, fees, disbursements and commissions of financial advisors,
counsel, accountants and other third parties incurred by the Purchaser in
connection with this Agreement, the Ancillary Agreements and the transactions
contemplated hereby and thereby shall be paid by the Purchaser.
SECTION 8.02 Notices. All notices, requests, claims, demands and
other communications hereunder shall be in writing and shall be given or made
(and shall be deemed to have been duly given or made upon receipt) by delivery
in person, by courier service, by cable, by telecopy, by telegram, by telex or
by registered or certified mail (postage prepaid, return receipt requested) to
the respective parties at the following addresses (or at such other address for
a party as shall be specified in a notice given in accordance with this Section
8.02):
26
<PAGE> 27
(a) if to HHHI: with a copy to:
Mr. Cary Griffin
Hilton Head, SC 29938 Bethea, Jordan & Griffin, P.A.
14 Valencia Road 23-B Shelter Cove Ln., Suite 400
Attention: Dr. Peter Miller Hilton Head Island, SC 29938-0003
(b) if to the Millers: with a copy to:
Mr. Cary Griffin
35 Baynard Cover Road Bethea, Jordan & Griffin, P.A.
Hilton Head, SC 29928 23-B Shelter Cove Ln., Suite 400
Hilton Head Island, SC 29938-0003
(c) if to the Purchaser:
The NextHealth Institute, Inc.
16600 N. Lago Del Oro Parkway
Tucson, AZ 85739
with a copy to:
Hecker, Phillips & Zeeb
Rockwell Building
405 West Franklin Street
Tucson, Arizona 85701
Telecopy: (602) 620-0405
Attention: Lawrence M. Hecker, Esq.
SECTION 8.03 Public Announcements. The parties to this Agreement
shall keep the existence and terms of this Agreement confidential, except to
the extent that disclosure is required by applicable laws or the parties
consent in writing otherwise. No party to this Agreement shall make, or cause
to be made, any press release or public announcement in respect of this
Agreement or the transactions contemplated hereby or otherwise communicate with
any news media without the prior consent of the other parties, and the parties
shall cooperate as to the timing and contents of any such press release or
public announcement.
SECTION 8.04 Headings. The descriptive headings contained in this
Agreement are for convenience of reference only and shall not affect in any way
the meaning or interpretation of this Agreement.
SECTION 8.05 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any Law or
public policy, all other terms and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or
other provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in an acceptable
manner in order that the transactions contemplated to the greatest extent
possible.
SECTION 8.06 Entire Agreement. This Agreement and the other
agreements, documents and instruments referenced herein constitute the entire
agreement of the parties hereto with respect to the subject matter hereof and
thereof and supersede all prior agreements and undertakings, both written and
oral, by and among HHHI, the Millers and the Purchaser with respect to the
subject matter hereof and thereof.
SECTION 8.07 Assignment. This Agreement may not be assigned by
operation of Law or otherwise without the express written consent of Seller and
the Purchaser (which consent may be granted or withheld in the sole discretion
of Seller and the Purchaser). Notwithstanding any other term or provision of
this Agreement, this Agreement, and the benefits associated herewith, may be
assigned by any probate estate or trust which is a party to this Agreement to
the beneficiaries of any such probate estate or the distributees of any such
trust.
27
<PAGE> 28
SECTION 8.08 No Third Party Beneficiaries. This Agreement shall be
binding upon and inure solely to the benefit of the parties hereto and their
permitted assigns and nothing herein, express or implied, is intended to or
shall confer upon any other Person, including, without limitation, any union or
any employee or former employee of HHHI, any legal or equitable right, benefit
or remedy of any nature whatsoever, including, without limitation, any rights
of employment for any specified period, under or by reason of this Agreement.
SECTION 8.09 Amendment. This Agreement may not be amended or modified
except by an instrument in writing signed by, or on behalf of, HHHI, the
Millers and the Purchaser.
SECTION 8.10 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of South Carolina
applicable to contracts executed in and to be performed entirely within that
state.
SECTION 8.11 Counterparts. This Agreement may be executed in one or
more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but
all of which taken together shall constitute one and the same agreement.
SECTION 8.12 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement
that relates to the acquisition of the Miller's Real Property and the financing
thereof was not performed in accordance with the terms hereof and that the
parties shall be entitled to specific performance of the terms hereof, in
addition to any other remedy at Law or equity without the necessity of
demonstrating the inadequacy of monetary damages.
SECTION 8.13 Enforcement. Any other controversy which shall arise
between the parties regarding the rights, duties or liabilities or either party
hereunder shall be settled by binding arbitration pursuant to the rules of the
American Arbitration Association, and judgement upon the award shall be entered
in accordance with the South Carolina Uniform Arbitration Act. The parties
agree (subject to the consent of the American Arbitration Association) that
such arbitration shall be processed pursuant to the American Arbitration
Association "expedited procedure" notwithstanding that the amount of
controversy may exceed the limits set forth for such procedure.
If any action, including arbitration, shall be brought by either party
to recover any sums hereunder, or for or on account of any breach, or to
enforce or interpret any of the covenants, terms or conditions of this
agreement, the prevailing parties shall be entitled to recover costs and
expenses, including reasonable attorneys fees.
If an arbitration proceeding is brought by any party to this agreement,
a request shall be made to the parties to the arbitrator that in the event a
prevailing party is not determined by the outcome of the act, the arbitrator
shall make a final determination concerning payment of all costs and expenses
(including reasonable attorneys fees) by one or both parties, as the arbitrator
deems appropriate based on the facts and circumstances of the case.
IN WITNESS OF, HHHI, the Millers and the Purchaser have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
HILTON HEAD HEALTH INSTITUTE, INC.
By:/S/SIGNATURE
Name: Peter M. Miller, Ph.D.
Its: President
THE MILLERS:
By:/S/SIGNATURE
Peter M. Miller, Ph.D.
/S/SIGNATURE
Gabrielle L. Miller
THE NEXTHEALTH INSTITUTE, INC.:
By:/S/SIGNATURE
Name: Wayne M. Morrison
Its: Chief Financial Officer
28
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1996 AND THE UNAUDITED
CONDENSED STATEMENT OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED MARCH 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 266
<SECURITIES> 0
<RECEIVABLES> 1,444
<ALLOWANCES> (430)
<INVENTORY> 510
<CURRENT-ASSETS> 2,331
<PP&E> 49,803
<DEPRECIATION> (8,480)
<TOTAL-ASSETS> 44,907
<CURRENT-LIABILITIES> 7,813
<BONDS> 3,352
0
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<COMMON> 86
<OTHER-SE> 33,656
<TOTAL-LIABILITY-AND-EQUITY> 44,907
<SALES> 4,501
<TOTAL-REVENUES> 4,627
<CGS> 0
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<OTHER-EXPENSES> 7,507
<LOSS-PROVISION> (109)
<INTEREST-EXPENSE> 65
<INCOME-PRETAX> (2,836)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,836)
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