<PAGE>   1
                                                                   EXHIBIT 4.2


               CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS

                                     OF THE

                      CONVERTIBLE PREFERRED STOCK, SERIES A

                                       AND

                      CUMULATIVE PREFERRED STOCK, SERIES B


                           (PAR VALUE $0.01 PER SHARE)

                                       OF

                                NEXTHEALTH, INC.


                ------------------------------------------------

                         PURSUANT TO SECTION 151 OF THE
                GENERAL CORPORATION LAW OF THE STATE OF DELAWARE

                ------------------------------------------------


         NextHealth, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (hereinafter called the
"Corporation"), does hereby certify that, pursuant to authority conferred on its
Board of Directors by the Certificate of Incorporation, as amended, of the
Corporation, and pursuant to the provisions of Section 151 of Title 8 of the
Delaware Code of 1953, as amended, the Board of Directors, at a meeting held on
November 11, 1996, adopted the following resolution providing for the issuance
of two (2) series of the Corporation's Preferred Stock, par value $0.01 per
share, consisting of (i) forty-six thousand sixty-five (46,065) shares of
Convertible Preferred Stock, Series A, and twenty-eight thousand nine hundred
fifty-six (28,956) shares of Cumulative Preferred Stock, Series B:

         "RESOLVED, that pursuant to the authority vested in this Board of
Directors in accordance with the provisions of ARTICLE FOURTH of the Certificate
of Incorporation, as amended, of the Corporation, two (2) series of Preferred
Stock of the Corporation known as (i) Convertible Preferred Stock, Series A, and
(ii) Cumulative Preferred Stock, Series B, respectively, be, and each hereby is,
created, classified, authorized and the issuance thereof provided for, and that
the designation and number of shares, and relative rights, preferences and
limitations thereof, shall be as set forth in the form appended hereto."

<PAGE>   2



         SECTION 1. DESIGNATION AND AMOUNT. The shares of the first series of
Preferred Stock shall be designated as "Convertible Preferred Stock, Series A"
and the number of shares constituting such series shall be 46,065, with a par
value of $0.01 per share. The shares of the second series of Preferred Stock
shall be designated as "Cumulative Preferred Stock, Series B" and the number of
shares constituting such series shall be 28,956, with a par value of $0.01 per
share. The relative rights, preferences, restrictions and other matters relating
to the Preferred Stock are contained in this Certificate of Designation.

         SECTION 2. DEFINITIONS. As used in this Certificate of Designation, the
following terms shall have the following meanings:

         "AFFILIATE" means, with respect to any Person, any Person (other than
Persons affiliated with Apollo), that directly or indirectly, controls, is
controlled by or under common control with such Person. For the purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by" and "under common control with"), as used with
respect to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
Person, whether through the ownership of voting securities, by contract or
otherwise.

         "ANNUAL DIVIDEND RATE" has the meaning set forth in Sections 3(a) and
6(b)(i) hereof.

         "APOLLO" means AP NH LLC, a Delaware limited liability company, and its
successors and assigns.

         "BOARD OF DIRECTORS" means the board of directors of the Corporation.

         "BUSINESS DAY" means any day other than a Saturday, a Sunday or a day
on which banking institutions in the City of New York, New York are authorized
or obligated by law or executive order to close.

         "CAPITAL STOCK" means any and all shares, rights to purchase, warrants,
options, convertible securities, participation or other equivalents of or
interests (other than security interests) in (however designated and whether
voting or nonvoting) corporate stock.

         "CERTIFICATE OF DESIGNATION" means this Certificate of Designation,
Preferences and Rights establishing the Preferred Stock pursuant to Section 151
of the General Corporation Law of the State of Delaware, as the same may be
amended, supplemented or modified from time to time in accordance with the terms
hereof and pursuant to applicable law.


                                       -2-
<PAGE>   3



         "CHANGE IN CONTROL" means the occurrence of any of the following
events:

                  (i) any Person or group (within the meaning of Section
         13(d)(3) or 14(d)(2) of the Exchange Act) acquires beneficial ownership
         (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
         of 20% or more of the number of shares of Common Stock or the combined
         voting power of Voting Stock of the Corporation outstanding immediately
         prior to such acquisition.

                  (ii) Preferred Directors cease for any reason to constitute at
         least forty percent (40%) of the Board of Directors.

                  (iii) the Corporation enters into any agreement or arrangement
         providing for the merger or consolidation of the Corporation with or
         into any other entity (other than a transaction which results in the
         ownership by the Corporation of not less than 51% of the voting power
         of such other entity), the sale of all or substantially all of the
         assets of the Corporation, the reorganization, liquidation or
         dissolution of the Corporation, or any similar transaction or event.

         "CLOSING DATE" means the date on which the shares of Preferred Stock
are initially issued pursuant to the Stock Purchase Agreement.

         "COMMON STOCK" means the Common Stock, par value $.01 per share, of the
Corporation and all shares hereafter authorized of any class of common stock of
the Corporation, and, in the case of a reclassification, recapitalization or
other similar change in such Common Stock or in the case of a consolidation or
merger of the Corporation with or into another Person, such consideration to
which a holder of a share of Common Stock would have been entitled upon the
occurrence of such event.

         "CONSOLIDATED NET INCOME" means, for any period, the aggregate net
income of the Corporation and its Subsidiaries for such period on a consolidated
basis, determined in accordance with generally accepted accounting principles
consistently applied, provided that there shall be excluded therefrom (i) the
proceeds of sales of assets outside of the ordinary course of business of the
Corporation and its Subsidiaries, and (ii) income attributed to any items
classified as extraordinary or nonrecurring.

         "CONVERSION DATE" has the meaning set forth in Section 9(b) hereof.

         "CONVERSION NOTICE" has the meaning set forth in Section 9(b) hereof.

         "CONVERSION PRICE" has the meaning set forth in Section 9(a) hereof.

                                       -3-
<PAGE>   4



         "CREDIT AGREEMENT" means the Credit Agreement, dated as of November 14,
1996, by and between AP LOM LLC, a Delaware limited liability company, and the
Corporation, as amended, modified and/or supplemented from time to time.

         "CREDIT AGREEMENT DEFAULT" means an Event of Default under, and as
defined in, the Credit Agreement, without giving effect to any amendment or
waiver to the Credit Agreement that is not agreed to by the Lender (as defined
in the Credit Agreement).

         "DEFAULT" has the meaning set forth in Section 6(a) hereof.

         "DEFAULT PRICE" has the meaning set forth in Section 5(e) hereof.

         "DEFAULT RIGHT" has the meaning set forth in Section 5(e) hereof.

         "DIVIDEND PAYMENT DATE" has the meaning set forth in Section 3(a)
hereof.

         "DIVIDEND PERIOD" has the meaning set forth in Section 3(a) hereof.

         "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
from time to time.

         "FAIR MARKET VALUE" of Common Stock means, as of any date, the average
of the closing prices of Common Stock for the 20 consecutive Trading Days next
preceding the date 5 days prior to the date in question. The closing price for
each day shall be: (i) the closing sales price of one share of Common Stock
quoted in the NASDAQ National Market System or any similar system of automated
dissemination of quotations of securities prices then in common use, if so
quoted; or (ii) if not quoted as described in clause (i), the average of the
highest bid and lowest offered quotations for Common Stock as reported by the
National Quotation Bureau Incorporated if at least two securities dealers have
inserted both bid and offered quotations for Common Stock on at least 5 of the
20 consecutive Trading Days next preceding the date 5 days prior to the date in
question; or (iii) if the Common Stock is listed or admitted for trading on any
national securities exchange, the last sale price, or the closing bid price if
no sale occurred, of Common Stock on the principal securities exchange on which
the Common Stock is listed or admitted for trading. If none of the conditions
set forth above is met, the closing price of Common Stock on any day or the
average of such closing prices for any period shall be the fair market value of
Common Stock for such day or period as determined by a member firm of the New
York Stock Exchange selected by the Corporation and approved by the Holders of a
majority of the outstanding Preferred Stock. If the Corporation and such Holders
are unable to agree on the selection of a member firm, then the matter shall be
submitted for arbitration to be held in New York City in accordance with the
rules of the American Arbitration Association then in effect.


                                      -4-
<PAGE>   5

         "GAAP" means those generally accepted accounting principles and
practices which are recognized as such by the American Institute of Certified
Public Accountants acting through its Accounting Principles Board or by the
Financial Accounting Standards Board or through other appropriate boards or
committees thereof and which are consistently applied for all periods after the
date hereof so as to properly reflect the financial condition, results of
operations and changes in financial position of any Person, except that any
accounting principle or practice required to be changed by such Accounting
Principles Board or Financial Accounting Standards Board (or other appropriate
board or committee of such Boards) in order to continue as a generally accepted
accounting principle or practice may be so changed.

         "HOLDER" of a share of Preferred Stock means the person in whose name
shares of Preferred Stock are registered on the books of the Corporation.

         "HOLDER'S NOTICE" has the meaning set forth in Section 5(f) hereof.

         "INDEBTEDNESS" means, with respect to any Person, all indebtedness,
obligations and liabilities of such Person, including without limitation (i) all
"liabilities" which would be reflected on a balance sheet of such Person,
prepared in accordance with GAAP, (ii) all obligations of such Person in respect
of any Guaranty, (iii) all obligations of such Person in respect of any lease of
property, real or personal, which would be capitalized on a balance sheet of the
lessee prepared in accordance with GAAP (but excluding, in any event, office
leases and equipment leases to the extent capitalized), and (iv) all
obligations, indebtedness and liabilities secured by any lien or security
interest on any property or assets of such Person; except that "Indebtedness"
shall not include any trade payables and other liabilities incurred in the
ordinary course of the Person's business up to a maximum of $250,000 in the
aggregate or otherwise approved by a majority of the Preferred Directors.
"Guaranty" means, with respect to any Person, any contract, lease, loan
agreement, indenture, mortgage, security agreement or other agreement or
obligation, whether written or oral, or any understanding of such Person,
pursuant to which such Person guarantees any Indebtedness of any other Person
(the "Primary Obligor") in any manner, whether directly or indirectly, including
without limitation agreements (i) to purchase such Indebtedness or any property
constituting security therefor, (ii) to advance or supply funds for the purchase
or payment of such Indebtedness or to maintain net worth or working capital or
other balance sheet conditions, or otherwise to advance or make available funds
for the purchase or payment of such Indebtedness, (iii) to purchase property,
securities or services primarily for the purpose of assuring the holder of such
Indebtedness of the ability of the Primary Obligor to make payment of the
Indebtedness, or (iv) otherwise to assure the holder of the Indebtedness of the
Primary Obligor against loss in respect thereof; except that "Guaranty" shall
not include the endorsement by the Corporation or by a Subsidiary in the
ordinary course of business of negotiable instruments or documents for deposit
or collection.

                                      -5-
<PAGE>   6

         "JUNIOR STOCK" means Common Stock and any other class or series of
Capital Stock of the Corporation now or hereafter issued and outstanding that
ranks junior as to dividends and/or liquidation to the Preferred Stock.

         "NASDAQ" means the National Association of Securities Dealers Automated
Quotation System.

         "PERSON" means an individual, a corporation, a partnership, a joint
venture, an association, a joint-stock company, a trust, a business trust, a
government or any agency or any political subdivision, any unincorporated
organization, or any other entity.

         "PREFERRED DIRECTORS" means the four members of the Board of Directors
elected by the Holders of Preferred Stock pursuant to Section 8(b).

         "PREFERRED STOCK" means the Series A Preferred Stock and the Series B
Preferred Stock.

         "PUT" has the meaning set forth in Section 5(d) hereof.

         "PUT PRICE" has the meaning set forth in Section 5(d) hereof.

         "REDEMPTION DATE" means any date on which shares of Preferred Stock are
to be redeemed pursuant to Section 5 hereof.

         "REDEMPTION PRICE" means, with respect to each share of Preferred
Stock, an amount equal to $92.26.

         "RESTRICTED PAYMENT" has the meaning set forth in Section 3(c) hereof.

         "SERIES A PREFERRED STOCK" means the Convertible Preferred Stock of the
Corporation, $0.01 par value per share, established pursuant to this Certificate
of Designation.

         "SERIES B PREFERRED STOCK" means the Cumulative Preferred Stock of the
Corporation, $0.01 par value per share, established pursuant to this Certificate
of Designation.

         "STOCK PURCHASE AGREEMENT" means the Stock and Warrant Purchase
Agreement dated as of November 14, 1996, between the Corporation and Apollo, as
the same may be amended, supplemented or modified from time to time in
accordance with the terms thereof.

                                      -6-
<PAGE>   7
         "STOCK PURCHASE AGREEMENT DEFAULT" means any material breach or
violation of the Corporation's representations and warranties (as of the closing
thereunder) or covenants set forth in Section 4 or 6.1 of the Stock Purchase
Agreement.

         "SUBSIDIARY" means (i) any corporation fifty percent (50%) or more of
the Voting Stock of which is owned, directly or indirectly, by the Corporation,
or (ii) any Person (other than a corporation) under the control of the
Corporation.

         "TRADING DAY" means, with respect to the Common Stock: (i) if any
series of Common Stock is quoted on the NASDAQ National Market System, any
similar system of automated dissemination of quotations of securities prices, or
the National Quotation Bureau Incorporated, each day on which quotations may be
made on such system; or (ii) if any series of Common Stock is listed or admitted
for trading on any national securities exchange, days on which such national
securities exchange is open for business; or (iii) if shares of the
Corporation's Common Stock are not quoted on any system or listed or admitted
for trading on any securities exchange, a Business Day.

         "VOTING STOCK" means, with respect to any Person, all classes of
Capital Stock of such Person then outstanding and normally entitled to vote for
the election of directors of such Person. Any reference to a percentage of
Voting Stock shall refer to the percentage of votes eligible to be cast for the
election of directors which are attributable to the applicable shares of Voting
Stock.

         SECTION 2. RANK. All shares of Preferred Stock shall rank prior, both
as to payment of dividends and as to distributions of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
to all of the Corporation's now or hereafter-issued Junior Stock.

         SECTION 3.  DIVIDENDS.

                  (a) PAYMENT OF DIVIDENDS ON PREFERRED STOCK. The Holders of
Preferred Stock shall be entitled to receive, when and as declared by the Board
of Directors, out of funds legally available therefor, cash dividends at the
rate per annum (the "Annual Dividend Rate") set forth below during the time
periods indicated, on the Redemption Price:
                                                                      Annual
                        Period                                     Dividend Rate

               Series A Preferred Stock

                   January 1, 1997 and thereafter                  00.0%

         Series B Preferred Stock

                                      -7-
<PAGE>   8

                   January 1, 1997 to January 31, 1997           12.0% 
                   February 1, 1997 and thereafter               18.0%.

Such dividends shall accrue (whether or not declared) from and including the
first day of the initial Dividend Period to and including the date on which the
Redemption Price is paid on such shares or on which such shares are converted or
redeemed and, to the extent not paid for any Dividend Period, will be
cumulative. Dividends on the Preferred Stock shall be payable quarterly, in
arrears, on March 31, June 30, September 30, and December 31 of each year
commencing March 31, 1997 (each such date, a "Dividend Payment Date"), except
that if any such date is not a Business Day, then such dividend shall be paid on
the next succeeding Business Day. Each such dividend shall be payable to Holders
of Preferred Stock at the close of business on the record date established by
the Board of Directors, which record date shall be not more than 60 days prior
to the date fixed for payment thereof. Quarterly dividend periods (each a
"Dividend Period") shall commence on and include the first day of January,
April, July and October of each year and shall end on and include the next
Dividend Payment Date; provided, however, that the initial Dividend Period shall
commence on January 1, 1997. The amount of dividends payable per share of
Preferred Stock for each full Dividend Period shall be computed by applying the
applicable Annual Dividend Rate to the Redemption Price and dividing such amount
by four (4). The amount of dividends payable for the initial Dividend Period and
any period shorter than a full Dividend Period shall be computed on the basis of
actual days elapsed and a 360-day year consisting of twelve 30-day months.
Dividends on the Preferred Stock shall accrue on a daily basis whether or not
the Corporation shall have earnings or surplus at the time.

                  (b) DISTRIBUTION OF PARTIAL DIVIDEND PAYMENTS. Except as
otherwise provided in this Certificate of Designation, if on any Dividend
Payment Date the Corporation pays less than the total amount of dividends then
accrued with respect to a Series of Preferred Stock, the amount so paid shall be
distributed ratably among the Holders of that Series of Preferred Stock based
upon the number of shares of that Series of Preferred Stock held by each such
Holder.

                  (c) LIMITATIONS ON CERTAIN PAYMENTS. So long as any Preferred
Stock shall be outstanding, the Corporation shall not declare or pay or set
apart for payment any dividends or make any other distributions on, or make any
payment on account of the purchase, redemption, exchange or other retirement of,
any Junior Stock (each, a "Restricted Payment"); provided, however, that a
"Restricted Payment" shall not include (i) any dividend or distribution payable
solely in shares of Junior Stock, (ii) the acquisition of any shares of Capital
Stock in exchange solely for shares of Junior Stock, or (iii) the acquisition of
any shares of Capital Stock from employees of the Corporation upon termination
of their services pursuant to binding written agreements entered into prior to
the issuance of the Preferred Stock or otherwise approved by a majority of
Preferred Directors.

                                      -8-
<PAGE>   9
         SECTION 4. LIQUIDATION PREFERENCE AS TO ACCRUED AND UNPAID DIVIDENDS.
In the event of any liquidation, dissolution, or winding up of the Corporation,
either voluntary or involuntary, the Holders of Preferred Stock shall be
entitled to receive out of assets of the Corporation available for distribution
to shareholders, an amount equal to the accrued and unpaid dividends on such
shares through the date of final distribution to shareholders, whether or not
declared, before any payment shall be made or any assets distributed to the
holders of Junior Stock. If the assets and funds thus distributed among the
Holders of the Preferred Stock shall be insufficient to permit the payment to
such Holders of the full preferential amount described above, then the entire
assets and funds of the Corporation legally available for distribution shall be
distributed among the Holders of the Preferred Stock in proportion to the shares
of Preferred Stock then held by them.

         SECTION 5. REDEMPTION.

                  (a) OPTIONAL REDEMPTION BY THE COMPANY. Except as provided in
Sections 5(c), 5(d) and 5(e) of this Certificate of Designation, the Corporation
may not redeem the Preferred Stock at any time before January 1, 2001.
Commencing on January 1, 2001, the Corporation may, at its option on any date
thereafter set by the Board of Directors, redeem for cash, out of funds legally
available therefor, all but not less than all of the outstanding shares of
Preferred Stock at a price per share equal to the Redemption Price plus all
accrued but unpaid dividends on such share.

                  (b) PROCEDURES FOR OPTIONAL REDEMPTION BY THE COMPANY.

                           (i) At least 30 days but not more than 60 days before
         the applicable Redemption Date, the Corporation or its transfer agent
         shall mail a notice of redemption by first-class mail postage prepaid
         to each Holder, addressed to such Holders at their last addresses shown
         on the stock transfer books of the Corporation. Such notice shall
         indicate that the shares of Preferred Stock are to be redeemed and
         shall, among other things, state:

                                    (A)     the Redemption Date;

                                    (B) the Redemption Price and the amount of
                  all accrued but unpaid dividends on such shares;

                                    (C) the Conversion Price then in effect;

                                    (D) that the shares of Preferred Stock
                  called for redemption must be surrendered to the Corporation
                  to collect the Redemption Price and all accrued and unpaid
                  dividends on such shares;

                                      -9-
<PAGE>   10

                                    (E) that shares of Preferred Stock called
                  for redemption may be converted at any time before the close
                  of business on the first Business Day preceding the Redemption
                  Date;

                                    (F) the section of this Certificate of
                  Designation pursuant to which the shares of Preferred Stock
                  called for redemption are being redeemed.

         Failure to give notice or any defect in the notice to any Holder shall
         not affect the validity of the notice given to any other Holder.

                           (iii) As long as the Corporation has complied with
         the requirements set forth in this Section 5(b), from and after the
         applicable Redemption Date, dividends on the shares of Preferred Stock
         so called for redemption shall cease to accrue, such shares shall be
         canceled and shall no longer be deemed to be outstanding, and all
         rights of the Holders thereof as stockholders of the Corporation
         (except the right to receive from the Corporation the Redemption Price
         and accrued and unpaid dividends) shall cease.

                  (c) OPTIONAL REDEMPTION BY THE HOLDER UPON CERTAIN CONDITIONS.
Subject to Section 9(j), from and after March 15, 1997, provided shares of
Series B Preferred Stock are then outstanding, each Holder of Preferred Stock
shall have the option to require the Corporation to redeem, out of funds legally
available therefor, all or any portion of the shares of Preferred Stock held by
such Holder (the "Conditional Redemption Right") at a price per share equal to
the Redemption Price plus all accrued but unpaid dividends on such shares.

                  (d) OPTIONAL REDEMPTION BY THE HOLDER UPON A CHANGE IN
CONTROL. In the event of a Change in Control and provided shares of Series B
Preferred Stock are then outstanding, each Holder of Preferred Stock shall have
the option to require the Corporation to redeem, out of funds legally available
therefor, all but not less than all of the shares of Preferred Stock held by
such Holder (the "Put"), at a price per share of Preferred Stock equal to (A)
all accrued but unpaid dividends on such share, plus (B) the higher of (i) 200%
of the Redemption Price of such share or (ii) the Fair Market Value of the
aggregate number of shares of Common Stock into which such share is convertible
on the effective date of such Change in Control (the "Put Price").

                  (e) OPTIONAL REDEMPTION BY THE HOLDER UPON A DEFAULT. In the
event of the occurrence of any Default and provided shares of Series B Preferred
Stock are then outstanding, and for so long as any such Default shall continue
to exist unwaived or uncured, each Holder of Preferred Stock shall have the
right to require the Corporation to redeem, out of funds legally available
therefor, all but not less than all of the shares of Preferred Stock held by
such Holder (the "Default Right"), at a price per share equal to the Redemption
Price plus all accrued but unpaid dividends on such share (the "Default Price").

                                      -10-
<PAGE>   11

                  (f) PROCEDURES FOR REDEMPTION UPON CONDITIONAL REDEMPTION,
CHANGE IN CONTROL OR DEFAULT. If any Holder elects to exercise its Conditional
Redemption Right, the Put or its Default Right, then such Holder shall notify
the Corporation in writing of its election (the "Holder's Notice"), and shall
surrender stock certificates evidencing the shares of Preferred Stock to be
redeemed by the Corporation pursuant to the Conditional Redemption Right, the
Put or the Default Right. Not later than twenty (20) Business Days following the
Corporation's receipt of the Holder's Notice and such surrendered stock
certificates (the "Redemption Date"), the Corporation shall pay the Redemption
Price, Put Price or the Default Price, as applicable, in cash for each share of
Preferred Stock so redeemed. As long as the Corporation has complied with the
requirements set forth in this Section 5(f), from and after the date the
Holder's Notice is given, dividends on the shares of Preferred Stock redeemed
pursuant to the Conditional Redemption Right, the Put or the Default Right shall
cease to accrue, such shares shall be canceled and shall no longer be deemed to
be outstanding, and all rights of the Holders thereof as stockholders of the
Corporation (except the right to receive from the Corporation the Redemption
Price, the Put Price or the Default Price) shall cease.

         SECTION 6.  DEFAULT.

                  (a) Each of the following events shall constitute a "Default"
under this Certificate of Designation:

                           (i) the Corporation shall fail to pay dividends
                  payable at the applicable Annual Dividend Rate on the
                  Preferred Stock on any two consecutive or non-consecutive
                  Dividend Payment Dates or on the date of final distribution of
                  dividends to Holders of Preferred Stock pursuant to Section 4.

                           (ii) the Corporation shall make any Restricted
                  Payment in violation of Section 3(c) above.

                           (iii) the Corporation shall fail to pay the
                  liquidation preference with respect to accrued and unpaid
                  dividends pursuant to Section 4.

                           (iv) the Corporation shall fail to redeem any shares
                  of Preferred Stock required to be redeemed pursuant to Section
                  5.

                           (v) the Corporation shall merge or consolidate with,
                  or transfer all or substantially all of its assets to, another
                  Person in violation of Section 7.

                                      -11-
<PAGE>   12

                           (vi) the Corporation shall take any action in
                  violation of, or shall fail to take any action required in
                  order to give effect to, the voting rights granted to Holders
                  of Preferred Stock contained in Section 8.

                           (vii) the Corporation shall authorize, create or
                  issue any class or series of Capital Stock of the Corporation
                  that is senior to or pari passu with the Preferred Stock with
                  respect to dividends or the distribution of assets upon
                  dissolution, liquidation or winding up of the Corporation.

                           (viii) without the written consent or affirmative
                  vote of the Preferred Directors, the Corporation shall amend,
                  alter or repeal any of the provisions of its by-laws, as
                  amended to date, so as to directly or indirectly adversely
                  affect any right, preference or voting power of the Holders of
                  Preferred Stock.

                           (ix) without the written consent or affirmative vote
                  of the Preferred Directors, the Corporation shall, or shall
                  permit any Subsidiary to: (A) incur any additional
                  Indebtedness not outstanding on the date of such Default; or
                  (B) enter into any acquisition, financing or other transaction
                  or series of related transactions having a total value in
                  excess of $250,000.

                           (x) a Stock Purchase Agreement Default and the
                  passage of 15 days thereafter.

                           (xi) a Credit Agreement Default.

                  (b) In the event of the occurrence of any Default, and
provided (i) written notice thereof shall have been given to the Corporation,
and (ii) such Default has not been cured or waived (within 15 days after such
notice is given), to the extent any agreement governing such Default permits
such cure or waiver:

                           (i) provided any shares of Series B Preferred Stock
                  are then outstanding, the Annual Dividend Rate applicable to
                  the Preferred Stock shall be increased to 18% commencing on
                  the date of such Default, and shall be calculated thereafter
                  on a quarterly compounded basis.

                           (ii) each Holder of Preferred Stock shall have the
                  right, provided any shares of Series B Preferred Stock are
                  then outstanding, to require the Corporation to redeem shares
                  of Preferred Stock pursuant to the Default Right described
                  above in Section 5(e).

                           (iii) notwithstanding anything to the contrary
                  contained in Section 9(a), each share of Series A Preferred
                  Stock and each share of Series B Preferred Stock shall be
                  convertible at the option of the Holder thereof 

                                      -12-
<PAGE>   13

                  into fully paid and nonassessable shares of Common Stock in
                  accordance with the provisions of Section 9.

                           (iv) Shares of Preferred Stock shall entitle the
                  Holders thereof, voting as a separate class, to elect by
                  plurality vote of the Holders of shares of Preferred Stock a
                  majority of the Board of Directors at any special meeting of
                  the Holders of Preferred Stock, at any annual or special
                  meeting of stockholders held for the purpose of electing
                  directors, or by written consent in accordance with the
                  General Corporation Law of the State of Delaware. Each Holder
                  of Preferred Stock shall have one vote for each share of stock
                  so held. At any time that such additional voting rights have
                  vested, the Corporation shall, and any Holder of Preferred
                  Stock may, call a special meeting of the Holders of shares of
                  Preferred Stock for the election of the directors to be
                  elected by them. Any vacancy in the office of the directors so
                  elected may be filled by the remaining directors elected by
                  the Holders of shares of Preferred Stock or, if none, by the
                  Holders of shares of Preferred Stock as described above.


         SECTION 7. CONSOLIDATION, MERGER AND SALE OF ASSETS, ETC. The
Corporation shall not consolidate with or merge into, or transfer all or
substantially all of its assets to, another Person unless (i) in the case of a
merger or consolidation, the Corporation is the surviving entity, the rights and
preferences of the Preferred Stock are not modified and the Corporation, as the
surviving entity, does not have outstanding any Capital Stock that ranks senior
to or pari passu with the Preferred Stock, or (ii) (A) the surviving, resulting
or acquiring Person is a Person organized under the laws of the United States,
any state thereof or the District of Columbia, or a Person organized under the
laws of a foreign jurisdiction whose equity securities are listed on a national
securities exchange in the United States or authorized for quotation on the
NASDAQ National Market System, (B) the Corporation shall make effective
provision such that, upon consummation of such transaction, the Holders of
Preferred Stock shall receive preferred stock of the surviving entity having
substantially identical terms as the Preferred Stock, and the surviving,
resulting or acquiring Person does not have outstanding any Capital Stock that
ranks senior to or pari passu with the Preferred Stock, and (C) the merger,
consolidation or transfer is approved by the written consent or affirmative vote
of the Preferred Directors.

                                      -13-
<PAGE>   14
         SECTION 8.  VOTING RIGHTS OF PREFERRED STOCK.

                  (a) Except as set forth in this Certificate of Designation or
as otherwise required by law, Holders of shares of Series A Preferred Stock
shall be entitled to vote together as a single class with the holders of shares
of Common Stock on all matters submitted for a vote of stockholders, shall be
entitled to vote separately as a separate class on all matters other than the
election of directors, and shall be entitled to notice of all stockholders'
meetings and to act by written consent in the same manner as the holders of
Common Stock. Each share of Series A Preferred Stock shall entitle the Holder
thereof to such number of votes per share as shall equal the number of shares of
Common Stock into which such share of Series A Preferred Stock is then
convertible. Any shares of Series A Preferred Stock owned, directly or
indirectly, by the Corporation or any of its Subsidiaries shall not have voting
rights hereunder and shall not be counted in determining the presence of a
quorum.

                  (b) Shares of Series A Preferred Stock shall entitle the
Holders thereof, voting as a separate class, to increase by four (4) the
then-authorized number of directors comprising the whole Board of Directors and
to elect by plurality vote of the Holders of shares of Series A Preferred Stock
four (4) directors (the "Preferred Directors") at any special meeting of the
Holders of Series A Preferred Stock, at any annual or special meeting of
stockholders held for the purpose of electing directors, or by written consent
in accordance with the General Corporation Law of the State of Delaware. Each
Holder of Series A Preferred Stock shall have one vote for each share of stock
so held. At any time that such voting rights have vested, the Corporation shall,
and any Holder of Series A Preferred Stock may, call a special meeting of the
Holders of shares of Series A Preferred Stock for the election of the Preferred
Directors to be elected by them. Any vacancy in the office of the Preferred
Directors may be filled by the remaining Preferred Director or, if none, by the
Holders of shares of Series A Preferred Stock as described above.

                  (c) So long as any shares of Series A Preferred Stock remain
outstanding, the affirmative vote of the Holders of a majority of the
outstanding shares of Series A Preferred Stock, voting as a separate class,
shall be required in order to:

         (i) amend, alter or repeal any of the provisions of the Certificate of
         Incorporation of the Corporation, as amended to date, so as to
         adversely affect any right, preference or voting power of the Holders
         of Series A Preferred Stock, or any of the provisions of this
         Certificate of Designation.

         (ii) authorize, create or issue any class or series of Capital Stock of
         the Corporation that is senior to or pari passu with the Series A
         Preferred Stock with respect to dividends or the distribution of assets
         upon dissolution, liquidation or winding up of the Corporation.

                                      -14-
<PAGE>   15

         (iii) enter into, or permit any Subsidiary to enter into, any
         transaction or series of transactions having a total value in excess of
         $250,000 per transaction or series of related transactions, or grant or
         consent to, or otherwise permit, any amendment to, supplement of, or
         waiver under, any agreement or contract with any Affiliate, unless the
         Board of Directors has determined in good faith, and has certified in
         writing to Apollo, that such transaction is (i) in the best interests
         of the Corporation or such Subsidiary, as applicable, based on full
         disclosure of all relevant facts and circumstances, and (ii) is on fair
         and reasonable terms, no less favorable to the Corporation or such
         Subsidiary than terms that the Corporation or such Subsidiary and a
         non-affiliated Person in a similar situation would agree to in an arm's
         length transaction, the terms of which have been negotiated in good
         faith.

                  (d) The foregoing voting provisions shall not apply if, at or
prior to the time when the action with respect to which such vote would
otherwise be required to be effected, all outstanding shares of Series A
Preferred Stock shall have been redeemed.

                  (e) The Series B Preferred Stock shall not have any voting
rights.

         SECTION 9.        CONVERSION OF PREFERRED STOCK.

                  (a)      RIGHT OF CONVERSION OF SERIES A PREFERRED STOCK.

                           (i) Subject to Section 6(b)(iii), each share of
Series A Preferred Stock shall be convertible at the option of the Holder
thereof, at any time and from time to time after the date of issuance of such
share, into a number of fully paid and nonassessable shares of Common Stock
equal to (x) the Redemption Price of such share of Preferred Stock as of the
Conversion Date, divided by (y) the Conversion Price in effect on the Conversion
Date, or into such additional or other securities, cash or property and at such
other rates as required in accordance with the provisions of this Section 9. For
purposes of this Certificate of Designation, the "Conversion Price" shall
initially be $0.9226 and shall be adjusted from time to time in accordance with
the provisions of this Section 9.

                           (ii) The Series B Preferred Stock shall not be
convertible into shares of Common Stock except as provided for in Section
6(b)(iii).

                  (b) CONVERSION PROCEDURES. In order to exercise the conversion
privilege, the Holder of any shares of Preferred Stock to be converted in whole
or in part shall surrender the certificate or certificates evidencing such
shares to the Corporation and shall give written notice to the Corporation
("Conversion Notice") that the Holder elects to convert such shares or the
portion thereof specified in said notice into shares of Common Stock. The
Conversion Notice shall also state the name or names (with address) in which the
certificates for shares of Common Stock which shall be issuable upon such
conversion shall be issued. Each certificate evidencing Preferred Stock

                                      -15-
<PAGE>   16
surrendered for conversion shall, unless the shares issuable on conversion are
to be issued in the same name as the registration of such shares of Preferred
Stock, be duly endorsed by, or be accompanied by instruments of transfer in form
satisfactory to the Corporation duly executed by, the Holder or its duly
authorized attorney.

         Within three (3) Business Days after receipt of a Conversion Notice and
surrender of the certificate or certificates evidencing the Preferred Stock
relating thereto, the Corporation shall issue and deliver to such Holder (or
upon the written order of such Holder) a certificate or certificates for the
number of full shares of Common Stock issuable upon the conversion of such
shares of Preferred Stock or portion thereof in accordance with the provisions
of this Section 9, and a check or cash in respect of any fractional shares of
Common Stock issuable upon such conversion, as provided in Section 9(e). In the
event that less than all the shares of Preferred Stock represented by a
certificate are to be converted, the Corporation shall issue and deliver or
cause to be issued and delivered to (or upon the written order of) the Holder of
the shares of Preferred Stock so surrendered, without charge to such Holder, a
new certificate or certificates representing a number of shares of Preferred
Stock equal to the unconverted portion of the surrendered certificate.

         Each conversion shall be deemed to have been effected on the date (the
"Conversion Date") on which the certificate or certificates evidencing shares of
Preferred Stock shall have been surrendered to the Corporation or its transfer
agent and a Conversion Notice with respect to such shares shall have been
received by the Corporation, as described above. Any Person in whose name any
certificate or certificates for shares of Common Stock shall be issuable upon
conversion shall be deemed to have become the holder of record of the shares
represented thereby on the Conversion Date; provided, however, that surrender of
the certificate or certificates evidencing shares of Preferred Stock on any date
when the stock transfer books of the Corporation shall be closed shall
constitute the Person in whose name the certificates are to be issued as the
record holder thereof for all purposes on the next succeeding day on which such
stock transfer books are open, but such conversion shall be at the Conversion
Rate in effect on the date on which such certificate or certificates shall have
been surrendered.

         Except as otherwise provided in this Section 9, no payment or
adjustment will be made for dividends or other distributions with respect to any
shares of Common Stock issuable upon conversion of shares of Preferred Stock as
provided herein. Full payment shall be made by the Corporation to any Holder of
shares of Preferred Stock surrendered for conversion in respect of dividends
accrued since the last preceding Dividend Payment Date on the shares of
Preferred Stock surrendered for conversion; provided, however, that if shares of
Preferred Stock shall be converted subsequent to any record date with respect to
any Dividend Payment Date and prior to the next succeeding Dividend Payment
Date, the dividend due on such Dividend Payment Date shall be payable with
respect to such shares of Preferred Stock notwithstanding such conversion, and
such dividend (whether or not punctually paid or duly provided for)

                                      -16-
<PAGE>   17

shall be paid to the Holder of such shares as of the close of business on such
record date, and the converting Holder need not include payment in the amount of
such dividend upon surrender of shares of Preferred Stock for conversion. Upon
conversion of any shares of Preferred Stock, the Fair Market Value of the shares
of Common Stock issued in respect thereof (together with any cash payment in
lieu of any fractional share) shall be treated as issued in exchange for the
Redemption Price of such shares of Preferred Stock.

                  (c) CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES. No fractional
shares of Common Stock or scrip representing fractional shares shall be issued
upon conversion of shares of Preferred Stock. If any fractional share of Common
Stock would, but for this Section 9(c), be issuable upon the conversion of any
shares of Preferred Stock, the Corporation shall make a payment therefor in cash
on the first Business Day immediately preceding the Conversion Date equal to the
Fair Market Value of such fractional share.

                  (d) ADJUSTMENT OF CONVERSION PRICE. The Conversion Price shall
be adjusted from time to time by the Corporation as follows:

                           (i) In case the Corporation shall (A) declare a
         dividend, or make a distribution, in shares of any series of its Common
         Stock, on any series of its Common Stock, (B) subdivide or reclassify
         any series of its outstanding Common Stock into a greater number of
         shares, (C) combine any series of its outstanding Common Stock into a
         smaller number of shares, (D) pay a dividend or make a distribution on
         any series of its Common Stock in shares of any series of its Capital
         Stock other than Common Stock, or (E) issue by reclassification of any
         series of its Common Stock shares of any series of its Capital Stock,
         the conversion privilege and the Conversion Price in effect immediately
         prior thereto shall be adjusted so that the Holder of any shares of
         Preferred Stock thereafter surrendered for conversion shall be entitled
         to receive the number of shares of Common Stock or other Capital Stock
         of the Corporation which such Holder would have owned or have been
         entitled to receive after the happening of any of the events described
         above had such Preferred Stock been converted immediately prior to the
         happening of such event. An adjustment made pursuant to this Section
         9(d)(i) shall become effective immediately after the record date in the
         case of a dividend or distribution and shall become effective
         immediately after the effective date in the case of subdivision,
         combination or reclassification. Such adjustment shall be made
         successively whenever any event referred to above shall occur. In the
         event such dividend, distribution, subdivision, reclassification or
         combination is not so made, the conversion privilege and the Conversion
         Price then in effect shall be readjusted to the conversion privilege
         and the Conversion Price which would then be in effect if such
         dividend, distribution, subdivision, reclassification or combination
         had not been declared or made, but such readjustment shall not affect
         the number of shares of Common 

                                      -17-
<PAGE>   18

         Stock or other shares of Capital Stock delivered upon any conversion
         prior to the date such readjustment is made.

                           (ii) In case the Corporation shall issue any shares
         of Common Stock (or any rights, warrants, options or convertible
         securities entitling the holders thereof to subscribe for or purchase
         any shares of Common Stock or any stock appreciation rights entitling
         the holders thereof to any interest in an increase in value of shares
         of Common Stock) at a price per share less than the Conversion Price in
         effect on the date of such issuance, then the Conversion Price shall be
         adjusted to equal such lesser price. An adjustment made pursuant to
         this Section (ii) shall become effective immediately upon the effective
         date of such issuance. Such adjustment shall be made successively
         whenever any shares, rights, warrants, options, convertible securities
         are issued at an effective price per share of Common Stock that is less
         than the Conversion Price in effect on the date of such issuance. To
         the extent that any such rights, warrants, options or convertible
         securities expire unexercised, the Conversion Price then in effect
         shall be readjusted to the Conversion Price which then would be in
         effect if such rights, options, warrants or convertible securities had
         not been issued, but such readjustment shall not affect the number of
         shares of Common Stock or other shares of Capital Stock delivered upon
         any conversion prior to the date such readjustment is made.

                           (iii) In case the Corporation shall distribute to all
         holders of any series of its Common Stock any of its assets or debt
         securities, or rights, options, warrants or convertible or exchangeable
         securities of the Corporation (including securities for cash, but
         excluding (A) distributions of Capital Stock referred to in Section
         9(d)(i) above, (B) distributions of rights, warrants or options
         referred to in Section 9(d)(ii) above, if the adjustment to the
         Conversion Price under that Section would be greater than an adjustment
         under this Section, (C) cash dividends or other cash distributions that
         are paid out of Consolidated Net Income for any current Dividend
         Period, earned surplus or retained earnings, unless the amount of such
         cash dividends or other cash distributions exceeds 5% of the aggregate
         Fair Market Value of all shares of Common Stock outstanding on the date
         such dividends or distributions are declared), then in each such case,
         the Conversion Price shall be adjusted to equal the Conversion Price in
         effect immediately prior to such distribution less an amount equal to
         the then fair market value (as reasonably determined by the Board of
         Directors, in good faith and as described in a resolution of the Board
         of Directors) of the portion of the assets or debt Securities of the
         Corporation so distributed or of such rights, options, warrants or
         convertible or exchangeable securities applicable to one share of
         Common Stock. Such adjustment shall become effective immediately after
         the record date for the determination of shares entitled to receive
         such distribution. Notwithstanding the foregoing, no adjustment of the
         Conversion Price shall be made upon the distribution to holders of any
         series of Common Stock of such rights, options, warrants, convertible
         securities, assets or debt securities if the plan or arrangement under
         which such rights, options, warrants, 

                                      -18-
<PAGE>   19

         convertible securities, assets or debt securities are issued provides
         for their issuance to Holders of shares of Preferred Stock in the same
         pro rata amounts upon conversion thereof. Such adjustment shall be made
         successively whenever any event listed above shall occur.

                           (iv) Anything in this Section 9(d) to the contrary
         notwithstanding, the Corporation shall be entitled to make such
         reductions in the Conversion Price, in addition to those required by
         this Section 9(d), as it in its reasonable discretion shall determine
         to be advisable in order that any stock dividends, subdivision of
         shares, distribution of rights to purchase stock or securities, or
         distribution of securities convertible into or exchangeable for stock
         hereafter made by the Corporation to its stockholders, shall not be
         taxable.

                           (v) Whenever the Conversion Price is adjusted as
         provided in this Section 9(d), or the Preferred Stock becomes
         convertible into shares of stock, securities, property or assets
         pursuant to Section 9(e) below, or the Corporation reduces the
         Conversion Price pursuant to Section 9(f) below, the Corporation shall
         prepare a notice of such adjustment of the Conversion Price setting
         forth the adjusted Conversion Price and the date on which such
         adjustment becomes effective, and setting forth in reasonable detail
         the facts requiring such adjustment and the calculation of such
         adjustment, and shall mail such notice of adjustment to all Holders of
         Preferred Stock at their last addresses appearing on the stock transfer
         books of the Corporation.

                           (vi) In any case in which this Section 9(d) provides
         that an adjustment shall become effective immediately after a record
         date for an event, the Corporation may defer until the occurrence of
         such event (i) issuing to the Holder of any shares of Preferred Stock
         converted after such record date and before the occurrence of such
         event the additional shares of Common Stock issuable upon such
         conversion by reason of the adjustment required by such event over and
         above the Common Stock issuable upon such conversion before giving
         effect to such adjustment, and (ii) paying to such Holder any amount in
         cash in lieu of any fractional share of Common Stock pursuant to
         Section 9(c).

                           (vii) For purposes of any computations pursuant to
         this Section 9(d), respecting consideration received, the following
         shall apply:

                                    (1) in the case of the issuance of shares of
                  Capital Stock for cash, the consideration shall be the amount
                  of such cash, provided that in no case shall any deduction be
                  made for any commissions, discounts or other expenses incurred
                  by the Corporation for any underwriting of the issue or
                  otherwise in connection therewith;

                                      -19-
<PAGE>   20
                                    (2) in the case of the issuance of shares of
                  Capital Stock for a consideration in whole or in part other
                  than cash, the consideration other than cash shall be deemed
                  to be the fair market value thereof as reasonably determined
                  in good faith by the Board of Directors or a duly authorized
                  committee thereof (irrespective of the accounting treatment
                  thereof), and described in a resolution of the Board of
                  Directors or such committee; and

                                    (3) in the case of the issuance of
                  securities convertible into or exchangeable or exercisable for
                  shares of Capital Stock, the aggregate consideration received
                  therefor shall be deemed to be the consideration received by
                  the Corporation for the issuance of such securities plus the
                  additional minimum consideration, if any, to be received by
                  the Corporation upon the conversion or exchange thereof (the
                  consideration in each case to be determined in the same manner
                  as provided in clauses (1) and (2) of this Section).

                           (viii) If after an adjustment a Holder of shares of
         Preferred Stock may, upon conversion of such Security, receive shares
         of two or more classes of Capital Stock of the Corporation, the
         Corporation shall determine on a fair basis the allocation of the
         adjusted Conversion Price between the classes of Capital Stock. After
         such allocation, the conversion privilege and the Conversion Price of
         each class of Capital Stock shall thereafter be subject to adjustment
         on terms comparable to those applicable to Common Stock in this Section
         9.

                           (ix) In no event shall an adjustment pursuant to this
         Section 9(d) reduce the Conversion Price below the then par value, if
         any, of the shares of Common Stock issuable upon conversion of shares
         of Preferred Stock.

                  (e) EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE.
If any of the following events occur, namely (i) any reclassification or change
of outstanding shares of Common Stock issuable upon conversion of shares of
Preferred Stock (other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
combination), (ii) any consolidation or merger of the Corporation with another
Person shall be effected as a result of which holders of Common Stock issuable
upon conversion of shares of Preferred Stock shall be entitled to receive stock,
securities or other property or assets (including cash) with respect to or in
exchange for such Common Stock, or (iii) any sale or conveyance of the
properties and assets of the Corporation as, or substantially as, an entirety to
any other Person, then the Corporation or such successor or purchasing Person,
as the case may be, shall make provisions in its certificate or articles of
incorporation or other constituent documents to establish that each share of
Preferred Stock then outstanding shall be convertible into the kind and amount
of shares of stock and other securities or property or assets (including cash)
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance by a holder of the number of shares of Common Stock

                                      -20-
<PAGE>   21
issuable upon conversion of such shares of Preferred Stock immediately prior to
such reclassification, change, consolidation, merger, sale or conveyance. Such
provisions shall provide for adjustments which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 9.

         If this Section 9(e) applies with respect to a transaction, Section
9(d) shall not apply with respect to that transaction. The above provisions of
this Section 9(e) shall similarly apply to successive reclassifications,
consolidations, mergers and sales.

                  (f) VOLUNTARY ADJUSTMENT. The Corporation at any time may
reduce the Conversion Price by any amount and for any period of time, provided
that such period is not less than twenty (20) Business Days. Whenever the
Conversion Price is reduced pursuant to this Section 9(f), the Corporation shall
mail to the Holders, a notice of the reduction at least 15 days before the date
the reduced Conversion Price takes effect and such notice shall state the
reduced Conversion Price and the period it will be in effect.

                  (g) TAXES ON SHARES ISSUED. The issuance of stock certificates
upon conversion or transfer of shares of Preferred Stock shall be made without
charge to the converting Holder for any tax in respect of the issuance thereof.

                  (h) RESERVATION OF SHARES; SHARES TO BE FULLY PAID; COMPLIANCE
WITH GOVERNMENTAL REQUIREMENTS. The Corporation shall reserve, free from
preemptive rights, out of its authorized but unissued shares, or out of shares
held in its treasury, sufficient shares of Common Stock to provide for the
conversion of all shares of Preferred Stock from time to time outstanding. The
Corporation covenants that all shares of Common Stock which may be issued upon
conversion of shares of Preferred Stock will upon issuance be fully paid and
nonassessable by the Corporation and free from all taxes, liens and charges with
respect to the issuance thereof.

                  (i) NOTICE TO HOLDERS PRIOR TO CERTAIN ACTIONS.  In the event:

                           (A) that the Corporation shall take any action that
         would require an adjustment in the Conversion Price pursuant to clauses
         (i), (ii) or (iii) of Section 9(d) above; or

                           (B) that any event described in Section 9(e) above
         shall occur; or

                           (C) of the voluntary or involuntary dissolution,
         liquidation or winding-up of the Corporation;

the Corporation shall cause notice of such proposed action or event to be mailed
to each Holder of record of Preferred Stock at its address appearing on the
stock transfer

                                      -21-
<PAGE>   22

books of the Corporation, as promptly as possible but in any event at least
thirty (30) days prior to the record date for such proposed action or the
effective date of such event; provided, however, that in the event that the
Corporation provides public notice of such proposed action or event specifying
the information set forth below at least ten (10) days prior to the proposed
record date or effective date, the Corporation shall be deemed to have satisfied
its obligation to provide notice pursuant to this Section 9(i). In any event,
such notice shall specify (A) the date on which a record is to be taken for the
purpose of such action, or, if a record is not to be taken, the date as of which
the holders of record of Common Stock are to be determined, or (B) the date on
which such proposed event is expected to become effective, and the date as of
which it is expected that holders of record of Common Stock shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such event. Failure to give such notice, or any defect therein, shall not affect
the legality or validity of such action or event.

                  (j) MANDATORY CONVERSION OF SERIES B PREFERRED STOCK. Each
share of Series B Preferred Stock shall be automatically converted into one
share of Series A Preferred Stock and shall not be deemed outstanding upon the
occurrence of the approval, by vote or written consent of a majority of total
votes cast in person or by proxy, by stockholders of the Corporation in
accordance with applicable Delaware and federal law, of the issuance of
additional shares of Series A Preferred Stock in excess of 17,109 shares.

                  (k) OPTIONAL CONVERSION OF SERIES B PREFERRED STOCK BY THE
HOLDER. Each share of Series B Preferred Stock shall be convertible at the
option of the Holder thereof into one share of Series A Preferred Stock, at any
time or from time to time (A) after March 15, 1997 unless the approval, by vote
or written consent of a majority of total votes cast in person or by proxy, by
stockholders of the Corporation in accordance with applicable Delaware and
federal law, of the issuance of additional shares of Series A Preferred Stock in
excess of 17,109 shares has been obtained by that date, and (B) after June 15,
1997 unless an amendment of the Corporation's Certificate of Incorporation
deleting Article 9 thereof has been (i) approved, by vote or written consent of
holders of at least two-thirds of the voting power of the outstanding stock of
the corporation entitled to vote thereon, by stockholders of the Corporation in
accordance with applicable Delaware and federal law, and (ii) filed and recorded
with the Secretary of State of the State of Delaware by that date.

         SECTION 10.       TRANSFERS; REPLACEMENT OF CERTIFICATES.

                  (a) TRANSFERS. Subject to any restrictions on transfer under
applicable securities or other laws, shares of Preferred Stock may be
transferred on the books of the Corporation by the surrender to the Corporation
of the certificate therefor properly endorsed or accompanied by a written
assignment and power of attorney properly 

                                      -22-
<PAGE>   23
executed, with transfer stamps (if necessary) affixed, and such proof of the
authenticity of signature as the Corporation or its transfer agent may
reasonably require.

                  (b) REPLACEMENT OF CERTIFICATES. If any mutilated certificate
representing shares of Preferred Stock is surrendered to the Corporation, or if
a Holder claims the certificate representing shares of Preferred Stock has been
lost, destroyed or willfully taken, the Corporation shall issue a replacement
certificate of like tenor and date if (i) the Holder provides an indemnity bond
or other security sufficient, in the reasonable judgment of the Corporation, to
protect the Corporation and any authenticating agent and any of their officers,
directors, employees or representatives from any loss which any of them may
suffer if a certificate representing shares of Preferred Stock is replaced, and
(ii) the Holder satisfies any other reasonable requirements of the Corporation.

         SECTION 11. REACQUIRED SHARES. Any shares of Preferred Stock which are
converted, purchased, redeemed or otherwise acquired by the Corporation, shall
be retired and canceled by the Corporation promptly thereafter. No such shares
shall upon their cancellation be reissued.


                                      -23-
<PAGE>   24
         IN WITNESS WHEREOF, NextHealth, Inc. has caused this Certificate of
Designation to be duly signed by William T O'Donnell, Jr, its President, and
attested by Bertha B Kenny, its Secretary, this 14th day of November, 1996.


                                                  NEXTHEALTH, INC.



                                                  BY: /S/WILLIAM T O'DONNELL, JR
                                                      --------------------------
                                                  NAME: WILLIAM T O'DONNELL, JR
                                                  TITLE: PRESIDENT



ATTEST:

BY: /S/BERTHA B KENNY
    -----------------------
NAME: BERTHA B KENNY
TITLE: CORPORATE SECRETARY


           

                                      -24-