<PAGE> 1
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 September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ___________ to ___________
Commission File Number: 0-17969
NEXTHEALTH, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 86-0589712
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
16600 N. Lago Del Oro Parkway, Tucson, Arizona 85739
(Address of Principal Executive Offices) (Zip Code)
(520) 792-5800
(Registrant's Telephone Number, including Area Code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1)has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2)has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
On November 1, 1996, there were 8,554,938 shares of the registrant's Common
Stock outstanding.
Reference is made to the listing beginning on page 16 of all exhibits filed as a
part of this report.
1
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NEXTHEALTH, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996 (unaudited) and
December 31, 1995................................................................. 3
Unaudited Consolidated Statements of Operations for the three and nine month
periods ended September 30, 1996 and 1995 ....................................... 4
Unaudited Consolidated Statements of Cash Flows for the nine month periods
ended September 30, 1996 and 1995 ............................................ 5
Unaudited Consolidated Statement of Changes in Stockholders' Equity for the
nine month period ended September 30, 1996 ........................................ 6
Unaudited Notes to the Consolidated Financial Statements ............................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ........................................................................ 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ....................................................................... 16
Item 2. Changes in Securities ................................................................... 16
Item 5. Other Information ....................................................................... 16
Item 6. Exhibits and Reports on Form 8-K ....................................................... 19
Signatures ........................................................................................ 20
</TABLE>
2
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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>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents ....................................... $ 430 $ 2,864
Short-term investments ..................................... -- 1,635
Accounts receivable, less allowance for doubtful accounts
of $380 and $431, respectively .......................... 889 1,340
Prepaid expenses ........................................... 672 476
Other current assets ....................................... 421 478
-------- --------
Total current assets .................................... 2,412 6,793
Property and equipment, net .................................... 39,554 40,158
Long-term receivables, less allowance for doubtful accounts
of $62 and $70, respectively .............................. 185 211
Intangible assets, less amortization of $7 and $33, respectively 108 704
Other assets ................................................... 495 76
-------- --------
Total assets ............................................ $ 42,754 $ 47,942
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade .................................... $ 2,730 $ 2,410
Accounts payable, construction ............................. -- 4,517
Current portion of long-term debt .......................... 3,052 --
Accrued expenses and other liabilities ..................... 4,333 3,451
-------- --------
Total current liabilities ............................... 10,115 10,378
Long-term debt and financing obligation, less current portion 4,642 985
-------- --------
Total liabilities ....................................... 14,757 11,363
-------- --------
Stockholders' Equity:
Preferred stock, $.01 par value, 4,000,000 shares
authorized; no shares issued and outstanding ............. -- --
Common stock, $.01 par value, 16,000,000 shares
authorized; 8,554,938 shares outstanding at September 30,
1996 and December 31, 1995 ............................... 86 86
Additional paid-in capital ................................. 43,453 43,453
Accumulated deficit ........................................ (15,542) (6,960)
-------- --------
Total stockholders' equity .............................. 27,997 36,579
-------- --------
Total liabilities and stockholders' equity .............. $ 42,754 $ 47,942
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000s, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30, September 30,
---------------------- ----------------------
1996 1995 1996 1995
------ ------ ------ -----
<S> <C> <C> <C> <C>
Revenue:
Net operating revenue .......... $ 4,255 $ 3,005 $ 13,502 $ 9,368
Investment income .............. 10 258 40 1,188
Other revenue .................. 61 75 248 523
-------- -------- -------- --------
Total net revenue ........ 4,326 3,338 13,790 11,079
Operating expenses:
Salaries and related benefits .. 3,695 1,953 11,225 5,784
General and administrative ..... 3,017 1,893 8,759 5,799
Business expansion ............. -- 2,601 -- 3,430
Interest ....................... 266 21 374 71
Depreciation and amortization .. 681 402 2,014 1,184
-------- -------- -------- --------
Total operating expenses . 7,659 6,870 22,372 16,268
-------- -------- -------- --------
Loss before income tax benefit ... (3,333) (3,532) (8,582) (5,189)
Income tax benefit ............... -- -- -- --
-------- -------- -------- --------
Net loss ......................... $ (3,333) $ (3,532) $ (8,582) $ (5,189)
======== ======== ======== ========
Weighted average shares of common
stock outstanding ................ 8,554 8,549 8,554 8,545
======== ======== ======== ========
Net loss per share of common stock $ (0.39) $ (0.41) $ (1.00) $ (0.61)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s)
(Unaudited)
<TABLE>
<CAPTION>
Nine months Ended
September 30,
---------------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................................. $ (8,582) $ (5,189)
Adjustments to reconcile net loss to cash (used in)
provided by operating activities:
Depreciation and amortization ............................................ 2,014 1,184
Provision (benefit) for bad debts ........................................ (122) 155
Changes in operating assets and liabilities net of effects from acquisitions:
Decrease (increase) in assets:
Accounts receivable ................................................... 598 1,991
Prepaid and other assets .............................................. (473) (495)
Increase in liabilities:
Accounts payable and accrued liabilities .............................. 2,225 5,156
Income taxes receivable ............................................... -- 4,507
-------- --------
Net cash (used in) provided by operating activities ......................... (4,340) 7,309
-------- --------
Cash flows for investing activities:
Purchase of property and equipment, net .................................. (1,103) (8,710)
Business acquisitions, net of cash acquired .............................. (88) (130)
Sale of Hilton Head Health Institute ..................................... 199 --
Purchase of long-term investments ........................................ -- (14,162)
Sale of long-term investments ............................................ -- 9,325
-------- --------
Net cash used in investing activities ....................................... (992) (13,677)
-------- --------
Cash flows from financing activities:
Exercise of Common Stock Options ......................................... -- 22
Proceeds from long-term debt ............................................. 3,929 --
Reduction of long-term debt .............................................. (2,666) (119)
-------- --------
Net cash used in financing activities ....................................... 1,263 (97)
-------- --------
Net decrease in cash and cash equivalents ................................... (4,069) (6,465)
Cash and equivalents at beginning of period ................................. 4,499 11,741
-------- --------
Cash and equivalents at end of period ....................................... $ 430 $ 5,276
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(000s, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Cost Shares Capital Deficit Equity
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 86 8,554,938 $ 43,453 $ (6,960) $ 36,579
Net loss for the nine months
ended September 30, 1996 -- -- -- (8,582) (8,582)
--------- --------- --------- ---------- ----------
Balance at September 30, 1996 $ 86 8,554,938 $ 43,453 $ (15,542) $ 27,997
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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NEXTHEALTH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(000s)
(Unaudited)
NOTE 1 - ORGANIZATION
NextHealth, Inc. is a leading provider of wellness and preventive health care
services in diverse retail markets. For over ten years, the Company has
developed effective treatment models which address individual wellness and
quality of life issues through a whole person, mind-body approach.
The Company operates in two distinct business segments. The Treatment segment
includes Sierra Tucson, Inc. ("STI"), a state licensed, special psychiatric
hospital and behavioral health care center for the treatment of substance abuse
and mental health disorders, including eating disorders and dual diagnosis and
Onsite Workshops, Inc. ("Onsite"), which offers short-term therapeutic
experiences and workshops. (See Note 3.) The Health and Leisure segment includes
Miraval(TM), a unique vacation experience blending stress management and
self-discovery programs in a luxury health resort environment, which opened in
late 1995 and Hilton Head Health Institute, Inc. ("HHHI"), a provider of weight
management programs for the development and maintenance of healthy lifestyles as
well as fitness, nutrition, stress management and other lifestyle change
programs, acquired in March 1996. (See Note 3.)
NOTE 2 - BASIS OF PRESENTATION
The unaudited consolidated financial statements presented herein should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1995. The accompanying interim consolidated financial statements as of
September 30, 1996 and for the three and nine-month periods ended September 30,
1996 and 1995 included herein are unaudited, but reflect, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary to fairly present the results for such periods. Operating
results for the three and nine-month periods ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1996.
NOTE 3 - DIVESTITURES
On October 18, 1996, the Company announced the divestiture of Onsite Workshops,
Inc. and Hilton Head Health Institute in order to further reduce corporate
overhead, eliminate long-term debt obligations and focus on its two primary
lines of business, Miraval and Sierra Tucson, Inc. The Onsite sale, which will
be completed on November 30, 1996, was made to the original owners in exchange
for the assumption of existing obligations. Goodwill of $281,000 recorded in
connection with the Onsite acquisition was written-off in anticipation of this
sale. The HHHI was purchased by NextHealth's President and Chief Executive
Officer, John Schmitz on October 1, 1996 for cash of $275,000 and assumption of
certain debt obligations, including the purchase of real property, such that no
gain or loss was realized by the Company on the sale. The Company guarantees up
to $130,000 of any loss related to the sale of the real property by John Schmitz
to an unaffiliated third party. The HHHI sales transaction was recorded in the
accompanying September 30, 1996 financial statements. This transaction was
reviewed and approved by an independent committee of the Company's Board of
Directors. In considering the divestiture of these two lines of business, the
Board concluded that neither offered a significant long-term profit potential
when compared to Miraval and Sierra Tucson, Inc. In addition, the divestitures
have a minimal impact on the Company's financial position, operations or cash
flow.
NOTE 4 - FINANCING TRANSACTIONS
On April 10, 1996, the Company obtained a $2,000 line of credit (the "LOC") from
the National Bank of
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Arizona for a term of six months. The LOC had a variable interest rate based
upon the prime rate as published in the Western Edition of the Wall Street
Journal plus 1 percent. The initial interest rate was 9.25%, payable in monthly
installments. The LOC was secured by certain real estate owned by the Company.
The LOC was paid off in full with the proceeds from the $4,000 financing
mentioned below.
On April 3, 1996, the Company negotiated an agreement with Sundt Corporation
("Sundt"), the general contractor of the Miraval project, for the payment of
approximately $3,700, which represented the remaining balance due Sundt at that
date for the construction of Miraval. This agreement has a term of eighteen
months and bears interest at an annual rate equal to the prime rate as
established by Bank One, N.A. plus 4 percent. Sundt received a $300 payment at
the closing of the LOC and will receive payments of $125 per month for a period
of eleven months commencing in May 1996. The balance remaining after the
aforementioned payments will be paid evenly in six monthly installments. Sundt
has agreed to subordinate the master Mechanics' Lien recorded against Miraval's
real property on March 28, 1996 to the LOC and additional borrowings up to
$5,000. Additionally, as part of this agreement, if the Company were to obtain
secured borrowings in excess of $5,000 or unsecured borrowings in excess of
$3,000, the unpaid balance due Sundt would immediately become due. At December
31, 1995, the amount due Sundt was classified as accounts payable, construction.
At June 30, 1996, as a result of the agreement negotiated with Sundt, the
long-term portion of this obligation has been classified as long-term debt.
On June 28, 1996, the Company amended its agreement with Sundt to facilitate the
closing of the $4,000 financing noted below. Sundt received an additional $100
payment in connection with this amendment.
On June 28, 1996, the Company secured financing in the amount of $4,000 with
Mortgages Ltd. Principal and interest at 13.75% is payable in monthly
installments of $53 through March, 1998 at which time all unpaid principal is
due and payable. The financing is collateralized by certain real estate and
property, plant and equipment owned by the Company. Proceeds were used to repay
the existing balance on the LOC and to assist with meeting short-term working
capital requirements.
On November 15, 1996, the Company completed separate equity and debt
transactions with affiliates of Apollo Real Estate Advisors, L.P. (See Part II,
Item 5). Both Sundt and Mortgages Limited were paid in full. See discussion in
the "Liquidity and Capital Resources" section.
NOTE 5 - SUBSEQUENT EVENTS
See Part II - Other Information, Item 5, Other Information.
NOTE 6 - RECLASSIFICATIONS
Certain prior period amounts in the unaudited consolidated financial statements
have been reclassified to conform to the presentation used in 1996.
8
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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 and nine-month periods ended September 30, 1996 and 1995. Certain
prior year amounts have been reclassified to conform to the presentation used in
1996. Reference should also be made to the Company's unaudited consolidated
financial statements and related notes thereto included elsewhere in this
document.
GENERAL
NextHealth, Inc. is a leading provider of wellness and preventive health care
services in diverse retail markets. For over ten years, the Company has
developed effective treatment models which address individual wellness and
quality of life issues through a whole person, mind-body approach.
The Company operates in two distinct business segments. The Treatment segment
includes Sierra Tucson, Inc., a state licensed, special psychiatric hospital and
behavioral health care center for the treatment of substance abuse and mental
health disorders, including eating disorders and dual diagnosis and Onsite,
which offers short-term therapeutic experiences and workshops. The Health and
Leisure segment includes Miraval, a unique vacation experience blending stress
management and self-discovery programs in a 106 room luxury health resort
environment, which opened in late 1995 and HHHI, a provider of weight management
programs for the development and maintenance of healthy lifestyles as well as
fitness, nutrition, stress management and other lifestyle change programs which
was acquired in March 1996. Agreements to sell both Onsite and HHHI were
executed after September 30, 1996.
The Company, as part of its long range plan, believes that it has positioned
itself to capitalize on the newly emerging health and leisure segment of the
health care services industry by developing Miraval, a luxury health resort
providing a full range of self-discovery, stress management and recreational
activities. For the nine-month period ended September 30, 1996, the Treatment
segment accounted for approximately 62% of all the Company's operating revenues
and approximately 37% of operating expenses while the Health and Leisure segment
accounted for approximately 37% of the Company's operating revenue and
approximately 46% of operating expenses. However, the Company believes that the
Health and Leisure segment will make significant contributions to the Company's
operating results in the future.
9
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RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 COMPARED TO THREE-MONTH PERIOD ENDED
SEPTEMBER 30, 1995
The significant changes in results of operations and net cash provided by (used
in) operating activities for the three-month period ended September 30, 1996,
compared to the same period in 1995 are discussed below.
<TABLE>
<CAPTION>
Three Months Ended
September 30
------------------------------------------------------
1996 1995 % Change
------------------ ------------------ -----------
<S> <C> <C> <C>
FINANCIAL RESULTS: (000s, except per share amounts)
Total net revenue ................................. $ 4,326 $ 3,338 29.6 %
Total operating expenses, less business expansion
costs ......................................... 7,659 4,269 79.4 %
Business expansion costs .......................... -- 2,601 (100.0)%
Net loss .......................................... (3,333) (3,532) 5.6 %
Net loss per share of common stock ................ (.39) (.41) 4.9 %
Net cash provided by (used in) operating activities (902) 334 (370.1)%
OPERATING DATA:
Patient days - STI ................................ 3,470 4,266 (18.7)%
Average daily census - STI ........................ 38 46 (17.4)%
Participant days - Onsite ......................... 1,927 2,137 (9.8)%
Average daily census - Onsite ..................... 21 23 (8.7)%
Participant days - HHHI (1) ....................... 2,569 -- --
Average daily census - HHHI (1) ................... 28 -- --
Guest days - Miraval (2) .......................... 4,893 -- --
Average daily guest count - Miraval (2) ........... 53 -- --
</TABLE>
(1) HHHI was acquired effective March 1, 1996.
(2) Miraval commenced operations in December 1995. Complimentary guest days
of 334 are included in the stated figures.
For the three-month period ended September 30, 1996, the loss before income tax
benefit and net loss decreased from $3.5 million in 1995 to $3.3 million in
1996. Net cash provided by operating activities was $334,000 in 1995 compared to
net cash used in operating activities of $902,000 in 1996.
Total net revenue increased $1.0 million to $4.3 million, an increase of 30%
when compared to the same period in 1995. Results reflect commencement of
operations at Miraval and the acquisition of HHHI. This increase was offset by a
decrease in investment income attributable to the use of cash and investments
for the development of Miraval.
Salaries and related benefits increased $1.7 million to $3.7 million, an
increase of 89% when compared to the same period in 1995. The increase was
primarily due to staffing requirements related to the operations at Miraval.
General and administrative expense increased $1.1 million to $3.0 million, an
increase of 59% when compared to the same period in 1995. The increase was due
primarily to operational costs related to Miraval. This increase was partially
offset by a decrease in general and administrative expense of $356,000 at Sierra
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Tucson, Inc.
The Company recognized a pre-tax loss of $3.3 million for the three-month period
ended September 30, 1996. No provision or benefit for income taxes was recorded
during this period. The Company will be able to carry forward the current period
loss to offset future tax liabilities.
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 COMPARED TO NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 1995
The significant changes in results of operations and net cash provided by (used
in) operating activities for the nine-month period ended September 30, 1996,
compared to the same period in 1995 are discussed below.
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------------------------------------------------
1996 1995 % Change
------------------ ------------------ -----------
<S> <C> <C> <C>
FINANCIAL RESULTS: (000s, except per share amounts)
Total net revenue ................................. $ 13,790 $ 11,079 24.5 %
Total operating expenses, less business expansion
costs .......................................... 22,372 12,838 74.3 %
Business expansion cost ........................... -- 3,430 (100.0)%
Net loss .......................................... (8,582) (5,189) (65.4)%
Net loss per share of common stock ................ (1.00) (0.61) (63.9)%
Net cash provided by (used in) operating activities (4,340) 7,309 (159.4)%
OPERATING DATA:
Patient days - STI ................................ 11,682 13,182 (11.4)%
Average daily census - STI ........................ 43 48 (10.4)%
Participant days - Onsite ......................... 5,800 5,862 (1.1)%
Average daily census - Onsite ..................... 21 22 (4.5)%
Participant days - HHHI (1) ....................... 7,077 -- --
Average daily census - HHHI (1) ................... 26 -- --
Guest days - Miraval (2) .......................... 12,617 -- --
Average daily guest count - Miraval (2) ........... 46 --
</TABLE>
(1) HHHI was acquired effective March 1, 1996 and was sold on October 1,
1996.
(2) Miraval commenced operations in December 1995. Complimentary guest days
of 1,895 are included in the stated figures.
For the nine-month period ended September 30, 1996, net loss increased $3.4
million to $8.6 million and net cash provided by operating activities decreased
$14.0 million resulting in net cash used in operating activities of $6.7 million
compared to the same period in 1995.
Total net revenue increased $2.7 million to $13.8 million, an increase of 24%
when compared to the same period in 1995. Results reflect commencement of
operations at Miraval and the acquisition of HHHI. This increase was offset by a
decrease in investment income attributable to the use of cash and investments
for the development of Miraval.
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Salaries and related benefits increased $5.4 million to $11.2 million, an
increase of 94% when compared to the same period in 1995. The increase was
primarily due to staffing requirements related to the operations at Miraval.
General and administrative expense increased $3.0 million to $8.8 million, an
increase of 51% when compared to the same period in 1995. The increase was
primarily due to operational costs related to Miraval. The Company recognized a
pre-tax loss of $8.6 million for the nine-month period ended September 30, 1996.
No provision or benefit for income taxes was recorded during this period. The
Company will be able to carry forward the current period loss to offset future
tax liabilities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources have typically
been cash provided by the Treatment segment's operating activities and funds
generated from the sale of investments and proceeds from public equity
offerings. Historically, these sources have been sufficient to meet the needs
and finance the operations and growth of the Company's business. Net cash
provided by the Treatment segment's operating activities has been primarily
affected by census levels and net revenue per patient day. This segment
contributed positive cash flow to the Company's operations during the three and
nine-month periods ended September 30, 1996.
Primarily as a result of operating expenditures required to support the Health
and Leisure segment until it is self sufficient, the Company's cash from
operations has decreased significantly. For the three-month period ended
September 30, 1996, the Company's net cash used in operating activities was
$902,000.
For the nine-month period ended September 30, 1996 the Company had net capital
expenditures of approximately $1.1 million. Primarily as a result of operating
expenditures required to support the Health and Leisure segment until it is
self-sufficient and the aforementioned capital expenditures, the Company's cash
reserves have decreased significantly. For the nine-month period ended September
30, 1996 the Company's net cash used in operating activities was $4.3 million.
The Treatment segment's operational results for the three-month period ended
September 30, 1996 reflect the segment's focus on attracting a high percentage
of retail patients. During this period, 74% of patient revenue was derived from
retail payments and the remaining 26% from third party payors. STI continues to
experience pressure from third party payors and managed care organizations to
restrict patient access to and payment for treatment services. Based on current
census levels and operating expenses, STI believes that it will generate
adequate cash flows to sustain the Treatment segment's ongoing operational
requirements.
Miraval, the Company's Health and Leisure segment's primary line of business,
commenced operations in December 1995. This segment's results are primarily
affected by occupancy, average annual room rates and the segment's ability to
manage costs. Miraval believes that it operates in a unique niche in an emerging
health and leisure market. Marketing and advertising initiatives for creating
marketplace awareness and demand for Miraval's services resulted in a room
occupancy rate of approximately 31% through September 30, 1996 of which 83% were
paying guests and 17% non-paying guests. As part of the segment's marketing
strategy, media, travel and trade representatives as well as other key
influencers have been invited to experience Miraval with the anticipation that
Miraval will be promoted in the marketplace. Management believes the Health and
Leisure segment will, in time, make a significant contribution to the Company's
financial condition. However, until such time that it generates positive cash
flow, short and long-term financing and the implementation of cost containment
measures will be necessary to sustain its operations.
To meet its current liquidity requirements, the Company entered into a financing
transaction. (See Item 5.)
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<PAGE> 13
The financing transaction closed on November 15, 1996. The proceeds from the
transaction were approximately $12,340,000. The source and use of funds are as
follows:
<TABLE>
<CAPTION>
Source of Funds
<S> <C>
- - Preferred Stock - Series A $ 1,578,000
- - Preferred Stock - Series B 2,672,000
- - Debt 8,090,000
-----------
Total Source of Funds 12,340,000
Use of Funds
- - Payoff of contractor obligations to Sundt Corporation 2,680,000
- - Funds placed into escrow to pay off the first mortgage with Mortgages Ltd. (1) 4,235,000
- - Payoff short term working capital loans 800,000
----------
Total Debt Repayments 7,715,000
- - Funds available to meet operating cash requirements and alleviate net
working capital deficit (2) 4,625,000
-----------
Total Use of Funds $12,340,000
===========
</TABLE>
(1) Funds were placed in escrow to avoid a prepayment penalty of
approximately $158,000. The funds placed in escrow will be used to pay
off the principal balance on January 4, 1997. The Company expects to
receive approximately $260,000 from the escrow monies after paying off
the balance on January 4, 1997.
(2) The funds available to meet operating cash requirements and alleviate
net working capital deficit will be utilized to bring trade accounts
payable and other current liabilities up to a current status. After
disbursing the funds necessary to bring trade payables and other
current liabilities to a current status, the Company expects to have
approximately $1,500,000 in cash (cash on hand) available to meet
future operating cash requirements.
The financing transaction (see Item 5) contains certain provisions related to a
stand by commitment for an additional $5,000,000. To the extent that cash on
hand is not enough to meet future operating cash requirements, the stand by
funds will be utilized to provide the cash necessary to fund future operating
cash requirements.
The Company must receive shareholder approval for certain items related to the
financing transaction (see Item 5). If shareholder approval of these items is
not obtained prior to March 15, 1997, the debt of $8,090,000 becomes immediately
due and payable as well as any accrued interest thereon and the $4,250,000 of
Preferred Stock is redeemable at the option of the holders, out of funds legally
available therefor. To the extent that shareholder approval is not obtained
related to those items required in the equity financing transaction, this would
create an immediate and significant liquidity crisis for the Company. The effect
of this potential liquidity crisis would have a major impact on the Company's
ability to continue operations.
Also, in order to alleviate current liquidity requirements, it is necessary for
the Company to increase occupancy levels and to implement additional cost
controls. Insufficient occupancy levels at Miraval or any significant decrease
in STI's patient levels would adversely affect the Company's financial position,
results of operations and cash flows. Management does not anticipate any
significant impact upon operations as a result of inflation, nor has the Company
historically experienced any such impact.
BUSINESS OUTLOOK
In 1997, the Company expects to realize a significant contribution to net income
and cash flow from its primary lines of business -- Treatment and Health &
Leisure.
Performance in the Treatment segment (Sierra Tucson, Inc.) will be driven by
continued aggressive implementation of cost controls and new marketing
initiatives. Particular emphasis will be placed on increasing the number of
self-pay patients through a combination of innovative treatment programs and
focused advertising, direct mail, field sales and outbound telemarketing
campaigns.
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<PAGE> 14
Recently introduced programs such as Recovery Plus(TM) and Sierra Care(TM) will
continue to be promoted to major referent and retail market sectors, and will
likewise be introduced to the corporate marketplace. Recovery Plus(TM) is a
unique product which ensures that a chemically-dependent patient who relapses
during the first six months following discharge will be readmitted for an
additional 10-14 days at a very modest per diem rate. This program is the first
of its kind in the treatment field, and visible evidence of STI's commitment to
the long-term recovery of each patient, and the proven effectiveness of the
Sierra Model(TM).
Sierra Care is an all-inclusive addictions package which provides the patient
with the tools necessary to meet their recovery goals within a 24 day time
frame -- and at a substantially reduced cost. Sierra Care is designed for
addiction patients with a lower acuity on the mental health diagnosis, and
those who fall more into a straight chemical dependency diagnosis.
STI will continue its traditional marketing efforts to the referent therapist
community, and look for the continued double-digit growth of prospective
patients which has characterized the third quarter of 1996.
Miraval, the Company's initial entry in the Health & Leisure category, has now
been in operation for nine months, and appears poised for steadily improving
performance in 1997. The resort has received extensive press coverage in such
diverse media as CNN, InStyle, Gourmet, and Vogue magazine (to name a few), and
has likewise gained a high level of awareness among consumers and travel
professionals.
Management's primary objective for Miraval in 1997 is to build short and
long-term occupancy levels while maintaining our unique program structure and
operational excellence. Marketing initiatives will be aimed primarily at upscale
consumers and top-echelon travel agents as well as corporate and incentive
groups. The Miraval message will be delivered through a blend of direct sales
and advertising -- including print, data base- driven direct mail, and public
relation activities.
Cost containment measures will continue to be a critical management objective in
1997. Variable staffing relative to seasonal occupancy fluctuations, a more
structured program format, and self-directed internal work teams focusing on all
aspects of operational quality should further improve efficiencies and cash
flow.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Management's Discussion and Analysis of Results of Operations and Financial
Condition contains forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 that involve a number of risks and
uncertainties. While management believes that such forward looking statements
are accurate as of the date hereof, the actual results and conditions could
differ materially from the statements contained herein. The information below
should be read in conjunction with the Company's unaudited consolidated
financial statements and related notes thereto included elsewhere and in other
portions of this document.
In addition, the following other factors could cause actual results and
conditions relating to liquidity and capital resources to differ materially.
Miraval represents a new and significant line of business for the Company.
Miraval is the Company's initial entry into a unique niche in the emerging
health and leisure market for which there is little, if any, industry market
data available. Its products and services are different than those of
traditional destination resorts or destination "spa" facilities. The Company has
little experience in the marketing, management or operation of a facility of
this nature, although it has hired qualified and experienced personnel from
related operations.
The Company is unable to project with any degree of accuracy the future
occupancy levels or revenues of Miraval because the facility is in its first
year of operation. The Company has no historical operating data for projecting
occupancy levels during peak and non-peak periods, marketing, operating or
maintenance costs and expenses. Although the Company believes that there is
strong consumer demand for Miraval's products
14
<PAGE> 15
and services because it represents a unique vacation alternative, the Company
cannot be certain that its current marketing strategy will successfully attract
the targeted clientele.
The Company cannot be certain that Miraval will generate sufficient revenues to
cover its operating expenses. Management believes that the existing capital
resources of the Company are insufficient to meet its short-term capital needs.
Additional capital may be available through short and long-term financing;
however, the Company cannot predict the terms or availability of such financing.
Miraval competes in the competitive resort hotel/spa industry. In many
instances, its competitors have greater name recognition and financial resources
as well as long-standing relationships with travel agents and tour and trip
planners. Management cannot anticipate what impact this will have on future
occupancy levels.
The entities comprising the Company's Treatment segment participate in the
highly competitive mental and behavioral health industry characterized by
intense competition for market share resulting from aggressive pricing practices
and increasing competition from companies with greater resources, including tax
exempt, non-profit status, government subsidized or endowment-related financial
support which may provide lower costs of capital.
While the Company anticipates continued growth in revenues and is committed to a
return to profitability, operating results could be adversely impacted if the
businesses are unable to anticipate customer demand accurately, are unable to
differentiate their products from those of their competitors, are unable to
offer services expeditiously in response to customer demand, or are negatively
impacted by managed care restrictions on payor reimbursement.
The Company must receive shareholder approval for certain items related to the
financing transaction (see Item 5). If shareholder approval of these items is
not obtained prior to March 15, 1997, the debt of $8,090,000 becomes immediately
due and payable as well as any accrued interest thereon and the $4,250,000 of
Preferred Stock is redeemable at the option of the holders, out of funds legally
available therefor. To the extent that shareholder approval is not obtained
related to those items required in the equity financing transaction, this would
create an immediate and significant liquidity crisis for the Company. The effect
of this potential liquidity crisis would have a major impact on the Company's
ability to continue operations.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various litigation and administrative proceedings
arising in the normal course of business. In the opinion of management, any
liabilities that may result from these claims will not, individually or in the
aggregate, have a material adverse effect on the Company's financial position,
results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES
See Item 5 - Other Information - "Financing Transaction".
ITEM 5. OTHER INFORMATION
Financing Transactions
On November 15, 1996 ("Closing Date"), the Company completed separate equity and
debt transactions with affiliates of Apollo Real Estate Advisors, L.P.
("Apollo") which consisted of: (a) the sale to AP NH LLC, a Delaware limited
liability company ("APNH") of (I) shares of two series of Preferred Stock in the
aggregate amount of $4,250,000 (the "Preferred Stock Transaction") and (ii) a
warrant (the "Warrant") to purchase 500,000 shares of the Company's Common Stock
("Common Stock") and (b) a secured loan in the amount of $13,090,000 (the "Debt
Transaction") with AP LOM LLC, a Delaware limited liability company ("APLOM").
The proceeds from these transactions will be used to retire various short-term
obligations, fund immediate cash flow requirements, and support the long-term
expansion of the Company's Miraval Health and Leisure resort. Apollo is a real
estate investment firm located in New York.
Preferred Stock Transaction
The Preferred Stock Transaction consists of the sale to APNH of 17,109 shares of
Series A Preferred Stock at a price of $92.26 per share ($1,578,476) and 28,956
shares of Series B Preferred Stock at a price of $92.26 per share ($2,671,480).
Reference herein to "Preferred Stock" shall include Series A Preferred Stock and
Series B Preferred Stock.
Immediately prior to the Closing Date, the Company's Board of Directors created
two series of Preferred Stock consisting of 46,065 of Series A Preferred Stock
and 28,956 shares of Series B Stock. The following is a summary of the
respective designations, preferences and rights of the Series A and Series B
Preferred Stock as set forth in the Certificate of Designation, Preference and
Rights filed with the State of Delaware, Office of the Secretary of State
("Series Designation").
1. Dividends. The holders of Series A Preferred Stock are not entitled to
receive dividends unless there is a default (as discussed below) in which event
the default rate on the Series A Preferred Stock will be 18%. The holders of
Series B Preferred Stock are entitled to receive cumulative, preferred dividends
at the rate of 12% per annum from January 1, 1997 to January 31, 1997 and at the
rate of 18% per annum from February 1, 1997 and thereafter and upon a default of
the provisions of the Series Designation.
16
<PAGE> 17
So long as any shares of Preferred Stock remain outstanding, the Company may not
declare or pay any cash dividends or make any other distributions with respect
to the Common Stock.
2. Liquidation Preferences. In the event of any liquidation, dissolution or
winding-up of the Company, the holders of Preferred Stock shall be entitled to a
liquidation preference over the holders of Common Stock in the amount of any
accrued but unpaid dividends. There are no other liquidation preferences.
3. Voting Rights. The holders of Series B Preferred Stock do not possess any
voting rights. The holders of Series A Preferred Stock are entitled to vote on
all matters presented to the Company's shareholders for a vote and, except with
respect to the election of Directors, each share of Series A Preferred Stock
shall entitle the holder thereof to such number of votes per share as shall
equal the number of shares of the Company's common stock into which such share
of Series A Preferred Stock is then convertible. Initially, each share of Series
A Preferred Stock is convertible into 100 shares of Common Stock.
In addition, the holders of Series A Preferred Stock, as a class, are entitled
to elect four directors to the Company's Board of Directors ("Preferred
Directors").
Upon the occurrence of an event of default as defined in the Series Designation,
the holders of Series A Preferred Stock will become entitled to elect a majority
of the Company's Board of Directors.
A majority vote of the holders of the outstanding Series A Preferred Stock is
required in order to approve certain transactions including: (I) the amendment
of the Company's Certificate of Incorporation so as to adversely affect the
rights of the holders of Series A Preferred Stock or any of the provisions of
the Certificate of Designation; (ii) authorize, create or issue any class of
capital stock that is senior to or pari passu with the Series A Preferred Stock
or (iii) enter into a transaction having a total value in excess of $250,000 per
transaction except under certain conditions.
4. Conversion of Preferred Stock into Common Stock. As of the Closing Date, each
share of Series A Preferred Stock is convertible into 100 shares of Common Stock
or 1,710,900 shares in the aggregate. Shares of Series B Preferred Stock are not
convertible into Common Stock . The number of shares of Common Stock issuable
upon conversion of the Series A Preferred Stock is subject to adjustment to
reflect certain transactions affecting the Common Stock such as issuance of
Common Stock at less than $0.9226 per share, stock dividends, splits, reverse
splits, etc. Upon Shareholder Approval (as defined below) an additional 28,956
shares of Series A Preferred Stock is issuable which will be convertible into
2,895,600 shares of Common Stock.
5. Conversion of Series B Preferred Stock into Series A Preferred Stock. Each
share of Series B Preferred Stock is subject to mandatory conversion into Series
A Preferred Stock, on a one for one basis, upon the approval by a majority of
the total votes cast by the stockholders of Company of the issuance of
additional shares of Series A Preferred Stock in excess of 17,109 shares
("Shareholder Approval"); provided such approval is obtained prior to March 15,
1997.
Each share of Series B Preferred Stock shall be convertible, at the option of
the holder, into one share of Series A Preferred Stock after March 15, 1997
unless shareholder approval has been obtained and after June 15, 1997 unless the
Company's Certificate of Incorporation has been amended to delete Article 9
thereof. Article 9 imposes a 66 2/3% affirmative shareholder voting requirement
in connection with certain change of control transactions such as a merger,
consolidation, sale of assets, etc.
The Company anticipates that a meeting of the shareholders will be held prior to
March 15, 1997 in order to consider whether or not (I) the shares of Series B
Preferred Stock should be converted into Series A Preferred Stock and (ii)
Article 9 should be deleted.
Two shareholders holding an aggregate 2,686,762 shares of Company Common Stock
have granted an
17
<PAGE> 18
irrevocable proxy to APNH to vote all their shares in favor of the foregoing
items and for the election of the Preferred Directors.
6. Redemption. Commencing on January 1, 2001, the Company may, at its option,
redeem shares of Preferred Stock at a price per share equal to the redemption
price of $92.26 per share ("Redemption Price") plus all accrued but unpaid
dividends.
If Shareholder Approval has not been obtained before March 15, 1997, unless and
until Shareholder Approval is obtained, the holders of Preferred Stock shall
have the option to require the Company to redeem all or any portion of their
Preferred Stock at a price equal to the Redemption Price plus all accrued and
unpaid dividends.
Unless and until Shareholder Approval is obtained, upon a "change in control" as
defined in the Series Designation, the holders of Preferred Stock shall have the
option to require the Company to redeem all but not less than all of their
shares of Preferred Stock at a price equal to the greater of 200% of the
Redemption Price or the fair market value of the aggregate number of shares of
Common Stock into which such shares are convertible on the effective date of
such change in control. A change of control includes the acquisition of 20% or
more of the outstanding voting stock of the Company; the merger or consolidation
or sale of substantially all of the assets of the Company or if the Preferred
Directors cease to constitute at least forty percent (40%) of the Board of
Directors.
Unless and until Shareholder Approval is obtained, upon the occurrence of any
default, the holders of Preferred Stock shall have the option to require the
Company to redeem all but not less than all of the shares of Preferred Stock
held by such person at a price equal to the redemption price plus all accrued
but unpaid dividends. Events of default include the failure to pay dividends for
any of two quarterly periods, a default under the Stock Purchase Agreement and
the passage of fifteen days thereafter, a default under the Credit Agreement,
etc.
Warrant
The Warrant entitles APNH to purchase 500,000 shares of Common Stock at an
exercise price of $1.50 per share. The Warrant is exercisable only on or after
March 15, 1997 and before November 14, 2006. The exercise price and number of
shares purchasable are subject to adjustment to reflect certain transactions
affecting the Common Stock such as stock dividends, splits, reverse splits, etc.
Debt Transaction
The Debt Transaction consisted of a loan funded at the time of closing in the
principal amount of $8,090,000 together with a $5,000,000 standby commitment.
The promissory notes evidencing the Debt Transaction ("Promissory Notes") bear
interest at the rate of 10% per annum during the first year; 11% during the
second year and 12% during the third year and increases to 18% per annum upon
the occurrence of an event of default or on February 1, 1997 if Shareholder
Approval has not been obtained by that date. The Promissory Notes mature on the
third anniversary of the Closing Date. The Promissory Notes become immediately
due and payable if such shareholder approval has not been obtained on or before
March 15, 1997.
The Promissory Notes are secured by a deed of trust to essentially all of the
land and buildings of the Company, a security interest in all of its personal
property and by the collateral pledge of the Company's stock in each of its
subsidiaries.
Transfer of Assets of Sierra Tucson, Inc.
On November 13, 1996, immediately prior to the completion of a debt and equity
transaction with affiliates of Apollo Real Estate Advisors ("Apollo") and at the
request of Apollo, the assets of Sierra Tucson, Inc. were
18
<PAGE> 19
transferred to Soften Realty, L.L.C., a Delaware limited liability company
comprised of NextHealth, Inc. and AP NH, L.L.C., a Delaware limited liability
company ("Soften"). The transfer of assets to Soften will not materially affect
the operation of the Company. The purchase price for the assets so transferred
is $8,000,000 with a nominal cash payment and the balance payable in accordance
with a promissory note delivered at the closing secured by a Security Agreement.
Management Changes
On November 14, 1996, John H. Schmitz resigned as the Company's President, Chief
Executive Officer and Chief Financial Officer and as a director. The Company's
Chairman of the Board and founder, Mr. William T. O'Donnell, Jr., was appointed
acting Chief Executive Officer and President and Ms. Loree Thompson was
appointed as acting Chief Financial Officer. Mr. Stephen Berger was elected to
fill the vacancy created by the resignation and to serve the remaining term of
Mr. Schmitz. Mr. Berger is a partner in the Chicago law firm of Neal, Gerber and
Eisenberg.
Immediately following the closing of the Preferred Stock Transaction, the
holders of Series A Preferred Stock elected the following persons as directors
of the Company: Lee S. Neibart, W. Edward Scheetz, Bruce Spector and Alfred C.
Trivilino. Each of the Preferred Directors is affiliated with Apollo.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
NONE
(b) Reports on Form 8-K
NONE
19
<PAGE> 20
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: November 19, 1996 BY: /s/ William T. O'Donnell, Jr.
--------------------------------------
WILLIAM T. O'DONNELL, JR.
President and Chief Executive Officer
DATE: November 19, 1996 BY: /s/ Loree Thompson
--------------------------------------
LOREE THOMPSON
Principal Financial and Accounting Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AS OF SEPT. 30, 1996 AND THE UNAUDITED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED SEPT. 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 430
<SECURITIES> 0
<RECEIVABLES> 1,284
<ALLOWANCES> 380
<INVENTORY> 405
<CURRENT-ASSETS> 2,412
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<DEPRECIATION> (9,462)
<TOTAL-ASSETS> 42,754
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<COMMON> 86
<OTHER-SE> 27,911
<TOTAL-LIABILITY-AND-EQUITY> 42,754
<SALES> 13,502
<TOTAL-REVENUES> 13,790
<CGS> 0
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<OTHER-EXPENSES> 22,119
<LOSS-PROVISION> (121)
<INTEREST-EXPENSE> 374
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