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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
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, 1997, there were 8,554,938 shares of the registrant's Common
Stock outstanding.
Reference is made to the listing beginning on page 15 of all exhibits filed as a
part of this report.
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NEXTHEALTH, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997 (unaudited) and
December 31, 1996.......................................................... 3
Unaudited Consolidated Statements of Operations for the three and nine month
periods ended September 30, 1997 and 1996 ................................. 4
Unaudited Consolidated Statements of Cash Flows for the nine month periods
ended September 30, 1997 and 1996 ......................................... 5
Unaudited Consolidated Statement of Changes in Stockholders' Equity for the
nine month period ended September 30, 1997 ................................ 6
Unaudited Notes to the Consolidated Financial Statements ....................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................ 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings .............................................................. 15
Item 6. Exhibits and Reports on Form 8-K ............................................... 15
Signatures ................................................................................ 16
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000s, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents ......................................... $ 832 $ 1,373
Accounts receivable, less allowance for doubtful accounts
of $455 and $457, respectively ............................ 455 928
Prepaid expenses ............................................. 200 387
Other current assets ......................................... 788 902
-------- --------
Total current assets ...................................... 2,275 3,590
Property and equipment, net ...................................... 36,225 37,417
Long-term receivables, less allowance for doubtful accounts
of $39 and $56, respectively ................................ 116 167
Intangible assets, less amortization of $126 and $29, respectively 354 451
Other assets ..................................................... 31 41
-------- --------
Total assets .............................................. $ 39,001 $ 41,666
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade ...................................... $ 849 $ 2,050
Accrued expenses and other liabilities ....................... 5,299 4,828
-------- --------
Total current liabilities ................................. 6,148 6,878
Long-term debt and financing obligation, less current portion .. 9,953 8,359
-------- --------
Total liabilities ......................................... 16,101 15,237
-------- --------
Mandatorily Redeemable Preferred Stock:
Series A, $.01 par value, 46,065 shares authorized,
17,109 shares outstanding at Dec. 31, 1996 ................... -- 1,578
Series B, $.01 par value, 28,956 shares authorized,
28,956 shares outstanding at Dec. 31, 1996 ................... -- 2,672
Stockholders' Equity:
Preferred stock- undesignated, $.01 par value, 3,924,979
shares authorized at Sept. 30, 1997 and Dec. 31, 1996;
no shares issued and outstanding ............................ -- --
Preferred stock, Series A, $.01 par value, 46,065 shares
authorized; 46,065 shares outstanding at Sept. 30, 1997 ...... -- --
Common stock, $.01 par value, 16,000,000 shares
authorized; 8,554,938 shares outstanding at both Sept. 30,
1997 and Dec. 31, 1996 ...................................... 86 86
Additional paid-in capital ..................................... 47,997 43,747
Accumulated deficit ............................................ (25,183) (21,654)
-------- --------
Total stockholders' equity ................................ 22,900 22,179
-------- --------
Total liabilities and stockholders' equity ................ $ 39,001 $ 41,666
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
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NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000s, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30, September 30,
------------------- --------------------
1997 1996 1997 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Net operating revenue.............. $ 3,681 $ 4,255 $14,770 $13,502
Other revenue...................... 129 71 323 288
------- ------- ------- -------
Total net revenue............ 3,810 4,326 15,093 13,790
Operating expenses:
Salaries and related benefits...... 2,415 3,695 8,586 11,225
General and administrative......... 2,081 3,017 7,268 8,759
Interest........................... 299 266 817 374
Depreciation and amortization...... 644 681 1,951 2,014
------- ------- ------- -------
Total operating expenses..... 5,439 7,659 18,622 22,372
------- ------- ------- -------
Loss before income tax benefit....... (1,629) (3,333) (3,529) (8,582)
Income tax benefit................... -- -- -- --
------- ------- ------- -------
Net loss............................. $(1,629) $(3,333) $(3,529) $(8,582)
======= ======= ======= =======
Weighted average shares of common
stock outstanding.................... 8,554 8,554 8,554 8,554
======= ======= ======= =======
Net loss per share of common stock... $ (0.19) $ (0.39) $ (0.41) $ (1.00)
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
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NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s)
(Unaudited)
<TABLE>
<CAPTION>
Nine months Ended
September 30,
-----------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................. $(3,529) $(8,582)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization............. 2,025 2,014
Provision (benefit) for bad debts......... 182 (122)
Minority interest......................... 41 --
Changes in operating assets and liabilities
net of effects from acquisitions:
Decrease (increase) in assets:
Accounts receivable..................... 343 598
Other assets............................ 311 (473)
Increase (decrease) in liabilities:
Accounts payable, accrued expenses and
other liabilities..................... (771) 2,225
------- -------
Net cash used in operating activities.......... (1,398) (4,340)
------- -------
Cash flows from investing activities:
Purchase of property and equipment........ (664) (1,013)
Business acquisitions, net of cash
acquired................................ -- (88)
Sale of Hilton Head Health Institute...... -- 199
------- -------
Net cash used in investing activities.......... (664) (992)
------- -------
Cash flows from financing activities:
Proceeds from long-term borrowings........ 1,600 3,929
Reduction of long-term borrowings and
financing obligation.................... (79) (2,666)
------- -------
Net cash provided by financing activities...... 1,521 1,263
------- -------
Net decrease in cash and equivalents........... (541) (4,069)
Cash and equivalents at beginning of period.... 1,373 4,499
------- -------
Cash and equivalents at end of period.......... $ 832 $ 430
======= =======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(000s, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Total
--------------- ------------ Paid-in Accumulated Stockholder's
Cost Shares Cost Shares Capital Deficit Equity
---- ------ ---- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Dec. 31, 1996.......... $ -- -- $86 8,554,938 $ 43,747 $(21,654) $ 22,179
Removal of Mandatory redemption
provisions on previously-
issued Preferred Stock,
Series A........................ -- 46,065 -- -- 4,250 -- 4,250
Net loss for the nine months
ended Sept. 30, 1997............ -- -- -- -- -- (3,529) (3,529)
----- ------ --- --------- -------- -------- --------
Balance at Sept. 30, 1997......... $ -- 46,065 $86 8,554,938 $ 47,997 $(25,183) $ 22,900
===== ====== === ========= ======== ======== ========
</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,
Sierra Tucson, LLC ("Sierra Tucson"), is an inpatient, state licensed
psychiatric hospital and behavioral health care center for the treatment of
substance abuse and a broad range of mental health and behavioral health
disorders. The Health and Leisure segment, Sierra Healthstyles, Inc. d/b/a
Miraval(TM) ("Miraval"), is a unique vacation experience blending stress
management and self-discovery programs in a luxury health resort environment. In
1996, the Treatment and Health and Leisure segments included Onsite (which
offered short-term therapeutic treatment experiences and workshops) and Hilton
Head Health Institute ("HHHI", a provider of weight management programs,
acquired March 1, 1996), respectively. Onsite and HHHI were divested on November
30, 1996 and October 1, 1996, respectively.
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, 1996. The accompanying interim consolidated financial statements
as of September 30, 1997 and for the three and nine-month periods ended
September 30, 1997 and 1996 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, 1997 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1997. The operations of Miraval appear to be
seasonal, and occupancy levels have fallen off during the summer months. An
effort is being made to offset this trend by offering seasonally-adjusted rates
and guest packages. Miraval was closed for two weeks in July in response to
reduced consumer demand as well as to permit certain renovations and
improvements to the facilities.
NOTE 3 -- STOCKHOLDERS' EQUITY
The Company received stockholder approval for conversion of the Series B
Preferred Stock to Series A Preferred Stock at a Special Meeting of
Stockholders held on January 29, 1997. As a result, each share of Series B
Preferred Stock outstanding was automatically converted into one share of
Series A Preferred Stock. Prior to stockholder approval, the holders of
preferred stock had the right to require the Company to redeem both Series A
and Series B Preferred Stock as long as any Series B Preferred Stock was
outstanding. As no Series B Preferred Stock remained outstanding as of
September 30, 1997 and thus the Preferred Stock was no longer mandatorily
redeemable, amounts attributable to Series A Preferred Stock have been
classified as equity in the accompanying unaudited balance sheet.
NOTE 4 -- EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is based on the weighted average shares outstanding,
as exercisable stock options, outstanding warrants and convertible preferred
stock are anti-dilutive (decrease the loss per share amount).
In February, 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. The new
requirements will not impact the primary earnings per share for either the
three month or nine month periods ended September 30, 1997 or September 30,
1996. The Company has not yet determined what the impact of Statement 128 will
be on the calculation of fully diluted earnings per share.
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NOTE 5 -- RECLASSIFICATIONS
Certain prior period amounts in the unaudited consolidated financial statements
have been reclassified to conform to the presentation used in third quarter
1997.
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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, 1997. Certain prior
year amounts have been reclassified to conform to the presentation used in
1997. 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,
Sierra Tucson, LLC ("Sierra Tucson"), is a state licensed, special psychiatric
hospital and behavioral health care center for the treatment of substance abuse
and a broad range of mental health and behavioral health disorders. The Health
and Leisure segment, Sierra Healthstyles, Inc. d/b/a Miraval(TM) ("Miraval"), is
a unique vacation experience blending stress management and self-discovery
programs in a luxury health resort environment. In 1996, the Treatment and
Health and Leisure segments included Onsite (which offered short-term
therapeutic treatment experiences and workshops) and Hilton Head Health
Institute ("HHHI", a provider of weight management programs acquired on March 1,
1996), respectively. Onsite and HHHI were divested on November 30, 1996 and
October 1, 1996, respectively.
The Company, as part of its long range plan, believes that it has positioned
itself to capitalize on the newly emerging health and leisure segment of the
health care services industry by developing Miraval, a luxury health resort
providing a full range of self-discovery, stress management and recreational
activities. The Company also continues to seek ways to increase market share for
its existing Treatment segment. For the nine-month period ended September 30,
1997, the Treatment segment accounted for approximately 56% of the Company's
operating revenues and approximately 34% of operating expenses while the Health
and Leisure segment accounted for approximately 41% of the Company's operating
revenue and approximately 53% of operating expenses. The Company believes that
the Health and Leisure segment will make significant contributions to the
Company's operating results in the future.
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RESULTS OF OPERATIONS
- ---------------------
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1997 COMPARED TO THREE-MONTH PERIOD
ENDED SEPTEMBER 30, 1996
The significant changes in results of operations and net cash used in operating
activities for the three-month period ended September 30, 1997, compared to the
same period in 1996 are discussed below.
<TABLE>
<CAPTION>
Three Months Ended
September 30
---------------------------
1997 1996 % Change
------ ------- ---------
<S> <C> <C> <C>
FINANCIAL RESULTS: (000s, except per
share amounts)
Total net revenue....................... $3,810 $ 4,326 (11.9)%
Total operating expenses................ 5,439 7,659 (29.0)%
Net loss................................ (1,629) (3,333) 51.1 %
Net loss per share of common stock...... (.19) (.39) 51.3 %
Net cash used in operating activities... (139) (902) 84.5 %
OPERATING DATA:
Patient days - Sierra Tucson............ 4,104 3,470 18.3 %
Average daily census - Sierra Tucson.... 45 38 18.4 %
Participant days - Onsite(1)............ -- 1,927 --
Average daily census - Onsite(1)........ -- 21 --
Participant days - HHHI(2).............. -- 2,569 --
Average daily census - HHHI(2).......... -- 28 --
Guest days - Miraval(3)................. 3,504 4,893 (28.4)%
Average daily guest count - Miraval(3).. 38 53 (28.3)%
</TABLE>
(1) Onsite was divested on November 30, 1996.
(2) HHHI was acquired March 1, 1996 and divested on October 1, 1996.
(3) Guest days include both paying and complimentary stays. Miraval was closed
for two weeks in July, 1997 due to low customer demand and to make needed
improvements to the facility.
For the three-month period ended September 30, 1997, the loss before income tax
benefit and net loss decreased from $3.3 million in 1996 to $1.6 million in
1997, a 51% improvement. Net cash used in operating activities was $139,000 in
1997 compared to $902,000 in 1996, a 84.5% improvement.
Total net revenue decreased $516,000 to $3.8 million, a decrease of 11.9% when
compared to the same period in 1996. Results reflect the absence of revenue
related to the divestiture of two subsidiaries in the 4th quarter of 1996. A
partial offset of this decrease relates to an increase of $310,000 from
continuing operations.
Salaries and related benefits decreased $1.3 million to $2.4 million, a decrease
of 34.6% when compared to the same period in 1996. The decrease was primarily
due to staff reorganization at the corporate level, variable staffing at Miraval
and divestiture of two subsidiaries.
General and administrative expense decreased $936,000 to $2.1 million, a
decrease of 31% when compared to the same period in 1996. The decrease was due
primarily to corporate cost reductions and the divestiture of two subsidiaries.
The Company recognized a pre-tax loss of $1.6 million for the three-month period
ended September 30, 1997. 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.
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NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1997 COMPARED TO NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 1996
The significant changes in results of operations and net cash used in operating
activities for the nine-month period ended September 30, 1997, compared to the
same period in 1996 are discussed below.
<TABLE>
<CAPTION>
Nine-months Ended
September 30,
-----------------------------------------
1997 1996 % Change
--------- --------- --------
<S> <C> <C> <C>
FINANCIAL RESULTS: (000s, except share amounts)
Total net revenue............................................. $ 15,093 $ 13,790 9.5 %
Total operating expenses...................................... 18,622 22,372 (16.8)%
Net loss...................................................... (3,529) (8,582) 58.9 %
Net loss per share of common stock............................ (0.41) (1.00) 59.0 %
Net cash used in operating activities......................... (1,398) (4,340) 67.8 %
OPERATING DATA:
Patient days - Sierra Tucson.................................. 12,969 11,682 (11.0)%
Average daily census - Sierra Tucson.......................... 48 43 (11.6)%
Participant days - Onsite(1).................................. -- 5,800 --
Average daily census - Onsite(1).............................. -- 21 --
Participant days - HHHI(2).................................... -- 7,077 --
Average daily census - HHHI(2)................................ -- 26 --
Guest Days - Miraval(3)....................................... 18,276 12,617 44.9 %
Average daily guest count - Miraval(3)........................ 67 46 45.7 %
</TABLE>
(1) Onsite was divested on November 30, 1996.
(2) HHHI was acquired March 1, 1996 and divested on October 1, 1996.
(3) Guest days include both paying and complimentary stays. Miraval was closed
for two weeks in July, 1997 due to low customer demand and to make needed
improvements to the facility.
For the nine-month period ended September 30, 1997, the loss before income tax
benefit and net loss decreased from $8.6 million in 1996 to $3.5 million in
1997, a 59% improvement. Net cash used in operating activities decreased $2.9
million resulting in net cash used in operating activities of $1.4 million in
1997 compared to $4.3 million for the same period in 1996, a 67.8% improvement.
Total net revenue increased $1.3 million to $15.1 million, an increase of 9.5%
when compared to the same period in 1996. Results reflect a $3.6 million
increase in revenue from continuing operations which was partially offset by the
divestiture of two subsidiaries in the fourth quarter of 1996.
Salaries and related benefits decreased $2.6 million to $8.6 million, a decrease
of 23.5% when compared to the same period in 1996. The decrease was realized in
all segments, but primarily as a result of corporate restructuring and the
divestitures.
Interest expense increased $443,000 to $817,000 as a result of the financing
transaction which occurred in the fourth quarter of 1996.
General and administrative expense decreased $1.5 million to $7.3 million, a
decrease of 17% when compared to the same period in 1996. The decrease was
primarily due to corporate cost reductions and to the divestitures.
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The Company recognized a pre-tax loss of $3.5 million for the nine-month period
ended September 30, 1997. No provision or benefit for income taxes was recorded
during this period. The Company will be able to carry forward the current
period loss to offset future tax liabilities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources have
typically been cash provided by the Treatment segment's operating activities,
funds generated from the sale of investments and proceeds from public equity
offerings and short-term borrowings. 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, 1997.
For the nine-month period ended September 30, 1997 the Company had net capital
expenditures of approximately $664,000. Included in these expenditures was the
improvement of meeting facilities at Miraval to allow for increased group
business. Primarily as a result of operating expenditures required to support
the Health and Leisure segment, the Company's cash reserves have decreased
significantly. At September 30, 1997 the Company's net cash and equivalents
were $832,000.
The Treatment segment's operational results for the nine-month period ended
September 30, 1997 reflect the segment's focus on attracting a high percentage
of retail patients. During this period, 56% of patient revenue was derived from
retail payments and the remaining 44% from third party payors. Sierra Tucson
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, Sierra Tucson believes
that it will continue to generate adequate cash flows to sustain the Treatment
segment's ongoing operational requirements as well as to offset some of the
negative cash flow of the Health and Leisure segment.
Miraval, the Company's Health and Leisure segment's line of business, commenced
operations in December 1995. Its results are affected by occupancy, average
room rates and cost containment. Miraval believes that it operates in a unique
niche in the increasingly popular health and leisure market. Public relations,
advertising and continued marketing to further increase marketplace awareness
and demand for Miraval's services resulted in a room occupancy rate of
approximately 44% through September 30, 1997 of which 97% were paying guests
and 3% non-paying guests. Miraval's marketing strategy to invite trade
representatives as well as key influencers has met with success in creating
awareness and market position for the product. Management believes the Health
and Leisure segment will ultimately make a significant contribution to the
Company's financial condition, although it operated at a negative cash flow
during the three and nine-month periods ended September 30, 1997.
To pay off certain outstanding obligations and to meet its liquidity
requirements, the Company entered into debt and equity financing transactions
which closed on November 15, 1996. The proceeds from the transactions were
approximately $12,340,000. The debt financing transaction contained certain
provisions related to a stand-by commitment for an additional $5,000,000,
subject to compliance with certain conditions and the lender's good faith
discretion. As of November 1, 1997, the Company had drawn $1.6 million on the
stand-by commitment. To the extent that cash on hand is not sufficient to meet
future operating cash requirements, and assuming compliance with all
conditions, management presently believes, although there can be no assurance,
that an additional amount of the stand-by funds will most likely be made
available to provide the cash necessary to fund future operating cash
requirements.
Management believes the stand-by commitment, of which $3.4 million remains as
of November 1, 1997, if available, will provide sufficient liquidity to allow
the Company to operate through the remainder of 1997 and into 1998. However, it
is necessary for the Company to increase occupancy levels in its lines of
business, and
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to implement additional cost controls to ensure 1997 operating losses do not
exceed an amount sustainable by the stand-by commitment, if available.
Insufficient occupancy levels at Miraval or any significant decrease in Sierra
Tucson's patient levels would adversely affect the Company's financial position,
results of operations and cash flows.
BUSINESS OUTLOOK
Performance in the Treatment segment (Sierra Tucson) will be driven by continued
aggressive implementation of cost controls and new marketing initiatives.
Particular emphasis will be placed on increasing the number of self-pay patients
through a combination of innovative treatment programs and focused advertising,
direct mail, field sales and outbound telemarketing campaigns.
Recently developed programs such as Recovery Plus(TM) and the New Addictions
Program will be promoted to major referent and retail market sectors, and will
likewise be introduced to the corporate marketplace. Sierra Tucson will also
continue its traditional marketing efforts to the referent therapist community,
and look for the continued growth of prospective patients.
The Company is currently considering the relocation of Sierra Tucson to the
facilities previously used by the Company's adolescent care unit (which ceased
operations in 1993) which are currently vacant. Such a relocation would
facilitate future expansion of both Sierra Tucson and Miraval should market
conditions justify such expansions. The zoning for the property currently
occupied by Sierra Tucson and Miraval was recently amended to permit a total of
356 resort hotel rooms.
Miraval, the Company's initial entry in the Health & Leisure category, has now
been in operation for twenty-two months. The resort continues to receive
extensive press coverage and was named in the Top Ten Spas of the World in the
September '97 issue of Conde Nast Traveler. Other exposure includes such
prestigious names as the Wall Street Journal, Good Morning America and USA
Today.
The operations of Miraval appear to be seasonal, and although seasonally
adjusted rates were offered, occupancy levels fell off during the summer months.
Miraval was closed for two weeks in July in response to reduced consumer demand
as well as to permit certain renovations and improvements to the facilities.
With the improvement of meeting facilities at Miraval, one of the 1997
objectives to increase group business is being achieved. Marketing initiatives,
aimed at high level corporate and incentive groups, have been enhanced through
the ability to provide world class meeting facilities. 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.
In addition, it is anticipated that the Board of Directors will continue to
consider strategic opportunities for expansion and growth of the Health and
Leisure segment which could include the divestiture or realignment of Company
assets.
Cost containment measures will continue to be a critical management objective
during the remainder of 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 allow the Company to
maintain operations and not fully utilize the remaining $3.4 million not drawn
under the stand-by commitment.
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.
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In addition, the following other factors could cause actual results and
conditions relating to liquidity and capital resources to differ materially.
The Company's Treatment segment participates in the highly competitive mental
and behavioral health industry, and faces intense competition for market share
resulting from aggressive pricing practices and increasing competition from
companies with greater resources. Some of these competitors have tax exempt,
non-profit status, are government subsidized or have endowment-related financial
support which may provide lower costs of capital.
Miraval represents a new and significant line of business for the Company. It 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 only in its
second year of operation. The Company has minimal operating data for projecting
occupancy levels during peak and non-peak periods, marketing, operating or
maintenance costs and expenses. Although the Company believes that there is
strong consumer demand for Miraval's products and services because it represents
a unique vacation alternative, the Company cannot be certain that its current
marketing strategy will successfully attract the targeted clientele.
The Company cannot be certain that Miraval will generate sufficient revenues to
cover its operating expenses. Management believes that the $3.4 million
remaining undrawn as of November 1, 1997 under the $5 million stand-by
commitment from the November 15, 1996 debt transaction, if available, is
sufficient to meet its short-term capital needs. Advances on the stand-by
commitment are subject to the lender's good faith discretion and compliance with
applicable conditions.
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.
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 accurately anticipate customer demand, 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.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various litigation and administrative proceedings
arising in the normal course of business. In the opinion of management, any
liabilities that may result from these claims will not, individually or in the
aggregate, have a material adverse effect on the Company's financial position,
results of operations or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
NONE
(b) Reports on Form 8-K
NONE
15
<PAGE> 16
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 14, 1997 BY: /s/ William T. O'Donnell, Jr.
--------------------------------------
WILLIAM T. O'DONNELL, JR.
President and Chief Executive Officer
DATE: November 14, 1997 BY: /s/ Loree Thompson
--------------------------------------
LOREE THOMPSON
Principal Financial and Accounting Officer
16
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE 9-MONTH PERIOD ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
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0
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