<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 June 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
Incorporation or Organization) Identification No.)
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 August 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.
1
<PAGE> 2
NEXTHEALTH, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1997 (unaudited) and December 31,
1996.......................................................................... 3
Unaudited Consolidated Statements of Operations for the three and six month
periods ended June 30, 1997 and 1996 ........................................ 4
Unaudited Consolidated Statements of Cash Flows for the six month periods ended
June 30, 1997 and 1996 ...................................................... 5
Unaudited Consolidated Statements of Changes in Stockholders' Equity for the
six month period ended June 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 4. Submission of Matters to a Vote of Security Holders............................... 15
Item 6. Exhibits and Reports on Form 8-K.................................................. 15
Signatures .................................................................................. 16
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000s, except share and per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents .................................................... $ 415 $ 1,373
Accounts receivable, less allowance for doubtful accounts
of $553 and $457, respectively ....................................... 584 928
Prepaid expenses ........................................................ 303 387
Other current assets .................................................... 620 902
-------- --------
Total current assets ................................................. 1,922 3,590
Property and equipment, net ................................................. 36,419 37,417
Long-term receivables, less allowance for doubtful accounts
of $44 and $56, respectively ........................................... 131 167
Intangible assets, less amortization of $94 and $29, respectively ........... 387 451
Other assets ................................................................ 32 41
-------- --------
Total assets ......................................................... $ 38,891 $ 41,666
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade ................................................. $ 740 $ 2,050
Accrued expenses and other liabilities .................................. 4,669 4,828
-------- --------
Total current liabilities ............................................ 5,409 6,878
Long-term debt and financing obligation, less current portion ............. 8,953 8,359
-------- --------
Total liabilities .................................................... 14,362 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 June 30, 1997 and Dec. 31, 1996;
no shares outstanding ................................................ -- --
Preferred stock, Series A, $.01 par value, 46,065 shares
authorized; 46,065 shares outstanding at June 30, 1997 ................ -- --
Common stock, $.01 par value, 16,000,000 shares
authorized; 8,554,938 shares outstanding .............................. 86 86
Additional paid-in capital .............................................. 47,997 43,747
Accumulated deficit ..................................................... (23,554) (21,654)
-------- --------
Total stockholders' equity ........................................... 24,529 22,179
-------- --------
Total liabilities and stockholders' equity ........................... $ 38,891 $ 41,666
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
<PAGE> 4
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000s, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Net operating revenue .......... $ 5,359 $ 4,746 $11,089 $ 9,247
Other revenue .................. 126 91 195 217
------- ------- ------- -------
Total net revenue ........ 5,485 4,837 11,284 9,464
Operating expenses:
Salaries and related benefits .. 3,080 3,741 6,171 7,530
General and administrative ..... 2,755 2,784 5,187 5,741
Interest ....................... 264 43 518 108
Depreciation and amortization .. 651 681 1,308 1,333
------- ------- ------- -------
Total operating expenses . 6,750 7,249 13,184 14,712
------- ------- ------- -------
Loss before income tax benefit ... (1,265) (2,412) (1,900) (5,248)
Income tax benefit ............... -- -- -- --
------- -------
Net loss ......................... $(1,265) $(2,412) $(1,900) $(5,248)
======= ======= ======= =======
Weighted average shares of common
stock outstanding ................ 8,555 8,555 8,555 8,555
======= ======= ======= =======
Net loss per share of common stock $ (0.15) $ (0.28) $ (0.22) $ (0.61)
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4
<PAGE> 5
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................................. $(1,900) $(5,248)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization ........................................... 1,357 1,333
Provision (benefit) for bad debts ....................................... 217 (178)
Minority interest ....................................................... 30 --
Changes in operating assets and liabilities net of effects from acquisitions:
Decrease (increase) in assets:
Accounts receivable .................................................. 161 555
Other assets ......................................................... 375 (739)
Increase (decrease) in liabilities:
Accounts payable, accrued expenses
and other liabilities .............................................. (1,499) 839
------- -------
Net cash used in operating activities ....................................... (1,259) (3,438)
Cash flows from investing activities:
Purchase of property and equipment ....................................... (245) (1,597)
Business acquisitions, net of cash acquired .............................. -- (88)
------- -------
Net cash used in investing activities ....................................... (245) (1,685)
Cash flows from financing activities:
Proceeds from long-term borrowings ....................................... 600 3,929
Reduction of long-term borrowings and
financing obligation ................................................... (54) (1,363)
------- -------
Net cash provided by financing activities ................................... 546 2,566
------- -------
Net decrease in cash and equivalents ........................................ (958) (2,557)
Cash and equivalents at beginning of period ................................. 1,373 4,499
------- -------
Cash and equivalents at end of period ....................................... $ 415 $ 1,942
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
5
<PAGE> 6
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 six
months ended
June 30, 1997 -- -- -- -- -- (1,900) (1,900)
--- ------ --- --------- ------- -------- -------
Balance at June 30, 1997 $-- 46,065 $86 8,554,938 $47,997 $(23,554) $24,529
=== ====== === ========= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
6
<PAGE> 7
NEXTHEALTH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(000s)
(Unaudited)
NOTE 1 - ORGANIZATION
NextHealth, Inc. is a leading provider of wellness and preventive health care
services in diverse retail markets. For over ten years, the Company has
developed effective treatment models which address individual wellness and
quality of life issues through a whole person, mind-body approach.
The Company operates in two distinct business segments. The Treatment segment,
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 on 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 June
30, 1997 and for the three and six-month periods ended June 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
six-month periods ended June 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 June 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
7
<PAGE> 8
requirements will not impact the primary earnings per share for either the three
month or six month periods ended June 30, 1997 or June 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.
NOTE 5 - RECLASSIFICATIONS
Certain prior period amounts in the unaudited consolidated financial statements
have been reclassified to conform to the presentation used in second quarter
1997.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis relates to factors which have affected the
consolidated financial condition and results of operations of the Company for
the three and six-month periods ended June 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 six-month period ended June 30, 1997,
the Treatment segment accounted for approximately 52% of the Company's operating
revenues and approximately 33% of operating expenses while the Health and
Leisure segment accounted for approximately 47% of the Company's operating
revenue and approximately 54% 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.
9
<PAGE> 10
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED JUNE 30, 1997 COMPARED TO THREE-MONTH PERIOD ENDED JUNE
30, 1996
The significant changes in results of operations and net cash used in operating
activities for the three-month period ended June 30, 1997, compared to the same
period in 1996 are discussed below.
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------------------
1997 1996 % Change
------- -------- --------
<S> <C> <C> <C>
FINANCIAL RESULTS: (000s, except per share amounts)
Total net revenue ............................... $ 5,485 $ 4,837 13.4 %
Total operating expenses ........................ 6,750 7,249 (6.9)%
Net loss ........................................ (1,265) (2,412) 47.6 %
Net loss per share of common stock .............. (0.15) (0.28) 46.4 %
Net cash used in operating activities............ (576) (804) 28.4 %
OPERATING DATA:
Patient days - Sierra Tucson .................... 4,486 4,066 10.3 %
Average daily census - Sierra Tucson ............ 49 45 8.9 %
Participant days - Onsite(1) .................... -- 1,981 --
Average daily census - Onsite(1) ................ -- 22 --
Participant days - HHHI(2) ...................... -- 3,381 --
Average daily census - HHHI(2) .................. -- 37 --
Guest days - Miraval(3) ......................... 6,938 3,702 87.4 %
Average daily guest count - Miraval(3)........... 76 41 85.4 %
</TABLE>
(1) Onsite was divested on November 30, 1996.
(2) HHHI was acquired March 1, 1996 and divested on October 1, 1996.
(3) Guest stays include both paying and complimentary stays.
For the three-month period ended June 30, 1997, the loss before income tax
benefit and net loss decreased from $2.4 million in 1996 to $1.3 million in
1997. Net cash used in operating activities was $576,000 in 1997 compared to
$804,000 for the same period in 1996.
Total net revenue increased $648,000 to $5.5 million, an increase of 13.4% when
compared to the same period in 1996. Results reflect a $1.3 million increase at
Miraval due to an 87.4% increase in guest days and a $232,000 increase at Sierra
Tucson. A partial offset to these increases relates to the divestiture of two
subsidiaries in the fourth quarter of 1996.
Salaries and related benefits decreased $661,000 to $3.1 million, a decrease of
17.7% when compared to the same period in 1996. The decrease was primarily due
to staff reorganization at the Corporate level as well as the divestiture of two
subsidiaries in the fourth quarter of 1996.
Interest expense increased $221,000 to $264,000 as a result of the financing
transaction which occurred in the fourth quarter of 1996.
The Company recognized a pre-tax loss of $1.3 million for the three-month period
ended June 30, 1997. This is a 47.6% improvement compared to the same period in
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.
10
<PAGE> 11
SIX-MONTH PERIOD ENDED JUNE 30, 1997 COMPARED TO SIX-MONTH PERIOD ENDED JUNE 30,
1996
The significant changes in results of operations and net cash provided by (used
in) operating activities for the six-month period ended June 30, 1997, compared
to the same period in 1996 are discussed below.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------------
1997 1996 % Change
-------- -------- --------
<S> <C> <C> <C>
FINANCIAL RESULTS: (000s, except per share amounts)
Total net revenue .............................. $ 11,284 $ 9,464 19.2 %
Total operating expenses ....................... 13,184 14,712 (10.4)%
Net loss ....................................... (1,900) (5,248) 63.8 %
Net loss per share of common stock ............. (0.22) (0.61) 63.9 %
Net cash used in operating activities .......... (1,259) (3,438) 63.4 %
OPERATING DATA:
Patient days - Sierra Tucson ................... 8,865 8,212 8.0 %
Average daily census - Sierra Tucson ........... 49 45 8.9 %
Participant days - Onsite(1) ................... -- 3,873 --
Average daily census - Onsite(1) ............... -- 21 --
Participant days - HHHI(2) ..................... -- 4,508 --
Average daily census - HHHI (2) ................ -- 37 --
Guest days - Miraval(3) ........................ 14,380 7,724 86.2 %
Average daily guest count - Miraval(3) ......... 79 42 88.1 %
</TABLE>
(1) Onsite was divested on November 30, 1996.
(2) HHHI was acquired effective March 1, 1996 and divested on October 1, 1996.
(3) Complimentary guest days of 472 are included in the stated figures.
For the six-month period ended June 30, 1997, the loss before income tax benefit
and net loss decreased from $5.3 million in 1996 to $1.9 million in 1997. Net
cash used in operating activities decreased $2.2 million to $1.3 million
compared to $3.4 million for the same period in 1996.
Total net revenue increased $1.8 million to $11.3 million, an increase of 19.2%
when compared to the same period in 1996. Results reflect a $2.9 million
increase at Miraval and a $445,000 increase at Sierra Tucson. A partial offset
to these increases relates to the divestiture of two subsidiaries in the fourth
quarter of 1996.
Salaries and related benefits decreased $1.4 million to $6.2 million. The
decrease was primarily due to staff reorganization at the corporate level as
well as the divestiture of two subsidiaries in the fourth quarter of 1996.
Interest expense increased $410,000 to $518,000 as a result of the financing
transaction which occurred in the fourth quarter of 1996.
The Company recognized a pre-tax loss of $1.9 million for the six-month period
ended June 30, 1997. This is a 63.8% improvement compared to the same period in
1996. No provision or benefit for income taxes was recorded during this period.
The Company will be able to carry forward the current period loss to offset
future tax liabilities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources have typically
been cash provided by the Treatment segment's operating activities, funds
generated from the sale of investments and proceeds from public equity offerings
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
11
<PAGE> 12
segment's operating activities are 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 six-month periods ended June 30, 1997.
For the six-month period ended June 30, 1997, the Company had capital
expenditures of approximately $245,000. Primarily as a result of operating
expenditures required to support the Health and Leisure segment, the Company's
cash reserves have decreased significantly. At June 30, 1997, the Company's cash
and equivalents were $415,000.
The Treatment segment's operational results for the six-month period ended June
30, 1997 reflect the segment's focus on attracting a high percentage of retail
patients. During this period, 58% of patient revenue was derived from retail
payments and the remaining 42% from third party payors. 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 remaining line of business,
commenced operations in December 1995. Its results are primarily affected by
occupancy, average room rates and the ability to manage costs. Miraval believes
that it operates in a unique niche in the emerging health and leisure market,
one which will take time to fully develop. Marketing and advertising initiatives
for creating marketplace awareness and demand for Miraval's services resulted in
a room occupancy rate of approximately 51% through June 30, 1997 of which 97%
were paying guests and 3% non-paying guests. As part of Miraval's marketing
strategy, media, travel and trade representatives as well as other key
influencers have been invited to experience Miraval in an effort to further
promote its position in the market place. 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 six-month periods ended June 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. To the extent that cash on hand is not sufficient to meet future
operating cash requirements, management believes that the stand-by funds will be
available to provide the cash necessary to fund future operating cash
requirements. As of August 1, 1997, the Company had drawn $1.1 million on the
stand-by commitment.
Management believes the stand-by commitment, of which $3.9 million remains as of
August 1, 1997, if available, will provide sufficient liquidity to allow the
Company to operate through 1997. However, it is necessary for the Company to
increase occupancy levels in its lines of business, and 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 Sierra Care(TM) will
be promoted to major referent and retail market sectors, and will likewise be
introduced to the corporate marketplace. Sierra Tucson will also
12
<PAGE> 13
continue its traditional marketing efforts to the referent therapist community,
and look for the continued growth of prospective patients which characterized
the first quarter of 1997.
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, and 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 and Leisure category, has now
been in operation for nineteen months and looks for improved performance in
1997. The resort has received extensive press coverage in such diverse media as
CNN, InStyle, Gourmet, and Vogue magazine, and has likewise gained a high level
of awareness among consumers and travel professionals.
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.
Management's primary objective for Miraval in 1997 is to build short and
long-term occupancy levels while maintaining its 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
relations activities.
In addition, it is anticipated that during the remainder of 1997, the Board of
Directors will consider strategic opportunities for expansion and growth of the
Health and Leisure segment.
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 $3.9 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.
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 an emerging health and
leisure market for which there is little, if any, industry market data
available. Its products and services are different than those of traditional
destination resorts or destination "spa"
13
<PAGE> 14
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 offers 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 $3.9 million
remaining undrawn as of August 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.
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
business is unable to accurately anticipate customer demand, is unable to
differentiate its products from those of its competitors, is unable to offer
services expeditiously in response to customer demand, or is 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 22, 1997. The
Company's stockholders elected Dr. Joseph R. Cruse and Neil E. Jenkins as
directors and selected Ernst & Young LLP as the Company's independent auditors
for the fiscal year ended December 31, 1997.
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: August 13, 1997 BY: /s/ William T. O'Donnell, Jr.
-------------------------------------
WILLIAM T. O'DONNELL, JR.
President and Chief Executive Officer
DATE: August 13, 1997 BY: /s/ Loree Thompson
-------------------------------------
LOREE THOMPSON
Principal Financial and Accounting
Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 415
<SECURITIES> 0
<RECEIVABLES> 1,150
<ALLOWANCES> 553
<INVENTORY> 607
<CURRENT-ASSETS> 1,922
<PP&E> 46,576
<DEPRECIATION> 10,157
<TOTAL-ASSETS> 38,891
<CURRENT-LIABILITIES> 5,409
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 24,443
<TOTAL-LIABILITY-AND-EQUITY> 38,891
<SALES> 11,089
<TOTAL-REVENUES> 11,284
<CGS> 0
<TOTAL-COSTS> 11,317
<OTHER-EXPENSES> 1,348
<LOSS-PROVISION> 218
<INTEREST-EXPENSE> 518
<INCOME-PRETAX> (1,900)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,900)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
