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, 1998
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, 1998, 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.
<PAGE>
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, 1998
(unaudited) and December 31, 1997 . . . . . . . . . . . . 3
Unaudited Consolidated Statements of Operations for the
three and nine-month periods ended September 30, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . 4
Unaudited Consolidated Statements of Cash Flows for the
nine-month periods ended September 30, 1998 and 1997 . . . 5
Unaudited Consolidated Statements of Changes in
Stockholders' Equity for the nine-month period ended
September 30, 1998 . . . . . . . . . . . . . . . . . . . 6
Unaudited Notes to the Consolidated Financial Statements . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . 16
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
<PAGE>
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,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents . . . . . . . . . . . . $ 1,112 $ 829
Accounts receivable,less allowance for doubtful
accounts of $434 and $390, respectively. . . 679 954
Prepaid expenses . . . . . . . . . . . . . . 289 232
Other current assets . . . . . . . . . . . . 501 567
--------- --------
Total current assets. . . . . . . . . . . . 2,581 2,582
Property and equipment, net . . . . . . . . . . 34,864 35,918
Long-term receivables, less allowance for doubtful
accounts of $53 and $50, respectively . . . . 160 151
Intangible assets, less amortization of $48 and
$158, respectively . . . . . . . . . . . . . . 654 322
Other assets. . . . . . . . . . . . . . . . . . 31 38
--------- ---------
Total assets . . . . . . . . . . . . . . . $38,290 $39,011
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade . . . . . . . . . . . $ 661 $ 838
Accrued expenses and other liabilities. . . . 3,698 6,638
--------- ---------
Total current liabilities. . . . . . . . . 4,359 7,476
Long-term debt and financing obligation . . . . 12,705 9,730
--------- ---------
Total liabilities . . . . . . . . . . . . 17,064 17,206
Stockholders' Equity:
Preferred stock - undesignated, $.01 par value,
3,924,979 shares authorized, no shares
outstanding . . . . . . . . . . . . . . . . -- --
Preferred stock, Series A, $.01 par value,
46,065 shares authorized; 46,065 shares
outstanding at September 30, 1998 and
December 31, 1997, respectively .. . . . . . -- --
Common stock, $.01 par value, 16,000,000 shares
authorized; 8,554,938 shares outstanding at
September 30, 1998 and December 31, 1997,
respectively . . . . . . . . . . . . . . . . 86 86
Additional paid-in capital . . . . . . . . . 47,997 47,997
Accumulated deficit. . . . . . . . . . . . . (26,857) (26,278)
--------- ---------
Total stockholders' equity . . . . . . . . . 21,226 21,805
--------- ---------
Total liabilities and stockholders' equity . . $38,290 $39,011
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000s, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Net operating revenue . . . . . $ 5,385 $ 3,681 $19,269 $14,770
Other revenue . . . . . . . . . 157 129 443 323
------- ------- ------- -------
Total net revenue. . . . . . 5,542 3,810 19,712 15,093
Operating expenses:
Salaries and related benefits . 2,868 2,415 9,326 8,586
General and administrative. . . 2,489 2,081 7,720 7,268
Depreciation and amortization . 657 644 1,929 1,951
Interest expense. . . . . . . . 334 299 1,052 817
------- ------- ------- -------
Total operating expenses . . 6,348 5,439 20,027 18,622
------- ------- ------- -------
Loss before extraordinary item. . (806) (1,629) (315) (3,529)
Extraordinary item. . . . . . . . (264) -- (264) --
------- ------- ------- -------
Net loss . . . . . . . . . . . . $(1,070) $(1,629) $ (579) $(3,529)
======= ======= ======= =======
Shares used in basic and diluted
per share calculation . . . . . 8,554,938 8,554,938 8,554,938 8,554,938
Basic and diluted loss per common
share:
Before extraordinary item. . . $ (0.10) $ (0.19) $ (0.04) $ (0.41)
Extraordinary item . . . . . . (0.03) -- (0.03) --
------- ------- ------- -------
Net loss. . . . . . . . . . . $ (0.13) $ (0.19) $ (0.07) $ (0.41)
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . $ (579) $( 3,529)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation and amortization. . . . . . . 1,995 2,025
Loss on early extinguishment of debt . . . 264 --
Provision for bad debts . . . . . . . . . 165 182
Minority Interest . . . . . . . . . . . . 58 41
Changes in operating assets and liabilities:
Decrease (increase) in assets:
Accounts receivable . . . . . . . . . . . 101 343
Other assets . . . . . . . . . . . . . . . ( 571) 311
Decrease in liabilities:
Accounts payable, accrued expenses
and other liabilities . . . . . . . . . . ( 633) ( 771)
-------- ---------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . 800 (1,398)
Cash flows from investing activities:
Purchase of property and equipment . . . . . ( 761) ( 664)
-------- ---------
Net cash used in investing activities. . . . . ( 761) ( 664)
Cash flows from financing activities:
Proceeds from long-term borrowings . . . . . 12,151 1,600
Reduction of long-term borrowings and
financing obligation . . . . . . . . . . . (11,907) ( 79)
--------- ---------
Net cash provided by financing activities. . . 244 1,521
--------- ---------
Net increase (decrease) in cash and
equivalents . . . . . . . . . .. . . . . . . 283 ( 541)
Cash and equivalents at beginning of period. . 829 1,373
--------- ---------
Cash and equivalents at end of period. . . . . $ 1,112 $ 832
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(000s, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Accumulated Stockholder's
Cost Shares Capital Deficit Equity
---- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 $ 86 8,554,938 $ 47,997 $ (26,278) $ 21,805
Net loss for the
nine months ended
September 30, 1998 -- -- -- (579) (579)
----- ---------- --------- --------- ---------
Balance at
September 30, 1998 $ 86 8,554,938 $ 47,997 $(26,857) $ 21,226
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
NEXTHEALTH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(000s)
(Unaudited)
NOTE 1 - ORGANIZATION
NextHealth, Inc. is a leading provider of addiction treatment and
therapeutic services, as well as programs and activities for a
life-changing vacation alternative in a luxury resort setting.
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, owns Sierra TucsonTM,
("Sierra Tucson") 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 Health-Styles, Inc.,
owns Miraval ("Miraval"), a unique vacation experience blending stress
management and self-discovery programs in a luxury resort environment.
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, 1997. The
accompanying interim consolidated financial statements as of
September 30, 1998 and for the three and nine-month periods ended
September 30, 1998 and 1997 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,
1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. The operations of
Miraval appear to be seasonal, and although seasonally adjusted
rates were offered in 1997 and 1998, occupancy levels fell off
during the summer months. Miraval was closed for two weeks in
July 1997 and for three weeks in July 1998 in response to the
anticipated seasonal fluctuation in consumer demand as well as to
permit certain renovations and improvements to the facilities.
NOTE 3 - NET INCOME (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings per Share. SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects
of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously computed
fully diluted earnings per share. The net income (loss) per
share amounts previously reported by the Company are now reported
as basic income (loss) per share, as such amounts were
historically calculated excluding the dilutive (or anti-dilutive)
effect of options, warrants and convertible securities. Diluted
earnings per share are equal to basic earnings per share for the
three and nine-month periods ending September 30, 1998 and 1997,
as the effect of all applicable securities is anti-dilutive
(decrease the loss per share amount).
NOTE 4 - SEGMENT INFORMATION
In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which is
effective for fiscal years beginning after December 15, 1997.
SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments
in annual financial statements and requires that those
enterprises report selected information about operating segments
in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic
areas, and major customers. The Company has elected to
voluntarily provide segment disclosures in its interim financial
statements in the initial year of application.
The Company operates in two principal business segments;
Treatment, and Health and Leisure through which it provides both
health care and wellness and preventive health services. The
Treatment segment, Sierra Tucson, is 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. Substantially all
revenues are derived from inpatient charges, therapy,
professional fees and pharmacy charges. The Health and Leisure
segment, Miraval, offers a unique vacation experience blending
stress management and self-discovery programs in a luxury resort
environment. Substantially all revenues result from guest
bookings, group bookings and retail charges. No single customer
accounted for more than 10% of either of the principal business
segment's revenue in the period ending September 30, 1998 or
1997.
Information about the Company's operations in different business
segments for the three and nine-month periods ending September
30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Corporate
Health & and
Treatment Leisure Other Items Consolidated
--------- -------- ----------- ------------
Three-month period ended September 30, 1998
---------------------------------------------------
<S> <C> <C> <C> <C>
Total Revenue $ 3,532 $ 1,999 $ 11 $ 5,542
Income (loss) before 965 (1,298) ( 473) ( 806)
extraordinary item
Extraordinary loss -- -- ( 264) ( 264)
Net income (loss) 965 ( 1,298) ( 737) ( 1,070)
Identifiable assets 4,300 32,643 1,347 38,290
Capital expenditures and 56 262 1 319
intersegment transfers, net
Depreciation & amortization 89 521 47 657
expense
Interest expense 112 58 164 334
Nine-month period ended September 30, 1998
---------------------------------------------------
Total Revenue $10,090 $ 9,441 $ 181 $ 19,712
Income (loss) before 2,891 ( 1,428) (1,778) ( 315)
extraordinary item
Extraordinary loss -- -- ( 264) ( 264)
Net income (loss) 2,891 ( 1,428) (2,042) ( 579)
Identifiable assets 4,300 32,643 1,347 38,290
Capital expenditures and 331 428 2 761
intersegment transfers, net
Depreciation & amortization 238 1,515 176 1,929
expense
Interest expense 113 58 881 1,052
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Corporate
Health & and
Treatment Leisure Other Items Consolidated
--------- -------- ----------- ------------
Three-month period ended September 30, 1997
---------------------------------------------------
<S> <C> <C> <C> <C>
Total Revenue $ 2,736 $ 1,008 $ 66 $ 3,810
Income (loss) before 562 ( 1,787) ( 404) (1,629)
income tax benefit
Identifiable assets 4,180 30,358 4,463 39,001
Capital expenditures and 27 380 12 419
intersegment transfers, net
Depreciation & amortization 86 492 66 644
expense
Interest expense -- -- 299 299
Nine-month period ended September 30, 1997
--------------------------------------------------
Total Revenue $ 8,639 $ 6,298 $ 156 $ 15,093
Income (loss) before 2,074 (3,586) (2,017) (3,529)
income tax benefit
Identifiable assets 4,180 30,358 4,463 39,001
Capital expenditures and 91 549 24 664
intersegment transfers, net
Depreciation & amortization 279 1,470 202 1,951
expense
Interest expense 1 -- 816 817
</TABLE>
NOTE 5 - COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, Reporting Comprehensive Income,
on January 1, 1998. At present, the Company does not have any
account balances which cause comprehensive income (loss) to
differ from net income (loss).
NOTE 6 - EXTRAORDINARY ITEM
In August 1998, the Company repaid the mortgage debt with AP LOM,
LLC. The write-off of the prepaid financing costs and
unamortized note discount associated with the debt are classified
as an extraordinary item on the September 30, 1998 financial
statements.
<PAGE>
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, 1998. 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 addiction treatment and
therapeutic services, as well as programs and activities for a
life-changing vacation alternative in a luxury resort setting.
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, 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,
Miraval, is a unique vacation experience blending stress
management and self-discovery programs in a luxury resort
environment.
The Company, as part of its long range plan, believes that it has
positioned itself to capitalize on the emerging health and
leisure segment of the health care services industry by
developing Miraval, a luxury health and leisure resort providing
a full range of self-discovery, stress management and
recreational activities. The Company is also seeking additional
opportunities to increase market share for its existing Treatment
segment. For the nine-month period ended September 30, 1998, the
Treatment segment accounted for approximately 51.2% of the
Company's operating revenues and approximately 35.9% of operating
expenses while the Health and Leisure segment accounted for
approximately 47.9% of the Company's operating revenue and
approximately 54.3% of operating expenses.
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 COMPARED TO THREE-MONTH PERIOD
ENDED SEPTEMBER 30, 1997
The significant changes in results of operations and net cash
used in operating activities for the three-month period ended
September 30, 1998, compared to the same period in 1997 are
discussed below.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------
1998 1997 % Change
---- ---- --------
<S> <C> <C> <C>
Financial results: (000s, except per
share amounts)
Total net revenue . . . . . . . . . . . $ 5,542 $ 3,810 45.5 %
Total operating expenses . . . . . . . . 6,348 5,439 16.7 %
------- -------
Net loss before extraordinary item . . . ( 806) (1,629) 50.5 %
Extraordinary item. . . . . . . . . . ( 264) -- --
------- -------
Net loss . . . . . . . . . . . . . . . . (1,070) 1,629) 34.3 %
Basic and diluted loss per common share:
Before extraordinary item . . . . . . ( 0.10) ( 0.19) 47.4 %
Extraordinary item. . . . . . . . . . ( 0.03) -- --
------- -------
Net loss. . . . . . . . . . . . . . . ( 0.13) ( 0.19) 31.6 %
Net cash used in operating activities. . ( 300) ( 139) (115.8)%
<PAGE>
Operating data:
Patient days - Sierra Tucson . . . . . . 4,964 4,104 21.0 %
Average daily census - Sierra Tucson . . 54 45 20.0 %
Guest days - Miraval . . . . . . . . . . 6,707 3,504 91.4 %
Average daily guest count - Miraval. . . 73 38 92.1 %
Room occupancy - Miraval . . . . . . . . 46.5 % 24.8% 87.5 %
</TABLE>
For the three-month period ended September 30, 1998, net loss
before extraordinary item was $806,000. An extraordinary charge
to 1998 earnings of $264,000 resulted from early retirement of
long-term debt. Net loss for the quarter after extraordinary
item was $1.07 million, an improvement of $559,000 or 34.3% over
the same period of the previous year.
Total net revenue increased $1.7 million to $5.5 million, an
increase of 45.5% when compared to the same period in 1997.
Results reflect a 98.3% net revenue increase at Miraval and a
29.3% net revenue increase at Sierra Tucson.
Salaries and related benefits increased $453,000 to $2.9 million,
when compared to the same period in 1997. The increase was
attributable to staffing adjustments related to higher occupancy
at Miraval and increased census at Sierra Tucson, as well as
costs related to the relocation of Sierra Tucson to the former
adolescent facility.
General and administrative expense increased $408,000 to $2.5
million, an increase of 19.6% when compared to the same period in
1997. The increase was related to staffing adjustments due to
higher occupancy at Miraval and increased census at Sierra
Tucson.
The Company recognized a pre-tax loss of $1.07 million for the
three-month period ended September 30, 1998. 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, 1998 COMPARED TO NINE-MONTH
PERIOD ENDED SEPTEMBER 30, 1997
The significant changes in results of operations and net cash
provided by (used in) operating activities for the nine-month
period ended September 30, 1998, compared to the same period in
1997 are discussed below.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1998 1997 % Change
---- ---- --------
<S> <C> <C> <C>
Financial results: (000's except
per share amounts)
Total net revenue . . . . . . . . . . . $ 19,712 $ 15,093 30.6%
Total operating expenses. . . . . . . . 20,027 18,622 7.5%
-------- ---------
Net loss before extraordinary item. . . (315) ( 3,529) 91.1%
Extraordinary item . . . . . . . . . . (264) -- --
-------- ---------
Net loss. . . . . . . . . . . . . . . . (579) ( 3,529) 83.6%
Basic and diluted loss per common share:
Before extraordinary item. . . . . . . (0.04) ( 0.41) 90.2%
Extraordinary item . . . . . . . . . . (0.03) -- --
-------- ---------
Net loss . . . . . . . . . . . . . . . (0.07) ( 0.41) 82.9%
Net cash provided by (used in)
operating activities. . . . . . . . . 800 ( 1,398) --
<PAGE>
Operating data:
Patient days - Sierra Tucson. . . . . . 14,668 12,969 13.1%
Average daily census - Sierra Tucson. . 54 48 12.5%
Guest days - Miraval. . . . . . . . . . 24,707 18,276 35.2%
Average daily guest count - Miraval . . 91 67 35.8%
Room occupancy - Miraval. . . . . . . . 57.8% 43.0% 34.4%
</TABLE>
For the nine-month period ended September 30, 1998, loss before
extraordinary item was $315,000. Loss after extraordinary item
was $579,000 compared to a net loss of $3.5 million for the same
period of 1997; an 83.6% improvement. Net cash provided by
operating activities was $800,000 compared to net cash used in
operating activities of $1.4 million for the same period of 1997.
Total net revenue for the nine-month period ended September 30,
1998 increased $4.6 million, or 30.6% to $19.7 million when
compared to the same period of 1997. The increase is
attributable to a 50% increase in net revenue at Miraval and a
16.8% net revenue increase at Sierra Tucson.
Salaries and related benefits increased $740,000 to $9.3 million
or 8.6% when compared to 1997. The increase is due primarily to
staffing adjustments related to increased utilization at both
Miraval and Sierra Tucson, as well as costs related to the move
of Sierra Tucson to the former adolescent facility.
General and administrative expense increased $452,000 or 6.2% to
$7.7 million when compared to the same period in 1997. The increase
was related to staffing adjustments due to higher occupancy at Miraval
and increased census at Sierra Tucson.
Interest expense increased $235,000 to $1.1 million when compared to
the same period in 1997, due to increased debt and a scheduled increase
in the adjustable interest rate.
The Company recognized a pre-tax loss of $579,000 for the nine-month
period ended September 30, 1998. 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 net cash provided by the operating activities
of the Treatment segment and the Health and Leisure segment,
funds generated from the sale of investments, proceeds from
public and private 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 is 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, 1998.
Sierra Tucson's operational focus will be to continue to attempt
to attract a high percentage of retail patients. Although Sierra
Tucson continues to experience pressure from third party payors
and managed care review organizations to restrict patient access
to and payment for treatment services, Sierra Tucson's
implementation of a case management system has increased the
potential for third party reimbursement of services. During this
period, 49.5% of patient revenue was derived from retail payments
and the remaining 50.5% from third party payors. Based on
current census levels and operating expenses, Sierra Tucson
believes that it will 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.
Building market awareness and acceptance of a new unique vacation
concept requires time. Vacation travel is a conservative
purchase due to cost and the allocation of the traveler's most
precious resource - leisure time. Marketing initiatives for
creating marketplace awareness and demand for Miraval's services
resulted in a room occupancy rate of approximately 46.5% for the
three-month period ended September 30, 1998.
<PAGE>
Customer acceptance plays a key role in determining these results.
Management believes that as marketplace demand for the Miraval product
increases, 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, 1998.
For the three-month period ended September 30, 1998, the Company
had capital expenditures of approximately $319,000. The
expenditures were primarily related to the relocation of Sierra
Tucson to the facilities previously used by the Company's
adolescent care unit (which ceased operations in 1993). At
September 30, 1998, the Company's cash and equivalents were
$1,112,000.
On August 11, 1998, the Company's principal subsidiaries, Sierra
Health-Styles, Inc., a Delaware corporation ("Miraval"), and
Sierra Tucson, LLC, a Delaware limited liability company ("Sierra
Tucson"), completed a debt refinancing loan agreement with Lehman
Brothers Holdings, Inc. The amount of the three-year loan is $14
million, of which $2.0 million is reserved for working capital
($1.0 million) and for capital improvements ($1.0 million).
$700,000 of the working capital portion will be available in 1998
and $300,000 in 1999. As of October 31, 1998, $200,000 has been
drawn from the capital improvements reserve. Proceeds from the
transaction were also used to extinguish existing mortgage debt
with AP LOM, LLC, an affiliate of AP NH, LLC ("APNH"), the holder
of the Company's outstanding Series A Preferred Stock. The loan
matures in three (3) years, bears interest at the rate of 4% over
the 30-day London Interbank Offered Rate (LIBOR), adjusted
monthly, and is payable interest-only through maturity. The
LIBOR rate at the date of closing was 5.65%. The Company
purchased a rate cap to protect against extreme upward movement
in the LIBOR rate. The maximum rate to be paid by the Company is
10.5%.
The loan is secured by a first lien against all real and personal
property of Miraval and is guaranteed by the assets of Sierra
Tucson. It is also partially guaranteed (to the extent of
liability arising by reason of certain exclusions to the non-recourse
provisions of the loan) by the Company and to a more
limited extent by Apollo Real Estate Investment Fund II, L.P.
("Apollo"). Apollo, an affiliate of APNH, received a fee in the
amount of $140,000 in consideration of its guarantee.
Management believes that funds from operations combined with the
funds available from the Lehman transaction will provide the cash
necessary to meet its short-term capital needs. However, it is
necessary for the Company to increase occupancy levels in its
lines of business, and to implement additional cost controls to
ensure that 1998 operating losses do not exceed an amount
sustainable by these funds. 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.
The Year 2000 problem is the result of computer programs being
written using two digits (rather than four) to define the
applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a major system failure or
miscalculations.
In order to address Year 2000 issues, the Company has established
a committee consisting of representatives from both the Treatment
segment and the Health and Leisure segment. The committee's
approach will be to follow four phases: assessment,
remediation, testing, and implementation. To date, the Company
has fully completed its assessment of all systems that could be
significantly affected by the Year 2000. The completed
assessment indicated that the most significant issues are with
the hospital systems for tracking patient data and the
telephone voice mail system at both Sierra Tucson and Miraval.
Upgrades are available for these systems. Efforts are focusing
on ways in which to bring these systems into compliance and on
developing contingency plans to address the most likely worst
case scenario.
The committee has also identified third party vendors who have
direct interfaces and third party vendors upon whom the Company
relies for providing various services. The Company is in the
process of sending inquiries to these third party vendors in an
effort to determine whether their systems will be Year 2000
compliant by December 31, 1999. To date, the Company is not aware
<PAGE>
of any external agent with a Year 2000 issue that would
materially impact the Company's results of operations, liquidity,
or capital resources. However, the Company has no means of
ensuring that external agents will be Year 2000 ready. The
inability of external agents to complete their Year 2000
resolution process in a timely fashion could materially impact
the Company. The effect of non-compliance by external agents is
not determinable.
The Company presently estimates the cost (including both software
and hardware) to correct the Year 2000 problem to be immaterial
to the financial position, results of operations or cash flows of
the Company.
BUSINESS OUTLOOK
Performance in the Treatment segment (Sierra Tucson) will be
driven by continued cost control efforts as well as new marketing
initiatives. Emphasis will be placed on increasing patient
census through a combination of innovative treatment programs and
focused advertising, direct mail, field sales and outbound
telemarketing campaigns. In addition, effective September 1,
1998, Sierra Tucson initiated a rate increase.
Clinically, Sierra Tucson's programs have been strengthened
considerably, including a restructuring of the Eating Disorders
Program, the reformatting of the Sexual Recovery/Trauma Program,
and the expansion of Fitness services to provide more individual
and group attention to patients. The range of treatment
modalities has increased so as to offer acupuncture, EMDR (Eye
Movement Desensitization Reprocessing) and cognitive behavioral
approaches. With the establishment of a consulting relationship
with a specialist in the area of comprehensive neuropsychological
testing, Sierra Tucson's assessment and diagnostic capabilities
have been expanded to meet the demand of professional review
organizations such as state medical boards, state bar
associations, clergy, etc. Sierra Tucson will continue its
traditional marketing efforts to the referent therapist
community, and look for continued growth in the number of
prospective patients.
In July 1998, the Company relocated the Sierra Tucson operations
to the facilities previously used by the Company's adolescent
care unit (which ceased operations in 1993). The facilities are
located on State Lease Land, and in October 1998, the Company
entered into a 50-year lease agreement for the property with the
Arizona State Land Department. Buildings at the facility are
leased from a related party, ODE, L.L.C. The Sierra Tucson
relocation initially provided 63 beds which is less than the
previous availability of 70 beds. The relocation will facilitate
future expansion of both Sierra Tucson and Miraval should market
conditions justify and capital be available for such expansions.
Zoning for the property currently occupied by Miraval and the
property previously occupied by Sierra Tucson was recently
amended to permit a total of 356 resort hotel rooms and up to 226
residential units.
Miraval, the Company's health and leisure resort, has been in
operation since December, 1995. The resort continues to receive
favorable publicity and was recently rated Number 4 in the
November 1998 Conde Nast Traveler magazine readers' choice poll.
In addition, Miraval was rated Number 8 of the top spas in the
United States by Travel and Leisure magazine with a second place
rating for best value (ratings were published in the October 1998
issue). Other exposure includes such prestigious names as the
New York Times, the Wall Street Journal, USA Today, New Age
magazine, Working Woman magazine and Good Morning America.
The operations of Miraval appear to be seasonal, and although
seasonally adjusted rates were offered in 1997 and 1998,
occupancy levels fell off during the summer months. Miraval was
closed for two weeks in July 1997 and for three weeks in July
1998 in response to the seasonal fluctuation in consumer demand
as well as to permit certain renovations and improvements to the
facilities.
With the improvement of meeting facilities at Miraval, marketing
initiatives, aimed at high level corporate and incentive groups,
have been enhanced. The Miraval message will be delivered
through a blend of direct sales and advertising -- including
print, data base-driven mail, and public relations activities.
Management's strategy for Miraval is to continuously improve its
unique program structure based on guest feedback. Increased
focus on the return guest will play a key role in assuring that
this highly desirable market segment continues to grow.
Operational quality and attention to detail will be critical
factors in ensuring continued word-of-mouth advertising -- the
single largest source for attracting new business.
<PAGE>
Cost containment measures will continue to be a critical
management objective. Management believes that variable staffing
relative to seasonal occupancy fluctuations, a more structured
program format, and focusing on all aspects of operational
quality should allow the Company to further improve efficiencies
and cash flow.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Management's Discussion and Analysis of Financial Condition and
Results of Operations 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
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 benchmark for the new and growing trend in
hospitality for lifestyle enhancing products. Although
competitive market data is available for the "spa" category,
Miraval's unique blending of luxury resort recreational
activities with stress management and self-discovery programs
clearly differentiates it from a spa. Because of Miraval's
relatively short history, the Company cannot project with a high
degree of accuracy the future levels of occupancy or revenue.
While the Company believes that there is strong consumer demand
for Miraval's products and services, the historical data does not
exist to be certain the current trends will continue. Management
believes that the existing capital resources of the Company
combined with the funds provided by the Lehman transaction, are
sufficient to meet its short-term capital needs.
While management believes that Miraval occupies a unique market
niche, it nevertheless competes in the resort hotel/spa industry.
Currently, its competitors have greater name recognition as well
as long-standing relationships with travel agents and meeting
planners. Market share must be obtained from competitors and
from introducing new customers to the benefits of the Miraval
product. Longevity in the marketplace plays a key role in
attaining credibility in this highly competitive field.
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.
<PAGE>
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
<PAGE>
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 12, 1998 BY: /s/ William T. O'Donnell, Jr.
-------------------------------------
WILLIAM T. O'DONNELL, JR.
President and Chief Executive Officer
DATE: November 12, 1998 BY: /s/ Loree Thompson
-------------------------------------
LOREE THOMPSON
Principal Financial and
Accounting Officer
<TABLE> <S> <C>
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This schedule contains summary financial information extracted from the
unaudited consolidated financial statements for the nine-month period
ended September 30, 1998 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
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