<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d)of The Securities Exchange
Act of 1934 for the Fiscal Year Ended December 31,1997 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)
Securities registered pursuant to Section 12(b)of the Act Common Stock,
$.01 par value
Securities registered pursuant to Section 12(g) of the Act: None
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 March 13, 1998, the aggregate market value of voting common stock held by
non-affiliates of the registrant was $10,092,808 based on the closing price
of the registrant's common stock as reported on The Nasdaq Stock Market on
such date. For purposes of the preceding sentence only, all directors and
executive officers of the registrant are assumed to be affiliates.
On March 13, 1998, there were 8,554,938 shares of the registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report (Items 10, 11, 12 and 13)
is incorporated by reference from the registrant's proxy statement to be
filed pursuant to Regulation 14A with respect to the annual meeting of
stockholders scheduled to be held on May 21, 1998.
Indicate by check mark if disclosure of delinquent filers to Item 405 of
Regulation S-K is not contained herein, and will not be contained,to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [X]
Reference is made to the listing beginning on page 36 of all exhibits filed
as a part of this report.
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TABLE OF CONTENTS
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Page
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<S> <C>
PART I
Item 1. Business .................................................. 3
Item 2. Properties ................................................. 6
Item 3. Legal Proceedings .......................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters........................................ 7
Item 6. Selected Financial Data .................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 9
Item 7A. Quantitative and Qualitative Disclosure About Market Risk .. 13
Item 8. Financial Statements and Supplementary Data ................ 14
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 34
PART III
Item 10. Directors and Executive Officers of the Registrant......... 35
Item 11. Executive Compensation ................................... 35
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................ 35
Item 13. Certain Relationships and Related Transactions............. 35
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................... 36
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
NEXTHEALTH, INC.
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 programs and services which address
individual quality of life issues through a whole person, mind-body approach.
NextHealth, Inc.(the "Company"), formerly Sierra Tucson Companies,Inc.,
was incorporated in Delaware in August 1989 and, as the result of a merger
effective in September 1989, is the successor to an Arizona corporation which
was originally formed in 1983. In September 1995, the Company changed its
name to NextHealth, Inc., to reflect an expanded scope of operations and
health care programs. It conducts business through separate subsidiaries.
The Company currently operates therapeutic treatment programs and luxury resort
activities and programs pursuant to a business strategy which concentrates on
identifying emerging revenue and growth opportunities.
The Company operates in two distinct business segments which are located
at separate facilities in the foothills of the Santa Catalina Mountains
northwest of Tucson,Arizona. The Treatment segment includes Sierra Tucson,LLC
("Sierra Tucson"), 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; it also
included Onsite Workshops, Inc. ("Onsite"), acquired in 1995, which offered
short-term therapeutic experiences and workshops. Onsite was divested by the
Company on November 30, 1996. The Health and Leisure segment includes Sierra
Healthstyles, Inc. d/b/a Miraval(TM)("Miraval"), opened in late 1995, a
unique vacation experience blending stress management and self-discovery
programs in a luxury resort environment. From March 1, 1996 (acquisition
date) through October 1, 1996 (disposal date) the Health and Leisure segment
also included Hilton Head Health Institute, Inc. ("HHHI"), located at
Hilton Head Island, South Carolina, a provider of weight management programs
for the development and maintenance of healthy lifestyles.
In October 1989, the Company and certain officers of the Company offered
2.5 million shares of common stock in an initial public offering. In June
1991, the Company and certain of its officers offered 2.45 million shares of
common stock in a secondary public offering. The Company's common stock
trades on The Nasdaq Stock Market under the symbol "NEXT". The Company's
principal offices are located at 16600 N. Lago del Oro Parkway, Tucson,
Arizona 85739, and its telephone number is 520-792-5800.
SIERRA TUCSON
Sierra Tucson is a 70-bed licensed special psychiatric hospital and
behavioral health center engaged in the treatment of addictions and mental
health disorders. Sierra Tucson provides medical services and programs that
reach beyond standard alcohol and drug addiction treatments. These programs
include the treatment of dual diagnosis, eating disorders, major depression,
post-traumatic stress disorder,and treatment for gambling and sexual disorders.
Sierra Tucson offers a safe, individualized treatment experience based
on the Sierra Model(TM),which treats the whole person with integrated,
individualized therapies rooted in the Twelve Steps program recovery process.
Experiential in nature, Sierra Tucson's individualized treatment plans are
developed and maintained by experienced, clinical professionals. They
integrate philosophies and methodologies from psychological, family systems
and self-help approaches into comprehensive and effective treatment
experiences. Since its inception, over 12,000 patients and nearly 30,000
family members have participated in Sierra Tucson programs, with a success
rate of approximately 70% based on
<PAGE>
outcome studies performed by a third party research entity on behalf of the
Company. Sierra Tucson is licensed by the Arizona Department of Health
Services and accredited by the Joint Commission of Accreditation of Healthcare
Organizations.
In order to facilitate its operations and strengthen its identity as a
separate and distinct business operation, on November 13, 1996, the assets of
Sierra Tucson, Inc. ("STI") were sold to Soften Realty, LLC, a Delaware
limited liability company ("Soften"). The purchase is evidenced by Soften's
non-negotiable promissory note which is secured by a security interest in the
assets of STI. Such assets consist of the business of STI, the tangible and
intangible assets used in connection with the business and a possessory right
to use certain land and buildings owned by the Company. (In May 1997, Soften
Realty, LLC was renamed Sierra Tucson, LLC ("Sierra Tucson")). The Company is
the manager of and owns a 98% interest in Sierra Tucson; the remaining 2% is
owned by AP NH, LLC (a Delaware limited liability company), the purchaser of
the Company's preferred stock as described below in the Liquidity & Capital
Resources section of Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.
MIRAVAL
With the commencement of operations at Miraval, the Company entered the
wellness and preventive health services category, a strategic diversification
focusing on upscale, retail consumer markets. The Company's decision to enter
these markets was based upon concept development, market research and
consumer testing.
Miraval combines elements of stress management, self-discovery and
recreational activities in a luxury health and leisure resort environment. By
incorporating educational programs such as mind/body and lifestyle
management, Miraval provides a "vacation with meaning" in place of the
traditional "getaway". Guests are taught skills to enhance wellness in
everyday life through self-discovery and recreational activities. Programs
offer both group and individual participation with expert facilitators.
Miraval presently has 106 guest rooms.
SOURCES OF REVENUE
The Company's revenue depends upon occupancy levels. At Sierra Tucson,
an inclusive daily rate for services is charged, ranging from $683 to $945
per day. Patient revenue is derived from private insurance reimbursement and
patient payments, none of which, individually, represents a significant
portion of revenue. Most commercial insurance plans reimburse their
subscribers or make direct payment to Sierra Tucson. No revenue is derived
from Medicare or Medicaid.
In 1997, Sierra Tucson and its patients continued to experience
significant pressure from third-party payors and managed care organizations
to restrict access to and payment for treatment services. The Company expects
this trend to continue. In response to this pressure, the Company has
aggressively pursued emerging self-pay referral provider markets, while it
continues to develop the traditional third-party payor sector. For 1997,
approximately 55% of patient revenue was derived from individual patient
payors, and approximately 45% was derived from insurance companies and other
third-party payors.
Miraval guest rates vary depending on season and market segment. Peak
season rates (October - May) start at $400 per day. Off season
(June - September) rates begin at $270 per day. Group rates are available
and vary depending on the number of rooms and the seasony. All rates are
inclusive packages consisting of luxury guest room, three gourmet meals, use
of the resort's amenities,participation in all programs, one personal service
per day and Tucson Airport transfers. Average stays range from 3 to 7 nights.
Miraval currently generates all of its revenue from guest bookings,
group bookings and retail store sales.
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Set forth below are the Company's total revenues by segment (000s):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 % 1996 % 1995 %
------ ----- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Treatment Segment. . . . . $11,702 56.6 $11,861 64.3 $12,765 85.8
Health & Leisure Segment . 8,754 42.4 6,521 35.3 530 3.6
Other, net . . . . . . . 196 1.0 76 .4 1,578 10.6
------- ------ ------- ------ ------- -----
Total Revenue $20,652 100.0 $18,458 100.0 $14,873 100.0
======= ====== ======= ====== ======= =====
</TABLE>
EMPLOYEES
On December 31, 1997, the Company and its subsidiaries employed
approximately 310 full time equivalent employees. The Company's businesses
have not experienced material difficulty in recruiting and retaining
employees. The Company considers relations with employees to be excellent.
COMPETITION
Sierra Tucson competes with psychiatric and behavioral health hospitals
as well as with other specialty residential facilities. Non-profit or
government-owned competitors may have certain financial advantages such as
endowments, charitable contributions and tax-exempt financing not available
to Sierra Tucson. The competitive position of Sierra Tucson is, to a
significant degree, dependent upon its reputation, historical success in
treating the patient, and price. The Company also believes that the
competitive position of Sierra Tucson is dependent upon the breadth of
services offered by the facility and the ability to implement programs best
suited to the needs of patients and payors in the marketplace.
Miraval competes for national and international consumers'discretionary
income typically expended upon luxury hotel and resort spas, holistic health
and other related upscale vacation experiences. While management believes
that Miraval occupies a unique market niche, it nevertheless competes with a
broad spectrum of vacation alternatives. It has been categorized as a
destination spa creating competition with a relatively small number of
well-known spas whose clients are very loyal. It also competes with
full-service resorts for group business. The criteria for competition is
based on price, amenities, program offerings and location.
INSURANCE
The Company maintains professional malpractice liability coverage for
the professionals it employs in addition to coverage for the customary risks
inherent in the operation of health care and resort facilities and business
in general. While the Company believes its insurance policies are adequate
in amount and coverage for its current operations, there is no assurance that
coverage will continue to be available in adequate amounts or at a reasonable
cost.
LICENSING AND REGULATION
The activities of Sierra Tucson are regulated by federal and state
governments. Sierra Tucson holds a behavioral health residential license
from the State of Arizona to operate a mental health and substance abuse
facility and a special hospital/psychiatric license from the State of Arizona
to operate a psychiatric hospital.
Sierra Tucson is also accredited by the Joint Commission on
Accreditation of Healthcare Organizations (JCAHO), a voluntary national
accrediting organization responsible for accrediting health care providers.
JCAHO accreditation is important to the Sierra Tucson operation as most
insurance companies require such accreditation in order for the treatment of
patients to qualify for insurance payment or reimbursement. In 1996, Sierra
Tucson was reaccredited with commendation by the JCAHO for a three-year period,
the longest accreditation period available. The next scheduled survey for
Sierra Tucson by JCAHO is in May, 1999.
<PAGE>
Both of the businesses operated by the Company are subject to extensive
state and local regulations and, on a periodic basis, must obtain various
licenses and permits. Management believes that the Company has obtained all
required licenses and permits and its businesses are conducted in substantial
compliance with applicable laws.
ITEM 2. PROPERTIES
The Company's primary facilities are located on approximately 400 acres
of owned or leased land northwest of Tucson, Arizona, in the foothills of
the Santa Catalina Mountains.
The Sierra Tucson facilities are contained within a campus setting and
are located on approximately 30 acres owned by the Company. The Miraval
facility was reconstructed from existing Company facilities and is located on
a separate Company-owned 130-acre parcel of property adjacent to the Sierra
Tucson facility. The remaining property, which is adjacent to the Miraval
facility, is unimproved open space, some of which is unbuildable either
because of its terrain or its location in the flood plain. The zoning for the
property currently occupied by Sierra Tucson and Miraval was recently amended
to permit a total of 356 resort hotel rooms and up to 226 residential units.
Until November 30, 1996, Onsite operated on approximately 160 acres of
land leased from the State of Arizona and in buildings leased from a related
party, ODE, LLC. The buildings were sold and leased back by the Company in
1994 to ODE, LLC. The land lease expires in 2001 and contains preferential
rights of renewal; the lease agreement with ODE, LLC grants the Company both
the option to repurchase the buildings at fair market value and to renew the
lease for an additional ten year period. The facility also has fitness and
recreation areas, riding stables and other administrative and support offices.
The Company retained its rights under the land and building lease as part of
the Onsite divestiture.
The Company is currently considering the relocation of the Sierra Tucson
operations to the facilities formerly occupied by Onsite. Such a relocation
would facilitate future expansion of both Sierra Tucson and Miraval should
market conditions justify and capital be available for such expansions.
As part of the debt transaction with AP LOM LLC ("Apollo"), completed
November 15, 1996, Apollo holds a first lien position in all Company-owned
property.
ITEM 3. 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 did not submit any matters to a vote of security holders in
the fourth quarter of the fiscal year ending December 31, 1997.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's common stock has been traded in the over-the-counter
market and quoted on The Nasdaq Stock Market since October 19, 1989. Stock
is traded under the symbol "NEXT". As of March 13,1998, there were
approximately 220 shareholders of record and approximately 1375 beneficial
holders of the Company's common stock. The high and low trade price
information set forth below, derived from data prepared by The Nasdaq Stock
Market, represents quotations by dealers and may not reflect applicable
markups, markdowns or commissions, and do not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
1997 1996
----------------- ----------------
High Low High Low
---- ---- ----- ----
<S> <C> <C> <C> <C>
First Quarter 3 1/8 1 3/8 3 9/16 2 3/8
Second Quarter 2 3/8 1 1/2 3 3/8 2 1/8
Third Quarter 2 1 3/8 2 3/8 1 1/8
Fourth Quarter 1 9/16 13/16 4 1
</TABLE>
On March 13, 1998, the closing bid price on The Nasdaq Stock Market
was $1.625 per share.
The Company did not pay a cash dividend on its common stock in 1997 or
1996 and does not intend to pay any in the foreseeable future. Any future
declaration and payment of dividends will be determined by the Board of
Directors based upon the conditions existing at the time, including the
Company's earnings, financial condition, capital requirements, applicable
legal restrictions and other factors. So long as any shares of preferred
stock remain outstanding, the Company may not declare or pay any cash
dividend or make any other distributions with respect to the common stock.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial and
operating data for the Company. Certain prior year amounts have been
reclassified to conform to the presentation used in 1997. The data for the
three years ended December 31, 1997, should be read in conjunction with the
Company's Consolidated Financial Statements included elsewhere in this
document. The selected consolidated financial and operating data for the two
years ended December 31, 1994, is derived from the Company's historical
Consolidated Financial Statements. See Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations. (000s, except per
share amounts and operating data.)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Total revenue.................. $20,652 $18,458 $14,873 $10,978 $23,380
Income (loss) before income
taxes......................... ( 4,624) (14,693) (11,967) ( 5,407) (13,780)
Income tax benefit............. -- -- -- 2,590 2,972
Net income (loss).............. ( 4,624) (14,693) (11,967) ( 2,817) (10,808)
Net income (loss) per share.... (.54) (1.72) (1.40) (.33) (1.27)
CASH FLOW DATA
Net cash (used in) provided by
operating activities......... ( 2,096) ( 9,246) 4,624 ( 5,641) 2,969
Capital expenditures........... 948 1,124 20,891 550 716
BALANCE SHEET DATA
(at period end)
Total Assets................... 39,011 41,666 47,942 50,972 59,566
Long-term Debt................. 9,730 8,359 985 1,182 210
Stockholders' Equity........... 21,805 22,179 36,578 47,955 51,172
OPERATING DATA
Patient Days-Sierra Tucson..... 17,445 15,683 17,650 15,955 31,874
Average Daily Census........... 48 43 48 44 87
Guest Days-Miraval(1)(2)....... 23,851 17,665 2,062 -- --
Avg. Daily Guest Count(1)(2)... 65 48 67 -- --
Participant Days-Onsite(3)..... -- 7,073 7,554 -- --
Average Daily Census(3)........ -- 21 21 -- --
Participant Days-HHHI(4)....... -- 7,077 -- -- --
Average Daily Census(4)........ -- 33 -- -- --
FINANCIAL STATISTICS
Current Ratio.................. .35:1 .52:1 .65:1 11:1 3:1
Days Outstanding in Accounts
Receivable.................... 27 44 38 41 95
</TABLE>
(1) The guest days and average daily guest count for the year ended
December 31, 1995 is calculated based on the number of days from the
commencement of operations on December 1, 1995 to December 31, 1995.
(2) Miraval was closed for two weeks in July, 1997 due to low
customer demand and to make needed improvements to the facility.
(3) Onsite was divested on November 30, 1996.
(4) Hilton Head Health Institute was acquired on March 1, 1996 and
divested on October 1, 1996.
<PAGE>
ITEM 7. 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 years ended December 31,1997. Certain prior year
amounts have been reclassified to conform to the presentation used in 1997.
Reference should also be made to the Company's Consolidated Financial
Statements and related notes thereto and the Selected Financial Data included
elsewhere in this document.
GENERAL
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 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; a state licensed, inpatient psychiatric
hospital providing service for the treatment of substance abuse, as
well as a broad range of mental health and behavioral disorders. For
the year ended December 31, 1997, the Treatment segment accounted for
approximately 57% of the Company's operating revenues and
approximately 35% of expenses, while the Health and Leisure segment
accounted for approximately 42% of the Company's operating revenue
and approximately 54% of operating expenses. However, the Company
believes that the Health and Leisure segment will make significant
contributions to the Company's operating results in the future.
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The significant changes in results of operations and net cash
provided by (used in) operating activities for the year ended
December 31, 1997, compared to the same period in 1996 are discussed
below. Unless otherwise stated, all comparisons are for the same
period.
For the year ended December 31, 1997, net loss decreased $10.1
million to $4.6 million; a 68.5% improvement. Net cash provided by
operating activities increased $7.2 million resulting in net cash
used in operating activities of $2.1 million compared to the same
period in 1996. The improvement in cash flow is attributable to the
net loss improvement.
Total revenue increased $2.2 million to $20.7 million, an
increase of 11.9% when compared to the same period in 1996. These
results reflect a 12.7% increase in net revenue at Sierra Tucson and
a 61.8% increase in net revenue at Miraval. The increase was
partially offset by Onsite's $1.5 million in net revenue from 1996.
Salaries and related benefits decreased $3.6 to $11.6 million, a
decrease of 24% when compared to the same period in 1996. The
decrease was primarily due to a 4% decrease in salaries and benefits expense,
including significant reductions at the corporate level. The reductions were
achieved even with the growth in revenue.
General and administrative expense decreased $4.5 million to
$10.0 million, a decrease of 31% when compared to the same period in
1996. The decrease was due to elimination of corporate expense and
Company-wide operating efficiencies which enabled Miraval and Sierra
Tucson to maintain costs at 1996 levels even though both achieved
significant revenue growth due to increased occupancy.
The Company recognized a pre-tax loss of $4.6 million for the
year ended December 31, 1997. There was no income tax benefit
recognized in 1997, as the Company recorded a 100% valuation reserve
against deferred tax assets.
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The significant changes in results of operations and net cash
provided by (used in) operating activities for the year ended
December 31, 1996, compared to the same period in 1995 are discussed
below. Unless otherwise stated, all comparisons are for the same
period.
For the year ended December 31, 1996, net loss increased $2.7
million to $14.7 million and net cash provided by operating
activities decreased $13.9 million resulting in net cash used in
operating activities of $9.2 million compared to the same period in
1995.
Total revenue increased $3.6 million to $18.5 million, an
increase of 24% when compared to the same period in 1995. These
results reflect a full year of operations at Miraval in 1996, versus
one month in 1995.
Salaries and related benefits increased $6.9 million to $15.2
million, an increase of 82% when compared to the same period in 1995.
The increase was due to staffing requirements related to the
operations at Miraval.
General and administrative expense increased $6.0 million to
$14.4 million, an increase of 72% when compared to the same period in
1995. The increase was due to advertising and operational costs
related to the operations at Miraval, and costs related to the
promotion and operations of existing lines of business. These
increases were partially offset by a decrease in the provision for
bad debts to reflect Sierra Tucson's current collection experience.
In 1995, the Company incurred $7.2 million in pre-opening costs
related to the development of Miraval. The pre-opening costs
included advertising, labor related costs, pilot program research and
development activities, and other related operating expenses. The
Company also renovated and expanded certain existing facilities to
accommodate Miraval's lodging, program and activities requirements.
As a result of this process, approximately $1.7 million of previously
existing facility-related assets were dismantled and replaced.
The Company recognized a pre-tax loss of $14.7 million for the
year ended December 31, 1996. There was no income tax benefit
recognized in 1996, as the Company recorded a 100% valuation reserve
against deferred tax assets.
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,
proceeds from public and private equity offerings and debt financing.
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 are
primarily affected by census levels and net revenue per patient day.
This segment contributed positive cash flow to the Company's
operations in 1997.
The Treatment segment's operational results reflect the
necessity of attracting a high percentage of retail patients. In
1997, 55% of patient revenue was derived from retail payments and the
remaining 45% from third party payors. Sierra Tucson continues to
experience pressure from third-party payors and managed care
organizations to restrict patient access and payment for treatment
services. However, 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.
In 1997, the Company had net capital expenditures of
approximately $.9 million. Primarily as a result of operating
expenditures required to support the Health and Leisure segment until
it is self-sufficient, and the aforementioned capital expenditures,
the Company's cash reserves have decreased significantly. In 1997,
the Company's net cash used in operating activities was $2.1 million.
<PAGE>
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 - time. Miraval results are affected by room
occupancy and average daily rate in addition to expense management.
In 1997, marketing initiatives for creating marketplace awareness and
demand for Miraval's services resulted in a room occupancy rate of
approximately 43%. 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.
To pay off certain outstanding obligations and to meet its
current 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
source and use of funds are as follows:
<TABLE>
<S> <C>
Source of Funds
- - Preferred Stock - Series A $ 1,578,000
- - Preferred Stock - Series B 2,672,000
- - Debt 8,090,000
--------------
Total Source of Funds 12,340,000
Use of Funds
- - Payoff of contractor obligations to Sundt Corporation 2,680,000
- - Funds placed into escrow to pay off the first mortgage
with Mortgages Ltd. (1) 4,235,000
- - Payoff short-term working capital loans 800,000
--------------
Total Debt Repayments 7,715,000
- - Funds available to meet operating cash requirements
and reduce net working capital deficit 4,625,000
--------------
Total Use of Funds $12,340,000
==============
</TABLE>
(1) Funds were placed in escrow to avoid a prepayment penalty of
approximately $158,000. The funds placed in escrow were used to
pay off the principal balance on January 4, 1997. The Company
received approximately $280,000 from the escrow monies after
paying off the balance on January 4, 1997.
The debt financing transaction contains 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 December 31, 1997, the Company had drawn
$2.8 million on the stand-by commitment.
The Company received shareholder 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.
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 the stand-by funds will most likely be available to
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 1998 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. Management does not
anticipate any significant impact upon operations as a result of
inflation, nor has the Company historically experienced any such
impact.
The Company is exploring other sources of financing, and
proceeds from any financing which is obtained will be used, in part,
to extinguish the existing financing agreements with AP LOM, LLC.
<PAGE>
The Company has conducted a review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue
and is developing a plan to resolve the issue. 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. 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 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.
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 the continued growth
of prospective patients which characterized 1997.
The Company is currently considering the relocation of Sierra
Tucson to the facilities previously occupied by Onsite. Such a
relocation would facilitate future expansion of both Sierra Tucson
and Miraval should market conditions justify and capital be available
for 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 and up to 226 residential units.
Miraval, the Company's health and leisure resort, has been in
operation since December, 1995. Growth performance was steady in
1997 and provided for a 30% increase in room occupancy. The resort
continues to receive favorable press coverage and was named in the
Top Ten Spas of the World in the September 1997 issue of Conde Nast
Traveler. Other exposure includes such prestigious names as the New
York Times, the Wall Street Journal, USA Today, and Good Morning
America where a segment on Miraval aired in July of 1997.
In 1997, the expense of operating the resort increased less than
1% while revenues increased by 62%. These improvements were
achieved while guest satisfaction ratings, critical to improved
market penetration, remained high. Management believes that further
operational efficiencies will be gained in 1998 to improve cash flow.
The operations of Miraval appear to be seasonal, and although
seasonally adjusted rates were offered in 1997, occupancy levels fell
off during the summer months. Miraval was closed for two weeks in
July of 1997 in response to the seasonal fluctuation in consumer
demand as well as to permit certain renovations and improvements to
the facilities. Management is anticipating a similar closure in July
1998.
With the improvement of meeting facilities at Miraval, an
objective of increasing 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 relations activities.
<PAGE>
Management's strategy for Miraval in 1998 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.
Cost containment measures will continue to be a critical
management objective during 1998. 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 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 and the $2.2 million remaining undrawn as of December 31,
1997 under the stand-by commitment from the November 15, 1996 debt
transaction, if available, are 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.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
NextHealth, Inc.'s Consolidated Financial Statements as of December
31, 1997 and 1996 and for the three years ended December 31, 1997.
PAGE
Report of Management......................................... 15
Report of Independent Auditors............................... 16
Consolidated Balance Sheets.................................. 17
Consolidated Statements of Operations........................ 18
Consolidated Statements of Cash Flows........................ 19
Consolidated Statements of Changes in Stockholders' Equity... 20
Notes to Consolidated Financial Statements................... 21
<PAGE>
REPORT OF MANAGEMENT
The financial statements and other financial information included in
this Annual Report on Form 10-K are the responsibility of management.
The financial statements have been prepared in conformity with
generally accepted accounting principles appropriate in the
circumstances and include amounts that are based on management's
informed judgments and estimates.
Management relies on the Company's system of internal accounting
controls to provide reasonable assurance that assets are safeguarded
and that transactions are properly recorded and executed in
accordance with management's authorization. The concept of
reasonable assurance is based on the recognition that there are
inherent limitations in all systems of internal accounting control
and that the cost of such systems should not exceed the benefits to
be derived. The internal accounting controls in place during the
periods presented are considered adequate to provide such assurance.
The Company's financial statements are audited by Ernst & Young LLP,
independent auditors. Their report states that they have conducted
their audit in accordance with generally accepted auditing standards.
These standards include an evaluation of the system of internal
accounting controls for the purpose of establishing the scope of
audit testing necessary to allow them to render an independent
professional opinion on the fairness of the Company's financial
statements.
The Audit Committee of the Board of Directors, composed solely of
directors who are not employees of the Company, reviews the Company's
financial reporting and accounting practices. The Audit Committee
meets periodically with the independent auditors and management to
review the work of each and to ensure that each is properly
discharging its responsibilities.
/s/ William T. O'Donnell, Jr.
- ------------------------------------
William T. O'Donnell, Jr.
President and Chief Executive Officer
/s/ Loree Thompson
- ------------------------------------
Loree Thompson
Principal Financial and Accounting Officer
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
NextHealth, Inc.
We have audited the accompanying consolidated balance sheets of
NextHealth, Inc., as of December 31, 1997 and 1996, and the related
consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period
ended December 31, 1997. Our audits also included the financial
statement schedule listed in the index at Item 14(a). These
financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of NextHealth, Inc. and subsidiaries, at December
31, 1997 and 1996, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects
the information therein.
/s/ Ernst & Young LLP
- -----------------------------
ERNST & YOUNG LLP
Tucson, Arizona
January 29, 1998
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000s, except share amounts)
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
------ -------
<S> <C> <C>
Assets
Current Assets:
Cash and equivalents..................................... $ 829 $ 1,373
Accounts receivable, less allowance for doubtful accounts
of $298 and $457,respectively........................... 954 928
Prepaid expenses......................................... 232 387
Other current assets..................................... 567 902
---------- ---------
Total current assets................................... 2,582 3,590
Property and equipment, net............................... 35,918 37,417
Long-term receivables, less allowance for doubtful
accounts of $50 and $56, respectively.................... 151 167
Intangible assets, less amortization of $158 and $29,
respectively............................................. 322 451
Other assets.............................................. 38 41
----------- ---------
Total assets........................................... $ 39,011 $ 41,666
=========== =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, trade.................................. $ 838 $ 2,050
Accrued expenses and other liabilities................... 6,638 4,828
----------- ---------
Total current liabilities.............................. 7,476 6,878
Long-term debt and financing obligation................... 9,730 8,359
----------- ---------
Total liabilities...................................... 17,206 15,237
Mandatorily Redeemable Preferred Stock:
Series A, $.01 par value, 46,065 shares authorized,
17,109 shares outstanding at December 31, 1996.......... -- 1,578
Series B, $.01 par value, 28,956 shares authorized,
28,956 shares outstanding at December 31, 1996.......... -- 2,672
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 Dec. 31,1997.... -- --
Common stock, $.01 par value, 16,000,000 shares authorized;
8,554,938 shares outstanding at Dec. 31, 1997 and 1996.. 86 86
Additional paid-in capital............................... 47,997 43,747
Accumulated deficit...................................... (26,278) (21,654)
----------- ----------
Total stockholders' equity............................. 21,805 22,179
----------- ----------
Total liabilities and stockholders' equity............. $39,011 $ 41,666
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000s, except share and per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1996 1995
---------- ----------- --------- ----------------
<S> <C> <C> <C>
Revenue:
Net operating revenue............. $ 20,457 $ 18,383 $ 12,967
Investment income................. 49 55 1,293
Other revenue..................... 146 20 613
---------- ----------- ----------
Total revenue.................. 20,652 18,458 14,873
Operating expenses:
Salaries and related benefits..... 11,607 15,234 8,362
General and administrative........ 9,967 14,433 8,396
Pre-opening costs................. -- -- 7,242
Retirement of assets.............. -- -- 1,695
Interest expense.................. 1,126 569 87
Depreciation and amortization..... 2,576 2,915 1,058
---------- ----------- ----------
Total operating expenses....... 25,276 33,151 26,840
---------- ----------- ----------
Loss before income taxes............ ( 4,624) (14,693) (11,967)
Income taxes........................ -- -- --
---------- ----------- ----------
Net loss............................ $ ( 4,624) $ (14,693) $ (11,967)
========== =========== ==========
Weighted average shares of common
stock outstanding.................. 8,554,938 8,554,938 8,547,490
========== =========== ==========
Basic and diluted Loss Per Share.... $ (0.54) $ (1.72) $ (1.40)
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................. $( 4,624) $(14,693) $ (11,967)
Adjustments to reconcile net loss
to net cash (used in) provided by
operating activities:
Depreciation and amortization...... 2,674 2,915 1,058
Retirement of assets............... -- 1,170 1,695
Provision for bad debts............ (41) 223 50
Provision for deferred income taxes -- -- 315
Changes in operating assets and liabilities
net of effects from acquisitions:
Decrease (increase) in assets:
Accounts receivable................ 30 233 1,366
Other assets....................... 493 (558) (844)
Income taxes receivable............ -- -- 4,508
(Decrease) Increase in liabilities:
Accounts payable, accrued expenses
and other liabilities and
litigation reserve................ (628) 1,464 8,443
---------- --------- --------
Net cash (used in) provided by
operating activities................. (2,096) (9,246) 4,624
Cash flows from investing activities:
Purchase of property and equipment... ( 948) (1,036) (20,761)
Business acquisitions, net of cash
acquired............................ -- (88) (130)
Business disposals................... -- 199 --
Sale of investments.................. -- 1,635 32,240
Purchase of long-term investments.... -- -- (14,163)
---------- --------- ---------
Net cash (used in) provided by
investing activities................. (948) 710 ( 2,814)
Cash flows from financing activities:
Proceeds from long-term borrowing.... 2,800 3,928 --
Proceeds from issuance of preferred
stock............................... -- 4,250 --
Proceeds from financing transaction.. -- 8,090 --
Reduction of long-term debt and
financing obligation................ (300) (9,223) (208)
Exercise of common stock options..... -- -- 35
---------- ---------- ---------
Net cash provided by (used in)
financing activities................. 2,500 7,045 (173)
---------- ---------- ---------
Net (decrease) increase in cash and
equivalents.......................... (544) (1,491) 1,637
Cash and equivalents, beginning of year 1,373 2,864 1,227
---------- ---------- ---------
Cash and equivalents, end of year..... $ 829 $ 1,373 $ 2,864
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(000s, except share amounts)
<TABLE>
<CAPTION>
Retained Total
Additional Earnings Unrealized Stock-
Common Stock Paid-in (Accum. Loss on holders'
-----------------
Cost Shares Capital Deficit) Investments Equity
------ ------ --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ 85 8,496,884 $43,263 $ 5,006 $ (399) $47,955
Net loss for the year ended
December 31, 1995 -- -- -- (11,967) -- (11,967)
Issuance of common stock for
business acquisition 1 50,000 155 -- -- 156
Exercise of common stock
options -- 8,054 35 -- -- 35
Liquidation of investments -- -- -- -- 399 399
------ ---------- --------- -------- --------- ---------
Balance at December 31, 1995 86 8,554,938 43,453 (6,961) -- 36,578
Net loss for the year ended
December 31, 1996 -- -- -- (14,693) -- (14,693)
Issuance of warrants -- -- 294 -- -- 294
------- ---------- ---------- -------- ---------- ---------
Balance at December 31, 1996 86 8,554,938 43,747 (21,654) -- 22,179
Net loss for the year ended
December 31, 1997 -- -- -- (4,624) -- (4,624)
Removal of mandatory redemption
provision - Preferred Stock -- -- 4,250 -- -- 4,250
------- ---------- --------- -------- ---------- ---------
Balance at December 31, 1997 $86 8,554,938 $47,997 $(26,278) $ -- $21,805
======= ========== ========= ======== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1997
ORGANIZATION
NextHealth, Inc.'s, and subsidiaries' (collectively, the "Company")
operations are categorized 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 includes
Sierra Tucson, LLC ("Sierra Tucson"), an inpatient, state licensed
psychiatric hospital and behavioral health care center providing service
for the treatment of substance abuse and a broad range of mental health
and behavioral disorders; and, through November 30, 1996, Onsite
Workshops, Inc. ("Onsite"), which offered intensive, therapeutic group
experiences addressing a wide variety of personal and family issues. The
Health and Leisure segment, Sierra Healthstyles, Inc. d/b/a Miraval
("Miraval"), is a luxury health resort providing a full range of self-
discovery, stress management and recreational activities. Also, from
March 1, 1996, through October 1, 1996, the Health and Leisure segment
included Hilton Head Health Institute, Inc. ("HHHI"), a provider of
weight management programs for the development and maintenance of healthy
lifestyles. The March 1, 1996 acquisition of HHHI was accounted for as a
purchase. HHHI was divested by the Company on October 1, 1996. The
current operations of the Company are located in Tucson, Arizona.
Effective September 28, 1995, the Company changed its name from Sierra
Tucson Companies, Inc. to NextHealth, Inc. This change was effected
through a short-form merger pursuant to Delaware law whereby Sierra
Tucson/Arizona Holdings, Inc. ( a wholly owned subsidiary of Sierra
Tucson Companies, Inc.) merged with and into Sierra Tucson Companies,
Inc. As part of the merger, the surviving entity's name was changed to
NextHealth, Inc. The sole purpose of the name change was to establish
separate identities for the parent company and each of its operating
subsidiaries.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of NextHealth,
Inc. and its subsidiaries, all but one of which are wholly owned. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Basis of Accounting
The accompanying financial statements have been prepared assuming the
Company is a going concern. Management believes the remaining $2.2
million, if available, under the existing stand-by commitment with AP
LOM, LLC will be sufficient to meet any working capital requirements.
However, Miraval will continue to require financial support until such
time as it gains market acceptance. Continuing operating losses at
Miraval, and/or a significant decline in patient census at Sierra Tucson,
would adversely impact the Company's ability to operate as a going
concern in 1998.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those
estimates.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1997
Cash and Equivalents
Cash and equivalents includes all cash balances and highly liquid
investments with an original maturity of three months or less. Cash and
equivalents are stated at cost which approximates market value.
Pre-opening Costs
Costs associated with the opening of new properties or major additions to
existing properties are expensed as incurred.
Investments
For the years ended December 31, 1997, 1996, and 1995, proceeds from the
sale of securities classified as available-for-sale were $0, $1,635, and
$38,545, respectively; gross gains recognized were $0, $0, and $404,
respectively; and gross losses recognized were $0, $0, and $80,
respectively.
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred
approximately $954, $1,212, and $3,600 in advertising costs during 1997,
1996 and 1995, respectively.
Intangible Assets
Intangible assets at December 31, 1997 include capitalized loan fees
which are being amortized over the life of the loan and ground water
rights which are being amortized over a period of 15 years. Intangible
assets of $547 were written off in 1996 as a result of the Onsite
divestiture.
Property and Equipment
Property and equipment are stated at cost. Interest incurred during the
construction of facilities is capitalized and amortized over the life of
the asset. Costs of improvements are capitalized. Costs of normal
repairs and maintenance are charged to expense as incurred. Upon the
sale or retirement of property and equipment, the cost and related
accumulated depreciation are removed from the respective accounts, and
the resulting gain or loss, if any, is included in income. Depreciation
is provided on a straight-line basis over the estimated useful lives of
the assets. The service lives of the Company's property and equipment
ranges from 3 to 31 years.
Income Taxes
The company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes.
Revenue Recognition
Revenue, net of any applicable contractual allowances or discounts, is
recognized in the period services are rendered.
Net Operating Revenue
Net operating revenue consists of revenue derived from guests, patients
and participants, based on the billing rates established for each line of
business, less any applicable discounts or contractual allowances. For
the three years ending December 31, 1997, contractual allowances and
discounts granted were approximately $1,595, $1,485, and $1,423,
respectively.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1997
Stock Based Compensation
Stock options are granted to employees at an exercise price equal to or
greater than fair value on the dates of grant. The Company accounts for
stock option grants in accordance with APB Opinion No. 25, "Accounting
for Stock Issued to Employees". The Company has adopted the disclosure-
only provisions of Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation".
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 all periods presented as
the effect of all applicable securities is anti-dilutive (decrease the
loss per share amount).
Credit Risk
A significant portion of the Company's accounts receivable are due from
individuals (self-pay), insurance companies, other entities which
provided health care benefits and credit card companies. Management
performs credit evaluations and believes its allowance for doubtful
accounts is adequate.
Impact of Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. Reclassifications of financial statements for earlier periods
provided for comparative purposes is required. At present, the Company
does not have any account balances which would cause comprehensive income
to differ from net income (loss), and, accordingly, the adoption of SFAS
No. 130 is expected to have no impact on the Company's consolidated
results of operations, financial position or cash flows.
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 will adopt the new requirements retroactively in
1998. Management has not completed its review of SFAS No. 131, but does
not anticipate that the adoption of this statement will have a
significant effect on the Company's reported segments.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1997
PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and improvements............ $ 2,920 $ 2,902
Buildings and improvements....... 34,915 34,404
Furniture and equipment.......... 9,430 9,049
---------- ----------
Total Property & equipment....... 47,265 46,355
Less: accumulated depreciation
and amortization................ 11,347 8,938
---------- ----------
Total property and
equipment, net.................. $ 35,918 $ 37,417
========== ==========
</TABLE>
ACCRUED EXPENSES AND OTHER LIABILITIES
At December 31, 1997 and 1996, accrued expenses and other liabilities
were comprised of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Payroll and related taxes..... $ 765 $ 1,403
Professional fees............. 197 743
Deposits and patient refunds.. 1,146 420
Reimbursement liability....... 1,018 1,018
Current Portion of Note Payable 1,472 258
Accrued Interest.............. 972 104
Other......................... 1,068 882
--------- ---------
Total accrued expenses and
other liabilities............ $ 6,638 $ 4,828
======= =========
</TABLE>
Accrued interest is owed to an affiliate of the Company's preferred
stockholder.
LONG-TERM DEBT AND FINANCING OBLIGATION
Long-term debt and financing obligation at December 31, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Secured debt with an interest
rate of 10%-12% maturing
through 1999.................. $ 10,499 $ 7,805
Financing obligation........... 703 796
Other.......................... 0 16
---------- -----------
11,202 8,617
Less: current portion.......... 1,472 258
---------- -----------
Total long-term debt and
financing obligation.......... $ 9,730 $ 8,359
========== ===========
</TABLE>
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1997
In November 1996, the Company entered into a secured loan agreement with
AP LOM, LLC an affiliate of Apollo Real Estate Advisors, L.P. in the
amount of $13,090 contemporaneously with the issuance of preferred stock
to this entity. The Company received $8,090; the remaining $5,000 was a
stand-by loan commitment, subject to compliance with certain conditions
and the lender's good faith discretion. As of December 31, 1997, $2,800
has been drawn under the stand-by loan commitment. The secured loan
agreement contains various operational and financial restrictions
including restrictions on additional debt and prohibition of
acquisitions. In the event of default, the Lender may declare the stand-
by loan commitment terminated, the principal and accrued interest due and
payable, and elect a majority of the Board of Directors. The loan
agreement bears interest at the rate of 10% for the first year, 11% for
the second year and 12% for the third year. The maturity date is
November 14, 1999. The loan agreement is secured by a deed of trust to
essentially all of the land and buildings of the Company, a security
interest in all of the Company's personal property and by the collateral
pledge of the Company's stock or other interest in the subsidiaries. At
December 31, 1997, the Company is in compliance with all terms and
conditions.
In December 1994, the Company sold a facility for $1,000 (the facility's
appraised value) to an entity controlled by the Chairman of the Company's
Board of Directors. The Company simultaneously leased this facility for
a term of seven years, at an annual cost of $150, payable in quarterly
installments. The Company has the option of extending the lease term for
an additional ten-year period or to repurchase the facility at fair
market value on any date, one year after the date of the sale-leaseback
agreement. This transaction has been accounted for as a financing as a
result of the Company's continuing involvement with the facility.
Future maturities of long-term debt and financing obligation at the date
indicated are as follows:
<TABLE>
<CAPTION>
December 31,
1997
----------------
<S> <C>
1998....................... $ 1,472
1999....................... 9,206
2000....................... 114
2001....................... 123
2002....................... 132
Thereafter................. 155
----------
$11,202
==========
</TABLE>
For years ended December 31, 1997, 1996, and 1995, interest paid was
$161, $569, and $87, respectively.
SEGMENT INFORMATION
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 includes
an inpatient, state licensed psychiatric hospital providing service for
the prevention, education and treatment of substance abuse, and a broad
range of mental health and behavioral disorders; and, through November
30, 1996, included a short-term intensive, experience-based workshop
program addressing a wide variety of personal and family issues.
Substantially all revenues resulted from group therapy, medical
assessments and stabilization, pharmacy, workshop and room and board
charges. The Health and Leisure segment presently consists of a luxury
resort providing a full range of self discovery, stress management and
recreational activities. Substantially all revenues result from guest
bookings, group bookings and retail charges. From March 1, 1996 through
October 1, 1996, the Health and Leisure segment also included HHHI, a
provider of weight management programs for the development and
maintenance of healthy lifestyles. During this period, HHHI provided
$112 in net income to the Company. No single customer accounted for
more than 10% of either of the principal business segment's revenue in
1997, 1996 or 1995.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1997
The results of operations for the Company's principal business segments
are reported in the Consolidated Statement of Operations. For the years
ended December 31, 1997, 1996 and 1995, there was no intersegment revenue
and all reported segment operating expenses are those directly related to
the operation of its business. In 1997, certain property and equipment
was transferred from Corporate to both Treatment and Health and Leisure.
Such transfers were made at historical cost. The current operations of
each principal business segment are located in Tucson, Arizona.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1997
Information about the Company's operations in different business segments
for the years ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Corporate
Health & and
Treatment Leisure Other Items Consolidated
--------- -------- ----------- ------------
1997
-----------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $11,702 $ 8,754 $ 196 $ 20,652
Income (loss) before
income tax benefit 2,935 (4,873) (2,686) ( 4,624)
Identifiable assets 4,257 30,726 4,028 39,011
Capital expenditures and
intersegment transfers,net 478 1,208 ( 738) 948
Depreciation & amortization
expense 361 1,944 271 2,576
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $11,861 $ 6,521 $ 76 $ 18,458
Income (loss) before
income tax benefit 1,148 ( 8,183) (7,658) (14,693)
Identifiable assets 6,031 31,064 4,571 41,666
Capital expenditures,net (65) 1,354 (165) 1,124
Depreciation & amortization
expense 544 1,933 438 2,915
</TABLE>
<TABLE>
<CAPTION>
1995
-----------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $12,765 $ 530 $ 1,578 $ 14,873
Income (loss) before
income tax benefit 765 (10,280) ( 2,452) ( 11,967)
Identifiable assets 7,191 32,291 8,460 47,942
Capital expenditures 540 19,900 451 20,891
Depreciation & amortization
expense 515 196 347 1,058
</TABLE>
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1997
STOCKHOLDERS' EQUITY
PREFERRED STOCK
In November 1996, the Company's Board of Directors created two series of
Preferred Stock ("Series A" and "Series B"). The Company authorized
46,065 shares of Series A stock and 28,956 shares of Series B stock. At
December 31, 1996,17,109 shares of Series A and 28,956 shares of Series B
were outstanding and classified as mandatorily redeemable preferred stock
in the balance sheet. The Series B Preferred Stock was converted into
Series A Preferred Stock on January 29, 1997. The mandatory redemption
provisions applicable to the outstanding preferred stock were
extinguished as a result of this conversion, therefore, the amounts
received from the sale of such stock are classified as equity in the
accompanying 1997 consolidated balance sheet. At December 31, 1997,
46,065 shares of Series A are outstanding. A total of approximately
5,200,000 shares of common stock have been reserved for conversion of
preferred stock and exercise of warrants held by the preferred
shareholder. Significant terms and conditions of the Preferred Stock are
described in the following paragraphs.
The holders of Series A stock are not entitled to receive dividends
except upon an event of default, in which event the dividend rate on the
Series A Preferred Stock will be 18% per annum. So long as any shares of
Preferred Stock remain outstanding, the Company may not declare or pay
any cash dividend or make any other distributions with respect to the
Common Stock.
In the event of any liquidation, dissolution or winding-up of the
Company, the holders of Preferred Stock shall be entitled to a
liquidation preference over the holders of Common Stock in the amount of
any accrued but unpaid dividends. There are no other liquidation
preferences.
The holders of Series A stock are entitled to vote on all matters
presented to the Company's stockholders for a vote and, except with
respect to the election of Directors, each share of Series A stock
entitles the holder thereof to such number of votes per share as equals
the number of shares of the Common Stock into which such shares of Series
A stock is then convertible. Initially, each share of Series A stock is
convertible into 100 shares of Common Stock. In addition, the holders of
Series A stock are entitled to vote separately as a separate class on all
matters other than the election of directors. This means that matters
submitted for a vote of the stockholders of the Company must receive the
approval of the requisite percentage of the holders of Common Stock (with
the holders of Series A stock being entitled to vote on an "as converted"
basis) as well as of the holders of the Series A stock. In addition, the
holders of Series A stock, as a class, are entitled to elect four
directors to the Company's Board of Directors ("Preferred Directors").
In the event of a default, the holders of Series A stock become entitled
to elect a majority of the Company's Board of Directors. The Company may
not redeem the Preferred Stock at any time before January 1, 2001. The
preferred stock is redeemable by the Company at $92.26 per share
(issuance price).
The Company issued a total of 600,000 warrants in 1996 which are
exercisable into 600,000 common shares at an exercise price of $1.50.
These warrants are exercisable through November 13, 2006. The fair value
of the warrants at issuance date was credited to additional paid-in
capital.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1997
STOCK OPTION PLANS
At December 31, 1997, 1,993,000 shares of common stock were reserved for
the exercise of options under the Company's 1992 and 1990 stock option
plans. Options to purchase shares of common stock are granted with an
exercise price equal to or greater than the fair market value on the
dates of grant, and are exercisable over periods ranging from three to
ten years. Options may be exercised in installments generally commencing
one year after the dates of grant. All options become fully vested upon
the acquisition of the Company or a merger in which the Company is not
the surviving entity.
In 1993, the Company established a Non-Employee Director Stock Option
Plan (the "DSO Plan"), which provides for the automatic granting of fully
vested options to purchase shares of common stock to members of the Board
of Directors who are not employees of the Company. At December 31,
1997, 300,000 shares of common stock were reserved for issuance under
the DSO Plan.
The fair value of these options was estimated at the dates of grant using
a Black-Scholes option pricing model with the following assumptions for
1997, 1996 and 1995, respectively: risk-free interest rates ranging from
6.10% to 6.52%, 4.87% to 5.16% and from 5.3% to 5.87%, respectively;
dividend yields of 0.0%; volatility factor of the expected market price
of the Company's common stock of .639; and an expected life of an option
of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the use of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
SFAS No. 123 requires the Company to present pro forma disclosure for
options granted subsequent to 1995. These disclosures are not indicative
of future amounts, as options granted prior to 1995 have not been
included as provided by SFAS No. 123. For purposes of pro forma
disclosures, the estimated fair value of stock options was amortized to
expense over the vesting period. Pro forma net income and loss per share
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Net Income (loss):
As reported................ $( 4,624) $(14,693) $(11,967)
Pro forma.................. ( 4,943) (14,933) (12,051)
Basic and diluted earnings
per share:
As reported................ $( .54) $( 1.72) $( 1.40)
Pro forma.................. ( .58) ( 1.75) ( 1.41)
</TABLE>
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1997
The following table summarizes the cumulative activity under the
Company's incentive stock option plans:
<TABLE>
<CAPTION>
Options Fully Option Price Weighted Avg.
Outstanding Vested Options Range (Per Share) Exercise Price
----------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Balance at
January 1,1995 887,135 377,251 $ 2.88 - $23.25 $4.11
Granted 608,750 2.88 - 6.19 3.67
Canceled (226,080) 2.88 - 10.75 3.99
Exercised (8,054) 2.88 - 4.00 3.63
----------- -------------- ---------------- ---------------
Balance at
December 31,1995 1,261,751 472,945 2.88 - 23.25 3.93
Granted 453,500 1.25 - 5.25 3.41
Canceled (361,887) 2.63 - 23.25 2.63
Exercised -- -- --
----------- -------------- ---------------- ---------------
Balance at
December 31,1996 1,353,364 846,188 1.25 - 9.50 3.76
Granted 219,500 1.50 - 2.75 2.61
Canceled (418,155) 2.63 - 9.50 3.72
Exercised -- -- --
----------- -------------- ---------------- ---------------
Balance at
December 31,1997 1,154,709 936,812 $ 1.25 -$ 6.00 $3.57
=========== ============== ================ ===============
</TABLE>
The weighted average fair value of options granted with an exercise price
above market price on the dates of grant during 1996 and 1995 was $1.38
(no such options were granted in 1997). The weighted average fair value
of options granted with an exercise price equal to market price on the
dates of grant during 1997, 1996 and 1995 was $1.52, $1.62 and $1.92,
respectively. The remaining average contractual life for options
outstanding as of December 31, 1997, was 6.30 years. The weighted
average exercise price for exercisable options was $3.58, $3.87 and $4.03
at December 31, 1997, 1996 and 1995, respectively.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1997
INCOME TAXES
For 1997 and 1996, there were no income tax benefits available. The
current benefit recognized in 1995 of $315 was completely offset by the
provision for deferred income taxes.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying value of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The components of the deferred tax assets, all noncurrent, at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Capitalized business expansion costs $ 1,638 $ 2,164
Tax basis of fixed assets in excess of
book basis 1,308 1,766
Non-deductible reserves 426 657
State net operating loss carryforward 2,590 2,134
Federal net operating loss carryforward 7,438 4,860
Minimum tax credit 258 258
Other, net 85 87
---------- -----------
Total deferred tax assets 13,743 11,926
Valuation allowance (13,743) (11,926)
---------- -----------
Net deferred tax assets $ -- $ --
========== ===========
</TABLE>
Management has established a valuation allowance equal to the deferred
tax assets at December 31, 1997 and 1996, based upon the likelihood that
such deferred tax assets will not be realized in the near term.
At December 31, 1997, the Company had approximately $22,000 and $43,000
of federal and state net operating loss carryforwards, respectively,
which expire for federal purposes during the years 2010 through 2013 and
for state purposes during the years 1999 through 2003. In addition, at
December 31, 1997, the Company has approximately $258 in Alternative
Minimum Tax Credits for federal tax purposes which do not expire. The
majority of the Company's net operating loss and minimum tax credit
carryforwards are subject to annual restrictions limiting their
utilization in accordance with Internal Revenue Code Section 382 as a
result of an ownership change which occurred during 1996.
The differences between the income tax benefit at the statutory rate and
the actual income tax benefit is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Federal income tax rate (34.0)% (34.0)% (35.0)%
Increase in taxes:
Change in valuation allowance 34.0 30.0 27.3
Other, net -- 4.0 7.7
------ ------ ------
Effective income tax rate 0.0 % 0.0 % 0.0 %
====== ====== ======
</TABLE>
No income tax payments were made in the three years ending December 31, 1997.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1997
OPERATING LEASES
The Company leases land, vehicles and equipment under operating leases.
Future annual minimum lease payments under noncancelable operating leases
at December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998 $ 244
1999 231
2000 143
2001 44
----------
$ 662
==========
</TABLE>
Total rental expense recognized under operating leases for 1997, 1996,
and 1995, was $287, $471, and $160, respectively.
EMPLOYEE RETIREMENT PLAN
The Company has a defined contribution plan that provides for
discretionary employer contributions and for optional employee
contributions which are matched by the Company at a maximum rate of 50%
of the employees' contributions up to amounts prescribed by law. All
employees who meet minimum age and service requirements are eligible to
participate in the plan. It is the Company's policy to fund plan
contributions as accrued. For 1997, 1996, and 1995, employer matching and
discretionary contributions to the plan were approximately $142, $163,
and $126, respectively.
UNUSUAL CHARGES
In 1996, the Company was committed to abandon one of its administrative
buildings and, therefore, wrote off the net book value of $1,170.
In 1995, in conjunction with the development of Miraval, certain of the
Company's facilities were renovated and expanded to accommodate the
lodging requirements and the programs and activities offered by Miraval.
Because of the nature of the construction activities, certain existing
assets and components of existing assets were retired or dismantled.
Accordingly, the Company recognized a charge of $1,695 in the fourth
quarter of 1995.
RELATED PARTY TRANSACTIONS
A member of the Company's Board of Directors whose term on the Board
ended in May 1996, is a member of an investment firm that provided
investment management services to the Company in 1995. In addition, an
entity which owned approximately 8% of the Company's common stock at
December 31, 1995 is affiliated with an investment firm that provided
investment management services to the Company. For 1997, 1996, and 1995,
approximately $0, $0, and $97, respectively, of the Company's investments
were managed by these firms. For 1997, 1996, and 1995, fees paid for
these services amounted to approximately $0, $0, and $50, respectively.
Management believes such fees are reasonable and comparable to those of
other institutions providing similar services.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1997
A member of the Company's Board of Directors is a member of an asset
management firm that provided management and financial services to the
Company in 1997 for a total fee of $72. Management believes such fees
are reasonable and comparable to those of other institutions providing
similar services.
Effective January 1, 1995, an individual related to a Director entered
into a one year consulting arrangement with the Company for total
compensation of $100.
The Company leases a facility from an entity controlled by the President
and CEO of the Company and Chairman of the Company's Board of Directors.
See note entitled Long-Term Debt and Financing Obligation for additional
information.
An entity controlled by the President and CEO of the Company and Chairman
of the Company's Board of Directors provided consulting services to the
Company; in 1997 and 1996 total fees of $153 and $141, respectively, were
paid to that entity.
A loan of $300 was made to the Company in September 1996 from the
President and CEO of the Company and Chairman of the Company's Board of
Directors. A loan of $275 was made to the Company in September 1996 from
the former President and CEO. Both loans were repaid prior to December
31, 1996.
Effective October 1, 1996, the Company sold HHHI to the former President
and CEO of the Company for an amount which equaled the Company's purchase
price plus advances to that subsidiary from the purchase through
disposition date. The Company agreed to indemnify the related party for
up to $130 upon resale of the HHHI real property to an unaffiliated third
party.
An individual who became a member of the Company's Board of Directors on
November 15, 1996, is a member of a legal firm which represents the
Company on real estate and transactional issues; total fees of $89 and
$93 were paid to that firm in 1997 and 1996, respectfully.
CONTINGENCIES
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.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1997
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes certain quarterly financial data:
<TABLE>
<CAPTION>
Loss Net Loss
Total Before Per Share
Total Operating Income of Common
Revenue Expenses Taxes Net Loss Stock
--------- --------- ------- -------- ----------
<S> <C> <C> <C> <C> <C>
1997 Quarter ended:
March 31.......... $ 5,798 $ 6,433 $ ( 635) $ ( 635) $ ( .07)
June 30........... 5,485 6,750 (1,265) (1,265) ( .15)
September 30...... 3,810 5,439 (1,629) (1,629) ( .19)
December 31....... 5,559 6,654 (1,095) (1,095) ( .13)
--------- --------- --------- --------- ----------
$ 20,652 $ 25,276 $ (4,624) $ (4,624) $ (0.54)
========= ========= ========= ========= ===========
1996 Quarter ended:
March 31.......... $ 4,627 $ 7,463 $ (2,836) $ (2,836) $ ( .33)
June 30........... 4,837 7,249 (2,412) (2,412) ( .28)
September 30...... 4,326 7,659 (3,333) (3,333) ( .39)
December 31....... 4,668 10,780 (6,112) (6,112) ( .72)
--------- --------- --------- --------- ----------
$ 18,458 $ 33,151 $(14,693) $(14,693) $ (1.72)
========= ========= ========= ========= ==========
</TABLE>
The financial data disclosed for the quarter ended December 31, 1996
includes a write-off of one of the Company's administrative buildings of
$1,170. This charge was recorded in the corporate segment.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
TEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to instruction G(3) to Form 10-K, Items 10, 11, 12 and 13
are omitted because the Company will file a definitive proxy statement
(the "Proxy Statement") pursuant to Regulation 14A under the Securities
Exchange Act of 1934 no later than 120 days after the close of the fiscal
year. The information required by such Items will be included in the
definitive proxy statement to be so filed for the Company's annual
meeting of stockholders scheduled for May 21, 1998, and is hereby
incorporated by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Reference is made to the listing on page 14 for a list of
all financial statements filed as a part of this report.
(2) Financial Statement Schedules. The following financial
statement schedules are required by Item 14(d). All
other schedules are omitted because they are not
applicable, or not required, or because the required
information is included in the consolidated financial
statements or notes thereto.
Schedule II. Valuation and Qualifying Accounts
(3) Exhibits. The following exhibits are incorporated by
reference as indicated or are filed as part of this
Annual Report on Form 10-K:
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Document Page
- ------- ------------------------------------------------- ------------
<S> <C> <C>
3.1 Certificate of Incorporation (1)
3.2 Amended Restated By-Laws (5)
4.1 Specimen Common Stock Certificate (1)
4.2 Certificate of Designation, Preferences and Rights
of the Convertible Preferred Stock, Series A and
Cumulative Preferred Stock, Series B of NextHealth,Inc. (11)
10.26 Stock Bonus and Repurchase Agreement, dated November 18,
1988, between John H. Schmitz and Rita F. Schmitz and
Sierra Tucson/Properties, Inc., as amended on
August 31, 1989 (1)
10.33 1989 Stock Option Plan (1)
10.47 1990 Stock Option Plan (2)
10.49 Commercial lease dated as of March 15, 1991, between
the State of Arizona and Sierra Tucson AC, Inc.,
relating to lease of Adolescent Care facility site (3)
10.51 Form of Indemnity Agreement* (4)
10.53 1992 Stock Option Plan (3)
10.54 Non-Employee Directors Stock Option Plan (5)
10.56 Real Estate Sale Agreement and industrial Building
Lease for Sierra Tucson AC, Inc. Adolescent Center
dated December 28, 1994, and December 29, 1994,
respectively. (6)
10.57 Onsite Training and Consulting, Inc. Stock Purchase
Agreement dated January 13, 1995 (6)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Document Page
- ------- --------------------------------------------------- ------------
<S> <C> <C>
10.58 Severance Agreement, General Release, Covenant (6)
Not to Sue between the Company and William T.
O'Donnell, Jr., dated January 20, 1995
10.59 Elements of compensation - Wayne M. Morrison, (7)
Vice President/Chief Financial Officer
10.60 Note Payable between NextHealth, Inc. and Sundt (8)
Corporation dated April 10, 1996(without exhibits)
10.61 Asset Purchase Agreement by and among NextHealth, Inc. (8)
and Hilton Head Health Institute, Inc. dated February
29, 1996 (without exhibits)
10.62 Amendment 1 to Note Payable between NextHealth, Inc. (9)
and Sundt Corporation dated June 28, 1996
10.63 Loan Agreement between NextHealth, Inc. and (9)
Mortgages, Ltd. dated June 25, 1996
(without exhibits)
10.64 Secured Promissory Note between NextHealth, Inc. and (9)
Mortgages, Ltd. dated June 25, 1996
10.65 Deed of Trust, Assignment of Rents and Security (9)
Agreement between NextHealth, Inc. and Mortgages,
Ltd. dated June 25, 1996
10.66 Security Agreement between Sierra Tucson, Inc. and (9)
Mortgages, Ltd. dated June 25,1996 (without exhibits)
10.67 Security Agreement between Sierra Healthstyles,Inc.and (9)
Mortgages, Ltd. dated June 25, 1996 (without exhibits)
10.68 Guaranty between Sierra Tucson, Inc. and Mortgages, Ltd. (9)
dated June 25, 1996
10.69 Guaranty between Sierra Healthstyles, Inc. and (9)
Mortgages, Ltd. dated June 25, 1996
10.70 Asset Purchase Agreement between Sierra Tucson, Inc.
and Soften Realty, LLC (10)
10.71 Operating Agreement of Soften Realty, Inc. between
NextHealth, Inc. and AP NH, LLC (10)
10.72 Security Agreement between Sierra Tucson, Inc. and
Soften Realty, LLC (10)
10.73 Non-negotiable Security Promissory Note (10)
10.74 Assumption agreement (10)
10.75 Bill of Sale and Assignment between Sierra Tucson,
Inc. and Soften Realty, LLC (10)
10.76 Preferred Stock and Warrant Purchase Agreement between
NextHealth, Inc. and AP LOM LLC (10)
10.77 Registration and Pre-emptive Rights Agreement between
NextHealth, Inc. and AP LOM LLC (10)
10.78 Credit Agreement between NextHealth,Inc. and AP LOM LLC (10)
10.79 Pledge Agreement between NextHealth,Inc. and AP LOM LLC (10)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Document Page
- ------- --------------------------------------------------- ------------
<S> <C> <C>
10.80 Term Note A between NextHealth, Inc. and AP LOM, LLC (11)
10.81 Term Note B between NextHealth, Inc. and AP LOM, LLC (11)
10.82 Warrant for 500,000 shares of Common Stock (11)
10.83 Deed of Trust for the use and benefit of AP LOM, LLC (11)
10.84 Guaranty made by NextHealth's subsidiaries (11)
10.85 General Security Agreement among NextHealth's
subsidiaries and AP LOM, LLC (11)
21.1 Subsidiaries 41
23.1 Consent of Ernst & Young LLP, Independent Auditors 42
</TABLE>
(1) Incorporated by reference from Company's Form S-1 Registration
Statement, File No. 33-31020, declared effective in October 1989.
(2) Incorporated by reference from the Company's Form 10-K for
the year ended December 31, 1990.
(3) Incorporated by reference from the Company's Form 10-Q for
the year ended March 31, 1991.
(4) Incorporated by reference from the Company's Form S-1 Registration
Statement declared effective on June 20, 1991.
(5) Incorporated by reference from the Company's Form 10-K for
the year ended December 31, 1992.
(6) Incorporated by reference from the Company's Form 10-K for
the year ended December 31, 1994.
(7) Incorporated by reference from the Company's Form 10-K for
the year ended December 31, 1995.
(8) Incorporated by reference from the Company's Form 10-Q for
the quarter ended March 31, 1996.
(9) Incorporated by reference from the Company's Form 10-Q for
the quarter ended June 30, 1996.
(10) Incorporated by reference from the Company's Form 10-Q/A No.
1 for the quarter ended September 30, 1996.
(11) Incorporated by reference from the Company's Form 10-Q/A No.
2 for the quarter ended September 30, 1996.
* The Company has entered into indemnification agreements with
certain of its directors, one of whom is an executive officer, and
certain former directors. Pursuant to the Instructions
accompanying Item 601 of Regulation S-K, the Company has
not filed each such indemnification agreement.
(b) Reports on Form 8-K. None.
(c) Exhibits Required by Item 601 of Regulation S-K. See (a)(3) above.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 27, 1998 BY: /s/ William T. O'Donnell, Jr.
---------------------------------
WILLIAM T. O'DONNELL, JR.
President & ChiefExecutive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- ---------- --------- -------
<S> <C> <C>
/s/William T. O'Donnell, Jr. Chairman of the Board of Directors March 27, 1998
- ---------------------------- President and Chief Executive Officer
William T. O'Donnell, Jr. (Principal Executive Officer)
/s/ Joseph R. Cruse Director March 27, 1998
- ----------------------------
Joseph R. Cruse
/s/ Neil E. Jenkins Director March 27, 1998
- ----------------------------
Neil E. Jenkins
/s/ George L. Ruff Director March 27, 1998
- ----------------------------
George L. Ruff
/s/ Stephen L. Berger Director March 27, 1998
- ----------------------------
Stephen L. Berger
/s/ Lee S. Neibart Director March 27, 1998
- ----------------------------
Lee S. Neibart
/s/ Bruce Spector Director March 27, 1998
- ----------------------------
Bruce Spector
/s/ Michael L. Ashner Director March 27, 1998
- ----------------------------
Michael L. Ashner
/s/ Alfred Trivilino Director March 27, 1998
- ----------------------------
Alfred Trivilino
/s/ Loree Thompson (Principal Financial and March 27, 1998
- ---------------------------- Accounting Officer)
Loree Thompson
</TABLE>
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(000s)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
--------- ------------ ----------- ---------- ----------
Additions
Balance at (Charged to Balance at
Beginning of Costs and End of
Description Period Expenses) Deductions Period
------------- ------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Year ended December
31, 1997:
Allowance for doubtful
accounts $ 513 $( 41) $ 124 $ 348
========= ========== ======== ==========
Year ended December
31, 1996:
Allowance for doubtful
accounts $ 501 $ 223 $ 211 $ 513
========= ========== ======== ==========
Year ended December
31, 1995:
Allowance for doubtful
accounts $ 727 $ 50 $ 276 $ 501
========= ========== ======== ==========
</TABLE>
EXHIBIT 21.1
NEXTHEALTH, INC.
SUBSIDIARY SCHEDULE
<TABLE>
<CAPTION>
Subsidiaries State of Incorporation Doing Business As
- ------------- ---------------------- -----------------
<S> <C> <C>
Sierra Tucson, Inc. Arizona
Sierra Tucson AC, Inc. (STAC) Arizona
Sierra Tucson Educational
Materials, Inc. (STEM) Arizona
Onsite Workshops,Inc.(inactive) Arizona
Sierra Healthstyles, Inc. Arizona Miraval
NextHealth Water Resources, Inc. Arizona
Hilton Head Health
Institute, Inc. (inactive) Arizona
Sierra Tucson, LLC Delaware Sierra Tucson
</TABLE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the
Registration Statement (Form S-8 No. 33-44620) pertaining to
the Sierra Tucson Companies, Inc., 1992 Stock Option Plan
and in the Registration Statement (Form S-8 No. 33-38608)
pertaining to the Sierra Tucson Companies, Inc., 1990 Stock
Option Plan of our report dated January 29, 1998, with
respect to the consolidated financial statements and
schedule of the Company included in the Annual Report (Form
10-K) for the year ended December 31, 1997.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Tucson, Arizona
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Audited
Consolidated Financial Statements for the twelve month period ended December 31,
1997 and is qualified in its entirety by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 829
<SECURITIES> 0
<RECEIVABLES> 1,252
<ALLOWANCES> 298
<INVENTORY> 560
<CURRENT-ASSETS> 2,582
<PP&E> 47,264
<DEPRECIATION> 11,346
<TOTAL-ASSETS> 39,011
<CURRENT-LIABILITIES> 7,476
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 21,719
<TOTAL-LIABILITY-AND-EQUITY> 39,011
<SALES> 0
<TOTAL-REVENUES> 20,652
<CGS> 0
<TOTAL-COSTS> 21,615
<OTHER-EXPENSES> 2,576
<LOSS-PROVISION> (41)
<INTEREST-EXPENSE> 1,126
<INCOME-PRETAX> (4,624)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,624)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,624)
<EPS-PRIMARY> (.54)
<EPS-DILUTED> (.54)
</TABLE>
