UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ___________ to ___________
Commission File Number: 0-17969
NEXTHEALTH, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 86-0589712
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
16600 N. Lago Del Oro Parkway, Tucson, Arizona 85739
(Address of Principal Executive Offices) (Zip Code)
(520) 792-5800
(Registrant's Telephone Number, including Area Code)
N/A
(Former name, former address and former fiscal year, if changed since last
report).
Indicate by check mark whether the registrant (1)has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2)has been subject to
such filing requirements for the past 90 days. [X] YES [ ] NO
On August 1, 1998, there were 8,554,938 shares of the registrant's Common
Stock outstanding.
Reference is made to the listing beginning on page 15 of all exhibits filed
as a part of this report.
<PAGE>
NEXTHEALTH, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (unaudited) and
December 31, 1997. . . . . . . . . . . . . . . . . . . . . . . 3
Unaudited Consolidated Statements of Operations for the three and
six-month periods ended June 30, 1998 and 1997. . . . . . . . . 4
Unaudited Consolidated Statements of Cash Flows for the six-month
periods ended June 30, 1998 and 1997. . . . . . . . . . . . . . 5
Unaudited Consolidated Statements of Changes in Stockholders'
Equity for the six-month period ended June 30, 1998 . . . . . . 6
Unaudited Notes to the Consolidated Financial Statements. . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . 10
Part II - Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of Security Holders . . . . 15
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 15
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000s, except share and per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents . . . . . . . . . . . . $ 747 $ 829
Accounts receivable, less allowance for doubtful
accounts of $398 and $390, respectively . . 725 954
Prepaid expenses . . . . . . . . . . . . . . 294 232
Other current assets . . . . . . . . . . . . 455 567
--------- ----------
Total current assets . . . . . . . . . . . 2,221 2,582
Property and equipment, net . . . . . . . . . 35,153 35,918
Long-term receivables, less allowance for doubtful
accounts of $52 and $50, respectively. . . . 156 151
Intangible assets, less amortization of $223 and
$158, respectively . . . . . . . . . . . . . 334 322
Other assets. . . . . . . . . . . . . . . . . 38 38
--------- ----------
Total assets . . . . . . . . . . . . . . . $ 37,902 $ 39,011
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade . . . . . . . . . . $ 620 $ 838
Accrued expenses and other liabilities. . . 5,947 6,638
--------- ----------
Total current liabilities. . . . . . . . . 6,567 7,476
Long-term debt and financing obligation . . . 9,039 9,730
--------- ----------
Total liabilities. . . . . . . . . . . . . 15,606 17,206
Stockholders' Equity:
Preferred stock-undesignated, $.01 par value,
3,924,979 shares authorized, no shares
outstanding . . . . . . . . . . . . . . . -- --
Preferred stock, Series A, $.01 par value,
46,065 shares authorized; 46,065 shares
outstanding at June 30, 1998 and
December 31, 1997, respectively. . . . . . -- --
Common stock, $.01 par value, 16,000,000
shares authorized; 8,554,938 shares
outstanding at June 30, 1998 and
December 31, 1997, respectively . . . . . 86 86
Additional paid-in capital. . . . . . . . . 47,997 47,997
Accumulated deficit . . . . . . . . . . . . (25,787) (26,278)
---------- ---------
Total stockholders' equity . . . . . . . . 22,296 21,805
---------- ---------
Total liabilities and stockholders'equity $ 37,902 $ 39,011
========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000s, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- --------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue:
Net operating revenue . . . . . . $ 7,122 $ 5,359 $13,884 $ 11,089
Other revenue . . . . . . . . . . 201 126 286 195
-------- -------- ------- --------
Total net revenue . . . . . . . 7,323 5,485 14,170 11,284
Operating expenses:
Salaries and related benefits . . 3,385 3,080 6,459 6,171
General and administrative. . . . 2,719 2,755 5,230 5,187
Depreciation and amortization . . 636 651 1,272 1,308
Interest expense . . . . . . . . 365 264 718 518
-------- -------- ------- ---------
Total operating expenses . . . 7,105 6,750 13,679 13,184
-------- -------- ------- ---------
Income (loss) before income taxes . 218 (1,265) 491 (1,900)
Income tax provision (benefit). . . -- -- -- --
-------- -------- ------- ---------
Net income (loss) . . . . . . . . . $ 218 $(1,265) $ 491 $ (1,900)
========= ======== ======= =========
Shares used in diluted per share
calculation . . . . . . . . . . . 13,346,559 8,554,938 13,253,883 8,554,938
========== ========= ========== =========
Shares used in basic per share
calculation . . . . . . . . . . . 8,554,938 8,554,938 8,554,938 8,554,938
========== ========= ========== =========
Diluted income (loss) per common
share . . . . . . . . . . . . . . $ .02 $ (0.15) $ 0.04 $ (0.22)
========== ========= ========== ==========
Basic income (loss) per common
share . . . . . . . . . . . . . . $ .03 $ (0.15) $ 0.06 $ (0.22)
========== ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------
1998 1997
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . $ 491 $ (1,900)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . 1,321 1,357
Provision for bad debts . . . . . . . . . . . . 102 217
Minority Interest . . . . . . . . . . . . . . . 39 30
Changes in operating assets and liabilities:
Decrease (increase) in assets:
Accounts receivable . . . . . . . . . .. . . . . 123 161
Other assets . . . . . . . . . . . . . .. . . . . ( 28) 375
Increase (decrease) in liabilities:
Accounts payable, accrued expenses
and other liabilities . . . . . . . . .. . . . . (948) (1,499)
--------- ---------
Net cash provided by (used in) operating activities. . 1,100 (1,259)
Cash flows from investing activities:
Purchase of property and equipment . . . . . . . . (442) ( 245)
--------- ---------
Net cash used in investing activities . . . . . . . . (442) ( 245)
Cash flows from financing activities:
Proceeds from long-term borrowings . . . . . . . . . -- 600
Reduction of long-term borrowings and
financing obligation . . . . . . . . . . . . . . . (740) ( 54)
--------- ---------
Net cash (used in) provided by financing activities. . (740) 546
--------- ---------
Net decrease in cash and equivalents. . . . . . . . . ( 82) ( 958)
Cash and equivalents at beginning of period. . . . . . 829 1,373
--------- ---------
Cash and equivalents at end of period. . . . . . . . . $ 747 $ 415
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(000s, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Accumulated Stockholder's
Cost Shares Capital Deficit Equity
---- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 $ 86 8,554,938 $ 47,997 $ (26,278) $ 21,805
Net income for the
six months ended
June 30, 1998 -- -- -- 491 491
---- --------- --------- ----------- -----------
Balance at
June 30, 1998 $ 86 8,554,938 $ 47,997 $ (25,787) $ 22,296
==== ========= ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
NEXTHEALTH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(000s)
(Unaudited)
NOTE 1 - ORGANIZATION
NextHealth, Inc. is a leading provider of addiction treatment and
therapeutic services, as well as programs and activities for a life-changing
vacation alternative in a luxury resort setting. For over ten
years, the Company has developed effective treatment models which
address individual wellness and quality of life issues through a whole
person, mind-body approach.
The Company operates in two distinct business segments. The Treatment
segment, Sierra Tucson, LLC, owns Sierra TucsonTM, ("Sierra Tucson") an
inpatient, state licensed psychiatric hospital and behavioral health
care center for the treatment of substance abuse and a broad range of
mental health and behavioral health disorders. The Health and Leisure
segment, Sierra Health-Styles, Inc., owns Miraval ("Miraval"), a
unique vacation experience blending stress management and self-discovery
programs in a luxury resort environment.
NOTE 2 - BASIS OF PRESENTATION
The unaudited consolidated financial statements presented herein should
be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997. The accompanying interim consolidated
financial statements as of June 30, 1998 and for the three and six-month
periods ended June 30, 1998 and 1997 included herein are unaudited, but
reflect, in the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary to fairly present the
results for such periods. Operating results for the three and six-month
periods ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998. The
operations of Miraval appear to be seasonal, and although seasonally
adjusted rates were offered in 1997 and 1998, occupancy levels fell off
during the summer months. Miraval was closed for two weeks in July
1997 and for three weeks in July 1998 in response to the seasonal
fluctuation in consumer demand as well as to permit certain renovations
and improvements to the facilities.
NOTE 3 - NET INCOME (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
128, Earnings per Share. SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to
the previously computed fully diluted earnings per share. The net
income (loss) per share amounts previously reported by the Company are
now reported as basic income (loss) per share, as such amounts were
historically calculated excluding the dilutive (or anti-dilutive) effect
of options, warrants and convertible securities. Diluted earnings per
share are equal to basic earnings per share for the three and six-month
periods ending June 30, 1997, as the effect of all applicable securities
is anti-dilutive (decrease the loss per share amount). Shares used in
the diluted per share calculation for the three and six-month periods
ending June 30, 1998 are as stated below:
<TABLE>
<CAPTION>
Three-month period Six-month period
ended June 30, 1998 ended June 30, 1998
------------------- -------------------
<S> <C> <C>
Common shares 8,554,938 8,554,938
Convertible preferred shares 4,606,500 4,606,500
Dilutive options 42,206 32,337
Dilutive warrants 142,915 60,108
----------- ------------
Diluted shares 13,346,559 13,253,883
=========== ============
</TABLE>
<PAGE>
NOTE 4 - SEGMENT INFORMATION
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, which is effective for fiscal
years beginning after December 15, 1997. SFAS No. 131 establishes
standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about
operating segments in interim financial reports. It also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. The Company has elected to
voluntarily provide segment disclosures in its interim financial
statements in the initial year of application.
The Company operates in two principal business segments; Treatment, and
Health and Leisure through which it provides both health care and
wellness and preventive health services. The Treatment segment, Sierra
Tucson, is a state licensed, special psychiatric hospital and behavioral
health care center for the treatment of substance abuse and mental
health disorders, including eating disorders and dual diagnosis.
Substantially all revenues are derived from inpatient charges, therapy,
professional fees and pharmacy charges. The Health and Leisure segment,
Miraval, offers a unique vacation experience blending stress management
and self-discovery programs in a luxury resort environment.
Substantially all revenues result from guest bookings, group bookings
and retail charges. No single customer accounted for more than 10% of
either of the principal business segment's revenue in the period ending
June 30, 1998 or 1997.
Information about the Company's operations in different business
segments for the three and six-month periods ending June 30, 1998 and
1997 is as follows:
<TABLE>
<CAPTION>
Corporate
Health & and
Treatment Leisure Other Items Consolidated
--------- -------- ----------- ------------
Three-month period ended June 30, 1998
-----------------------------------------------
<S> <C> <C> <C> <C>
Total Revenue $ 3,616 $ 3,564 $ 143 $ 7,323
Income (loss) before 1,170 ( 358) ( 594) 218
income tax benefit
Identifiable assets 4,174 29,504 4,224 37,902
Capital expenditures 246 109 1 356
Depreciation & amortization 73 499 64 636
expense
Interest expense 1 0 364 365
Six-month period ended June 30, 1998
----------------------------------------------
Total Revenue $ 6,558 $ 7,442 $ 170 $ 14,170
Income (loss) before 1,926 ( 130) (1,305) 491
income tax benefit
Identifiable assets 4,174 29,504 4,224 37,902
Capital expenditures 275 166 1 442
Depreciation & amortization 149 994 129 1,272
expense
Interest expense 1 0 717 718
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Corporate
Health & and
Treatment Leisure Other Items Consolidated
--------- -------- ----------- ------------
Three-month period ended June 30, 1997
--------------------------------------------------
<S> <C> <C> <C> <C>
Total Revenue $ 3,012 $ 2,408 $ 65 $ 5,485
Income (loss) before 800 ( 1,251) ( 814) (1,265)
income tax benefit
Identifiable assets 4,422 30,697 3,772 38,891
Capital expenditures 11 102 38 151
Depreciation & amortization 94 490 67 651
expense
Interest expense 1 0 263 264
Six-month period ended June 30, 1997
-------------------------------------------------
Total Revenue $ 5,903 $ 5,290 $ 91 $ 11,284
Income (loss) before 1,512 (1,799) (1,613) (1,900)
income tax benefit
Identifiable assets 4,422 30,697 3,772 38,891
Capital expenditures and 64 169 12 245
intersegment transfers, net
Depreciation & amortization 193 978 137 1,308
expense
Interest expense 1 0 517 518
</TABLE>
NOTE 5- INCOME TAXES
No provision for income taxes was recorded in the three or six-month
periods ended June 30, 1998 due to the existence of deferred tax assets
(net operating loss carryforwards) not previously benefited.
NOTE 6 - COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, Reporting Comprehensive Income, on
January 1, 1998. At present, the Company does not have any account
balances which cause comprehensive income (loss) to differ from net
income (loss).
NOTE 7 - RECLASSIFICATIONS
Certain prior period amounts in the unaudited consolidated financial
statements have been reclassified to conform to the presentation used in
second quarter 1998.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis relates to factors which have
affected the consolidated financial condition and results of operations
of the Company for the three and six-month periods ended June 30, 1998.
Reference should also be made to the Company's unaudited consolidated
financial statements and related notes thereto included elsewhere in
this document.
GENERAL
NextHealth, Inc. is a leading provider of addiction treatment and
therapeutic services, as well as programs and activities for a life-changing
vacation alternative in a luxury resort setting. For over ten
years, the Company has developed effective treatment models which
address individual wellness and quality of life issues through a whole
person, mind-body approach.
The Company operates in two distinct business segments. The Treatment
segment, Sierra Tucson, is a state licensed, special psychiatric
hospital and behavioral health care center for the treatment of
substance abuse and a broad range of mental health and behavioral health
disorders. The Health and Leisure segment, Miraval, is a unique
vacation experience blending stress management and self-discovery
programs in a luxury resort environment.
The Company, as part of its long range plan, believes that it has
positioned itself to capitalize on the emerging health and leisure
segment of the health care services industry by developing Miraval, a
luxury health and leisure resort providing a full range of self-discovery,
stress management and recreational activities. The Company
is also seeking additional opportunities to increase market share for
its existing Treatment segment. For the six-month period ended June 30,
1998, the Treatment segment accounted for approximately 46% of the
Company's operating revenues and approximately 34% of operating expenses
while the Health and Leisure segment accounted for approximately 53% of
the Company's operating revenue and approximately 55% of operating
expenses.
RESULTS OF OPERATIONS
Three-month period ended June 30, 1998 compared to three-month period
ended June 30, 1997
The significant changes in results of operations and net cash provided
by (used in) operating activities for the three-month period ended June
30, 1998, compared to the same period in 1997 are discussed below.
<TABLE>
<CAPTION>
Three Months Ended
June 30,
----------------------------------
1998 1997 % Change
---- ---- ---------
<S> <C> <C> <C>
Financial results:
(000s, except per share amounts)
Total net revenue . . . . . . . . . . . $ 7,323 $ 5,485 33.5 %
Total operating expenses . . . . . . . . 7,105 6,750 5.3 %
Net income (loss) . . . . . . . . . . . 218 (1,265) --
Basic income (loss) per common share . . .03 ( 0.15) --
Net cash provided by (used in) . . . . . 502 ( 576) --
operating activities
Operating data:
Patient days - Sierra Tucson . . . . . . 5,379 4,486 20.0 %
Average daily census - Sierra Tucson . . 59 49 20.4 %
Guest days - Miraval . . . . . . . . . . 9,624 6,938 38.7 %
Average daily guest count - Miraval. . . 106 76 39.5 %
Room occupancy - Miraval . . . . . . . . 65.9% 50.4% 30.8 %
</TABLE>
<PAGE>
For the three-month period ended June 30, 1998, net income increased to
$218,000 compared to a net loss of $1.3 million for the same period of
1997; an improvement of $1.5 million. Net cash provided by operating
activities increased to $502,000 compared to net cash used in operating
activities of $576,000 in second quarter 1997; a $1.1 million
improvement.
Total net revenue increased $1.8 million to $7.3 million, an increase of
33.5% when compared to the same period in 1997. Results reflect
increased revenues from the operations of both Miraval and Sierra
Tucson.
Salaries and related benefits increased $305,000 to $3.4 million, when
compared to the same period in 1997. The increase was attributable to
staffing adjustments related to higher occupancy at Miraval and
increased census at Sierra Tucson.
General and administrative expense decreased $36,000 to $2.7 million, a
decrease of 1.3% when compared to the same period in 1997. The decrease
reflects continued Company-wide cost control efforts.
Interest expense increased $101,000 to $365,000 due to additional draws
under the stand-by loan commitment and an increase in interest rate in
November 1997 to 11% from 10%.
The Company recognized a pre-tax income of $218,000 for the three month
period ended June 30, 1998. No provision or benefit for income taxes
was recorded during this period due to the existence of deferred tax
assets not yet previously benefited.
Six-month period ended June 30, 1998 compared to six-month period ended
June 30, 1997
The significant changes in results of operations and net cash provided
by (used in) operating activities for the six-month period ended June
30, 1998, compared to the same period in 1997 are discussed below.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------------
1998 1997 % Change
---- ---- --------
<S> <C> <C> <C>
Financial results:
(000's except per share amounts)
Total net revenue . . . . . . . . . . . $ 14,170 $ 11,284 25.6%
Total operating expenses. . . . . . . . 13,679 13,184 3.8%
Net income (loss) . . . . . . . . . . . 491 ( 1,900) --
Basic income (loss) per common share. . .06 ( 0.22) --
Net cash provided by (used in). . . . . 1,100 ( 1,259) --
operating activities
Operating data:
Patient days - Sierra Tucson. . . . . . 9,704 8,865 9.5%
Average daily census - Sierra Tucson. . 54 49 10.2%
Guest days - Miraval. . . . . . . . . . 18,000 14,380 25.2%
Average daily guest count - Miraval . . 99 79 25.3%
Room occupancy - Miraval. . . . . . . . 63.6% 52.3% 21.6%
</TABLE>
For the six-month period ended June 30, 1998, net income increased $2.4
million to $491,000 compared to a net loss of $1.9 million for the same
period of 1997. Net cash provided by operating activities increased to
$1.1 compared to net cash used in operating activities of $1.3 million;
a $2.4 million improvement over the same period of 1997.
Total net revenue for the six-month period ended June 30, 1998 increased
$2.9 million, or 25.6% to $14.2 million when compared to the same period
of 1997. The increase is attributable to a 41% increase in net revenue
at Miraval and an 11.0% net revenue increase at Sierra Tucson.
<PAGE>
Salaries and related benefits increased $288,000 to $6.5 million or 4.7%
when compared to 1997. The increase is due primarily to staffing
adjustments related to increased utilization at both Miraval and Sierra
Tucson.
General and administrative expense increased $42,000 or 0.8% to $5.2
million when compared to the same period in 1997.
Interest expense increased $200,000 to $718,000 when compared to the
same period in 1997, due to additional draws under the stand-by loan
commitment and an increase in interest rate in November 1997 to 11% from
10%.
The Company recognized a pre-tax income of $491,000 for the six-month
period ended June 30, 1998. No provision or benefit for income taxes
was recorded during this period due to the existence of deferred tax
assets not yet previously benefitted.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources have
typically been net cash provided by the operating activities of the
Treatment segment and the Health and Leisure segment, funds generated
from the sale of investments, proceeds from public and private equity
offerings and short-term borrowings. Historically, these sources have
been sufficient to meet the needs and finance the operations and growth
of the Company's business.
Net cash provided by the Treatment segment's operating activities is
primarily affected by census levels and net revenue per patient day.
This segment contributed positive cash flow to the Company's operations
during the three and six-month periods ended June 30, 1998. Net cash
provided by the Health and Leisure segment's operating activities is
primarily affected by room occupancy, average daily rate, and
seasonality. Although the Health and Leisure segment operated at a
negative cash flow during the three-month period ended June 30, 1998, it
provided positive cash flow to the Company's operations during the six-month
period ended June 30, 1998.
Sierra Tucson continues to experience pressure from third party payors
and managed care review organizations to restrict patient access to and
payment for treatment services. Consequently, the Treatment segment's
operational focus will be to continue to attempt to attract a high
percentage of retail patients. Sierra Tucson has implemented a case
management system to increase the potential for third party
reimbursement of services. During this period, 48% of patient revenue
was derived from retail payments and the remaining 52% from third party
payors. Based on current census levels and operating expenses, Sierra
Tucson believes that it will generate adequate cash flows to sustain the
Treatment segment's ongoing operational requirements.
Building market awareness and acceptance of a new unique vacation
concept requires time. Vacation travel is a conservative purchase due
to cost and the allocation of the traveler's most precious resource -
leisure time. Marketing initiatives for creating marketplace awareness
and demand for Miraval's services resulted in a room occupancy rate of
approximately 65.9% for the three-month period ended June 30, 1998.
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.
For the three-month period ended June 30, 1998, the Company had capital
expenditures of approximately $442,000. The expenditures were primarily
related to the relocation of Sierra Tucson to the facilities previously
used by the Company's adolescent care unit (which ceased operations in
1993). At June 30, 1998, the Company's cash and equivalents were
$747,000.
<PAGE>
On August 11, 1998, the Company (through its principal subsidiaries)
completed a debt refinancing loan agreement with Lehman Brothers
Holdings, Inc. The amount of the three-year loan is $14 million, of
which $2.0 million is reserved for working capital ($1.0 million) and
for capital improvements ($1.0 million). $700,000 of the working
capital portion will be available in 1998 and $300,000 in 1999.
Proceeds from the transaction will also be used to extinguish existing
mortgage debt with AP LOM, LLC, an affiliate of AP NH, LLC, the holder
of the Company's outstanding Series A Preferred Stock. (See Part II,
Item 5 - Other Information) Management believes that funds from
operations combined with the funds available from the Lehman transaction
will provide the cash necessary to meet its short-term capital needs.
However, it is necessary for the Company to increase occupancy levels in
its lines of business, and to implement additional cost controls to
ensure 1998 operating losses do not exceed an amount sustainable by
these funds. Insufficient occupancy levels at Miraval or any
significant decrease in Sierra Tucson's patient levels would adversely
affect the Company's financial position, results of operations and cash
flows.
The 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 cost control efforts as well as new marketing initiatives.
Emphasis will be placed on increasing patient census through a
combination of innovative treatment programs and focused advertising,
direct mail, field sales and outbound telemarketing campaigns.
Clinically, Sierra Tucson's programs have been strengthened
considerably, including a restructuring of the Eating Disorders Program,
the reformatting of the Sexual Recovery/Trauma Program, and the
expansion of Fitness services to provide more individual and group
attention to patients. The range of treatment modalities has increased
so as to offer acupuncture, EMDR (Eye Movement Desensitization
Reprocessing) and cognitive behavioral approaches. With the
establishment of a consulting relationship with a specialist in the area
of comprehensive neuropsychological testing, Sierra Tucson's assessment
and diagnostic capabilities have been expanded to meet the demand of
professional review organizations such as state medical boards, state
bar associations, clergy, etc. Sierra Tucson will continue its
traditional marketing efforts to the referent therapist community, and
look for continued growth in the number of prospective patients.
In July 1998, the Company relocated the Sierra Tucson operations to the
facilities previously used by the Company's adolescent care unit (which
ceased operations in 1993). The relocation will initially provide 63
beds which is less than the previous availability of 70 beds. The
relocation will facilitate future expansion of both Sierra Tucson and
Miraval should market conditions justify and capital be available for
such expansions. Zoning for the property currently occupied by Miraval
and the property previously occupied by Sierra Tucson was recently
amended to permit a total of 356 resort hotel rooms and up to 226
residential units.
Miraval, the Company's health and leisure resort, has been in operation
since December, 1995. The resort continues to receive favorable 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.
The operations of Miraval appear to be seasonal, and although seasonally
adjusted rates were offered in 1997 and 1998, occupancy levels fell off
during the summer months. Miraval was closed for two weeks in July 1997
and for three weeks in July 1998 in response to the seasonal
fluctuation in consumer demand as well as to permit certain renovations
and improvements to the facilities.
<PAGE>
With the improvement of meeting facilities at Miraval, marketing
initiatives, aimed at high level corporate and incentive groups, have
been enhanced. The Miraval message will be delivered through a blend of
direct sales and advertising -- including print, data base-driven mail,
and public relations activities.
Management's strategy for Miraval is to continuously improve its unique
program structure based on guest feedback. Increased focus on the
return guest will play a key role in assuring that this highly desirable
market segment continues to grow. Operational quality and attention to
detail will be critical factors in ensuring continued word-of-mouth
advertising -- the single largest source for attracting new business.
Cost containment measures will continue to be a critical management
objective. Management believes that variable staffing relative to
seasonal occupancy fluctuations, a more structured program format, and
focusing on all aspects of operational quality should allow the Company
to further improve efficiencies and cash flow.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 that involve a
number of risks and uncertainties. While management believes that such
forward looking statements are accurate as of the date hereof, the
actual results and conditions could differ materially from the
statements contained herein. The information below should be read in
conjunction with the Company's unaudited consolidated financial
statements and related notes thereto included elsewhere and in other
portions of this document.
In addition, the following other factors could cause actual results and
conditions relating to liquidity and capital resources to differ
materially.
The Company's Treatment segment participates in the highly competitive
mental and behavioral health industry, and faces competition for market
share resulting from aggressive pricing practices and increasing
competition from companies with greater resources. Some of these
competitors have tax exempt, non-profit status, are government
subsidized or have endowment-related financial support which may provide
lower costs of capital.
Miraval represents a benchmark for the new and growing trend in
hospitality for lifestyle enhancing products. Although competitive
market data is available for the "spa" category, Miraval's unique
blending of luxury resort recreational activities with stress management
and self-discovery programs clearly differentiates it from a spa.
Because of Miraval's relatively short history, the Company cannot
project with a high degree of accuracy the future levels of occupancy or
revenue. While the Company believes that there is strong consumer
demand for Miraval's products and services, the historical data does not
exist to be certain the current trends will continue. Management
believes that the existing capital resources of the Company combined
with the funds provided by the Lehman transaction, are sufficient to
meet its short-term capital needs.
While management believes that Miraval occupies a unique market niche,
it nevertheless competes in the resort hotel/spa industry. Currently,
its competitors have greater name recognition as well as long-standing
relationships with travel agents and meeting planners. Market share
must be obtained from competitors and from introducing new customers to
the benefits of the Miraval product. Longevity in the marketplace plays
a key role in attaining credibility in this highly competitive field.
Management cannot anticipate what impact this will have on future
occupancy levels.
While the Company anticipates continued growth in revenues and is
committed to a return to profitability, operating results could be
adversely impacted if the business is unable to accurately anticipate
customer demand, is unable to differentiate its products from those of
its competitors, is unable to offer services expeditiously in response
to customer demand, or is negatively impacted by managed care
restrictions on payor reimbursement.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various litigation and administrative
proceedings arising in the normal course of business. In the opinion of
management, any liabilities that may result from these claims will not,
individually or in the aggregate, have a material adverse effect on the
Company's financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 21, 1998.
The Company's stockholders elected Mr. William T. O'Donnell, Jr. and Mr.
Stephen L. Berger as directors, selected Ernst & Young LLP as the
Company's independent auditors for the fiscal year ended December 31,
1998, and approved an amendment to the Non-Employee Directors Stock
Option Plan to increase the number of shares available in the Plan by an
additional 300,000 shares.
ITEM 5. OTHER INFORMATION
On August 11, 1998, the Company's principal subsidiaries, Sierra
HealthStyles, Inc., a Delaware corporation ("HealthStyles"), and Sierra
Tucson, LLC, a Delaware limited liability company ("Sierra"), borrowed
the aggregate amount of $14,000,000 (the "Loan") from Lehman Brothers
Holdings Inc. ("Lender"). $12,000,000 of the Loan was funded at
closing, of which $11,100,000 was used to satisfy the Company's
indebtedness to AP LOM, LLC. HealthStyles owns the real property and
other assets comprising Miraval, and Sierra owns the assets comprising
Sierra Tucson. Approximately $1,000,000 of the Loan will be available
for working capital in 1998 and 1999, and $1,000,000 will be available
for capital improvements to Sierra Tucson and Miraval.
The Loan matures in three (3) years, bears interest at the rate of 4%
over the 30-day London Interbank Offered Rate (LIBOR), adjusted monthly,
and is payable interest-only through maturity. The LIBOR rate at date
of closing was 5.65%.
The Loan is secured by a first lien against all real and personal
property of HealthStyles and will be guaranteed by the assets of Sierra.
It is also partially guaranteed (to the extent of liability arising by
reason of certain exclusions to the non-recourse provisions of the loan)
by the Company and to a more limited extent by Apollo Real Estate
Investment Fund II, L.P. ("Apollo"). Apollo, an affiliate of AP NH,
LLC, the holder of the outstanding Series A Preferred Stock of the
Company, received a fee in the amount of $140,000 in consideration of
its guarantee.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
NONE
b) Reports on Form 8-K
NONE
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NextHealth, Inc.
--------------------------------
Registrant
DATE: August 13, 1998 BY: /s/ William T. O'Donnell, Jr.
----------------------------------
WILLIAM T. O'DONNELL, JR.
President and Chief Executive Officer
DATE: August 13, 1998 BY: /s/ Loree Thompson
----------------------------------
LOREE THOMPSON
Principal Financial and
Accounting Officer
<PAGE>
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