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 March 31, 1999
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 May 1, 1999, 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
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998................... 3
Unaudited Consolidated Statements of Operations for
the three months ended March 31, 1999 and 1998...... 4
Unaudited Consolidated Statements of Cash Flows for
the three months ended March 31, 1999 and 1998...... 5
Unaudited Consolidated Statements of Changes in
Stockholders' Equity for the three months ended
March 31, 1999...................................... 6
Unaudited Notes to the Consolidated Financial
Statements.......................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................. 15
Item 4. Submission of Matters to a Vote of Security
Holders............................................ 15
Item 6. Exhibits and Reports on Form 8-K................... 15
Signatures.................................................. 16
<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>
March 31, December 31,
1999 1998
----------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents..................... $ 2,541 $ 843
Accounts receivable, less allowance for
doubtful accounts of $242 and $233,
respectively............................ 1,102 955
Prepaid expenses......................... 511 313
Other current assets..................... 537 554
--------- ----------
Total current assets.................. 4,691 2,665
Property and equipment, net................ 34,086 34,347
Long-term receivables, less allowance for
doubtful accounts of $30 and $45,
respectively.............................. 89 135
Intangible assets, less amortization of
$148 and $93, respectively................ 593 648
Other assets............................... 20 20
--------- -----------
Total assets........................... $39,479 $37,815
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade.................. $ 893 $ 561
Accrued expenses and other liabilities... 3,974 3,610
--------- -----------
Total current liabilities.............. 4,867 4,171
Long-term debt and financing obligation.... 12,807 12,815
--------- -----------
Total liabilities...................... 17,674 16,986
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 March 31, 1999
and December 31, 1998..................... -- --
Common stock, $.01 par value, 16,000,000
shares authorized; 8,554,938 shares
outstanding at March 31, 1999 and
December 31, 1998......................... 86 86
Additional paid-in capital................. 47,997 47,997
Accumulated deficit........................ (26,278) (27,254)
-------- ---------
Total stockholders' equity.............. 21,805 20,829
-------- ---------
Total liabilities and stockholders'
equity................................. $ 39,479 $37,815
========= =========
</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
March 31,
------------------
1999 1998
---- ------
<S> <C> <C>
Revenue:
Net operating revenue.............. $ 8,092 $ 6,821
Other revenue...................... 45 26
-------- ---------
Total net revenue............... 8,137 6,847
Operating expenses:
Salaries and related benefits...... 3,361 3,074
General and administrative......... 2,827 2,511
Depreciation and amortization...... 671 636
Interest expense................... 302 353
--------- ---------
Total operating expenses........ 7,161 6,574
--------- ---------
Income before income taxes............ 976 273
Income tax provision (benefit)........ -- --
--------- ---------
Net income............................ $ 976 $ 273
========= =========
Shares used in basic per share
calculation......................... 8,554,938 8,554,938
========== ==========
Shares used in diluted per share
calculation......................... 13,195,495 13,181,358
========== ==========
Basic income per common
share............................... $ .11 $ .03
========== ==========
Diluted income per common
share............................... $ .07 $ .02
========== ==========
</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>
Three Months Ended
March 31,
------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income.......................... $ 976 $ 273
Adjustments to reconcile net income
to cash provided by operating
activities:
Depreciation and amortization.... 671 660
Loss on disposal of assets....... 20 --
Provision for bad debts.......... (10) 51
Minority Interest................ 23 15
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable.............. ( 92) (27)
Other assets..................... (181) (84)
Increase (decrease) in liabilities:
Accounts payable, accrued expenses
and other liabilities.......... 673 (290)
------- ---------
Net cash provided by operating activities 2,080 598
Cash flows from investing activities:
Purchase of property and equipment... (323) (86)
-------- ----------
Net cash used in investing activities... (323) (86)
Cash flows from financing activities:
Reduction of long-term borrowings and
financing obligation............... ( 59) (372)
-------- ----------
Net cash used in financing activities.. ( 59) (372)
-------- ----------
Net increase in cash and
equivalents.......................... 1,698 140
Cash and equivalents at beginning
of period............................ 843 829
-------- ----------
Cash and equivalents at end of period.. $ 2,541 $ 969
======== ==========
</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 Stockholders'
Cost Shares Capital Deficit Equity
---- ------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1998 $ 86 8,554,938 $ 47,997 $ (27,254) $ 20,829
Net income for the
three months ended
March 31, 1999 -- -- -- 976 976
----- --------- --------- ---------- ---------
Balance at
March 31, 1999 $ 86 8,554,938 $ 47,997 $ (26,278) $ 21,805
===== ========= ========= ========== =========
</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. (the "Company") is a leading provider of addiction treatment
and therapeutic services, and a provider of 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 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 Tucson(TM), ("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 disorders. The Health and Leisure segment, Sierra
Health-Styles, Inc. d/b/a Miraval(TM), owns Miraval ("Miraval"), a unique
vacation experience blending stress management, self-discovery and
recreational activities in a luxury health and leisure 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, 1998. The accompanying interim consolidated financial
statements as of March 31, 1999 and for the three-month periods ended March
31, 1999 and 1998 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-month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999.
NOTE 3 - NET INCOME PER SHARE
Shares used in the diluted per share calculation for the three-month periods
ending March 31, 1999 and 1998 are as stated below:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Common shares 8,554,938 8,554,938
Convertible preferred shares 4,606,500 4,606,500
Dilutive options 34,057 19,920
--------- ---------
Diluted shares 13,195,495 13,181,358
========== ==========
</TABLE>
<PAGE>
NOTE 4 - BUSINESS SEGMENT AND OTHER OPERATING DATA
The Company operates in two principal business segments; Treatment, and
Health and Leisure (the Segments) through which it provides both health care
and wellness and preventive health services. The Segments are located in and
derive all their revenues from their facilities in Tucson, Arizona. The
Treatment Segment includes an inpatient, 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 in this Segment result from inpatient
charges, therapy, professional fees, and pharmacy charges. The Health and
Leisure Segment consists of a luxury resort providing a full range of self-
discovery, stress management and recreational activities. Substantially all
revenues in this Segment result from guest bookings, group bookings and
retail sales of goods and services. Beginning in August 1998, each segment
became responsible for interest expense.
Information about the Company's operations in different business segments for
the three-month periods ending March 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Corporate
Health & and
Treatment Leisure Other Items Consolidated
--------- -------- ----------- ------------
<S> <C> <C> <C> <C>
1999
- ----------------------------
Total revenue............... $ 4,010 $ 4,097 $ 30 $ 8,137
Income (loss) before
income tax benefit......... 1,347 (139) ( 232) 976
Identifiable assets......... 4,920 32,887 1,672 39,479
Capital expenditures........ 219 104 0 323
Depreciation & amortization
expense................... 80 586 5 671
Interest expense............ 192 110 0 302
1998
- ----------------------------
Total revenue............... $ 2,943 $ 3,878 $ 26 $ 6,847
Income (loss) before
income tax benefit......... 756 227 ( 710) 273
Identifiable assets......... 4,191 30,078 4,393 38,662
Capital expenditures........ 29 57 0 86
Depreciation & amortization
expense ................... 76 495 65 636
Interest expense............ 0 0 353 353
</TABLE>
NOTE 5- INCOME TAXES
No provision for income taxes was recorded in the three-month periods ended
March 31, 1999 or March 31, 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).
<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-month period ended March 31, 1999. 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, and a provider of 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 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 disorders. The Health and Leisure
segment, Miraval, is a unique vacation experience blending stress management,
self-discovery and recreational activities in a luxury health and leisure
resort environment.
By developing Miraval, the Company believes that it has positioned itself to
capitalize on the emerging health and leisure segment of the health care
services industry. The Company is also seeking additional opportunities to
increase market share for its existing Treatment segment, Sierra Tucson. The
Company is currently expanding the Sierra Tucson facilities through the
addition of space for sixteen beds and additional administrative offices.
For the quarter ended March 31, 1999, the Treatment segment accounted for
approximately 49% of the Company's operating revenues and approximately 37%
of expenses, while the Health and Leisure segment accounted for approximately
50% of the Company's operating revenue and approximately 59% of operating
expenses. The Company believes that the Health and Leisure segment will make
more significant contributions to the Company's operating results in the
future.
RESULTS OF OPERATIONS
Three-month period ended March 31, 1999 compared to three-month period ended
March 31, 1998
The significant changes in results of operations and net cash provided by
operating activities for the three-month period ended March 31, 1999,
compared to the same period in 1998 are discussed below.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1999 1998 % Change
---- ---- --------
<S> <C> <C> <C>
Financial results:
(000s, except per share amounts)
Total net revenue................... $ 8,137 $ 6,847 18.8 %
Total operating expenses............ 7,161 6,574 8.9 %
Net income.......................... 976 273 257.5 %
Basic income per common share....... .11 .03 266.7 %
Diluted income per common share..... .07 .02 250.0 %
Net cash provided by operating
activities......................... 2,080 598 247.8 %
Operating data:
Patient days - Sierra Tucson........ 5,236 4,325 21.1 %
Average daily census-Sierra Tucson.. 58 48 20.8 %
Guest days - Miraval................ 8,070 8,376 ( 3.7)%
Room occupancy - Miraval............ 59% 61% ( 3.3)%
</TABLE>
<PAGE>
For the three-month period ended March 31, 1999, net income increased
$703,000 to $976,000 or 258% over the comparable quarter of 1998. Net cash
provided by operating activities increased 248% resulting in net cash
provided by operating activities of $2.1 million compared to the same period
in 1998.
Total net revenue increased $1.3 million to $8.1 million, an increase of 19%
when compared to the same period in 1998. Results reflect a 5.7% revenue
increase at Miraval and a 36.6% revenue increase at Sierra Tucson, when
compared to the corresponding quarter of 1998.
Salaries and related benefits decreased 3.6% as a percentage of revenue
during the period. Salaries and related benefits increased $287,000 to $3.4
million, when compared to the same period in 1998. The increase was
attributable to staffing adjustments at Miraval and staffing related to
increased census at Sierra Tucson.
General and administrative expense decreased 2.0% as a percentage of revenue
during the first quarter of 1999. General and administrative expense
increased $316,000 to $2.8 million, an increase of 12.6% when compared to the
same period in 1998. The increase was related to the Company's decision to
emphasize advertising at Miraval during the quarter and increased census at
Sierra Tucson.
The Company recognized a pre-tax income of $976,000 for the three-month
period ended March 31, 1999. No provision or benefit for income taxes was
recorded during this period due to the existence of deferred tax assets not
previously benefited.
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 private equity
offerings and long-term 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-month period ended March 31, 1999. During this period, 43% of patient
revenue was derived from retail payments and the remaining 57% from third
party payors. Based on current census levels and operating expenses, Sierra
Tucson believes that it will generate adequate cash flows to sustain the
Treatment segment's ongoing operational requirements as well as to offset any
potential negative cash flow of the Health and Leisure segment, if needed.
Results in the Health and Leisure segment are primarily affected by room
occupancy and average daily rate in addition to expense management. During
first quarter 1999, marketing initiatives for creating marketplace awareness
and demand for Miraval's services resulted in a room occupancy rate of
approximately 59%. 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.
Miraval also contributed positive cash flow to the Company's operations
during the first quarter of 1999.
For the three-month period ended March 31, 1999, the Company had capital
expenditures of approximately $323,000. At March 31, 1999, the Company's
cash and equivalents were $2.5 million.
On August 11, 1998, the Company's principal subsidiaries, Miraval and Sierra
Tucson, completed a debt refinancing loan agreement with Lehman Brothers
Holdings Inc. The amount available under the agreement was $14 million, of
which $2.0 million was reserved for working capital ($1.0 million) and for
capital improvements ($1.0 million). $700,000 of the working capital portion
was available in 1998 and $300,000 is available in 1999. As of March 31,
1999, $292,000 had been drawn from the capital improvements reserve
<PAGE>
and $0 from the working capital reserve. The unused portion of the working
capital reserve rolled over to the capital improvements reserve at January 1,
1999. Proceeds from the transaction were primarily used to extinguish
existing mortgage debt with AP LOM, LLC, an affiliate of AP NH, LLC ("APNH"),
the holder of the Company's outstanding Series A Preferred Stock. The loan
matures in three years (a one-year extension is available upon consent of the
lender and payment of a 2% fee), bears interest at the rate of 4% over the
30-day London Interbank Offered Rate (LIBOR), adjusted monthly, and is
payable interest-only through maturity. The LIBOR rate at the date of closing
was 5.65%. The Company purchased a rate cap to protect against extreme
upward movement in the LIBOR rate which limits the maximum rate to be paid by
the Company to 10.5%.
The loan is secured by a first lien against all real and personal property of
Miraval and is guaranteed by the assets of Sierra Tucson. It is also
partially guaranteed (to the extent of liability arising by reason of certain
exclusions to the non-recourse provisions of the loan) by the Company and to
a more limited extent by Apollo Real Estate Investment Fund II, L.P.
("Apollo"). Apollo, an affiliate of APNH, received a fee in the amount of
$140,000 in consideration of its guarantee.
Management believes that funds from operations combined with the funds
available from the Lehman transaction will provide the cash necessary to meet
its short-term capital needs. However, it is necessary for the Company to
increase occupancy levels in its lines of business, and to implement
additional cost controls to ensure 1999 operating losses do not exceed an
amount sustainable by these funds. Insufficient occupancy levels at Miraval
or any significant decrease in Sierra Tucson's patient levels would adversely
affect the Company's financial position, results of operations and cash
flows.
The Year 2000 problem is the result of computer programs being written using
two digits (rather than four) to define the applicable year. Any of the
Company's programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in
a major system failure or miscalculations.
In order to address Year 2000 issues, the Company has established a committee
consisting of representatives from both the Treatment segment and the Health
and Leisure segment. The committee's approach will be to follow four phases:
assessment, remediation, testing, and implementation. To date, the Company
has fully completed its assessment of all systems that could be significantly
affected by the Year 2000. The completed assessment indicated that most of
the Company's significant information technology systems are not affected. Of
the systems which are not currently Year 2000 compliant, the current vendors
have tested and implemented (at other customers) a solution to the problem.
However, if such modifications are not made, or are not completed timely, the
Year 2000 issue could force Sierra Tucson to operate certain aspects of their
business on a manual system which could result in a negative impact to cash
flow (liquidity). The Company will continue to monitor the progress with the
modifications and/or replacement systems and develop contingency plans for
all critical systems not meeting benchmark dates. The cost for replacement
or upgrades is between $150,000 and $250,000 and is being funded through
operating cash flow. As of March 31, 1999, the Company has incurred
approximately $23,000 in expenses related to Year 2000.
The Company interfaces directly with credit card companies for payment of
services rendered. The Company has successfully completed the testing phase,
based on the software companies criteria.
The Company has queried its critical vendors and suppliers (external agents)
that do not share information systems with the Company. To date, the Company
is not aware of any external agent Year 2000 issue that would materially
impact the Company's results of operations, liquidity or capital resources.
However, the Company has no means of ensuring that external agents will be
Year 2000 ready. The inability of external agents to complete their Year 2000
resolution process in a timely fashion could materially impact the Company.
The effect of non-compliance by external agents is not determinable.
<PAGE>
The Company is finalizing its assessment of its most reasonably likely worst
case Year 2000 scenario. The responses the Company receives from suppliers
regarding their Year 2000 readiness will play a critical role in these
determinations. This and other relevant information will be utilized to
develop the Company's contingency plan. It is presently expected that the
contingency plan will be developed by June 30, 1999.
Like virtually all other public and private companies, the Company's day-to-
day business is dependent on telecommunications services, banking services
and utility services provided by a large number of entities. At this time,
the Company is not aware of any of these entities (or of any significant
supplier) that has disclosed that it will not be Year 2000 compliant by
January 1, 2000. However, many of these entities are, like the Company,
still engaged in the process of attempting to become Year 2000 compliant.
The Company plans to attempt to obtain written assurance of Year 2000
compliance from all entities which management considers critical to
operations of the Company and its subsidiaries. However, it is likely that
some critical suppliers will not give written assurance as to Year 2000
compliance because of concerns as to legal liability.
Even where written assurance is provided by critical suppliers and a
contingency plan is developed by the Company to deal with possible non-
compliance by other critical suppliers, the Year 2000 conversion process will
continue to create risk to the Company which is outside the control of the
Company. There can be no assurance that a major Year 2000 disruption will
not occur in a critical supplier which would have an impact on the Company
that could be material to its financial position, results of operations, or
cash flows.
BUSINESS OUTLOOK
Performance in the Treatment segment (Sierra Tucson) will be driven by
continued cost control efforts as well as new marketing initiatives.
Particular emphasis will be placed on increasing awareness of Sierra Tucson's
innovative treatment programs through a combination of 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. In addition to continuing its traditional
marketing efforts to the referent therapist community and alumni, Sierra
Tucson will utilize direct mail campaigns, media opportunities, enhanced web
site and internet capabilities, and participation in various conferences and
professional boards and organizations. Marketing field representatives will
continue their efforts to enhance Sierra Tucson's national exposure and to
increase the number of prospective patients.
In July 1998, the Company relocated the Sierra Tucson operations to the
facilities previously used by the Company's adolescent care unit (which
ceased operations in 1993). The facilities are located on State leased land,
and in October 1998, the Company entered into a 50-year lease agreement for
the property with the Arizona State Land Department. The relocation
initially provided 63 beds, and in March 1999 the Company began construction
of space for 16 additional beds as well as additional administrative offices.
Construction is scheduled for completion in September 1999.
Miraval, the Company's health and leisure resort, has been in operation since
December, 1995. In 1998, the resort was recognized nationally as Number 2
Best Spa for Value by Travel & Leisure magazine; the Number 4 Best Spa in the
Conde Nast Reader's Choice Awards; and Number 8 Best Spa by Travel & Leisure
magazine. Miraval also received media attention in the New York Times
(Sunday Travel Section), Fitness Magazine, Working Woman, Town and Country,
and Self Magazine as well as numerous mentions in other publications.
<PAGE>
The frequent individual traveler and return guest have played an integral
role in Miraval's success to date. Through its quarterly guest newsletter,
Miraval will offer special return guest programs. This recognition is aimed
at stimulating future bookings and recommendations to friends which has
proven to be one of the most effective means for generating new and repeat
business.
The importance of the group market is also recognized, and Miraval will
continue to focus on soliciting groups for team building and corporate
retreats. Based on guest comments, special retreats and pilot programs will
be offered in order to test interest levels. Some of the programs being
considered are weight loss, women's health issues, naturalist programs and
special healing programs. A day spa mailing was completed in October 1998,
and the day spa will be advertised in order to promote Miraval to the local
market.
The operations of Miraval appear to be seasonal, and although seasonally
adjusted rates were offered in 1998 and 1997, 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. A similar closure is not anticipated for 1999.
Management's strategy for Miraval will be to continue to improve its unique
program structure based on guest feedback. Aggressive public relations
efforts and increased media placement will also be utilized in order to
provide improved national exposure for Miraval. Several public relations
pieces are being developed and press releases will be submitted to select
publications throughout the year to insure that a high profile is maintained.
Cost containment measures will continue to be a critical management objective
during 1999. Management believes that improvement in the quality and
uniqueness of Miraval's programs and services in a cost effective manner is
an important element in its ability to compete successfully in the growing
spa and resort industry.
In addition, it is anticipated that the Board of Directors will continue to
consider strategic opportunities for expansion and growth of both the
Treatment and Health and Leisure segments.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations (particularly as it relates to the Business Outlook section of
this report, and the growth of the Health and Leisure segment) 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.
Sierra Tucson's operations are accredited by the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO"). JCAHO accreditation is
important to the operations of Sierra Tucson since most insurance companies
require such accreditation in order for the treatment of patients to qualify
for insurance
<PAGE>
payment or reimbursement. The next scheduled survey for Sierra Tucson by
JCAHO is in May 1999. If Sierra Tucson were unable to maintain its JCAHO
accreditation, its business would be adversely affected.
Miraval's unique blending of luxury resort recreational activities with
stress management and self-discovery programs clearly differentiates it from
the spas with which it competes. Because Miraval represents a benchmark for
the new and growing trend in hospitality for lifestyle enhancing products,
market data in this niche cannot easily be ascertained. Due to Miraval's
relatively short history and the uniqueness of its programs and services, 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.
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
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(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: May 12, 1999 BY: /s/ William T. O'Donnell, Jr.
-------------------------------------
WILLIAM T. O'DONNELL, JR.
President & Chief Executive Officer
DATE: May 12, 1999 BY: /s/ Loree Thompson
------------------------------------
LOREE THOMPSON
Principal Financial & Accounting
Officer
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This schedule contains summary financial information extracted from the
unaudited consolidated financial statements for the 3-month period
ended March 31, 1999.
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<MULTIPLIER> 1000
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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