UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 November 5, 1999, there were 8,554,938 shares of the
registrant's Common Stock outstanding.
Reference is made to the listing beginning on page 17 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 September 30, 1999
(unaudited) and December 31, 1998 3
Unaudited Consolidated Statements of Operations for
the three and nine-month periods ended September
30, 1999 and 1998 4
Unaudited Consolidated Statements of Cash Flows
for the nine-month periods ended September 30,
1999 and 1998 5
Unaudited Consolidated Statements of Changes in
Stockholders' Equity for the nine-month period
ended September 30, 1999 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 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000s, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 2,963 $ 843
Accounts receivable,less allowance
for doubtful accounts of $426 and
$233, respectively 1,151 955
Prepaid expenses 439 313
Other current assets 466 554
--------- --------
Total current assets 5,019 2,665
Property and equipment, net 33,780 34,347
Long-term receivables, less allowance
for doubtful accounts of $26 and $45,
respectively 77 135
Intangible assets, less amortization of
$256 and $93, respectively 485 648
Other assets 20 20
-------- ---------
Total assets $ 39,381 $37,815
======== =========
LIABILITIES AND STOCKHOLDERS'EQUITY
Current Liabilities:
Accounts payable, trade $ 732 $ 561
Accrued expenses and other
liabilities 4,137 3,610
-------- ---------
Total current liabilities 4,869 4,171
Long-term debt and financing
obligation 12,735 12,815
-------- ---------
Total liabilities 17,604 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
September 30, 1999 and December
31, 1998 -- --
Common stock, $.01 par value,
16,000,000 shares authorized;
8,554,938 shares outstanding at
September 30, 1999 and December
31, 1998 86 86
Additional paid-in capital 47,997 47,997
Accumulated deficit (26,306) (27,254)
-------- --------
Total stockholders' equity 21,777 20,829
-------- --------
Total liabilities and
stockholders' equity $ 39,381 $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 Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Net operating revenue $ 6,627 $ 5,525 $22,325 $ 19,525
Other revenue 23 17 89 187
-------- -------- -------- --------
Total net revenue 6,650 5,542 22,414 19,712
Operating expenses:
Salaries and related benefits 3,353 2,868 10,075 9,326
General and administrative 2,753 2,489 8,481 7,720
Depreciation and amortization 673 657 2,012 1,929
Interest expense 300 334 898 1,052
-------- -------- -------- --------
Total operating expenses 7,079 6,348 21,466 20,027
-------- -------- -------- --------
Income (loss) before extraordinary
item (429) (806) 948 (315)
Extraordinary item -- (264) -- (264)
--------- --------- -------- --------
Net income (loss) $ (429) $ (1,070) $ 948 $ (579)
========= ========= ======== ========
Shares used in basic per share
calculation 8,554,938 8,554,938 8,554,938 8,554,938
========= ========= ========= =========
Shares used in diluted per share
calculation 8,554,938 8,554,938 13,180,742 8,554,938
========= ========= ========== =========
Basic income (loss) per common share:
Before extraordinary item $ (0.05) $ (0.10) $ 0.11 $ (0.04)
Extraordinary item $ -- $ (0.03) $ -- $ (0.03)
---------- ---------- --------- ----------
Net income (loss) $ (0.05) $ (0.13) $ 0.11 $ (0.07)
========== ========== ========= ==========
Diluted income (loss) per common share:
Before extraordinary item $ (0.05) $ (0.10) $ 0.07 $ (0.04)
Extraordinary item $ -- $ (0.03) $ -- $ (0.03)
---------- ---------- -------- ----------
Net income (loss) $ (0.05) $ (0.13) $ 0.07 $ (0.07)
========== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 948 $ (579)
Adjustments to reconcile net
income to cash provided by operating
activities:
Depreciation and amortization 2,012 1,995
Loss on early extinguishment of debt -- 264
Loss on disposal of assets 22 --
Provision for bad debts 285 165
Minority Interest 68 58
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (423) 101
Other assets ( 38) (571)
Increase (decrease) in liabilities:
Accounts payable, accrued expenses
and other liabilities 616 (633)
-------- --------
Net cash provided by operating
activities 3,490 800
Cash flows from investing activities:
Purchase of property and equipment (1,250) (761)
-------- --------
Net cash used in investing activities (1,250) (761)
Cash flows from financing activities:
Proceeds from long-term borrowings -- 12,151
Reduction of long-term borrowings
and financing obligation ( 120) (11,907)
--------- ---------
Net cash (used in) provided by
financing activities ( 120) 244
--------- ---------
Net increase in cash and equivalents 2,120 283
Cash and equivalents at beginning
of period 843 829
--------- ---------
Cash and equivalents at end of period $ 2,963 $ 1,112
========= =========
</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
nine months ended
September 30, 1999 -- -- -- 948 948
----- --------- -------- --------- ----------
Balance at
September 30, 1999 $ 86 8,554,938 $ 47,997 $(26,306) $ 21,777
===== ========= ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
NEXTHEALTH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share amounts)
(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-balancing 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 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
disorders. The Health and Leisure segment, Sierra Health-Styles,
Inc. d/b/a MiravalTM owns Miraval ("Miraval"), a unique vacation
experience blending stress management, self-awareness 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
September 30, 1999 and for the three and nine-month periods ended
September 30, 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 and nine-month periods ended September 30,
1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. The operations
of Miraval appear to be seasonal, and although seasonally
adjusted rates were offered in 1998 and 1999, occupancy levels
fell off during the summer months. Miraval was closed 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. Miraval did not close during
July 1999.
NOTE 3 - NET INCOME (LOSS) PER SHARE
Shares used in the diluted per share calculation for the three
and nine-month periods ending September 30, 1999 and 1998 are as
stated below:
<TABLE>
<CAPTION>
Three-month period Nine-month period
ended September 30, ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common shares 8,554,938 8,554,938 8,554,938 8,554,938
Convertible preferred shares -- -- 4,606,500 --
Dilutive options -- -- 19,304 --
--------- --------- ---------- ----------
Diluted shares 8,554,938 8,554,938 13,180,742 8,554,938
========= ========= ========== ==========
</TABLE>
The dilutive effect of convertible preferred shares and options
has been excluded from the per-share figures for the three months
ended September 30, 1999 and 1998 and the nine months ended
September 30, 1998 as their effect is anti-dilutive (decrease the
loss per-share amount).
<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-awareness, 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, interest expense was reclassified from
corporate to each segment.
Information about the Company's operations in different business
segments for the three and nine-month periods ending September
30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Corporate
Health & and
Treatment Leisure Other Items Consolidated
--------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Three-month period ended
September 30, 1999
- ------------------------
Total revenue $ 4,302 $ 2,344 $ 4 $ 6,650
Income (loss) before
income tax benefit 1,196 (1,385) (240) (429)
Identifiable assets 6,491 30,980 1,910 39,381
Capital expenditures 303 71 0 374
Depreciation & amortization
expense 84 586 3 673
Interest expense 191 109 0 300
Nine-month period ended
September 30, 1999
- ------------------------
Total revenue $12,467 $ 9,907 $ 40 $22,414
Income (loss) before
income tax benefit 3,772 (2,086) ( 738) 948
Identifiable assets 6,491 30,980 1,910 39,381
Capital expenditures 986 264 0 1,250
Depreciation & amortization
expense 246 1,756 10 2,012
Interest expense 573 323 2 898
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Corporate
Health & and
Treatment Leisure Other Items Consolidated
--------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Three-month period ended
September 30, 1998
- -------------------------
Total revenue $ 3,532 $ 1,999 $ 11 $ 5,542
Income (loss) before
extraordinary item 965 (1,298) (473) (806)
Extraordinary item -- -- (264) (264)
Net income (loss) 965 (1,298) (737) (1,070)
Identifiable assets 4,300 32,643 1,347 38,290
Capital expenditures and
intersegment transfers, net 56 262 1 319
Depreciation & amortization
expense 89 521 47 657
Interest expense 112 58 164 334
Nine-month period ended
September 30, 1998
- ------------------------
Total revenue $10,090 $ 9,441 $ 181 $ 19,712
Income (loss) before
extraordinary item 2,891 (1,428) (1,778) (315)
Extraordinary item -- -- (264) (264)
Net income (loss) 2,891 (1,428) (2,042) (579)
Identifiable assets 4,300 32,643 1,347 38,290
Capital expenditures and
intersegment transfers, net 331 428 2 761
Depreciation & amortization
expense 238 1,515 176 1,929
Interest expense 113 58 881 1,052
</TABLE>
NOTE 5- INCOME TAXES
No provision for income taxes was recorded in the nine-month
period ended September 30, 1999 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 - EXTRAORDINARY ITEM
In August 1998, the Company repaid the mortgage debt with AP LOM,
LLC. The write-off of the prepaid financing costs and
unamortized note discount associated with the debt are classified
as an extraordinary item on the September 30, 1998 financial
statements.
NOTE 8 - RECLASSIFICATIONS
Certain prior period amounts in the unaudited consolidated
statements of operations have been reclassified to conform to the
presentation used in third quarter 1999.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis relates to factors which
have affected the consolidated financial condition and results of
operations of the Company for the three and nine-month periods
ended September 30, 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-balancing 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-awareness and recreational activities in a
luxury health and leisure resort environment.
In July 1999, the Sierra Tucson facilities were expanded to
increase bed capacity by approximately 20%. For the nine-month
period ended September 30, 1999, the Treatment segment accounted
for approximately 55.6% of the Company's operating revenues and
approximately 40.5% of expenses, while the Health and Leisure
segment accounted for approximately 44.2% of the Company's
operating revenue and approximately 55.9% of operating expenses.
The Company believes that the Health and Leisure segment will
make a more significant contribution to the Company's operating
results in the future.
RESULTS OF OPERATIONS
Three-month period ended September 30, 1999 compared to three-
month period ended September 30, 1998
The significant changes in results of operations and net cash
provided by operating activities for the three-month period ended
September 30, 1999, compared to the same period in 1998 are
discussed below.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------------------
1999 1998 % Change
---- ---- --------
<S> <C> <C> <C>
Financial results:
(000s, except per share amounts)
Total net revenue $ 6,650 $ 5,542 20.0 %
Total operating expenses 7,079 6,348 11.5 %
------- -------
Net loss before extraordinary item (429) (806) 46.8 %
Extraordinary item -- (264) --
------- -------
Net loss (429) (1,070) 59.9 %
Basic and diluted loss per
common share:
Before extraordinary item (0.05) (0.10) 50.0 %
Extraordinary item -- (0.03) --
-------- --------
Net loss (0.05) (0.13) 61.5 %
Net cash provided by operating
activities 999 (300) 433.0 %
<PAGE>
Operating data:
Patient days - Sierra Tucson 5,069 4,964 2.1 %
Average daily census - Sierra Tucson 55 54 1.9 %
Guest days - Miraval 6,821 6,707 1.7 %
Room occupancy - Miraval 46.3% 46.5% (0.4)%
</TABLE>
For the three-month period ended September 30, 1999, net loss
decreased $641,000 to $429,000, a 59.9% improvement over the
comparable quarter of 1998. Net cash provided by operating
activities was $999,000 compared to net cash used in operating
activities of $300,000 for the same period in 1998; a $1.3
million improvement.
Total net revenue increased $1.1 million to $6.6 million, an
increase of 20.0% when compared to the same period in 1998.
Results reflect a 21.9% revenue increase at Sierra Tucson
primarily related to a rate increase instituted July 1, 1999; and
a 17.3% increase at Miraval which is primarily related to an
increase in the average revenue per guest.
Salaries and related benefits decreased 1.3% as a percentage of
revenue during the period. Salaries and related benefits
increased $485,000 to $3.4 million, when compared to the same
period in 1998. The increase is attributable to Miraval's
remaining open during the month of July 1999 as well as to
staffing adjustments at Sierra Tucson.
General and administrative expense decreased 3.5% as a percentage
of revenue during the third quarter of 1999. General and
administrative expense increased $264,000 to $2.8 million, an
increase of 10.6% when compared to the same period in 1998. The
increase is related to the allowance for doubtful accounts
related to commercial insurance receivables as well as variable
costs related to the increase in revenues.
Interest expense decreased $34,000 or 10.2% to $300,000. The
decrease reflects the lower rate on the loan outstanding in 1999
compared to the rate charged on the loan outstanding in 1998.
Nine-month period ended September 30, 1999 compared to nine-month
period ended September 30, 1998
The significant changes in results of operations and net cash
provided by operating activities for the nine-month period ended
September 30, 1999, compared to the same period in 1998 are
discussed below.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------
1999 1998 % Change
<S> <C> <C> <C>
Financial results:
(000's except per share amounts)
Total net revenue $ 22,414 $ 19,712 13.7 %
Total operating expenses 21,466 20,027 7.2 %
-------- --------
Net income (loss) before
extraordinary item 948 (315) 400.9 %
Extraordinary item -- (264) --
-------- ---------
Net income (loss) 948 (579) 263.7 %
Basic income (loss) per common share:
Before extraordinary item 0.11 (0.04) 375.0 %
Extraordinary item -- (0.03) --
-------- ---------
Net income (loss) 0.11 (0.07) 257.1 %
Diluted income (loss) per common share:
Before extraordinary item 0.07 (0.04) 275.0 %
Extraordinary item -- (0.03) --
-------- ---------
Net income (loss) 0.07 (0.07) 200.0 %
Net cash provided by operating
activities 3,490 800 336.3 %
<PAGE>
Operating data:
Patient days - Sierra Tucson 15,617 14,668 6.5 %
Average daily census - Sierra Tucson 57 54 5.7 %
Guest days - Miraval 22,365 24,707 (9.5)%
Room occupancy - Miraval 52.9% 57.8% (8.5)%
</TABLE>
For the nine-month period ended September 30, 1999, net income
was $948,000 compared to a net loss after extraordinary item of
$579,000 for the same period of 1998. Net cash provided by
operating activities increased to $3.5 million compared to
$800,000 for the nine-month period of 1998; a 336.3% increase.
Total net revenue for the nine-month period ended September 30,
1999 increased $2.7 million or 13.7% to $22.4 million when
compared to the same period of 1998. The increase is
attributable to a 23.7% revenue increase at Sierra Tucson
primarily related to a rate increase initiated in July 1999; and
a 4.9% revenue increase at Miraval which is primarily related to
an increase in the average revenue per guest.
Salaries and related benefits decreased 2.5 % as a percentage of
revenue during the nine-month period. Salaries and related
benefits increased $749,000 to $10.1 million or 8.0% when
compared to 1998. The increase is related to Miraval's remaining
open during the month of July 1999 as well as to staffing
adjustments due to increased census at Sierra Tucson.
General and administrative expense decreased 1.4% as a percentage
of revenue during the nine-month period ended September 30, 1999.
General and administrative expense increased $761,000 or 9.9%
to $8.5 million when compared to the same period of 1998. The
increase is related to the allowance for doubtful accounts related
to commercial insurance receivables as well as variable costs
related to the increase in revenues.
Interest expense decreased $154,000 to $898,000 or 14.6% when
compared to the previous year. The decrease reflects the lower
rate on the loan outstanding in 1999 compared to the rate charged
on the loan outstanding in 1998.
The Company recognized pre-tax income of $948,000 for the nine-
month period ended September 30, 1999. No provision for income
taxes was recorded during this period due to the existence of
deferred tax assets not yet previously benefited.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources
have typically been cash provided by the operating activities of
both the Treatment and Health and Leisure segments, 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 and nine-month periods
ended September 30, 1999. During the nine-month period ended
September 30, 1999, 46% of patient revenue was derived from
retail payments and the remaining 54% from insurance, contracts
and other third party payors. The increase in revenue from third
party payors has resulted in an increase in accounts receivable
and the related allowance for doubtful accounts. Based on
current census levels and operating expenses, the Company
believes that Sierra Tucson will generate adequate cash flows to
sustain the Treatment segment's ongoing operational requirements,
fund anticipated capital projects, and to offset any potential
negative cash flow of the Health and Leisure segment, if needed.
<PAGE>
Results in the Health and Leisure segment are primarily affected
by room occupancy and average daily rate in addition to expense
management. During third quarter 1999, Miraval's room occupancy
rate was approximately 46.3%. As marketplace demand for the
Miraval product increases, management believes that the Health
and Leisure segment will make a more significant contribution to
the Company's financial condition. Even though Miraval operated
at a negative cash flow for the three-month period ended
September 30, 1999, it contributed positive cash flow for the
nine-month period ended September 30, 1999.
For the three-month period ended September 30, 1999, the Company
had capital expenditures of approximately $374,000 primarily
related to the expansion of the Sierra Tucson facility. At
September 30, 1999, the Company's cash and equivalents were $3.0
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
September 30, 1999, $292,000 had been drawn from the capital
improvements reserve and $0 from the working capital reserve.
The unused portion of the workingcapital 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 September 2001 (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 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 will provide the
cash necessary to meet its short-term capital needs. Funds from
the Lehman transaction are also available if needed. 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 expenses 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 established a
committee consisting of representatives from both the Treatment
segment and the Health and Leisure segment. The committee's
approach was 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 were not Year 2000 compliant, upgrades for all but one of
the critical systems has been completed as of November 10, 1999.
The remaining vendor has tested and implemented (at other
customers) a solution to the problem. The Company will continue
to monitor progress with the modifications and/or
<PAGE>
replacement system and develop contingency plans for the critical
system in the event that benchmark dates
are not achieved. The cost for replacement or upgrades is between
$150,000 and $250,000 and is being funded through operating cash
flow. As of September 30, 1999, the Company has incurred
approximately $125,000 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.
The Company has finalized its assessment of its most reasonably
likely worst case Year 2000 scenario. The responses the Company
received from suppliers regarding their Year 2000 readiness
played a critical role in these determinations. This and other
relevant information was utilized to develop the Company's
contingency plan.
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
In the Treatment segment (Sierra Tucson), 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. In addition to continuing its traditional marketing
efforts to the referent therapist community and alumni, Sierra
Tucson will participate in various conferences and professional
boards and organizations in order to enhance Sierra Tucson's
national exposure and to increase the number of prospective
patients.
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.
<PAGE>
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
payment or reimbursement. Sierra Tucson successfully completed
its JCAHO review in May 1999 by receiving accreditation with
commendation. The next scheduled review by JCAHO will be in May
2002.
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.
Management's strategy for Miraval, the Company's health and
leisure resort, will be to continue to improve its unique program
structure based on guest feedback. A combination of focused
target marketing, aggressive public relations efforts and
increased media placement will be utilized in order to provide
improved national exposure for Miraval.
Since it opened in December 1995, Miraval has garnered
outstanding media coverage. Miraval was named the Number 1 Spa in
the world in the November 1999 Conde Nast Traveler Readers'
Choice poll, ahead of such competitors as Canyon Ranch, the Lodge
at Skylonda, Rancho La Puerta and Golden Door. As part of the
same poll, Miraval was ranked Number 29 in the "Best of the Best"
among a world-wide combination of resorts, hotels, cruise lines,
islands, monuments, spas and cities. Of the U.S. facilities
listed in the "Best of the Best", Miraval was the third highest.
In September 1999, Miraval was named the number 4 Best Spa in
America in Travel and Leisure's readers' poll. Additional media
coverage has also been received in Gourmet Magazine, National
Geographic Traveler, Spa Finders and Fitness Magazine.
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. Miraval also continues to solicit to groups that would
enjoy and benefit from the Miraval experience.
The operations of Miraval appear to be seasonal, and although
seasonally adjusted rates were offered in 1998 and 1999,
occupancy levels fell off during the summer months. Miraval was
closed 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. Miraval remained
open during July 1999.
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.
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. An October 1999
agreement between Sierra Tucson and Avalon, a Mexico City eating
disorders treatment center, will provide an opportunity for both
Sierra Tucson and Miraval to establish a marketing presence in
the untapped areas of Mexico and Central and South America.
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
<PAGE>
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's unique blending of luxury resort recreational
activities with stress management and self-awareness programs
clearly differentiates it from the spas with which it competes.
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.
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. Even though longevity in the marketplace plays a key
role in attaining credibility in this highly competitive field,
the Company believes that Miraval has made significant progress
in obtaining name recognition as evidenced by its positive
rankings in various travel and leisure industry publications and
readers' polls over the past three years.
While the Company anticipates continued growth in revenues and is
committed to a return to profitability, operating results could
be adversely impacted if the business is unable to accurately
anticipate customer demand, is unable to differentiate its
products from those of its competitors, is unable to offer
services expeditiously in response to customer demand, or is
negatively impacted by managed care restrictions on payor
reimbursement.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various litigation and administrative
proceedings arising in the normal course of business. In the
opinion of management, any liabilities that may result from these
claims will not, individually or in the aggregate, have a
material adverse effect on the Company's financial position,
results of operations or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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: November 10,1999 BY: /s/WILLIAM T. O'DONNELL, JR.
------------------------------
WILLIAM T. O'DONNELL, JR.
President and Chief
Executive Officer
DATE: November 10,1999 BY: /s/ LOREE THOMPSON
------------------------------
LOREE THOMPSON
Principal Financial and
Accounting Officer
<TABLE> <S> <C>
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<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated financial statements for the nine month period
ended september 30, 1999 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<CURRENCY> U.S. DOLLARS
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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<CURRENT-ASSETS> 5,019
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0
0
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