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, 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 August 2, 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 June 30, 1999
(unaudited) and December 31, 1998..................... 3
Unaudited Consolidated Statements of Operations for
the three and six-month periods ended June 30, 1999
and 1998.............................................. 4
Unaudited Consolidated Statements of Cash Flows for
the six-month periods ended June 30, 1999 and 1998.... 5
Unaudited Consolidated Statements of Changes in
Stockholders' Equity for the six-month period ended
June 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 4. Submission of Matters to a Vote of Security Holders... 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>
June 30, December 31,
1999 1998
--------- ------------
(Unaudited)
<<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents.................. $ 2,395 $ 843
Accounts receivable, less allowance
for doubtful accounts of $339 and
$233, respectively................... 1,385 955
Prepaid expenses...................... 471 313
Other current assets.................. 511 554
--------- ----------
Total current assets................. 4,762 2,665
Property and equipment, net............. 34,026 34,347
Long-term receivables, less allowance
for doubtful accounts of $24 and $45,
respectively........................... 72 135
Intangible assets, less amortization
of $202 and $93, respectively.......... 539 648
Other assets............................ 19 20
--------- ----------
Total assets......................... $ 39,418 $37,815
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade................. $ 560 $ 561
Accrued expenses and other liabilities.. 3,861 3,610
--------- ----------
Total current liabilities............ 4,421 4,171
Long-term debt and financing obligation. 12,791 12,815
--------- ----------
Total liabilities.................... 17,212 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 June 30, 1999
and December 31, 1998................. -- --
Common stock, $.01 par value, 16,000,000
shares authorized; 8,554,938 shares
outstanding at June 30, 1999 and
December 31, 1998..................... 86 86
Additional paid-in capital............. 47,997 47,997
Accumulated deficit.................... (25,877) (27,254)
--------- ----------
Total stockholders' equity........... 22,206 20,829
--------- ----------
Total liabilities and stockholders'
equity.............................. $ 39,418 $37,815
========= ==========
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)
<CAPTION>
</TABLE>
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Net operating revenue........... $ 7,606 $ 7,180 $ 15,698 $ 14,001
Other revenue................... 21 143 66 169
-------- -------- -------- --------
Total net revenue............. 7,627 7,323 15,764 14,170
Operating expenses:
Salaries and related benefits... 3,361 3,385 6,722 6,459
General and administrative...... 2,902 2,719 5,729 5,230
Depreciation and amortization... 667 636 1,338 1,272
Interest expense................ 296 365 598 718
-------- -------- -------- --------
Total operating expenses...... 7,226 7,105 14,387 13,679
-------- -------- -------- --------
Income before income taxes....... 401 218 1,377 491
Income tax provision (benefit)... -- -- -- --
-------- -------- -------- --------
Net income....................... $ 401 $ 218 $ 1,377 $ 491
-------- -------- -------- --------
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..................... 13,169,808 13,346,559 13,183,875 13,253,883
========== ========== ========== ==========
Basic income per common
share........................... $ .05 $ .03 $ .16 $ .06
========== ========== ========== ==========
Diluted income per common
share........................... $ .03 $ .02 $ .10 $ .04
========== ========== ========== ==========
</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,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................... $ 1,377 $ 491
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization.............. 1,338 1,321
Loss on disposal of assets................. 20 --
Provision for bad debts.................... 110 102
Minority Interest.......................... 46 39
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable........................ (477) 123
Other assets............................... (115) ( 28)
Increase (decrease) in liabilities:
Accounts payable, accrued expenses
and other liabilities..................... 192 (948)
--------- ----------
Net cash provided by operating activities...... 2,491 1,100
Cash flows from investing activities:
Purchase of property and equipment............ (876) (442)
--------- ----------
Net cash used in investing activities.......... (876) (442)
Cash flows from financing activities:
Reduction of long-term borrowings and
financing obligation......................... ( 63) (740)
--------- ----------
Net cash used in financing activities.......... ( 63) (740)
--------- ----------
Net increase (decrease) in cash and
equivalents................................... 1,552 ( 82)
Cash and equivalents at beginning of period.... 843 829
--------- ----------
Cash and equivalents at end of period.......... $ 2,395 $ 747
========= ==========
</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
six months ended
June 30, 1999 -- -- -- 1,377 1,377
----- --------- -------- ----------- ---------
Balance at
June 30, 1999 $ 86 8,554,938 $ 47,997 $ (25,877) $ 22,206
===== ========= ======== =========== ==========
</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 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-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 June
30, 1999 and for the three and six-month periods ended June 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 six-month periods ended June 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 PER SHARE
Shares used in the diluted per share calculation for the three and six-month
periods ending June 30, 1999 and 1998 are as stated below:
<TABLE>
<CAPTION>
Three-month period Six-month period
ended June 30, ended June 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 4,606,500 4,606,500 4,606,500
Dilutive options 8,370 42,206 22,437 32,337
Dilutive warrants -- 142,915 -- 60,108
--------- --------- --------- ----------
Diluted shares 13,169,808 13,346,559 13,183,875 13,253,883
========== ========== ========== ===========
</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-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, each segment became responsible for
interest expense.
Information about the Company's operations in different business segments for
the three and six-month periods ending June 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
June 30, 1999
- ---------------------------
Total revenue............... $ 4,155 $ 3,466 $ 6 $ 7,627
Income (loss) before
income tax benefit........ 1,229 (562) (266) 401
Identifiable assets......... 5,856 31,796 1,766 39,418
Capital expenditures........ 464 89 -- 553
Depreciation & amortization
expense................... 82 583 2 667
Interest expense............ 191 104 1 296
Six-month period ended
June 30, 1999
- -----------------------------
Total revenue............... $ 8,166 $ 7,563 $ 35 $ 15,764
Income (loss) before
income tax benefit........ 2,576 (701) ( 498) 1,377
Identifiable assets......... 5,856 31,796 1,766 39,418
Capital expenditures........ 683 193 -- 876
Depreciation & amortization
expense................... 163 1,170 5 1,338
Interest expense............ 383 214 1 598
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Corporate
Health & and
Treatment Leisure Other Items Consolidated
--------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Three-month period ended
June 30, 1998
- ----------------------------
Total revenue................ $ 3,616 $ 3,564 $ 143 $ 7,323
Income (loss) before
income tax benefit......... 1,170 (358) (594) 218
Identifiable assets.......... 4,174 29,504 4,224 37,902
Capital expenditures......... 246 109 1 356
Depreciation & amortization
expense.................... 73 499 64 636
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
income tax benefit......... 1,926 (130) (1,305) 491
Identifiable assets.......... 4,174 29,504 4,224 37,902
Capital expenditures......... 275 166 1 442
Depreciation & amortization
expense.................... 149 994 129 1,272
Interest expense............. 1 0 717 718
</TABLE>
NOTE 5- INCOME TAXES
No provision for income taxes was recorded in the three or six-month periods
ended June 30, 1999 and 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 statements of
operations have been reclassified to conform to the presentation used in second
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 six-month periods ended June 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.
The Company is seeking additional opportunities to increase market share for its
existing Treatment segment, Sierra Tucson. In July 1999, the Company completed
expansion of the Sierra Tucson facilities which increased bed capacity by
approximately 20%. For the six-month period ended June 30, 1999, the Treatment
segment accounted for approximately 52% of the Company's operating revenues and
approximately 39% of expenses, while the Health and Leisure segment accounted
for approximately 48% of the Company's operating revenue and approximately 57%
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 JUNE 30, 1999 COMPARED TO THREE-MONTH PERIOD ENDED
JUNE 30, 1998
The significant changes in results of operations and net cash provided by
operating activities for the three-month period ended June 30, 1999, compared to
the same period in 1998 are discussed below.
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------------
1999 1998 % Change
---- ---- --------
<S> <C> <C> <C>
Financial results: (000s, except per share amounts)
Total net revenue............................ $ 7,627 $ 7,323 4.2 %
Total operating expenses..................... 7,226 7,105 1.7 %
Net income................................... 401 218 83.9 %
Basic income per common share................ .05 .03 66.7 %
Diluted income per common share.............. .03 .02 50.0 %
Net cash provided by operating activities.... 411 502 (18.1)%
Operating data:
Patient days - Sierra Tucson................. 5,312 5,379 ( 1.3)%
Average daily census - Sierra Tucson......... 58 59 ( 1.7)%
Guest days - Miraval......................... 7,474 9,624 (22.3)%
Room occupancy - Miraval..................... 53.2% 65.9% (19.3)%
</TABLE>
<PAGE>
For the three-month period ended June 30, 1999, net income increased $183,000 to
$401,000 or 83.9% over the comparable quarter of 1998. Net cash provided by
operating activities decreased 18% resulting in net cash provided by operating
activities of $411,000 compared to net cash provided by operating activities of
$502,000 for the same period in 1998.
Total net revenue increased $304,000 to $7.6 million, an increase of 4.2% when
compared to the same period in 1998. Results reflect a 14.9% revenue increase
at Sierra Tucson which was partially offset by a less than 3% decrease at
Miraval.
Salaries and related benefits decreased 2.2% as a percentage of revenue during
the period. Salaries and related benefits decreased $24,000 to $3.4 million,
when compared to the same period in 1998. The decrease is attributable to a 3.8%
reduction in salaries and related benefits at Miraval which was partially offset
by a 4.3% increase at Sierra Tucson.
General and administrative expense increased 1.0% as a percentage of revenue
during the second quarter of 1999. General and administrative expense increased
$183,000 to $2.9 million, an increase of 6.7% when compared to the same period
in 1998. The increase is primarily related to the additional allowance for
doubtful accounts made in the second quarter of 1999 related to commercial
insurance receivables.
Interest expense decreased $69,000 or 18.9% to $296,000. The decrease reflects
the lower rate on the loan outstanding in 1999 than the rate charged on the loan
outstanding in 1998.
The Company recognized pre-tax income of $401,000 for the three-month period
ended June 30, 1999. No provision or benefit for income taxes was recorded
during this period due to the existence of deferred tax assets not previously
benefited.
SIX-MONTH PERIOD ENDED JUNE 30, 1999 COMPARED TO SIX-MONTH PERIOD ENDED JUNE 30,
1998
The significant changes in results of operations and net cash provided by
operating activities for the six-month period ended June 30, 1999, compared to
the same period in 1998 are discussed below.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1999 1998 % Change
---- ---- --------
<S> <C> <C> <C>
Financial results: (000's except per share amounts)
Total net revenue........................... $ 15,764 $ 14,170 11.3 %
Total operating expenses.................... 14,387 13,679 5.2 %
Net income.................................. 1,377 491 180.5 %
Basic income per common share............... 0.16 0.06 166.7 %
Diluted income per common share............. 0.10 0.04 150.0 %
Net cash provided by operating activities... 2,491 1,100 126.5 %
Operating data:
Patient days - Sierra Tucson................ 10,548 9,704 8.7 %
Average daily census - Sierra Tucson........ 58 54 7.4 %
Guest days - Miraval........................ 15,544 18,000 (13.6)%
Room occupancy - Miraval.................... 56.2% 63.6% (11.6)%
</TABLE>
For the six-month period ended June 30, 1999, net income increased $886,000 to
$1.4 million or 180.5% over the same period of 1998. Net cash provided by
operating activities increased to $2.5 million compared to $1.1 million for the
six-month period of 1998; a 126.5% increase.
<PAGE>
Total net revenue for the six-month period ended June 30, 1999 increased $1.6
million or 11.3% to $15.8 million when compared to the same period of 1998. The
increase is attributable to a 24.7% revenue increase at Sierra Tucson and a 1.6%
revenue increase at Miraval.
Salaries and related benefits decreased 2.9% as a percentage of revenue during
the six-month period. Salaries and related benefits increased $263,000 to $6.7
million or 4.1% when compared to 1998. The increase is due primarily to
staffing adjustments related to increased utilization at Sierra Tucson.
General and administrative expense decreased .6% as a percentage of revenue
during the six-month period ended June 30, 1999. General and administrative
expense increased $499,000 or 9.5% to $5.7 million when compared to the same
period of 1998.
Interest expense decreased $120,000 to $598,000 or 16.7% when compared to the
previous year. The decrease reflects the lower rate on the loan outstanding in
1999 than the rate charged on the loan outstanding in 1998.
The Company recognized pre-tax income of $1.4 million for the six-month period
ended June 30, 1999. No provision or benefit 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 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 and
six-month periods ended June 30, 1999. During the six-month period ended June
30, 1999, 44% of patient revenue was derived from retail payments and the
remaining 56% 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, Sierra Tucson believes that it
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.
Results in the Health and Leisure segment are primarily affected by room
occupancy and average daily rate in addition to expense management. During
second quarter 1999, Miraval's room occupancy rate was approximately 53%.
Management believes that as marketplace demand for the Miraval product
increases, 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 June 30, 1999, it
contributed positive cash flow for the six-month period ended June 30, 1999.
For the three-month period ended June 30, 1999, the Company had capital
expenditures of approximately $553,000 primarily related to the expansion at
Sierra Tucson discussed below. At June 30, 1999, the Company's cash and
equivalents were $2.4 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
<PAGE>
was available in 1998 and $300,000 is available in 1999. As of June 30, 1999,
$292,000 had been drawn from the capital improvements reserve
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
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 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 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 June 30, 1999, the Company has incurred approximately $72,000
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 is being utilized to develop
the Company's contingency plan which is in the final stages of completion.
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. 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.
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. In July 1999 the Company
completed construction of space for additional beds and administrative offices.
In addition, effective July 1, 1999, Sierra Tucson initiated a rate increase.
<PAGE>
Miraval, the Company's health and leisure resort, has been in operation since
December, 1995, and media coverage for the facility continues to be positive.
In May 1999, Miraval was featured on CNN's Medical News Segment in a piece
called "Mindful Living". In addition to receiving media attention in such
prestigious publications as Travel and Leisure, Conde Nast Traveler, Gourmet
Magazine and Sunset Magazine, Miraval is receiving increased attention from
Tucson and Phoenix vicinity publications. This coverage has contributed to
increased utilization of Miraval's Day Spa programs.
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.
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.
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, but still experienced seasonal fluctuations in occupancy.
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
<PAGE>
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. Longevity in the marketplace plays a key role in attaining credibility
in this highly competitive field.
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 27, 1999. The
Company's stockholders elected Mr. George L. Ruff as director and selected Ernst
& Young LLP as the Company's independent auditors for the fiscal year ending
December 31, 1999.
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: August 11, 1999 BY: /s/William T. O'Donnell, Jr.
---------------------------------
WILLIAM T. O'DONNELL, JR.
President and Chief Executive Officer
DATE: August 11, 1999 BY: /s/Loree Thompson
---------------------------------
LOREE THOMPSON
Principal Financial and
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated financial statements for the six-month period
ended June 30, 1999 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,395
<SECURITIES> 0
<RECEIVABLES> 1,724
<ALLOWANCES> 339
<INVENTORY> 0
<CURRENT-ASSETS> 4,762
<PP&E> 48,719
<DEPRECIATION> 14,693
<TOTAL-ASSETS> 39,418
<CURRENT-LIABILITIES> 4,421
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 22,206
<TOTAL-LIABILITY-AND-EQUITY> 39,418
<SALES> 0
<TOTAL-REVENUES> 15,764
<CGS> 0
<TOTAL-COSTS> 12,341
<OTHER-EXPENSES> 1,338
<LOSS-PROVISION> 110
<INTEREST-EXPENSE> 598
<INCOME-PRETAX> 1,377
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,377
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,377
<EPS-BASIC> .16
<EPS-DILUTED> .10
</TABLE>
