UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of The
Securities Exchange Act of 1934 for the Fiscal Year Ended
December 31, 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)
Securities registered pursuant to Section 12(b) of the Act: Common Stock,
$.01 par value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ X ] YES [ ] NO
On March 3, 2000, the aggregate market value of voting common
stock held by non-affiliates of the registrant was $17,950,832,
based on the closing price of the registrant's common stock as
reported on The Nasdaq Stock Market on such date. For purposes
of the preceding sentence only, all directors and executive
officers of the registrant are assumed to be affiliates.
On March 3, 2000, there were 8,584,938 shares of the registrant=s
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report (Items 10,
11, 12 and 13) is incorporated by reference from the registrant's
proxy statement to be filed pursuant to Regulation 14A with
respect to the annual meeting of stockholders scheduled to be
held on May 24, 2000.
Indicate by check mark if disclosure of delinquent filers to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
Reference is made to the listing beginning on page 35 of all
exhibits filed as a part of this report.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I
Item 1. Business............................................... 3
Item 2. Properties............................................. 6
Item 3. Legal Proceedings...................................... 6
Item 4. Submission of Matters to a Vote of Security Holders.... 6
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters................................... 7
Item 6. Selected Financial Data................................ 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 9
Item 7A.Quantitative and Qualitative Disclosure About
Market Risk........................................... 14
Item 8. Financial Statements and Supplementary Data............ 15
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 33
PART III
Item 10.Directors and Executive Officers of the Registrant..... 34
Item 11.Executive Compensation................................. 34
Item 12.Security Ownership of Certain Beneficial Owners
and Management........................................ 34
Item 13.Certain Relationships and Related Transactions......... 34
PART IV
Item 14.Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................... 35
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
NEXTHEALTH, INC.
NextHealth, Inc. (the "Company") is a leading provider of
alternative health care services which focus on prevention and
self care. For over ten years, the Company has developed
effective programs and services which address individual quality-
of-life issues through a whole person, mind-body approach. The
Company's two subsidiaries, Sierra Tucson, an addictions and
behavioral healthcare center, and Miraval, a luxury health
leisure resort and spa, are acknowledged leaders in their
respective fields and together define an important market niche
in the healthcare industry.
NextHealth, Inc., formerly Sierra Tucson Companies, Inc.,
was incorporated in Delaware in August 1989 and, as the result of
a merger effective in September 1989, is the successor to an
Arizona corporation which was originally formed in 1983. In
September 1995, the Company changed its name to NextHealth, Inc.,
to reflect an expanded scope of operations as well as to
establish separate identities for the parent company and each of
its subsidiaries. The Company currently operates therapeutic
treatment programs as well as lifestyle management and self-
awareness programs pursuant to a business strategy which
concentrates on identifying emerging revenue and growth
opportunities.
The Company operates in two distinct business segments which
are located at separate facilities in the foothills of the Santa
Catalina Mountains northwest of Tucson, Arizona. The Treatment
segment, Sierra Tucson, LLC, a Delaware limited liability company
("ST, LLC"), owns Sierra TucsonTM ("Sierra Tucson"), an inpatient,
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, Sierra Health-Styles, Inc., a Delaware
corporation ("Healthstyles, Inc."), owns MiravalTM ("Miraval"), a
unique vacation experience blending stress management, self-
awareness and recreational activities in a luxury health leisure
resort and spa environment.
In October 1989, the Company and certain officers of the
Company offered 2.5 million shares of common stock in an initial
public offering. In June 1991, the Company and certain of its
officers offered 2.45 million shares of common stock in a
secondary public offering. The Company's common stock trades on
The Nasdaq Stock Market under the symbol "NEXT". The Company's
principal offices are located at 16600 N. Lago del Oro Parkway,
Tucson, Arizona 85739, and its telephone number is 520-792-5800.
SIERRA TUCSON
Sierra Tucson is licensed by the State of Arizona as a 79-
bed inpatient, special psychiatric hospital and behavioral health
care center engaged in the treatment of addictions and mental
health disorders. Sierra Tucson provides medical services and
programs that reach beyond standard alcohol and drug addiction
treatments. These programs include the treatment of dual
diagnosis, eating disorders, major depression, post-traumatic
stress disorder, and treatment for gambling and sexual disorders.
Sierra Tucson offers a safe, individualized treatment
experience based on the Sierra ModelTM, which was conceived and
designed to treat the whole person utilizing a bio-psycho-social-
spiritual approach. The Sierra Model integrates philosophies and
practices from the medical and therapeutic communities, family
systems theory and the Twelve Steps philosophy. Sierra Tucson's
individualized treatment plans are developed and maintained by
experienced, clinical professionals. Every program at Sierra
Tucson is shaped by the philosophy of the Sierra Model,
addressing both causes and symptoms, thereby assuring the
greatest possible chance for long-term recovery. Since its
inception, over 13,000 patients and nearly 35,000 family members
have participated in Sierra Tucson programs. Sierra Tucson is
licensed by the Arizona Department of Health Services and
accredited with commendation by the Joint Commission on
Accreditation of Healthcare Organizations.
<PAGE>
In order to facilitate its operations and strengthen its
identity as a separate and distinct business operation, on
November 13, 1996, the business and assets of Sierra Tucson, Inc.
("STI") were sold to ST, LLC, a subsidiary of the Company. The
purchase is evidenced by ST, LLC's non-negotiable promissory note
which is secured by a security interest in the assets of STI.
The Company is the manager of and owns a 98% interest in ST, LLC;
the remaining 2% is owned by AP NH, LLC (a Delaware limited
liability company), the holder of the Company's Series A
preferred stock as described below in the Stockholders' Equity
section of Notes to the Consolidated Financial Statements.
MIRAVAL
Miraval, a luxury health leisure resort and spa, combines
elements of stress management, self-awareness and recreational
activities. By incorporating educational programs such as
mind/body and lifestyle management, Miraval provides an
innovative approach to managing the pressures of everyday life.
Services and amenities are designed to provide guests with unique
skills to enhance wellness and to learn enjoyable approaches for
creating a sense of well being. Guests are provided with the
opportunity to create a custom-tailored program designed to meet
their goals for stress reduction, relaxation and fitness.
Programs offer both group and individual participation with
expert facilitators. Miraval presently has 106 guest rooms.
In August, 1998, as part of the debt refinancing loan
agreement with Lehman Brothers Holdings Inc., the business and
assets of Miraval were transferred to Healthstyles, Inc., a
wholly-owned subsidiary of the Company.
The Company is considering expansion and the development of
new lines of business within its Health and Leisure segment; both
at its current and at other locations and using other mediums.
The Company owns approximately 30 acres of land and
buildings north of Miraval ("North Campus"). The North Campus
facilities include nine separate buildings (approximately 41,700
square feet) that contain 30 casita-style rooms, group rooms, a
kitchen, dining room and other support facilities which, until
mid-1998, had been the site of Sierra Tucson. The Company is
evaluating possible uses for the North Campus facility which
could include a wellness and alternative medicine center; a
business/conference center; and other uses.
The Company has also considered proposals for new locations
for Miraval, although it is not actively pursuing any such
proposals at this time.
SOURCES OF REVENUE
The Company's revenue depends upon occupancy levels. At
Sierra Tucson, an inclusive daily rate for services is charged,
ranging from $895 to $1,150 per day. Patient revenue is derived
from private insurance reimbursement, contracts, and patient
payments, none of which, individually, represents a significant
portion of revenue. Most commercial insurance plans reimburse
their subscribers or make direct payment to Sierra Tucson. No
revenue is derived from Medicare or Medicaid.
During 1999, 46% of patient revenue was derived from retail
payments and the remaining 54% from insurance, contracts and
other third party payors. In 1998, 50% of patient revenue came
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.
Miraval guest rates vary depending on season and market
segment. Peak season rates (October - May) start at $395 per
day. Off season (June - September) rates begin at $275 per day.
Group rates are available and vary depending on the number of
rooms and the season. All rates are inclusive packages
consisting of luxury guest room, three gourmet meals, use of the
resort=s amenities, participation in all group programs and
activities, one personal service per day, and Tucson Airport
transfers. Average stays range from 3 to 7 nights. Miraval
currently generates all of its revenue from guest bookings, group
bookings and retail sales of goods and services.
<PAGE>
Set forth below are the Company's total revenues by segment
(000s):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1999 % 1998 % 1997 %
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Treatment Segment........... $16,842 55.5 $13,904 52.9 $11,702 56.6
Health and Leisure Segment.. 13,464 44.4 12,194 46.4 8,754 42.4
Other, net.................. 44 .1 186 .7 196 1.0
------- ---- ------- ---- ------- ----
Total Revenue $30,350 100.0 $26,284 100.0 $20,652 100.0
======= ===== ======= ===== ======= =====
</TABLE>
EMPLOYEES
On December 31, 1999, the Company and its subsidiaries
employed approximately 333 full time equivalent employees. The
Company's businesses have not experienced material difficulty in
recruiting and retaining employees. The Company considers
relations with employees to be excellent.
COMPETITION
Sierra Tucson competes with psychiatric and behavioral
health hospitals as well as with other specialty residential
facilities. Non-profit or government-owned competitors may have
certain financial advantages such as endowments, charitable
contributions and tax-exempt financing not available to Sierra
Tucson. The Company believes that the competitive position of
Sierra Tucson is, to a significant degree, dependent upon its
reputation, historical success in treating the patient, and
price. The Company also believes that the competitive position
of Sierra Tucson is dependent upon the breadth of services
offered by the facility and the ability to implement programs
best suited to the needs of patients and payors in the
marketplace.
Miraval competes for national and international consumers'
discretionary income typically expended upon luxury hotel and
resort spas, holistic health and other related upscale vacation
experiences. While management believes that Miraval occupies a
unique market niche, it nevertheless competes with a broad
spectrum of vacation alternatives. It has been categorized as a
destination spa, creating competition with a relatively small
number of well-known spas whose clients are very loyal. It also
competes with full-service resorts for group business. The
criteria for competition is based on price, amenities, program
offerings and location.
INSURANCE
The Company maintains professional malpractice liability
coverage for the professionals it employs in addition to coverage
for the customary risks inherent in the operation of health care
and resort facilities and business in general. While the Company
believes its insurance policies are adequate in amount and
coverage for its current operations, there is no assurance that
coverage will continue to be available in adequate amounts or at
a reasonable cost.
LICENSING AND REGULATION
The activities of Sierra Tucson are regulated by federal and
state governments. Sierra Tucson holds a behavioral health
residential license from the State of Arizona to operate a mental
health and substance abuse facility and a special
hospital/psychiatric license from the State of Arizona to operate
a psychiatric hospital.
Sierra Tucson is also accredited by the Joint Commission on
Accreditation of Healthcare Organizations (JCAHO), a voluntary
national accrediting organization responsible for accrediting
health care providers. JCAHO accreditation is important to the
Sierra Tucson operation as most insurance companies require such
accreditation in order for the treatment of patients to qualify
for insurance payment or reimbursement. In 1999, Sierra Tucson
was reaccredited with commendation by the JCAHO for a three-year
period, the longest accreditation period available. The next
scheduled survey for Sierra Tucson by JCAHO is in May, 2002.
<PAGE>
Both of the businesses operated by the Company are subject
to extensive state and local regulations and, on a periodic
basis, must obtain various licenses and permits. Management
believes that the Company has obtained all required licenses and
permits and its businesses are conducted in substantial
compliance with applicable laws.
ITEM 2. PROPERTIES
The Company's primary facilities are located on
approximately 400 acres of owned or leased land northwest of
Tucson, Arizona, in the foothills of the Santa Catalina
Mountains.
In July 1998, the Company relocated Sierra Tucson to the
facilities previously used by the Company's adolescent care unit
(which ceased operations in 1993). These facilities are located
on approximately 160 acres of land leased from the State of
Arizona and in buildings ("Buildings") leased from a related
party, ODE, L.L.C. In October 1998, the Company entered into a
50-year Commercial Land Lease Agreement ("State Land Lease") with
the Arizona State Land Department, which replaced a 10-year lease
that would have expired in 2001. The Company recently amended its
lease ("Building Lease") with ODE for the Buildings to provide
for a lease term (with options) that coincides with the State
Land Lease. The Buildings had been purchased by ODE in 1994 and
leased back to the Company. The Building Lease grants the Company
the option to repurchase the Buildings at their fair market
value. The current rent for the buildings is $150,000 per year.
Under the terms of the Building Lease, the rent will be adjusted
in 2001 to a fair market rent to be determined by independent
appraisal and will be adjusted every 10 years thereafter if the
Company exercises its renewal options. It is anticipated that
rent for the Buildings will increase significantly in 2001. The
Company is therefore currently considering repurchasing the
Buildings. The facility also has fitness and recreation areas,
riding stables and other administrative and support offices. In
1999, the Company expanded the Sierra Tucson facilities through
the addition of space for sixteen beds and additional
administrative offices.
The Miraval facility was reconstructed from existing Company
facilities and is located on a separate Company-owned 130-acre
parcel of property. The 30-acre parcel previously occupied by
Sierra Tucson, which is located just north of the Miraval
property, is currently vacant. The Board is considering several
potential uses for the buildings and land. The remaining
property, located to the south and east of the Miraval facility,
is unimproved open space, some of which is unbuildable either
because of its terrain or its location in the flood plain. In
1998, the zoning for the property currently occupied by Miraval
and the adjacent 30-acre vacant parcel to the north was amended
to permit a total of 356 resort hotel rooms and up to 226
residential units.
The Company's obligations under the debt refinancing loan
agreement with Lehman Brothers Holdings Inc., are secured by a
first lien against all real and personal property of Miraval and
Sierra Tucson.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various litigation and
administrative proceedings arising in the normal course of
business. In the opinion of management, any liabilities that may
result from these claims will not, individually or in the
aggregate, have a material adverse effect on the Company's
financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security
holders in the fourth quarter of the fiscal year ending December
31, 1999.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's common stock has been traded in the over-the-
counter market and quoted on The Nasdaq Stock Market since
October 19, 1989. Stock is traded under the symbol "NEXT". As
of March 3, 2000, there were approximately 212 shareholders of
record and approximately 1559 beneficial holders of the Company's
common stock. The high and low sales price information set forth
below, derived from data prepared by The Nasdaq Stock Market,
represents quotations by dealers and may not reflect applicable
markups, markdowns or commissions, and do not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
1999 1998
------------- ------------
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $1.500 $1.000 $1.875 $0.875
Second Quarter $1.438 $0.719 $2.500 $1.000
Third Quarter $1.250 $0.906 $1.625 $0.750
Fourth Quarter $2.500 $0.938 $1.594 $0.688
</TABLE>
On March 3, 2000, the closing bid price on The Nasdaq Stock
Market was $3.469 per share.
The Company did not pay a cash dividend on its common stock
in 1999 or 1998 and does not intend to pay any in the foreseeable
future. Any future declaration and payment of dividends will be
determined by the Board of Directors based upon the conditions
existing at the time, including the Company's earnings, financial
condition, capital requirements, applicable legal restrictions
and other factors. So long as any shares of preferred stock
remain outstanding, the Company may not declare or pay any cash
dividend or make any other distributions with respect to the
common stock.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated
financial and operating data for the Company. Certain prior year
amounts have been reclassified to conform to the presentation
used in 1999. The data for the three years ended December 31,
1999, should be read in conjunction with the Company's
Consolidated Financial Statements included elsewhere in this
document. The selected consolidated financial and operating data
for the two years ended December 31, 1996, is derived from the
Company's historical Consolidated Financial Statements. See Item
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations. (000s, except per share amounts and
operating data.)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Total revenue................. $30,350 $26,284 $20,652 $18,458 $14,873
Income (loss) before
extraordinary item.......... 1,151 ( 712) ( 4,624) (14,693) (11,967)
Extraordinary item............ -- ( 264) -- -- --
------- -------- -------- -------- --------
Net income (loss) before
income taxes................. 1,151 ( 976) ( 4,624) (14,693) (11,967)
Income tax benefit............ -- -- -- -- --
------- -------- -------- -------- --------
Net income (loss)............. 1,151 ( 976) ( 4,624) (14,693) (11,967)
Basic net income (loss) per share:
Before extraordinary item... 0.13 ( 0.08) ( 0.54) ( 1.72) ( 1.40)
Extraordinary item.......... -- ( 0.03) -- -- --
------- -------- -------- -------- --------
Net income (loss)........... 0.13 ( 0.11) ( 0.54) ( 1.72) ( 1.40)
Diluted net income (loss) per share:
Before extraordinary item... 0.09 ( 0.08) ( 0.54) ( 1.72) ( 1.40)
Extraordinary item.......... -- ( 0.03) -- -- --
------- -------- -------- -------- --------
Net income (loss)........... 0.09 ( 0.11) ( 0.54) ( 1.72) ( 1.40)
Cash Flow Data
Net cash provided by (used in)
operating activities......... 4,515 523 ( 2,096) ( 9,246) 4,624
Capital expenditures.......... 1,415 862 948 1,124 20,891
Balance Sheet Data
Total Assets.................. 39,831 37,815 39,011 41,666 47,942
Long-term Debt................ 12,724 12,815 9,730 8,359 985
Stockholders' Equity.......... 21,995 20,829 21,805 22,179 36,578
Operating Data
Patient Days-Sierra Tucson.... 20,618 19,618 17,445 15,683 17,650
Average Daily Census.......... 57 54 48 43 48
Guest Days-Miraval(1)(2)...... 29,828 30,361 23,851 17,665 2,062
Room Occupancy-Miraval(1)(2).. 52.6% 53.7% 42.9% 33.6% 41.5%
Participant Days-Onsite(3).... -- -- -- 7,073 7,554
Average Daily Census(3)....... -- -- -- 21 21
Participant Days-HHHI(4)...... -- -- -- 7,077 --
Average Daily Census(4)....... -- -- -- 33 --
Financial Statistics
Current Ratio................. 1.27:1 .64:1 .35:1 .52:1 .65:1
Days Outstanding in Accounts
Receivable.................. 17 20 27 44 38
</TABLE>
<PAGE>
(1) Miraval guest days and occupancy for the year ended December
31, 1995 were calculated based on the number
of days from the commencement of operations on December 1,
1995 to December 31, 1995.
(2) Miraval was closed for two weeks in July, 1997 and for three
weeks in July, 1998 due to seasonal occupancy fluctuation
and to make needed improvements to the facility.
(3) Onsite was acquired by the Company on January 2, 1995, and
was divested on November 30, 1996.
(4) Hilton Head Health Institute was acquired on March 1, 1996
and divested on October 1, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis relates to factors
which have affected the consolidated financial condition and
results of operations of the Company for the three years ended
December 31, 1999. Certain prior year amounts have been
reclassified to conform to the presentation used in 1999.
Reference should also be made to the Company's Consolidated
Financial Statements and related notes thereto and the Selected
Financial Data included elsewhere in this document.
GENERAL
NextHealth, Inc. is a leading provider of a broad range of
alternative health care services which focus on prevention and
self care. 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 believes that it has positioned itself to
capitalize on the emerging health and leisure segment of the
health care services industry through the development of Miraval,
a luxury health leisure resort and spa which provides a full
range of self-awareness, stress management and recreational
activities. The Company is also seeking additional opportunities
to increase market share for its existing Treatment segment, an
inpatient, 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. In 1999, the Company expanded the Sierra Tucson
facilities through the addition of space for sixteen beds and
additional administrative offices. For the year ended December
31, 1999, the Treatment segment accounted for approximately 55.5%
of the Company's operating revenues and approximately 40.8% of
expenses, while the Health and Leisure segment accounted for
approximately 44.4% of the Company's operating revenue and
approximately 55.0% 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
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
The significant changes in results of operations and net
cash provided by operating activities for the year ended December
31, 1999, compared to the same period in 1998 are discussed
below. Unless otherwise stated, all comparisons are for the same
period.
For the year ended December 31, 1999, net income increased
to $1.2 million, compared to a net loss of $976,000 in 1998; a
$2.1 million improvement. Net cash provided by operating
activities increased $4.0 million to $4.5 million; a more than
700% improvement over the previous year. The improvement in cash
flow was related to the reduction in the net loss and favorable
changes in current liabilities related to payables and advance
deposits.
Total revenue increased $4.1 million to $30.4 million, an
increase of 15.5% when compared to 1998. The results reflect a
21.3% net revenue improvement at Sierra Tucson and a 10.4% net
revenue improvement at Miraval. The growth in revenue was
attributable to increased package rates and a-la-carte
utilization rates at Miraval and increased census revenue at
Sierra Tucson.
<PAGE>
Salaries and related benefits decreased 3.0% as a percentage
of revenue during 1999. Salaries and related benefits increased
8.2% to $13.6 million when compared to the same period in 1998.
The increase was attributable to Miraval's remaining open during
the entire month of July 1999, and to the increased facility size
and increased census at Sierra Tucson.
General and administrative expense decreased 1.4% as a
percentage of revenue during 1999. General and administrative
expense increased $1.2 million to $11.7 million when compared to
the previous year. The increase was related to an increase in
the allowance for doubtful accounts for commercial insurance
receivables as well as variable costs related to the increase in
revenues.
Interest expense decreased $138,000 to $1.2 million or 10.2%
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 $1.2 million for
the year ended December 31, 1999. There was no provision for
income tax recognized in 1999, as the Company's taxable income
was fully offset by net operating loss carryforwards not
previously benefitted.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The significant changes in results of operations and net
cash provided by (used in) operating activities for the year
ended December 31, 1998, compared to the same period in 1997 are
discussed below. Unless otherwise stated, all comparisons are
for the same period.
For the year ended December 31, 1998, net loss decreased
$3.6 million to $976,000; a 78.9% improvement. The net loss
includes an extraordinary charge to 1998 earnings of $264,000
resulting from early extinguishment of long-term debt in the
third quarter. When compared to the same period in 1997, net cash
provided by operating activities increased $2.6 million resulting
in net cash provided by operating activities of $523,000. The
improvement in cash flow was related to the reduction in the net loss.
Total revenue increased $5.6 million to $26.3 million, an
increase of 27.3% when compared to 1997. The results reflect
an 18.9% net revenue improvement at Sierra Tucson and a 39.3%
net revenue improvement at Miraval. The increase was attributable
to higher occupancy at Miraval and increased census at Sierra
Tucson.
Salaries and related benefits decreased 8.5% as a percentage
of revenue during 1998. Salaries and related benefits increased
8.1% to $12.6 million when compared to the same period in 1997.
The increase was attributable to staffing adjustments related to
higher occupancy at Miraval and increased census at Sierra
Tucson.
General and administrative expense decreased 8.3% as a
percentage of revenue during 1998. General and administrative
expense increased $538,000 to $10.5 million, a 5.4% increase in
comparison with the same period in 1997. The increase was
attributable to relocation of the Sierra Tucson facility as well
as higher occupancy at Miraval and increased census at Sierra
Tucson.
The Company recognized a pre-tax loss of $976,000 for the
year ended December 31, 1998. There was no income tax benefit
recognized in 1998, as the Company recorded a 100% valuation
reserve against deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
In the last five years, the Company's primary sources of
liquidity and capital resources have been net 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.
<PAGE>
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 in 1999. In 1999, 46% of the Treatment
segment's patient revenue was derived from retail payments and
the remaining 54% from insurance, contracts and other third party
payors. In 1998, 50% of patient revenue was derived 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 and to fund anticipated capital projects.
In 2001, the Company anticipates a significant increase in
rental payments for the Sierra Tucson buildings that are leased
from a related party, ODE, L.L.C. As part of a revised 48-year
building lease agreement, the rent will be adjusted in 2001 to a
fair market rent to be determined by independent appraisal and
will be adjusted every 10 years thereafter if the Company
exercises its renewal options. The lease agreement also gives the
Company the option of repurchasing the buildings at fair market
value. The Company has begun preliminary discussions regarding
the repurchase of the buildings.
The Company's cash flow improved to net cash provided by
operating activities in 1999 of $4.5 million versus $523,000 in
1998. In addition, the Company had net capital expenditures in
1999 of approximately $1.4 million which were all funded from
cash flow.
Results in the Health and Leisure segment are primarily
affected by room occupancy and average daily rate in addition to
expense management. In 1999, Miraval's room occupancy rate was
approximately 52.6%. Management believes that as marketplace
demand for the Miraval product continues to increase, the Health
and Leisure segment will ultimately make a significant
contribution to the Company's financial condition. This segment
contributed positive cash flow to the Company's operations in
1999.
On August 11, 1998, the Company's principal subsidiaries,
Healthstyles, Inc., and ST, LLC, 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 in 1999. As
of December 31, 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, 2000.
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 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. The
Company must continue to focus on revenue growth and expense
controls in order to preserve and improve its liquidity position.
Insufficient occupancy levels at Miraval or any significant
decrease in Sierra Tucson's patient levels would adversely affect
the Company's financial position, results of operations and cash
flows.
The Company has not experienced significant Year 2000
disruptions, nor do they expect any in the future.
<PAGE>
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, conference
sponsorships 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.
Marketing field representatives will continue their efforts 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 and state bar
associations.
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 Commercial Land Lease
Agreement for the property with the Arizona State Land
Department. In 1999, the Company expanded the Sierra Tucson
facilities through the addition of space for 16 additional beds
as well as additional administrative offices.
The Company currently leases the Sierra Tucson buildings
from a related party, ODE, L.L.C. The Company recently amended
its building lease with ODE to provide for a lease term that
coincides with the State Land Lease. The revised lease agreement
grants the Company the option of repurchasing the buildings at
fair market value or leasing the facilities at fair market rental
value. The Company has begun preliminary discussions regarding
the repurchase of the buildings.
Miraval, the Company's health leisure resort and spa, will
continue its focused sales efforts in targeted cities in 2000 and
will also continue to build national awareness by capitalizing on
the media support received in 1999. Miraval was voted the #1 Spa
in the World in the November Conde Nast Traveler's Readers' 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 #4 Best Spa in America in Travel and
Leisure's readers' poll. In the September 1999 National
Geographic Traveler, Miraval was listed among their Top 24 Best
Spas in America; in Shape Magazine in October 1999, Miraval was
voted #5 Best Spa in America.
Locally, increased sales efforts and community awareness
resulted in considerable media attention in such prestigious
regional publications as Arizona Highways, Tucson Quarterly,
Arizona Foothills Magazine, Phoenix Magazine, and Tucson
Lifestyle Magazine. Miraval will continue its community and
state-wide marketing initiatives in an effort to capture the
local group and day spa business. This will be done through
increased contact with key meeting planners and business organizations
in the Tucson, Phoenix and Scottsdale areas.
The importance of the group market is also recognized, and
Miraval will continue to focus on soliciting groups for team
building and corporate retreats. The potential for developing
program stays will be assessed and the special promotions that
proved successful in 1999 will again be offered throughout the
year. In addition, Miraval will continue to promote the Day Spa
and Activities Day as well as other specialty weeks.
The operations of Miraval appear to be seasonal, and
although seasonally adjusted rates were offered in 1999 and 1998,
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 the entire month of July 1999.
<PAGE>
In 2000, Miraval will continue to improve and expand its
unique program structure based on guest feedback. Cost
containment measures will also continue to be a critical
management objective. 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.
Zoning for the property currently occupied by Miraval and
the property formerly occupied by Sierra Tucson which is located
to the north of Miraval, was amended in 1998 to permit a total of
356 resort hotel rooms and up to 226 residential units.
It is anticipated that the Board of Directors will continue
to consider strategic opportunities for expansion and growth of
NextHealth.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Management's Discussion and Analysis of Financial Condition
and Results of Operations (particularly as it relates to 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 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 payment or reimbursement. If Sierra Tucson were
unable to maintain its JCAHO accreditation, its business would be
adversely affected. 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.
The Sierra Tucson buildings are currently leased from a
related party, ODE, L.L.C. The Company recently amended its
building lease with ODE to provide for a lease term that
coincides with the 50-year Commercial Land Lease Agreement with
the Arizona State Land Department. The revised building lease
agreement gives the Company the option of repurchasing the
buildings at fair market value or leasing the buildings at fair
market rental value. The rent will be adjusted in 2001 to a
fair market rent to be determined by independent appraisal. The
Company anticipates a significant increase in rental payments
beginning in 2001. The Company has begun preliminary discussions
regarding the repurchase of the buildings.
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.
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 in this market niche to be certain the demand will
continue.
<PAGE>
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 increased profitability, operating results
could be adversely impacted if the business is unable to
accurately anticipate customer demand, is unable to differentiate
its products from those of its competitors, is unable to offer
services expeditiously in response to customer demand, or is
negatively impacted by managed care restrictions on payor
reimbursement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
The Company is subject to interest rate risk as it relates
to the loan from Lehman Brothers Holdings Inc., which bears
interest at 4% over the 30-day London Interbank Offered Rate
(LIBOR), adjusted monthly. To limit its exposure under this
variable-rate agreement, the Company purchased a rate cap to
protect against an extreme upward movement in the LIBOR rate
during the scheduled three-year term of the loan. The rate cap
limits the maximum rate to be paid by the Company to 10.5%. The
effective rate for the Company at December 31, 1999 was 9.625%.
A 100 basis point change in the LIBOR rate in 2000 would result
in a $120,000 change in interest expense incurred by the Company
in that year.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
NextHealth, Inc.'s Consolidated Financial Statements as of
December 31, 1999 and 1998 and for the three years ended December
31, 1999.
Page
Report of Management......................................... 16
Report of Independent Auditors............................... 17
Consolidated Balance Sheets.................................. 18
Consolidated Statements of Operations........................ 19
Consolidated Statements of Cash Flows........................ 20
Consolidated Statements of Changes in Stockholders' Equity... 21
Notes to Consolidated Financial Statements................... 22
<PAGE>
REPORT OF MANAGEMENT
The financial statements and other financial information included
in this Annual Report on Form 10-K are the responsibility of
management. The financial statements have been prepared in
conformity with generally accepted accounting principles
appropriate in the circumstances and include amounts that are
based on management's informed judgments and estimates.
Management relies on the Company's system of internal accounting
controls to provide reasonable assurance that assets are
safeguarded and that transactions are properly recorded and
executed in accordance with management's authorization. The
concept of reasonable assurance is based on the recognition that
there are inherent limitations in all systems of internal
accounting control and that the cost of such systems should not
exceed the benefits to be derived. The internal accounting
controls in place during the periods presented are considered
adequate to provide such assurance.
The Company's financial statements are audited by Ernst & Young
LLP, independent auditors. Their report states that they have
conducted their audit in accordance with auditing standards
generally accepted in the United States. These standards include
an evaluation of the system of internal accounting controls for
the purpose of establishing the scope of audit testing necessary
to allow them to render an independent professional opinion on
the fairness of the Company's financial statements.
The Audit Committee of the Board of Directors, composed solely of
directors who are not employees of the Company, reviews the
Company's financial reporting and accounting practices. The
Audit Committee meets periodically with the independent auditors
and management to review the work of each and to ensure that each
is properly discharging its responsibilities.
/s/ William T. O'Donnell, Jr.
- ----------------------------------
William T. O'Donnell, Jr.
President and Chief Executive Officer
/s/ Loree Thompson
- ----------------------------------
Loree Thompson
Principal Financial and Accounting Officer
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
NextHealth, Inc.
We have audited the accompanying consolidated balance sheets of
NextHealth, Inc. and subsidiaries, as of December 31, 1999 and
1998, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. Our audits
also included the financial statement schedule listed in the
index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of NextHealth, Inc. and subsidiaries, at
December 31, 1999 and 1998, and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information
therein.
/s/ Ernst & Young LLP
-----------------------
ERNST & YOUNG LLP
Tucson, Arizona
January 28, 2000
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000s, except share amounts)
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
---- ----
<S> <C> <C>
Assets
Current Assets:
Cash and equivalents........................ $ 3,803 $ 843
Accounts receivable, less allowance for
doubtful accounts of $337 and $233,
respectively............................... 1,174 955
Prepaid expenses............................ 438 313
Other current assets........................ 573 554
--------- ----------
Total current assets...................... 5,988 2,665
Property and equipment, net................... 33,327 34,347
Long-term receivables, less allowance for
doubtful accounts of $21 and $45,respectively 64 135
Intangible assets, less amortization of
$310 and $93, respectively.................. 431 648
Other assets.................................. 21 20
--------- -----------
Total assets.............................. $ 39,831 $ 37,815
========= ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, trade...................... $ 888 $ 561
Accrued expenses and other liabilities....... 3,835 3,308
--------- ----------
Total current liabilities................. 4,723 3,869
Minority Interest............................. 389 302
Long-term debt and financing obligation....... 12,724 12,815
--------- ----------
Total liabilities......................... 17,836 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 December 31, 1999 and 1998.... -- --
Common stock, $.01 par value, 16,000,000 shares
authorized; 8,554,938 shares outstanding at
December 31, 1999 and 1998................... 86 86
Additional paid-in capital.................... 48,012 47,997
Accumulated deficit........................... (26,103) (27,254)
--------- ---------
Total stockholders' equity.................. 21,995 20,829
--------- ---------
Total liabilities and stockholders' equity.. $39,831 $37,815
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000s, except share and per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenue:
Net operating revenue................. $30,229 $26,058 $20,457
Investment income..................... 80 75 49
Other revenue......................... 41 151 146
-------- -------- --------
Total revenue....................... 30,350 26,284 20,652
Operating expenses:
Salaries and related benefits......... 13,573 12,550 11,607
General and administrative............ 11,719 10,505 9,967
Interest.............................. 1,211 1,349 1,126
Depreciation and amortization......... 2,696 2,592 2,576
-------- -------- --------
Total operating expenses............ 29,199 26,996 25,276
-------- -------- --------
Income(loss)before extraordinary item.. 1,151 ( 712) ( 4,624)
Extraordinary item..................... -- ( 264) --
-------- -------- --------
Income (loss) before income taxes...... 1,151 ( 976) ( 4,624)
Income taxes........................... -- -- --
-------- -------- --------
Net income (loss)...................... $ 1,151 $( 976) $( 4,624)
======== ========= =========
Basic income (loss) per share:
Before extraordinary item........... $ 0.13 $( 0.08) $( 0.54)
Extraordinary item.................. -- ( 0.03) --
-------- --------- ---------
Net income (loss)................... $ 0.13 $( 0.11) $( 0.54)
======== ========= =========
Diluted income (loss) per share:
Before extraordinary item........... $ 0.09 $( 0.08) $( 0.54)
Extraordinary item.................. -- ( 0.03) --
-------- --------- ---------
Net income (loss)................... $ 0.09 $( 0.11) $( 0.54)
======== ========= =========
Shares used in basic per
share calculation.................... 8,554,938 8,554,938 8,554,938
========= ========== ==========
Shares used in diluted per
share calculation................... 13,187,119 8,554,938 8,554,938
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ 1,151 $ (976) $( 4,624)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................ 2,696 2,657 2,674
Loss on early extinguishment of debt......... -- 264 --
Charge for non-employee options.............. 15 -- --
Provision for bad debts...................... 370 159 ( 41)
Minority interest............................ 87 54 58
Changes in operating assets and liabilities
net of effects from acquisitions:
(Increase) decrease in assets:
Accounts receivable.......................... ( 518) ( 110) 30
Other assets................................. ( 145) ( 676) 493
Increase (decrease) in liabilities:
Accounts payable, accrued expenses and
other liabilities........................... 859 ( 849) ( 686)
-------- -------- -------
Net cash provided by (used in)
operating activities........................... 4,515 523 ( 2,096)
Cash flows from investing activities:
Purchase of property and equipment............. ( 1,405) ( 862) ( 948)
-------- --------- --------
Net cash used in investing activities........... ( 1,405) ( 862) ( 948)
Cash flows from financing activities:
Proceeds from long-term borrowing.............. -- 12,292 2,800
Reduction of long-term debt and
financing obligation.......................... ( 150) (11,939) ( 300)
-------- -------- --------
Net cash (used in) provided by financing
activities..................................... ( 150) 353 2,500
-------- -------- --------
Net increase (decrease) in cash and
equivalents.................................... 2,960 14 ( 544)
Cash and equivalents, beginning of year......... 843 829 1,373
-------- -------- --------
Cash and equivalents, end of year............... $ 3,803 $ 843 $ 829
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(000s, except share amounts)
<TABLE>
<CAPTION>
Total
Additional Stock-
Common Stock Paid-in (Accumulated holders'
Cost Shares Capital Deficit) Equity
---- ------ ---------- ------------ -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $86 8,554,938 $43,747 $(21,654) $22,179
Net loss for the year ended
December 31, 1997 -- -- -- ( 4,624) ( 4,624)
Removal of mandatory redemption
provision - Preferred Stock -- -- 4,250 -- 4,250
---- ---------- ------- -------- --------
Balance at December 31, 1997 86 8,554,938 47,997 (26,278) 21,805
Net loss for the year ended
December 31, 1998 -- -- -- ( 976) ( 976)
---- ---------- ------- -------- --------
Balance at December 31, 1998 86 8,554,938 47,997 (27,254) 20,829
Net income for the year ended
December 31, 1999 -- -- -- 1,151 1,151
Issuance of non-employee
vested options -- -- 15 -- 15
---- ----------- -------- -------- --------
Balance at December 31, 1999 $86 8,554,938 $48,012 $(26,103) $21,995
==== =========== ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1999
ORGANIZATION
NextHealth, Inc. and subsidiaries (collectively, the ACompany@)
have operations in two principal business segments; Treatment,
and Health and Leisure through which it provides both health care
and wellness and preventive health services. The Treatment
segment includes Sierra Tucson, LLC ("Sierra Tucson"), an
inpatient, state licensed, special psychiatric hospital and
behavioral health care center providing treatment for 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 ("Miraval"), is a luxury health leisure resort
and spa which provides a unique vacation experience blending
stress management and self-awareness programs with a full range
of personal services and recreational activities. The current
operations of the Company are located in Tucson, Arizona.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of
NextHealth, Inc. and its subsidiaries, all but one of which is
wholly owned. All material intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Cash and Equivalents
Cash and equivalents includes all cash balances and highly liquid
investments with an original maturity of three months or less.
Cash and equivalents are stated at cost which approximates market
value.
Advertising Expense
The cost of advertising is expensed as incurred. The Company
incurred approximately $885, $833, and $954 in advertising costs
during 1999, 1998 and 1997, respectively.
Intangible Assets
Intangible assets at December 31, 1999 include capitalized loan
fees which are being amortized over the life of the loan and
ground water rights which are being amortized over a period of 15
years. Intangible assets of $142 were written off in 1998 as a
result of the Lehman refinancing (see note entitled Long-term
Debt and Financing Obligation) and included in the 1998
extraordinary charge.
Property and Equipment
Property and equipment are stated at cost. Interest incurred
during the construction of facilities is capitalized and
amortized over the life of the asset. Costs of improvements are
capitalized. Costs of normal repairs and maintenance are charged
to expense as incurred. Upon the sale or retirement of property
and equipment, the cost and related accumulated depreciation are
removed from the respective accounts, and the resulting gain or
loss, if any, is included in income. Depreciation is provided on
a straight-line basis over the estimated useful lives of the
assets. The service lives of the Company's property and equipment
ranges from 3 to 31 years.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1999
Income Taxes
The company accounts for income taxes using the liability method
in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes.
Revenue Recognition
Revenue, net of any applicable contractual allowances or
discounts, is recognized in the period services are rendered.
Net Operating Revenue
Net operating revenue consists of revenue derived from guests and
patients, based on the billing rates established for each
business segment, less any applicable discounts or contractual
allowances.
Stock Based Compensation
The Company grants employee stock options for a fixed number of
shares with an exercise price equal to or greater than the fair
value of the shares at the date of grant. The Company accounts
for stock option grants in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related
Interpretations because the Company believes the alternative fair
value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation, requires the use of
option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the
exercise price of the valuing employee stock options equals or
exceeds the market price of the underlying stock on the date of
grant, no compensation expense is recognized. Options granted to
non-employees are recorded at fair value on the date of grant.
Net Income (Loss) Per Share
The following table sets forth the components of the share figure
used in the computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Basic:
Weighted average shares......... 8,554,938 8,554,938 8,554,938
Effect of dilutive securities:
Stock options................... 25,681 -- --
Preferred stock................. 4,606,500 -- --
Warrants........................ -- -- --
--------- --------- ----------
Diluted Shares.................. 13,187,119 8,554,938 8,554,938
========== ========= ==========
</TABLE>
Diluted earnings per share are equal to basic earnings per share
for the periods ending December 31, 1998 and 1997, as the effect
of all applicable securities is anti-dilutive (decrease the loss
per share amount).
Credit Risk
A significant portion of the Company's accounts receivable are
due from individuals (self-pay), insurance companies, other
entities which provided health care benefits and credit card
companies. Management performs credit evaluations and believes
its allowance for doubtful accounts is adequate.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1999
Reclassifications
The consolidated financial statements for prior years reflect
certain reclassifications to conform with the classifications
adopted in 1999.
PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land and improvements........... $ 2,930 $ 2,920
Buildings and improvements...... 36,210 35,307
Furniture and equipment......... 10,127 9,869
-------- --------
Total property and equipment.... 49,267 48,096
Less: accumulated depreciation
and amortization............... 15,940 13,749
-------- --------
Total property and
equipment, net................. $ 33,327 $ 34,347
======== ========
</TABLE>
ACCRUED EXPENSES AND OTHER LIABILITIES
At December 31, 1999 and 1998, accrued expenses and other
liabilities were comprised of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Payroll and related taxes............... $ 734 $ 501
Professional fees....................... 60 115
Deposits and patient refunds............ 1,580 1,193
Reimbursement liability................. 1,018 1,018
Current portion of financing obligation. 99 106
Other................................... 344 375
------ ------
Total accrued expenses and
other liabilities..................... $3,835 $3,308
====== ======
</TABLE>
LONG-TERM DEBT AND FINANCING OBLIGATION
Long-term debt and financing obligation at December 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Secured debt, interest rate of 30-day
LIBOR + 4%, matures September 1, 2001... $12,292 $12,292
Financing obligation..................... 495 629
Other.................................... 36 --
------- -------
12,823 12,921
Less: current portion.................... 99 106
------- -------
Total long-term debt and financing
obligation.............................. $12,724 $12,815
======= =======
</TABLE>
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1999
In August 1998, the Company's principal subsidiaries, Miraval and
Sierra Tucson, completed a debt refinancing loan agreement with
Lehman Brothers Holdings Inc. The amount of the three-year loan
was $14,000, of which $2,000 was reserved for working capital
($1,000) and for capital improvements ($1,000). $700 of the
working capital portion was available in 1998 and $300 in 1999.
As of December 31, 1999, $292 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, 2000. Proceeds from
the transaction were also 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 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 maturity date may be
extended by one year with the consent of the lender and payment
of a 2% fee. The fair value of the debt financing loan agreement
approximates its carrying value given it bears interest at a
variable rate and matures in the near term. The Company
purchased a rate cap to protect against extreme upward movement
in the LIBOR rate; the maximum rate to be paid by the Company is
10.5%, while the rate at December 31, 1999, was 9.625%. The loan
agreement contains various operational and financial restrictions
including restrictions on additional debt without the lender's
approval. At December 31, 1999, the Company was in compliance
with all such operational and financial restrictions.
The debt refinancing loan agreement is secured by a first lien
against all real and personal property of Miraval and 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 in consideration of its guarantee.
In November 1996, the Company entered into a secured loan
agreement with AP LOM, LLC an affiliate of Apollo Real Estate
Advisors, L.P. in the amount of $13,090 contemporaneously with
the issuance of preferred stock to this entity. The above-
mentioned debt refinancing loan agreement extinguished the debt
portion of the Apollo loan; however, Apollo retained its equity
position. In 1998, an extraordinary charge to earnings of $264
occurred due to the early extinguishment of this long-term debt
as a result of the Lehman debt refinancing arrangement.
In December 1994, the Company sold a facility for $1,000 (the
facility's appraised value) to ODE, L.L.C., an entity controlled
by the Chairman of the Company's Board of Directors. The Company
simultaneously leased this facility for a term of seven years, at
an annual cost of $150, payable in quarterly installments. This
transaction has been accounted for as a financing as a result of
the Company's continuing involvement with the facility. The
Company recently amended its lease with ODE to provide for a
lease term that coincides with the State Land Lease. The revised
building lease agreement gives the Company the option of
repurchasing the buildings at fair market value or leasing the
buildings at fair market rental value.
Future maturities of long-term debt and financing obligation at
the date indicated are as follows:
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
2000................... $ 99
2001................... 12,429
2002................... 141
2003................... 154
-------
$12,823
=======
</TABLE>
For years ended December 31, 1999, 1998, and 1997, interest paid
was $1,211, $1,471, and $161, respectively.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1999
BUSINESS SEGMENT AND OTHER OPERATING DATA
The Company's business is organized on a services basis, and the
Company's Chief Operating Decision Maker (the Company's Chairman,
President and Chief Executive Officer) assesses performance and
allocates resources on this basis. The information provided in
the following section is representative of the information used
by the Chief Operating Decision Maker in deciding how to allocate
resources and in assessing performance.
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 is 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 health leisure resort and spa 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.
The Company's Chief Operating Decision Maker evaluates
performance and allocates resources based on pretax income
(loss). The accounting policies of the Segments are the same as
those described in the Summary of Significant Accounting
Policies. There are no sales between the Segments, although
fixed assets are occasionally transferred between Segments at net
book value on the transfer date. Corporate activity benefiting
the Company as a whole is separately identified below. No single
customer accounted for more than 10% of either Segment's revenue
in 1999, 1998 or 1997.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1999
Information about the Company's operations in different business
segments for the years ended December 31, 1999, 1998 and 1997 is
as follows:
<TABLE>
<CAPTION>
Corporate
Health & and
Treatment Leisure OtherItems Consolidated
--------- -------- ---------- ------------
<S> <C> <C> <C> <C>
1999
- -------------------------------
Total revenue................... $16,842 $13,464 $ 44 $30,350
Income (loss) before
income tax benefit............. 4,924 ( 2,604) ( 1,169) 1,151
Identifiable assets............. 7,372 30,646 1,813 39,831
Capital expenditures and
intersegment transfers, net.... 1,053 380 ( 28) 1,405
Depreciation & amortization
expense........................ 334 2,344 18 2,696
Interest expense................ 772 435 4 1,211
1998
- -------------------------------
Total revenue................... $13,904 $12,194 $ 186 $26,284
Income (loss) before
extraordinary item............. 3,801 ( 2,541) ( 1,972) ( 712)
Extraordinary item.............. -- -- ( 264) ( 264)
Net income (loss)............... 3,801 ( 2,541) ( 2,236) ( 976)
Identifiable assets............. 4,111 32,129 1,575 37,815
Capital expenditures and
intersegment transfers, net.... ( 1,878) 4,370 ( 1,630) 862
Depreciation & amortization
expense........................ 325 2,092 175 2,592
Interest expense................ 308 165 876 1,349
1997
- -------------------------------
Total revenue................... $11,702 $ 8,754 $ 196 $20,652
Income (loss) before
income tax benefit............. 2,935 ( 4,873) ( 2,686) ( 4,624)
Identifiable assets............. 4,257 30,726 4,028 39,011
Capital expenditures and
intersegment transfers, net.... 478 1,208 ( 738) 948
Depreciation & amortization
expense........................ 361 1,944 271 2,576
Interest expense................ 1 -- 1,125 1,126
</TABLE>
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1999
STOCKHOLDERS' EQUITY
Preferred Stock
In November 1996, the Company's Board of Directors created two
series of Preferred Stock ("Series A" and "Series B"). The
Company authorized 46,065 shares of Series A stock and 28,956
shares of Series B stock. At December 31, 1996, 17,109 shares of
Series A and 28,956 shares of Series B were outstanding and
classified as mandatorily redeemable preferred stock in the
balance sheet. The Series B Preferred Stock was converted into
Series A Preferred Stock on January 29, 1997. The mandatory
redemption provisions applicable to the outstanding preferred
stock were extinguished as a result of this conversion,
therefore, the amounts received from the sale of such stock are
classified as equity in the accompanying consolidated balance
sheets. At December 31, 1999 and 1998, 46,065 shares of Series A
are outstanding. A total of approximately 5,200,000 shares of
common stock have been reserved for conversion of preferred stock
and exercise of warrants held by the preferred shareholder.
Significant terms and conditions of the Preferred Stock are
described in the following paragraphs.
The holders of Series A stock are not entitled to receive
dividends except upon an event of default, in which event the
dividend rate on the Series A Preferred Stock will be 18% per
annum. So long as any shares of Preferred Stock remain
outstanding, the Company may not declare or pay any cash dividend
or make any other distributions with respect to the Common Stock.
In the event of any liquidation, dissolution or winding-up of the
Company, the holders of Preferred Stock shall be entitled to a
liquidation preference over the holders of Common Stock in the
amount of any accrued but unpaid dividends. There are no other
liquidation preferences.
The holders of Series A stock are entitled to vote on all matters
presented to the Company's stockholders for a vote and, except
with respect to the election of Directors, each share of Series A
stock entitles the holder thereof to such number of votes per
share as equals the number of shares of the Common Stock into
which such shares of Series A stock is then convertible.
Initially, each share of Series A stock is convertible into 100
shares of Common Stock. In addition, the holders of Series A
stock are entitled to vote separately as a separate class on all
matters other than the election of directors. This means that
matters submitted for a vote of the stockholders of the Company
must receive the approval of the requisite percentage of the
holders of Common Stock (with the holders of Series A stock being
entitled to vote on an "as converted" basis) as well as of the
holders of the Series A stock. In addition, the holders of
Series A stock, as a class, are entitled to elect three directors
to the Company's Board of Directors ("Preferred Directors"). In
the event of a default, the holders of Series A stock become
entitled to elect a majority of the Company's Board of Directors.
The Company may not redeem the Preferred Stock at any time before
January 1, 2001. The preferred stock is redeemable by the
Company at $92.26 per share (issuance price).
The Company issued a total of 600,000 warrants in 1996 which are
exercisable into 600,000 common shares at an exercise price of
$1.50. These warrants are exercisable through November 13, 2006.
The fair value of the warrants at issuance date was credited to
additional paid-in capital.
Stock Option Plans
At December 31, 1999, 1,993,000 shares of common stock were
reserved for the exercise of options under the Company's 1992 and
1990 stock option plans. Options to purchase shares of common
stock are granted with an exercise price equal to or greater than
the fair market value on the dates of grant, and are exercisable
over periods ranging from three to ten years. Options may be
exercised in installments generally commencing one year after the
dates of grant. All options become fully vested upon the
acquisition of the Company or a merger in which the Company is
not the surviving entity.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1999
In 1993, the Company established a Non-Employee Director Stock
Option Plan (the "DSO Plan"), which provides for the automatic
granting of fully vested options to purchase shares of common
stock to members of the Board of Directors who are not employees
of the Company. At December 31, 1999, 600,000 shares of common
stock were reserved for issuance under the DSO Plan.
The fair value of these options was estimated at the dates of
grant using a Black-Scholes option pricing model with the
following assumptions for 1999, 1998 and 1997, respectively: risk-
free interest rates ranging from 4.73% to 6.01%, 4.52% to 5.69%,
and from 6.10% to 6.52%, respectively; dividend yields of 0.0%;
volatility factor of the expected market price of the Company's
common stock of .639; and an expected life of an option of 5
years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the use of highly subjective assumptions
including the expected stock price volatility. Because the
Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
SFAS No. 123 requires the Company to present pro forma disclosure
for options granted subsequent to 1995. These disclosures are
not indicative of future amounts, as options granted prior to
1995 have not been included as provided by SFAS No. 123. For
purposes of pro forma disclosures, the estimated fair value of
stock options was amortized to expense over the vesting period.
Pro forma net loss and loss per share are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Income (loss):
As reported................... $ 1,151 $( 976) $( 4,624)
Pro forma..................... 918 ( 1,142) ( 4,943)
Basic earnings (loss)
per share:
As reported................... $ 0.13 $( 0.11) $( 0.54)
Pro forma..................... 0.11 ( 0.13) ( 0.58)
Diluted earnings (loss)
per share:
As reported................... $ 0.09 $( 0.11) $( 0.54)
Pro forma..................... 0.07 ( 0.13) ( 0.58)
</TABLE>
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1999
The following table summarizes the cumulative activity under the
Company's incentive stock option plans:
<TABLE>
<CAPTION>
Options Fully Option Price Weighted Avg.
Outstanding Vested Options Range (Per Share) Exercise Price
----------- -------------- ----------------- --------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 1,353,364 846,188 $ 1.25 - $9.50 $3.76
Granted 219,500 1.50 - 2.75 2.61
Canceled (418,155) 2.63 - 9.50 3.72
Exercised -- -- --
---------- --------- --------------- --------
Balance at December 31, 1997 1,154,709 936,812 1.25 - 6.00 3.57
Granted 238,300 1.00 - 2.00 1.31
Canceled (309,584) 1.25 - 6.00 3.29
Exercised -- -- --
---------- ---------- --------------- --------
Balance at December 31, 1998 1,083,425 898,972 1.00 - 6.00 3.15
Granted 326,250 1.00 - 1.50 1.38
Canceled ( 61,350) 1.00 - 5.75 2.77
Exercised -- -- --
----------- ---------- --------------- --------
Balance at December 31, 1999 1,348,325 1,069,303 $ 1.00 - $6.00 $2.74
=========== ========== =============== ========
</TABLE>
No options were granted in 1999, 1998 or 1997 with an exercise
price above market price on the dates of grant. The weighted
average fair value of options granted with an exercise price
equal to market price on the dates of grant during 1999, 1998 and
1997 was $.81, $.77, and $1.52, respectively. The remaining
average contractual life for options outstanding as of December
31, 1999, was 6.63 years. The weighted average exercise price
for exercisable options was $3.04, $3.35, and $3.58, at December
31, 1999, 1998 and 1997, respectively.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1999
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying value of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes. The components of the deferred tax assets, all
noncurrent, at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Capitalized business expansion costs..... $ 547 $ 1,079
Tax basis of fixed assets in excess of
book basis.............................. 1,726 1,638
Non-deductible reserves.................. 551 404
State net operating loss carryforward.... 1,439 2,701
Federal net operating loss carryforward.. 8,192 8,233
Minimum tax credit....................... 258 258
Other, net............................... 45 85
---------- ----------
Total deferred tax assets................ 12,758 14,398
Valuation allowance...................... (12,758) (14,398)
---------- ----------
Net deferred tax assets.................. $ -- $ --
========== ==========
</TABLE>
Management has established a valuation allowance equal to the
deferred tax assets at December 31, 1999 and 1998, based upon the
likelihood that such deferred tax assets will not be realized in
the near term.
At December 31, 1999, the Company had approximately $24,000 of
federal and state net operating loss carryforwards which expire
for federal purposes during the years 2011 through 2019 and for
state purposes during the years 2000 through 2004. In addition,
at December 31, 1999, the Company has approximately $258 in
Alternative Minimum Tax Credits for federal tax purposes which do
not expire. The majority of the Company's net operating loss and
minimum tax credit carryforwards are subject to annual
restrictions limiting their utilization in accordance with
Internal Revenue Code Section 382 as a result of an ownership
change which occurred during 1996.
The differences between the income tax benefit at the statutory
rate and the actual income tax benefit is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate............. 34.0 % (34.0)% (34.0)%
Increase in taxes:
Change in valuation allowance...... (34.0) 34.0 34.0
------- ------- -------
Effective income tax rate........... 0.0 % 0.0 % 0.0 %
======= ======= =======
</TABLE>
Federal income tax payments of $30 were made during the year
ending December 31, 1999. No payments were made in the years
ending December 31, 1998 and 1997.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1999
OPERATING LEASES
The Company leases land, vehicles and equipment under operating
leases. Future annual minimum lease payments under noncancelable
operating leases at December 31, 1999, are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 263
2001 220
2002 181
2003 184
2004 209
Thereafter 13,912
-------
$14,969
=======
</TABLE>
Future payments under the land lease increase as the number of
beds operated by Sierra Tucson increases in accordance with the
levels specified in the agreement. Total rental expense
recognized under operating leases for 1999, 1998, and 1997, was
$374, $355, and $287, respectively.
EMPLOYEE RETIREMENT PLAN
The Company has a defined contribution plan that provides for
discretionary employer contributions and for optional employee
contributions which are matched by the Company at a maximum rate
of 50% of the employees' contributions up to amounts prescribed
by law. All employees who meet minimum age and service
requirements are eligible to participate in the plan. It is the
Company's policy to fund plan contributions as accrued. For 1999,
1998, and 1997, employer matching and discretionary contributions
to the plan were approximately $160, $143, and $142,
respectively.
RELATED PARTY TRANSACTIONS
A member of the Company's Board of Directors is a member of an
asset management firm that provided management and financial
services to the Company in 1999 and 1998. Fees paid for services
in 1999 and 1998 were $60, and $84, respectively. Management
believes such fees are reasonable and comparable to those of
other institutions providing similar services.
The Company leases a facility from an entity controlled by the
President and CEO of the Company and Chairman of the Company's
Board of Directors. See note entitled Long-Term Debt and
Financing Obligation for additional information.
An entity controlled by the President and CEO of the Company and
Chairman of the Company's Board of Directors provided consulting
services to the Company; in 1999 and 1998 total fees of $267, and
$71, respectively, were paid to that entity. Of the $267 paid in
1999, $100 was a Compensation Committee approved bonus for 1997
and 1998 which was paid in 1999; and $100 was a Compensation
Committee approved bonus for 1999 which was paid in 1999.
An individual who became a member of the Company's Board of
Directors on November 15, 1996, is a member of a law firm which
represents the Company on real estate and transactional issues;
total fees of $51 and $107 were paid to that firm in 1999 and
1998, respectively.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s, except share and per share amounts)
December 31, 1999
Effective October 1, 1996, the Company sold HHHI to the former
President and CEO of the Company for an amount which equaled the
Company's purchase price plus advances to that subsidiary from
the purchase through disposition date. The Company agreed to
indemnify the related party for up to $130 upon resale of the
HHHI real property to an unaffiliated third party. The Company
will receive up to $130, after agreed upon deductions, in the
event of a gain on the sale of the property.
CONTINGENCIES
The Company is involved in various litigation and administrative
proceedings arising in the normal course of business. In the
opinion of management, any liabilities that may result from these
claims will not, individually or in the aggregate, have a
material adverse effect on the Company=s financial position,
results of operations or cash flows.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes certain quarterly financial data:
<TABLE>
<CAPTION>
Income Net Income (loss)
(Loss) Per Share of
Before Net Common Stock
Total Operating Extraordinary Income Before Ext. Item
Revenue Expenses Item (Loss) Basic Diluted
------- --------- ------------- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C>
1999 Quarter ended:
March 31................ $8,137 $7,161 $ 976 $ 976 $0.11 $ 0.07
June 30................. 7,627 7,226 401 401 0.05 0.03
September 30............ 6,650 7,079 ( 429) ( 429) (0.05) (0.05)
December 31............. 7,936 7,733 203 203 0.02 0.02
1998 Quarter ended:
March 31................ $6,847 $6,574 $ 273 $ 273 $0.03 $ 0.02
June 30................. 7,323 7,105 218 218 0.03 0.02
September 30............ 5,542 6,348 ( 806) (1,070) (0.09) (0.09)
December 31............. 6,572 6,969 ( 397) ( 397) (0.04) (0.04)
</TABLE>
The Company recorded an extraordinary charge for early
extinguishment of debt of $264 in the third quarter of 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to instruction G(3) to Form 10-K, Items 10, 11, 12
and 13 are omitted because the Company will file a definitive
proxy statement (the "Proxy Statement") pursuant to Regulation
14A under the Securities Exchange Act of 1934 no later than 120
days after the close of the fiscal year. The information
required by such Items will be included in the definitive proxy
statement to be so filed for the Company's annual meeting of
stockholders scheduled for May 24, 2000, and is hereby
incorporated by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Reference is made to the listing on page 15 for a
list of all financial statements filed as a
part of this report.
(2) Financial Statement Schedules. The following financial
statement schedules are required by Item 14(d). All
other schedules are omitted because they are not applicable, or
not required, or because the required information is
included in the consolidated financial statements or notes thereto.
Schedule II. Valuation and Qualifying Accounts
(3) Exhibits. The following exhibits are incorporated by reference as
indicated or are filed as part of this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Document Page
- ------- ----------------------------------------------------- ------------
<S> <C> <C>
3.1 Certificate of Incorporation (1)
3.2 Amended Restated By-Laws (5)
4.1 Specimen Common Stock Certificate (1)
4.2 Certificate of Designation, Preferences and Rights of (11)
the Convertible Preferred Stock, Series A and Cumulative
Preferred Stock, Series B of NextHealth, Inc.
10.26 Stock Bonus and Repurchase Agreement, dated November 18, (1)
1988, between John H. Schmitz and Rita F. Schmitz and Sierra
Tucson/Properties, Inc., as amended on August 31, 1989
10.33 1989 Stock Option Plan (1)
10.47 1990 Stock Option Plan (2)
10.49 Commercial lease dated as of March 15, 1991, between the (3)
State of Arizona and Sierra Tucson AC, Inc., relating to
lease of Adolescent Care facility site
10.51 Form of Indemnity Agreement* (4)
10.53 1992 Stock Option Plan (3)
10.54 Non-Employee Directors Stock Option Plan (5)
10.56 Real Estate Sale Agreement and industrial Building Lease (6)
for Sierra Tucson AC, Inc. Adolescent Center dated
December 28, 1994, and December 29, 1994, respectively.
10.57 Onsite Training and Consulting, Inc. Stock Purchase (6)
Agreement dated January 13, 1995
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Document Page
- ------- --------------------------------------------------------- ------------
<S> <C> <C>
10.58 Severance Agreement, General Release, Covenant Not to (6)
Sue between the Company and William T. O'Donnell, Jr.,
dated January 20, 1995
10.59 Elements of compensation - Wayne M. Morrison, Vice President/ (7)
Chief Financial Officer
10.60 Note Payable between NextHealth, Inc. and Sundt Corporation (8)
dated April 10, 1996 (without exhibits)
10.61 Asset Purchase Agreement by and among NextHealth, Inc. (8)
and Hilton Head Health Institute, Inc. dated February 29,
1996 (without exhibits)
10.62 Amendment 1 to Note Payable between NextHealth, Inc. and (9)
Sundt Corporation dated June 28, 1996
10.63 Loan Agreement between NextHealth, Inc. and Mortgages,Ltd. (9)
dated June 25, 1996 (without exhibits)
10.64 Secured Promissory Note between NextHealth, Inc. and (9)
Mortgages, Ltd. dated June 25, 1996
10.65 Deed of Trust, Assignment of Rents and Security Agreement (9)
between NextHealth, Inc. and Mortgages, Ltd. dated June 25, 1996
10.66 Security Agreement between Sierra Tucson, Inc. and Mortgages, (9)
Ltd. dated June 25, 1996 (without exhibits)
10.67 Security Agreement between Sierra Healthstyles, Inc. and (9)
Mortgages, Ltd. dated June 25, 1996 (without exhibits)
10.68 Guaranty between Sierra Tucson, Inc. and Mortgages, Ltd. (9)
dated June 25, 1996
10.69 Guaranty between Sierra Healthstyles, Inc. and Mortgages, (9)
Ltd. dated June 25, 1996
10.70 Asset Purchase Agreement between Sierra Tucson, Inc. and (10)
Soften Realty, LLC
10.71 Operating Agreement of Soften Realty, Inc. between (10)
NextHealth, Inc. and AP NH, LLC
10.72 Security Agreement between Sierra Tucson, Inc. and (10)
Soften Realty, LLC
10.73 Non-negotiable Security Promissory Note (10)
10.74 Assumption agreement (10)
10.75 Bill of Sale and Assignment between Sierra Tucson, Inc. (10)
and Soften Realty, LLC
10.76 Preferred Stock and Warrant Purchase Agreement between (10)
NextHealth, Inc. and AP LOM LLC
10.77 Registration and Pre-emptive Rights Agreement between (10)
NextHealth, Inc. and AP LOM LLC
10.78 Credit Agreement between NextHealth, Inc. and AP LOM LLC (10)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Document Page
- ------- ---------------------------------------------------------- ------------
<S> <C> <C>
10.79 Pledge Agreement between NextHealth, Inc. and AP LOM LLC (10)
10.80 Term Note A between NextHealth, Inc. and AP LOM, LLC (11)
10.81 Term Note B between NextHealth, Inc. and AP LOM, LLC (11)
10.82 Warrant for 500,000 shares of Common Stock (11)
10.83 Deed of Trust for the use and benefit of AP LOM, LLC (11)
10.84 Guaranty made by NextHealth's subsidiaries (11)
10.85 General Security Agreement among NextHealth's subsidiaries (11)
and AP LOM, LLC
10.86 Loan Agreement made by Sierra Health-Styles, Inc., and (12)
Sierra Tucson, LLC in favor of Lehman Brothers Holdings Inc.
10.87 Mortgage Note made by Sierra Health-Styles, Inc., and (12)
Sierra Tucson, LLC in favor of Lehman Brothers Holdings Inc.
10.88 Commercial long-term lease dated October 23, 1998, between (13)
the State of Arizona State Land Department and Sierra Tucson,
L.L.C. relating to the Sierra Tucson site.
10.89 Amended and Restated First Amendment to Lease, dated March 15, (14)
2000, between ODE, L.L.C and Sierra Tucson, L.L.C. relating to
the Sierra Tucson buildings.
21.1 Subsidiaries 41
23.1 Consent of Ernst & Young LLP, Independent Auditors 42
27 Financial Data Schedule
</TABLE>
(1) Incorporated by reference from Company's Form S-1 Registration
Statement, File No. 33-31020, declared effective in October 1989.
(2) Incorporated by reference from the Company's Form 10-K for the year
ended December 31, 1990.
(3) Incorporated by reference from the Company's Form 10-Q for the
quarter ended March 31, 1991.
(4) Incorporated by reference from the Company's Form S-1 Registration
Statement declared effective on June 20, 1991.
(5) Incorporated by reference from the Company's Form 10-K for the year
ended December 31, 1992.
(6) Incorporated by reference from the Company's Form 10-K for the year
ended December 31, 1994.
(7) Incorporated by reference from the Company's Form 10-K for the year
ended December 31, 1995.
(8) Incorporated by reference from the Company's Form 10-Q for the
quarter ended March 31, 1996.
(9) Incorporated by reference from the Company's Form 10-Q for the
quarter ended June 30, 1996.
(10) Incorporated by reference from the Company's Form 10-Q/A No. 1
for the quarter ended September 30, 1996.
<PAGE>
(11) Incorporated by reference from the Company's Form 10-Q/A No. 2
for the quarter ended September 30, 1996.
(12) Incorporated by reference from the Company's Form 10-Q/A No. 1
for the quarter ended June 30, 1998.
(13) Incorporated by reference from the Company's Form 10-K for
the year ended December 31, 1998.
(14) Filed as part of this Annual Report on Form 10-K.
* The Company has entered into indemnification agreements
with certain of its directors, one of whom is an
executive officer, and certain former directors.
Pursuant to the Instructions accompanying Item 601 of
Regulation S-K, the Company has not filed each such
indemnification agreement.
(b) Reports on Form 8-K. None.
(c) Exhibits Required by Item 601 of Regulation S-K. See
(a)(3) above.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NEXTHEALTH, INC.
Dated: March 29, 2000 BY: /s/ William T. O'Donnell, Jr.
------------------------------
WILLIAM T. O'DONNELL, JR.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/William T. O'Donnell, Jr. Chairman of the Board of Directors March 29, 2000
- ---------------------------- President and Chief Executive Officer
William T. O'Donnell, Jr. (Principal Executive Officer)
/s/ Neil E. Jenkins Director March 29, 2000
- ----------------------------
Neil E. Jenkins
/s/ George L. Ruff Director March 29, 2000
- ----------------------------
George L. Ruff
/s/ Stephen L. Berger Director March 29, 2000
- ----------------------------
Stephen L. Berger
/s/ Lee S. Neibart Director March 29, 2000
- ----------------------------
Lee S. Neibart
/s/ Michael L. Ashner Director March 29, 2000
- ----------------------------
Michael L. Ashner
/s/ Alfred Trivilino Director March 29, 2000
- ----------------------------
Alfred Trivilino
/s/ Loree Thompson (Principal Financial and March 29, 2000
- --------------------------- Accounting Officer)
Loree Thompson
</TABLE>
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(000s)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at (Charged to Balance at
Beginning of Costs and End of
Description Period Expenses) Deductions Period
----------- ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1999:
Allowance for doubtful
accounts $ 278 $ 370 $ 290 $ 358
Year ended December 31, 1998:
Allowance for doubtful
accounts $ 348 $ 159 $ 229 $ 278
Year ended December 31, 1997:
Allowance for doubtful
accounts $ 513 $( 41) $ 124 $ 348
</TABLE>
<PAGE>
Exhibit 21.1
NEXTHEALTH, INC.
Subsidiary Schedule
<TABLE>
<CAPTION>
Subsidiaries State of Incorporation Doing Business As
- ------------ ---------------------- -----------------
<S> <C> <C>
Sierra Tucson, LLC Delaware Sierra Tucson
Sierra Health-Styles, Inc. Delaware Miraval
Sierra Tucson Educational
Materials, Inc. (STEM) Arizona
NextHealth Water Resources, Inc. Arizona
Sierra Tucson AC, Inc. (STAC) Arizona
Miraval Service Corporation, Inc. Arizona
Old Corporation, Inc. (inactive) Arizona
Onsite Workshops, Inc. (inactive) Arizona
The NextHealth Institute, Inc. Arizona
(inactive)
</TABLE>
<PAGE>
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-44620) pertaining to the Sierra Tucson
Companies, Inc., 1992 Stock Option Plan and in the Registration
Statement (Form S-8 No. 33-38608) pertaining to the Sierra Tucson
Companies, Inc., 1990 Stock Option Plan of our report dated
January 28, 2000, with respect to the consolidated financial
statements and schedule of the Company included in the Annual
Report (Form 10-K) for the year ended December 31, 1999.
/s/ Ernst & Young LLP
------------------------
ERNST & YOUNG LLP
Tucson, Arizona
March 23, 2000
AMENDED AND RESTATED FIRST AMENDMENT TO LEASE
This Amended and Restated First Amendment to Lease dated as of
March 15, 2000 by and between ODE, L.L.C., an Illinois limited
liability company, as Lessor ("ODE") and SIERRA TUCSON, L.L.C., a
Delaware limited liability company, as Lessee ("Sierra").
WHEREAS, ODE and Sierra made and entered into a First
Amendment to Lease dated May 31, 1998 with respect to certain
premises described therein (the "Premises");
WHEREAS, ODE and Sierra wish to clarify certain terms,
provisions and conditions of the First Amendment as hereinafter
stated with respect to, inter alia, the length of the term
hereof and the rent to be paid hereunder.
NOW, THEREFORE, in consideration of the mutual covenants
herein contained and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, it is
agreed as follows:
1. Section R-3 of the Lease is hereby deleted and the
following substituted in lieu thereof:
"R-3. Lessee is hereby granted the right, privilege and
option to renew this Lease by delivering written notice to
Lessor not less than twelve (12) months prior to the
expiration hereof for five (5) additional consecutive ten (10)
year terms or such shorter period or longer period as may be
remaining under and pursuant to that certain Commercial
Lease Long-term Lease No. 03-103445 with respect to the
Premises by and between the State of Arizona, as lessor, and
Lessee, as lessee."
2. The first grammatical paragraph of Section R-4(b)
shall be deleted and the following substituted in lieu thereof:
"R-4(b). Lessee shall pay Lessor rent for each Option Term
based upon an independent fair rental value appraisal of the
Premises (the "Fair Rental Value") for such Option Term
submitted by Lessee together with the notice delivered
pursuant to Section R-3 above. In the event that Lessor
disputes the Fair Rental Value as determined by such
appraisal, the following procedure shall govern for
purposes of determining Fair Rental Value."
3. Subsection (iii) of Section R-4(b) of the Lease is
hereby deleted in its entirety and the following substituted in lieu
thereof:
"(iii) The Board of Appraisers shall, within thirty (30) days
following their appointment, report their appraisal, or the
appraisal of a majority of them, in writing to the respective
parties to this Lease, and a majority appraisal shall be
final and binding upon the parties in all respects;
provided, in no event, should the Fair Rental Value be less
than 110% of the Rent payable during the later of the Initial
Term or immediately preceding Option Term."
4. The following shall be added to Section R-16 of the Lease:
"Lessee shall not construct additional buildings or
improvements on the Land (as defined in the Principal
Lease) without the prior written consent of Lessor."
In all other respects, the balance of the terms and
provisions of this Lease shall remain unmodified and in full
force and effect.
SIERRA TUCSON,L.L.C.,a Delaware limited
liability company
By: NEXTHEALTH, INC., a Delaware
corporation, its Manager
By: /s/ Bertha B. Kenny
-----------------------------
Bertha B. Kenny
ODE, L.L.C., an Illinois limited liability
company
By: /s/ William T. O'Donnell, Jr.
-----------------------------------
William T. O'Donnell, Jr.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Audited Consolidated Financial Statements for the year ended December
31, 1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 3,803
<SECURITIES> 0
<RECEIVABLES> 1,511
<ALLOWANCES> 337
<INVENTORY> 0
<CURRENT-ASSETS> 5,988
<PP&E> 49,267
<DEPRECIATION> 15,940
<TOTAL-ASSETS> 39,831
<CURRENT-LIABILITIES> 4,723
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 21,995
<TOTAL-LIABILITY-AND-EQUITY> 39,831
<SALES> 0
<TOTAL-REVENUES> 30,350
<CGS> 0
<TOTAL-COSTS> 24,922
<OTHER-EXPENSES> 2,696
<LOSS-PROVISION> 370
<INTEREST-EXPENSE> 1,211
<INCOME-PRETAX> 1,151
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,151
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,151
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.09
</TABLE>
