UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
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
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(Registrant's Telephone Number, including Area Code)
N/A
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(Former name, former address and former fiscal year, if changed
since last report).
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
On August 1, 2000, there were 8,619,418 shares of the
registrant's Common Stock outstanding.
Reference is made to the listing beginning on page 16 of all
exhibits filed as a part of this report.
<PAGE>
NEXTHEALTH, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2000
(unaudited) and December 31, 1999.................. 3
Unaudited Consolidated Statements of Operations for the
three and six-month periods ended June 30, 2000 and 1999 4
Unaudited Consolidated Statements of Cash Flows for the
six-month periods ended June 30, 2000 and 1999.......... 5
Unaudited Consolidated Statements of Changes in
Stockholders' Equity for the six-month period ended
June 30, 2000........................................... 6
Unaudited Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................... 16
Item 4. Submission of Matters to a Vote of Security Holders.... 16
Item 6. Exhibits and Reports on Form 8-K....................... 16
Signatures..................................................... 17
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000s, except share and per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents.................... $ 9,348 $ 3,803
Accounts receivable, less allowance for
doubtful accounts of $265 and $337,
respectively........................... 1,144 1,174
Prepaid expenses........................ 721 438
Other current assets.................... 592 573
--------- --------
Total current assets.................. 11,805 5,988
Property and equipment, net.............. 32,564 33,327
Long-term receivables, less allowance
for doubtful accounts of $18 and $21,
respectively............................ 53 64
Intangible assets, less amortization
of $419 and $310, respectively.......... 322 431
Other assets............................. 21 21
--------- ---------
Total assets.......................... $44,765 $39,831
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade................. $ 617 $ 888
Accrued expenses and other liabilities.. 4,148 3,835
-------- ----------
Total current liabilities............. 4,765 4,723
Minority interest........................ 472 389
Long-term debt and financing obligation.. 12,660 12,724
--------- ----------
Total liabilities..................... 17,897 17,836
Stockholders' Equity:
Preferred stock-undesignated, $.01 par
value, 3,924,979 shares authorized,
no shares outstanding................. -- --
Preferred stock, Series A, $.01 par value,
46,065 shares authorized; 46,065 shares
outstanding at June 30, 2000
and December 31, 1999................. -- --
Common stock, $.01 par value, 16,000,000
shares authorized; 8,619,488 shares
outstanding at June 30, 2000 and 8,554,938
shares outstanding at December 31, 1999.. 86 86
Additional paid-in capital............. 48,136 48,012
Accumulated deficit.................... (21,354) (26,103)
--------- ---------
Total stockholders' equity............ 26,868 21,995
--------- ---------
Total liabilities and
stockholders' equity................. $ 44,765 $39,831
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000s, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
------ ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Net operating revenue.......... $10,437 $ 7,606 $21,145 $15,698
Other revenue.................. 81 21 143 66
-------- -------- -------- --------
Total net revenue............ 10,518 7,627 21,288 15,764
Operating expenses:
Salaries and related benefits.. 3,958 3,361 7,918 6,722
General and administrative..... 3,271 2,902 6,467 5,729
Depreciation and amortization.. 704 667 1,399 1,338
Interest expense............... 333 296 658 598
-------- ------- -------- -------
Total operating expenses..... 8,266 7,226 16,442 14,387
-------- -------- -------- -------
Income before income taxes........ 2,252 401 4,846 1,377
Income tax provision.............. 97 -- 97 --
-------- -------- -------- -------
Net income........................ $ 2,155 $ 401 $ 4,749 $ 1,377
======== ======== ======== ========
Shares used in basic per share
calculation..................... 8,619,488 8,554,938 8,619,488 8,554,938
========= ========= ========= =========
Shares used in diluted per share
calculation.................... 14,127,030 13,169,808 14,103,780 13,183,875
========== ========== ========== ==========
Basic income per common
share.......................... $ .25 $ .05 $ .55 $ .16
========== ========== ========== =========
Diluted income per common
share.......................... $ .15 $ .03 $ .34 $ .10
========== ========== ========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 4,749 $ 1,377
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization.................. 1,399 1,338
Provision for bad debts........................ 63 110
Provision for income tax....................... 97 --
Minority Interest.............................. 83 46
Charge for non-employee options................ 4 --
Changes in operating assets and liabilities:
Increase in assets:
Accounts receivable............................ ( 22) (477)
Other assets................................... (302) (115)
(Decrease) increase in liabilities:
Accounts payable, accrued expenses
and other liabilities......................... ( 78) 192
-------- --------
Net cash provided by operating activities.............. 5,993 2,471
Cash flows from investing activities:
Purchase of property and equipment................ (504) (856)
-------- --------
Net cash used in investing activities.................. (504) (856)
Cash flows from financing activities:
Proceeds from sale of stock....................... 120 --
Reduction of long-term borrowings and
financing obligation........................... (64) ( 63)
-------- ---------
Net cash provided by (used in) financing activities.... 56 ( 63)
-------- ---------
Net increase in cash and
equivalents.......................................... 5,545 1,552
Cash and equivalents at beginning of period............ 3,803 843
-------- ---------
Cash and equivalents at end of period.................. $ 9,348 $ 2,395
======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(000s, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Cost Shares Capital Deficit Equity
---- ------ --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1999 $ 86 8,554,938 $48,012 $(26,103) $ 21,995
Sale of common stock -- 64,550 120 -- 120
Issuance of non-employee
vested options 4 4
Net income for the
six months ended
June 30, 2000 -- -- -- 4,749 4,749
------- ----------- --------- ---------- --------
Balance at
June 30, 2000 $ 86 8,619,488 $48,136 $(21,354) $ 26,868
======= =========== ========= ========== =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
NEXTHEALTH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(000s)
(Unaudited)
NOTE 1 - ORGANIZATION
NextHealth, Inc. and subsidiaries (collectively, the "Company")
have operations in two principal business segments; Treatment,
and Health and Leisure through which it provides both behavioral
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 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.
NOTE 2 - BASIS OF PRESENTATION
The unaudited consolidated financial statements presented herein
should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999. The
accompanying interim consolidated financial statements as of June
30, 2000 and for the three and six-month periods ended June 30,
2000 and 1999 included herein are unaudited, but reflect, in the
opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary to fairly present the
results for such periods. Operating results for the three and
six-month periods ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ended
December 31, 2000.
NOTE 3 - NET INCOME PER SHARE
Shares used in the diluted per share calculation for the three
and six-month periods ending June 30, 2000 and 1999 are as stated
below:
<TABLE>
<CAPTION>
Three-month period Six-month period
ended June 30, ended June 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common shares 8,619,488 8,554,938 8,619,488 8,554,938
Convertible preferred shares 4,606,500 4,606,500 4,606,500 4,606,500
Dilutive options 301,042 8,370 277,792 22,437
Dilutive warrants 600,000 -- 600,000 --
--------- ---------- --------- --------
Diluted shares 14,127,030 13,169,808 14,103,780 13,183,875
========== ========== ========== ==========
</TABLE>
NOTE 4 - BUSINESS SEGMENT AND OTHER OPERATING DATA
The Company operates in two principal business segments;
Treatment, and Health and Leisure (the Segments) through which it
provides both behavioral 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 providing treatment
for substance abuse and a broad range of mental health and
behavioral disorders. 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 resort and spa which provides a unique vacation
<PAGE>
experience blending stress management and self-awareness programs
with a full range of personal services and recreational
activities. Substantially all revenues in this Segment result
from guest bookings, group bookings and retail sales of goods and
services.
Information about the Company's operations in different business
segments for the three and six-month periods ending June 30, 2000
and 1999 is as follows:
<TABLE>
<CAPTION>
Corporate
Health & and
Treatment Leisure Other Items Consolidated
--------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Three-month period ended
June 30, 2000
------------------------
Total revenue............... $ 5,631 $ 4,879 $ 8 $ 10,518
Income (loss) before
income tax benefit........ 2,359 241 (348) 2,252
Identifiable assets......... 10,545 32,166 2,054 44,765
Capital expenditures........ 145 70 -- 215
Depreciation & amortization
expense................... 95 605 4 704
Interest expense............ 212 120 1 333
Six-month period ended
June 30, 2000
------------------------
Total revenue............... $10,750 $10,514 $ 24 $ 21,288
Income (loss) before
income tax benefit........ 4,280 1,175 (609) 4,846
Identifiable assets......... 10,545 32,166 2,054 44,765
Capital expenditures........ 190 314 -- 504
Depreciation & amortization
expense................... 188 1,203 8 1,399
Interest expense............ 420 237 1 658
Three-month period ended
June 30, 1999
------------------------
Total revenue............... $ 4,155 $ 3,466 $ 6 $ 7,627
Income (loss) before
income tax benefit........ 1,229 (562) (266) 401
Identifiable assets......... 5,856 31,796 1,766 39,418
Capital expenditures........ 464 89 -- 553
Depreciation & amortization
expense................... 82 583 2 667
Interest expense............ 191 104 1 296
Six-month period ended
June 30, 1999
------------------------
Total revenue............... $ 8,166 $ 7,563 $ 35 $ 15,764
Income (loss) before
income tax benefit........ 2,576 (701) (498) 1,377
Identifiable assets......... 5,856 31,796 1,766 39,418
Capital expenditures........ 683 193 -- 876
Depreciation & amortization
expense................... 163 1,170 5 1,338
Interest expense............ 383 214 1 598
</TABLE>
<PAGE>
NOTE 5- INCOME TAXES
A provision for income taxes was recorded in the three and six-
month periods ended June 30, 2000 due to the existence of
Alternative Minimum Tax (AMT) requirements. A valuation
allowance was recorded to offset the deferred tax assets due to
recent cummulative losses. The Company does not expect to
recognize these deferred tax assets in the near term.
No provision for income taxes was recorded in the three or six-
month periods ended June 30, 1999 due to the existence of
deferred tax assets (net operating loss carryforwards) not
previously benefited.
NOTE 7 - RECLASSIFICATIONS
Certain prior period amounts in the unaudited consolidated
statements of cash flows have been reclassified to conform to the
presentation used in the second quarter 2000.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis relates to factors which
have affected the consolidated financial condition and results of
operations of the Company for the three and six-month periods
ended June 30, 2000. Reference should also be made to the
Company's unaudited consolidated financial statements and related
notes thereto included elsewhere in this document.
GENERAL
NextHealth, Inc. is a leading provider of a broad range of
alternative health care services which focus on prevention and
self care. For over fifteen years, the Company has provided
effective programs and services which address individual wellness
and quality-of-life issues through a whole person, mind-body
approach.
For the six-month period ended June 30, 2000, the Treatment segment
accounted for approximately 50% of the Company's operating
revenues and approximately 39% of its operating expenses, while
the Health and Leisure segment accounted for approximately 49% of
the Company's operating revenue and approximately 57% of its
operating expenses.
MATERIAL CHANGES IN FINANCIAL CONDITION
Cash and equivalents for the quarter increased $5.5 million to
$9.3 million or 146%. The increase is primarily a result of cash
flow from operating activities during the period. See
Consolidated Statements of Cash Flows for more information.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Three-month period ended June 30, 2000 compared to three-month
period ended June 30, 1999
The significant changes in results of operations and net cash
provided by operating activities for the three-month period ended
June 30, 2000, compared to the same period in 1999 are discussed
below.
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------------------------
2000 1999 % Change
---- ---- --------
<S> <C> <C> <C>
Financial results:
(000s, except per share amounts)
Total net revenue...................... $10,518 $ 7,627 37.9 %
Total operating expenses............... 8,266 7,226 14.4
Income before income taxes............. 2,252 401 461.6
Basic income per common share.......... .25 .05 400.0
Diluted income per common share........ .15 .03 400.0
Net cash provided by operating
activities............................ 2,121 411 416.1
Operating data:
Patient days - Sierra Tucson........... 5,921 5,312 11.5
Average daily census - Sierra Tucson... 65 58 12.1
Guest days - Miraval................... 9,524 7,474 27.4
Room occupancy - Miraval............... 66% 53% 24.5
</TABLE>
<PAGE>
For the three-month period ended June 30, 2000, net income before
income taxes increased $1.8 million to $2.3 million or 461.6%
over the comparable quarter of 1999. Net cash provided by
operating activities increased 416.1% resulting in net cash
provided by operating activities of $2.1 million compared to
$411,000 for the same period in 1999.
Total net revenue increased $2.9 million to $10.5 million, an
increase of 37.9% when compared to the same period in 1999.
Results reflect a 40.8% revenue increase at Miraval and a 35.7%
revenue increase at Sierra Tucson, when compared to the
corresponding quarter of 1999.
Salaries and related benefits decreased 6.4% as a percentage of
revenue during the period. Salaries and related benefits
increased $597,000 to $4.0 million, when compared to the same
period in 1999. The increase was attributable to staffing
adjustments related to increased occupancy at Miraval and
staffing adjustments related to increased census at Sierra
Tucson.
General and administrative expense decreased 7.0% as a percentage
of revenue during the second quarter of 2000. General and
administrative expense increased $369,000 to $3.3 million, an
increase of 12.7% when compared to the same period in 1999. The
increase was related to costs associated with increased occupancy
at Miraval and increased census at Sierra Tucson during the
quarter.
Interest expense increased $37,000 to $333,000 or 12.5% when
compared to second quarter 1999. The increase reflects the
higher interest rate on the loan outstanding in second quarter
2000 compared to the rate charged in the corresponding quarter of
1999.
The Company recognized pre-tax income of $2.3 million for the
three-month period ended June, 2000. A $97,000 provision for
income taxes was recorded during this period due to the existence
of Alternative Minimum Tax (AMT) requirements. A valuation
allowance was recorded to offset the deferred tax assets due to
recent cummulative losses. The Company does not expect to
recognize these deferred tax assets in the near term.
Six-month period ended June 30, 2000 compared to six-month period
ended June 30, 1999
The significant changes in results of operations and net cash
provided by operating activities for the six-month period ended
June 30, 2000, compared to the same period in 1999 are discussed
below.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------
2000 1999 % Change
---- ---- --------
<S> <C> <C> <C>
Financial results:
(000's except per share amounts)
Total net revenue....................... $ 21,288 $ 15,764 35.0 %
Total operating expenses................ 16,442 14,387 14.3
Income before income taxes.............. 4,846 1,377 251.9
Basic income per common share........... 0.55 0.16 243.8
Diluted income per common share......... 0.34 0.10 240.0
Net cash provided by operating activities 5,993 2,471 142.5
Operating data:
Patient days - Sierra Tucson............ 11,579 10,548 9.8
Average daily census - Sierra Tucson.... 64 58 10.3
Guest days - Miraval.................... 19,294 15,544 24.1
Room occupancy - Miraval................ 67% 56% 19.6
</TABLE>
For the six-month period ended June 30, 2000, net income before
income taxes increased $3.4 million to $4.8 million or 251.9%
over the same period of 1999. Net cash provided by operating
activities increased to $6.0 million compared to $2.5 million for
the six-month period of 1999; a 142.5% increase.
<PAGE>
Total net revenue for the six-month period ended June 30, 2000
increased $5.5 million or 35.1% to $21.3 million when compared to
the same period of 1999. The increase is attributable to a 31.7%
revenue increase at Sierra Tucson and a 39.0% revenue increase at
Miraval.
Salaries and related benefits decreased 5.5% as a percentage of
revenue during the six-month period. Salaries and related
benefits increased $1.2 million to $7.9 million or 17.8% when
compared to 1999. The increase is due primarily to staffing
adjustments related to increased occupancy at Miraval and
staffing adjustments related to increased census at Sierra
Tucson.
General and administrative expense decreased 6.0% as a percentage
of revenue during the six-month period ended June 30, 2000.
General and administrative expense increased $738,000 or 12.9% to
$6.5 million when compared to the same period of 1999. The
increase was related to costs associated with increased occupancy
at Miraval and increased census at Sierra Tucson during the
quarter.
Interest expense increased $60,000 to $658,000 or 10.0% when
compared to the previous year. The increase reflects the higher
rate on the loan outstanding in second quarter 2000 as compared
to the rate charged on the loan outstanding in second quarter
1999.
The Company recognized pre-tax income of $4.8 million for the six-
month period ended June 30, 2000. A $97,000 provision for income
taxes was recorded during this period due to the existence of
Alternative Minimum Tax (AMT) requirements. A valuation
allowance was recorded to offset the deferred tax assets due to
recent cummulative losses. The Company does not expect to
recognize these deferred tax assets in the near term.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by the Treatment segment's operating activities
is primarily affected by census levels and net revenue per
patient day. This segment contributed positive cash flow to the
Company's operations during the three and six-month periods ended
June 30, 2000. During this period, 48% of patient revenue was
derived from retail payments and the remaining 52% from
insurance, contracts and other third party payors. Based on
current census levels and operating expenses, Sierra Tucson
believes that it will generate adequate cash flows to sustain the
Treatment segment's ongoing operational requirements 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.
Results in the Health and Leisure segment are primarily affected
by room occupancy and average daily rate in addition to expense
management. Miraval also contributed positive cash flow to the
Company's operations during the three and six-month periods
ended June 30, 2000. During second quarter 2000, Miraval's room
occupancy rate was approximately 66%.
For the three-month period ended June 30, 2000, the Company had
capital expenditures of approximately $215,000. At June 30,
2000, the Company's cash and equivalents were $9.3 million.
Management believes that funds from operations will provide the cash
necessary to meet its short-term capital needs. The $1.7 million capital
improvement reserve funds from the August 1998 debt refinancing loan
agreement with Lehman Brothers Holdings Inc. are also available. The
Company is considering possible uses for the North Campus facility
which could include a wellness and alternative medicine center,
a business/conference center and other activities.
<PAGE>
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.
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, enhanced relationships
with other treatment centers, conference sponsorships, an
enhanced interactive web site, 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. Sierra Tucson will continue to add program
offerings anticipated to respond to trends in the marketplace.
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 starting in 2001. 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 and will
also continue to build national awareness by capitalizing on the
outstanding media support it has received. Miraval was voted the
#1 Spa in the World in the November 1999 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 May 2000, Miraval was named the #2 Best Spa in
Gourmet Magazine's Readers' Poll. 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.
<PAGE>
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. In addition, the special
promotions that have proved successful will again be offered
throughout the year, and Miraval will continue to promote other
specialty week activities.
The operations of Miraval are seasonal, and seasonally adjusted
rates as well as promotional rates are offered during the summer
months in order to increase occupancy.
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. Zoning for the property
occupied by Miraval and the North Campus was amended in 1998 to
permit a total of 356 resort hotel rooms and up to 226
residential units.
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 activities. The
Board of Directors will continue to consider strategic
opportunities for expansion and growth of NextHealth at its
current sites and elsewhere.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Management's Discussion and Analysis of Financial Condition and
Results of Operations (particularly as it relates to the Business
Outlook section of this report, and the growth of the Health and
Leisure segment) contains forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995
that involve a number of risks and uncertainties. While
management believes that such forward looking statements are
accurate as of the date hereof, the actual results and conditions
could differ materially from the statements contained herein.
The information below should be read in conjunction with the
Company's unaudited consolidated financial statements and related
notes thereto included elsewhere and in other portions of this
document.
In addition, the following other factors could cause actual
results and conditions relating to liquidity and capital
resources to differ materially.
The Company's Treatment segment participates in the highly
competitive mental and behavioral health industry, and faces
competition for market share resulting from aggressive pricing
practices and increasing competition from companies with greater
resources. Some of these competitors have tax exempt, non-profit
status, are government subsidized or have endowment-related
financial support which may provide lower costs of capital.
Sierra Tucson's operations are accredited by the Joint Commission
on Accreditation of Healthcare Organizations ("JCAHO"). JCAHO
accreditation is important to the operations of Sierra Tucson
since most insurance companies require such accreditation in
order for the treatment of patients to qualify for insurance
payment or reimbursement. If Sierra Tucson were unable to
maintain its JCAHO accreditation, its business would be adversely
affected. In May 1999, Sierra Tucson successfully completed its
JCAHO review 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
<PAGE>
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 niche to be certain the demand will continue.
While management believes that Miraval occupies a unique market
niche, it nevertheless competes in the resort hotel/spa industry.
Currently, its competitors have greater name recognition as well
as long-standing relationships with travel agents and meeting
planners. Market share must be obtained from competitors and
from introducing new customers to the benefits of the Miraval
product. Longevity in the marketplace plays a key role in
attaining credibility in this highly competitive field.
Management cannot anticipate what impact this will have on future
occupancy levels.
While the Company anticipates continued growth in revenues and is
committed to 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.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various litigation and administrative
proceedings arising in the normal course of business. In the
opinion of management, any liabilities that may result from these
claims will not, individually or in the aggregate, have a
material adverse effect on the Company's financial position,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 24,
2000. The Company's stockholders elected Mr. Neil E. Jenkins as
director and selected Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31,
2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
NONE
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
NextHealth, Inc.
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Registrant
DATE: August 10, 2000 BY: /s/ William T. O'Donnell, Jr.
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WILLIAM T. O'DONNELL, JR.
President and Chief Executive Officer
DATE: August 10, 2000 BY: /s/ Loree Thompson
---------------------------------
LOREE THOMPSON
Chief Financial Officer
