UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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) 818-5800
(Registrant's Telephone Number, including Area Code)
N/A
(Former name, former address and former fiscal year, if changed
since last report).
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
On November 3, 2000, there were 8,620,513 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
<TABLE>
<CAPTION>
Part I - Financial Information Page
------------------------------ ----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999.............................. 3
Unaudited Consolidated Statements of Operations for the three
and nine-month periods ended September 30, 2000 and 1999....... 4
Unaudited Consolidated Statements of Cash Flows for the
nine-month periods ended September 30, 2000 and 1999........... 5
Unaudited Consolidated Statements of Changes in Stockholders'
Equity for the nine-month period ended September 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 6. Exhibits and Reports on Form 8-K............................... 16
Signatures............................................................. 17
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000s, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents...................... $ 11,556 $ 3,803
Accounts receivable, less allowance for
doubtful accounts of $393 and $337,
respectively............................. 1,324 1,174
Prepaid expenses.......................... 771 438
Other current assets...................... 655 573
--------- ----------
Total current assets................... 14,306 5,988
Property and equipment, net................. 32,265 33,327
Intangible assets, less amortization of $472
and $310, respectively..................... 269 431
Other assets................................ 79 85
--------- -----------
Total assets........................... $ 46,919 $ 39,831
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade................... $ 1,124 $ 888
Accrued expenses and other liabilities.... 4,900 3,835
--------- -----------
Total current liabilities.............. 6,024 4,723
Long-term debt and financing obligation..... 12,627 12,724
--------- -----------
Total liabilities...................... 18,651 17,447
Minority interest........................... 514 389
Stockholders' Equity:
Preferred stock - undesignated, $.01 par
value, 3,924,979 shares authorized, no
shares outstanding....................... -- --
Preferred stock, Series A, $.01 par value,
46,065 shares authorized; 46,065 shares
outstanding at September 30, 2000
and December 31, 1999.................... -- --
Common stock, $.01 par value, 16,000,000
shares authorized; 8,619,488 shares
outstanding at September 30, 2000 and
8,554,938 shares outstanding at
December 31, 1999........................ 86 86
Additional paid-in capital................ 48,136 48,012
Accumulated deficit....................... (20,468) (26,103)
--------- ----------
Total stockholders' equity............. 27,754 21,995
--------- ----------
Total liabilities and stockholders'
equity................................ $ 46,919 $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 Nine Months Ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Net operating revenue................. $ 9,280 $ 6,627 $ 30,425 $ 22,325
Other revenue......................... 123 23 266 89
-------- -------- -------- --------
Total net revenue................... 9,403 6,650 30,691 22,414
Operating expenses:
Salaries and related benefits......... 4,212 3,353 12,130 10,075
General and administrative............ 3,240 2,753 9,707 8,481
Depreciation and amortization......... 707 673 2,106 2,012
Interest expense...................... 340 300 998 898
-------- -------- -------- --------
Total operating expenses............ 8,499 7,079 24,941 21,466
-------- -------- -------- --------
Income (loss) before income taxes........ 904 (429) 5,750 948
Income tax provision..................... 18 -- 115 --
-------- -------- -------- --------
Net income (loss)........................ $ 886 $ (429) $ 5,635 $ 948
======== ======== ======== ========
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............................ 13,986,059 8,554,938 13,839,388 13,180,742
========== ========= ========== ==========
Basic income (loss) per common share..... $ .10 $ (.05) $ .65 $ .11
========== ========= ======== ==========
Diluted income (loss) per common share... $ .06 $ (.05) $ .41 $ .07
========== ========= ======== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
NEXTHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income................................... $ 5,635 $ 948
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization............ 2,106 2,012
Provision for bad debts.................. 174 285
Provision for income tax................. 25 --
Minority interest........................ 125 68
Charge for non-employee options.......... 4 --
Changes in operating assets and liabilities:
Increase in assets:
Accounts receivable...................... (317) (423)
Other assets............................. (415) ( 38)
Increase in liabilities:
Accounts payable, accrued expenses
and other liabilities................... 1,239 616
-------- --------
Net cash provided by operating activities...... 8,576 3,468
Cash flows from investing activities:
Purchase of property and equipment.......... (848) (1,228)
-------- --------
Net cash used in investing activities.......... (848) (1,228)
Cash flows from financing activities:
Proceeds from sale of stock................. 120 --
Reduction of long-term borrowings and
financing obligation...................... (95) ( 120)
-------- --------
Net cash provided by (used in) financing
activities.................................... 25 ( 120)
-------- --------
Net increase in cash and equivalents........... 7,753 2,120
Cash and equivalents at beginning of period.... 3,803 843
-------- --------
Cash and equivalents at end of period.......... $11,556 $ 2,963
======== ========
</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
nine months ended
September 30, 2000 -- -- -- 5,635 5,635
----- ---------- -------- -------- --------
Balance at
September 30, 2000 $ 86 8,619,488 $ 48,136 $(20,468) $27,754
</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 mindfulness, personal growth 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 September 30, 2000
and for the three and nine-month periods ended September 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 nine-month periods
ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000.
NOTE 3 - NEW PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This
statement requires recognition of all derivatives as either assets or
liabilities on the balance sheet and measurement of those instruments
at fair value. Changes in fair value of derivatives are recorded each
period in current earnings or other comprehensive income (loss). The
statement was originally required to be adopted and is effective for
all fiscal years beginning after June 15, 2000. The Company is evaluating
the effect SFAS No. 133 will have on its financial reporting and
disclosures as well as on its derivative and hedging activities.
In December 1999, the Securities Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, Revenue Recognition in Financial
Statements. The effective date of SAB 101 for the Company is the
fourth fiscal quarter of the year ending December 31, 2000. The
Company does not expect SAB 101 to have an effect on its consolidated
financial statements.
<PAGE>
NOTE 4 - NET INCOME PER SHARE
Shares used in the diluted per share calculation for the three and
nine-month periods ending September 30, 2000 and 1999 are as stated
below:
<TABLE>
<CAPTION>
Three-month period Nine-month period
ended September 30, ended September 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
Dilutive options 415,029 -- 319,418 19,304
Dilutive warrants 345,042 -- 293,982 --
--------- --------- --------- ---------
Diluted shares 13,986,059 8,554,938 13,839,388 13,180,742
========== ========= ========== ==========
</TABLE>
NOTE 5 - 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
experience blending mindfulness, personal growth 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 nine-month periods ending September 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
September 30, 2000
------------------------
Total revenue................. $ 5,547 $ 3,845 $ 11 $ 9,403
Income (loss) before
income tax benefit.......... 2,038 (731) (403) 904
Identifiable assets........... 12,510 32,361 2,048 46,919
Capital expenditures.......... 237 106 1 344
Depreciation & amortization
expense..................... 96 607 4 707
Interest expense.............. 217 123 0 340
Nine-month period ended
September 30, 2000
-----------------------
Total revenue................. $16,297 $14,359 $ 35 $30,691
Income (loss) before
income tax benefit.......... 6,319 444 (1,013) 5,750
Identifiable assets........... 12,510 32,361 2,048 46,919
Capital expenditures.......... 427 420 1 848
Depreciation & amortization
expense..................... 284 1,810 12 2,106
Interest expense.............. 637 359 2 998
<PAGE>
Three-month period ended
September 30, 1999
------------------------
Total revenue................. $ 4,302 $ 2,344 $ 4 $ 6,650
Income (loss) before
income tax benefit.......... 1,196 (1,385) (240) (429)
Identifiable assets........... 6,491 30,980 1,910 39,381
Capital expenditures.......... 303 71 0 374
Depreciation & amortization
expense..................... 84 586 3 673
Interest expense.............. 191 109 0 300
Nine-month period ended
September 30, 1999
-----------------------
Total revenue................. $12,467 $ 9,907 $ 40 $22,414
Income (loss) before
income tax benefit.......... 3,772 (2,086) (738) 948
Identifiable assets........... 6,491 30,980 1,910 39,381
Capital expenditures.......... 986 264 0 1,250
Depreciation & amortization
expense..................... 246 1,756 10 2,012
Interest expense.............. 573 323 2 898
</TABLE>
NOTE 6 - INCOME TAXES
A provision for income taxes was recorded in the three and nine-month
periods ended September 30, 2000 due to the existence of Alternative
Minimum Tax (AMT) requirements. A valuation allowance has been recorded
to offset deferred tax assets which principally consist of net operating
loss carryforwards. The Company intends to recognize the benefits of
deferred tax assets as the net operating loss carryforwards are utilized.
No provision for income taxes was recorded in the three or nine-month
periods ended September 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 third 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 nine-month periods ended
September 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 nine-month period ended September 30, 2000, the Treatment
segment accounted for approximately 53.1% of the Company's operating
revenues and approximately 40.0% of its operating expenses, while the
Health and Leisure segment accounted for approximately 46.8% of the
Company's operating revenue and approximately 55.8% of its operating
expenses.
MATERIAL CHANGES IN FINANCIAL CONDITION
Cash and equivalents for the nine-month period ended September 30,
2000, increased $7.8 million to $11.6 million or 204%. 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 September 30, 2000 compared to three-month
period ended September 30, 1999
The significant changes in results of operations and net cash
provided by operating activities for the three-month period ended
September 30, 2000, compared to the same period in 1999 are discussed
below.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------------
2000 1999 % Change
---- ---- --------
<S> <C> <C> <C>
Financial results:
(000s, except per share amounts)
Total net revenue..................... $ 9,403 $ 6,650 41.4%
Total operating expenses.............. 8,499 7,079 20.1
Income (loss) before income taxes..... 904 (429) 310.7
Basic income (loss) per common share .10 (.05) 300.0
Diluted income (loss) per common share .06 (.05) 220.0
Net cash provided by operating
activities........................... 2,583 997 159.1
Operating data:
Patient days - Sierra Tucson.......... 5,826 5,069 14.9
Average daily census-Sierra Tucson.... 63 55 14.5
Guest days - Miraval.................. 10,133 6,821 48.6
Room occupancy - Miraval.............. 68% 46% 47.8
</TABLE>
For the three-month period ended September 30, 2000, net income
before income taxes increased $1.3 million to $904,000 or 310.7% over
the comparable quarter of 1999. Net cash provided by operating
activities increased 159.1% resulting in net cash provided by
operating activities of $2.6 million compared to $997,000 for the
same period in 1999.
<PAGE>
Total net revenue increased $2.8 million to $9.4 million, an increase
of 41.4% when compared to the same period in 1999. Results reflect a
64.0% revenue increase at Miraval and a 29.1% revenue increase at
Sierra Tucson, when compared to the corresponding quarter of 1999.
Salaries and related benefits decreased 5.6% as a percentage of
revenue during the period. Salaries and related benefits increased
$859,000 to $4.2 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 6.9% as a percentage of
revenue during the third quarter of 2000. General and administrative
expense increased $487,000 to $3.2 million, an increase of 17.7% 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 as well as increased advertising expense
incurred during the quarter.
Interest expense increased $40,000 to $340,000 or 13.3% when compared
to third quarter 1999. The increase reflects the higher interest
rate on the loan outstanding in third quarter 2000 compared to the
rate charged in the corresponding quarter of 1999.
The Company recognized pre-tax income of $904,000 for the three-month
period ended September, 2000. An $18,000 provision for income taxes
was recorded during this period due to the existence of Alternative
Minimum Tax (AMT) requirements. A valuation allowance has been recorded
to offset the deferred tax assets which principally consist of net
operating loss carryforwards. The Company intends to recognize the
benefits of deferred tax assets as the net operating loss carryforwards
are utilized.
Nine-month period ended September 30, 2000 compared to nine-month
period ended September 30, 1999
The significant changes in results of operations and net cash
provided by operating activities for the nine-month period ended
September 30, 2000, compared to the same period in 1999 are discussed
below.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
2000 1999 %Change
---- ---- -------
<S> <C> <C> <C>
Financial results:
(000's except per share amounts)
Total net revenue....................... $ 30,691 $ 22,414 36.9 %
Total operating expenses................ 24,941 21,466 16.2
Income before income taxes.............. 5,750 948 506.5
Basic income per common share........... .65 .11 490.9
Diluted income per common share......... .41 .07 485.7
Net cash provided by operating activities 8,576 3,468 147.3
Operating data:
Patient days - Sierra Tucson............ 17,405 15,617 11.4
Average daily census - Sierra Tucson.... 64 57 12.3
Guest days - Miraval.................... 29,427 22,365 31.6
Room occupancy - Miraval................ 68% 53% 28.3
</TABLE>
For the nine-month period ended September 30, 2000, net income before
income taxes increased $4.8 million to $5.8 million or 506.5% over
the same period of 1999. Net cash provided by operating activities
increased to $8.6 million compared to $3.5 million for the nine-month
period of 1999; a 147.3% increase.
Total net revenue for the nine-month period ended September 30, 2000
increased $8.3 million or 36.9% to $30.7 million when compared to the
same period of 1999. The increase is attributable to a 44.9% revenue
increase at Miraval and a 30.8% revenue increase at Sierra Tucson.
<PAGE>
Salaries and related benefits decreased 5.4% as a percentage of
revenue during the nine-month period. Salaries and related benefits
increased $2.1 million to $12.1 million or 20.4% 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 6.2% as a percentage of
revenue during the nine-month period ended September 30, 2000.
General and administrative expense increased $1.2 million or 14.5% to
$9.7 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 as well as increased
advertising expense incurred during the period.
Interest expense increased $100,000 to $998,000 or 11.1% when
compared to the previous year. The increase reflects the higher rate
on the loan outstanding in the nine-month period of 2000 as compared
to the rate charged on the loan outstanding in nine-month period of
1999.
The Company recognized pre-tax income of $5.8 million for the nine-
month period ended September 30, 2000. A $115,000 provision for
income taxes was recorded during this period due to the existence of
Alternative Minimum Tax (AMT) requirements. A valuation allowance
has been recorded to offset the deferred tax assets which principally
consist of net operating loss carryforwards. The Company intends to
recognize the benefits of deferred tax assets as the net operating
loss carryforwards are utilized.
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 nine-month periods ended September
30, 2000. During the three-month period, 54% of patient revenue was
derived from retail payments and the remaining 46% 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 50-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.
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 nine-month periods ended
September 30, 2000. During third quarter 2000, Miraval's room
occupancy rate was approximately 68%.
For the three-month period ended September 30, 2000, the Company had
capital expenditures of approximately $344,000. At September 30,
2000, the Company's cash and equivalents were $11.6 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.
The Company must continue to focus on revenue growth and expense
controls in order to preserve and improve its liquidity position.
<PAGE>
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.
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. In September 2000 Miraval was voted #2 in
Travel & Leisure's 2000 World's Best Awards, moving up from their #4
position the previous year. Miraval was also 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 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.
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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 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.
Miraval's unique blending of luxury resort recreational activities
with mindfulness, personal growth and self-awareness programs clearly
differentiates it from the spas with which it competes. Because
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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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
NONE
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
NextHealth, Inc.
--------------------------------
Registrant
DATE: November 14, 2000 BY:/s/William T. O'Donnell, Jr.
-----------------------------
WILLIAM T. O'DONNELL, JR.
President and Chief Executive Officer
DATE: November 14, 2000 BY:/s/Loree Thompson
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LOREE THOMPSON
Chief Financial Officer
