ITEM 1. BUSINESS
NEXTHEALTH, INC.
NextHealth, Inc. is a leading provider of substance abuse and mental health disorders treatment services, and wellness and preventive health services in diverse retail markets. For over ten years, the Company has developed effective treatment models which address individual wellness and quality of life issues through a whole person, mind-body approach.
NextHealth, Inc. (the "Company"), 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 and health care programs. It conducts business through separate divisions and wholly-owned subsidiaries. The Company currently operates health, wellness and therapeutic treatment programs pursuant to a business strategy which concentrates on identifying emerging revenue and growth opportunities.
The Company operates in two distinct business segments. The Treatment segment includes Soften Realty, LLC d/b/a Sierra Tucson ("Sierra Tucson"), a 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; it also included Onsite Workshops, Inc. ("Onsite"), acquired in 1995, which offered short-term therapeutic experiences and workshops. Onsite was divested by the Company on November 30, 1996. The Health and Leisure segment includes Sierra Healthstyles, Inc. d/b/a Miraval(TM) ("Miraval"), opened in late 1995, a unique vacation experience blending stress management and self-discovery programs in a luxury resort environment. From March 1, 1996 (acquisition date) through October 1, 1996 (disposal date) the Health and Leisure segment also included Hilton Head Health Institute, Inc. ("HHHI"), located at Hilton Head Island, South Carolina, a provider of weight management programs for the development and maintenance of healthy lifestyles.
The Company operates its two lines of business at separate locations northwest of Tucson, Arizona, in the foothills of the Santa Catalina Mountains. Sierra Tucson currently has 70 inpatient beds at one facility, the result of consolidation from 1992-1994. Miraval operates at a separate facility, presently comprised of 106 guest rooms. The Company owns or leases approximately 400 acres of land at these locations.
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 stock traded on the NASDAQ exchange under the symbol "STSN." As a result of the Company's name change in 1995, it is now listed under the trading 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 a licensed special psychiatric hospital and behavioral health 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.
The treatment philosophy at Sierra Tucson, as expressed in the Sierra Model(TM), treats the whole person with integrated, individualized therapies rooted in the Twelve Steps program recovery process. Experiential
in nature, Sierra Tucson's individualized treatment plans are developed and maintained by experienced, clinical professionals. They integrate philosophies and methodologies from psychological, family systems and self-help approaches into comprehensive and effective treatment experiences. Since its inception, over 12,000 patients and nearly 30,000 family members have participated in Sierra Tucson programs, with a 70 percent success rate based on outcome studies performed by a third party research entity on behalf of the Company. Sierra Tucson is licensed by the Arizona Department of Health Services and accredited by the Joint Commission of Accreditation of Healthcare Organizations.
In order to facilitate its operations and strengthen its identity as a separate and distinct business operation, on November 13, 1996, the assets of Sierra Tucson were sold to Soften Realty, LLC, a Delaware limited liability company ("Soften") for $8,000,000. The purchase price is evidenced by Soften's non-negotiable promissory note which is secured by a security interest in the assets of Sierra Tucson. Such assets consist of the business of Sierra Tucson, the tangible and intangible assets used in connection with the business and a possessory right to use certain land and buildings owned by the Company. The Company is the manager of and owns a 98% interest in Soften; the remaining 2% is owned by APNH, LLC, a Delaware limited liability company, the purchaser of the Company's preferred stock as described below in the Liquidity & Capital Resources section of Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
MIRAVAL
With the commencement of operations at Miraval, the Company entered the wellness and preventive health services category, a strategic diversification focusing on upscale, retail consumer markets with a demonstrated interest in alternative wellness services and therapies. The Company's decision to enter these markets was based upon concept development, market research and consumer testing.
Miraval combines elements of stress management, self-discovery and recreational activities in a luxury health resort environment, providing guests with tools to achieve and maintain wellness in everyday life. By incorporating educational programs such as mind/body and lifestyle management, fitness/recreation activities and personal workshops, Miraval offers an alternative to the traditional luxury resort vacation. Programs are individually tailored to the particular requirements of each guest.
SOURCES OF REVENUE
The Company's revenue depends upon occupancy levels. At Sierra Tucson, an inclusive daily rate for services is charged, ranging from $683 to $945 per day. Patient revenue is derived from private insurance reimbursement 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.
In 1996, Sierra Tucson and its patients continued to experience significant pressure from third-party payors and managed care organizations to restrict access to and payment for treatment services. The Company expects this trend to continue. In response to this pressure, the Company has aggressively pursued emerging self-pay referral provider markets, while it continues to develop the traditional third-party payor sector. For 1996, approximately 67% of patient revenue was derived from individual patient payors, and approximately 33% was derived from insurance companies and other third-party payors.
Until its divestiture on November 30, 1996, Onsite charged an inclusive rate for its programs, which ranged in length from five to eight days. Rates ran from $300 to $2,050 per program, depending on the nature of the workshop. Onsite received all of its revenues directly from participants.
Miraval individual guest rates vary depending on the season and length of stay, beginning at $630 per day in peak season (October to May) to off-peak season rates beginning at $450 per day. Daily rates include luxury accommodations, three gourmet meals, use of all resort amenities, participation in workshops and one personal
service treatment. Gratuities, taxes and airport transfers are also included in the daily rate. Typical stays range from 3 to 6 days. Miraval currently generates all of its revenue from guest bookings and retail store sales.
Set forth below are the Company's total revenues by segment (000s):
EMPLOYEES
On December 31, 1996, the Company and its subsidiaries employed approximately 321 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 psychiatric hospitals. 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 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. Although Miraval's product offering is unique, it nevertheless competes with a broad array of spa and resort properties. The Company considers that the criteria for competition is based upon price, 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 1996,
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, 1999.
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.
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.
The Sierra Tucson facilities are contained within a campus setting and are located on approximately 30 acres owned by the Company. The Miraval facility was reconstructed from existing Company facilities and is located on a separate Company-owned 130-acre parcel of property adjacent to the Sierra Tucson facility. The remaining property, which is adjacent to the Miraval facility, is unimproved open space, some of which is unbuildable either because of its terrain or its location in the flood plain.
Until November 30, 1996, Onsite operated on approximately 160 acres of land leased from the State of Arizona and in buildings leased from a related party, ODE, LLC. The buildings were sold and leased back by the Company in 1994 to ODE, LLC. The land lease expires in 2001 and contains preferential rights of renewal; the lease agreement with ODE, LLC grants the Company both the option to repurchase the Onsite buildings at fair market value and to renew the lease for an additional ten year period. The facility also has fitness and recreation areas, riding stables and other administrative and support offices. The Company retained its rights under the land and building lease as part of the Onsite divestiture.
HHHI is located at the Cottages, Shipyard Plantation, Hilton Head Island, South Carolina. From March 1, 1996 until October 1, 1996, the Company leased the real property at a monthly rental of $15,500.
As part of the debt transaction with AP LOM LLC ("Apollo"), completed November 15, 1996, Apollo holds a first lien position in all Company-owned property.
ITEM 3.
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.
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, 1996.
PART II
ITEM 5.
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 National Association of Securities Dealers Automated Quotations/National Market System (NASDAQ/NMS) since October 19, 1989. Stock is traded under the symbol "NEXT". As of March 14, 1997, there were approximately 230 shareholders of record and approximately 1,800 beneficial holders of the Company's common stock. The high and low bid prices set forth below, derived from data prepared by the National Association of Securities Dealers, Inc., represent quotations by dealers and may not reflect applicable markups, markdowns or commissions, and do not necessarily represent actual transactions.
On March 14, 1997, the closing bid price on the NASDAQ/NMS was $1.625 per share.
The Company did not pay a cash dividend on its common stock in 1996 or 1995 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.
ITEM 6.
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 1996. The data for the three years ended December 31, 1996, 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, 1993, is derived from the Company's historical Consolidated Financial Statements. See Item 7
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, 1996. Certain prior year amounts have been reclassified to conform to the presentation used in 1996. 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
The Company, as part of its long range plan, believes that it has positioned itself to capitalize on the newly emerging health and leisure segment of the health care services industry by developing Miraval, a luxury resort providing a full range of self-discovery, stress management and recreational activities. The Company is also seeking additional opportunities to increase market share for its existing Treatment segment; a state licensed, inpatient psychiatric hospital providing service for the treatment of substance abuse, as well as a broad range of mental health and behavioral disorders. For the year ended December 31, 1996, the Treatment segment accounted for approximately 64% of the Company's operating revenues and approximately 32% of expenses, while the Health and Leisure segment accounted for approximately 35% of the Company's operating revenue and approximately 44% of operating expenses. However, the Company believes that the Health and Leisure segment will make significant contributions to the Company's operating results in the future.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The significant changes in results of operations and net cash provided by (used in) operating activities for the year ended December 31, 1996, compared to the same period in 1995 are discussed below. Unless otherwise stated, all comparisons are for the same period.
For the year ended December 31, 1996, net loss increased $2.7 million to $14.7 million and net cash provided by operating activities decreased $13.9 million resulting in net cash used in operating activities of $9.2 million compared to the same period in 1995.
Total revenue increased $3.6 million to $18.5 million, an increase of 24% when compared to the same period in 1995. These results reflect a full year of operations at Miraval in 1996, versus one month in 1995.
Salaries and related benefits increased $6.9 million to $15.2 million, an increase of 82% when compared to the same period in 1995. The increase was due to staffing requirements related to the operations at Miraval.
General and administrative expense increased $6.0 million to $14.4 million, an increase of 72% when compared to the same period in 1995. The increase was due to advertising and operational costs related to the operations at Miraval, and costs related to the promotion and operations of existing lines of business. These increases were partially offset by a decrease in the provision for bad debts to reflect Sierra Tucson's current collection experience.
In 1995, the Company incurred $7.2 million in pre-opening costs related to the development of Miraval. The pre-opening costs included advertising, labor related costs, pilot program research and development activities, and other related operating expenses. The Company also renovated and expanded certain existing facilities to accommodate Miraval's lodging, program and activities requirements. As a result of this process, approximately $1.7 million of previously existing facility-related assets were dismantled and replaced.
The Company recognized a pre-tax loss of $14.7 million for the year ended December 31, 1996. There was no income tax benefit recognized in 1996, as the Company recorded a 100% valuation reserve against deferred tax assets.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The significant changes in results of operations and net cash provided by (used in) operating activities for the year ended December 31, 1995, compared to the same period in 1994 are discussed below. Unless otherwise stated, all comparisons are for the same period.
For the year ended December 31, 1995, net loss increased $9.2 million to $12.0 million, loss before income tax benefit increased $6.6 million to $12.0 million and net cash provided by operating activities increased $10.3 million to $4.6 million compared to the same period in 1994. Excluding $7.2 million in pre-opening costs and $1.7 million in retirement and dismantlement of certain assets associated with the development of Miraval, net loss increased $213,000 to $3.0 million, loss before income tax benefit decreased $2.4 million to $3.0 million and net cash provided by operating activities increased $19.2 million to $13.6 million compared to the same period in 1994.
Total revenue increased $3.9 million to $14.9 million, an increase of 35% when compared to the same period in 1994. These results reflect an increase in Sierra Tucson patient census levels resulting from intensified marketing efforts, the acquisition of Onsite and commencement of operations at Miraval.
Salaries and related benefits increased $849,000 to $8.4 million, an increase of 11% when compared to the same period in 1994. The increase was due to staffing requirements related to the commencement of operations at Miraval and the acquisition of Onsite. While salaries and related benefits increased in total, they declined as a percentage of total revenue. Salaries and related benefits as a percentage of total revenue for 1995 were approximately 56% compared to 68% in 1994.
General and administrative expense increased $1.0 million to $8.4 million, an increase of 14% when compared to the same period in 1994. The increase was due to advertising and operational costs related to the commencement of operations at Miraval, and costs related to the promotion and operations of existing lines of business. These increases were partially offset by a decrease in the provision for bad debts to reflect Sierra Tucson's current collection experience. Although there was an overall increase in this category, it has declined as a percentage of total revenue. General and administrative expense as a percentage of total revenue for the year ended December 31,1995, was approximately 56% compared to 67% for the year ended December 31,1994.
In 1995, the Company incurred $7.2 million in pre-opening costs related to the development of Miraval. The pre-opening costs included advertising, labor related costs, pilot program research and development activities, and other related operating expenses.
In 1995, the Company renovated and expanded certain existing facilities to accommodate Miraval's lodging, program and activities requirements. As a result of this process, approximately $1.7 million of previously existing facility-related assets were dismantled and replaced.
The Company recognized a pre-tax loss of $12.0 million for the year ended December 31, 1995. There was no income tax benefit recognized in 1995, as the Company recorded a 100% valuation reserve against deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources have typically been cash provided by the Treatment segment's operating activities, funds generated from the sale of investments and proceeds from public equity offerings. Historically, these sources have been sufficient to meet the needs and finance the operations and growth of the Company's business. Net cash provided by the Treatment segment's operating activities are primarily
affected by census levels and net revenue per patient day. This segment contributed positive cash flow to the Company's operations in 1996.
The Treatment segment's operational results reflect the necessity of attracting a high percentage of retail patients. In 1996, 67% of patient revenue was derived from retail payments and the remaining 33% from third party payors. Sierra Tucson continues to experience pressure from third-party payors and managed care organizations to restrict patient access and payment for treatment services. However, 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.
In 1996, the Company had net capital expenditures of approximately $1.1 million. Primarily as a result of operating expenditures required to support the Health and Leisure segment until it is self-sufficient, and the aforementioned capital expenditures, the Company's cash reserves have decreased significantly. In 1996, the Company's net cash used in operating activities was $9.2 million.
Miraval, the Company's Health and Leisure segment's remaining line of business, commenced operations in December 1995. Its results are primarily affected by occupancy, average room rates and the ability to manage costs. Miraval believes that it operates in a unique niche in the emerging health and leisure market, one which will take time to fully develop. In 1996, marketing and advertising initiatives for creating marketplace awareness and demand for Miraval's services resulted in a room occupancy rate of approximately 33%. As part of Miraval's marketing strategy, media, travel and trade representatives and other key influencers have been invited to experience Miraval in an effort to further promote its position in the marketplace. Management believes the Health and Leisure segment will ultimately make a significant contribution to the Company's financial condition.
To meet its current liquidity requirements, the Company entered into debt and equity financing transactions. The financing transactions closed on November 15, 1996. The proceeds from the transactions were approximately $12,340,000. The source and use of funds are as follows:
(1) Funds were placed in escrow to avoid a prepayment penalty of approximately $158,000. The funds placed in escrow were used to pay off the principal balance on January 4, 1997. The Company received approximately $280,000 from the escrow monies after paying off the balance on January 4, 1997.
The debt financing transaction contains certain provisions related to a stand-by commitment for an additional $5,000,000, subject to compliance with certain conditions and the lender's good faith discretion. To the extent that cash on hand is not sufficient to meet future operating cash requirements, the stand-by funds will be available to provide the cash necessary to fund future operating cash requirements.
The Company received shareholder approval for conversion of the Series B Preferred Stock to Series A Preferred Stock at a Special Meeting of Stockholders held on January 29, 1997. As a result, each share of Series B Preferred Stock outstanding was automatically converted into one share of Series A Preferred Stock.
Management believes the previously described stand-by commitment for $5 million will provide sufficient liquidity to allow the Company to operate through 1997. However, it is necessary for the Company to increase occupancy levels in its lines of business, and to implement additional cost controls to ensure 1997 operating losses do not exceed an amount sustainable by the stand-by commitment, if available. 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. Management does not anticipate any significant impact upon operations as a result of inflation, nor has the Company historically experienced any such impact.
BUSINESS OUTLOOK
Performance in the Treatment segment (Sierra Tucson) will be driven by continued aggressive implementation of cost controls and new marketing initiatives. Particular emphasis will be placed on increasing the number of self-pay patients through a combination of innovative treatment programs and focused advertising, direct mail, field sales and outbound telemarketing campaigns.
Recently developed programs such as Recovery Plus(TM) and Sierra Care(T)M will be promoted to major referent and retail market sectors, and will likewise be introduced to the corporate marketplace. Recovery Plus is a unique product which ensures that a chemically-dependent patient who relapses during the first six months following discharge will be readmitted for an additional 10-14 days at a very modest per diem rate. To the Company's knowledge, this program is the first of its kind in the treatment field, and provides visible evidence of Sierra Tucson's commitment to the long-term recovery of each patient, as well as the proven effectiveness of the Sierra Model(TM).
Sierra Care is an all-inclusive addictions package which provides the patient with tools necessary to meet their recovery goals within a 24-day time frame -- at a substantially reduced cost. Sierra Care is designed for addiction patients with a lower acuity on the mental health diagnosis, and those who fall more into a straight chemical dependency diagnosis.
Sierra Tucson will continue its traditional marketing efforts to the referent therapist community, and look for the continued growth of prospective patients which characterized the second half of 1996.
Miraval, the Company's initial entry in the Health and Leisure category, has now been in operation for thirteen months and looks for steadily improving performance in 1997. The resort has received extensive press coverage in such diverse media as CNN, InStyle, Gourmet, and Vogue magazine, and has likewise gained a high level of awareness among consumers and travel professionals.
Management's primary objective for Miraval in 1997 is to build short and long-term occupancy levels while maintaining its unique program structure and operational excellence. Marketing initiatives will be aimed primarily at upscale consumers and top-echelon travel agents as well as corporate and incentive groups. The Miraval message will be delivered through a blend of direct sales and advertising -- including print, data base-driven direct mail, and public relations activities.
Cost containment measures will continue to be a critical management objective in 1997. Variable staffing relative to seasonal occupancy fluctuations, a more structured program format, and self-directed internal work teams focusing on all aspects of operational quality should further improve efficiencies and cash flow.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Management's Discussion and Analysis of Financial Condition and Results of Operations 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 intense 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, government subsidized or endowment-related financial support which may provide lower costs of capital.
Miraval represents a new and significant line of business for the Company. It is the Company's initial entry into a unique niche in the emerging health and leisure market for which there is little, if any, industry market data available. Its products and services are different from those of traditional destination resorts or destination "spa" facilities. The Company has little experience in the marketing, management or operation of a facility of this nature although management believes it has hired qualified and experienced personnel from related operations.
The Company is unable to project with any degree of accuracy the future occupancy levels or revenues of Miraval because the facility is in its second year of operation. The Company has minimal operating data for projecting occupancy levels during peak and non-peak periods, marketing, operating or maintenance costs and expenses. Although the Company believes there is strong consumer demand for Miraval's products and services because it offers a unique vacation alternative, the Company cannot be certain its current marketing strategy will successfully attract the targeted clientele.
The Company cannot be certain that Miraval will generate sufficient revenues to cover its operating expenses. Management believes that the existing capital resources of the Company and the $5 million stand-by commitment from the November 15, 1996 debt transaction, if available, are sufficient to meet its short-term capital needs. Advances on the stand-by commitment are subject to the lender's good faith discretion.
Miraval competes in the competitive resort hotel/spa industries. In many instances, its competitors have greater name recognition and financial resources as well as long-standing relationships with travel agents and tour and trip planners. Management cannot anticipate what impact this will have on future occupancy levels.
While the Company anticipates continued growth in revenues and is committed to a return to profitability, operating results could be adversely impacted if the business is unable to anticipate customer demand accurately, 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 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
NextHealth, Inc.'s Consolidated Financial Statements as of December 31, 1996 and 1995 and for the three years ended December 31, 1996.
PAGE
Report of Management .......................................... 15
Report of Independent Auditors ................................ 16
Consolidated Balance Sheets ................................... 17
Consolidated Statements of Operations ......................... 18
Consolidated Statements of Cash Flows ......................... 19
Consolidated Statements of Changes in Stockholders' Equity .... 20
Notes to Consolidated Financial Statements .................... 21
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 generally accepted auditing standards. 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 Chief Financial Officer
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders NextHealth, Inc.
We have audited the accompanying consolidated balance sheets of NextHealth, Inc., as of December 31, 1996 and 1995, 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, 1996. 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 generally accepted auditing standards. 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., at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. 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 27, 1997
NEXTHEALTH, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (000s, except share and per share amounts)
The accompanying notes are an integral part of these financial statements.
NEXTHEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (000s, except share and per share amounts)
The accompanying notes are an integral part of these financial statements.
NEXTHEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (000s)
The accompanying notes are an integral part of these financial statements.
NEXTHEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (000s, except share amounts)
The accompanying notes are an integral part of these financial statements.
NEXTHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s, except share and per share amounts) December 31, 1996
ORGANIZATION
NextHealth, Inc.'s, and subsidiaries' (collectively, the "Company") operations are categorized in two principal business segments; Health and Leisure and Treatment through which it provides both wellness and preventive health and health care services. The Health and Leisure segment, Sierra Healthstyles, Inc. d/b/a Miraval ("Miraval"), is a luxury health resort providing a full range of self-discovery, stress management and recreational activities. Also, from March 1, 1996, through October 1, 1996, the Health and Leisure segment included Hilton Head Health Institute, Inc. ("HHHI"), a provider of weight management programs for the development and maintenance of healthy lifestyles. The March 1, 1996 acquisition of HHHI was accounted for as a purchase. HHHI was divested by the Company on October 1, 1996. The Treatment segment includes Soften Realty, LLC d/b/a Sierra Tucson ("Sierra Tucson"), an inpatient, state licensed psychiatric hospital and behavioral health care center providing service for the treatment of substance abuse and a broad range of mental health and behavioral disorders; and, through November 30, 1996, Onsite Workshops, Inc. ("Onsite"), which offered intensive, therapeutic group experiences addressing a wide variety of personal and family issues. The current operations of the Company are located in Tucson, Arizona.
Effective September 28, 1995, the Company changed its name from Sierra Tucson Companies, Inc. to NextHealth, Inc. This change was effected through a short form merger pursuant to Delaware law whereby Sierra Tucson/Arizona Holdings, Inc. ( a wholly owned subsidiary of Sierra Tucson Companies, Inc.) merged with and into Sierra Tucson Companies, Inc. As part of the merger, the surviving entity's name was changed to NextHealth, Inc. The sole purpose of the name change was to establish separate identities for the parent company and each of its operating subsidiaries.
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 are wholly owned. All material intercompany accounts and transactions have been eliminated in consolidation.
Basis of Accounting
The accompanying financial statements have been prepared assuming the Company is a going concern. Management believes the $5 million, if available, under the existing stand-by commitment with AP LOM, LLC will be sufficient to meet any working capital requirements. However, Miraval will continue to require financial support until such time as it gains market acceptance. Continuing operating losses at Miraval, and/or a significant decline in patient census at Sierra Tucson, would adversely impact the Company's ability to operate as a going concern in 1997.
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.
NEXTHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s, except share and per share amounts) December 31, 1996
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.
Pre-opening Costs
Costs associated with the opening of new properties or major additions to existing properties are expensed as incurred.
Investments
Short-term investments consisted of money market funds, short-term commercial paper, repurchase agreements, municipal bonds and other debt securities with an original maturity of one year or less. Long-term investments consisted primarily of U.S. government and agency obligations, municipal bonds, collateralized mortgage obligations and other debt securities. At December 31, 1995, all investments were classified as available-for-sale, and reported at fair value.
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred approximately $1,212, $3,600, and $425 in advertising costs during 1996, 1995 and 1994, respectively.
Intangible Assets
Intangible assets at December 31, 1996 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 in 1995 also included goodwill incurred in connection with the acquisition of Onsite in January, 1995. The entire amount outstanding of $547 was written off in 1996 as a result of the Onsite divestiture.
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.
Income Taxes
The company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
Revenue Recognition
Revenue, net of any applicable contractual allowances or discounts, is recognized in the period services are rendered.
NEXTHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s, except share and per share amounts) December 31, 1996
Net Operating Revenue
Net operating revenue consists of revenue derived from guests, patients and participants, based on the billing rates established for each line of business, less any applicable discounts or contractual allowances. For the three years ending December 31, 1996, contractual allowances and discounts granted were approximately $1,485, $1,423, and $1,500, respectively.
Stock Based Compensation
Stock options are granted to employees at an exercise price equal to or greater than fair value on the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation."
Net Income (Loss) Per Share
Net income (loss) per share is based on the weighted average shares outstanding, as exercisable stock options and outstanding warrants are 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.
Reclassifications
The consolidated financial statements for prior years reflect certain reclassifications to conform with classifications adopted in 1996.
NEXTHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s, except share and per share amounts) December 31, 1996
INVESTMENTS
The estimated cost and fair value of the Company's available-for-sale securities at December 31, 1996 and 1995 are as follows:
For the years ended December 31, 1996, 1995, and 1994, gross unrealized losses were $0, $0, and $399, respectively; proceeds from the sale of securities classified as available-for-sale were $1,635, $38,545, and $23,065, respectively; gross gains recognized were $0, $404, and $95, respectively; and gross losses recognized were $0, $80, and $375, respectively.
PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1995 are as follows:
NEXTHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s, except share and per share amounts) December 31, 1996
ACCRUED EXPENSES AND OTHER LIABILITIES
At December 31, 1996 and 1995, accrued expenses and other liabilities were comprised of the following account balances:
LONG-TERM DEBT AND FINANCING OBLIGATION
Long-term debt and financing obligation at December 31, 1996 and 1995 are as follows:
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. The Company received $8,090; the remaining $5,000 is a stand-by loan commitment, subject to compliance with certain conditions and the lender's good faith discretion. The obligations contain various operational and financial restrictions including restrictions on additional debt, prohibition of acquisitions and requirement of consolidated net worth (including Preferred Stock) of $24,000. In the event of default, the Lender may declare the $5,000 terminated, the principal and accrued interest due and payable, and elect a majority of the Board of Directors. The loan agreement bears interest at the rate of 10% for the first year, 11% for the second year and 12% for the third year. The maturity date is November 14, 1999. The loan agreement is secured by a deed of trust to essentially all of the land and buildings of the Company, a security interest in all of the Company's and its subsidiaries' personal property and by the collateral pledge of the Company's stock or other interest in the subsidiaries.
In December 1994, the Company sold a facility for $1,000 (the facility's appraised value) to 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. The Company has the option of extending the lease term for an additional ten-year period or to repurchase the facility at fair market value on any date, one year after the date of the sale-leaseback agreement. This transaction has been accounted for as a financing as a result of the Company's continuing involvement with the facility.
Future maturities of long-term debt and financing obligation at the date indicated are as follows:
For three years ended December 31, 1996, interest paid was $569, $87, and $12, respectively.
SEGMENT INFORMATION
The Company operates in two principal business segments; Health and Leisure and Treatment through which it provides both wellness and preventive health and health care services. The Health and Leisure segment presently consists of a luxury resort providing a full range of self discovery, stress management and recreational activities. Substantially all revenues result from guest bookings and retail charges. From March 1, 1996 through October 1, 1996, the Health and Leisure segment also included HHHI, a provider of weight management programs for the development and maintenance of healthy lifestyles. During this period, HHHI provided $112 in net income to the Company. The Treatment segment includes an inpatient, state licensed psychiatric hospital providing service for the prevention, education and treatment of substance abuse, and a broad range of mental health and behavioral disorders; and, through November 30, 1996, included a short-term intensive, experienced-based workshop program addressing a wide variety of personal and family issues. Substantially all revenues resulted from group therapy, medical assessments and stabilization, pharmacy, workshop and room and board charges. For the year ended December 31, 1996, no single customer accounted for more than 10% of either of the principal business segment's revenue. Prior to 1995, the Company operated in only the Treatment segment.
The results of operations for the Company's principal business segments are reported in the Consolidated Statement of Operations. For the years ended December 31, 1996 and 1995, there was no intersegment revenue and all reported segment operating expenses are those directly related to the operation of its business. The current operations of each principal business segment are located in Tucson, Arizona.
NEXTHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s, except share and per share amounts) December 31, 1996
Information about the Company's operations in different business segments for the years ended December 31, 1996 and 1995 is as follows:
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 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. 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. The holders of Series B are entitled to receive cumulative, preferred dividends at the rate of 12% per annum from January 1, 1997 to January 31, 1997 and at the rate of 18% per annum from February 1, 1997 and thereafter and upon a default of the provisions of the Series Designation. 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 by 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 four directors to the Company's Board of Directors ("Preferred Directors"). Upon the occurrence of a default, the holders of Series A stock become entitled to elect a majority of the Company's Board of Directors. The holders of Series B stock do not possess any voting rights.
The Company may not redeem the Preferred Stock at any time before January 1, 2001. However, as long as any Series B stock is outstanding, the Preferred Stockholders can require the Company to redeem the Preferred Stock at its issuance price. The redemption price is equal to a price per share of $92.26 plus accrued but unpaid dividends.
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 for the period of March 15, 1997 to 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, 1996, 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 date of grant, and are exercisable over periods ranging from three to ten years. Options may be exercised in installments commencing one year after the date 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.
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 officers or employees of the Company. At December 31, 1996, 300,000 shares of common stock were reserved for issuance under the DSO Plan.
The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for 1996 and 1995, respectively: risk-free interest rates ranging from 4.87% to 5.16% and from 5.3% to 5.87%, 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 income and loss per share are as follows:
The following table summarizes the cumulative activity under the Company's incentive stock option plans:
The weighted average fair value of options granted with an exercise price above market price on the date of grant during 1996 and 1995 was $1.38. The weighted average fair value of options granted with an exercise price equal to market price on the date of grant during 1996 and 1995 was $1.62 and $1.92, respectively. The remaining average contractual life for options outstanding as of December 31, 1996, was 6.75 years. The weighted average exercise price for exercisable options was $3.87 and $4.03 at December 31, 1996 and 1995, respectively.
NEXTHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s, except share and per share amounts) December 31, 1996
INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109. The cumulative effect of adopting SFAS No. 109 as of January 1, 1993 was not material.
The provisions (benefits) for income taxes for the three years ending December 31, 1996 are as follows:
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 at December 31, 1996 and 1995 are as follows:
Management has established a valuation allowance equal to the deferred tax assets at December 31, 1996 and 1995, based upon the likelihood that such deferred tax assets will not be realized.
At December 31, 1996, the Company had approximately $14,300 and $35,500 of federal and state net operating loss carryforwards, respectively, which expire for federal purposes during the years 2005 through 2012 and for state purposes during the years 1998 through 2002. In addition, at December 31, 1996, the Company has approximately $258 in Alternative Minimum Tax Credits for federal tax purposes which do not expire. Substantially all 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.
NEXTHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s, except share and per share amounts) December 31, 1996
The differences between the income tax benefit at the statutory rate and the actual income tax benefit is as follows:
For the three years ending December 31, 1996, no income tax payments were made.
OPERATING LEASES
The Company leases land, vehicles and equipment under operating leases. Future annual minimum lease payments under noncancelable operating leases at December 31, 1996, are as follows:
Total rental expense recognized under operating leases for the three years ending December 31, 1996, was $471, $160, and $124, 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 the three years ending December 31, 1996, employer matching and discretionary contributions to the plan were approximately $163, $126, and $63, respectively.
NEXTHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s, except share and per share amounts) December 31, 1996
UNUSUAL CHARGES
In 1996, the Company was committed to abandon one of its administrative buildings and, therefore, wrote off the net book value of $1,170.
In 1995, in conjunction with the development of Miraval, certain of the Company's facilities were renovated and expanded to accommodate the lodging requirements and the programs and activities offered by Miraval. Because of the nature of the construction activities, certain existing assets and components of existing assets were retired or dismantled. Accordingly, the Company recognized a charge of $1,695 in the fourth quarter of 1995.
RELATED PARTY TRANSACTIONS
A member of the Company's Board of Directors whose term on the Board ended in May, 1996, is a member of an investment firm that provided investment management services to the Company. In addition, an entity which owned approximately 8% of the Company's common stock at December 31, 1995 is affiliated with an investment firm that provided investment management services to the Company. For the three years ended December 31, 1996, approximately $0, $97, and $17,000, respectively, of the Company's investments were managed by these firms. For the three years ended December 31, 1996, fees paid for these services amounted to approximately $0, $50, and $41, respectively. Management believes such fees are reasonable and comparable to those of other institutions providing similar services.
Effective January 1, 1995, an individual related to a Director entered into a one year consulting arrangement with the Company for total compensation of $100.
The Company leases a facility from an entity controlled by the Acting President 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 Acting President of the Company and Chairman of the Company's Board of Directors provided consulting services to the Company; in 1996 total fees of $141 were paid to that entity.
A loan of $300 was made to the Company in September 1996 from the Acting President of the Company and Chairman of the Company's Board of Directors. A loan of $275 was made to the Company in September 1996 from the former President and CEO. Both loans were repaid prior to December 31, 1996.
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.
An individual who became a member of the Company's Board of Directors on November 15, 1996, is a member of a legal firm which represents the Company on real estate and transactional issues; total fees of $93 were paid to that firm in 1996.
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.
NEXTHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s, except share and per share amounts) December 31, 1996
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes certain quarterly financial data:
The financial data disclosed for the quarter ended December 31, 1996 includes a write-off of one of the Company's administrative buildings of $1,170. This charge was recorded in the corporate segment.
The financial data disclosed for the quarters ended June 30, 1995, and September 30, 1995, includes pre-opening costs of $828 and $2,602, respectively. The financial data disclosed for the quarter ended December 31, 1995, includes pre-opening costs of $3,812 and charges related to the retirement and dismantlement of certain of the Company's assets of $1,695.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.
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 22, 1997, and is hereby incorporated by reference.
PART IV
ITEM 14.
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 14 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:
(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 year 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.
(11) Incorporated by reference from the Company's Form 10-Q/A No. 2 for the quarter ended September 30, 1996.
* 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.
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 28, 1997 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.
NEXTHEALTH, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (000s)